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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FRANKLIN TELECOMMUNICATIONS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 3670 95-3733534
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361 (805) 373-8688
ADDRESS AND TELEPHONE NUMBER, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FRANK W. PETERS
733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361
(805) 373-8688
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPY TO:
ROBERT J. ZEPFEL, ESQ.
HADDAN & ZEPFEL LLP
4675 MACARTHUR COURT, SUITE 710
NEWPORT BEACH, CALIFORNIA 92660
(949) 752-6100
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Amendment to Registration Statement is declared
effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of each Proposed Proposed
Class of Maximum Maximum
Securities Securities Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Unit Price Fee
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Common Stock(1) 4,264,736 $2.81 $11,983,908 $3,331.52
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(1) Pursuant to Rule 416 under the Securities Act of 1933, there are also being
registered such indeterminate number of additional shares of common stock as may
be issuable upon the exercise of the common stock purchase warrants described
herein pursuant to the antidilution provisions thereof. The proposed maximum
offering price per share and maximum aggregate offering price for the shares
being registered hereby is calculated in accordance with Rule 457(c) under the
Securities Act.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
4,264,736 SHARES
FRANKLIN TELECOMMUNICATIONS CORP.
COMMON STOCK
These shares of common stock are being offered by Crescent International
Ltd., one of our current shareholders. We issued the shares, or reserved the
shares for issuance, to Crescent International, Ltd. in connection with
investments made in the Company in August and September 1999.
The selling shareholder may sell the shares covered by this Prospectus on
the American Stock Exchange and in ordinary brokerage transactions, in
negotiated transactions or otherwise, at prevailing market prices at the time of
sale or at negotiated prices, and may engage a broker or dealer to sell the
shares. For additional information on the selling shareholder's possible methods
of sale, you should refer to the section of this prospectus entitled "Plan of
Distribution." The selling shareholder may be deemed to be an "underwriter"
within the meaning of the Securities Act in connection with the sale of its
shares. We will not receive any proceeds from the sale of the shares, but will
bear the costs relating to the registration of the shares.
Our common stock is traded on American Stock Exchange under the symbol
"FCM." On September 20, 1999, the closing price for our common stock was $2.81
per share.
The shares offered in this prospectus involve a high degree of risk. You should
carefully consider the "Risk Factors" beginning on page 2 in determining whether
to purchase shares of our common stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER __, 1999.
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You should rely only on information contained or incorporated by reference
in this prospectus. See "Information Incorporated by Reference" on page 10.
Neither we nor the selling shareholder have authorized any other person to
provide you with information different from that contained in this prospectus.
The information contained in this prospectus is correct only as of the date
on the cover, regardless of the date this prospectus was delivered to you or the
date on which you acquired any of the shares.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." These forward-looking
statements include, without limitation, statements about our market opportunity,
our strategies, competition, expected activities and expenditures as we pursue
our business plan, and the adequacy of our available cash resources. Our actual
results could differ materially from those expressed or implied by these
forward-looking statements as a result of various factors, including the risk
factors described above and elsewhere in this prospectus.
OUR BUSINESS
Franklin Telecommunications Corp. designs, builds and sells Internet
Telephony equipment and other high speed communications products and subsystems.
Our products are marketed through Original Equipment Manufacturers ("OEMs") and
distributors, as well as directly to end users. In addition, through our
majority-owned subsidiary, FNet Corp. we provide Internet Protocol telephony
services and Internet access to businesses and individuals. Franklin was formed
in 1981. Our address is 733 Lakefield Road, Westlake Village, California 91361
and our telephone number is (805) 373-8688.
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in our shares. You should not purchase
any of the shares unless you can afford a complete loss of your investment.
WE HAVE A HISTORY OF OPERATING LOSSES.
We have incurred operating losses in each of our last three fiscal years,
and have a significant accumulated deficit. Our operating losses have resulted
from a number of factors, including reduced demand for our original hardware
products, higher expenses for the development of new hardware products and for
installing the infrastructure for the Internet telephony and Internet services
business of FNet, and increasing sales and marketing expenses to promote new
products and services. Much of our operating capital during this period has been
derived from equity financings, rather than from operations. We have been
dependent on these equity financings to sustain our ongoing operations. Thus, an
investment in our shares is highly speculative and we cannot assure you that you
will realize any return on your investment or that you will not lose their
entire investment.
OUR SUBSIDIARY, FNET, POSES CERTAIN RISKS.
Several year ago we organized FNet, which offers Internet Protocol telephony
services and Internet access. We have devoted significant resources and
management time to the organization and development of FNet. We currently own
approximately 70% of the common stock of FNet, with the balance owned by members
of management, including Franklin=s CEO, and certain investors. We believe that
the growth of FNet will benefit Franklin through increased demand for our
communications hardware as well as the value of our interest in FNet. However,
FNet may adversely affect our principal
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business in the short term due to competing demands on our resources and
management. Also, the fact that members of Franklin's management, including our
CEO, hold a direct interest in FNet may pose conflicts of interest. FNet is a
relatively new business venture, and it can be expected that its operations will
be subject to many of the expenses, delays and risks inherent in the
establishment of a new business.
WE DEPEND ON SEVERAL MAJOR CUSTOMERS.
Our sales have been concentrated in a relatively small number of customers,
who account for a significant portion of our revenues. During the fiscal year
ended June 30, 1999, a single customer represented 76% of sales. The loss of
any major customer could adversely affect the Company. The Company has no
ongoing supply contracts with any of its major customers.
WE MAY HAVE DIFFICULTIES IN MANAGING OUR GROWTH.
Our growth has placed a significant strain on our personnel and systems. To
accommodate our current size and manage growth, we must improve our operational,
financial and information systems, and expand, train and manage our employee
base. This problem may be more serious if we acquire additional businesses, as
each such business must then be integrated into our operations and systems.
As we expand our customer base, we will experience greater demands on our
network infrastructure, technical staff and resources. If such demand results in
difficulties satisfying the needs of our customers, it could negatively affect
us by causing subscribers or potential subscribers to utilize competitive long
distance telephone service providers and Internet service providers. We believe
that our ability to provide timely access for customers, and adequate customer
and technical support, will mainly depend on our ability to attract, train,
integrate and retain qualified employees.
IT IS LIKELY WE WILL REQUIRE ADDITIONAL CAPITAL.
All of the proceeds of this offering will be received by the selling
shareholder. While we may receive cash from the exercise of warrants covered by
this Prospectus, we can't be sure that we will derive any specific amount from
this offering. We may require additional capital to sustain our business as
presently operated, and developments in our business and possible expansion into
other markets could indicate that we need to raise additional capital.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results may vary significantly due to a variety of
factors, including the availability and cost of materials and components, the
introduction of new products, the timing of our marketing efforts, pricing
pressures, general economic and industry conditions that affect customer demand,
and other factors.
OUR FUTURE GROWTH DEPENDS UPON AN INCREASE IN THE USE OF INTERNET PROTOCOL
TELEPHONY AS A MEDIUM FOR VOICE COMMUNICATIONS.
The Internet Protocol telephony business has little operating history, and is
evolving rapidly. Until very recently, the sound quality of Internet telephony
calls was poor, and the technology is still in the early stages of development.
As the industry has grown, substantial improvements to sound quality have been
made but technological impediments still need to be overcome. In addition, the
capacity constraints of the public Internet network could hinder further
development of Internet telephony if callers experience delays, errors in
transmissions or other difficulties. We have attempted to reduce this risk by
utilizing private leased lines, international private lines, Frame Relay lines
and T-1 lines for voice traffic, while using the Internet primarily for fax and
data traffic and only secondarily for voice traffic. As is typical in the case
of a new and rapidly evolving industry, demand and market acceptance for our
services are
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subject to a high level of uncertainty and risk. In particular, the Internet
must be accepted as a viable alternative to traditional telephony service.
Customers that have already invested substantial resources in integrating
traditional telephony service with their operations may be particularly
reluctant or slow to adopt a new technology that makes their existing
infrastructure obsolete. Because this market is new and evolving, it is
difficult to predict the size of this market and its growth rate. If the
Internet telephony market fails to develop, develops more slowly than we expect
or becomes saturated with competitors, then our business, results of operations
and financial condition will be materially adversely affected.
OUR BUSINESS IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID TECHNOLOGICAL CHANGES.
The internet telephony, data communications and telecommunications industry
is extremely competitive. Our principal competitors in the manufacture of
communications hardware are Lucent Technologies, Nokia, HyperCom, Clarent,
Ascend Communications and Cisco Systems. Most of these companies have
substantially greater marketing, financial, technical and field support
resources. In addition, we could face strong competition from a number of
established computer and telecommunications firms which may enter the market in
the future.
The fields of internet telephony and data communications are marked by rapid
changes in technology, which can cause products to become obsolete over very
short time frames. Thus, our performance will depend on our ability to develop
and market new hardware products and services to meet changing technology,
pricing considerations and other market factors. Our business could be severely
impacted if we were to experience delays in developing new hardware products and
services or enhancements.
The market for internet telephony services has been extremely competitive,
and is expected to be so for the foreseeable future. Many companies offer
Internet telephony products and services, and many of these companies have a
substantial presence in this market. Most of the current Internet telephony
products permit voice communications over the Internet between two parties that
are both connected to the Internet with sound-equipped personal computers and
where both parties are using identical Internet telephony software products.
Current product offerings include VocalTec Communications' Internet Phone,
QuarterDeck's WebPhone and Microsoft's NetMeeting.
In addition, a number of large telecommunications providers and equipment
manufacturers, such as Cisco, Lucent, Northern Telecom and Dialogic, have
announced that they intend to offer server-based products. These products are
expected to allow voice communications over the Internet between parties using a
personal computer and a telephone and between two parties using telephones.
Cisco Systems has also taken a further step by recently acquiring two companies
that produce devices that help Internet service providers transition voice and
data traffic to cell and packet networks while maintaining traditional phone
usage and infrastructure. Internet telephony service providers, such as ICG
Communications, IPVoice.com, ITXC, RSL Communications (through its Delta Three
subsidiary) and VIP Calling, route Internet telephony traffic to destinations on
a worldwide basis. In addition, major long distance providers, such as AT&T,
Deutsche Telekom, Frontier, MCI WorldCom, and Qwest Communications, as well as
other major companies such as Motorola and Intel, have all entered or plan to
enter the Internet telephony market. Many of our competitors are larger than and
have substantially greater financial, distribution and marketing resources than
we do. We cannot be certain that we will be able to compete successfully in the
developing Internet telephony market.
The entry of new participants from these categories and the potential entry
of competitors from other categories (such as computer hardware manufacturers)
would result in substantially greater competition. The ability of these
competitors or others to bundle services and products with Internet connectivity
services could place FNet at a significant competitive disadvantage. In
addition, competitors in the telecommunications industry may be able to provide
customers with reduced communications costs in connection with their long
distance telephone and Internet access services, reducing the overall
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cost of telephone and Internet access and significantly increasing pricing
pressures on FNet.
WE FACE PRICING PRESSURES, PARTICULARLY IN THE INTERNET TELEPHONY MARKET.
The success of our current product and service offerings is based on our
ability to provide discounted voice communications by taking advantage of cost
savings achieved through Internet telephony. In recent years, the price of
traditional domestic and international long distance calls has been declining.
In response to these declines, many internet telephony providers have lowered
the price of their service offerings. Should prices of traditional long distance
calls decline to a point where we no longer have a price advantage over our
competitors, we would lose a significant competitive advantage and would have to
rely on factors other than price to differentiate our product and service
offerings. If we fail to do so, our business could be materially adversely
affected.
OUR BUSINESS DEPENDS ON OUR NETWORK INFRASTRUCTURE AND CAPACITY, AND MAY BE
SUBJECT TO SYSTEM FAILURE AND SECURITY RISKS
The future success of FNet's business will depend on the capacity,
reliability and security of its network infrastructure. FNet will be required to
expand and improve this infrastructure as the number of customers and the amount
and type of information its customers communicate over the Internet increases,
and the means by which customers connect to the Internet evolve. Such expansion
and improvement may require substantial financial, operational and managerial
resources.
Capacity constraints have occurred at many Internet Service Providers, both
at the level of particular "points of presence" ("POPs") (affecting only
customers attempting to use that particular POP) and in connection with system
wide services (such as e-mail and news services, which can affect all
customers). From time to time, FNet has experienced delayed delivery from
suppliers of new telephone lines, modems, servers and other equipment used by
FNet in providing its services. Any severe shortage of new telephone lines,
modems, servers or other equipment could result in incoming access lines
becoming full during peak times, causing busy signals for customers who are
trying to connect to the Internet. Similar problems may occur if FNet is unable
to expand the capacity of its various network, e-mail, World Wide Web and other
servers quickly enough to keep pace with demand from our expanding customer
base. If the capacity of such servers is exceeded, customers will experience
delays when trying to use a particular service. Further, if FNet does not
maintain sufficient capacity in its network connections, customers will
experience a general slowdown of all services on the Internet. Any of these
events could cause customers to terminate use of FNet's services. Accordingly,
our business would be damaged if we failed to expand or enhance our network
infrastructure on a timely basis, or failed to adapt it to an expanding customer
base, changing customer requirements or evolving industry standards.
FNet's operations are dependent on its ability to protect its
telecommunications and computer equipment against damage from fire, earthquake,
power loss, telecommunication failure and similar events. The occurrence of a
natural disaster or another unanticipated problem at our headquarters and
network hub or at POPs through which customers connect to the Internet could
cause interruptions in the services provided by FNet. In addition, failure of
FNet's telecommunications providers to provide the data communications capacity
required by FNet as a result of a natural disaster, operational disruption or
for any other reason could cause interruptions in the services provided by FNet.
FNet's network infrastructure may be vulnerable to computer viruses and
other similar disruptive problems caused by its customers, other Internet users
or other third parties. Computer viruses and other problems could lead to
interruptions, delays in or cessation of service to FNet's customers, as well as
corruption of FNet's or its customers' computer systems. Inappropriate use of
the Internet by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of FNet or those of its
customers, which may cause losses to FNet or its customers, or deter certain
persons from using FNet's services. We expect that FNet's customers may
increasingly use the Internet
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for commercial transactions in the future. Any network malfunction or security
breach could cause these transactions to be delayed, not completed or completed
with compromised security. Alleviating problems caused by computer viruses or
other inappropriate uses or security breaches may cause interruptions, delays or
cessation in service to FNet's customers. Customers or others could assert
claims of liability against us as a result of such events. FNet does not
presently maintain redundant or backup Internet services or backbone facilities
or other redundant computing and telecommunications facilities.
OUR BUSINESS DEPENDS ON OUR ABILITY TO PROTECT OUR TECHNOLOGY.
Our success will depend in part on protecting our proprietary technology.
While we have patents covering certain of our products, we rely principally on
copyright law for protection of our hardware and software designs, as well as
trade secret law, confidentiality agreements and our technical abilities and
responsiveness to the demands of customers to protect ours proprietary rights.
THE TELECOMMUNICATIONS BUSINESS IS HEAVILY REGULATED, AND REGULATORY CHANGES
COULD DISRUPT OUR BUSINESS.
