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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
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Commission file number 1-5486
COYOTE NETWORK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2448698
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4360 Park Terrace Drive, Westlake Village, CA 91361
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(Address of principal executive offices) (Zip Code)
(818) 735-7600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| YES |_| NO
At November 13, 1998, the Registrant had issued and outstanding an aggregate
of 10,506,148 shares of its common stock.
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<PAGE>
COYOTE NETWORK SYSTEMS, INC.
AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets........................................ 2
Statement of Operations............................... 3
Statement of Cash Flows............................... 4
Notes to Financial Statements......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 12
Item 2. Changes in Securities and Use of Proceeds............. 12
Item 6. Exhibits and Reports on Form 8-K...................... 12
Signatures ...................................................... 13
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars In Thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, March 31,
1998 1998
------------- ----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 16,224 $ 3,746
Marketable securities --- 16
Receivables 3,216 715
Inventories 2,515 2,122
Notes receivable - current 2,456 4,596
Other current assets 5,888 1,409
---------- ----------
Total current assets 30,299 12,604
Property and equipment, net 5,325 2,391
Capitalized software development 763 ---
Intangible assets, net 7,741 3,542
Net assets of discontinued operations 172 909
Notes receivable - non-current 550 1,170
Other assets 2,654 1,359
---------- ----------
$ 47,504 $ 21,975
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 12,416 $ 1,920
Deferred revenue and customer deposits 1,871 1,900
Accrued loss reserve 3,141 2,200
Accrued professional fees and litigation costs 361 805
Other accrued liabilities 4,586 1,130
Notes payable 5,098 ---
Current portion of long-term debt 141 141
---------- ----------
Total current liabilities 27,614 8,096
Long-term debt 1,605 5,349
Other liabilities 453 470
Commitments and contingencies (Note 4) --- ---
Shareholders' equity:
Preferred stock - $.01 par value.
Authorized 5,000,000 shares; 700 issued --- ---
Common stock - $1 par value. Authorized 30,000,000 shares,
issued 10,492,620 and 9,151,920 shares 10,493 9,152
Additional paid-in capital 113,248 102,360
Accumulated deficit (100,152) (97,695)
Treasury stock at cost (5,757) (5,757)
----------- -----------
Total shareholders' equity 17,832 8,060
---------- ----------
$ 47,504 $ 21,975
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
------------------------- --------------------------
<S> <C> <C> <C> <C>
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
Net sales $ 15,164 $ 106 $ 22,357 $ 1,050
Cost of goods sold 9,309 37 12,529 442
---------- --------- ---------- ---------
Gross profit 5,855 69 9,828 608
Selling and administrative expenses 3,155 2,590 6,095 6,126
Engineering, research and development 2,431 603 4,368 1,297
---------- --------- ---------- ---------
Total operating expenses 5,586 3,193 10,463 7,423
---------- --------- ---------- ---------
Operating income (loss) 269 (3,124) (635) (6,815)
Interest expense (27) (123) (42) (123)
Non-operating income --- 4 --- 4
Non-operating expense (721) (5,522) (880) (5,522)
----------- --------- ----------- ----------
Loss from continuing operations (479) (8,765) (1,557) (12,456)
Loss from discontinued operations (900) --- (900) ---
----------- --------- ----------- -------
Net loss $ (1,379) $ (8,765) $ (2,457) $ (12,456)
=========== ========== =========== ==========
Loss per common share (basic & diluted):
Continuing operations $ (.05) $ (1.27) $ (.17) $ (2.04)
Discontinued operations (.09) --- (.10) ---
----------- --------- ----------- -------
Net loss per common share (basic & diluted) $ (.14) $ (1.27) $ (.27) $ (2.04)
=========== ========== =========== ==========
Weighted average number of common shares outstanding 9,586 6,897 9,125 6,102
(basic & diluted) ========== ========= ========== =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
6 MONTHS ENDED
----------------------------------
<S> <C> <C>
Sept. 30, 1998 Sept. 30, 1997
Operating activities:
Net loss $ (2,457) $ (12,456)
Adjustments to reconcile loss to net cash
provided (used) by operating activities:
Depreciation and amortization 578 355
Gain on sale of land (17) ---
Provision for loss on discontinued operations 900 5,522
Provision for common stock warrants issued 485 366
Net change in discontinued operations (163) 777
Changes in current assets and liabilities 10,319 2,756
---------- ----------
Net cash provided (used) by operating activities $ 9,645 $ (2,680)
Investing activities:
Capitalized software development (763) ---
Purchases of property and equipment (1,575) (80)
Proceeds from sales of marketable securities 16 397
Proceeds from sale of land 67 ---
Change in notes receivable 270 ---
Net change in discontinued operations --- (411)
Investment in affiliate (400) ---
Cash investment in INET (1,333) ---
----------- ---------
Net cash provided (used) by investing activities $ (3,718) $ (94)
Financing activities:
Repayments of long-term debt $ (71) $ (71)
Common stock issued 306 5,347
Preference stock issued net of expenses 6,345 ---
Changes in notes payable --- 152
Net change in discontinued operations --- 592
Preference stock dividends paid (29) ---
----------- ---------
Net cash provided by financing activities $ 6,551 $ 6,020
---------- ----------
Increase (decrease) in cash and cash equivalents 12,478 3,246
Cash and cash equivalents:
At beginning of the period 3,746 81
---------- ----------
At end of the period $ 16,224 $ 3,327
========== ==========
Non-cash transactions:
Issuance of common stock warrants to investment banker
and placement agent 485 366
Note payable to related party --- 98
Change in convertibility of Class A/B Units --- 5,522
Conversion of note payable to common stock --- 250
Conversion of convertible notes and interest into common stock 3,407 825
Discount granted for investment in affiliate 900 ---
Issuance of common stock for INET acquisition 1,686 ---
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended March 31,
1998.
The computation of loss per common share is determined by using the
weighted average number of shares of common stock outstanding during each
period.
NOTE 2 DISCONTINUED OPERATIONS
On November 20, 1996, the Board of Directors of Coyote Network Systems,
Inc. (the "Company") approved a restructuring plan (the "Restructuring") to
separate its telecom switching equipment business (the "CTL Business") performed
through its operating subsidiary Coyote Technologies, LLC ("CTL") from the
following businesses:
Segment Company
Telecommunications equipment distribution C&L
Wire installation and service Valley
Wholesale distribution of meat and seafood Entree/APC
The Restructuring provided for a spin-off of the non-CTL businesses,
through a special dividend to the Company's shareholders. Consequently, the
Company reported the results of operations of the telecommunications equipment
distribution segment, the voice and data network wire installation and service
segment and the wholesale distribution of meat and seafood segment separately as
discontinued operations. Subsequently, the Company received a purchase offer for
a majority of the assets of APC. On February 3, 1997, the Board of Directors of
the Company approved the sale of a majority of the assets of APC to Colorado
Boxed Beef Company ("Colorado"). The sale closed on February 3, 1997.
As a result of the sale of APC's assets, the Company's Board of
Directors terminated the original Restructuring plan for a spin-off of the
non-CTL businesses. The Company adopted a revised Restructuring plan to sell C&L
and Valley. The revised Restructuring plan was approved by the Board of
Directors in February 1997. On November 20, 1997, the Company completed the sale
of its telecommunications equipment distributor subsidiary, C&L Communications,
Inc. ("C&L"), to the management of C&L.
In March 1998, the Company reached agreement on the sale of its 80%
owned wire installation and service subsidiary, Valley Communications Inc.
("Valley") to Technology Services Corporation ("TSC"). Under the terms of the
agreement, the Company received $2,300,000, which was paid in cash in June 1998,
and $811,000 paid by the assumption by TSC of the Company's entire liability
under certain promissory notes to and among the Company and other shareholders
of Valley dated August 1995.
5
<PAGE>
As of November 4, 1998, the Company had collected all cash related to the
sale of discontinued operations except $530,000 due under a note and the only
asset of discontinued operations was real estate related to the land and
buildings of the discontinued APC operation. The real estate is listed for sale.
Based upon an estimate of the current market value of the real estate, the
Company has taken an additional charge of $900,000 in the second quarter ended
September 30, 1998, reducing the asset book value to $170,000 net of mortgages
applicable to the property.
NOTE 3 ACQUISITIONS
On September 30, 1998, the Company completed the acquisition of INET
Interactive Network System, Inc. ("INET") through the merger of INET into a
wholly owned subsidiary of the Company. Headquartered in Los Angeles,
California, INET is a provider of international long distance services to more
than 17,000 customers, primarily to French and Japanese affinity groups.
Under the terms of the merger agreement, the Company made total cash
payments of $1,000,000 and issued a total of 198,300 shares of the Company's
common stock as consideration for the outstanding shares of INET capital stock,
the cancellation of certain warrants to purchase shares of INET common stock,
the transfer of certain lines of credit and certain contractual releases. The
Company also agreed to forgive and extinguish all loans and advances in the
amount of $433,000 which had been made to INET prior to the merger. As further
consideration, the Company will issue earnout shares of the Company common stock
to the former INET shareholders in five installments based upon certain earning
targets being achieved during the period from October 1, 1998 to March 31, 2001.
The maximum amount payable under the earnout agreement is $2,000,000 payable in
Company common stock to be valued at certain average trading prices at the time
any earnout is payable.
In September 1998, the Company acquired a 19.9% equity position in
Crescent Communications, Inc. ("Crescent"). Crescent is headquartered in
California and was formed to provide primarily wholesale telecommunication
services to select international markets. The Company acquired this minority
interest for the sum of $1,300,000 represented by a cash payment of $400,000 to
Crescent and $900,000 in the form of a discount granted on equipment sold to
Crescent in September 1998.
In October 1998, the Company announced that it intends to acquire a 19%
equity position in DTA Communications Network, Inc. ("DTA"), a facilities based
provider of wholesale international long distance telephone services. The
acquisition is expected to be completed in the third quarter of fiscal 1999.
NOTE 4 COMMITMENTS AND CONTINGENCIES
Coyote Network Systems, Inc. (The Diana Corporation) Securities
Litigation (Civ. No. 97-3186). This is a consolidation of what were originally
nine separate actions brought in the United States District Court for the
Central District of California on behalf of purchasers of the Company's common
stock during a class period that extended from December 6, 1994 through May 2,
1997. On July 23, 1997, the Court entered a stipulation and order consolidating
the nine actions for all purposes. On September 9, 1997, plaintiffs filed a
consolidated amended complaint (the "Consolidated Complaint") asserting claims
against the Company, certain of its present and former directors and officers,
and others under Section 10(b) of the Securities Exchange Act of 1934. The
Consolidated Complaint alleges essentially that the Company and other defendants
were engaged in a scheme to inflate the price of the Company's common stock
during the class period through false and misleading statements and manipulative
transactions. The Consolidated Complaint seeks unspecified damages, but
identifies the significant movement in the Company's stock price during the
putative class period (a swing of more than $115 per share) to imply that the
damages that will be claimed will exceed the Company's assets.
6
<PAGE>
On July 9, 1998, the respective counsel for the Plaintiffs and for the
Company executed a letter agreeing in principle, subject to various conditions
and contingencies, to settle the claims against the Company and its subsidiaries
in The Diana Securities Litigation. If consummated, the settlement will require
the Company to issue warrants to acquire 2,500,000 shares of the Company's
common stock. The warrants will be exercisable for three years from the date of
issuance and will have an exercise price of $9 per share in the first year, $10
per share in the second year and $11 per share in the third year, subject to
adjustment in certain events. On November 5, 1998, the Company's common stock
was listed on Nasdaq. The Company will use its best efforts to arrange for a
listing of the warrants on Nasdaq. Among the conditions to the settlement are
that the Plaintiffs also reach a settlement with the individual defendants in
the litigation and their D&O insurance carriers and that, ultimately, the
settlement receives court approval. The Company regards this agreement in
principle as a step toward the resolution of this litigation, but cautions that,
in view of the conditions and contingencies associated with this preliminary
agreement, the Company is unable to predict with certainty the nature or timing
of an actual settlement. The Company recorded the fair market value of the
warrants of $8,000,000 in the financial statements for fiscal 1998.
After the Company and the Plaintiffs entered into their agreement in
principle, Plaintiffs and the individual defendants and their D&O carriers, also
entered into an agreement in principle to settle the action. The parties are
presently in the process of negotiating a formal settlement agreement that will
be presented to the Court for approval.
Performed Line Products v. Coyote Technologies, LLC, Case No. 3:98 CV
1871-T, in the Federal District Court for the Northern District of Texas. The
Company's subsidiary, Coyote Technologies, LLC, is the defendant in this action.
PLP alleges that Coyote is infringing upon the "Coyote" trademark that PLP has
registered in connection with its cable and enclosure product line. PLP also
asserts claims under the Texas Deceptive Trade Practices Act. PLP seeks
permanent injunctive relief preventing Coyote Technologies' use of any form of
the name "Coyote," and unspecified damages for past alleged infringement. The
Company defends on the basis that its DSS 10000 product does not infringe upon
the use of the Coyote name for PLP's very dissimilar products. The Company
intends to vigorously defend the action.
Superior Street, LLC v. Coyote Network Systems, Inc., Case No. 98 L
11488, in the Circuit Court for Cook County, Illinois. The Company is the
defendant in this case in which Superior Street alleges that Coyote has breached
a consulting contract. An Answer to the Complaint has not yet been filed.
However, the Company intends to defend this action vigorously.
The Company is also involved with other proceedings or threatened
actions incident to the operation of its businesses. It is management's opinion
that none of these matters will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
NOTE 5 SHAREHOLDERS' EQUITY
Convertible Preferred Stock and Warrants
- ----------------------------------------
In September 1998, the Company entered into a private placement
agreement and issued 700 shares of 5% Series A Convertible Preferred Stock, par
value $.01 and a stated value of $10,000 per share. The total cash received by
the Company was $6,345,000 after payment of $655,000 for fees and expenses
associated with the issue. The preferred stock has no voting rights and is
convertible, subject to certain limitations and restrictions, into shares of
common stock, after a minimum holding period of 120 days, based upon a per share
common stock price that will be the lesser of the initial conversion price as
defined in the contract or 87% of the average of the three lowest per share
market values during the ten trading day period prior to an applicable
conversion date. Details of voting powers, preferences and relative
participation, optional or other special rights and qualifications, limitations
or restrictions of the 5% Series A Convertible Preferred Stock are included in
Exhibit 10.03 attached herewith.
7
<PAGE>
In conjunction with this agreement, the Company issued warrant rights
to the investment participant to purchase 225,000 shares of common stock at a
warrant exercise price of $8.43 per share. The term of the warrants is 3 years.
Common Stock Dividend
- ---------------------
In October 1998, the Board of Directors approved the declaration of a
5% common stock dividend. Based upon an established record date of October 21,
1998, the Company issued 497,623 shares of common stock on November 4, 1998.
Certain contractual anti-dilution provisions will reduce conversion and warrant
exercise prices by a minor amount.
Common Stock Options and Warrants
- ---------------------------------
Since June 30, 1998, the Company's Board of Directors has granted to
certain executives, employees and non-employee directors options to purchase a
total of 192,242 shares of Company common stock. During the quarter ended
September 30, 1998, the Company issued warrants with three year terms to
purchase a total of 145,000 shares of Company common stock to non-employees. The
fair market value of the warrants was determined using the Black Scholes Method
and a total amount of $485,000 was charged against earnings during the quarter.
NOTE 6 RELATED PARTY TRANSACTIONS
In January 1998, the Board of Directors of the Company approved an
interest-free loan to Daniel W. Latham for a maximum amount of $500,000 to be
used solely for the purpose of providing a partial down payment on his purchase
of a residence in California. The funding is to be secured by the residential
property and is for a five-year term unless specifically extended by the Board
of Directors. Earlier repayment of the loan will be demanded in the event of
either (1) sale or refinancing of the property; (2) termination of Mr. Latham's
employment either voluntarily or for cause; or (3) sale by Mr. Latham of all, or
substantially all, of his stock in Coyote Network Systems, Inc. As of September
30, 1998, $421,000 was funded under this agreement.
In July 1998, the Company authorized an interest-free loan to Edward A.
Beeman in the amount of $75,000 to be used solely for the purpose of providing a
partial down payment on his purchase of a residence in California. The funding
is for a five year term unless specifically extended by the Company. Earlier
repayment of the loan will be demanded in the event of termination of Mr.
Beeman's employment either voluntarily or for cause. This loan was funded in
July 1998.
In October 1998, the Company amended the terms of the above loans and
in agreement with Messrs. Latham and Beeman established an annual interest rate
of 6.5% to be applied to the loans and payable at the completion of the term.
In September 1998, the Company sold approximately $13,000,000 of
equipment to Crescent Communications, Inc. ("Crescent") through a third party
leasing arrangement. In addition to the cash proceeds, the Company received an
approximately 20 percent ownership interest in Crescent and the Company entered
into a maintenance and service agreement with Crescent. The Company has deferred
recognition of approximately $2.5 million of this sale related to its equity
interest in the buyer and amounts reserved for service contingencies. The entire
cash proceeds related to the sale were collected prior to September 30, 1998.
8
<PAGE>
NOTE 7 LINE OF CREDIT
As of September 30, 1998, Coyote Gateway, LLC ("CGL") has an
established a line of credit of $8,100,000 secured by CGL's trade receivables
and by 708,692 treasury shares of the Company's common stock. As of September
30, 1998, $5,062,000 had been drawn against this line of credit.
NOTE 8 YEAR 2000 COMPLIANCE
The Company believes that its CTL switching product operating
systems and its internal computer systems are Year 2000 compliant and does not
anticipate that it will incur significant expenditures to ensure that such
systems will function properly with respect to dates in the Year 2000 and
beyond. The Company has designed and tested the current versions of its DSS
Switches, AMT and CMS products, which comprise the principle products sensitive
to the Year 2000 issues. There were no problems found with the date rollover
issue nor were any problems encountered with the Year 2000 leap year issue. The
products continued processing calls without interruption during the test cycles.
Testing of all products and components will continue as other adjuncts are
integrated and tested. The Company is conducting a review of its significant
suppliers and other third parties to ensure that those parties have appropriate
plans to remedy Year 2000 issues where their systems interface with the
Company's systems or otherwise impact its operations. The Company is continuing
to request and receive Year 2000 certification documents from its third party
software suppliers. Third party software used in the development and operation
of DSS, AMT & CMS products was verified to be Year 2000 compliant during system
testing.
The costs incurred by the Company to date on the Year 2000 issues have
not been material to the Company's financial condition or operations. The
Company presently does not have a documented Year 2000 contingency plan to cope
with a worst case scenario. The Company intends to complete documentation of a
contingency plan by December 31, 1998. There can be no assurance that a failure
of the CTL switching product operating systems or that the systems of third
parties on which the Company's systems and operations rely to be Year 2000
compliant will not have a material adverse affect on the Company's business,
financial condition or operating results.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
For the second quarter of fiscal 1999 ended September 30, 1998, the
Company's revenues were $15,164,000, primarily from the sale of DSS Switches and
associated OEM equipment, compared to revenues of $106,000 in the corresponding
quarter of fiscal 1998. The increase is primarily attributable to shipments made
to Crescent through a third party leasing company under a major contract which
accounted for 82% of the revenue for the quarter.
The second quarter revenue generated $5,855,000 of gross profit, an
increase of $5,786,000 in gross profit compared to the corresponding quarter of
the prior fiscal year. The gross profit margin for the second quarter of fiscal
1999 is lower than prior quarters due to the deferral of a portion of a sale
contract as described in Note 6 of the Financial Statements.
Selling and general administration expenses for the quarter of
$3,155,000 were $565,000 higher than the corresponding quarter of the prior
fiscal year, primarily due to the increased level of selling and marketing
support expenses associated with the significant increase in the sales revenue
and marketing activity.
Engineering, research and development expenses for the quarter of
$2,431,000 were $1,828,000 above the corresponding period expense for the prior
year as the Company continued to enhance product offerings. The Company is
accelerating development of its client/server architecture as well as the
Company's roll out of voice over Internet Protocol (IP) and IP/ATM as an
enhancement to the current product line.
Operating income for the quarter was $269,000 compared to a loss of
$3,124,000 in the corresponding quarter of fiscal 1998. This improvement is due
to the increase in gross profit generated by the higher level of revenues
achieved in the quarter.
Non-operating expense for the quarter was $721,000, primarily due to
investment banking consulting expenses. In the corresponding quarter of the
prior fiscal year, the Company incurred a one-time non-operating expense charge
of $5,522,000 related to the convertibility of certain ownership units into
Company common stock.
The loss from discontinued operations in the quarter of $900,000 is due
to a management estimate of the reduction in potential market value of the
discontinued APC operation real estate which is currently listed for sale.
The net loss for the quarter was $1,379,000 compared to a net loss of
$8,765,000 in the corresponding quarter of the prior year. This reduction in the
net loss was primarily due to the improvement in operating performance and
operating income and the reduction in non-operating expense.
10
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company generated an increase in cash of $12,478,000 during the
first two quarters of fiscal 1999, and closed the second quarter ended September
30, 1998, with a cash and cash equivalents balance of $16,224,000.
Net cash provided by operating activities in the first two quarters of
fiscal 1998 was $9,645,000 compared to a net cash usage of $2,680,000 in the
corresponding six months of the prior fiscal year. The increase in operating
revenues and operating profit together with prompt collection of customer
receivables were the main contributors to the increase in cash provided from
operations.
Net cash used in investing activities during the first two quarters of
fiscal 1999 of $3,718,000 consisted primarily of (1) the cash portion of the
acquisition of INET ($1.3M), (2) the cash portion of a minority investment in
Crescent ($0.4M), (3) the purchase of manufacturing and test equipment ($1.5M),
and (4) investment in engineering software development ($0.7M).