Some of our products are subject to regulations of the Federal
Communications Commission. Certain regulations require that products which
reside on a customer's premises and interconnect the public switched network
meet certain standards to prevent harm to the network. Other regulations limit
the levels of electromagnetic radiation which may emanate from an electronic
device located on a customer's premises. We currently comply with these
regulations and we foresee no problem in complying with these regulations in the
future.
The use of the Internet to provide telephone service is a recent market
development. The Federal Communications Commission is considering whether to
impose surcharges or additional regulations on certain providers of Internet
telephony. In April of 1998 the FCC issued a report on the implementation of the
universal service provisions of the Telecommunications Act. The report indicates
that the FCC plans to examine the question of whether certain forms of
"phone-to-phone" Internet telephony are information services or
telecommunications services. The FCC noted that it did not have, as of the date
of the Report, an adequate record on which to make a definitive pronouncement,
but that the record suggested that certain forms of phone-to-phone Internet
telephony appear to have the same functionality as non-Internet
telecommunications services and lack the characteristics that would render them
information services. If the FCC were to determine that certain services are
subject to FCC regulation as telecommunications services, the FCC may require
providers of Internet telephony services to make universal service
contributions, pay access charges or be subject to traditional common carrier
regulation. In addition, the FCC sets the access charges on traditional
telephony traffic and if it reduces these access charges, the cost of
traditional long distance telephone calls will probably be lowered, thereby
decreasing our competitive pricing advantage.
In September 1998, two regional Bell operating companies, U S WEST and
BellSouth, advised Internet telephony providers that the regional companies
would impose access charges on Internet telephony traffic. In addition, U S WEST
has petitioned the FCC for a declaratory ruling that providers of interstate
Internet telephony must pay federal access charges, and has petitioned the
public utilities commissions of two states for similar rulings concerning
payment of access charges for intrastate Internet telephone calls. It is not
known whether these companies, U S WEST and BellSouth, will actually impose
access charges or when such charges will become effective. If these companies
succeed in imposing access charges that may reduce the cost savings of using
Internet telephony as compared to traditional telephone service. The existence
of such access charges could adversely affect the development of our Internet
telephony business. In February 1999, the FCC adopted an order concerning
payment of reciprocal compensation that provides support for a possible finding
by the FCC that providers of Internet telephony must pay access charges for at
least some portions of Internet telephony services. If the FCC were to make such
a finding, the payment of access charges could adversely affect our business.
Many of our competitors are
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lobbying the FCC for the imposition of access charges on Internet telephony
traffic.
To our knowledge, there are currently no domestic and few foreign laws or
regulations that prohibit voice communications over the Internet. State public
utility commissions may retain jurisdiction to regulate the provision of
intrastate Internet telephony services. A number of countries that currently
prohibit competition in the provision of voice telephony have also prohibited
Internet telephony. Other countries permit but regulate Internet telephony. If
Congress, the FCC, state regulatory agencies or foreign governments begin to
regulate Internet telephony, such regulation may interfere with our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
We anticipate that a substantial portion of FNet=s business will be based
outside of the United States, and international expansion is a significant
component of our strategy. We cannot assure you that we will be successful in
expanding into additional international markets. In addition to the uncertainty
regarding our ability to generate revenue from foreign operations and expand our
international presence, there are certain risks inherent in conducting a
telecommunications business on an international basis, including uncertain and
changing legal and regulatory requirements, political instability, and
subscriber fraud.
AS AN INTERNET SERVICE PROVIDER, FNET MAY BE SUBJECT TO SPECIALIZED RISKS.
The law relating to the liability of Internet Service Providers and online
service companies for information carried on or disseminated through their
networks has not yet been definitively established. Several private lawsuits
seeking to impose such liability upon Internet Service Providers and online
services companies are currently pending. Although no such claims have been
asserted against FNet to date, there can be no assurance that such claims will
not be asserted in the future, or if asserted, will not be successful. The
Telecommunications Act imposes fines on any entity that knowingly (i) uses any
interactive computer service or telecommunications device to send obscene or
indecent material to minors; (ii) makes obscene or indecent material available
to minors via an interactive computer service; or (iii) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. As the law in this area develops, the potential
imposition of liability upon FNet for information carried on and disseminated
through its network could require it to implement measures to reduce its
exposure to such liability. The implementation of such measures could require
the expenditure of substantial resources or the discontinuation of certain
service offerings. Any costs that are incurred as a result of such expenditure,
contesting any such asserted claims or the imposition of liability could have a
material adverse effect on FNet.
Due to the increasing use of the Internet, it is possible that additional
laws and regulations may be adopted with respect to the Internet covering issues
such as content, user privacy, pricing, libel, intellectual property protection
and infringement and technology export and other controls. Changes in the
regulatory environment relating to the Internet services industry, including
regulatory changes that directly or indirectly affect telecommunication costs or
increase the likelihood or scope of competition, could affect the Company.
OUR NETWORK DEPENDS ON UNRELATED TELECOMMUNICATIONS CARRIERS.
We depend on other telecommunications carriers to route our telephone
traffic. All of the telephone calls made by FNet=s customers are connected at
least in part through leased transmission facilities. In many of the foreign
jurisdictions in which FNet conducts or plans to conduct business, the primary
provider transmission facilities is a governmental telephone monopoly.
Accordingly, we may be required to lease transmission capacity at artificially
high rates from a single provider. These rates may prevent us from generating a
profit on those calls. In addition, national telephone companies may not be
required by law to allow us to lease necessary transmission lines. In any event,
we may encounter delays in
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negotiating leases and interconnection agreements, which would delay
commencement of operations.
In the United States, the providers of local exchange transmission
facilities are generally the incumbent local exchange carriers, including the
regional Bell operating companies. The permitted pricing of local exchange
facilities in the United States is subject to uncertainties. The Federal
Communications Commission issued an order requiring existing local exchange
carriers to price those facilities at total element long-run incremental cost,
and the United States Supreme Court recently upheld the FCC's jurisdiction to
set a pricing standard for incumbent local exchange carrier facilities provided
to competitors. However, the local exchange carriers could challenge the FCC's
total element long-run incremental cost standard and, if they succeed, the
result may be to increase the cost of local exchange carrier facilities obtained
by us.
Many of the international telephone calls made by our customers are
transported via transmission facilities that we lease from our current and
potential competitors. We lease facilities from local exchange carriers that are
our competitors, such as the regional Bell operating companies. We generally
lease lines on a fixed-cost basis. These include leases of transmission capacity
for point-to-point circuits on a monthly or longer-term fixed-cost basis.
OUR PRODUCTS AND SERVICES MAY BE SUBJECT TO RISKS RELATED TO THE YEAR 2000
PROBLEM.
Many computer systems and software products are coded to understand only
dates that have two digits for the relevant year. These systems and products
need upgrading to accept four digit entries in order to distinguish 21st century
dates from 20th century dates. Without upgrading, many computer applications
could fail or create erroneous results beginning in the year 2000. We are
conducting an assessment to ensure that our computer-related applications will
not fail or create erroneous results as a result of these issues. The "Year
2000" problems of companies on the Internet generally could affect our systems
or operations.
SELLING SHAREHOLDER
Crescent International, Ltd., the selling shareholder, acquired 1,932,368
shares of common stock (the "Shares"), and two warrants to purchase shares of
common stock (the "Warrants") in August and September of 1999.
The first Warrant is a warrant to purchase an indeterminate number of shares
at an exercise price of $.01 per share. The number of shares is determined by
reference to the market price of the Company's Common Stock on the date the
registration statement of which this Prospectus is a part is declared effective,
as compared to the purchase price for the shares. Thus, if the market price on
the effective date exceeds the purchase price for the shares, the warrant
effectively expires on that date. If the market price on the effective date is
lower than the purchase price, then the warrant is exercisable to purchase a
number of shares calculated so that the market value of the original shares plus
the market value of the warrant shares equal the initial purchase price. The
second warrant is a warrant to purchase up to 400,000 shares at an exercise
price of $1.55 per share. This exercise price is subject to adjustment under
certain circumstances in the event of stock splits, stock dividends,
recapitalizations, reclassifications, and similar events.
The resale of the Shares and the shares issuable upon exercise of the
Warrants have been registered in the registration statement of which this
Prospectus is a part.
The following table sets forth certain information as of September 15, 1999,
regarding the ownership of the Company's common stock by the selling shareholder
and as adjusted to give effect to the sale of the shares offered in this
Prospectus. The information relating to the shares owned by the selling
shareholder prior to the offering and the number of shares being offered
excludes the number of shares issuable upon exercise of the Warrants.
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Ownership After Offering
Shares if All Shares Offered
Owned Prior Shares Being Hereby Are Sold
Selling Shareholder to Offering Offered Shares Percent
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Crescent International Ltd. 1,932,368 1,932,368 -0- -0-
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The selling shareholder and its officers and directors have not held any
positions or office or had any other material relationship with the Company or
any of its affiliates within the past three years.
PLAN OF DISTRIBUTION
The shares are being offered on behalf of the selling shareholder, and we
will not receive any proceeds from the offering. The shares may be sold or
distributed from time to time by the selling shareholder, or by pledgees, donees
or transferees of, or other successors in interest to, the selling shareholder,
directly to one or more purchasers (including pledgees) or through brokers,
dealers or underwriters who may act solely as agent or may acquire such shares
as principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, at negotiated prices, or at fixed
prices, which may be subject to change. The sale of the shares may be effected
through one or more of the following methods: (i) ordinary brokers'
transactions, which may include long or short sales; (ii) transactions involving
cross or block trades or otherwise on the American Stock Exchange; (iii)
purchases by brokers, dealers or underwriters as principal and resale by such
purchasers for their own accounts pursuant to this prospectus; (iv) "at the
market" to or through market makers or into established trading markets,
including direct sales to purchasers or sales effected through agents; and (v)
any combination of the foregoing, or by any other legally available means. In
addition, the selling shareholder may enter into hedging transactions with
broker-dealers who may engage in short sales in the course of hedging the
position they assume with the selling shareholder. The selling shareholder also
may enter into option or other transactions with broker-dealers that require the
delivery by such broker-dealers of the shares, which shares may be resold
thereafter pursuant to this prospectus. We cannot be certain that all or any of
the shares will be sold by the selling shareholder.
Brokers, dealers, underwriters or agents participating in the sale of the
shares as agents may receive compensation in the form of commissions, discounts
or concessions from the selling shareholder and/or purchasers of the shares for
whom such broker-dealers may act as agent, or to whom they may sell as
principal, or both (which compensation to a particular broker-dealer may be less
than or in excess of customary commissions). The selling shareholder and any
broker-dealers or other persons who act in connection with the sale of the
common stock may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commission they receive and proceeds of any sale of such
shares may be deemed to be underwriting discounts and commissions under the
Securities Act. Neither the Company nor the selling shareholder can presently
estimate the amount of such compensation. The Company knows of no existing
arrangements between the selling shareholder and any other shareholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the shares.
The selling shareholder and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the shares by the selling
shareholder or any other such persons. The foregoing may affect the
marketability of the shares.
We will pay substantially all of the expenses incidental to the
registration, offering and sale of the shares to the public, other than any
commissions or discounts of underwriters, broker-dealers or
9
<PAGE> 12
agents. We and the selling shareholder have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
INFORMATION INCORPORATED BY REFERENCE AND OTHER AVAILABLE INFORMATION
This prospectus is part of a Registration Statement on Form S-3 that we
filed with the SEC. Certain information in the Registration Statement has been
omitted from this prospectus in accordance with SEC rules.
We file annual, quarterly and special reports and other information with the
SEC. You may read and copy the Registration statement and any other document
that we file at the SEC's public reference rooms located at Room 1024, Judiciary
Plaza, 450 Fifth Street N.W., Washington, D.C. 20549; 7 World Trade Center,
Suite 1300, New York, New York 10048; and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to you free of charge at the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" certain of our
publicly-filed documents into this Prospectus, which means that information
included in those documents is considered part of this Prospectus. Information
that we file with the SEC subsequent to the date of this Prospectus will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
the selling shareholder has sold all the shares.
The following documents filed with the SEC are incorporated by reference in
this prospectus:
(1) Our Annual Report on Form 10-K for the year ended June 30, 1999; and
(2) The description of our common stock set forth under the caption
"Description of Common Stock" in our Registration Statement on Form S-1 (File
No. 333-24791) as originally filed with the Securities and Exchange Commission
on April 9, 1997, or as subsequently amended (the "Registration Statement").
We will furnish without charge to you, on written or oral request, a copy of
any or all of the documents incorporated by reference, other than exhibits to
such documents. You should direct any requests for documents to Secretary,
Franklin Telecommunications Corp, 733 Lakefield Road, Westlake Village,
California 91361.
The information relating to the Company contained in this prospectus is not
comprehensive and should be read together with the information contained in the
incorporated documents.
EXPERTS
The financial statements incorporated in this prospectus by reference from
our Annual Report on Form 10-K for the year ended June 30, 1999, have been so
incorporated in reliance on the report of Singer Lewak Goldstein & Greenbaum
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
Certain legal matters with respect to the legality under California law of
the shares of Common Stock offered hereby will be passed upon for the Company by
Haddan & Zepfel LLP, Newport Beach, California.
10
<PAGE> 13
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF
THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements............... 2
Our Business............................. 2
Risk Factors............................. 2
Selling Shareholder...................... 8
Plan of Distribution..................... 9
Information Incorporated by Reference
and Other Available Information........ 10
Experts.................................. 10
Legal Matters............................ 10
</TABLE>
4,264,736 SHARES
FRANKLIN
TELECOMMUNICATIONS
CORP.
COMMON STOCK
PROSPECTUS
September __, 1999
11
<PAGE> 14
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses incurred or to be incurred by the Company in connection with
the preparation and filing of this Registration Statement are estimated to be as
follows:
<TABLE>
<S> <C>
Printing and duplication expenses.......................... $ 7,000.00
Registration fee........................................... 3,331.52
Legal fees and expenses.................................... 5,000.00
Accounting fees and expenses............................... 2,000.00
Transfer Agent fees........................................ 300.00
Miscellaneous.............................................. 1,500.00
Total............................................ $19,131.52
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws provide that the Company may indemnify its officers and
directors, and may indemnify its employees and other agents, to the fullest
extent permitted by California law. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to officers, directors
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
ITEM 16. EXHIBITS
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<S> <C>
3.1* Restated Articles of Incorporation of Franklin
Telecommunications Corp.
3.2* Bylaws of Franklin Telecommunications Corp.
5.1 Opinion of Haddan & Zepfel LLP
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters.
</TABLE>
12
<PAGE> 15
<TABLE>
<S> <C>
10.2 Stock Purchase Agreement, dated August 30, 1999 between
Registrant and Crescent International Ltd.
10.3 Warrant, dated August 30, 1999, issued To Crescent
International Ltd. (Early Put Warrant)
10.4 Warrant, dated August 30, 1999, issued To Crescent International
Ltd. (Incentive Warrant)
10.5 Registration Rights Agreement, dated August 30, 1999 between the
Registrant and Crescent International Ltd.
10.6 Amendment to Stock Purchase Agreement, dated September 15, 1999
between Registrant and Crescent International Ltd.
10.7 Amendment to Registration Rights Agreement, dated September 15,
1999 between Registrant and Crescent International Ltd.
10.8 Letter Agreement, dated September 15, 1999 between Registrant
and Crescent International Ltd.
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP
23.2 Consent of Haddan & Zepfel LLP (included as part of Exhibit
5.1).
</TABLE>
- ----------
*Incorporated by reference from Registrant's Registration Statement on Form S-1
(No. 333-24791), filed with the Commission on April 9, 1997, and incorporated
herein by reference.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section l0(a)(3) of the
Securities Act of l933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement, including
(but not limited to) any addition or deletion of a managing underwriter.
(2) That, for the purpose of determining any liability under the Securities
Act of l933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
13
<PAGE> 16
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of l933 may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Westlake Village, State of California, on September
22, 1999.
FRANKLIN TELECOMMUNICATIONS CORP.
By /s/ FRANK W. PETERS
------------------------------------
Frank W. Peters
President
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
authorizes the agent for service named in this Registration Statement, with full
power to act alone, to file one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as such agent for service deems
appropriate, and the Registrant and each such person hereby appoints such agent
for service as attorney-in-fact, with full power to act alone, to execute in the
name and in behalf of the Registrant and any such person, individually and in
each capacity stated below, any such amendments to this Registration Statement.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer
/s/ FRANK W. PETERS Chief Executive Officer and a September 22, 1999
- ----------------------------------------------------- Director
Frank W. Peters
(2) Principal Financial and Accounting Officer
/s/ THOMAS RUSSELL Chief Financial Officer and a September 22, 1999
- ----------------------------------------------------- Director
Thomas Russell
(3) Directors
/s/ PETER S. BUSWELL President and a Director September 22, 1999
- -----------------------------------------------------
Peter S. Buswell
/s/ ROBERT S. HARP Director September 22, 1999
- -----------------------------------------------------
Robert S. Harp
/s/ HERB MITCHELL Director September 22, 1999
- -----------------------------------------------------
Herb Mitchell
</TABLE>
15
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<S> <C>
3.1* Restated Articles of Incorporation of Franklin
Telecommunications Corp.
3.2* Bylaws of Franklin Telecommunications Corp.
5.1 Opinion of Haddan & Zepfel LLP
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters.
10.2 Stock Purchase Agreement, dated August 30, 1999 between
Registrant and Crescent International Ltd.
10.3 Warrant, dated August 30, 1999, issued To Crescent
International Ltd. (Early Put Warrant)
10.4 Warrant, dated August 30, 1999, issued To Crescent International
Ltd. (Incentive Warrant)
10.5 Registration Rights Agreement, dated August 30, 1999 between the
Registrant and Crescent International Ltd.
10.6 Amendment to Stock Purchase Agreement, dated September 15, 1999
between Registrant and Crescent International Ltd.
10.7 Amendment to Registration Rights Agreement, dated September 15,
1999 between Registrant and Crescent International Ltd.
10.8 Letter Agreement, dated September 15, 1999 between Registrant
and Crescent International Ltd.
23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP
23.2 Consent of Haddan & Zepfel LLP (included as part of Exhibit
5.1).
</TABLE>
- ----------
*Incorporated by reference from Registrant's Registration Statement on Form S-1
(No. 333-24791), filed with the Commission on April 9, 1997, and incorporated
herein by reference.
<PAGE> 1
Exhibit 5.1
[LETTERHEAD OF HADDAN & ZEPFEL LLP]
September 22, 1999
Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, California 91361
Dear Sirs:
You have requested our opinion with respect to certain matters in
connection with the filing by Franklin Telecommunications Corp. (the "Company")
of a Registration Statement on Form S-3 (the "Registration Statement") with the
Securities and Exchange Commission, covering the registration of up to 4,264,736
shares of the Company's Common Stock, without par value (the "Shares"), for
issuance pursuant to a Stock Purchase Agreement, dated as of August 30,1999
between the Company and Crescent International Ltd., as amended by an Amendment
to Stock Purchase Agreement dated September 15, 1999 (the "Stock Purchase
Agreement"), and upon exercise of Stock Purchase Warrants issued pursuant to the
Stock Purchase Agreement (the "Warrants").
In connection with this opinion, we have examined and relied upon the
Registration Statement, the Company's Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws, the Stock Purchase Agreement, as
amended, the Warrants, and the originals or copies certified to our satisfaction
of such records, documents, certificates, memoranda and other instruments as in
our judgment are necessary or appropriate to enable us to render the opinion
expressed below. We have assumed the genuineness and authenticity of all
documents submitted to us as originals, the conformity to originals of all
documents submitted to us as copies thereof and the due execution and delivery
of all documents where due execution and delivery are a prerequisite to the
effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that the Shares, when sold and issued in accordance with the Stock
Purchase Agreement, as amended, and the Warrants, are or will be validly issued,
fully paid, and nonassessable shares of Common Stock of the Company.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Haddan & Zepfel LLP
-------------------------------
Haddan & Zepfel LLP
<PAGE> 1
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
CRESCENT INTERNATIONAL LTD.
AND
FRANKLIN TELECOMMUNICATIONS CORP.
DATED AS OF AUGUST 30, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I CERTAIN DEFINITIONS.......................................................1
Section 1.1. "Bid Price"...........................................................1
Section 1.2. "Capital Shares"......................................................1
Section 1.3. "Closing".............................................................1
Section 1.4. "Closing Date"........................................................2
Section 1.5. "Commitment Period"...................................................2
Section 1.6. "Common Stock"........................................................2
Section 1.7. "Condition Satisfaction Date".........................................2
Section 1.8. "Daily Trading Value".................................................2
Section 1.9. "Damages".............................................................2
Section 1.10. "Early Put Shares"....................................................2
Section 1.11. "Early Put Warrant"...................................................2
Section 1.12. "Early Put Warrant Shares"............................................2
Section 1.13. "Effective Date"......................................................2
Section 1.14. "Exchange Act"........................................................2
Section 1.15. "Incentive Warrant Shares"............................................2
Section 1.16. "Incentive Warrant"...................................................2
Section 1.17. "Investment Amount"...................................................3
Section 1.18. "Legend"..............................................................3
Section 1.19. "Lowest Average Price"................................................3
Section 1.20. "Material Adverse Effect".............................................3
Section 1.21. "Maximum Commitment Amount"...........................................3
Section 1.22. "Maximum Put Amount"..................................................3
Section 1.23. "Minimum Bid Price"...................................................3
Section 1.24. "Minimum Put Amount"..................................................3
Section 1.25. "Minimum Time Interval"...............................................3
Section 1.26. "NASD"................................................................3
Section 1.27. "Outstanding".........................................................3
Section 1.28. "Person"..............................................................3
Section 1.29. "Principal Market"....................................................3
Section 1.30. "Purchase Price"......................................................3
Section 1.31. "Put".................................................................4
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C>
Section 1.32. "Put Date"............................................................4
Section 1.33. "Put Fees"............................................................4
Section 1.34. "Put Notice"..........................................................4
Section 1.35. "Put Notice Period"...................................................4
Section 1.36. "Put Shares"..........................................................4
Section 1.37. "Registrable Securities"..............................................4
Section 1.38. "Registration Rights Agreement".......................................4
Section 1.39. "Registration Statement"..............................................4
Section 1.40. "Regulation D"........................................................5
Section 1.41. "SEC".................................................................5
Section 1.42. "SEC Documents".......................................................5
Section 1.43. "Section 4(2)"........................................................5
Section 1.44. "Securities Act"......................................................5
Section 1.45. "Subscription Date"...................................................5
Section 1.46. "Subsidiary"..........................................................5
Section 1.47. "Trading Day".........................................................5
Section 1.48. "Underwriter".........................................................5
Section 1.49. "Valuation Period"....................................................5
Section 1.50. "Warrants"............................................................5
Section 1.51. "Warrant Shares"......................................................5
ARTICLE II PURCHASE AND SALE OF COMMON STOCK; TERMINATION OF OBLIGATIONS;
INCENTIVE WARRANT.........................................................5
Section 2.1. Investments...........................................................6
Section 2.2. Mechanics.............................................................6
Section 2.3. Closings..............................................................6
Section 2.4. Termination of Agreement and Investment Obligation....................7
Section 2.5. The Incentive Warrant.................................................7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR................................7
Section 3.1. Intent................................................................7
Section 3.2. Sophisticated Investor................................................7
Section 3.3. Authority.............................................................7
Section 3.4. Not an Affiliate......................................................8
Section 3.5. Organization and Standing.............................................8
Section 3.6. Absence of Conflicts..................................................8
Section 3.7. Disclosure; Access to Information.....................................8
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
Section 3.8. Manner of Sale........................................................8
Section 3.9. Resale Restrictions...................................................8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................9
Section 4.1. Organization of the Company...........................................9
Section 4.2. Authority.............................................................9
Section 4.3. Corporate Documents...................................................9
Section 4.4. Books and Records.....................................................9
Section 4.5. Capitalization.......................................................10
Section 4.6. Registration and Listing of Common Stock.............................10
Section 4.7. Financial Statements.................................................10
Section 4.8. SEC Documents........................................................10
Section 4.9. Exemption from Registration; Valid Issuances; New Issuances..........11
Section 4.10. No General Solicitation or Advertising in Regard to this
Transaction..........................................................11
Section 4.11. No Conflicts.........................................................11
Section 4.12. No Material Adverse Change...........................................12
Section 4.13. No Undisclosed Liabilities...........................................12
Section 4.14. No Undisclosed Events or Circumstances...............................12
Section 4.15. No Integrated Offering...............................................12
Section 4.16. Litigation and Other Proceedings.....................................13
Section 4.17. No Misleading or Untrue Communication................................13
Section 4.18. Material Non-Public Information......................................13
ARTICLE V COVENANTS OF THE INVESTOR................................................13
Section 5.1. Compliance...........................................................13
Section 5.2. No Short Sales.......................................................13
ARTICLE VI COVENANTS OF THE COMPANY.................................................13
Section 6.1. Registration Rights..................................................14
Section 6.2. Reservation of Common Stock..........................................14
Section 6.3. Listing of Common Stock..............................................14
Section 6.4. Exchange Act Registration............................................14
Section 6.5. Legends..............................................................14
Section 6.6. Corporate Existence..................................................14
Section 6.7. Additional SEC Documents.............................................14
Section 6.8. Notice of Certain Events Affecting Registration; Suspension of
Right to Make a Put..................................................14
Section 6.9. Consolidation; Merger................................................15
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C>
Section 6.10. Issuance of Put Shares, Warrant Shares and Additional Shares.........15
Section 6.11. Legal Opinion on Subscription Date...................................15
Section 6.12. No Similar Arrangement; Right of First Refusal.......................16
ARTICLE VII CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING..........16
Section 7.1. Conditions Precedent to the Obligation of the Company to Issue
and Sell Common Stock................................................16
Section 7.2. Conditions Precedent to the Right of the Company to Deliver a
Put Notice and the Obligation of the Investor to Purchase Put
Shares...............................................................17
Section 7.3. Due Diligence Review; Non-Disclosure of Non-Public Information.......19
ARTICLE VIII LEGENDS..................................................................20
Section 8.1. Legends..............................................................20
Section 8.2. No Other Legend or Stock Transfer Restrictions.......................22
Section 8.3. Investor's Compliance................................................22
ARTICLE IX INDEMNIFICATION; ARBITRATION.............................................22
Section 9.1. Indemnification......................................................22
Section 9.2. Method of Asserting Indemnification Claims...........................23
Section 9.3. Arbitration..........................................................26
ARTICLE X MISCELLANEOUS............................................................26
Section 10.1. Put Fees and Transaction Costs.......................................26
Section 10.2. Reporting Entity for the Common Stock................................27
Section 10.3. Brokerage............................................................27
Section 10.4. Notices..............................................................27
Section 10.5. Assignment...........................................................28
Section 10.6. Amendment; No Waiver.................................................28
Section 10.7. Annexes and Exhibits; Entire Agreement...............................29
Section 10.8. Survival.............................................................29
Section 10.9. Severability.........................................................29
Section 10.10.Title and Subtitles..................................................29
Section 10.11.Counterparts.........................................................29
Section 10.12.Choice of Law........................................................29
Section 10.13.Other Expenses.......................................................29
</TABLE>
4
<PAGE> 6
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
CRESCENT INTERNATIONAL LTD.
AND
FRANKLIN TELECOMMUNICATIONS CORP.
DATED AS OF AUGUST 30, 1999
This STOCK PURCHASE AGREEMENT is entered into as of the 30th day of
August, 1999 (this "Agreement"), by and between Crescent International Ltd. (the
"Investor"), an entity organized and existing under the laws of Bermuda, and
Franklin Telecommunications Corp., a corporation organized and existing under
the laws of the State of California (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase, up to
$6,500,000 of the Common Stock (as defined below); and
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in Common Stock to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "Bid Price" shall mean the closing bid price as reported
under Section 10.2 of this Agreement.
Section 1.2. "Capital Shares" shall mean the Common Stock and any shares
of any other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of dividends (as and when declared)
and assets (upon liquidation of the Company).
Section 1.3. "Closing" shall mean one of the closings of a purchase and
sale of the Common Stock pursuant to Section 2.1.
<PAGE> 7
Section 1.4. "Closing Date" shall mean, with respect to a Closing, the
first Trading Day following the Put Notice Period related to such Closing,
provided all conditions to such Closing have been satisfied on or before such
Trading Day.
Section 1.5. "Commitment Period" shall mean the period commencing on the
Subscription Date and expiring on the earlier to occur of (i) the date on which
the Investor shall have purchased Put Shares pursuant to this Agreement for an
aggregate Purchase Price of the Maximum Commitment Amount, (ii) the date this
Agreement is terminated pursuant to Section 2.4, or (iii) the date occurring two
years from the Subscription Date.
Section 1.6. "Common Stock" shall mean the Company's common stock, no
par value per share.
Section 1.7. "Condition Satisfaction Date" shall have the meaning set
forth in Section 7.2 of this Agreement.
Section 1.8. "Daily Trading Value" shall mean, on any Trading Day, the
Bid Price multiplied by the trading volume of the Common Stock.
Section 1.9. "Damages" shall mean any and all losses, claims, damages,
liabilities, costs and expenses (including, without limitation, any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any and all amounts paid in defense or settlement of, any action, suit or
proceeding between any indemnified party and any indemnifying party or between
any indemnified party and any third party, or otherwise, or any claim asserted).
Section 1.10. "Early Put Shares" shall mean the shares of Common Stock
purchased by the Investor from the Company on the Subscription Date pursuant to
Section 2.1(c).
Section 1.11. "Early Put Warrant" shall mean the Early Put Warrant in
the form of Exhibit C hereto issued pursuant to Section 2.1(d) of this
Agreement.
Section 1.12. "Early Put Warrant Shares" shall mean all shares of Common
Stock issued or issuable pursuant to exercise of the Early Put Warrants.
Section 1.13. "Effective Date" shall mean the earlier to occur of: (i)
the date on which the SEC has declared effective a Registration Statement
registering resale of Registrable Securities as set forth in Section 7.2(a) and
(ii) the date on which such Registrable Securities first become eligible for
resale pursuant to Rule 144 of the Securities Act.