Financing activities provided $6,551,000 during the first two quarters
of fiscal 1999 which consisted primarily of the net receipts from the sale of 5%
Series A Convertible Preferred Stock of the Company in September 1998.
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998, the Company's operations will need to be
funded during fiscal 1999 either with funds generated through operations or with
additional debt or equity financing. If the Company's operations do not provide
funds sufficient to fund its operations and the Company seeks outside financing,
there can be no assurance that the Company will be able to obtain such financing
when needed, on acceptable terms or at all. In addition, any future equity
financing or convertible debt financing would cause the Company's shareholders
to incur dilution in common stock holdings as a percentage of the total
outstanding shares.
Forward Looking Statements
- --------------------------
All statements other than historical statements contained in this
Report on Form 10-Q constitute "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward looking statements include statements regarding new products to be
introduced by the Company in the future, statements about the Company's business
strategy and plans, statements about the adequacy of the Company's working
capital and other financial resources, and in general statements herein that are
not of a historical nature. Any Form 10-K, Annual Report to Shareholders, Form
10-Q, Form 8-K or press release of the Company may include forward looking
statements. In addition, other written or oral statements which constitute
forward looking statements have been made or may in the future be made by the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new contract signings, and industry growth rates and the Company's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to: risks associated with recent
operating losses, no assurance of profitability, the need to increase sales,
liquidity deficiency and in general the other risk factors set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
The Company disclaims any intention or obligation to update or revise any
forward looking statements whether as a result of new information, future events
or otherwise.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see Note 4 to the Condensed Consolidated Financial Statements
herein and Note 6 to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998,
for information on various legal proceedings. There are no material developments
to report at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) Issuances of equity securities not registered under Securities Act of
1933 are described in Note 5 of the Condensed Consolidated Financial
Statements.
The Company believes that the sale of the Preferred Stock was exempt
from the securities registration requirement pursuant to Section 4(2)
of the Securities Act and Regulation D promulgated thereunder in that
the Preferred Stock was offered and sold only to accredited investors,
each of which made written representations to the Company regarding
their status as an accredited investor, their financial satisfaction
and their investment intent. The certificates representing the
Preferred Stock were legended to indicate that they were "restricted
securities".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
3.01 Restated Certificate of Incorporation of the Company.
3.02 By-Laws of the Company incorporated herein by reference to
Exhibit 3.2 of the Company's Form 10-K for the year ended
March 31, 1997.
4.01 Restated Certificate of Incorporation of the Company (See Note
3.01 above).
4.02 By-Laws of the Company (See Note 3.02 above).
10.03Convertible Preferred Stock Purchase Agreement between the
Company and JNC Opportunity Fund, dated August 31, 1998.
27 Financial Data Schedule
b) A Form 8-K was filed by the Company on October 15, 1998, which
covered:
Item 2. Acquisition or Disposition of Assets.
On September 30, 1998, the Company completed the acquisition of
INET Interactive Network System, Inc., through the merger of INET
into a wholly owned subsidiary of the Company.
12
<PAGE>
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 thereunto duly authorized.
DATE: November 16, 1998 COYOTE NETWORK SYSTEMS, INC.
By: /s/ James J. Fiedler
-----------------------------------
James J. Fiedler
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Brian A. Robson
-----------------------------------
Brian A. Robson
Vice President and Controller
(Principal Financial and Accounting Officer)
13
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
COYOTE NETWORK SYSTEMS, INC.
The corporation was originally incorporated under the name Roy Minor
Corporation and its original certificate of incorporation was filed with the
Secretary of State of Delaware on January 25, 1961.
This Restated Certificate of Incorporation has been duly adopted by the
board of directors of the corporation in accordance with Section 245 of the
General Corporation Law of the State of Delaware to restate and integrate but
not further amend the certificate of incorporation of the corporation as
heretofore amended. Upon the filing of this Restated Certificate of
Incorporation with the Secretary of State, the corporation's original
certificate of incorporation, as theretofore amended or supplemented, shall be
superseded; and thenceforth, this Restated Certificate of Incorporation shall be
the certificate of incorporation of the corporation.
ARTICLE I
The name of the corporation (hereinafter referred to as the
"Corporation") is COYOTE NETWORK SYSTEMS, INC.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV
The total number of shares of stock of all classes which the
corporation shall have authority to issue is 20,000,000, of which 5,000,000
shares shall be shares of Preferred Stock, $.01 par value per share, and
15,000,000 shares shall be shares of Common Stock, $1.00 par value per share.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the shares of each class of stock
of the Corporation are as follows:
1. The Board of Directors is expressly authorized to provide for the
issue of all or any shares of the Preferred Stock, in one or more series, and to
fix for each such series such voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating, optional
or other special rights and such qualifications, limitations or restrictions
thereof, as shall be stated and expressed in the resolution or resolutions
adopted by the Board of Directors providing for the issue of such series and as
may be permitted by the General Corporation Law of the State of Delaware,
including, without limitation, the authority to provide that any such series may
be (i) subject to redemption at such time or times and at such price or prices;
(ii) entitled to receive dividends (which may be cumulative or noncumulative) at
such rates, on such conditions, and at such times and payable in preference to,
or in such relation to, the dividends payable on any other class or classes or
any other series; (iii) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Corporation at
such price or prices or at such rates of exchange and with such adjustments; all
as may be stated in such resolution or resolutions.
2. All shares of the Common Stock of the Corporation shall be identical
and, except as otherwise required by law or as otherwise provided in the
resolution or resolutions, if any, adopted by the Board of Directors with
respect to any series of Preferred Stock, the holders of the Common Stock shall
exclusively possess all voting power, and each share of Common Stock shall have
one vote.
The Board of Directors of the Corporation has provided for the issuance
of a series of 700 shares of Preferred Stock designated as "5% Series A
Convertible Preferred Stock" The voting powers, preferences and relative
participation, optional or other special rights and qualifications, limitations
or restrictions of the 5% Series A Convertible Preferred Stock are as follows:
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as 5% Series A Convertible Preferred Stock
(the "Preferred Stock") and the number of shares so designated shall be 700
(which shall not be subject to increase without the consent of the holders of
the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $.01 and a stated value of
$10,000 (the "Stated Value").
Section 2. Dividends.
(a) Holders shall be entitled to receive, when and as declared by the Board
of Directors out of funds legally available therefor, and the Company shall pay,
cumulative dividends at the rate per share (as a percentage of the Stated Value
per share) equal to 5% per annum, payable on a quarterly basis on March 31, June
30, September 30 and December 31 of each year during the term hereof (each a
"Dividend Payment Date"), commencing on September 30, 1998 and thereafter, upon
the earlier to occur of a Dividend Payment Date and a Conversion Date (as
defined herein), in cash or shares of Common Stock (as defined in Section 8) at,
subject to the terms and conditions set forth herein, the option of the Company.
Dividends on the Preferred Stock shall be calculated on the basis of a 360-day
year, shall accrue daily commencing on the Original Issue Date (as defined in
Section 8), and shall be deemed to accrue from such date whether or not earned
or declared and whether or not there are profits, surplus or other funds of the
Company legally available for the payment of dividends. Any dividends not paid
on any Dividend Payment Date shall continue to accrue and shall be due and
payable upon conversion of the Preferred Stock. A party that holds shares of
Preferred Stock on a Dividend Payment Date will be entitled to receive such
dividend payment and any other accrued and unpaid dividends which accrued prior
to such Dividend Payment Date, without regard to any sale or disposition of such
Preferred Stock subsequent to the applicable record date. All overdue accrued
and unpaid dividends and other amounts due herewith shall entail a late fee at
the rate of 15% per annum (to accrue daily, from the date such dividend is due
hereunder through and including the date of payment). Except as otherwise
provided herein, if at any time the Company pays less than the total amount of
dividends then accrued on account of the Preferred Stock, such payment shall be
distributed ratably among the Holders based upon the number of shares held by
each Holder. The Company shall provide the Holders notice of its intention to
pay dividends in cash or shares of Common Stock not less than 10 Trading Days
prior to any Dividend Payment Date for so long as shares of Preferred Stock are
outstanding. If dividends are paid in shares of Common Stock, the number of
shares of Common Stock issuable on account of such dividend shall equal the cash
amount of such dividend on such Dividend Payment Date divided by the Conversion
Price (as defined below) on such date.
(b) Notwithstanding anything to the contrary contained herein, the Company
may not issue shares of Common Stock in payment of dividends on the Preferred
Stock (and must deliver cash in respect thereof) if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such
dividends in shares of Common Stock;
(ii) such shares of Common Stock are not registered for resale
pursuant to an effective Underlying Securities Registration Statement (as
defined in Section 8) and may not be sold without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), as determined by counsel to the Company
pursuant to a written opinion letter, addressed to the Company's transfer
agent in the form and substance acceptable to the Holders and such transfer
agent (such shares, "Restricted Shares"), provided, that the Company shall
be entitled, prior to the earlier to occur of (A) the Effectiveness Date
(as defined in the Registration Rights Agreement) and (B) the date the
Underlying Securities Registration Statement is declared effective by the
Securities and Exchange Commission (the "Commission"), to issue Restricted
Shares in payment of dividends on the Preferred Stock, provided, however,
that, no later than three (3) Trading Days following the date the
Underlying Securities Registration Statement is declared effective by the
Securities and Exchange Commission, the Company shall replace any
Restricted Shares issued in payment of dividends on the Preferred Stock
with the equivalent stock certificates evidencing such shares of Common
Stock issued in payment of dividends on the Preferred Stock which shall be
free of any restrictive legend;
(iii) the Common Stock is not then Actively Traded (as defined in
Section 8) or listed for trading on the New York Stock Exchange, American
Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market (each a
"Subsequent Market");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares of Common Stock would result in the
recipient thereof beneficially owning, as determined in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended (the `Exchange Act"), more than 4.999% of the then issued and
outstanding shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding, neither the
Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (as defined in Section 8), nor
shall the Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities
(as defined in Section 8), nor shall any monies be set aside for or applied to
the purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities (unless, in the case of pari passu securities, the Preferred Stock
receives such amount on a pro rata basis with such other pari passu securities).
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Company shall not and shall cause its subsidiaries not to, without the
affirmative vote of the Holders of two thirds of all of the shares of the
Preferred Stock then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock ranking
as to dividends or distribution of assets upon a Liquidation (as defined in
Section 4) senior to or otherwise pari passu with or senior to the Preferred
Stock, (d) amend its Certificate of Incorporation, bylaws or other charter
documents so as to affect adversely any rights of any Holders, (e) increase the
authorized number of shares of Preferred Stock, or (f) enter into any agreement
with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value plus all due but unpaid dividends per share,
whether declared or not, before any distribution or payment shall be made to the
holders of any Junior Securities, and if the assets of the Company shall be
insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders shall be distributed among the Holders ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 33% of the voting power of the Company is disposed of, or a consolidation
or merger of the Company with or into any other company or companies shall not
be treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such Liquidation, not
less than 45 days prior to the payment date stated therein, to each record
Holder.
Section 5. Conversion.
(a)(i) Conversions at Option of Holder. Each share of Preferred Stock
shall be convertible into shares of Common Stock (subject to the
limitations set forth in Section 5(a)(iii) hereof) at the Conversion Ratio
(as defined in Section 8) at the option of the Holder, at any time and from
time to time, from and after the 120th day following the Original Issue
Date (the "Initial Conversion Date"), thereafter any conversions of
Preferred Stock are limited in each monthly period to 25% of the number of
shares of Preferred Stock originally issued to the Holder on the Original
Issue Date, on a cumulative basis (for example, during the first month
following the Initial Conversion Date, the Holder may convert up to 25% of
the number of shares of Preferred Stock issued to it on the Original Issue
Date and during the first two (2) months following the Initial Conversion
Date the Holder may convert up to 50% of the number of shares of Preferred
Stock issued to it on the Original Issue Date). Holders shall effect
conversions by surrendering the certificate or certificates representing
the shares of Preferred Stock to be converted to the Company, together with
the form of conversion notice attached hereto as Exhibit A (a "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is to
be effected, which date may not be prior to the date the Holder delivers
such Conversion Notice by facsimile (the "Conversion Date"). If no
Conversion Date is specified in a Conversion Notice, the Conversion Date
shall be the date that the Conversion Notice is deemed delivered hereunder.
If the Holder is converting less than all shares of Preferred Stock
represented by the certificate or certificates tendered by the Holder with
the Conversion Notice, or if a conversion hereunder cannot be effected in
full for any reason, the Company shall promptly deliver to such Holder (in
the manner and within the time set forth in Section 5(b)) a certificate for
such number of shares as have not been converted.
(ii) Automatic Conversion. Subject to the provisions in this
paragraph, all outstanding shares of Preferred Stock for which conversion
notices have not previously been received or for which redemption has not
been made or required hereunder shall be automatically converted on the
third anniversary of the Original Issue Date at the Conversion Price on
such date. The conversion contemplated by this paragraph shall not occur if
(a) (1) an Underlying Securities Registration Statement is not then
effective or (2) the Holder is not permitted to resell Underlying Shares
pursuant to Rule 144(k) promulgated under the Securities Act, without
volume restrictions, as evidenced by an opinion letter of counsel
acceptable to the Holder and the transfer agent for the Common Stock; (b)
there are not sufficient shares of Common Stock authorized and reserved for
issuance upon such conversion; or (c) the Company shall have defaulted on
its covenants and obligations hereunder or under the Purchase Agreement or
Registration Rights Agreement. Notwithstanding the foregoing, the
three-year period for conversion under this Section shall be extended (on a
day-for-day basis) for any Trading Days after the earlier of (i) the
Effectiveness Date, and (ii) the date the Underlying Securities
Registration Statement is declared effective by the Commission that the
Purchaser is unable to resell Underlying Shares under an Underlying
Securities Registration Statement due to (a) the Common Stock not being
Actively Traded or not listed on any Subsequent Market , (b) the failure of
an Underlying Securities Registration Statement to be declared effective by
the Commission by the Effectiveness Date, or (c) if an Underlying
Securities Registration Statement shall have been declared effective by the
Commission, (x) the failure of such Underlying Securities Registration
Statement to remain effective at all times thereafter as to all Underlying
Shares, or (y) the suspension of the Holder's ability to resell Underlying
Shares thereunder.
(iii) Certain Conversion Restrictions. (A)(1) The Holder shall not
convert shares of Preferred Stock to the extent such conversion would
result in the Holder beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act and the rules thereunder) in excess of
4.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon conversion of the shares of Preferred Stock held by
such Holder after application of this Section. To the extent that the
limitation contained in this Section applies, the determination of whether
shares of Preferred Stock are convertible (in relation to other securities
owned by a Holder) and of which shares of Preferred Stock are convertible
shall be in the sole discretion of the Holder, and the submission of shares
of Preferred Stock for conversion shall be deemed to be the Holder's
determination of whether such shares of Preferred Stock are convertible (in
relation to other securities owned by the Holder) and of which portion of
such shares of Preferred Stock are convertible, in each case subject to
such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of the Holder to
convert shares of Preferred Stock at such time as such conversion will not
violate the provisions of this Section. The provisions of this Section will
not apply to any conversion pursuant to Section 5 (a)(ii) hereof, and may
be waived by a Holder (but only as to itself and not to any other Holder)
upon not less than 75 days prior notice to the Company (in which case, the
Holder shall make such filings with the Commission, including under Rule
13D or 13G, as are required by applicable law), and the provisions of this
Section shall continue to apply until such 75th day (or later, if stated in
the notice of waiver). Other Holders shall be unaffected by any such
waiver.
(2) The Holder shall not convert shares of Preferred Stock to the extent
such conversion would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 9.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the shares of Preferred Stock held
by such Holder after application of this Section. To the extent that the
limitation contained in this Section applies, the determination of whether
shares of Preferred Stock are convertible (in relation to other securities owned
by a Holder) and of which shares of Preferred Stock are convertible shall be in
the sole discretion of the Holder, and the submission of shares of Preferred
Stock for conversion shall be deemed to be the Holder's determination of whether
such shares of Preferred Stock are convertible (in relation to other securities
owned by the Holder) and of which portion of such shares of Preferred Stock are
convertible, in each case subject to such aggregate percentage limitation, and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the right of
the Holder to convert shares of Preferred Stock at such time as such conversion
will not violate the provisions of this Section. The provisions of this Section
will not apply to any conversion pursuant to Section 5 (a)(ii) hereof, and may
be waived by a Holder (but only as to itself and not to any other Holder) upon
not less than 75 days prior notice to the Company, and the provisions of this
Section shall continue to apply until such 75th day (or later, if stated in the
notice of waiver). Other Holders shall be unaffected by any such waiver.
(B) If on any Conversion Date (A) the Common Stock is listed for
trading on the Nasdaq SmallCap Market or the Nasdaq National Market, (B)
the Conversion Price then in effect is such that the aggregate number of
shares of Common Stock that would then be issuable upon conversion in full
of all then outstanding shares of Preferred Stock and as payment of
dividends thereon in shares of Common Stock, together with any shares of
the Common Stock previously issued upon conversion of shares of Preferred
Stock and as payment of dividends thereon, would equal or exceed 20% of the
number of shares of the Common Stock outstanding on the Original Issue Date
(such number of shares as would not equal or exceed such 20% limit, the
"Issuable Maximum" and any such Conversion Date, the "Record Date"), and
(C) the Company shall not have previously obtained the vote of shareholders
(the "Shareholder Approval"), if any, as may be required by the applicable
rules and regulations of The Nasdaq Stock Market (or any success entity)
applicable to approve the issuance of shares of Common Stock in excess of
the Issuable Maximum in a private placement whereby shares of Common Stock
are deemed to have been issued at a price that is less than the greater of
book or fair market value of the Common Stock, then the Company shall issue
to the Holder so requesting a conversion a number of shares of Common Stock
equal to the Issuable Maximum and, with respect to the remainder of the
aggregate Stated Value of the shares of Preferred Stock then held by such
Holder for which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of the Issuable Maximum
(the "Excess Stated Value"), the Company shall, within three (3) days of
the Record Date, provide the converting Holder with a notice (the "Notice")
as to whether or not it has elected to use its best efforts to obtain the
Shareholder Approval applicable to such issuance. If the Company shall
either (i) fail to provide the converting Holder with the Notice within
three (3) days of the Record Date, or (ii) indicate in the Notice that it
does not intend to obtain the Shareholder Approval applicable to such
issuance, or (iii) fail to obtain the Shareholder Approval applicable to
such issuance prior to the 60th day following the Record Date, the
converting Holder shall have the option to require the Company to either
(1) if the Company has not prior thereto attempted and failed to obtain the
Shareholder Approval in accordance with this Section, use its best efforts
to obtain the Shareholder Approval applicable to such issuance as soon as
is possible, but in any event not later than the 60th day after such
request, or (2)(i) issue and deliver to such Holder a number of shares of
Common Stock as equals (x) the Excess Stated Value, plus accrued and unpaid
dividends on all shares of Preferred Stock being converted, divided by (y)
the closing sales price of the Common Stock on the Original Issue Date, and
(ii) cash in an amount equal to the product of (x) the Per Share Market
Value on the Conversion Date and (y) the number of shares of Common Stock
in excess of such Holder's pro rata portion of the Issuable Maximum that
would have otherwise been issuable to the Holder in respect of such
conversion but for the provisions of this Section (such amount of cash
being hereinafter referred to as the "Discount Equivalent"), or (3) pay
cash to the converting Holder in an amount equal to the Mandatory
Redemption Amount (as defined in Section 8) for the Excess Stated Value. If
the Company fails to pay the Discount Equivalent or the Mandatory
Redemption Amount, as the case may be, in full pursuant to this Section
within seven (7) days after the date payable, the Company will pay interest
thereon at a rate of 15% per annum to the converting Holder, accruing daily
from the Conversion Date until such amount, plus all such interest thereon,
is paid in full.
(iv)(1) Subject to compliance with the conditions set forth in
paragraph (2) of this Section 5(a)(iv), if the Conversion Price applicable
to a conversion at the option of the Holder is less than $5.50, the Company
shall have the option of either (i) converting all of the shares of
Preferred Stock specified in the Conversion Notice into shares of Common
Stock, as provided in Section 5(a)(i), (ii) paying such Holder within three
(3) Trading Days of the Conversion Date cash in the amount equal to the
product of (A) the number of Underlying Shares into which the shares of
Preferred Stock specified in the Conversion Notice would otherwise be
convertible and (B) the closing sales price of the Common Stock on the
Conversion Date or (iii) converting certain of the shares of Preferred
Stock specified in the Conversion Notice into shares of Common Stock (the
shares of Preferred Stock not so converted, called the "Non-Converted
Preferred Shares") and paying such Holder cash in the amount equal to the
product of (A) the number of Underlying Shares into which the Non-Converted
Preferred Shares would otherwise be convertible and (B) the closing sales
price of the Common Stock on the Conversion Date.
(2) The Company may not pay cash in lieu of issuing Underlying Shares upon
conversions of Preferred Stock or as payment of dividends thereon (and must
deliver Underlying Shares in respect thereof) unless the Company shall, no later
than the Trading Day prior to the Conversion Date, have delivered by facsimile
to the Holders a notice stating its intention to pay such cash in lieu and
setting forth the total amount of cash it intends to pay for such purpose. The
Company's ability to pay cash in lieu of issuing Underlying Shares upon a
conversion of Preferred Stock and as payment of dividends thereon shall be
limited to the amount indicated in such notice. The Company may state in a
notice under this Section that such notice shall remain in effect either for a
defined period of time or until revoked in writing by the Company. Holders shall
be affected by any such notice pro rata in accordance with the shares of
Preferred Stock then held by them. If the Company shall have elected to pay cash
in lieu of issuing Underlying Shares upon a conversion of Preferred Stock and
shall have failed to deliver payment of the amount of such cash due on account
of such conversion by the third (3rd) Trading Day following such election
pursuant to Section 5(b)(iv) hereof, the Holder shall be entitled to demand
delivery within three (3) Trading Days thereafter of the Common Stock issuable
upon conversion of such Preferred Stock.