Section 1.14. "Exchange Act" shall mean the United States Securities
Exchange Act of 1934, as amended and the rules and regulations promulgated
thereunder.
Section 1.15. "Incentive Warrant Shares" shall mean all shares of Common
Stock issued or issuable pursuant to exercise of the Incentive Warrant.
Section 1.16. "Incentive Warrant" shall mean the Incentive Warrant in
the form of Exhibit B hereto issued pursuant to Section 2.5 of this Agreement.
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Section 1.17. "Investment Amount" shall mean the dollar amount to be
invested by the Investor to purchase Put Shares with respect to any Put Date as
notified by the Company to the Investor in accordance with Section 2.2 hereof.
Section 1.18. "Legend" shall have the meaning specified in Section 8.1.
Section 1.19. "Lowest Average Price" shall mean the average of the
lowest three consecutive Bid Prices during the applicable Valuation Period.
Section 1.20. "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company or to the Company and such
other entities controlling or controlled by the Company, taken as a whole,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
its obligations under any of (i) this Agreement, (ii) the Registration Rights
Agreement and (iii) the Warrants.
Section 1.21. "Maximum Commitment Amount" shall mean $6,500,000.
Section 1.22. "Maximum Put Amount" shall mean $300,000.
Section 1.23. "Minimum Bid Price" shall have the meaning set forth in
Section 7.2(j) of this Agreement.
Section 1.24. "Minimum Put Amount" shall mean $200,000.
Section 1.25. "Minimum Time Interval" shall mean the mandatory
twenty-two (22) Trading Days between any two Put Dates.
Section 1.26. "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.27. "Outstanding" when used with reference to Common Shares or
Capital Shares (collectively the "Shares"), shall mean, at any date as of which
the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not refer to any such Shares then
directly or indirectly owned or held by or for the account of the Company.
Section 1.28. "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.29. "Principal Market" shall mean the Nasdaq National Market,
the Nasdaq SmallCap Market, the American Stock Exchange, the Bulletin Board or
the New York Stock Exchange, whichever is at the time the principal trading
exchange or market for the Common Stock.
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Section 1.30. "Purchase Price" shall mean, with respect to a Put,
ninety-two percent (92%) of the Lowest Average Price.
Section 1.31. "Put" shall mean each occasion the Company elects to
exercise its right to tender a Put Notice requiring the Investor to purchase a
discretionary amount of the Company's Common Stock, subject to the terms and
conditions of this Agreement.
Section 1.32. "Put Date" shall mean the Trading Day during the
Commitment Period that a Put Notice to sell Common Stock to the Investor is
deemed delivered pursuant to Section 2.2(b) hereof.
Section 1.33. "Put Fees" shall have the meaning specified in Section
10.1 hereof.
Section 1.34. "Put Notice" shall mean a written notice to the Investor
setting forth the intended Closing Date and the Investment Amount that the
Company intends to require the Investor to purchase pursuant to the terms of
this Agreement.
Section 1.35. "Put Notice Period" shall mean a period beginning on a Put
Date and ending on a Closing Date; provided that in no event shall a Put Notice
Period be less than seven (7) Trading Days.
Section 1.36. "Put Shares" shall mean all shares of Common Stock issued
or issuable pursuant to a Put that has been exercised or may be exercised in
accordance with the terms and conditions of this Agreement.
Section 1.37. "Registrable Securities" shall mean (i) the Put Shares,
(ii) the Warrant Shares and (iii) any securities issued or issuable with respect
to any of the foregoing by way of exchange, stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization or otherwise. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable Securities
when (w) the applicable Registration Statement has been declared effective by
the SEC and all such Registrable Securities have been disposed of pursuant to
the applicable Registration Statement, (x) all such Registrable Securities have
been sold under circumstances under which all of the applicable conditions of
Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (y) such time as all such Registrable Securities have been
otherwise transferred to holders who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive legend
or (z) in the opinion of counsel to the Company, which counsel shall be
reasonably acceptable to the Investor, all such Registrable Securities may be
sold without registration or the need for an exemption from any registration
requirements and without any time, volume or manner limitations pursuant to Rule
144(k) (or any similar provision then in effect) under the Securities Act.
Section 1.38. "Registration Rights Agreement" shall mean the
registration rights agreement in the form of Exhibit A hereto.
Section 1.39. "Registration Statement" shall mean a registration
statement on Form S-3 (if use of such form is then available to the Company
pursuant to the rules of the SEC and, if not,
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on such other form promulgated by the SEC for which the Company then qualifies
and which counsel for the Company shall deem appropriate and which form shall be
available for the resale of the Registrable Securities to be registered
thereunder in accordance with the provisions of this Agreement, the Registration
Rights Agreement and the Warrants and in accordance with the intended method of
distribution of such securities), for the registration of the resale by the
Investor of the Registrable Securities under the Securities Act.
Section 1.40. "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.41. "SEC" shall mean the Securities and Exchange Commission.
Section 1.42. "SEC Documents" shall mean the Company's latest Form 10-K
as of the time in question, all Forms 10-Q and 8-K filed thereafter, and the
Proxy Statement for its latest fiscal year as of the time in question until such
time the Company no longer has an obligation to maintain the effectiveness of a
Registration Statement as set forth in the Registration Rights Agreement.
Section 1.43. "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.44. "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.45. "Subscription Date" shall mean the date on which this
Agreement is executed and delivered by the parties hereto.
Section 1.46. "Subsidiary" shall mean any Person in which the Company,
directly or indirectly through Subsidiaries or otherwise, beneficially owns more
than fifty percent (50%) of either the equity interests in, or the voting
control of, such Person.
Section 1.47. "Trading Day" shall mean any day during which the
Principal Market shall be open for business.
Section 1.48. "Underwriter" shall mean any underwriter participating in
any disposition of the Registrable Securities on behalf of the Investor pursuant
to a Registration Statement.
Section 1.49. "Valuation Period" shall mean (i) with respect to the
Subscription Date, the twenty-two (22) Trading Day period immediately preceding
the Subscription Date, (ii) with respect to an Effective Date, the twenty-two
(22) Trading Day period immediately preceding such Effective Date and (iii) with
respect to a Closing Date, the twenty-two (22) Trading Day period immediately
preceding the applicable Put Date, during which the Purchase Price of the Common
Stock is determined.
Section 1.50. "Warrants" shall mean the Early Put Warrants and Incentive
Warrant.
Section 1.51. "Warrant Shares" shall mean the Early Put Warrant Shares
and the Incentive Warrant Shares.
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ARTICLE II
PURCHASE AND SALE OF COMMON STOCK;
TERMINATION OF OBLIGATIONS; INCENTIVE WARRANT
Section 2.1. Investments.
(a)Puts. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII
hereof), on any Put Date the Company may exercise a Put by the
delivery of a Put Notice. The number of Put Shares that the
Investor shall receive pursuant to such Put shall be determined
by dividing the Investment Amount specified in the Put Notice by
the Purchase Price with respect to such Put Date.
(b)Maximum Amount of Puts. Unless the Company obtains the
requisite approval of its shareholders in accordance with the
corporate laws of California and the applicable rules of the
Principal Market, no more than 19.9% of the Outstanding shares
of Common Stock may be issued and sold pursuant to Puts and
Warrants.
(c)Early Put. The Company shall issue and sell and the Investor
shall purchase, on the Subscription Date, shares of the Common
Stock for an Investment Amount of $1,000,000 at the Purchase
Price on the Subscription Date (the "Early Put Shares"). For the
purpose only of such Early Put, the Investor waives the
requirements of Section 2.2, and the conditions set forth in
paragraphs (a) and (b) of Section 7.2 hereof.
(d)Early Put Warrants. In addition to the Incentive Warrant (as
defined hereinafter), on the Subscription Date, the Company
shall issue to the Investor an Early Put Warrant with an
exercise price of $0.01 for each share of Common Stock.
Section 2.2. Mechanics.
(a)Put Notice. At any time during the Commitment Period, the
Company may deliver a Put Notice to the Investor, subject to the
conditions set forth in Section 7.2; provided, however, the
Investment Amount for each Put as designated by the Company in
the applicable Put Notice shall be neither less than the Minimum
Put Amount nor more than the Maximum Put Amount.
(b)Date of Delivery of Put Notice. A Put Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile or
otherwise by the Investor if such notice is received prior to
12:00 noon New York time, or (ii) the immediately succeeding
Trading Day if it is received by facsimile or otherwise after
12:00 noon New York time on a Trading Day or at any time on a
day which is not a Trading Day. No Put Notice may be deemed
delivered, on a day that is not a Trading Day.
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Section 2.3. Closings. On each Closing Date for a Put, (i) the Company
shall deliver irrevocable instructions to the transfer agent to prepare and
deliver to the Investor a share certificate in the name of the Investor and in
the amount of the applicable Put Shares and (ii) the Investor shall deliver to
the Company the Investment Amount specified in the Put Notice by wire transfer
of immediately available funds to the account designated in the Put Notice. In
addition, on or prior to such Closing Date, each of the Company and the Investor
shall deliver to the other all documents, instruments and writings required to
be delivered or reasonably requested by either of them pursuant to this
Agreement in order to implement and effect the transactions contemplated herein.
Section 2.4. Termination of Agreement and Investment Obligation. The
Company shall have the right to terminate this Agreement at any time upon thirty
(30) days' written notice to the Investor. The Investor shall have the right to
immediately terminate this Agreement (including with respect to any Put, notice
of which has been given but the applicable Closing Date has not yet occurred) in
accordance with Section 6.12 or in the event that: (i) the Registration
Statement with respect to shares of Common Stock purchased through the Early Put
is not effective within ninety (90) days following the Subscription Date, (ii) a
Registration Statement with respect to shares of Common Stock purchased through
any subsequent Put is not effective within ninety (90) days following the
applicable Closing Date, (iii) there shall occur any stop order or suspension of
the effectiveness of the Registration Statement for an aggregate of thirty (30)
Trading Days during the Commitment Period, (iv) the Company shall at any time
fail to comply with the requirements of Section 6.2, 6.3, 6.4, 6.5, 6.6, 6.8 or
6.9.
Section 2.5. The Incentive Warrant. On the Subscription Date, the
Company shall issue the Incentive Warrant to the Investor. The Incentive Warrant
shall be delivered by the Company to the Investor upon execution of this
Agreement by the parties hereto. The Incentive Warrant Shares shall be
registered for resale pursuant to the Registration Rights Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1. Intent. The Investor is entering into this Agreement for
its own account and the Investor has no view to the distribution of the
Registrable Securities or Warrants and has no present arrangement (whether or
not legally binding) at any time to sell the Registrable Securities or Warrants
to or through any person or entity; provided, however, that by making the
representations herein, the Investor does not agree to hold the Registrable
Securities or Warrants for any minimum or other specific term and reserves the
right to dispose of the Registrable Securities or Warrants at any time pursuant
to the Registration Statement and in accordance with federal and state
securities laws applicable to such disposition.
Section 3.2. Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in the Common Stock. The
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Investor acknowledges that an investment in the Common Stock is speculative and
involves a high degree of risk.
Section 3.3. Authority. Each of this Agreement and the Registration
Rights Agreement has been duly authorized by all necessary corporate action and
no further consent or authorization of the Investor, or its Board of Directors
or stockholders is required. Each of this Agreement and the Registration Rights
Agreement was validly executed and delivered by the Investor and each is a valid
and binding agreement of the Investor enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
Section 3.4. Not an Affiliate. The Investor is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 3.5. Organization and Standing. Investor is duly organized,
validly existing, and in good standing under the laws of Bermuda.
Section 3.6. Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument contemplated hereby, and the
consummation of the transactions contemplated thereby, and compliance with the
requirements thereof, will not (a) violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on Investor, or, to the
Investor's knowledge, (b) violate any provision of any indenture, instrument or
agreement to which Investor is a party or is subject, or by which Investor or
any of its assets is bound, (c) conflict with or constitute a material default
thereunder, (d) result in the creation or imposition of any lien pursuant to the
terms of any such indenture, instrument or agreement, or constitute a breach of
any fiduciary duty owed by Investor to any third party, or (e) require the
approval of any third-party (that has not been obtained) pursuant to any
material contract to which Investor is subject or to which any of its assets,
operations or management may be subject.
Section 3.7. Disclosure; Access to Information. Investor has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. The Investor has
received and reviewed copies of the SEC Documents.
Section 3.8. Manner of Sale. At no time was Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
Section 3.9. Resale Restrictions. It is acknowledged by Investor that
any Registrable Securities and Warrants to be acquired by Investor have not been
registered under the federal securities laws or any applicable state securities
laws in reliance upon exemptions available for non-public or limited offerings.
Investor understands that Investor must bear the economic risk of the investment
in the Registrable Securities and Warrants because the Registrable Securities
and Warrants have not been so registered and therefore are subject to
restrictions upon transfer such that they may not be sold or otherwise
transferred unless registered under the applicable securities laws or an
exemption from such registration is available. Investor will not reoffer, sell,
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assign, transfer, pledge, encumber, hypothecate or otherwise dispose of any
Registrable Securities or the Warrants in the absence of an effective
registration statement, qualification or authorization relating thereto under
federal and applicable state securities laws or an opinion of qualified counsel
satisfactory to the Company to the effect that the proposed transaction in the
Registrable Securities or the Warrants will neither constitute or result in any
violation of the federal or state securities laws. Subject to Section 8.1 of
this Agreement, any certificate or other document that may be issued
representing any shares of Registrable Securities or the Warrants may be
endorsed with a legend to this effect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1. Organization of the Company. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California and has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
Except as set forth in the SEC Documents, the Company does not own more than
fifty percent (50%) of the outstanding capital stock of or control any other
business entity. The Company is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect.
Section 4.2. Authority. (i) The Company has the requisite corporate
power and authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement and the Warrants and to issue the
Put Shares, the Warrants and the Warrant Shares; (ii) the execution and delivery
of this Agreement and the Registration Rights Agreement, and the execution,
issuance and delivery of the Warrants, by the Company and the consummation by it
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action and no further consent or authorization of the
Company or its Board of Directors or stockholders is required; and (iii) each of
this Agreement and the Registration Rights Agreement has been duly executed and
delivered, and the Warrants have been duly executed, issued and delivered, by
the Company and constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.
Section 4.3. Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Articles of
Incorporation, as amended and in effect on the date hereof (the "Certificate"),
and the Company's By-Laws, as amended and in effect on the date hereof (the
"By-Laws").
Section 4.4. Books and Records. The minute books and other similar
records of the Company and its subsidiaries as made available to Investor prior
to the execution of this
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Agreement contain a true and complete record, in all material respects, of all
action taken at all meetings and by all written consents in lieu of meetings of
the stockholders, the boards of directors and committees of the boards of
directors of the Company and the subsidiaries. The stock transfer ledgers and
other similar records of the Company and the subsidiaries as made available to
Investor prior to the execution of this Agreement accurately reflect all record
transfers prior to the execution of this Agreement in the capital stock of the
Company and the subsidiaries. Neither the Company nor any subsidiary has any of
its Books and Records recorded, stored, maintained, operated or otherwise wholly
or partly dependent upon or held by any means (including any electronic,
mechanical or photographic process, whether computerized or not) which
(including all means of access thereto and therefrom) are not under the
exclusive ownership and direct control of the Company or a subsidiary.
Section 4.5. Capitalization. The authorized capital stock of the Company
consists of 90,000,000 shares of Common Stock, of which 25,806,726 shares are
issued and outstanding, and 10,000,000 shares of preferred stock, none of which
are issued and outstanding. Except for (i) options to purchase not more than
11,422,000 shares of Common Stock with purchase prices between $0.10 and $2.78
per share; and (ii) warrants to purchase not more than 1,047,510 shares of
Common Stock with purchase prices between $0.78 and $5.00 per share, there are
no options, warrants, or rights to subscribe to, securities, rights or
obligations convertible into or exchangeable for or giving any right to
subscribe for any shares of capital stock of the Company. All of the outstanding
shares of Common Stock of the Company have been duly and validly authorized and
issued and are fully paid and nonassessable.
Section 4.6. Registration and Listing of Common Stock. The Company has
registered its Common Stock pursuant to Section 12(b) or 12(g) of the Exchange
Act and is in full compliance with all reporting requirements of the Exchange
Act, and the Company has maintained all requirements for the continued listing
or quotation of its Common Stock, and such Common Stock is currently listed or
quoted on the Principal Market. As of the date hereof, the Principal Market is
the American Stock Exchange.
Section 4.7. Financial Statements. Prior to the execution of this
Agreement, the Company has delivered to the Investor true and complete copies of
the following financial statements:
(a) the audited balance sheets of the Company and its
consolidated subsidiaries as of June 30, 1997, and June 30, 1998, and the
related audited consolidated statements of operations, stockholders' equity and
cash flows for each of the fiscal years then ended, together with a true and
correct copy of the report of such audited information by Singer Lewak Greenbaum
& Goldstein LLP, and all letters from such accountants with respect to the
results of such audits; and
(b) the unaudited balance sheets of the Company and its
consolidated subsidiaries as of March 31, 1999, found in the Company's 10-Q
filed on April 29, 1999, for the quarterly period ended March 31, 1999 and the
related unaudited consolidated statements of operations and stockholders' equity
for the portion of the fiscal year then ended.
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The financial statements of the Company delivered to the Investor have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 4.8. SEC Documents. The Company has delivered or made available
to the Investor true and complete copies of the SEC Documents (including,
without limitation, proxy information and solicitation materials). The Company
has not provided to the Investor any information that, according to applicable
law, rule or regulation, should have been disclosed publicly prior to the date
hereof by the Company, but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
other federal, state and local laws, rules and regulations applicable to such
SEC Documents, and none of the SEC Documents 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. The financial
statements of the Company included in the SEC Documents comply as to form and
substance in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may include summary notes
and may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
Section 4.9. Exemption from Registration; Valid Issuances; New
Issuances. The sale and issuance of the Warrants, the Warrant Shares, and the
Put Shares in accordance with the terms and on the bases of the representations
and warranties set forth in this Agreement, may and shall be properly issued
pursuant to Rule 4(2), Regulation D and/or any applicable state law. When issued
and paid for as herein provided, the Put Shares and the Warrant Shares shall be
duly and validly issued, fully paid, and nonassessable. Neither the sales of the
Put Shares, the Warrants, or the Warrant Shares pursuant to, nor the Company's
performance of its obligations under, this Agreement, the Registration Rights
Agreement or the Warrants shall (i) result in the creation or imposition of any
liens, charges, claims or other encumbrances upon the Put Shares, the Warrant
Shares, or any of the assets of the Company, or (ii) entitle the holders of
Outstanding Capital Shares to preemptive or other rights to subscribe to or
acquire the Capital Shares or other securities of the Company. The Put Shares
and the Warrant Shares shall not subject the Investor to personal liability by
reason of the ownership thereof. The Put Shares and Warrant Shares have been
duly authorized by the Company, but have not been issued (whether or not
subsequently repurchased by the Company) to any Person, and when issued to the
Investor in
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accordance with this Agreement and the Warrants will not have been issued
(whether or not subsequently repurchased by the Company) to any Person other
than the Investor.
Section 4.10. No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Put Shares, the Warrants, or
the Warrant Shares, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that would
require registration of the Common Stock under the Securities Act.
Section 4.11. No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Put Shares, the Warrants and the Warrant Shares do not and will not (i)
result in a violation of the Certificate or By-Laws or (ii) conflict with, or
constitute a material default (or an event that with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture,
instrument or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state, local or foreign law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations) applicable
to the Company or by which any property or asset of the Company is bound or
affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect) nor is the Company otherwise in
violation of, conflict with or in default under any of the foregoing; provided,
however, that for purposes of the Company's representations and warranties as to
violations of foreign law, rule or regulation referenced in clause (iii), such
representations and warranties are made only to the best of the Company's
knowledge insofar as the execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby are or may be affected by the status of the Investor under
or pursuant to any such foreign law, rule or regulation. The business of the
Company is not being conducted in violation of any law, ordinance or regulation
of any governmental entity, except for possible violations that either singly or
in the aggregate do not and will not have a Material Adverse Effect. The Company
is not required under federal, state or local law, rule or regulation to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under this Agreement or issue and sell the Common Stock
or the Warrants in accordance with the terms hereof (other than any SEC, NASD or
state securities filings that may be required to be made by the Company
subsequent to any Closing, any registration statement that may be filed pursuant
hereto, and any shareholder approval required by the rules applicable to
companies whose common stock trades on the American Stock Exchange); provided
that, for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Investor herein.
Section 4.12. No Material Adverse Change. Since June 30, 1998, no event
has occurred that would have a Material Adverse Effect on the Company.
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Section 4.13. No Undisclosed Liabilities. The Company has no liabilities
or obligations that are material, individually or in the aggregate, other than
those incurred in the ordinary course of the Company's businesses since June 30,
1998, and which, individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company.
Section 4.14. No Undisclosed Events or Circumstances. Since June 30,
1998, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced.
Section 4.15. No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act.
Section 4.16. Litigation and Other Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect. Except as set
forth in the SEC Documents, no judgment, order, writ, injunction or decree or
award has been issued by or, so far as is known by the Company, requested of any
court, arbitrator or governmental agency which might result in a Material
Adverse Effect.
Section 4.17. No Misleading or Untrue Communication. The Company, any
Person representing the Company, and, to the knowledge of the Company, any other
Person selling or offering to sell the Put Shares, the Warrants or the Warrant
Shares in connection with the transactions contemplated by this Agreement, have
not made, at any time, any oral communication in connection with the offer or
sale of the same which contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the statements, in
the light of the circumstances under which they were made, not misleading.
Section 4.18. Material Non-Public Information. The Company is not in
possession of, nor has the Company or its agents disclosed to the Investor, any
material non-public information that (i) if disclosed, would, or could
reasonably be expected to have, an effect on the price of the Common Stock or
(ii) according to applicable law, rule or regulation, should have been disclosed
publicly by the Company prior to the date hereof but which has not been so
disclosed.
ARTICLE V
COVENANTS OF THE INVESTOR
Section 5.1. Compliance. The Investor's trading activities with respect
to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and the
rules and regulations of the Principal Market on which the Company's Common
Stock is listed.
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Section 5.2. No Short Sales. During the thirty (30) days prior to the
Subscription Date, neither the Investor nor any affiliate of the Investor has,
and during the Commitment Period neither the Investor nor any affiliate of the
Investor will (i) engage in any short sale of the Common Stock of the Company,
or (ii) take any action or engage in any transaction for the purpose of
affecting the market price of the Company's Common Stock. Nothing in this
Section 5.2 shall prohibit the Investor or any affiliate from making regular
sales of the Common Stock acquired pursuant to this Agreement.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. Registration Rights. The Company shall cause the
Registration Rights Agreement to remain in full force and effect and the Company
shall comply in all respects with the terms thereof.
Section 6.2. Reservation of Common Stock. As of the date hereof, the
Company has available and the Company shall reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to satisfy any obligation to issue the Put Shares and the
Warrant Shares; such amount of shares of Common Stock to be reserved shall be
calculated based upon the minimum Purchase Price for the Put Shares under the
terms and conditions of this Agreement and the Exercise Price of the Incentive
Warrant and the maximum number of Early Put Warrant Shares issuable pursuant to
the Early Put Warrant. The number of shares so reserved from time to time, as
theretofore increased or reduced as hereinafter provided, may be reduced by the
number of shares actually delivered.
Section 6.3. Listing of Common Stock. The Company shall exercise best
efforts to maintain the listing of the Common Stock on a Principal Market, and
as soon as practicable (but in any event prior to the Closing Date for any Put)
will cause the Put Shares and the Warrant Shares with respect to such Put to be
listed on the Principal Market. The Company further shall, if the Company
applies to have the Common Stock traded on any other Principal Market, include
in such application the Put Shares and the Warrant Shares, and shall take such
other action as is necessary or desirable in the opinion of the Investor to
cause the Common Stock to be listed on such other Principal Market as promptly
as possible. The Company shall use commercially reasonable efforts to continue
the listing and trading of its Common Stock on the Principal Market (including,
without limitation, maintaining sufficient net tangible assets) and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and the Principal Market.
Section 6.4. Exchange Act Registration. After each Registration
Statement becomes effective, the Company shall cause the Common Stock covered by
such Registration Statement to continue to be registered under Section 12(g) or
12(b) of the Exchange Act, will comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
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thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under the Exchange Act.
Section 6.5. Legends. The certificates evidencing the Put Shares and the
Warrant Shares shall be free of legends, except as provided for in Article VIII.
Section 6.6. Corporate Existence. The Company shall take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.7. Additional SEC Documents. During the Commitment Period, the
Company shall deliver to the Investor, as and when the originals thereof are
submitted to the SEC for filing, copies of all SEC Documents so furnished or
submitted to the SEC.
Section 6.8. Notice of Certain Events Affecting Registration; Suspension
of Right to Make a Put. The Company shall immediately notify the Investor, but
in no event later than two (2) business days by facsimile and by overnight
courier, upon the occurrence of any of the following events in respect of a
Registration Statement or related prospectus in respect of an offering of
Registrable Securities: (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement for amendments or supplements to
the Registration Statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt 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; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of a Registration Statement, 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 not misleading, and
that in the case of the related prospectus, 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 the light of the
circumstances under which they were made, not misleading; (v) the declaration by
the SEC of the effectiveness of a Registration Statement; and (vi) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate, and the Company shall promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Put Notice during the continuation
of any of the foregoing events. While in possession of material non-public
information received from the Company, the Investor shall not dispose of any
Registrable Securities until such information is disclosed to the public (a
"Restricted Period"); provided that, if such Restricted Period exceeds one
hundred twenty (120) days, the liquidated damages described in Section 1.1(c) of
the Registration Rights Agreement shall be increased to three percent (3.0%)
until such Restricted Period shall have elapsed.
Section 6.9. Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or
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substantially all of the assets of the Company to, another entity unless the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument the obligation to deliver to the Investor such shares of stock and/or
securities as the Investor is entitled to receive pursuant to this Agreement and
the Warrants.
Section 6.10. Issuance of Put Shares, Warrant Shares and Additional
Shares. The sale of the Put Shares and the issuance of the Warrant Shares
pursuant to exercise of the Warrants shall be made in accordance with the
provisions and requirements of Regulation D and any applicable state law.
Issuance of the Warrant Shares pursuant to exercise of the Warrants through a
cashless exercise shall be made in accordance with the provisions and
requirements of Section 3(a)(9) under the Securities Act and any applicable
state law.
Section 6.11. Legal Opinion on Subscription Date. The Company's
independent counsel shall deliver to the Investor on the Subscription Date an
opinion in the form of Exhibit D, except for paragraph 7 thereof.
Section 6.12. No Similar Arrangement; Right of First Refusal. The
Company shall refrain from entering into any other agreements, arrangements or
understandings granting to the Company the right to sell shares of its
securities to one or more investors in placements exempt from registration under
the Securities Act until thirty (30) calendar days after this Agreement is
terminated pursuant to Section 2.4 hereof (the "Exclusivity Period"). The
Exclusivity Period shall not apply to an issuance of securities exempt from
registration under the Securities Act by the Company in connection with any
strategic investment, corporate partnering arrangements, or other situations in
which the investment in the Company is not strictly a financial one. If the
Company, for the purpose of obtaining any additional financing, wishes to sell
shares of its securities in placements exempt from registration under the
Securities Act during the Exclusivity Period (a "Sale") to a party other than
the Investor (the "Third Party"), the Company shall first offer (the "Offer") to
the Investor, in writing, the right to purchase such shares (the "Offered
Shares") at the bona fide price offered by the Third Party (the "Offer Price").
The Offer shall grant the Investor the right during the five (5) Trading Days
immediately following the date of the Offer to elect to purchase any or all of
the Offered Shares. The Company, in connection with such a Sale, shall refrain
from circumventing or attempting to circumvent the Investor's right of first
refusal by way of making such a Sale to any of its affiliates without first
making an Offer to the Investor. If the Investor so exercises it's right to
purchase any or all of the Offered Shares, the purchase will be treated as a Put
except that the purchase price for the Offered Shares shall be the Offer Price.
The closing and method of payment shall be as provided for in Section 2.2 hereof
and the Closing Date shall be seven (7) Trading Days after the Investor
exercises such right. If the Investor fails to exercise its right to purchase
any or all of the Offered Shares, then during the thirty (30) calendar days
immediately following the expiration of such right, the Company shall be free to
sell any or all of the Offered Shares to a purchaser for a purchase price not
lower than the Offer Price payable on terms and conditions that are not more
favorable to such purchaser than those contained in the Offer. In the event that
the Company effects a Sale to a Third Party, the Investor may immediately
terminate this Agreement.
ARTICLE VII
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CONDITIONS TO DELIVERY OF
PUT NOTICES AND CONDITIONS TO CLOSING
Section 7.1. Conditions Precedent to the Obligation of the Company to
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
and sell the Put Shares to the Investor incident to each Closing is subject to
the satisfaction, at or before each such Closing, of each of the conditions set
forth below.
(a)Accuracy of the Investor's Representation and Warranties. The
representations and warranties of the Investor shall be true and
correct in all material respects as of the date of this
Agreement and as of the date of each such Closing as though made
at each such time.
(b)Performance by the Investor. The Investor shall have
performed, satisfied and complied in all respects with all
covenants, agreements and conditions required by this Agreement
to be performed, satisfied or complied with by the Investor at
or prior to such Closing.
Section 7.2. Conditions Precedent to the Right of the Company to Deliver
a Put Notice and the Obligation of the Investor to Purchase Put Shares.
Following completion of the Early Put, the right of the Company to deliver a Put
Notice and the obligation of the Investor hereunder to acquire and pay for the
Put Shares incident to a Closing is subject to the satisfaction, on (i) the
applicable Put Date and (ii) the applicable Closing Date (each a "Condition
Satisfaction Date"), of each of the following conditions:
(a)Registration of the Registrable Securities with the SEC. As
set forth in the Registration Rights Agreement, the Company
shall have filed with the SEC either:
(i) a Registration Statement covering the resale of the
Common Stock purchased by the Investor through the Early
Put that shall have been declared effective by the SEC
in no event later than ninety (90) days after the
Subscription Date, and a Registration Statement covering
the resale of the Common Stock purchased by the Investor
through all subsequent Puts that shall have been
declared effective by the SEC prior to any subsequent
Put; or
(ii) a Combined Registration Statement (as defined in
the Registration Rights Agreement) that shall have been
declared effective by the SEC in no event later than
ninety (90) days after the Subscription Date.