(b)(i) Not later than three (3) Trading Days after any Conversion Date
and subject to Sections 5(a)(iii)-(iv), the Company will deliver to the
Holder (i) except where the Company is permitted pursuant to Section
5(a)(iv) to pay cash in lieu of issuing Underlying Shares upon conversion,
a certificate or certificates which shall be free of restrictive legends
and trading restrictions (other than those required by Section 3.1(b) of
the Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock (subject to
the limitations set forth in Section 5(a)(iii)(B), (ii) one or more
certificates representing the number of shares of Preferred Stock not
converted, (iii) a bank check in the amount of accrued and unpaid dividends
(if the Company has elected to pay accrued and unpaid dividends in cash),
(iv) if the Company has elected and is permitted hereunder to pay accrued
and unpaid dividends in shares of Common Stock, certificates, which shall
be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement), representing such
shares of Common Stock, and (v) if the Company is permitted and has elected
pursuant to Section 5(a)(iv) to pay cash in lieu of issuing Underlying
Shares upon a conversion of Preferred Stock, payment by wire transfer of
immediately available funds to an account designated by the Holder for such
purpose of an amount equal to the amount due pursuant to Section 5(a)(iv)
in respect of such conversion (in the event the amount of cash permitted to
be paid by the Company in accordance with Section 5(a)(iv) is not
sufficient to cover the conversion in full of shares of Preferred Stock
tendered for such conversion, the Company shall issue Underlying Shares in
respect of such excess in accordance with subparagraph (i) of this
Section); provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Preferred Stock until certificates evidencing
such shares of Preferred Stock are either delivered for conversion to the
Company or any transfer agent for the Preferred Stock or Common Stock, or
the Holder of such Preferred Stock notifies the Company that such
certificates have been lost, stolen or destroyed and provides a bond (or
other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith.
The Company shall, upon request of the Holder, if available, use its
reasonable efforts to deliver any certificate or certificates required to
be delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Conversion Notice such
certificate or certificates, including for purposes hereof, any shares of
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid dividends hereunder, are not delivered to or as directed by the
applicable Holder by the third (3rd) Trading Day after the Conversion Date,
the Holder shall be entitled by written notice to the Company at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately
return the certificates representing the shares of Preferred Stock tendered
for conversion.
(ii) Except where the Company is permitted and has elected under
Section 5(a)(iv) to pay solely cash in lieu of Underlying Shares upon
conversion hereunder, if the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), including for
purposes hereof, any shares of Common Stock to be issued on the Conversion
Date on account of accrued but unpaid dividends hereunder, by the fourth
(4th) Trading Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, $2,500 for
each day after such fourth (4th) Trading Day until such certificates are
delivered. Nothing herein shall limit a Holder's right to pursue actual
damages for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified herein
and such Holder shall have the right to pursue all remedies available to it
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall
not prohibit a Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law. Further, if the Company shall not
have delivered any cash due in respect of conversions of Preferred Stock or
as payment of dividends thereon by the fourth (4th) Trading Day after the
Conversion Date, the Holder may, by notice to the Company, require the
Company to issue Underlying Shares pursuant to Section 5(c), except that
for such purpose the Conversion Price applicable thereto shall be the
lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such Underlying Shares will be
subject to the provision of this Section.
(iii) In addition to any other rights available to the Holder and
except where the Company is permitted and has elected under Section
5(a)(iv) to pay solely cash in lieu of Underlying Shares upon conversion
hereunder, if the Company fails to deliver to the Holder such certificate
or certificates pursuant to Section 5(b)(i), including for purposes hereof,
any shares of Common Stock to be issued on the Conversion Date on account
of accrued but unpaid dividends hereunder, by the fourth (4th) Trading Day
after the Conversion Date, and if after such fourth (4th) Trading Day the
Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving upon such
conversion (a "Buy-In"), then the Company shall pay in cash to the Holder
(in addition to any remedies available to or elected by the Holder) the
amount by which (x) the Holder's total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds
(y) the aggregate stated value of the shares of Preferred Stock for which
such conversion was not timely honored. For example, if the Holder
purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of $10,000
aggregate stated value of the shares of Preferred Stock, the Company shall
be required to pay the Holder $1,000. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in respect of
the Buy-In.
(c)(i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lesser of
(a) the Initial Conversion Price (as defined in Section 8), and (b) 87%
(the "Discount Rate") multiplied by the average of the three (3) lowest Per
Share Market Values during the ten (10) Trading Day period immediately
preceding the applicable Conversion Date, provided, however, that such ten
(10) Trading Day period shall be extended for the number of Trading Days,
if any, during such period in which (A) trading in the Common Stock was not
Actively Traded or suspended from such Subsequent Market on which the
Common Stock is then listed, or (B) after the date declared effective by
the Commission, the Underlying Securities Registration Statement is not
effective, or (C) after the date declared effective by the Commission, the
Prospectus included in the Underlying Securities Registration Statement may
not be used by the Holder for the resale of Underlying Shares. If: (a) an
Underlying Securities Registration Statement is not filed on or prior to
the Filing Date (if the Company files such Underlying Securities
Registration Statement without affording the Holder the opportunity to
review and comment on the same as required by Section 3(a) of the
Registration Rights Agreement, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Securities Exchange Act of 1934, as amended, within
five (5) days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the Commission that an Underlying
Securities Registration Statement will not be "reviewed," or not subject to
further review, or (c) the Underlying Securities Registration Statement is
not declared effective by the Commission on or prior to the Effectiveness
Date (as defined in the Registration Rights Agreement), or (d) such
Underlying Securities Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as defined in the Registration Rights Agreement) at
any time prior to the expiration of the "Effectiveness Period" (as defined
in the Registration Rights Agreement), without being succeeded within ten
(10) days by a subsequent Underlying Securities Registration Statement
filed with and declared effective by the Commission, or (e) the Common
Stock shall fail to be Actively Traded, or (f) the Common Stock shall be
delisted or suspended from trading on any Subsequent Market on which the
Common Stock is then listed for more than three (3) Business Days (which
need not be consecutive days), (g) the conversion rights of the Holders are
suspended for any reason or (h) an amendment to the Underlying Securities
Registration Statement is not filed by the Company with the Commission
within ten (10) days of the Commission's notifying the Company that such
amendment is required in order for the Underlying Securities Registration
Statement to be declared effective (any such failure or breach being
referred to as an "Event," and for purposes of clauses (a), (c), (e) and
(g) the date on which such Event occurs, or for purposes of clause (b) the
date on which such five (5) day period is exceeded, or for purposes of
clauses (d) and (h) the date which such 10 day-period is exceeded, or for
purposes of clause (f) the date on which such three (3) Business
Day-period, is exceeded, being referred to as "Event Date"), then on the
Event Date and each monthly anniversary thereof until such time as the
applicable Event is cured, the Company shall, within five (5) Business Days
of each such date, either (x) pay to the Holder, in cash, 2% of the
aggregate Stated Value of the shares of Preferred Stock then held by such
Holder, as liquidated damages and not as a penalty, or (y) each of the
Initial Conversion Price and the Discount Rate shall be decreased by 2% on
the Event Date and on each monthly anniversary thereof until such time as
the applicable Event is cured (i.e., the Discount Rate would decrease to
85% as of the Event Date and 83% as of the one month anniversary of the
Event Date); provided, that, commencing on the second month anniversary of
the Event Date, the Holder (and not the Company) shall have the right to
require either further cumulative 2% discounts to continue or require the
Company to pay the 2% cash amounts referenced in clause (x) above until
such time as the Event in question is cured. Any decrease in the Initial
Conversion Price and Discount Rate pursuant to this Section shall remain in
effect notwithstanding the fact that the Event causing such decrease has
been subsequently cured and further monthly decreases have ceased. The
provisions of this Section are not exclusive and shall in no way limit the
Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari
passu securities (in the case of pari passu securities, only if such
dividend or distribution is not also made on a pro rata basis to the
Preferred Stock) payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c)
combine outstanding shares of Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of Common Stock any shares of
capital stock of the Company, the Initial Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section 5(c)(ii) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights, warrants or options to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Initial Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of
such rights, warrants or options, plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares so offered
would purchase at such Per Share Market Value, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common
Stock offered for subscription or purchase. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration
of any right, warrant or option to purchase shares of Common Stock the
issuance of which resulted in an adjustment in the Conversion Price
pursuant to this Section 5(c)(iii), if any such right, warrant or option
shall expire and shall not have been exercised, the Conversion Price shall
immediately upon such expiration shall be recomputed and effective
immediately upon such expiration shall be increased to the price which it
would have been (but reflecting any other adjustments in the Conversion
Price made pursuant to the provisions of this Section 5 upon the issuance
of other rights or warrants) had the adjustment of the Conversion Price
made upon the issuance of such rights, warrants, or options been made on
the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such rights,
warrants or options actually exercised.
(iv) If the Company or any subsidiary thereof, as applicable with
respect to Common Stock Equivalents (as defined below), at any time while
any shares of Preferred Stock are outstanding, shall issue shares of Common
Stock or rights, warrants, options or other securities or debt that is
convertible into or exchangeable for shares of Common Stock ("Common Stock
Equivalents") entitling any Person to acquire shares of Common Stock at a
price per share less than the Conversion Price, then the Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of shares of Common Stock or such Common Stock Equivalents plus
the number of shares of Common Stock which the offering price for such
shares of Common Stock or Common Stock Equivalents would purchase at the
Conversion Price, and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock so issued or issuable,
provided, that for purposes hereof, all shares of Common Stock that are
issuable upon exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common
Stock or Common Stock Equivalents are issued, provided, that no such
adjustment shall be made in the case of issuances by the Company of Common
Stock Equivalents pursuant to Section 3.11(a)(i)-(vi) of the Purchase
Agreement (the "Permitted Issuances"), provided, however, that an issuance
of by the Company of Common Stock Equivalents, in connection with an
acquisition by the Company of non-affiliated third parties, shall not
constitute a Permitted Issuance if a Shareholder Approval is required by
the applicable rules and regulations of The Nasdaq Stock Market (or any
success entity) applicable to approve such acquisition.
(v) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in
Sections 5(c)(ii)-(iv) above), then in each such case the Initial
Conversion Price at which each share of Preferred Stock shall thereafter be
convertible shall be determined by multiplying the Initial Conversion Price
in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the Per Share Market Value of Common Stock
determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of Common Stock as determined by the
Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company,
if the Holders of a majority in interest of the Preferred Stock dispute
such valuation, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the Holders of a majority in
interest of the shares of Preferred Stock then outstanding; and provided,
further, that the Company, after receipt of the determination by such
Appraiser shall have the right to select an additional Appraiser, in good
faith, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the Holders of the portion of
assets or evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(i),(ii),(iii),(iv), or (v) the Company shall promptly mail to each
Holder, a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (other than compulsory share
exchanges which constitute Change of Control Transactions), the Holders of
the Preferred Stock then outstanding shall have the right thereafter to
convert such shares only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common
Stock following such reclassification or share exchange, and the Holders of
the Preferred Stock shall be entitled upon such event to receive such
amount of securities, cash or property as a holder of the number of shares
of the Common Stock of the Company into which such shares of Preferred
Stock could have been converted immediately prior to such reclassification
or share exchange would have been entitled. This provision shall similarly
apply to successive reclassifications or share exchanges.
(ix) If (a) the Company shall declare a dividend (or any other
distribution) on its Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock, (c) the
Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock
of any class or of any rights, (d) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the
Common Stock of the Company, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share of exchange whereby the
Common Stock is converted into other securities, cash or property, or (e)
the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company; then the Company
shall cause to be filed at each office or agency maintained for the purpose
of conversion of Preferred Stock, and shall cause to be mailed to the
Holders at their last addresses as they shall appear upon the stock books
of the Company, at least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants
are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share
exchange; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. Holders are
entitled to convert shares of Preferred Stock during the 20-day period
commencing the date of such notice to the effective date of the event
triggering such notice.
(x) If the Company (i) makes a public announcement that it intends to
enter into a Change of Control Transaction (as defined in Section 8) or
(ii) any person, group or entity (including the Company, but excluding a
Holder or any affiliate of a Holder) publicly announces a bona fide tender
offer, exchange offer or other transaction to purchase 33% or more of the
Common Stock (such announcement being referred to herein as a "Major
Announcement" and the date on which a Major Announcement is made, the
"Announcement Date"), then, in the event that a Holder seeks to convert
shares of Preferred Stock on or following the Announcement Date, the
Conversion Price shall, effective upon the Announcement Date and continuing
through the earlier to occur of the consummation of the proposed
transaction or tender offer, exchange offer or other transaction and the
Abandonment Date (as defined below), be equal to the lower of (x) the
average Per Share Market Value on the five Trading Days immediately
preceding (but not including) the Announcement Date and (y) the Conversion
Price that would otherwise have been in effect on the Conversion Date for
such Preferred Stock but for the application of this section. "Abandonment
Date" means with respect to any proposed transaction or tender offer,
exchange offer or other transaction for which a public announcement as
contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity
(in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this paragraph to become operative.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than
the Holders, not less than such number of shares of Common Stock as shall
(subject to any additional requirements of the Company as to reservation of
such shares set forth in the Purchase Agreement) be issuable (taking into
account the adjustments and restrictions of Section 5(a) and Section 5(c))
upon the conversion of all outstanding shares of Preferred Stock and
payment of dividends hereunder. The Company covenants that all shares of
Common Stock that shall be so issuable shall, upon issue, be duly and
validly authorized, issued and fully paid, nonassessable and freely
tradeable, subject to the legend requirements of Section 3.1(b) of the
Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the
Holder of a share of Preferred Stock shall be entitled to receive, in lieu
of the final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the Holder of such
shares of Preferred Stock so converted and the Company shall not be
required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled. The Company may not reissue any shares of Preferred Stock.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and
delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to the attention of the Chief
Financial Officer of the Company at the facsimile telephone number or
address of the principal place of business of the Company as set forth in
the Purchase Agreement. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at
the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 8:00 p.m. (New York City Time), (ii) the
date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 8:00 p.m. (New York City Time) on any date and earlier
than 11:59 p.m. (New York City Time) on such date, (iii) upon receipt, if
sent by a nationally recognized overnight courier service, or (iv) upon
actual receipt by the party to whom such notice is required to be given.
<PAGE>
Section 6. Optional Redemption.
(a) The Company shall have the right, exercisable at any time upon 20
Trading Days' notice (an "Optional Redemption Notice") to the Holders of
the Preferred Stock given at any time after the Original Issue Date to
redeem all or any portion of the shares of Preferred Stock which have not
previously been converted or redeemed, at a price equal to the Optional
Redemption Price (as defined below). The entire Optional Redemption Price
shall be paid in cash. Holders may convert (and the Company shall honor
such conversions in accordance with the terms hereof) any shares of
Preferred Stock, including shares subject to an Optional Redemption Notice,
during the period from the date thereof through the 20th Trading Day after
the receipt of an Optional Redemption Notice, provided, however, that in
the event that the Optional Redemption Price is not paid in full prior to
the expiration of the 20th Trading Day after the receipt of an Optional
Redemption Notice, such conversion rights shall continue to exist as if no
Optional Redemption Notice were delivered.
(b) If any portion of the Optional Redemption Price shall not be paid
by the Company by the 20th Trading Day after the delivery of an Optional
Redemption Notice, the Optional Redemption Notice with regard to such
unpaid portion shall be null and void and ab initio. In such event, the
Company shall not again be permitted to exercise any optional redemption
rights with respect to the Preferred Stock without the consent of the
Holders.
(c) "Optional Redemption Price" shall equal the sum of (i) the greater
of (A) 125% of the aggregate -------------------------- Stated Value of the
shares of Preferred Stock to be redeemed and all accrued and unpaid
dividends thereon, and (B) the product of (a) the Per Share Market Value on
the Trading Day immediately preceding (x) the date of the Optional
Redemption Notice, or (y) the date of payment in full by the Company of the
Optional Redemption Price, whichever is greater, and (b) the Conversion
Ratio calculated on the date of the Optional Redemption Notice, and (ii)
all other amounts, costs, expenses and liquidated damages due in respect of
such shares of Preferred Stock.
Section 7. Redemption Upon Triggering Events.
(a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable
law), have the right, exercisable at the sole option of such Holder, to
require the Company to redeem all or a portion of the Preferred Stock then
held by such Holder for a redemption price, in cash, equal to the sum of
(i) the Mandatory Redemption Amount plus (ii) the product of (A) the number
of Underlying Shares issued in respect of conversions or as payment of
dividends hereunder and then held by the Holder and (B) the Per Share
Market Value on the date such redemption is demanded or the date the
redemption price hereunder is paid in full, whichever is greater (the
"Redemption Price"). The Redemption Price shall be due and payable within
ten (10) days of the date on which the notice for the payment therefor is
provided by a Holder.
(b) If the Company fails to pay the redemption price hereunder in full
pursuant to this Section within seven (7) days after the date when due in
accordance with the terms of Section 7(a), the Company will pay interest
thereon at a rate of 15% per annum, accruing daily from such seventh day
until the redemption price, plus all such interest thereon, is paid in
full. For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Underlying
Shares upon a conversion (or attempted conversion) thereof.
(c) A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order
of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) the failure of an Underlying Securities Registration Statement to
be declared effective by the Commission on or prior to the 180th day after
the Original Issue Date;
(ii) if, during the Effectiveness Period, the effectiveness of the
Underlying Securities Registration Statement lapses for any reason, or the
Holder shall not be permitted to resell Registrable Securities under the
Underlying Securities Registration Statement;
(iii) the failure of the Common Stock to be Actively Traded or, if the
Common Stock shall have become listed on a Subsequent Market, the delisting
or the suspension from trading of the Common Stock from such Subsequent
Market for more than three (3) Business Days (which need not be consecutive
Business Days);
(iv) the Company shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that
comply with the provisions hereof prior to the 10th day after the
Conversion Date or the Company shall provide notice to any Holder,
including by way of public announcement, at any time, of its intention not
to comply with requests for conversion of any Preferred Stock in accordance
with the terms hereof;
(v) (A) the Company shall consummate a Change of Control Transaction,
or shall sell (in one or a series of related transactions) all or
substantially all of its assets (whether or not such sale would constitute
a Change of Control Transaction), provided, that (x) the Company shall
notify the Holder if it enters into an agreement for such a transaction,
(y) the agreement for such transaction shall explicitly state that the
redemption contemplated by this Section shall be made in full at the time
of the consummation of such transaction and (z) if such transaction is
consummated, the dated used for calculating the Per Share Market Value used
in calculating the Redemption Price shall be the date on which (i) the
Company enters into an agreement for such transaction, (ii) such
transaction is consummated, or (iii) the Redemption Price is paid in full,
whichever of such dates contemplated in clauses (i), (ii) or (iii) above
yields the greatest Per Share Market Value, or (B) the Company shall redeem
more than a de minimis number of shares of Common Stock or other Junior
Securities (other than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of the
Holders prior to the expiration of thirty (30) days from the Event Date
relating thereto;
(vii) the Company shall fail for any reason to deliver the certificate
or certificates required pursuant to Section 5(b)(iii) or the cash pursuant
to a Buy-In within seven (7) days after notice is deemed delivered
hereunder;
(viii) the Company shall fail to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue to such Holder
upon a conversion hereunder; or
(ix) the Consolidated Tangible Net Worth of the Company as of any date
on which any shares of Preferred Stock are outstanding (the "Determination
Date") shall be less than the sum of (A) the aggregate Redemption Price as
of the Determination Date for all of the shares of Preferred Stock then
outstanding, and (B) $1,500,000, unless the Company within 10 days of the
Determination Date provides written notice to the Holder that the Company
irrevocably elects to redeem in whole the Company's 11.25% Subordinated
Debentures due 2002 issued pursuant to the Indenture, dated as of January
1, 1992, between the Company and National City Bank, as trustee, excluding
any amendments thereto (the "Indenture") and the Company subsequently
redeems such Subordinated Debentures in whole in accordance with the terms
and conditions of the Indenture.
Section 8. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Actively Traded" shall mean, on any date of determination, that
the average daily trading volume of the Common Stock for the previous
three (3) months is greater than 75,000 shares of Common Stock.
"Change of Control Transaction" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
in excess of 33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 33% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"Common Stock" means the Company's common stock, par value
$1.00 per share, and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"Consolidated Subsidiary" means a subsidiary of the Company
whose financial statements are included in the most recent annual consolidated
financial statements of the Company.
"Consolidated Tangible Net Worth" means the total of all
assets appearing on a consolidated balance sheet of the Company and all
Consolidated Subsidiaries, prepared in accordance with generally accepted
accounting principles less the sum of (i) the book value of all assets of the
Company and all of its Consolidated Subsidiaries which would be treated as
intangibles under generally accepted accounting principles including, without
limitation, such items as goodwill, trademarks, trade names, service marks,
copyrights, patents and licenses and rights with respect to the foregoing but
excluding as an intangible any item representing the deferred portion of
expenses incurred in connection with the issuance of indebtedness, (ii) all
liabilities of the Company and all of its Consolidated Subsidiaries determined
in accordance with generally accepted accounting principles, and (iii) the
portion of the total of all assets of all of the Company's Consolidated
Subsidiaries are attributable to minority interests (excluding any portion of
the assets referred to in (i) above attributable to minority interests).
"Conversion Ratio" means, at any time, a fraction, the
numerator of which is Stated Value plus accrued but unpaid dividends (including
any accrued but unpaid late fees thereon) but only to the extent not paid in
shares of Common Stock in accordance with the terms hereof, and the denominator
of which is the Conversion Price at such time.
"Initial Conversion Price" means $6.32.
"Junior Securities" means the Common Stock and all other
equity securities of the Company which are junior in rights and liquidation
preference to the Preferred Stock.
"Mandatory Redemption Amount" for each share of Preferred
Stock means the sum of (i) the greater of (A) 125% of the Stated Value and all
accrued and unpaid dividends with respect to such share, and (B) the product of
(a) the Per Share Market Value on the Trading Day immediately preceding (x) the
date of the Triggering Event or the Conversion Date, as the case may be, or (y)
the date of payment in full by the Company of the applicable redemption price,
whichever is greater, and (b) the Conversion Ratio calculated on the date of the
Triggering Event, or the Conversion Date, as the case may be, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.
"Original Issue Date" shall mean the date of the first
issuance of any shares of the Preferred Stock regardless of the number of
transfers of any particular shares of Preferred Stock and regardless of the
number of certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on such Subsequent
Market on which the Common Stock is then listed or quoted, as reported by
Bloomberg Information Services, Inc. (or any successor entity succeeding to its
function of reporting prices), or if there is no such price on such date, then
the closing bid price on such Subsequent Market on the date nearest preceding
such date, as reported by Bloomberg Information Services, Inc. (or any successor
entity succeeding to its function of reporting prices), or (b) if the Common
Stock is not then listed or quoted on a Subsequent Market, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) and as listed on Bloomberg
Information Services, Inc. (or any successor entity succeeding to its function
of reporting prices), at the close of business on such date, or (c) if the
Common Stock is not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices) and as listed on Bloomberg Information Services, Inc. (or any successor
entity succeeding to its function of reporting prices), then the average of the
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the Holder, or (d) if the Common Stock is not then publicly traded the
fair market value of a share of Common Stock as determined by an Appraiser
selected in good faith by the Holders of a majority of the shares of the
Preferred Stock.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of the Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on such Subsequent Market on which the Common Stock is then listed or
quoted, as reported on Bloomberg Information Services, Inc. (or any successor
entity succeeding to its function of reporting prices), or (b) if the Common
Stock is not listed on a Subsequent Market, a day on which the Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board, as
reported on Bloomberg Information Services, Inc. (or any successor entity
succeeding to its function of reporting prices), or (c) if the Common Stock is
not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices) and as listed on Bloomberg Information Services, Inc. (or any
successor entity succeeding to its function of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except
Saturday, Sunday and any day which shall be a legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law
or other government action to close.
"Underlying Securities Registration Statement" means a
registration statement that meets the requirement of the Registration Rights
Agreement and registers the resale of all Underlying Shares by the recipient
thereof, who shall be named as a "selling stockholder" thereunder.
"Underlying Shares" means, collectively, the shares of Common
Stock into which the Shares are convertible and the shares of Common Stock
issuable upon payment of dividends thereon in accordance with the terms hereof.
ARTICLE V
The term of existence of the Corporation shall be perpetual.
ARTICLE VI
The stockholders may hold their meetings, annual or special, within or
without the State of Delaware as may be provided in the By-Laws, and the Board
of Directors or any Committee thereof may hold all or any of their meetings
within or without the State of Delaware at such places as the By-Laws or the
Board of Directors may designate. The Corporation may have one or more offices
and keep any of the books of the Corporation subject to the provisions of the
laws of the State of Delaware within or without the State of Delaware at such
places as may from time to time be designated by the Board of Directors.
Elections of directors need not be by written ballot unless the By-Laws of the
Corporation shall so provide.
ARTICLE VII
The Corporation shall possess and may exercise all the powers and
privileges granted by the General Corporation Law or by any other law of the
State of Delaware at the time in force or by this Restated Certificate of
Incorporation, together with any powers incidental thereto, so far as such
powers and such privileges are necessary or convenient to the conduct, promotion
or attainment of the purpose set forth in Article III of this Restated
Certificate of Incorporation.
ARTICLE VIII
In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the Board of Directors may exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation, subject, nevertheless, to the express provisions of the laws of the
State of Delaware, of this Restated Certificate of Incorporation, and of the
By-Laws of the Corporation.
ARTICLE IX
The Corporation shall, to the full extent permitted by the General
Corporation Law of the State of Delaware, indemnify all persons whom this
Corporation may indemnify pursuant thereto.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived and improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this provision to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE X
All transactions between the Corporation and one or more of its
directors or officers, or between the Corporation and any other corporation,
partnership, association or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be valid to the full extent permitted by the General Corporation Law of
the State of Delaware.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation in the
manner now or hereafter prescribed by statute, and all rights and powers
conferred herein on stockholders, directors and officers are subject to this
reservation.
ARTICLE XII
The Board of Directors shall be divided into 3 classes; the term of
office of the directors of the 1st class to expire at the annual meeting of
shareholders to be held in 1988; that of the 2nd class to expire at the annual
meeting of shareholders to be held in 1989; and that of the 3rd class to expire
at the annual meeting of shareholders to be held in 1990. At each annual meeting
starting in 1988 the number of directors equal to the number of the class whose
term expires at the time of such meeting shall be elected to hold office until
the 3rd succeeding annual meeting. The number of directors of the corporation
shall be six. This number of directors may be changed only by the affirmative
vote of (i) the holders of at least 75% of the shares of the corporation
entitled to vote on such change, or (ii) a majority of the directors in office
at the time of the vote. When the number of directors is changed, any increase
or decrease in directorships shall be apportioned among the classes so as to
make all classes as nearly equal in number as possible.
A director may be removed from office only for cause, and only by
affirmative vote of a majority of the shares entitled to vote for the election
of such director, taken at a meeting of shareholders called for that purpose.
Except as may otherwise be provided by law, cause for removal shall be construed
to exist only if the director whose removal is proposed has been convicted of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal or has been adjudged by a court of competent
jurisdiction to be liable for negligence or misconduct in the performance of his
duty to the corporation in a matter of substantial importance to the
corporation, and such adjudication is no longer subject to direct appeal.
All nominations for election to the Board of Directors, including any
nomination to fill a vacancy (whether created by an increase in the number of
directors, a resignation of a Director or the removal of a Director, or
otherwise), other than those made by the remaining directors then in office,
must be made at a meeting of shareholders called for the election of directors.
Special meetings of the shareholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called only by the Chairman of
the Board or the Secretary, or the Board of Directors.
This Article XII may be altered, amended or repealed only by the
affirmative vote of not less than seventy-five percent (75%) of the shares
present or represented at an annual or special meeting of the stockholders at
which a quorum is in attendance.
IN WITNESS WHEREOF, COYOTE NETWORK SYSTEMS, INC. has caused this Restated
Certificate of Incorporation to be signed by its President and attested by its
Secretary, this 4th day of September, 1998.
COYOTE NETWORK SYSTEMS, INC.
BY /s/ Daniel W. Latham
-------------------------------------
Daniel W. Latham
President and Chief Operating Officer
Attest:
/s/ Brian A. Robson
- ---------------------------
Brian A. Robson, Secretary
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
COYOTE NETWORK SYSTEMS, INC.
and
JNC OPPORTUNITY FUND LTD.
August 31, 1998
<PAGE>
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement"),
dated as of August 31, 1998, between Coyote Network Systems, Inc., a Delaware
corporation (the "Company"), and JNC Opportunity Fund Ltd., a Cayman Islands
corporation (the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to purchase from the Company, shares of the Company's 5%
Series A Convertible Preferred Stock, par value $.01 per share (the "Preferred
Stock"), which are convertible into shares of the Company's common stock, par
value $ 1.00 per share (the "Common Stock").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy are
hereby acknowledged, the Company and Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 The Closing.
(a) The Closing. (i) Subject to the terms and conditions set
forth in this Agreement, the Company shall issue and sell to the Purchaser and
the Purchaser shall purchase 700 shares of Preferred Stock (the "Shares") for an
aggregate purchase price of $7,000,000. The closing of the purchase and sale of
the Shares (the "Closing") shall take place at the offices of Robinson Silverman
Pearce Aronsohn & Berman LLP ("Robinson Silverman"), 1290 Avenue of the
Americas, New York, New York 10104, immediately following the execution hereof
or such later date as the parties shall agree. The date of the Closing is
hereinafter referred to as the "Closing Date."
(ii) At the Closing, the parties shall deliver or shall cause to be
delivered the following: (A) the Company shall deliver (1) stock certificates
representing the Shares, registered in the name of the Purchaser, (2) a Common
Stock purchase warrant, in the form of Exhibit D, registered in the name of the
Purchaser, pursuant to which the Purchaser shall have the right at any time and
from time to time thereafter through the third anniversary of the Closing Date
to acquire 225,000 shares of Common Stock at an exercise price per share
(subject to adjustment as provided therein) of $8.43 (the "Warrant"), (3) the
legal opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.,
outside counsel to the Company, substantially in the form of Exhibit C, and (4)
all other documents, instruments and writings required to have been delivered at
or prior to the Closing Date by the Company pursuant to this Agreement,
including an executed Registration Rights Agreement, dated the date hereof,
between the Company and the Purchaser, in the form of Exhibit B (the
"Registration Rights Agreement"), and the Irrevocable Transfer Agent
Instructions, in the form of Exhibit E, delivered to and acknowledged by the
Company's transfer agent (the "Transfer Agent Instructions"); and
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(B) the Purchaser shall deliver (1) $7,000,000 in United States dollars in
immediately available funds by wire transfer to an account designated in writing
by the Company for such purpose, and (2) all documents, instruments and writings
required to have been delivered at or prior to the Closing Date by the Purchaser
pursuant to this Agreement, including, without limitation, an executed
Registration Rights Agreement.
1.2 Form of Preferred Stock. The Preferred Stock shall have
the rights preferences and privileges set forth in Exhibit A, and shall be
incorporated into a Certificate of Designation ("Certificate of Designation"),
in form and substance mutually agreed to by the parties.
For purposes of this Agreement, "Conversion Price," "Original
Issue Date," "Conversion Date" and "Trading Day" shall have the meanings set
forth in Exhibit A; "Business Day" shall mean any day except Saturday, Sunday
and any day which shall be a federal legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties to the
Purchaser:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, with the requisite corporate power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. The Company has no subsidiaries other than as set forth in
Schedule 2.1(a) (collectively the "Subsidiaries"). Each of the Subsidiaries is
an entity, duly incorporated or otherwise organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the full corporate power and authority to own
and use its properties and assets and to carry on its business as currently
conducted. Each of the Company and the Subsidiaries is duly qualified to do
business and is in good standing as a foreign corporation in each jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of the Securities (as
defined below) or any of this Agreement, the Certificate of Designation, the
Registration Rights Agreement or the Warrant (collectively, the "Transaction
Documents"), (y) have or result in a material adverse effect on the results of
operations, assets, prospects, or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, or (z) adversely impair the
Company's ability to perform fully on a timely basis its obligations under any
of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse
Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents, and otherwise to carry out
its obligations thereunder. The execution and delivery of each of the
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Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
corporate action on the part of the Company and no further corporate action is
required by the Company. Each of the Transaction Documents has been duly
executed by the Company and, when delivered (or filed, as the case may be) in
accordance with the terms hereof, will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms. Neither the Company nor any Subsidiary is in violation of any of the
provisions of its respective certificate of incorporation, by-laws or other
charter documents.
(c) Capitalization. The number of authorized, issued and
outstanding capital stock of the Company is set forth in Schedule 2.1(c). No
shares of Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as disclosed in Schedule 2.1(c), there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result of
the purchase and sale of the Shares and the Warrant, securities, rights or
obligations convertible into or exchangeable for, or giving any Person any right
to subscribe for or acquire any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common Stock. To
the knowledge of the Company, except as specifically disclosed in the SEC
Documents (as defined below) or Schedule 2.1(c), no Person or group of related
Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or
has the right to acquire by agreement with or by obligation binding upon the
Company beneficial ownership of in excess of 5% of the Common Stock. A "Person"
means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.
(d) Issuance of the Shares and the Warrant. The Shares and the
Warrant are duly authorized, and, when issued and paid for in accordance with
the terms hereof, shall have been validly issued, fully paid and nonassessable,
free and clear of all liens, encumbrances and rights of first refusal of any
kind (collectively, "Liens"). The Company has on the date hereof and will, at
all times while the Shares and the Warrant are outstanding, maintain an adequate
reserve of duly authorized shares of Common Stock, reserved for issuance to the
holders of the Shares, to enable it to perform its conversion, exercise and
other obligations under this Agreement, the Certificate of Designation and the
Warrant. Such number of reserved and available shares of Common Stock is not
less than the sum of (i) 200% of the number of shares of Common Stock which
would be issuable upon conversion in full of the Shares, assuming such
conversion occurred on the Original Issue Date or the Filing Date (as defined in
the Registration Rights Agreement), whichever yields a lower Conversion Price,
(ii) the number of shares of Common Stock issuable upon exercise of the Warrant,
and (iii) the number of shares Common Stock which would be issuable upon payment
of dividends on the Shares, assuming each Share is outstanding for three years
and all dividends are paid in shares of Common Stock (such number of shares, the
"Initial Minimum"). All such authorized shares of Common Stock shall be duly
reserved for issuance to the holders of such Shares and Warrant. The shares of
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<PAGE>
Common Stock issuable upon conversion of the Shares, as payment of dividends
thereon and upon exercise of the Warrant are collectively referred to herein as
the "Underlying Shares." The Shares, the Warrant and the Underlying Shares are
collectively, the "Securities." When issued in accordance with the Certificate
of Designation and the Warrant, in accordance with their respective terms, the
Underlying Shares shall have been duly authorized, validly issued, fully paid
and nonassessable, free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), 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 (with or without notice, lapse of time
or both) of, any agreement, credit facility, indenture or instrument (evidencing
a Company debt or otherwise) to which the Company or any Subsidiary is a party
or by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company is subject (including Federal and state
securities laws and regulations), or by which any property or asset of the
Company is bound or affected, except in the case of each of clauses (ii) and
(iii), as could not, individually or in the aggregate, have or result in a
Material Adverse Effect. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually or in the aggregate, could not have or
result in a Material Adverse Effect.
(f) Consents and Approvals. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
Federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filing of the Certificate of
Designation with the Secretary of State of Delaware, (ii) the filings required
pursuant to Section 3.12, (iii) the filing of the Underlying Securities
Registration Statement with the Securities and Exchange Commission (the
"Commission") meeting the requirements set forth in the Registration Rights
Agreement and covering the resale of the Underlying Shares by the Purchaser,
(iv) applicable Blue Sky filings and, and (v) in all other cases where the
failure to obtain such consent, waiver, authorization or order, or to give such
notice or make such filing or registration could not have or result in,
individually or in the aggregate, a Material Adverse Effect (collectively, the
"Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed
in the SEC Documents or in Schedule 2.1(g), there is no action, suit, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against the Company or any of its Subsidiaries or any of
their respective properties before or by any court, governmental or
administrative agency or regulatory authority (Federal, state, county, local or
foreign) which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii)
could, individually or in the aggregate, have or result in a Material Adverse
Effect.
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<PAGE>
(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or in violation of (and no event has occurred
which has not been waived which, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under), nor has the Company
or any Subsidiary received notice of a claim that it is in default under or that
it is in violation of, any indenture, loan or credit agreement or any other
agreement or instrument to which it is a party or by which it or any of its
properties is bound, (ii) is in violation of any order of any court, arbitrator
or governmental body, or (iii) is in violation of any statute, rule or
regulation of any governmental authority, except as could not individually or in
the aggregate, have or result in a Material Adverse Effect.
(i) Private Offering. Assuming the accuracy of the
representations and warranties of the Purchaser set forth in Sections
2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchaser as
contemplated hereby are exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). Neither the Company
nor any Person acting on its behalf has taken any action that could subject the
offering, issuance or sale of the Securities to the registration requirements of
the Securities Act.
(j) SEC Documents; Financial Statements. Except as set forth
in Schedule 2.1(j), the Company has filed all reports required to be filed by it
under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
for the three years preceding the date hereof (or such shorter period as the
Company was required by law to file such material) (the foregoing materials
being collectively referred to herein as the "SEC Documents" and, together with
the Schedules to this Agreement the "Disclosure Materials") on a timely basis or
has received a valid extension of such time of filing and has filed any such SEC
Documents prior to the expiration of any such extension. As of their respective
dates, the SEC Documents complied in all material respects with the requirements
of the Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. All material agreements to which the Company is a party or to which
the property or assets of the Company are subject have been filed as exhibits to
the SEC Documents as required by Item 601 of Regulation S-K. The financial
statements of the Company included in the SEC Documents comply in all material
respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting ("GAAP") principles applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial statements or
the notes thereto, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments. Since March 31, 1998, except as specifically
disclosed in the SEC Documents, (a) there has been no event, occurrence or
development that has had or that could have or result in a Material Adverse
Effect, (b) the Company has not incurred any liabilities (contingent or
otherwise) other than (x) liabilities incurred in the ordinary course of
business consistent with past practice and (y) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, (c) the Company has not
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<PAGE>
altered its method of accounting or the identity of its auditors and (d) the
Company has not declared or made any payment or distribution of cash or other
property to its stockholders or officers or directors (other than in compliance
with existing Company stock option plans) with respect to its capital stock, or
purchased, redeemed (or made any agreements to purchase or redeem) any shares of
its capital stock. The Company last filed audited financial statements with the
Commission on July 14, 1998, and has not received any comments from the
Commission in respect thereof.
(k) Investment Company. The Company is not, and is not an
Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(l) Certain Fees. Except for certain fees payable by the
Company to Jesup & Lamont Securities Corporation and the Shemano Group, no fees
or commissions will be payable by the Company to any broker, financial advisor
or consultant, finder, placement agent, investment banker, or bank with respect
to the transactions contemplated by this Agreement. The Purchaser shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by this Agreement. The
Company shall indemnify and hold harmless the Purchaser, its employees,
officers, directors, agents, and partners, and their respective Affiliates, from
and against all claims, losses, damages, costs (including the costs of
preparation and attorney's fees) and expenses suffered in respect of any such
claimed or existing fees, as such fees and expenses are incurred.
(m) Solicitation Materials. Neither the Company nor any Person
acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) Form S-1 Eligibility. The Company is eligible to register
securities for resale with the Commission under Form S-1 promulgated under the
Securities Act.
(o) Exclusivity. As long as the Preferred Stock is
outstanding, the Company shall not issue and sell shares of the Preferred Stock
to any Person other than the Purchaser other than with the specific prior
written consent of the Purchaser.
(p) Seniority. No class of equity securities of the Company is
senior to the Shares in right of payment, whether upon liquidation or
dissolution, or otherwise.
(q) Patents and Trademarks. Except as may result from the
litigation described in Schedule 2.1(g), the Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights (collectively, the
"Intellectual Property Rights") which are necessary or material for use in
connection with its business, and which the failure to so have would have a
Material Adverse Effect. To the best knowledge of the Company, except as may
result from the litigation described in Schedule 2.1(g), all such Intellectual
Property Rights are enforceable and there is no existing infringement by another
Person of any of the Intellectual Property Rights.
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(r) Registration Rights; Rights of Participation. Except as
set forth on Schedule 6(b) to the Registration Rights Agreement, the Company has
not granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(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 as described in the SEC Documents, except where the
failure to possess such permits could not, individually or in the aggregate,
have or result in a Material Adverse Effect ("Material Permits"), and neither
the Company nor any such Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.
(t) Title. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property and personal property owned
by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all Liens, except for such Liens as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
Subsidiaries. Any real property and facilities held under lease by the Company
and its Subsidiaries are held by them under valid, subsisting and 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.
(u) Disclosure. The Company confirms that it has not provided
the Purchaser or its agents or counsel with any information that constitutes or
might constitute material non-public information. The Company understands and
confirms that the Purchaser shall be relying on the foregoing representations in
effecting transactions in securities of the Company. All disclosure provided to
the Purchaser regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
2.2 Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Company as follows:
(a) Organization; Authority. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with the requisite corporate power and
authority, to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations thereunder. The
purchase by the Purchaser of the Securities hereunder has been duly authorized
by all necessary action on the part of the Purchaser. Each of this Agreement and
the Registration Rights Agreement has been duly executed, authorized and
delivered by the Purchaser and constitutes the valid and legally binding
obligation of the Purchaser, enforceable against it in accordance with its
terms.
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(b) Investment Intent. The Purchaser is acquiring the
Securities for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof or
interest therein, without prejudice, however, to the Purchaser's right, subject
to the provisions of this Agreement and the Registration Rights Agreement, at
all times to sell or otherwise dispose of all or any part of such Securities
pursuant to an effective registration statement under the Securities Act and in
compliance with applicable state securities laws or under an exemption from such
registration.
(c) Purchaser Status. At the time the Purchaser was offered
the Shares and the Warrant, it was, and at the date hereof it is, and at each
exercise date under the Warrant, it will be, an "accredited investor" as defined
in Rule 501(a) under the Securities Act.
(d) Experience of the Purchaser. The Purchaser, either alone
or together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) Ability of the Purchaser to Bear Risk of Investment. The
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) Access to Information. The Purchaser acknowledges receipt
of the Disclosure Materials and further acknowledges that it has reviewed the
Disclosure Materials and has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its representatives or counsel shall modify, amend
or affect such Purchaser's right to rely on the truth, accuracy and completeness
of the Disclosure Materials and the Company's representations and warranties
contained in the Transaction Documents.
(g) General Solicitation. The Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.
(h) Reliance. The Purchaser understands and acknowledges that
(i) the Securities are being offered and sold to it without registration under
the Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and the Purchaser hereby consents to such
reliance.
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The Company acknowledges and agrees that the Purchaser makes
no representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred securities under the
Securities Act. Notwithstanding the foregoing, the Company hereby consents to
and agrees to register on the books of the Company and with any transfer agent
for the securities of the Company any transfer of Securities by the Purchaser to
an Affiliate of the Purchaser or to funds under common management with the
Purchaser, and any transfer among any such Affiliates or funds, provided that
transferee certifies to the Company that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and that it is acquiring the
Securities solely for investment purposes. Any such transferee shall agree in
writing to be bound by the terms of this Agreement and shall have the rights of
a Purchaser under this Agreement and the Registration Rights Agreement.