(b)Effective Registration Statement. As set forth in the
Registration Rights Agreement, the Registration Statement(s)
shall have previously become effective and shall remain
effective on each Condition Satisfaction Date and (i) neither
the Company nor the Investor shall have received notice that the
SEC has issued or intends to issue a stop order with respect to
a Registration Statement or that the SEC otherwise has suspended
or withdrawn the effectiveness of a Registration Statement,
either temporarily or permanently, or intends or has threatened
to do so
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(unless the SEC's concerns have been addressed and the Investor
is reasonably satisfied that the SEC no longer is considering or
intends to take such action), (ii) no other suspension of the
use or withdrawal of the effectiveness of such Registration
Statement or related prospectus shall exist and (iii) with
respect to the second Put only, the Company shall have notified
the Investor in accordance with Section 6.8 that the
Registration Statement covering the Registrable Securities
purchased by the Investor through the Early Put has been
declared effective by the SEC and (iv) at least 30 days shall
have elapsed since the Initial Registration Statement (as
defined in the Registration Rights Agreement) has been declared
effective by the SEC.
(c)Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and
correct as of each Condition Satisfaction Date as though made at
each such time (except for representations and warranties
specifically made as of a particular date).
(d)Performance by the Company. The Company shall have performed,
satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement, the
Registration Rights Agreement and the Warrants to be performed,
satisfied or complied with by the Company at or prior to each
Condition Satisfaction Date.
(e)No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered,
promulgated or adopted by any court or governmental authority of
competent jurisdiction that prohibits the transactions
contemplated by this Agreement or otherwise has a Material
Adverse Effect, and no actions, suits or proceedings shall be in
progress, pending or threatened by any Person, that seek to
enjoin or prohibit the transactions contemplated by this
Agreement or otherwise could reasonably be expected to have a
Material Adverse Effect. For purposes of this paragraph (e), no
proceeding shall be deemed pending or threatened unless one of
the parties has received written or oral notification thereof
prior to the applicable Closing Date.
(f)No Suspension of Trading In or Delisting of Common Stock. The
trading of the Common Stock shall not have been suspended by the
SEC, the Principal Market or the NASD and the Common Stock shall
have been approved for listing or quotation on and shall not
have been delisted from the Principal Market. The issuance of
shares of Common Stock with respect to the applicable Closing,
if any, shall not violate the shareholder approval requirements
of the Principal Market.
(g)Legal Opinion. The Company shall have caused to be delivered
to the Investor, within five (5) Trading Days of the effective
date of a Registration Statement, an opinion of the Company's
independent counsel in the form of Exhibit D hereto, addressed
to the Investor.
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(h)Due Diligence. Pursuant to Section 7.3, the Investor shall
not have a material dispute with the Company as to the adequacy
of the disclosure contained in the Registration Statement.
(i)Five Percent Limitation. On each Closing Date, the number of
Put Shares then to be purchased by the Investor shall not exceed
the number of such shares that, when aggregated with all other
shares of Common Stock and Registrable Securities then owned by
the Investor beneficially or deemed beneficially owned by the
Investor, would result in the Investor owning no more than 4.9%
of all of such Common Stock as would be outstanding on such
Closing Date, as determined in accordance with Section 13(d) of
the Exchange Act and the regulations promulgated thereunder. For
purposes of this Section, in the event that the amount of Common
Stock outstanding as determined in accordance with Section 13(d)
of the Exchange Act and the regulations promulgated thereunder
is greater on a Closing Date than on the date upon which the Put
Notice associated with such Closing Date is given, the amount of
Common Stock outstanding on such Closing Date shall govern for
purposes of determining whether the Investor, when aggregating
all purchases of Common Stock made pursuant to this Agreement
and, if any, Warrant Shares would own more than 4.9% of the
Common Stock following such Closing Date.
(j)Minimum Bid Price. The Bid Price equals or exceeds $2.00 on
each of the seven (7) Trading Days immediately preceding the
Subscription Date and on each Trading Day during any Put Notice
Period.
(k)Minimum Average Daily Trading Value. The average of the Daily
Trading Value during the twenty-two (22) Trading Days
immediately preceding the applicable Put Notice Period equals or
exceeds $160,000.
(l)No Knowledge. The Company shall have no knowledge of any
event more likely than not to have the effect of causing any
Registration Statement to be suspended or otherwise ineffective
(which event is more likely than not to occur within the fifteen
Trading Days following the Trading Day on which such notice is
deemed delivered).
(m)Minimum Time Interval. The Minimum Time Interval shall have
elapsed since the immediately preceding Put Date.
(n)Shareholder Vote. The issuance of shares of Common Stock with
respect to the applicable Closing, if any, shall not violate the
shareholder approval requirements of the Principal Market.
(o)Other. On each Condition Satisfaction Date, the Investor
shall have received and been reasonably satisfied with such
other certificates and documents as shall have been reasonably
requested by the Investor in order for the Investor to confirm
the Company's satisfaction of the conditions set forth in this
Section 7.2., including, without limitation, a certificate in
substantially the form and substance
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of Exhibit E hereto, executed in either case by an executive
officer of the Company and to the effect that all the conditions
to such Closing shall have been satisfied as at the date of each
such certificate.
Section 7.3. Due Diligence Review; Non-Disclosure of Non-Public
Information.
(a)The Company shall make available for inspection and review by
the Investor, advisors to and representatives of the Investor
(who may or may not be affiliated with the Investor and who are
reasonably acceptable to the Company), and any Underwriter, any
Registration Statement or amendment or supplement thereto or any
blue sky, NASD or other filing, all financial and other records,
all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause
the Company's officers, directors and employees to supply all
such information reasonably requested by the Investor or any
such representative, advisor or Underwriter in connection with
such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after
the filing and effectiveness of such Registration Statement for
the sole purpose of enabling the Investor and such
representatives, advisors and Underwriters and their respective
accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of such
Registration Statement.
(b)Each of the Company, its officers, directors, employees and
agents shall in no event disclose non-public information to the
Investor, advisors to or representatives of the Investor unless
prior to disclosure of such information the Company identifies
such information as being non-public information and provides
the Investor, such advisors and representatives with the
opportunity to accept or refuse to accept such non-public
information for review. The Company may, as a condition to
disclosing any non-public information hereunder, require the
Investor's advisors and representatives to enter into a
confidentiality agreement in form reasonably satisfactory to the
Company and the Investor.
(c)Nothing herein shall require the Company to disclose
non-public information to the Investor or its advisors or
representatives, and the Company represents that it does not
disseminate non-public information to any investors who purchase
stock in the Company in a public offering, to money managers or
to securities analysts; provided, however, that notwithstanding
anything herein to the contrary, the Company shall, as
hereinabove provided, immediately notify the advisors and
representatives of the Investor and any Underwriters of any
event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of
which it becomes aware, constituting non-public information
(whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or
entities), which, if not disclosed in the prospectus included in
the applicable Registration Statement would cause such
prospectus to include a material misstatement or to omit a
material fact required
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to be stated therein in order to make the statements, therein,
in light of the circumstances in which they were made, not
misleading. Nothing contained in this Section 7.3 shall be
construed to mean that such persons or entities other than the
Investor (without the written consent of the Investor prior to
disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in
accordance with the terms and conditions of this Agreement and
nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due
diligence by such persons or entities, that such Registration
Statement contains an untrue statement of a material fact or
omits a material fact required to be stated in such Registration
Statement or necessary to make the statements contained therein,
in light of the circumstances in which they were made, not
misleading.
ARTICLE VIII
LEGENDS
Section 8.1. Legends. Each of the Warrant and, unless otherwise provided
below, each certificate representing Registrable Securities will bear the
following legend (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR
ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF,
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT
SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE
BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK
PURCHASE AGREEMENT, DATED AS OF AUGUST 30, 1999, BETWEEN FRANKLIN
TELECOMMUNICATIONS CORP. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE
PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE
OBTAINED FROM FRANKLIN TELECOMMUNICATIONS CORP.'S EXECUTIVE OFFICES.
As soon as practicable after the execution and delivery hereof, but in
any event within five (5) Trading Days hereafter, the Company shall issue to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit F hereto, with a copy to the Investor. Other than as required as a
result of change in law, such instructions shall be irrevocable by the Company
from and after
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the date hereof or from and after the issuance thereof to any such substitute or
replacement transfer agent, as the case may be, except as otherwise expressly
provided in the Registration Rights Agreement. It is the intent and purpose of
such instructions, as provided therein, to require the transfer agent for the
Common Stock from time to time upon transfer of Registrable Securities by the
Investor to issue certificates evidencing such Registrable Securities free of
the Legend during the following periods and under the following circumstances
and without consultation by the transfer agent with the Company or its counsel
and without the need for any further advice or instruction or documentation to
the transfer agent by or from the Company or its counsel or the Investor:
(a)At any time after the applicable Effective Date, upon
surrender of one or more certificates evidencing Common Stock
that bear the Legend, to the extent accompanied by a notice
requesting the issuance of new certificates free of the Legend
to replace those surrendered; provided that (i) the applicable
Registration Statement shall then be effective and (ii) if
reasonably requested by the transfer agent the Investor confirms
to the transfer agent that the Investor has transferred the
Registrable Securities pursuant to such Registration Statement
and has complied with the prospectus delivery requirement.
(b)At any time upon any surrender of one or more certificates
evidencing Registrable Securities that bear the Legend, to the
extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered and
containing representations that the Investor is permitted to
dispose of such Registrable Securities without limitation as to
amount or manner of sale pursuant to Rule 144(k) under the
Securities Act.
Section 8.2. No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 8.1 has been or shall be placed on the
share certificates representing the Common Stock and no instructions or "stop
transfers orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article VIII.
Section 8.3. Investor's Compliance. Nothing in this Article VIII shall
affect in any way the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
ARTICLE IX
INDEMNIFICATION; ARBITRATION
Section 9.1. Indemnification.
(a)The Company agrees to indemnify and hold harmless the
Investor, its partners, affiliates, officers, directors,
employees, and duly authorized agents, and each Person or
entity, if any, who controls the Investor within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange
Act, together with
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its controlling persons from and against any Damages, joint or
several, and any action in respect thereof to which the
Investor, its partners, affiliates, officers, directors,
employees, and duly authorized agents, and any such controlling
person becomes subject to, resulting from, arising out of or
relating to any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or
agreement on the part of Company contained in this Agreement, as
such Damages are incurred, unless such Damages result primarily
from the Investor's gross negligence, recklessness or bad faith
in performing its obligations under this Agreement; provided,
however, that the maximum aggregate liability of the Company
shall be limited to the amount actually invested by the Investor
under this Agreement, and provided, further, that in no event
shall this provision be deemed to limit any rights to
indemnification arising under the Registration Rights Agreement.
(b)The Investor agrees to indemnify and hold harmless the
Company, its partners, affiliates, officers, directors,
employees, and duly authorized agents, and each Person or
entity, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange
Act, together with its controlling persons from and against any
Damages, joint or several, and any action in respect thereof to
which the Company, its partners, affiliates, officers,
directors, employees, and duly authorized agents, and any such
controlling person becomes subject to, resulting from, arising
out of or relating to any misrepresentation, breach of warranty
or nonfulfillment of or failure to perform any covenant or
agreement on the part of the Investor contained in this
Agreement, as such Damages are incurred, unless such Damages
result primarily from the Company's gross negligence,
recklessness or bad faith in performing its obligations under
this Agreement; provided, however, that the maximum aggregate
liability of the Investor shall be limited to the amount
actually invested by the Investor under this Agreement, and
provided, further, that in no event shall this provision be
deemed to limit any rights to indemnification arising under the
Registration Rights Agreement.
Section 9.2. Method of Asserting Indemnification Claims. All claims for
indemnification by any Indemnified Party (as defined below) under Section 9.1
shall be asserted and resolved as follows:
(a)In the event any claim or demand in respect of which any
person claiming indemnification under any provision of Section
9.1 (an "Indemnified Party") might seek indemnity under Section
9.1 is asserted against or sought to be collected from such
Indemnified Party by a person other than the Company, the
Investor or any affiliate of the Company (a "Third Party
Claim"), the Indemnified Party shall deliver a written
notification, enclosing a copy of all papers served, if any, and
specifying the nature of and basis for such Third Party Claim
and for the Indemnified Party's claim for indemnification that
is being asserted under any provision of Section 9.1 against any
person (the "Indemnifying Party"), together with the amount or,
if not then reasonably ascertainable, the estimated amount,
determined in good faith, of such Third Party Claim (a "Claim
Notice") with
23
<PAGE> 29
reasonable promptness to the Indemnifying Party. If the
Indemnified Party fails to provide the Claim Notice with
reasonable promptness after the Indemnified Party receives
notice of such Third Party Claim, the Indemnifying Party shall
not be obligated to indemnify the Indemnified Party with respect
to such Third Party Claim to the extent that the Indemnifying
Party's ability to defend has been irreparably prejudiced by
such failure of the Indemnified Party. The Indemnifying Party
shall notify the Indemnified Party as soon as practicable within
the period ending thirty (30) calendar days following receipt by
the Indemnifying Party of either a Claim Notice or an Indemnity
Notice (as defined below) (the "Dispute Period") whether the
Indemnifying Party disputes its liability or the amount of its
liability to the Indemnified Party under Section 9.1 and whether
the Indemnifying Party desires, at its sole cost and expense, to
defend the Indemnified Party against such Third Party Claim.
(i) If the Indemnifying Party notifies the Indemnified
Party within the Dispute Period that the Indemnifying
Party desires to defend the Indemnified Party with
respect to the Third Party Claim pursuant to this
Section 9.2(a), then the Indemnifying Party shall have
the right to defend, with counsel reasonably
satisfactory to the Indemnified Party, at the sole cost
and expense of the Indemnifying Party, such Third Party
Claim by all appropriate proceedings, which proceedings
shall be vigorously and diligently prosecuted by the
Indemnifying Party to a final conclusion or will be
settled at the discretion of the Indemnifying Party (but
only with the consent of the Indemnified Party in the
case of any settlement that provides for any relief
other than the payment of monetary damages or that
provides for the payment of monetary damages as to which
the Indemnified Party shall not be indemnified in full
pursuant to Section 9.1). The Indemnifying Party shall
have full control of such defense and proceedings,
including any compromise or settlement thereof;
provided, however, that the Indemnified Party may, at
the sole cost and expense of the Indemnified Party, at
any time prior to the Indemnifying Party's delivery of
the notice referred to in the first sentence of this
clause (i), file any motion, answer or other pleadings
or take any other action that the Indemnified Party
reasonably believes to be necessary or appropriate to
protect its interests; and provided further, that if
requested by the Indemnifying Party, the Indemnified
Party will, at the sole cost and expense of the
Indemnifying Party, provide reasonable cooperation to
the Indemnifying Party in contesting any Third Party
Claim that the Indemnifying Party elects to contest. The
Indemnified Party may participate in, but not control,
any defense or settlement of any Third Party Claim
controlled by the Indemnifying Party pursuant to this
clause (i), and except as provided in the preceding
sentence, the Indemnified Party shall bear its own costs
and expenses with respect to such participation.