(b) The Purchaser agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above
nor any other legend if the conversion of Shares, the payment of dividends
thereon, and exercise of the Warrant or other issuances of Underlying Shares as
contemplated hereby, by the Certificate of Designation or the Warrant occurs at
any time while an Underlying Securities Registration Statement is effective
under the Securities Act or, in the event there is not an effective Underlying
Securities Registration Statement at such time, if in the opinion of counsel to
the Company such legend is not required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements issued by
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the staff of the Commission). The Company shall cause its counsel to issue the
legal opinion included in the Transfer Agent Instructions to the Company's
transfer agent on the day that the Underlying Securities Registration Statement
is declared effective by the Commission. The Company agrees that it will provide
the Purchaser, upon request, with a certificate or certificates representing
Underlying Shares, free from such legend at such time as such legend is no
longer required hereunder. The Company may not make any notation on its records
or give instructions to any transfer agent of the Company which enlarge the
restrictions of transfer set forth in this Section.
3.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Shares and payment
of dividends thereon in accordance with the terms of the Certificate of
Designation, and (ii) exercise of the Warrant in accordance with its terms, may
result in dilution of the outstanding shares of Common Stock, which dilution may
be substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Underlying Shares upon (x) conversion of the Shares
and payment of dividends thereon in accordance with the terms of the Certificate
of Designation, and (y) exercise of the Warrant in accordance with its terms, is
not relieved or otherwise altered by the effect of any such dilution.
3.3 Furnishing of Information. As long as the Purchaser owns
Securities, the Company covenants to use its best efforts to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act. As long as the Purchaser
owns Securities, if the Company is not required to file reports pursuant to such
sections, it will prepare and furnish to the Purchaser and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any holder of Securities may
reasonably request, all to the extent required from time to time to enable such
Person to sell Underlying Shares without registration under the Securities Act
within the limitation of the exemptions provided by Rule 144 promulgated under
the Securities Act, including the legal opinion referenced above in this
Section. Upon the request of any such Person, the Company shall deliver to such
Person a written certification of a duly authorized officer as to whether it has
complied with such requirements.
3.4 Subsequent Nasdaq Listing. The Company shall use its best efforts
to cause the Common Stock to be listed for trading and quoted on the Nasdaq
National Market or the Nasdaq SmallCap Market as soon as possible, but in any
event prior to the Filing Date (as such term is defined in the Registration
Rights Agreement).
3.5 Integration. The Company shall not, and shall use its best efforts
to ensure that, no Affiliate shall, sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
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of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchaser.
3.6 Increase in Authorized Shares. At such times as the Company would
be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from (a) issuing 200% of the number of
Underlying Shares as would then be issuable upon a conversion in full of the
Shares and as payment of any accrued and unpaid dividends in respect thereof in
shares of Common Stock, or (b) honoring the exercise in full of the Warrant, in
either case, due to the unavailability of a sufficient number of shares of
authorized but unissued or reserved Common Stock, the Board of Directors of the
Company shall promptly (and in any case, within 30 Business Days from such date)
prepare and mail to the stockholders of the Company proxy materials requesting
authorization to amend the Company's Certificate of Incorporation to increase
the number of shares of Common Stock which the Company is authorized to issue to
at least such number of shares as reasonably requested by the Purchaser in order
to provide for such number of authorized and unissued shares of Common Stock to
enable the Company to comply with its conversion exercise and reservation of
shares obligations as set forth in this Agreement, the Certificate of
Designation and the Warrant (the sum of (x) the number of shares of Common Stock
then authorized, (y) the number of shares of Common Stock then outstanding plus
all shares of Common Stock issuable upon exercise of all outstanding options,
warrants and convertible instruments, and (z) the sum of (i) 200% of the number
of Underlying Shares as are then issuable upon a conversion in full of all
Shares and as payment of dividends thereon, and (ii) the number of Underlying
Shares as are issuable upon exercise in full of the Warrant, shall be a
reasonable number). In connection therewith, the Board of Directors shall (a)
adopt proper resolutions authorizing such increase, (b) recommend to and
otherwise use its best efforts to promptly and duly obtain stockholder approval
to carry out such resolutions (and hold a special meeting of the stockholders no
later than the 60th day after delivery of the proxy materials relating to such
meeting) and (c) within five (5) Business Days of obtaining such stockholder
authorization, file an appropriate amendment to the Company's Certificate of
Incorporation to evidence such increase.
3.7 Reservation and Listing of Underlying Shares. (a) The
Company shall maintain a reserve of Common Stock for issuance upon conversion of
the Shares (and for payment of dividends thereon in shares of Common Stock) and
exercise of the Warrant in such amount as may be required to perform its
obligations in full under the Transaction Documents, which reserve shall include
a number of shares of Common Stock equal to no less than (i) 200% of the number
of shares of Common Stock as would be issuable upon conversion in full of the
Shares and upon payment of dividends thereon, and (ii) the number of shares of
Common Stock issuable upon exercise of the Warrant.
(b) The Company shall (i) not later than the Tenth (10th) day
following the date, if any, on which the shares of Common Stock become listed
for trading on any of the New York Stock Exchange, American Stock Exchange,
Nasdaq National Market or Nasdaq SmallCap Market (each a "Subsequent Market"),
prepare and file with any such Subsequent Market an additional shares listing
application covering a number of shares of Common Stock which is at least equal
to the number of shares required to be reserved pursuant to Section 2.1(d), (ii)
take all steps necessary to cause the such shares to be approved for listing on
such Subsequent Market as soon as possible thereafter, and (iii) provide to the
Purchaser evidence of such listing, and the Company shall maintain the listing
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of its Common Stock thereon or on another Subsequent Market. If the number of
Underlying Shares as are issuable upon conversion in full of the number of
Shares then outstanding, as payment of dividends thereon and exercise of the
Warrant exceeds 85% of the number of Underlying Shares previously listed on
account thereof with such Subsequent Market, the Company shall take the
necessary actions to immediately list a number of Underlying Shares as equals
(i) 200% of the number of Underlying Shares then issuable upon conversion in
full of the Shares and upon payment of dividends thereon, and (ii) the number of
Underlying Shares issuable upon exercise of the Warrant.
3.8 Conversion Procedures. The Transfer Agent Instructions, Conversion
Notice (as defined in Exhibit A) and Notice of Exercise under the Warrant set
forth the totality of the procedures with respect to the conversion of the
Shares and exercise of the Warrant, including the form of legal opinion, if
necessary, that shall be rendered to the Company's transfer agent and such other
information and instructions as may be reasonably necessary to enable the
Purchaser to convert its Shares and exercise the Warrant as contemplated in the
Certificate of Designation and the Warrant (as applicable).
3.9 Notice of Breaches. (a) Each of the Company and the Purchaser shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained therein to be
incorrect or breached as of the Closing Date. However, no disclosure by either
party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
(b) Notwithstanding the generality of Section 3.9(a), the
Company shall promptly notify the Purchaser of any notice or claim (written or
oral) that it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by the Transaction Documents
violates or would violate any written agreement or understanding between such
lender and the Company, and the Company shall promptly furnish by facsimile to
the holders of the Securities a copy of any written statement in support of or
relating to such claim or notice.
3.10 Conversion and Exercise Obligations of the Company. The Company
shall honor conversions of the Shares and exercises of the Warrant and shall
deliver Underlying Shares in accordance with the respective terms, conditions
and time periods set forth in the respective Certificate of Designation and the
Warrant.
3.11 Right of First Refusal; Subsequent Registrations. (a) The Company
shall not, directly or indirectly, without the prior written consent of the
Purchaser, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities or a transaction intended to be exempt or not subject to registration
under the Securities Act (a "Subsequent Placement") for a period of 180 days
after the Closing Date, except (i) the granting of Common Stock options,
warrants or other securities to acquire Common Stock to employees, officers and
directors, and the issuance of shares upon exercise of such securities, under
any stock option plan or other employee compensation plan heretofore or
hereinafter duly adopted by the Company, (ii) shares of Common Stock issued upon
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exercise of any currently outstanding warrants and upon conversion of any
currently outstanding convertible securities of the Company, in each case
disclosed in Schedule 2.1(c), (iii) shares of Common Stock issued upon
conversion of Preferred Stock and as payment of dividends thereon and upon
exercise of the Warrant in accordance with the Certificate of Designation or the
Warrant, respectively, (iv) shares of Common Stock, warrants or other securities
to acquire shares of Common Stock, in either case, issued in connection with
acquisitions by the Company of non-affiliated third parties or as inducement for
debt or lease financing with non-affiliated third party institutional lenders
whose primary business is not trading or investing in securities, (v) shares of
Common Stock, warrants or other securities to acquire Common Stock issued
pursuant to any agreement entered into with the Company which are unrelated to
the raising of capital, and (vi) shares of Common Stock, warrants or other
securities to acquire shares of Common Stock, in either case, issued in
connection with the raising of capital by the Company in order to redeem all of
the Shares then held by the Purchaser pursuant to Section 6 of the Certificate
of Designation (but only if (1) such redemption be made in full within twenty
(20) Trading Days of the consummation of an issuance of such shares of Common
Stock, warrants or other securities to acquire shares of Common Stock and (2)
the documents, if any, entered into in connection with such capital raising
explicitly state that proceeds therefrom shall first be used to redeem the
Shares in accordance with this clause (vi)), unless (A) the Company delivers to
the Purchaser a written notice (the "Subsequent Placement Notice") of its
intention effect such Subsequent Placement, which Subsequent Placement Notice
shall describe in reasonable detail the proposed terms of such Subsequent
Placement, the amount of proceeds intended to be raised thereunder, the Person
with whom such Subsequent Placement shall be effected, and attached to which
shall be a term sheet or similar document relating thereto and (B) the Purchaser
shall not have notified the Company by 5:00 p.m. (New York City time) on the
tenth (10th) Trading Day after its receipt of the Subsequent Placement Notice of
its willingness to cause the Purchaser to provide (or to cause its sole designee
to provide), subject to completion of mutually acceptable documentation,
financing to the Company on substantially the terms set forth in the Subsequent
Placement Notice. If the Purchaser shall fail to notify the Company of its
intention to enter into such negotiations within such time period, the Company
may effect the Subsequent Placement substantially upon the terms and to the
Persons (or Affiliates of such Persons) set forth in the Subsequent Placement
Notice; provided, that the Company shall provide the Purchaser with a second
Subsequent Placement Notice, and the Purchaser shall again have the right of
first refusal set forth above in this paragraph (a), if the Subsequent Placement
subject to the initial Subsequent Placement Notice shall not have been
consummated for any reason on the terms set forth in such Subsequent Placement
Notice within thirty (30) Trading Days after the date of the initial Subsequent
Placement Notice with the Person (or an Affiliate of such Person) identified in
the Subsequent Placement Notice.
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company permitted pursuant to Schedule 6(b) of
the Registration's Rights Agreement to be registered, in the Underlying
Securities Registration in accordance with the Registration Rights Agreement,
and (z) Common Stock to be registered for resale in connection with financings
permitted pursuant to paragraph (a)(i) and (vi) of Section 3.11(a) (provided, in
the case of a financing permitted pursuant paragraph (a)(vi) of Section 3.11(a),
it shall be a condition precedent to such registration that the Optional
Redemption Price for the Shares shall have been paid in full), the Company shall
not, without the prior written consent of the Purchaser (i) issue or sell any of
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its or any of its Affiliates' equity or equity-equivalent securities pursuant to
Regulation S promulgated under the Securities Act, or (ii) register for resale
any securities of the Company for a period of not less than 90 Trading Days
after the date that the Underlying Securities Registration Statement is declared
effective by the Commission. Any days that a Purchaser is unable to sell
Underlying Securities under the Underlying Securities Registration Statement
shall be added to such 90 Trading Day period for the purposes of (i) and (ii)
above.
3.12 Certain Securities Laws Disclosures; Publicity. The Company shall:
(i) issue a press release acceptable to the Purchaser disclosing the
transactions contemplated hereby on the Closing Date, (ii) either include the
disclosure of this transaction in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998 or file with the Commission a
Report on Form 8-K disclosing the transactions contemplated hereby within
fifteen (15) Business Days after the Closing Date, and (iii) timely file with
the Commission a Form D promulgated under the Securities Act as required under
Regulation D promulgated under the Securities Act and provide a copy thereof to
the Purchaser promptly after the filing thereof. The Company shall, no less than
two (2) Business Days prior to the filing of any disclosure required by clauses
(ii) and (iii) above, provide a copy thereof to Encore Capital Management,
L.L.C. ("Encore").
3.13 Use of Proceeds. The Company shall not use the net proceeds from
the sale of the Securities hereunder to redeem any Company equity or
equity-equivalent securities or to pay down debt other than trade debt.
3.14 Transfer of Intellectual Property Rights. For so long as any
Shares are outstanding, except in connection with the sale of all or
substantially all of the assets of the Company, the Company shall not transfer,
sell or otherwise dispose of any Intellectual Property Rights, or allow any of
the Intellectual Property Rights to become subject to any Liens, or fail to
renew such Intellectual Property Rights (if renewable and it would otherwise
lapse if not renewed), without the prior written consent of the Purchaser.
3.15 Reimbursement. If the Purchaser, other than by reason of its gross
negligence, willful misconduct or violation of law, becomes involved in any
capacity in any action, proceeding or investigation brought by or against any
Person, including stockholders of the Company but not including investors in the
Purchaser or investment funds managed by Encore, in connection with or as a
result of the consummation of the transactions contemplated by Transaction
Documents, the Company will reimburse the Purchaser for its reasonable legal and
other expenses (including the cost of any investigation and preparation)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchaser who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchaser and any such Affiliate, and shall be binding upon and inure
to the benefit of any successors, assigns, heirs and personal representatives of
the Company, the Purchaser and any such Affiliate and any such Person. The
Company also agrees that neither the Purchaser nor any such Affiliates,
partners, directors, agents, employees or controlling persons shall have any
liability to the Company or any Person asserting claims on behalf of or in right
of the Company in connection with or as a result of the consummation of the
Transaction Documents except to the extent that any losses, claims, damages,
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liabilities or expenses incurred by the Company result from the gross
negligence, willful misconduct or violation of law of the Purchaser or entity in
connection with the transactions contemplated by this Agreement.
ARTICLE IV
MISCELLANEOUS
4.1 Fees and Expenses. At the Closing the Company shall (i)
pay $15,000 to Robinson Silverman in connection with the preparation and
negotiation of the Transaction Documents and (ii) pay $10,000 to Encore for its
due diligence expenses and disbursements in connection with the transactions
contemplated hereby. Other than the amounts contemplated in the immediately
preceding sentence, and except as otherwise set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities.
4.2 Entire Agreements; Amendments. This Agreement, together
with the Exhibits and Schedules hereto, the Registration Rights Agreement, the
Certificate of Designation, the Transfer Agent Instructions and the Warrant
contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters, which the parties acknowledge have been
merged into such documents, exhibits and schedules.
4.3 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 8:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: Coyote Network Systems, Inc.
4360 Park Terrace Drive
Westlake Village, CA 91361
Facsimile No.: (818) 735-7633
Attn: Chief Financial Officer
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With copies to: Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
One Norwest Center
1700 Lincoln Street, Suite 3725
Denver, CO 80203-4537
Facsimile No.: (303) 831-4805
Attn: Timothy G. Atkinson
If to the JNC Opportunity Fund Ltd.
Purchaser: c/o Olympia Capital (Cayman) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Director
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Managing Member
With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Purchaser; or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought. No waiver of
any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Purchaser. Except as set
forth in Section 3.1(a), the Purchaser may not assign this Agreement or any of
the rights or obligations hereunder (other than to an Affiliate of the
Purchaser) without the consent of the Company, except that the Purchaser may
16
<PAGE>
assign its rights hereunder and under the Transaction Documents without the
consent of the Company as long as such assignee demonstrates to the reasonable
satisfaction of the Company its satisfaction of the representations and
warranties set forth in Section 2.2. This provision shall not limit the
Purchaser's right to transfer securities or transfer or assign rights hereunder
or under the Registration Rights Agreement.
4.7 No Third-Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective successors and
permitted assigns and, other with respect to Encore who is an intended
beneficiary of, and entitled to enforce, Sections 3.12, 4.1 and 4.11, is not for
the benefit of, nor may any provision hereof be enforced by, any other Person.
4.8 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), 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 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 in effect for 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.
4.9 Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Shares and the Warrant.
4.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 Publicity. The Company and the Purchaser shall consult
with each other in issuing any press releases or otherwise making public
statements or filings and other communications with the Commission or any
regulatory agency or stock market or trading facility with respect to the
transactions contemplated hereby and neither party shall issue any such press
release or otherwise make any such public statement, filings or other
communications without the prior written consent of the other, which consent
shall not be unreasonably withheld or delayed, except that no prior consent
shall be required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
17
<PAGE>
statement, filing or other communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of the Purchaser or Encore, or
include the name of the Purchaser or Encore in any filing with the Commission,
or any regulatory agency, trading facility or stock market without the prior
written consent of Encore, except to the extent such disclosure (but not any
disclosure as to the controlling Persons thereof) is required by law, in which
case the Company shall provide the Purchaser and Encore with prior notice of
such disclosure.
4.12 Severability. In case any one or more of the provisions
of this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement shall
not in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS]
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Convertible Preferred Stock Purchase Agreement
IN WITNESS WHEREOF, the parties hereto have caused this
Convertible Preferred Stock Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.
COYOTE NETWORK SYSTEMS, INC.
By: /s/ James J. Fiedler
------------------------------------------
Name: James J. Fiedler
Title: Chairman and Chief Executive Officer
JNC OPPORTUNITY FUND LTD.
By: /s/ Neil T. Chau
-------------------------------------------
Name: Neil T. Chau
Title: Managing Member
19
<PAGE>
---------
EXHIBIT A
---------
COYOTE NETWORK SYSTEMS, INC.
CERTIFICATE OF DESIGNATIONS OF THE POWERS,
PREFERENCES AND RELATIVE PARTICIPATING,
OPTIONAL AND OTHER SPECIAL RIGHTS
OF 5% SERIES A CONVERTIBLE PREFERRED STOCK, AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
----------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-----------------------------------------------
Coyote Network Systems, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Company"), does hereby certify that, pursuant to authority conferred upon the
Board of Directors of the Company by the Company's Restated Certificate of
Incorporation, as amended, and expressly delegated by the Board of Directors to
the Pricing Committee of the Board of Directors (the "Pricing Committee"), and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the Pricing Committee with full power and authority to act on behalf of the
Board of Directors, by unanimous written consent of the members of the Pricing
Committee dated August 28, 1998, duly approved and adopted the following
resolution:
RESOLVED, that, pursuant to authority vested in the Board of
Directors by the Company's Restated Certificate of Incorporation and delegated
to the Pricing Committee by the Board of Directors, the Pricing Committee does
hereby create, authorize and provide for the issue of 5% Series A Convertible
Preferred Stock, par value $0.01 per share, consisting of 700 shares, and having
the designations, voting power, preferences and relative, participating,
optional and other special rights, qualifications, limitations and restrictions
that are set forth in the Restated Certificate of Incorporation and as follows:
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as 5% Series A Convertible Preferred Stock
(the "Preferred Stock") and the number of shares so designated shall be 700
(which shall not be subject to increase without the consent of the holders of
the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $.01 and a stated value of
$10,000 (the "Stated Value").
<PAGE>
Section 2. Dividends.
(a) Holders shall be entitled to receive, when and as declared by the Board
of Directors out of funds legally available therefor, and the Company shall pay,
cumulative dividends at the rate per share (as a percentage of the Stated Value
per share) equal to 5% per annum, payable on a quarterly basis on March 31, June
30, September 30 and December 31 of each year during the term hereof (each a
"Dividend Payment Date"), commencing on September 30, 1998 and thereafter, upon
the earlier to occur of a Dividend Payment Date and a Conversion Date (as
defined herein), in cash or shares of Common Stock (as defined in Section 8) at,
subject to the terms and conditions set forth herein, the option of the Company.
Dividends on the Preferred Stock shall be calculated on the basis of a 360-day
year, shall accrue daily commencing on the Original Issue Date (as defined in
Section 8), and shall be deemed to accrue from such date whether or not earned
or declared and whether or not there are profits, surplus or other funds of the
Company legally available for the payment of dividends. Any dividends not paid
on any Dividend Payment Date shall continue to accrue and shall be due and
payable upon conversion of the Preferred Stock. A party that holds shares of
Preferred Stock on a Dividend Payment Date will be entitled to receive such
dividend payment and any other accrued and unpaid dividends which accrued prior
to such Dividend Payment Date, without regard to any sale or disposition of such
Preferred Stock subsequent to the applicable record date. All overdue accrued
and unpaid dividends and other amounts due herewith shall entail a late fee at
the rate of 15% per annum (to accrue daily, from the date such dividend is due
hereunder through and including the date of payment). Except as otherwise
provided herein, if at any time the Company pays less than the total amount of
dividends then accrued on account of the Preferred Stock, such payment shall be
distributed ratably among the Holders based upon the number of shares held by
each Holder. The Company shall provide the Holders notice of its intention to
pay dividends in cash or shares of Common Stock not less than 10 Trading Days
prior to any Dividend Payment Date for so long as shares of Preferred Stock are
outstanding. If dividends are paid in shares of Common Stock, the number of
shares of Common Stock issuable on account of such dividend shall equal the cash
amount of such dividend on such Dividend Payment Date divided by the Conversion
Price (as defined below) on such date.
(b) Notwithstanding anything to the contrary contained herein, the Company
may not issue shares of Common Stock in payment of dividends on the Preferred
Stock (and must deliver cash in respect thereof) if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such
dividends in shares of Common Stock;
(ii) such shares of Common Stock are not registered for resale
pursuant to an effective Underlying Securities Registration Statement (as
defined in Section 8) and may not be sold without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), as determined by counsel to the Company
pursuant to a written opinion letter, addressed to the Company's transfer
agent in the form and substance acceptable to the Holders and such transfer
agent (such shares, "Restricted Shares"), provided, that the Company shall
be entitled, prior to the earlier to occur of (A) the Effectiveness Date
(as defined in the Registration Rights Agreement) and (B) the date the
Underlying Securities Registration Statement is declared effective by the
Securities and Exchange Commission (the "Commission"), to issue Restricted
Shares in payment of dividends on the Preferred Stock, provided, however,
that, no later than three (3) Trading Days following the date the
Underlying Securities Registration Statement is declared effective by the
Securities and Exchange Commission, the Company shall replace any
Restricted Shares issued in payment of dividends on the Preferred Stock
with the equivalent stock certificates evidencing such shares of Common
Stock issued in payment of dividends on the Preferred Stock which shall be
free of any restrictive legend;
(iii) the Common Stock is not then Actively Traded (as defined in
Section 8) or listed for trading on the New York Stock Exchange, American
Stock Exchange, Nasdaq National Market or Nasdaq SmallCap Market (each a
"Subsequent Market");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares of Common Stock would result in the
recipient thereof beneficially owning, as determined in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended (the `Exchange Act"), more than 4.999% of the then issued and
outstanding shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding, neither the
Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (as defined in Section 8), nor
shall the Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities
(as defined in Section 8), nor shall any monies be set aside for or applied to
the purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities (unless, in the case of pari passu securities, the Preferred Stock
receives such amount on a pro rata basis with such other pari passu securities).
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Company shall not and shall cause its subsidiaries not to, without the
affirmative vote of the Holders of two thirds of all of the shares of the
Preferred Stock then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock ranking
as to dividends or distribution of assets upon a Liquidation (as defined in
Section 4) senior to or otherwise pari passu with or senior to the Preferred
Stock, (d) amend its Certificate of Incorporation, bylaws or other charter
documents so as to affect adversely any rights of any Holders, (e) increase the
authorized number of shares of Preferred Stock, or (f) enter into any agreement
with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value plus all due but unpaid dividends per share,
whether declared or not, before any distribution or payment shall be made to the
holders of any Junior Securities, and if the assets of the Company shall be
insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders shall be distributed among the Holders ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 33% of the voting power of the Company is disposed of, or a consolidation
or merger of the Company with or into any other company or companies shall not
be treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such Liquidation, not
less than 45 days prior to the payment date stated therein, to each record
Holder.
Section 5. Conversion.
(a)(i) Conversions at Option of Holder. Each share of Preferred Stock shall
be convertible into shares of Common Stock (subject to the limitations set forth
in Section 5(a)(iii) hereof) at the Conversion Ratio (as defined in Section 8)
at the option of the Holder, at any time and from time to time, from and after
the 120th day following the Original Issue Date (the "Initial Conversion Date"),
thereafter any conversions of Preferred Stock are limited in each monthly period
to 25% of the number of shares of Preferred Stock originally issued to the
Holder on the Original Issue Date, on a cumulative basis (for example, during
the first month following the Initial Conversion Date, the Holder may convert up
to 25% of the number of shares of Preferred Stock issued to it on the Original
Issue Date and during the first two (2) months following the Initial Conversion
Date the Holder may convert up to 50% of the number of shares of Preferred Stock
issued to it on the Original Issue Date). Holders shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as Exhibit A (a "Conversion Notice"). Each
Conversion Notice shall specify the number of shares of Preferred Stock to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice by
facsimile (the "Conversion Date"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered hereunder. If the Holder is converting less than all
shares of Preferred Stock represented by the certificate or certificates
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) Automatic Conversion. Subject to the provisions in this
paragraph, all outstanding shares of Preferred Stock for which conversion
notices have not previously been received or for which redemption has not
been made or required hereunder shall be automatically converted on the
third anniversary of the Original Issue Date at the Conversion Price on
such date. The conversion contemplated by this paragraph shall not occur if
(a) (1) an Underlying Securities Registration Statement is not then
effective or (2) the Holder is not permitted to resell Underlying Shares
pursuant to Rule 144(k) promulgated under the Securities Act, without
volume restrictions, as evidenced by an opinion letter of counsel
acceptable to the Holder and the transfer agent for the Common Stock; (b)
there are not sufficient shares of Common Stock authorized and reserved for
issuance upon such conversion; or (c) the Company shall have defaulted on
its covenants and obligations hereunder or under the Purchase Agreement or
Registration Rights Agreement. Notwithstanding the foregoing, the
three-year period for conversion under this Section shall be extended (on a
day-for-day basis) for any Trading Days after the earlier of (i) the
Effectiveness Date, and (ii) the date the Underlying Securities
Registration Statement is declared effective by the Commission that the
Purchaser is unable to resell Underlying Shares under an Underlying
Securities Registration Statement due to (a) the Common Stock not being
Actively Traded or not listed on any Subsequent Market , (b) the failure of
an Underlying Securities Registration Statement to be declared effective by
the Commission by the Effectiveness Date, or (c) if an Underlying
Securities Registration Statement shall have been declared effective by the
Commission, (x) the failure of such Underlying Securities Registration
Statement to remain effective at all times thereafter as to all Underlying
Shares, or (y) the suspension of the Holder's ability to resell Underlying
Shares thereunder.
(iii) Certain Conversion Restrictions.
(A)(1) The Holder shall not convert shares of Preferred Stock to the
extent such conversion would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the
rules thereunder) in excess of 4.999% of the then issued and outstanding
shares of Common Stock, including shares issuable upon conversion of the
shares of Preferred Stock held by such Holder after application of this
Section. To the extent that the limitation contained in this Section
applies, the determination of whether shares of Preferred Stock are
convertible (in relation to other securities owned by a Holder) and of
which shares of Preferred Stock are convertible shall be in the sole
discretion of the Holder, and the submission of shares of Preferred Stock
for conversion shall be deemed to be the Holder's determination of whether
such shares of Preferred Stock are convertible (in relation to other
securities owned by the Holder) and of which portion of such shares of
Preferred Stock are convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to verify
or confirm the accuracy of such determination. Nothing contained herein
shall be deemed to restrict the right of the Holder to convert shares of
Preferred Stock at such time as such conversion will not violate the
provisions of this Section. The provisions of this Section will not apply
to any conversion pursuant to Section 5 (a)(ii) hereof, and may be waived
by a Holder (but only as to itself and not to any other Holder) upon not
less than 75 days prior notice to the Company (in which case, the Holder
shall make such filings with the Commission, including under Rule 13D or
13G, as are required by applicable law), and the provisions of this Section
shall continue to apply until such 75th day (or later, if stated in the
notice of waiver). Other Holders shall be unaffected by any such waiver.
(2) The Holder shall not convert shares of Preferred Stock to the extent
such conversion would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in
excess of 9.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of the shares of Preferred Stock held
by such Holder after application of this Section. To the extent that the
limitation contained in this Section applies, the determination of whether
shares of Preferred Stock are convertible (in relation to other securities owned
by a Holder) and of which shares of Preferred Stock are convertible shall be in
the sole discretion of the Holder, and the submission of shares of Preferred
Stock for conversion shall be deemed to be the Holder's determination of whether
such shares of Preferred Stock are convertible (in relation to other securities
owned by the Holder) and of which portion of such shares of Preferred Stock are
convertible, in each case subject to such aggregate percentage limitation, and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the right of
the Holder to convert shares of Preferred Stock at such time as such conversion
will not violate the provisions of this Section. The provisions of this Section
will not apply to any conversion pursuant to Section 5 (a)(ii) hereof, and may
be waived by a Holder (but only as to itself and not to any other Holder) upon
not less than 75 days prior notice to the Company, and the provisions of this
Section shall continue to apply until such 75th day (or later, if stated in the
notice of waiver). Other Holders shall be unaffected by any such waiver.
(B) If on any Conversion Date (A) the Common Stock is listed for trading on
the Nasdaq SmallCap Market or the Nasdaq National Market, (B) the Conversion
Price then in effect is such that the aggregate number of shares of Common Stock
that would then be issuable upon conversion in full of all then outstanding
shares of Preferred Stock and as payment of dividends thereon in shares of
Common Stock, together with any shares of the Common Stock previously issued
upon conversion of shares of Preferred Stock and as payment of dividends
thereon, would equal or exceed 20% of the number of shares of the Common Stock
outstanding on the Original Issue Date (such number of shares as would not equal
or exceed such 20% limit, the "Issuable Maximum" and any such Conversion Date,
the "Record Date"), and (C) the Company shall not have previously obtained the
vote of shareholders (the "Shareholder Approval"), if any, as may be required by
the applicable rules and regulations of The Nasdaq Stock Market (or any success
entity) applicable to approve the issuance of shares of Common Stock in excess
of the Issuable Maximum in a private placement whereby shares of Common Stock
are deemed to have been issued at a price that is less than the greater of book
or fair market value of the Common Stock, then the Company shall issue to the
Holder so requesting a conversion a number of shares of Common Stock equal to
the Issuable Maximum and, with respect to the remainder of the aggregate Stated
Value of the shares of Preferred Stock then held by such Holder for which a
conversion in accordance with the Conversion Price would result in an issuance
of Common Stock in excess of the Issuable Maximum (the "Excess Stated Value"),
the Company shall, within three (3) days of the Record Date, provide the
converting Holder with a notice (the "Notice") as to whether or not it has
elected to use its best efforts to obtain the Shareholder Approval applicable to
such issuance. If the Company shall either (i) fail to provide the converting
Holder with the Notice within three (3) days of the Record Date, or (ii)
indicate in the Notice that it does not intend to obtain the Shareholder
Approval applicable to such issuance, or (iii) fail to obtain the Shareholder
Approval applicable to such issuance prior to the 60th day following the Record
Date, the converting Holder shall have the option to require the Company to
either (1) if the Company has not prior thereto attempted and failed to obtain
the Shareholder Approval in accordance with this Section, use its best efforts
to obtain the Shareholder Approval applicable to such issuance as soon as is
possible, but in any event not later than the 60th day after such request, or
(2)(i) issue and deliver to such Holder a number of shares of Common Stock as
equals (x) the Excess Stated Value, plus accrued and unpaid dividends on all
shares of Preferred Stock being converted, divided by (y) the closing sales
price of the Common Stock on the Original Issue Date, and (ii) cash in an amount
equal to the product of (x) the Per Share Market Value on the Conversion Date
and (y) the number of shares of Common Stock in excess of such Holder's pro rata
portion of the Issuable Maximum that would have otherwise been issuable to the
Holder in respect of such conversion but for the provisions of this Section
(such amount of cash being hereinafter referred to as the "Discount
Equivalent"), or (3) pay cash to the converting Holder in an amount equal to the
Mandatory Redemption Amount (as defined in Section 8) for the Excess Stated
Value. If the Company fails to pay the Discount Equivalent or the Mandatory
Redemption Amount, as the case may be, in full pursuant to this Section within
seven (7) days after the date payable, the Company will pay interest thereon at
a rate of 15% per annum to the converting Holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid in
full.
(iv)(1) Subject to compliance with the conditions set forth in
paragraph (2) of this Section 5(a)(iv), if the Conversion Price applicable
to a conversion at the option of the Holder is less than $5.50, the Company
shall have the option of either (i) converting all of the shares of
Preferred Stock specified in the Conversion Notice into shares of Common
Stock, as provided in Section 5(a)(i), (ii) paying such Holder within three
(3) Trading Days of the Conversion Date cash in the amount equal to the
product of (A) the number of Underlying Shares into which the shares of
Preferred Stock specified in the Conversion Notice would otherwise be
convertible and (B) the closing sales price of the Common Stock on the
Conversion Date or (iii) converting certain of the shares of Preferred
Stock specified in the Conversion Notice into shares of Common Stock (the
shares of Preferred Stock not so converted, called the "Non-Converted
Preferred Shares") and paying such Holder cash in the amount equal to the
product of (A) the number of Underlying Shares into which the Non-Converted
Preferred Shares would otherwise be convertible and (B) the closing sales
price of the Common Stock on the Conversion Date.
(2) The Company may not pay cash in lieu of issuing Underlying Shares upon
conversions of Preferred Stock or as payment of dividends thereon (and must
deliver Underlying Shares in respect thereof) unless the Company shall, no later
than the Trading Day prior to the Conversion Date, have delivered by facsimile
to the Holders a notice stating its intention to pay such cash in lieu and
setting forth the total amount of cash it intends to pay for such purpose. The
Company's ability to pay cash in lieu of issuing Underlying Shares upon a
conversion of Preferred Stock and as payment of dividends thereon shall be
limited to the amount indicated in such notice. The Company may state in a
notice under this Section that such notice shall remain in effect either for a
defined period of time or until revoked in writing by the Company. Holders shall
be affected by any such notice pro rata in accordance with the shares of
Preferred Stock then held by them. If the Company shall have elected to pay cash
in lieu of issuing Underlying Shares upon a conversion of Preferred Stock and
shall have failed to deliver payment of the amount of such cash due on account
of such conversion by the third (3rd) Trading Day following such election
pursuant to Section 5(b)(iv) hereof, the Holder shall be entitled to demand
delivery within three (3) Trading Days thereafter of the Common Stock issuable
upon conversion of such Preferred Stock.
(b)(i) Not later than three (3) Trading Days after any Conversion Date
and subject to Sections 5(a)(iii)-(iv), the Company will deliver to the
Holder (i) except where the Company is permitted pursuant to Section
5(a)(iv) to pay cash in lieu of issuing Underlying Shares upon conversion,
a certificate or certificates which shall be free of restrictive legends
and trading restrictions (other than those required by Section 3.1(b) of
the Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock (subject to
the limitations set forth in Section 5(a)(iii)(B), (ii) one or more
certificates representing the number of shares of Preferred Stock not
converted, (iii) a bank check in the amount of accrued and unpaid dividends
(if the Company has elected to pay accrued and unpaid dividends in cash),
(iv) if the Company has elected and is permitted hereunder to pay accrued
and unpaid dividends in shares of Common Stock, certificates, which shall
be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement), representing such
shares of Common Stock, and (v) if the Company is permitted and has elected
pursuant to Section 5(a)(iv) to pay cash in lieu of issuing Underlying
Shares upon a conversion of Preferred Stock, payment by wire transfer of
immediately available funds to an account designated by the Holder for such
purpose of an amount equal to the amount due pursuant to Section 5(a)(iv)
in respect of such conversion (in the event the amount of cash permitted to
be paid by the Company in accordance with Section 5(a)(iv) is not
sufficient to cover the conversion in full of shares of Preferred Stock
tendered for such conversion, the Company shall issue Underlying Shares in
respect of such excess in accordance with subparagraph (i) of this
Section); provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Preferred Stock until certificates evidencing
such shares of Preferred Stock are either delivered for conversion to the
Company or any transfer agent for the Preferred Stock or Common Stock, or
the Holder of such Preferred Stock notifies the Company that such
certificates have been lost, stolen or destroyed and provides a bond (or
other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith.
The Company shall, upon request of the Holder, if available, use its
reasonable efforts to deliver any certificate or certificates required to
be delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Conversion Notice such
certificate or certificates, including for purposes hereof, any shares of
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid dividends hereunder, are not delivered to or as directed by the
applicable Holder by the third (3rd) Trading Day after the Conversion Date,
the Holder shall be entitled by written notice to the Company at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately
return the certificates representing the shares of Preferred Stock tendered
for conversion.
(ii) Except where the Company is permitted and has elected under
Section 5(a)(iv) to pay solely cash in lieu of Underlying Shares upon
conversion hereunder, if the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), including for
purposes hereof, any shares of Common Stock to be issued on the Conversion
Date on account of accrued but unpaid dividends hereunder, by the fourth
(4th) Trading Day after the Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a penalty, $2,500 for
each day after such fourth (4th) Trading Day until such certificates are
delivered. Nothing herein shall limit a Holder's right to pursue actual
damages for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified herein
and such Holder shall have the right to pursue all remedies available to it
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall
not prohibit a Holder from seeking to enforce damages pursuant to any other
Section hereof or under applicable law. Further, if the Company shall not
have delivered any cash due in respect of conversions of Preferred Stock or
as payment of dividends thereon by the fourth (4th) Trading Day after the
Conversion Date, the Holder may, by notice to the Company, require the
Company to issue Underlying Shares pursuant to Section 5(c), except that
for such purpose the Conversion Price applicable thereto shall be the
lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such Underlying Shares will be
subject to the provision of this Section.
(iii) In addition to any other rights available to the Holder and
except where the Company is permitted and has elected under Section
5(a)(iv) to pay solely cash in lieu of Underlying Shares upon conversion
hereunder, if the Company fails to deliver to the Holder such certificate
or certificates pursuant to Section 5(b)(i), including for purposes hereof,
any shares of Common Stock to be issued on the Conversion Date on account
of accrued but unpaid dividends hereunder, by the fourth (4th) Trading Day
after the Conversion Date, and if after such fourth (4th) Trading Day the
Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving upon such
conversion (a "Buy-In"), then the Company shall pay in cash to the Holder
(in addition to any remedies available to or elected by the Holder) the
amount by which (x) the Holder's total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds
(y) the aggregate stated value of the shares of Preferred Stock for which
such conversion was not timely honored. For example, if the Holder
purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of $10,000
aggregate stated value of the shares of Preferred Stock, the Company shall
be required to pay the Holder $1,000. The Holder shall provide the Company
written notice indicating the amounts payable to the Holder in respect of
the Buy-In.
(c)(i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lesser of
(a) the Initial Conversion Price (as defined in Section 8), and (b) 87%
(the "Discount Rate") multiplied by the average of the three (3) lowest Per
Share Market Values during the ten (10) Trading Day period immediately
preceding the applicable Conversion Date, provided, however, that such ten
(10) Trading Day period shall be extended for the number of Trading Days,
if any, during such period in which (A) trading in the Common Stock was not
Actively Traded or suspended from such Subsequent Market on which the
Common Stock is then listed, or (B) after the date declared effective by
the Commission, the Underlying Securities Registration Statement is not
effective, or (C) after the date declared effective by the Commission, the
Prospectus included in the Underlying Securities Registration Statement may
not be used by the Holder for the resale of Underlying Shares. If: (a) an
Underlying Securities Registration Statement is not filed on or prior to
the Filing Date (if the Company files such Underlying Securities
Registration Statement without affording the Holder the opportunity to
review and comment on the same as required by Section 3(a) of the
Registration Rights Agreement, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Securities Exchange Act of 1934, as amended, within
five (5) days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the Commission that an Underlying
Securities Registration Statement will not be "reviewed," or not subject to
further review, or (c) the Underlying Securities Registration Statement is
not declared effective by the Commission on or prior to the Effectiveness
Date (as defined in the Registration Rights Agreement), or (d) such
Underlying Securities Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as defined in the Registration Rights Agreement) at
any time prior to the expiration of the "Effectiveness Period" (as defined
in the Registration Rights Agreement), without being succeeded within ten
(10) days by a subsequent Underlying Securities Registration Statement
filed with and declared effective by the Commission, or (e) the Common
Stock shall fail to be Actively Traded, or (f) the Common Stock shall be
delisted or suspended from trading on any Subsequent Market on which the
Common Stock is then listed for more than three (3) Business Days (which
need not be consecutive days), (g) the conversion rights of the Holders are
suspended for any reason or (h) an amendment to the Underlying Securities
Registration Statement is not filed by the Company with the Commission
within ten (10) days of the Commission's notifying the Company that such
amendment is required in order for the Underlying Securities Registration
Statement to be declared effective (any such failure or breach being
referred to as an "Event," and for purposes of clauses (a), (c), (e) and
(g) the date on which such Event occurs, or for purposes of clause (b) the
date on which such five (5) day period is exceeded, or for purposes of
clauses (d) and (h) the date which such 10 day-period is exceeded, or for
purposes of clause (f) the date on which such three (3) Business
Day-period, is exceeded, being referred to as "Event Date"), then on the
Event Date and each monthly anniversary thereof until such time as the
applicable Event is cured, the Company shall, within five (5) Business Days
of each such date, either (x) pay to the Holder, in cash, 2% of the
aggregate Stated Value of the shares of Preferred Stock then held by such
Holder, as liquidated damages and not as a penalty, or (y) each of the
Initial Conversion Price and the Discount Rate shall be decreased by 2% on
the Event Date and on each monthly anniversary thereof until such time as
the applicable Event is cured (i.e., the Discount Rate would decrease to
85% as of the Event Date and 83% as of the one month anniversary of the
Event Date); provided, that, commencing on the second month anniversary of
the Event Date, the Holder (and not the Company) shall have the right to
require either further cumulative 2% discounts to continue or require the
Company to pay the 2% cash amounts referenced in clause (x) above until
such time as the Event in question is cured. Any decrease in the Initial
Conversion Price and Discount Rate pursuant to this Section shall remain in
effect notwithstanding the fact that the Event causing such decrease has
been subsequently cured and further monthly decreases have ceased. The
provisions of this Section are not exclusive and shall in no way limit the
Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari
passu securities (in the case of pari passu securities, only if such
dividend or distribution is not also made on a pro rata basis to the
Preferred Stock) payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c)
combine outstanding shares of Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of Common Stock any shares of
capital stock of the Company, the Initial Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section 5(c)(ii) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights, warrants or options to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Initial Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of
such rights, warrants or options, plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares so offered
would purchase at such Per Share Market Value, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common
Stock offered for subscription or purchase. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration
of any right, warrant or option to purchase shares of Common Stock the
issuance of which resulted in an adjustment in the Conversion Price
pursuant to this Section 5(c)(iii), if any such right, warrant or option
shall expire and shall not have been exercised, the Conversion Price shall
immediately upon such expiration shall be recomputed and effective
immediately upon such expiration shall be increased to the price which it
would have been (but reflecting any other adjustments in the Conversion
Price made pursuant to the provisions of this Section 5 upon the issuance
of other rights or warrants) had the adjustment of the Conversion Price
made upon the issuance of such rights, warrants, or options been made on
the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such rights,
warrants or options actually exercised.