Notwithstanding the foregoing, the Indemnified Party may
take over the control of the defense or settlement of a
Third Party Claim at any time if it irrevocably waives
its right to indemnity under Section 9.1 with respect to
such Third Party Claim.
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<PAGE> 30
(ii) If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the
Indemnifying Party desires to defend the Third Party
Claim pursuant to Section 9.2(a), or if the Indemnifying
Party gives such notice but fails to prosecute
vigorously and diligently or settle the Third Party
Claim, or if the Indemnifying Party fails to give any
notice whatsoever within the Dispute Period, then the
Indemnified Party shall have the right to defend, at the
sole cost and expense of the Indemnifying Party, the
Third Party Claim by all appropriate proceedings, which
proceedings shall be prosecuted by the Indemnified Party
in a reasonable manner and in good faith or will be
settled at the discretion of the Indemnified Party (with
the consent of the Indemnifying Party, which consent
will not be unreasonably withheld). The Indemnified
Party will have full control of such defense and
proceedings, including any compromise or settlement
thereof; provided, however, that if requested by the
Indemnified Party, the Indemnifying Party will, at the
sole cost and expense of the Indemnifying Party, provide
reasonable cooperation to the Indemnified Party and its
counsel in contesting any Third Party Claim which the
Indemnified Party is contesting. Notwithstanding the
foregoing provisions of this clause (ii), if the
Indemnifying Party has notified the Indemnified Party
within the Dispute Period that the Indemnifying Party
disputes its liability or the amount of its liability
hereunder to the Indemnified Party with respect to such
Third Party Claim and if such dispute is resolved in
favor of the Indemnifying Party in the manner provided
in clause (iii) below, the Indemnifying Party will not
be required to bear the costs and expenses of the
Indemnified Party's defense pursuant to this clause (ii)
or of the Indemnifying Party's participation therein at
the Indemnified Party's request, and the Indemnified
Party shall reimburse the Indemnifying Party in full for
all reasonable costs and expenses incurred by the
Indemnifying Party in connection with such litigation.
The Indemnifying Party may participate in, but not
control, any defense or settlement controlled by the
Indemnified Party pursuant to this clause (ii), and the
Indemnifying Party shall bear its own costs and expenses
with respect to such participation.
(iii) If the Indemnifying Party notifies the Indemnified
Party that it does not dispute its liability or the
amount of its liability to the Indemnified Party with
respect to the Third Party Claim under Section 9.1 or
fails to notify the Indemnified Party within the Dispute
Period whether the Indemnifying Party disputes its
liability or the amount of its liability to the
Indemnified Party with respect to such Third Party
Claim, the Damages in the amount specified in the Claim
Notice shall be conclusively deemed a liability of the
Indemnifying Party under Section 9.1 and the
Indemnifying Party shall pay the amount of such Damages
to the Indemnified Party on demand. If the Indemnifying
Party has timely disputed its liability or the amount of
its liability with respect to such claim, the
Indemnifying Party and the Indemnified Party shall
proceed in good faith to negotiate a resolution of such
dispute, and if not resolved
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<PAGE> 31
through negotiations within the period of thirty (30)
calendar days immediately following the Dispute Period,
such dispute shall be resolved by arbitration in
accordance with Section 9.3.
(b)In the event any Indemnified Party should have a claim under
Section 9.1 against the Indemnifying Party that does not involve
a Third Party Claim, the Indemnified Party shall deliver a
written notification of a claim for indemnity under Section 9.1
specifying the nature of and basis for such claim, together with
the amount or, if not then reasonably ascertainable, the
estimated amount, determined in good faith, of such claim (an
"Indemnity Notice") with reasonable promptness to the
Indemnifying Party. The failure by any Indemnified Party to give
the Indemnity Notice shall not impair such party's rights
hereunder except to the extent that the Indemnifying Party
demonstrates that it has been irreparably prejudiced thereby. If
the Indemnifying Party notifies the Indemnified Party that it
does not dispute the claim or the amount of the claim described
in such Indemnity Notice or fails to notify the Indemnified
Party within the Dispute Period whether the Indemnifying Party
disputes the claim or the amount of the claim described in such
Indemnity Notice, the Damages in the amount specified in the
Indemnity Notice will be conclusively deemed a liability of the
Indemnifying Party under Section 9.1 and the Indemnifying Party
shall pay the amount of such Damages to the Indemnified Party on
demand. If the Indemnifying Party has timely disputed its
liability or the amount of its liability with respect to such
claim, the Indemnifying Party and the Indemnified Party shall
proceed in good faith to negotiate a resolution of such dispute,
and if not resolved through negotiations within the period of
thirty (30) calendar days immediately following the Dispute
Period, such dispute shall be resolved by arbitration in
accordance with Section 9.3.
Section 9.3. Arbitration. Any dispute under this Agreement (including,
without limitation, pursuant to Section 9.2) or the Warrants shall be submitted
to arbitration and shall be finally and conclusively determined by the decision
of a board of arbitration consisting of three (3) members (the "Board of
Arbitration") selected as hereinafter provided. Each of the Company, on the one
hand, and the Investor and/or any other Indemnified Party, on the other hand,
shall select one (1) member and the third member shall be selected by mutual
agreement of the other members, or if the other members fail to reach agreement
on a third member within twenty (20) days after their selection, such third
member shall thereafter be selected by the American Arbitration Association upon
application made to it for such purpose by the other members. The Board of
Arbitration shall meet on consecutive business days in New York City, New York
or such other place as a majority of the members of the Board of Arbitration
determines more appropriate, and shall reach and render a decision in writing
(concurred in by a majority of the members of the Board of Arbitration). In
connection with rendering its decision, the Board of Arbitration shall adopt and
follow such rules and procedures as a majority of the members of the Board of
Arbitration deems necessary or appropriate. To the extent practicable, decisions
of the Board of Arbitration shall be rendered no more than thirty (30) calendar
days following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to the Company and
the Investor and/or any other Indemnified Party. Any decision made by the Board
of Arbitration (either prior to or after the
26
<PAGE> 32
expiration of such thirty (30) calendar day period) shall be final, binding and
conclusive on the Company and the Investor and/or any other Indemnified Party
and entitled to be enforced to the fullest extent permitted by law and entered
in any court of competent jurisdiction. The non-prevailing party to any
arbitration shall bear the expense of both parties in relation thereto,
including but not limited to the parties' attorneys' fees, if any, and the
expenses and fees of the Board of Arbitration.
ARTICLE X
MISCELLANEOUS
Section 10.1. Put Fees and Transaction Costs. In connection with the
execution of this agreement the following Put Fees and Transaction Costs (as
defined below) are payable by the Company.
(a)Put Fees. The Company shall pay certain fees (the "Put Fees")
to the payee entities in accordance with Schedule 10.1. Crescent
is authorized by the Company to retain and to pay on behalf of
the Company Put Fees, to the payee entities in accordance with
Schedule 10.1.
(b)Transaction Costs. The fees, expenses and disbursements of
the Investor's counsel (the "Investor Legal Fees") shall be paid
as follows: (i) the Investor shall pay the initial $10,000 of
Investor Legal Fees; (ii) the Company shall pay all Investor
Legal Fees in excess of $10,000 and less than $20,000; and (iii)
the Investor shall pay all Investor Legal Fees in excess of
$20,000. The Company and the Investor shall share equally all
the Investor due diligence costs in connection with the
consummation of this Agreement and the transactions contemplated
hereby (the "Due Diligence Costs," and together with the
Investor Legal Fees, the "Transaction Costs"), provided that the
Company's share of the Due Diligence Costs shall not exceed
$10,000. The Company shall pay to the Investor the Company's
share of the Transaction Costs on the Subscription Date, to the
extent such share of the Transaction Costs can be determined on
the Subscription Date. The Company shall pay its share of the
remaining Transaction Costs to the Investor not later than ten
(10) days after receipt of notice from the Investor that such
amount is due. The Company agrees to pay its own expenses
incident to the performance of its obligations hereunder.
Section 10.2. Reporting Entity for the Common Stock. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on the Principal Market on any given Trading Day for the
purposes of this Agreement shall be the Bloomberg L.P. The written mutual
consent of the Investor and the Company shall be required to employ any other
reporting entity.
Section 10.3. Brokerage. Except as disclosed in Section 10.1, each of
the parties hereto represents that it has had no dealings in connection with
this transaction with any finder or broker which would impose a legal obligation
to pay any fee or commission. The Company on
27
<PAGE> 33
the one hand, and the Investor, on the other hand, agree to indemnify the other
against and hold the other harmless from any and all liabilities to any persons
claiming brokerage commissions or finder's fees on account of services purported
to have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby.
Section 10.4. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice given in accordance herewith. Any notice or
other communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
If to the Company:
Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, CA 91361
Attention: Frank W. Peters
Telephone: (805) 373-8868
Facsimile: (805) 373-7373
with a copy (which shall not constitute notice) to:
Hadden & Zepfel LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Attention: Robert J. Zepfel, Esq.
Telephone: (949) 752-6100
Facsimile: (949) 752-6161
if to the Investor:
Crescent International Ltd.
c/o GreenLight (Switzerland) SA
84, av Louis-Casai, P.O. Box 42
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
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<PAGE> 34
Facsimile: +41 22 929 53 94
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile number
for notices under this Section by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 10.5. Assignment. Neither this Agreement nor any rights of the
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, the Investor's interest in this Agreement
may be assigned at any time, in whole or in part, to any affiliate of the
Investor upon the prior written consent of the Company, which consent shall not
to be unreasonably withheld provided, however, that any such assignment or
transfer shall relieve the Investor of its duties under this Agreement only upon
performance thereof by any such assignee or transferee.
Section 10.6. Amendment; No Waiver. No party shall be liable or bound to
any other party in any manner by any warranties, representations or covenants
except as specifically set forth in this Agreement or therein. Except as
expressly provided in this Agreement, neither this Agreement nor any term hereof
may be amended, waived, discharged or terminated other than by a written
instrument signed by both parties hereto. The failure of the either party to
insist on strict compliance with this Agreement, or to exercise any right or
remedy under this Agreement, shall not constitute a waiver of any rights
provided under this Agreement, nor estop the parties from thereafter demanding
full and complete compliance nor prevent the parties from exercising such a
right or remedy in the future.
Section 10.7. Annexes and Exhibits; Entire Agreement. All annexes and
exhibits to this Agreement are incorporated herein by reference and shall
constitute part of this Agreement. This Agreement, the Warrants and the
Registration Rights Agreement set forth the entire agreement and understanding
of the parties relating to the subject matter hereof and thereof and supersede
all prior and contemporaneous agreements, negotiations and understandings
between the parties, both oral and written, relating to the subject matter
hereof.
Section 10.8. Survival. The provisions of Articles VI, VIII, IX and X,
and of Section 7.3, shall survive the termination of this Agreement.
Section 10.9. Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
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<PAGE> 35
Section 10.10.Title and Subtitles. The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.
Section 10.11.Counterparts. This Agreement may be executed in multiple
counterparts, each of which may be executed by less than all of the parties and
shall be deemed to be an original instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.
Section 10.12.Choice of Law. This Agreement shall be construed under the
laws of the State of New York.
Section 10.13.Other Expenses. In the event that a dispute between the
parties is not determined by a Board of Arbitration, the non-prevailing party in
any action, suit or proceeding shall bear all investigative, legal and other
expenses reasonably incurred in connection with, and any and all amounts paid in
defense or settlement of such action, suit or proceeding.
30
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, thereunto duly authorized, as of the date first set
forth above.
Crescent International Ltd.
By: /s/ Maxi Brezzi /s/ Omar A. Ali
---------------------------------------------------
GreenLight (Switzerland) S.A. as Investor's manager
Name:
Title:
Franklin Telecommunications Corp.
By: /s/ Thomas Russell
---------------------------------------------------
Name: Thomas Russell
Title: Chief Financial Officer
31
<PAGE> 37
EXHIBIT A
FORM OF REGISTRATION RIGHTS AGREEMENT
34
<PAGE> 38
EXHIBIT B
FORM OF INCENTIVE WARRANT
35
<PAGE> 39
EXHIBIT C
[FORM OF EARLY PUT WARRANT]
36
<PAGE> 40
EXHIBIT D
FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
August ___, 1999
Crescent International Ltd.
c/o GreenLight (Switzerland) SA
84, av Louis-Casai, P.O. Box 42
1216 Geneva, Cointrin
Switzerland
Re: Stock Purchase Agreement Between Crescent International Ltd. and
Franklin Telecommunications Corp.
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section [6.11] [7.2(g)] of
the Stock Purchase Agreement by and between Crescent International Ltd., a
Bermuda entity (the "Investor") and Franklin Telecommunications Corp. (the
"Company"), dated August ___, 1999 (the "Stock Purchase Agreement"), which
provides for the issuance and sale by the Company of up to _________ shares of
Common Stock of the Company (the "Put Shares"), a warrant to purchase up to
________ shares of Common Stock of the Company (the "Incentive Warrant") and
warrants to purchase a number of shares to be determined in accordance with the
terms of such warrants (the "Early Put Warrants", and together with the
Incentive Warrant, the "Warrants") (the shares of Common Stock issued or
issuable pursuant to exercise of the Warrants are referred to herein as the
"Warrant Shares"). All terms used herein have the meanings defined for them in
the Stock Purchase Agreement unless otherwise defined herein.
We have acted as counsel for the Company in connection with the
negotiation of the Stock Purchase Agreement, the Warrants, and the Registration
Rights Agreement between the Investor and the Company, dated August ___, 1999
(the "Registration Rights Agreement" and together with the Stock Purchase
Agreement, the "Agreements"). As counsel, we have made such legal and factual
examinations and inquires as we have deemed advisable or necessary for the
purpose of rendering this opinion. In addition, we have examined, among other
things, originals or copies of such corporate records of the Company,
certificates of public officials and such other documents and questions of law
that we consider necessary or advisable for the purpose of rendering this
opinion. In such examination we have assumed the genuineness of all signatures
on original documents, the authenticity and completeness of all documents
submitted to us as originals, the conformity to original documents of all copies
submitted to us as copies thereof, the legal capacity of natural persons, and
the due execution and delivery of all documents (except as to due execution and
delivery by the Company) where due execution and delivery are a prerequisite to
the effectiveness thereof.
As used in this opinion, the expression "to our knowledge" refers to the
current actual knowledge of the attorneys of this firm who have worked on
matters for the Company solely in connection with the Agreements and the
Warrants and the transactions contemplated thereby.
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<PAGE> 41
For purposes of this opinion, we have assumed that you have all requisite
power and authority, and have taken any and all necessary corporate action, to
execute and deliver the Agreements, and we are assuming that the
representations and warranties made by the Investor
in the Agreements and pursuant thereto are true and correct.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of California and has all
requisite power and authority (corporate and other) to carry on its business and
to own, lease and operate its properties and assets as described in the
Company's SEC Documents. To our knowledge, except as set forth in the SEC
Documents, the Company does not own more than fifty percent (50%) of the
outstanding capital stock of or control any other business entity. The Company
is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the Company owns or leases property,
other than those in which the failure so to qualify would not have a Material
Adverse Effect.