(iv) If the Company or any subsidiary thereof, as applicable with
respect to Common Stock Equivalents (as defined below), at any time while
any shares of Preferred Stock are outstanding, shall issue shares of Common
Stock or rights, warrants, options or other securities or debt that is
convertible into or exchangeable for shares of Common Stock ("Common Stock
Equivalents") entitling any Person to acquire shares of Common Stock at a
price per share less than the Conversion Price, then the Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of shares of Common Stock or such Common Stock Equivalents plus
the number of shares of Common Stock which the offering price for such
shares of Common Stock or Common Stock Equivalents would purchase at the
Conversion Price, and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock so issued or issuable,
provided, that for purposes hereof, all shares of Common Stock that are
issuable upon exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common
Stock or Common Stock Equivalents are issued, provided, that no such
adjustment shall be made in the case of issuances by the Company of Common
Stock Equivalents pursuant to Section 3.11(a)(i)-(vi) of the Purchase
Agreement (the "Permitted Issuances"), provided, however, that an issuance
of by the Company of Common Stock Equivalents, in connection with an
acquisition by the Company of non-affiliated third parties, shall not
constitute a Permitted Issuance if a Shareholder Approval is required by
the applicable rules and regulations of The Nasdaq Stock Market (or any
success entity) applicable to approve such acquisition.
(v) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in
Sections 5(c)(ii)-(iv) above), then in each such case the Initial
Conversion Price at which each share of Preferred Stock shall thereafter be
convertible shall be determined by multiplying the Initial Conversion Price
in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the Per Share Market Value of Common Stock
determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of Common Stock as determined by the
Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company,
if the Holders of a majority in interest of the Preferred Stock dispute
such valuation, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the Holders of a majority in
interest of the shares of Preferred Stock then outstanding; and provided,
further, that the Company, after receipt of the determination by such
Appraiser shall have the right to select an additional Appraiser, in good
faith, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the Holders of the portion of
assets or evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(i),(ii),(iii),(iv), or (v) the Company shall promptly mail to each
Holder, a notice setting forth the Conversion Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (other than compulsory share
exchanges which constitute Change of Control Transactions), the Holders of
the Preferred Stock then outstanding shall have the right thereafter to
convert such shares only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common
Stock following such reclassification or share exchange, and the Holders of
the Preferred Stock shall be entitled upon such event to receive such
amount of securities, cash or property as a holder of the number of shares
of the Common Stock of the Company into which such shares of Preferred
Stock could have been converted immediately prior to such reclassification
or share exchange would have been entitled. This provision shall similarly
apply to successive reclassifications or share exchanges.
(ix) If (a) the Company shall declare a dividend (or any other
distribution) on its Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock, (c) the
Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock
of any class or of any rights, (d) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the
Common Stock of the Company, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share of exchange whereby the
Common Stock is converted into other securities, cash or property, or (e)
the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company; then the Company
shall cause to be filed at each office or agency maintained for the purpose
of conversion of Preferred Stock, and shall cause to be mailed to the
Holders at their last addresses as they shall appear upon the stock books
of the Company, at least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants
are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share
exchange; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. Holders are
entitled to convert shares of Preferred Stock during the 20-day period
commencing the date of such notice to the effective date of the event
triggering such notice.
(x) If the Company (i) makes a public announcement that it intends to
enter into a Change of Control Transaction (as defined in Section 8) or
(ii) any person, group or entity (including the Company, but excluding a
Holder or any affiliate of a Holder) publicly announces a bona fide tender
offer, exchange offer or other transaction to purchase 33% or more of the
Common Stock (such announcement being referred to herein as a "Major
Announcement" and the date on which a Major Announcement is made, the
"Announcement Date"), then, in the event that a Holder seeks to convert
shares of Preferred Stock on or following the Announcement Date, the
Conversion Price shall, effective upon the Announcement Date and continuing
through the earlier to occur of the consummation of the proposed
transaction or tender offer, exchange offer or other transaction and the
Abandonment Date (as defined below), be equal to the lower of (x) the
average Per Share Market Value on the five Trading Days immediately
preceding (but not including) the Announcement Date and (y) the Conversion
Price that would otherwise have been in effect on the Conversion Date for
such Preferred Stock but for the application of this section. "Abandonment
Date" means with respect to any proposed transaction or tender offer,
exchange offer or other transaction for which a public announcement as
contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity
(in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this paragraph to become operative.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock and payment of dividends on
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the Holders, not
less than such number of shares of Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and freely tradeable, subject to the legend requirements of
Section 3.1(b) of the Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the Per Share Market Value at such time. If the Company elects
not, or is unable, to make such a cash payment, the Holder of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on conversion
of Preferred Stock shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such shares of Preferred Stock so converted and the
Company shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled. The Company may not reissue any shares of Preferred Stock.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Financial Officer of the Company at the
facsimile telephone number or address of the principal place of business of the
Company as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (New York City Time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 8:00 p.m. (New York City
Time) on any date and earlier than 11:59 p.m. (New York City Time) on such date,
(iii) upon receipt, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. Optional Redemption.
(a) The Company shall have the right, exercisable at any time upon 20
Trading Days' notice (an "Optional Redemption Notice") to the Holders of the
Preferred Stock given at any time after the Original Issue Date to redeem all or
any portion of the shares of Preferred Stock which have not previously been
converted or redeemed, at a price equal to the Optional Redemption Price (as
defined below). The entire Optional Redemption Price shall be paid in cash.
Holders may convert (and the Company shall honor such conversions in accordance
with the terms hereof) any shares of Preferred Stock, including shares subject
to an Optional Redemption Notice, during the period from the date thereof
through the 20th Trading Day after the receipt of an Optional Redemption Notice,
provided, however, that in the event that the Optional Redemption Price is not
paid in full prior to the expiration of the 20th Trading Day after the receipt
of an Optional Redemption Notice, such conversion rights shall continue to exist
as if no Optional Redemption Notice were delivered.
(b) If any portion of the Optional Redemption Price shall not be paid by
the Company by the 20th Trading Day after the delivery of an Optional Redemption
Notice, the Optional Redemption Notice with regard to such unpaid portion shall
be null and void and ab initio. In such event, the Company shall not again be
permitted to exercise any optional redemption rights with respect to the
Preferred Stock without the consent of the Holders.
(c) "Optional Redemption Price" shall equal the sum of (i) the greater of
(A) 125% of the aggregate Stated Value of the shares of Preferred Stock to be
redeemed and all accrued and unpaid dividends thereon, and (B) the product of
(a) the Per Share Market Value on the Trading Day immediately preceding (x) the
date of the Optional Redemption Notice, or (y) the date of payment in full by
the Company of the Optional Redemption Price, whichever is greater, and (b) the
Conversion Ratio calculated on the date of the Optional Redemption Notice, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such shares of Preferred Stock.
Section 7. Redemption Upon Triggering Events.
(a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law),
have the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount plus (ii) the product of (A) the number of Underlying Shares
issued in respect of conversions or as payment of dividends hereunder and then
held by the Holder and (B) the Per Share Market Value on the date such
redemption is demanded or the date the redemption price hereunder is paid in
full, whichever is greater (the "Redemption Price"). The Redemption Price shall
be due and payable within ten (10) days of the date on which the notice for the
payment therefor is provided by a Holder.
(b) If the Company fails to pay the redemption price hereunder in full
pursuant to this Section within seven (7) days after the date when due in
accordance with the terms of Section 7(a), the Company will pay interest thereon
at a rate of 15% per annum, accruing daily from such seventh day until the
redemption price, plus all such interest thereon, is paid in full. For purposes
of this Section, a share of Preferred Stock is outstanding until such date as
the Holder shall have received Underlying Shares upon a conversion (or attempted
conversion) thereof.
(c) A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(i) the failure of an Underlying Securities Registration Statement to
be declared effective by the Commission on or prior to the 180th day after
the Original Issue Date;
(ii) if, during the Effectiveness Period, the effectiveness of the
Underlying Securities Registration Statement lapses for any reason, or the
Holder shall not be permitted to resell Registrable Securities under the
Underlying Securities Registration Statement;
(iii) the failure of the Common Stock to be Actively Traded or, if the
Common Stock shall have become listed on a Subsequent Market, the delisting
or the suspension from trading of the Common Stock from such Subsequent
Market for more than three (3) Business Days (which need not be consecutive
Business Days);
(iv) the Company shall fail for any reason to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that
comply with the provisions hereof prior to the 10th day after the
Conversion Date or the Company shall provide notice to any Holder,
including by way of public announcement, at any time, of its intention not
to comply with requests for conversion of any Preferred Stock in accordance
with the terms hereof;
(v) (A) the Company shall consummate a Change of Control Transaction,
or shall sell (in one or a series of related transactions) all or
substantially all of its assets (whether or not such sale would constitute
a Change of Control Transaction), provided, that (x) the Company shall
notify the Holder if it enters into an agreement for such a transaction,
(y) the agreement for such transaction shall explicitly state that the
redemption contemplated by this Section shall be made in full at the time
of the consummation of such transaction and (z) if such transaction is
consummated, the dated used for calculating the Per Share Market Value used
in calculating the Redemption Price shall be the date on which (i) the
Company enters into an agreement for such transaction, (ii) such
transaction is consummated, or (iii) the Redemption Price is paid in full,
whichever of such dates contemplated in clauses (i), (ii) or (iii) above
yields the greatest Per Share Market Value, or (B) the Company shall redeem
more than a de minimis number of shares of Common Stock or other Junior
Securities (other than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of the
Holders prior to the expiration of thirty (30) days from the Event Date
relating thereto;
(vii) the Company shall fail for any reason to deliver the certificate
or certificates required pursuant to Section 5(b)(iii) or the cash pursuant
to a Buy-In within seven (7) days after notice is deemed delivered
hereunder;
(viii) the Company shall fail to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue to such Holder
upon a conversion hereunder; or
(ix) the Consolidated Tangible Net Worth of the Company as of any date
on which any shares of Preferred Stock are outstanding (the "Determination
Date") shall be less than the sum of (A) the aggregate Redemption Price as
of the Determination Date for all of the shares of Preferred Stock then
outstanding, and (B) $1,500,000, unless the Company within 10 days of the
Determination Date provides written notice to the Holder that the Company
irrevocably elects to redeem in whole the Company's 11.25% Subordinated
Debentures due 2002 issued pursuant to the Indenture, dated as of January
1, 1992, between the Company and National City Bank, as trustee, excluding
any amendments thereto (the "Indenture") and the Company subsequently
redeems such Subordinated Debentures in whole in accordance with the terms
and conditions of the Indenture.
Section 8. Definitions. For the purposes hereof, the
following terms shall have the following meanings:
"Actively Traded" shall mean, on any date of determination,
that the average daily trading volume of the Common Stock for the previous three
(3) months is greater than 75,000 shares of Common Stock.
"Change of Control Transaction" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
in excess of 33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 33% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"Common Stock" means the Company's common stock, par value
$1.00 per share, and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"Consolidated Subsidiary" means a subsidiary of the Company
whose financial statements are included in the most recent annual consolidated
financial statements of the Company.
"Consolidated Tangible Net Worth" means the total of all
assets appearing on a consolidated balance sheet of the Company and all
Consolidated Subsidiaries, prepared in accordance with generally accepted
accounting principles less the sum of (i) the book value of all assets of the
Company and all of its Consolidated Subsidiaries which would be treated as
intangibles under generally accepted accounting principles including, without
limitation, such items as goodwill, trademarks, trade names, service marks,
copyrights, patents and licenses and rights with respect to the foregoing but
excluding as an intangible any item representing the deferred portion of
expenses incurred in connection with the issuance of indebtedness, (ii) all
liabilities of the Company and all of its Consolidated Subsidiaries determined
in accordance with generally accepted accounting principles, and (iii) the
portion of the total of all assets of all of the Company's Consolidated
Subsidiaries are attributable to minority interests (excluding any portion of
the assets referred to in (i) above attributable to minority interests).
"Conversion Ratio" means, at any time, a fraction, the
numerator of which is Stated Value plus accrued but unpaid dividends (including
any accrued but unpaid late fees thereon) but only to the extent not paid in
shares of Common Stock in accordance with the terms hereof, and the denominator
of which is the Conversion Price at such time.
"Initial Conversion Price" means $6.32.
"Junior Securities" means the Common Stock and all other
equity securities of the Company which are junior in rights and liquidation
preference to the Preferred Stock.
"Mandatory Redemption Amount" for each share of Preferred
Stock means the sum of (i) the greater of (A) 125% of the Stated Value and all
accrued and unpaid dividends with respect to such share, and (B) the product of
(a) the Per Share Market Value on the Trading Day immediately preceding (x) the
date of the Triggering Event or the Conversion Date, as the case may be, or (y)
the date of payment in full by the Company of the applicable redemption price,
whichever is greater, and (b) the Conversion Ratio calculated on the date of the
Triggering Event, or the Conversion Date, as the case may be, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.
"Original Issue Date" shall mean the date of the first
issuance of any shares of the Preferred Stock regardless of the number of
transfers of any particular shares of Preferred Stock and regardless of the
number of certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on such Subsequent
Market on which the Common Stock is then listed or quoted, as reported by
Bloomberg Information Services, Inc. (or any successor entity succeeding to its
function of reporting prices), or if there is no such price on such date, then
the closing bid price on such Subsequent Market on the date nearest preceding
such date, as reported by Bloomberg Information Services, Inc. (or any successor
entity succeeding to its function of reporting prices), or (b) if the Common
Stock is not then listed or quoted on a Subsequent Market, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) and as listed on Bloomberg
Information Services, Inc. (or any successor entity succeeding to its function
of reporting prices), at the close of business on such date, or (c) if the
Common Stock is not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices) and as listed on Bloomberg Information Services, Inc. (or any successor
entity succeeding to its function of reporting prices), then the average of the
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the Holder, or (d) if the Common Stock is not then publicly traded the
fair market value of a share of Common Stock as determined by an Appraiser
selected in good faith by the Holders of a majority of the shares of the
Preferred Stock.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of the Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on such Subsequent Market on which the Common Stock is then listed or
quoted, as reported on Bloomberg Information Services, Inc. (or any successor
entity succeeding to its function of reporting prices), or (b) if the Common
Stock is not listed on a Subsequent Market, a day on which the Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board, as
reported on Bloomberg Information Services, Inc. (or any successor entity
succeeding to its function of reporting prices), or (c) if the Common Stock is
not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices) and as listed on Bloomberg Information Services, Inc. (or any
successor entity succeeding to its function of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except
Saturday, Sunday and any day which shall be a legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law
or other government action to close.
"Underlying Securities Registration Statement" means a
registration statement that meets the requirement of the Registration Rights
Agreement and registers the resale of all Underlying Shares by the recipient
thereof, who shall be named as a "selling stockholder" thereunder.
"Underlying Shares" means, collectively, the shares of Common
Stock into which the Shares are convertible and the shares of Common Stock
issuable upon payment of dividends thereon in accordance with the terms hereof.
IN WITNESS WHEREOF, Coyote Network Systems, Inc. has caused this
Certificate of Designations to be executed in its corporate name by Daniel W.
Latham, its President, and attested by Edward A. Beeman, its Secretary, this 1st
day of September, 1998.
COYOTE NETWORK SYSTEMS, INC.
BY /s/ Daniel W. Latham
-------------------------------------
Daniel W. Latham, President
Attest:
BY /s/ Edward A. Beeman
-------------------------------------
Edward A. Beeman, Secretary
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of 5% Series A
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $1.00 per share (the "Common Stock"), of Coyote Network Systems, Inc. (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the Holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations: ________________________________________
Date to Effect Conversion
________________________________________
Number of shares of Preferred Stock to be Converted
________________________________________
Number of shares of Common Stock to be Issued
________________________________________
Applicable Conversion Price
________________________________________
Signature
________________________________________
Name
________________________________________
Address
<PAGE>
---------
EXHIBIT B
---------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of August 31, 1998, between Coyote Network Systems, Inc., a
Delaware corporation (the "Company"), and JNC Opportunity Fund Ltd., a Cayman
Islands corporation (the "Purchaser ").
This Agreement is made pursuant to the Convertible Preferred
Stock Purchase Agreement, dated as of the date hereof between the Company and
the Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that
are defined in the Purchase Agreement shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value $1.00 per share.
"Effectiveness Date" means the 120th day following the Closing Date.
"Effectiveness Period" shall have the meaning set forth in Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE>
"Filing Date" means the 90th day following the Closing Date;
provided, that, if the Company shall, prior to such 90th day after the Closing
Date, have reason to believe that it will not be eligible to register for resale
shares of Common Stock under Form S-3 promulgated under the Securities Act
(whether by reason of being notified by the Nasdaq Stock Market, Inc. that the
Common Stock will not be eligible for quotation on the Nasdaq National Market or
Nasdaq SmallCap Market prior to such 90th day, by reason of failing to make
timely filings under the Exchange Act or Securities Act in order to be eligible
to utilize Form S-3 for resales of Common Stock by such 90th day, or otherwise),
then Filing Date shall mean the later to occur of the tenth Business Day after
the Company has reason to believe it will not be so S-3 eligible within such
time period and the 60th day after the Closing Date, but in no event later than
the 90th day after the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" means the Company's shares of 5% Series A
Convertible Preferred Stock, $.01 par value, to be issued to the Purchaser
pursuant to the Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable (i) upon conversion in full of the Preferred Stock, (ii) as payment of
dividends in respect of the Preferred Stock, assuming all such dividends are
paid in shares of Common Stock and that the shares of Preferred Stock remain
outstanding for three years, and (iii) upon exercise of the Warrants; provided,
however that in order to account for the fact that the number of shares of
Common Stock issuable upon conversion of the shares of Preferred Stock (together
with the payment of dividends thereon) is determined in part upon the market
price of the Common Stock prior to the time of conversion, Registrable
Securities contemplated by clauses (i) and (ii) above shall include (but not be
limited to) a number of shares of Common Stock equal to no less than 200% of the
number of shares of Common Stock into which the shares of Preferred Stock
(together with the payment of dividends thereon) are convertible, assuming such
conversion occurred on the Closing Date or the Filing Date, whichever yields a
lower Conversion Price (as defined in the Purchase Agreement). The Company shall
be required to file additional Registration Statements to the extent the sum of
(i) the number of the shares of Common Stock into which the shares of Preferred
Stock are convertible (together with the payment of dividends thereon), and (ii)
the number of shares of Common Stock issuable upon exercise in full of the
Warrants, exceeds the number of shares of Common Stock initially registered in
accordance with the immediately prior sentence. The Company shall have ten (10)
days to file such additional Registration Statements after notice of the
requirement thereof, which the Holders may give at such time when the number of
shares of Common Stock as are issuable upon conversion of shares of Preferred
Stock (together with the payment of dividends thereon) and upon exercise of the
Warrants, exceeds 85% of the number of shares of Common Stock to be registered
in a Registration Statement hereunder.
"Registration Statement" means the registration statement and
any additional registration statements contemplated by Section 2(a), including
(in each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means one special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
<PAGE>
"Warrants" means collectively (i) the Common Stock purchase
warrant issued to the Purchaser pursuant to the Purchase Agreement, and (ii) the
Common Stock purchase warrant issued to Jesup & Lamont Securities Corporation in
connection with consulting services provided to the Company.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form S-3 (or if the Company
is not then eligible to register for resale the Registrable Securities on Form
S-3 such registration shall be on another appropriate form in accordance
herewith (including Form S-1), or, in connection with an Underwritten Offering
hereunder, such other form agreed to by the Company and by the Holders of
Registrable Securities). The Registration Statement shall state, to the extent
permitted by Rule 416 under the Securities Act, that it also covers such
indeterminate number of shares of Common Stock as may be required to effect
conversion of the shares of Preferred Stock (and payment of dividends thereon)
or exercise of the Warrants, in each case to prevent dilution resulting from
stock splits, stock dividends or similar events, or by reason of changes in the
Conversion Price in accordance with the terms of the Certificate of Designation
(as defined in the Purchase Agreement) or by reason of changes in the Exercise
Price (as defined in the Warrants) in accordance with the terms of the Warrants.
The Company shall use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event prior to the Effectiveness Date, and shall use
its best efforts to keep such Registration Statement continuously effective
under the Securities Act until the date which is three years after the date that
such Registration Statement is declared effective by the Commission or such
earlier date when all Registrable Securities covered by such Registration
Statement have been sold or may be sold without volume restrictions pursuant to
Rule 144(k) as determined by the counsel to the Company pursuant to a written
opinion letter to such effect, addressed and acceptable to the Company's
transfer agent (the "Effectiveness Period"), provided, however, that the Company
shall not be deemed to have used its best efforts to keep the Registration
Statement effective during the Effectiveness Period if it voluntarily takes any
action that would result in the Holders not being able to sell the Registrable
Securities covered by such Registration Statement during the Effectiveness
Period, unless such action is required under applicable law or the Company has
filed a post-effective amendment to the Registration Statement and the
Commission has not declared it effective.
(b) If (i) the Common Stock is not Actively Traded (as such
term is defined in the Certificate of Designation), (ii) the Holders of at least
two thirds of the Registrable Securities have exercised their rights to a
mandatory redemption and the Company has failed to pay the redemption amount
applicable thereto by the tenth (10th) day after demand is made therefor, (iii)
the Registration Statement shall either fail to be declared effective by the
Commission by the thirtieth (30th) day after the Effectiveness Date or, if so
declared effective by the Commission, shall fail to remain effective and
available to the Holders for more than ten (10) Business Days during the
Effectiveness Period, if the Holders of two-thirds of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and, if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated pro rata among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(i) agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement on Form S-3 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3 such
registration shall be on another appropriate form in accordance herewith, or, in
connection with an Underwritten Offering hereunder, such other form agreed to by
the Company and by the Holders of Registrable Securities) which shall contain
the "Plan of Distribution" attached hereto as Annex A (except if otherwise
directed by the Holders), and cause the Registration Statement to become
effective and remain effective as provided herein; provided, however, that not
less than five (5) Business Days prior to the filing of the Registration
Statement or any related Prospectus or any amendment or supplement thereto
(including any document that would be incorporated or deemed to be incorporated
therein by reference), the Company shall, (i) furnish to the Holders, their
Special Counsel and any managing underwriters, copies of all such documents
proposed to be filed, which documents (other than those incorporated or deemed
to be incorporated by reference) will be subject to the review of such Holders,
their Special Counsel and such managing underwriters, and (ii) cause its
officers and directors, counsel and independent certified public accountants to
respond to such inquiries as shall be necessary, in the reasonable opinion of
respective counsel to such Holders and such underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as reasonably possible to any comments
received from the Commission with respect to the Registration Statement or any
amendment thereto and as promptly as reasonably possible provide the Holders
true and complete copies of all correspondence from and to the Commission
relating to the Registration Statement; and (iv) comply in all material respects
with the provisions of the Securities Act and the Exchange Act with respect to
the disposition of all Registrable Securities covered by the Registration
Statement during the applicable period in accordance with the intended methods
of disposition by the Holders thereof set forth in the Registration Statement as
so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five (5) days prior to
such filing) and (if requested by any such Person) confirm such notice in
writing no later than one (1) Business Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (B) when the Commission notifies
the Company whether there will be a "review" of such Registration Statement and
whenever the Commission comments in writing on such Registration Statement (the
Company shall provide true and complete copies thereof and all written responses
thereto to each of the Holders); and (C) with respect to the Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the Commission or any other Federal or state governmental
authority for amendments or supplements to the Registration Statement or
Prospectus or for additional information; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the representations
and warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and (vi) of the
occurrence of any event that makes any statement made in the Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Use its reasonable best efforts to avoid the issuance of,
or, if issued, obtain the withdrawal of (i) any order suspending the
effectiveness of the Registration Statement, or (ii) any suspension of the
qualification (or exemption from qualification) of any of the Registrable
Securities for sale in any jurisdiction, at the earliest practicable moment.
<PAGE>
(e) In the event of an Underwritten Offering, if requested by
any managing underwriter or the Holders of a majority in interest of the
Registrable Securities to be sold in connection with an Underwritten Offering,
(i) promptly incorporate in a Prospectus supplement or post-effective amendment
to the Registration Statement such information as such managing underwriters and
such Holders reasonably agree should be included therein, and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to take any
action pursuant to this Section 3(e) that would, in the opinion of counsel for
the Company, violate applicable law or be materially detrimental to the business
prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by a
Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject.
(i) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by applicable law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request at least two Business
Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as reasonably possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(k) If the shares of Common Stock become listed for trading on
any of the New York Stock Exchange, American Stock Exchange, Nasdaq National
Market or Nasdaq SmallCap Market (each a "Subsequent Market"), use its best
efforts to cause all Registrable Securities relating to such Registration
Statement to be listed on such Subsequent Market as and when required pursuant
to the Purchase Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance as
is customary in Underwritten Offerings) and take all such other actions in
connection therewith (including those reasonably requested by any managing
underwriters and the Holders of a majority of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered into, (i)
make such representations and warranties to such Holders and such underwriters
as are customarily made by issuers to underwriters in underwritten public
offerings, and confirm the same if and when requested; (ii) obtain and deliver
copies thereof to each Holder and the managing underwriters, if any, of opinions
of counsel to the Company and updates thereof addressed to each Holder and each
such underwriter, in form, scope and substance reasonably satisfactory to any
such managing underwriters and Special Counsel to the selling Holders covering
the matters customarily covered in opinions requested in Underwritten Offerings
and such other matters as may be reasonably requested by such Special Counsel
and underwriters; (iii) at the time of delivery of any Registrable Securities
sold pursuant thereto, use its best reasonable efforts to obtain and deliver
copies to the Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in the Registration Statement), addressed to the Company in form
and substance as are customary in connection with Underwritten Offerings; (iv)
if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the selling
Holders and the underwriters, if any, than those set forth in Section 5 (or such
other provisions and procedures acceptable to the managing underwriters, if any,
and holders of a majority of Registrable Securities participating in such
Underwritten Offering); and (v) deliver such documents and certificates as may
be reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing underwriters to
evidence the continued validity of the representations and warranties made
pursuant to clause 3(l)(i) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission.
(o) The Company may require each selling Holder to furnish in
writing to the Company such information regarding the distribution of such
Registrable Securities and the beneficial ownership of Common Stock held by such
Holder as is required by law to be disclosed in the Registration Statement, and
the Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 3(j), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an Underwritten Offering and whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in the foregoing sentence shall include, without limitation, (i) all
registration and filing fees (including, without limitation, fees and expenses
(A) with respect to filings required to be made with any Subsequent Market on
which the Common Stock is then listed for trading, and (B) in compliance with
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Holders in connection with Blue Sky
qualifications or exemptions of the Registrable Securities and determination of
the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as the managing underwriters, if any, or the Holders of a
majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the managing underwriters, if any, or by the
holders of a majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and Special Counsel for the Holders,
(v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant
to the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising
out of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that such untrue
statements or omissions are based solely upon information regarding such Holder
furnished in writing to the Company by such Holder expressly for use therein,
which information was reasonably relied on by the Company for use therein or to
the extent that such information relates to such Holder or such Holder's
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in the
Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto. The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising out of or based solely on either (i) a sale of the
Registrable Securities by a Holder in a manner not covered by the Plan of
Distribution of the Registration Statement or (ii) any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto, or arising solely
out of or based solely upon any omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information so furnished in writing by such Holder to the
Company specifically for inclusion in the Registration Statement or such
Prospectus and that such information was reasonably relied upon by the Company
for use in the Registration Statement, such Prospectus or such form of
prospectus or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus, or in
any amendment or supplement thereto. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation. A Holder shall notify the
Company promptly of the institution, threat or assertion of any Proceeding of
which such Holder is aware in connection with the transactions contemplated by
this Agreement.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party shall promptly notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall
be required to contribute, in the aggregate, any amount in excess of the amount
by which the proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of
its subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Except as and to the extent specified in Schedule 6(b) hereto, neither the
Company nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specified in Schedule 6(b) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.
(d) Piggy-Back Registrations. If at any time when there is not
an effective Registration Statement covering all of the Registrable Securities
and the Underlying Shares, the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity 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, then the Company shall send to each holder of Registrable
Securities written notice of such determination and, if within twenty (20) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; provided, however,
that the Company shall not be required to register any Registrable Securities
pursuant to this Section 7(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 8:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: Coyote Network Systems, Inc.
4360 Park Terrace Drive
Westlake Village, CA 91361
Facsimile No.: (818) 735-7633
Attn: Chief Financial Officer
With copies to: Reinhart, Boerner, Van Deuren, Norris & Rieselbach,P.C.
One Norwest Center
1700 Lincoln Street, Suite 3725
Denver, CO 80203-4537
Facsimile No.: (303) 831-4805
Attn: Timothy G. Atkinson
If to the
Purchaser: JNC Opportunity Fund Ltd.
c/o Olympia Capital (Cayman) Ltd.
Williams House, 20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Director
With copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Managing Member
With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the stock transfer books of
the Company or such other address as may be designated in writing hereafter, in
the same manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.
(h) Assignment of Registration Rights. The rights of each
Holder hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any Affiliate of such Holder, any
other Holder or Affiliate of any other Holder if: (i) the Holder agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned, (iii) following such
transfer or assignment the further disposition of such securities by the
transferee or assignees is restricted under the Securities Act and applicable
state securities laws, (iv) at or before the time the Company receives the
written notice contemplated by clause (ii) of this Section, the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
of this Agreement, and (v) such transfer shall have been made in accordance with
the applicable requirements of the Purchase Agreement. The rights to assignment
shall apply to the Holders (and to subsequent) successors and assigns.
(i) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(j) Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), 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 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 in effect for 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.
(k) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(m) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(n) Shares Held by The Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.
COYOTE NETWORK SYSTEMS, INC.
By: /S/ JAMES J. FIEDLER
-----------------------------------
Name: James J. Fiedler
Title: Chairman and Chief Financial Officer
JNC OPPORTUNITY FUND LTD.
By: /S/ NEIL T. CHAU
-----------------------------------
Name: Neil T. Chau
Title: Managing Member
<PAGE>
Registration Rights Agreement
Annex A
Plan of Distribution
The Selling Stockholders, their pledgees, donees, transferees or other
successors-in-interest, may, from time to time, sell all or a portion of the
shares of Common Stock being registered hereunder (the "Shares") in privately
negotiated transactions or otherwise, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices. The Shares may be sold by the Selling
Stockholders by one or more of the following methods, without limitation: (a)
block trades in which the broker or dealer so engaged will attempt to sell the
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction, (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus,
(c) an exchange distribution in accordance with the rules of the applicable
exchange, (d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers, (e) privately negotiated transactions, (f) delivery
of Shares in satisfaction of open positions in the Company's securities, (g) a
combination of any such methods of sale and (h) any other method permitted
pursuant to applicable law.
In effecting sales, brokers and dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate in such
sales. Brokers or dealers may receive commissions or discounts from the Selling
Stockholders (or, if any such broker-dealer acts as agent for the purchaser of
such shares, from such purchaser) in amounts to be negotiated which are not
expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the Selling Stockholders to sell a specified
number of such Shares at a stipulated price per share, and, to the extent such
broker-dealer is unable to do so acting as agent for a Selling Stockholder, to
purchase as principal any unsold Shares at the price required to fulfill the
broker-dealer commitment to the Selling Stockholders. Broker-dealers who acquire
Shares as principal may thereafter resell such Shares from time to time in
transactions (which may involve block transactions and sales to and through
other broker-dealers, including transactions of the nature described above) in
the over-the-counter market or otherwise at prices and on terms then prevailing
at the time of sale, at prices then related to the then-current market price or
in negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such Shares commissions as described above. The
Selling Stockholders may also sell the Shares in accordance with Rule 144 under
the Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders in sales of the Shares may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the Shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the Shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
<PAGE>
---------
EXHIBIT D
---------
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
COYOTE NETWORK SYSTEMS, INC.
WARRANT
Dated: August 31, 1998
Coyote Network Systems, Inc., a Delaware corporation (the "Company"),
hereby certifies that, for value received, JNC Opportunity Fund Ltd., or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company up to a total of 225,000 shares of Common
Stock, $1.00 par value per share (the "Common Stock"), of the Company (each such
share, a "Warrant Share" and all such shares, the "Warrant Shares") at an
exercise price equal to $8.43 per share (as adjusted from time to time as
provided in Section 8, the "Exercise Price"), at any time and from time to time
from and after the date hereof and through and including August 31, 2001 (the
"Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) This Warrant may not be offered or sold except in accordance with the
legend on the first page hereof and subject to compliance with such legend. The
Company shall register the transfer of any portion of this Warrant in the
Warrant Register, upon surrender of this Warrant, with the Form of Assignment
attached hereto duly completed and signed, to the Transfer Agent or to the
Company at the office specified in or pursuant to Section 3(b). Upon any such
registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by the Holder
to the office of the Company specified in or pursuant to Section 3(b) for one or
more New Warrants, evidencing in the aggregate the right to purchase the number
of Warrant Shares which may then be purchased hereunder. Any such New Warrant
will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:30 P.M., Eastern time, at any time and from time to time
on or after the date hereof to and including the Expiration Date. At 5:30 P.M.,
Eastern time on the Expiration Date, the portion of this Warrant not exercised
prior thereto shall be and become void and of no value. Prior to the Expiration
Date, the Company may not call or otherwise redeem this Warrant without the
prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 9, upon surrender of this Warrant, with
the Form of Election to Purchase attached hereto duly completed and signed, to
the Company at its address for notice set forth in Section 11 and upon payment
of the Exercise Price multiplied by the number of Warrant Shares that the Holder
intends to purchase hereunder, in lawful money of the United States of America,
in cash or by certified or official bank check or checks, all as specified by
the Holder in the Form of Election to Purchase, the Company shall promptly (but
in no event later than 3 business days after the Date of Exercise) issue or
cause to be issued and cause to be delivered to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate for
the Warrant Shares issuable upon such exercise, free of restrictive legends
other than as required by applicable law. Any person so designated by the Holder
to receive Warrant Shares shall be deemed to have become holder of record of
such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety or, from time
to time, for a portion of the number of Warrant Shares. If less than all of the
Warrant Shares which may be purchased under this Warrant are exercised at any
time, the Company shall issue or cause to be issued, at its expense, a New
Warrant evidencing the right to purchase the remaining number of Warrant Shares
for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this
Warrant, the Company may not file any registration statement with the Securities
and Exchange Commission (other than registration statements of the Company filed
on Form S-8 or Form S-4, each as promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to which the Company is registering
securities pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition or similar transaction including supplements thereto, but not
additionally filed registration statements in respect of such securities) at any
time when there is not an effective registration statement covering the resale
of the Warrant Shares and naming the Holder as a selling stockholder thereunder,
unless the Company provides the Holder with not less than 20 days notice of its
intention to file such registration statement and provides the Holder the option
to include any or all of the applicable Warrant Shares therein. The piggyback
registration rights granted to the Holder pursuant to this Section shall
continue until all of the Holder's Warrant Shares have been sold in accordance
with an effective registration statement or upon the Expiration Date. The
Company will pay all registration expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise of
this Warrant; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the
registration of any certificates for Warrant Shares or Warrants in a name other
than that of the Holder, and the Company shall not be required to issue or cause
to be issued or deliver or cause to be delivered the certificates for Warrant
Shares unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid. The Holder shall
be responsible for all other tax liability that may arise as a result of holding
or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 8). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to adjustment
from time to time as set forth in this Section 8. Upon each such adjustment of
the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior
to the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding, (i)
shall pay a stock dividend (except scheduled dividends paid on outstanding
preferred stock as of the date hereof which contain a stated divided rate) or
otherwise make a distribution or distributions on shares of its Common Stock (as
defined below) or on any other class of capital stock and not the Common Stock)
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock into a larger number of shares, or (iii) combine outstanding shares of
Common Stock into a smaller number of shares, the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before such event
and of which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding after such event. Any adjustment
made pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock, any consolidation
or merger of the Company with or into another person, the sale or transfer of
all or substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property, then the Holder shall have the right thereafter to exercise
this Warrant only into the shares of stock and other securities and property
receivable upon or deemed to be held by holders of Common Stock following such
reclassification, consolidation, merger, sale, transfer or share exchange, and
the Holder shall be entitled upon such event to receive such amount of
securities or property equal to the amount of Warrant Shares such Holder would
have been entitled to had such Holder exercised this Warrant immediately prior
to such reclassification, consolidation, merger, sale, transfer or share
exchange. The terms of any such consolidation, merger, sale, transfer or share
exchange shall include such terms so as to continue to give to the Holder the
right to receive the securities or property set forth in this Section 8(b) upon
any exercise following any such reclassification, consolidation, merger, sale,
transfer or share exchange.
(c) If the Company, at any time while this Warrant is outstanding, shall
distribute to all holders of Common Stock (and not to holders of this Warrant)
evidences of its indebtedness or assets or rights or warrants to subscribe for
or purchase any security (excluding those referred to in Sections 8(a), (b) and
(d)), then in each such case the Exercise Price shall be determined by
multiplying the Exercise Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Exercise Price determined as of
the record date mentioned above, and of which the numerator shall be such
Exercise Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) If, at any time while this Warrant is outstanding, the Company shall
issue or cause to be issued rights or warrants to acquire or otherwise sell or
distribute shares of Common Stock to all holders of Common Stock for a
consideration per share less than the Exercise Price then in effect, then,
forthwith upon such issue or sale, the Exercise Price shall be reduced to the
price (calculated to the nearest cent) determined by multiplying the Exercise
Price in effect immediately prior thereto by a fraction, the numerator of which
shall be the sum of (i) the number of shares of Common Stock outstanding
immediately prior to such issuance, and (ii) the number of shares of Common
Stock which the aggregate consideration received (or to be received, assuming
exercise or conversion in full of such rights, warrants and convertible
securities) for the issuance of such additional shares of Common Stock would
purchase at the Exercise Price, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares. Such adjustment shall be made successively whenever
such an issuance is made.
(e) For the purposes of this Section 8, the following clauses shall also be
applicable:
(i) Record Date. In case the Company shall take a record of the holders of
its Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock or in securities convertible or
exchangeable into shares of Common Stock, or (B) to subscribe for or purchase
Common Stock or securities convertible or exchangeable into shares of Common
Stock, then such record date shall be deemed to be the date of the issue or sale
of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(ii) Treasury Shares. The number of shares of Common Stock outstanding at
any given time shall not include shares owned or held by or for the account of
the Company, and the disposition of any such shares shall be considered an issue
or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to the nearest cent
or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above,
the Holder, after receipt of the determination by the Appraiser, shall have the
right to select an additional appraiser (which shall be a nationally recognized
accounting firm), in which case the adjustment shall be equal to the average of
the adjustments recommended by each of the Appraiser and such appraiser. The
Holder shall promptly mail or cause to be mailed to the Company, a notice
setting forth the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. Such adjustment shall become
effective immediately after the record date mentioned above.
(h) If:
(i) the Company shall declare a dividend (or any other distribution)
on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash dividend on
or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
(iv) the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution, liquidation
or winding up of the affairs of the Company, then the Company shall cause
to be mailed to each Holder at their last addresses as they shall appear
upon the Warrant Register, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is
not to be taken, the date as of which the holders of Common Stock of record
to be entitled to such dividend, distributions, redemption, rights or
warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger,
sale, transfer, share exchange, dissolution, liquidation or winding up;
provided, however, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Payment of Exercise Price. The Holder may pay the Exercise
Price in one of the following manners:
(a) Cash Exercise. The Holder shall deliver immediately available
funds; or
(b) Cashless Exercise. The Holder shall surrender this Warrant to the
Company together with a notice of cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined
as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued
to the Holder.
Y = the number of Warrant Shares with respect
to which this Warrant is being exercised.
A = the average of the closing sale prices
of the Common Stock for the five (5) trading
days immediately prior to (but not
including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
10. Fractional Shares. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of this
Warrant. The number of full Warrant Shares which shall be issuable upon the
exercise of this Warrant shall be computed on the basis of the aggregate number
of Warrant Shares purchasable on exercise of this Warrant so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 10,
be issuable on the exercise of this Warrant, the Company shall pay an amount in
cash equal to the Exercise Price multiplied by such fraction.
11. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 4:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
4360 Park Terrace Drive, Westlake Village, CA 91361, Attention: Chief Financial
Officer, or to facsimile no. (818) 735-7633, or (ii) if to the Holder, to the
Holder at the address or facsimile number appearing on the Warrant Register or
such other address or facsimile number as the Holder may provide to the Company
in accordance with this Section 11.
12. Warrant Agent.
(a) The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the Holder, the Company may appoint a new warrant
agent.
(b) Any corporation into which the Company or any new warrant agent may be
merged or any corporation resulting from any consolidation to which the Company
or any new warrant agent shall be a party or any corporation to which the
Company or any new warrant agent transfers substantially all of its corporate
trust or shareholders services business shall be a successor warrant agent under
this Warrant without any further act. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed (by first
class mail, postage prepaid) to the Holder at the Holder's last address as shown
on the Warrant Register.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 13(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant. This
Warrant shall inure to the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a part
of this Warrant and shall not be deemed to limit or affect any of the provisions
hereof.
<PAGE>
(e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by
its authorized officer as of the date first indicated above.
COYOTE NETWORK SYSTEMS, INC.
By: /s/ James J. Fiedler
------------------------------------
Name: James J. Fiedler
Title: Chairman and Chief Executive Officer
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Coyote Network Systems, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $1.00 par value per share, of Coyote
Network Systems, Inc. and , if such Holder is not utilizing the cashless
exercise provisions set forth in this Warrant, encloses herewith $________ in
cash, certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of shares of
Common Stock to which this Form of Election to Purchase relates, together with
any applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
(Please print name and address)
Dated: ____________________ Name of Holder: __________________________
(Print)
(By:)
(Name:)
(Title:)
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
<PAGE>
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Coyote Network
Systems, Inc. to which the within Warrant relates and appoints ________________
attorney to transfer said right on the books of Coyote Network Systems, Inc.
with full power of substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF COYOTE NETWORKS SYSTEMS, INC. AS
OF AND FOR THE QUARTER ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,224
<SECURITIES> 0
<RECEIVABLES> 3,216
<ALLOWANCES> 0
<INVENTORY> 2,515
<CURRENT-ASSETS> 30,299
<PP&E> 6,869
<DEPRECIATION> (1,544)
<TOTAL-ASSETS> 47,504
<CURRENT-LIABILITIES> 27,614
<BONDS> 1,605
0
0
<COMMON> 10,493
<OTHER-SE> 7,339
<TOTAL-LIABILITY-AND-EQUITY> 47,504
<SALES> 15,164
<TOTAL-REVENUES> 15,164
<CGS> 9,309
<TOTAL-COSTS> 9,309
<OTHER-EXPENSES> 5,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (1,379)
<INCOME-TAX> 0
<INCOME-CONTINUING> (479)
<DISCONTINUED> (900)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,379)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