2. The Company has the requisite corporate power and authority to
enter into and perform its obligations under the Agreements and the Warrants and
to issue the Put Shares, the Warrants and the Warrant Shares. The execution and
delivery of the Agreements, and the execution, issuance and delivery of the
Warrants, by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary corporate action
and no further consent or authorization of the Company or its Board of Directors
or stockholders is required. Each of the Agreements has been duly executed and
delivered, and the Warrants have been, and upon issuance will be, duly executed,
issued and delivered, by the Company and each of the Agreements and the Warrants
constitutes, and upon issuance will constitute, valid and binding obligations of
the Company enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.
3. The execution, delivery and performance of the Agreements and
the Warrants by the Company and the consummation by the Company of the
transactions contemplated thereby, including without limitation the issuance of
the Put Shares, the Warrant and the Warrant Shares, do not and will not (i)
result in a violation of the Company's Articles or By-Laws; (ii) to our
knowledge, conflict with, or constitute a material default (or an event that
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any material agreement, indenture, instrument or any "lock-up" or similar
provision of any underwriting or similar agreement to which the Company is a
party, except for such conflicts, defaults, terminations, amendments,
accelerations and cancellations as would not, individually or in the aggregate,
have a Material Adverse Effect; or (iii) result in a violation of any federal or
state law, rule or regulation applicable to the Company or by which any property
or asset of the Company is bound or affected, except for such violations as
would not, individually or in the aggregate, have a Material Adverse Effect. To
our knowledge, the Company is not in violation of any terms of its Articles or
Bylaws.
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<PAGE> 42
4. The issuance of the Put Shares and the Warrants in accordance
with the Stock Purchase Agreement, and the issuance of the Warrant Shares in
accordance with the Warrants, will be exempt from registration under the
Securities Act of 1933 and will be in compliance with California state
securities laws. When so issued, the Put Shares and the Warrant Shares will be
duly and validly issued, fully paid and nonassessable, and free of any liens,
encumbrances and preemptive or similar rights contained in the Articles or
Bylaws or, to our knowledge, in any agreement to which the Company is party.
5. To our knowledge, except as disclosed in the SEC Documents,
there are no claims, actions, suits, proceedings or investigations that are
pending against the Company or its properties, or against any officer or
director of the Company in his or her capacity as such, nor has the Company
received any written threat of any such claims, actions, suits, proceedings, or
investigations which are required to be and have not been disclosed in the SEC
Documents.
6. To our knowledge, there are no outstanding options, warrants,
calls or commitments of any character whatsoever relating to, or securities,
rights or obligations convertible into or exchangeable for, or giving any right
to subscribe for or acquire any shares of Common Stock or contracts,
commitments, understanding, or arrangements by which the Company is or may
become bound to issue additional shares of Common Stock, or securities or rights
convertible or exchangeable into shares of Common Stock, except as described in
the SEC Documents.
[7. Nothing has come to our attention that has caused us to believe
that the Registration Statement and the Prospectus at the time the Registration
Statement became effective and as of the date of the filing with the Commission
of the Company's most recent Annual Report on Form 10-K or Quarterly Report on
Form 10-Q incorporated by reference into such Registration Statement contained
an untrue statement of a material fact or omitted 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; however,
we express no opinion with respect to the financial statements and the notes
thereto and the schedules and other financial and statistical data derived
therefrom included in the Registration Statement or the Prospectus.] [For
Opinion pursuant to Section 7.2(g).]
This opinion is furnished to the Investor solely for its benefit in
connection with the transactions described above and may not be relied upon by
any other person or for any other purpose without our prior written consent.
Very truly yours,
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<PAGE> 43
EXHIBIT E
COMPLIANCE CERTIFICATE
-----------------
The undersigned, __________, hereby certifies, with respect to shares of
common stock of Franklin Telecommunications Corp. (the "Company") issuable in
connection with the Put Notice, dated _____________ (the "Notice"), delivered
pursuant to Article II of the Stock Purchase Agreement, dated August ___, 1999,
by and between the Company and Crescent International Ltd. (the "Agreement"), as
follows:
1. The undersigned is the duly elected [Office] of the Company.
2. The representations and warranties of the Company set forth in
Article V of the Agreement are true and correct in all material respects as
though made on and as of the date hereof.
3. The Company has performed in all material respects all covenants
and agreements to be performed by the Company on or prior to the Closing Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in Article VII of the Agreement.
The undersigned has executed this Certificate this ____ day of ________,
____.
------------------------------------
Name:
Title:
40
<PAGE> 44
EXHIBIT F
FORM OF TRANSFER AGENT INSTRUCTIONS
41
<PAGE> 1
EXHIBIT 10.3
EARLY PUT WARRANT
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A
TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE
COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF AUGUST 30,
1999, BETWEEN Franklin Telecommunications Corp. AND CRESCENT INTERNATIONAL
LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM Franklin Telecommunications Corp.'S
EXECUTIVE OFFICES.
August 30, 1999
Warrant to Purchase Shares of Common Stock of Franklin
Telecommunications Corp. (hereinafter an "Early Put Warrant"), up to a total
number determined in accordance with Section 2(b) hereof.
Franklin Telecommunications Corp., an entity organized and
existing under the laws of the State of California (the "Company"), hereby
agrees that Crescent International Ltd. (the "Investor") or any other Warrant
Holder is entitled, on the terms and conditions set forth below, to purchase
from the Company at any time during the Exercise Period up to a total number,
determined in accordance with Section 2(b) hereof, of fully paid and
nonassessable shares of Common Stock, no par value per share, of the Company
(the "Common Stock"), as the same may be adjusted from time to time pursuant to
Section 7 hereof, at the Exercise Price (hereinafter defined), as the same may
be adjusted pursuant to Section 7 hereof. The resale of the shares of Common
Stock or other securities issuable upon exercise or exchange of this Early Put
Warrant is subject to the provisions of the Registration Rights Agreement (as
defined below).
Section 1. Definitions.
"Agreement" shall mean the Stock Purchase Agreement, dated the date hereof,
between the Company and the Investor.
"Capital Shares" shall mean the Common Stock and any shares of any other class
of common stock whether now or hereafter authorized, having the right to
participate in the distribution of earnings and assets of the Company.
"Exercise Date" shall mean either (i) the date this Early Put Warrant, the
Exercise Notice and the Aggregate Exercise Price are received by the Company or
(ii) the date advanced copy of the
<PAGE> 2
Exercise Notice is sent by facsimile to the Company, provided that this Early
Put Warrant, the original Exercise Notice, and the Aggregate Exercise Price are
received by the Company within three (3) business days thereafter. If this Early
Put Warrant, the original Exercise Notice and the Aggregate Exercise Price are
not received within three (3) business days in accordance with clause (ii)
above, the Exercise Date shall be the date this Incentive Warrant, the original
Exercise Notice and the Aggregate Exercise Price are received by the Company.
"Exercise Notice" shall mean the exercise form attached hereto as Exhibit A duly
executed by the Warrant Holder.
"Exercise Period" shall mean the period beginning on the Effective Date
applicable to the Put Closing and continuing until the two-year period
thereafter; provided that such period shall be extended one day for each day
after the applicable Effective Date, that the Registration Statement covering
(i) shares purchased by the Investor through the applicable Put and (ii) the
Early Put Warrant Shares related to such Put and purchasable by exercise of this
Early Put Warrant, is not effective during the period such Registration
Statement is required to be effective pursuant to the Registration Rights
Agreement.
"Exercise Price" as of the date hereof shall mean $0.01 per share of Common
Stock, subject to the adjustments provided for in Section 7 of this Early Put
Warrant.
"Per Share Early Put Warrant Value" shall mean the difference resulting from
subtracting the Exercise Price from the Bid Price of one share of Common Stock
on the Trading Day immediately preceding the Exercise Date.
"Put Closing" shall mean the closing of the purchase and sale of 966,184 shares
of Common Stock for an investment amount equal to $1,000,000 which occurred on
August 30, 1999, and the closing of the purchase and sale of 966,184 shares of
Common Stock for an investment amount equal to $1,000,000 which occurred on
September 14, 1999, for a total Investment Amount of $2,000,000.
"Registration Rights Agreement" shall mean the registration rights agreement,
dated the date hereof between the Company and the Investor.
"Subscription Date" shall mean the date on which the Agreement is executed and
delivered by the parties hereto.
"Warrant Holder" shall mean the Investor or any assignee or transferee of all or
any portion of this Early Put Warrant; and other capitalized terms used but not
defined herein shall have their respective meanings set forth in the Agreement.
Section 2. Exercisability.
a. Timing. If the Purchase Price on the Effective Date applicable
to the Put Closing is lower than the Purchase Price on the Subscription Date
with respect to such Put, this Early Put Warrant shall become immediately
exercisable, subject to clause c. below.
b. Number of Shares. The number of shares of Common Stock for
which this Early Put Warrant is exercisable (the "Early Put Warrant Shares")
shall be determined by subtracting (x) the Investment Amount divided by the
Purchase Price on the Subscription Date
<PAGE> 3
from (y) the Investment Amount divided by the Purchase Price on the Effective
Date applicable to the Put Closing.
c. Cash Payment in Lieu of Exercise. In the event that the
Investor gives notice of exercise of this Early Put Warrant (in whole or in
part) in accordance with Section 3 hereof, then the Company may, in lieu of
issuance of shares of Common Stock pursuant to such exercise, pay to the
Investor the Cash-Out Price (as defined below) for any or all of the shares of
Common Stock purchasable by the Investor through the exercise of this Early Put
Warrant. In the event that the Investor gives notice of exercise of this Early
Put Warrant (in whole or in part) in accordance with Section 3 hereof and the
number of Early Put Warrant Shares related to the Put Closing to be purchased
pursuant to such exercise exceeds the number of shares registered pursuant to
Section 1.1a. of the Registration Rights Agreement (the "Excess Shares"), then
the Company may, in lieu of issuance of shares of Common Stock pursuant to such
exercise, pay to the Investor the Cash-Out Price (as defined below) for any or
all of the Excess Shares.
d. Notice of Cash Payment in Lieu of Exercise. In the event that
the Company elects to pay cash in lieu of exercise for any Early Put Warrant
Shares or any Excess Shares in accordance with Section 2c. (the "Cash-Out
Option"), the Company shall promptly give notice to the Investor of such
election which notice shall be given no later than one business day following
notice of the Investor's intention to exercise this Early Put Warrant and which
notice shall set forth the number of shares of Common Stock for which the
Company elects the Cash-Out Option.
e. Method of Cash-Out; Effect of Cash-Out. In the event that the
Company chooses the Cash-Out Option, then in lieu of delivering stock
certificates as provided in Section 5 hereof, the Company shall deliver by wire
transfer of immediately available funds to an account designated by the Investor
as soon as practicable after the exercise of this Early Put Warrant (in full or
in part), and in any event within three (3) Trading Days thereafter, the
Cash-Out Price (as defined below) for any and all shares of Common Stock for
which the Company elects the Cash-Out Option.
"Cash-Out Price" shall mean the product of (x) the Bid
Price of one share of Common Stock on the Trading Day immediately preceding the
Exercise Date multiplied by (y) the number of shares of Common Stock for which
the Company proposes to pay cash in lieu of exercise pursuant to Section 2c.
Section 3. Exercise; Cashless Exercise.
a. Method of Exercise. This Early Put Warrant may be exercised in
whole or in part (but not as to a fractional share of Common Stock), at any time
and from time to time during the Exercise Period, by the Warrant Holder by (i)
the surrender of this Early Put Warrant, the Exercise Notice and the Aggregate
Exercise Price to the Company at the address set forth in Section 14 hereof or
(ii) the delivery by facsimile of an executed and completed Exercise Notice to
the Company and delivery to the Company within three (3) business days
thereafter of this Early Put Warrant, the original Exercise Notice and the
Aggregate Exercise Price.
b. Payment of Aggregate Exercise Price. Subject to paragraph (c)
below, payment of the Aggregate Exercise Price shall be made by check or bank
draft payable to the
<PAGE> 4
order of the Company or by wire transfer to an account designated by the
Company. If the amount of the payment received by the Company is less than the
Aggregate Exercise Price, the Warrant Holder will be notified of the deficiency
and shall make payment in that amount within five (5) business days of such
notice. In the event the payment exceeds the Aggregate Exercise Price, the
Company will refund the excess to the Warrant Holder within three (3) business
days of both the receipt of such payment and the knowledge of such excess.
c. Cashless Exercise. As an alternative to payment of the
Aggregate Exercise Price in accordance with Section 3b. above, the Warrant
Holder may elect to effect a cashless exercise by so indicating on the Exercise
Notice and including a calculation of the number of shares of Common Stock to be
issued upon such exercise in accordance with the terms hereof (a "Cashless
Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall
surrender this Early Put Warrant for that number of shares of Common Stock
determined by (i) multiplying the number of Early Put Warrant Shares for which
this Early Put Warrant is being exercised by the Per Share Early Put Warrant
Value and (ii) dividing the product by the Bid Price of one share of the Common
Stock on the Trading Day immediately preceding the Exercise Date.
d. Replacement Early Put Warrant. In the event that the Early Put
Warrant is not exercised in full, the number of Early Put Warrant Shares shall
be reduced by the number of such Early Put Warrant Shares for which this Early
Put Warrant is exercised, and the Company, at its expense, shall forthwith issue
and deliver to the Warrant Holder a new Early Put Warrant of like tenor in the
name of the Warrant Holder or as the Warrant Holder may request, reflecting such
adjusted number of Early Put Warrant Shares.
Section 4. Five Percent Limitation. The Warrant Holder may not exercise
this Early Put Warrant such that the number of Early Put Warrant Shares to be
received pursuant to such exercise aggregated with all other shares of Common
Stock then owned by the Warrant Holder beneficially or deemed beneficially owned
by the Warrant Holder would result in the Warrant Holder owning more than 4.9%
of all of such Common Stock as would be outstanding on such Exercise Date, as
determined in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder. As of any date prior to the Exercise
Date, the aggregate number of shares of Common Stock into which this Early Put
Warrant is exercisable, together with all other shares of Common Stock then
beneficially owned (as such term is defined in Rule 13(d) under the Exchange
Act) by such Warrant Holder and its affiliates, shall not exceed 4.9% of the
total outstanding shares of Common Stock as of such date.
Section 5. Delivery of Stock Certificates.
a. Subject to the terms and conditions of this Early Put Warrant,
as soon as practicable after the exercise of this Early Put Warrant in full or
in part, and in any event within five (5) Trading Days thereafter, the Company
at its expense (including, without limitation, the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate
or certificates for the number of validly issued, fully paid and non-assessable
Early Put Warrant Shares to which the Warrant Holder shall be entitled on such
exercise, together with any other stock or other securities or property
(including cash, where applicable) to which the Warrant Holder is
<PAGE> 5
entitled upon such exercise in accordance with the provisions hereof; provided,
however, that any such delivery to a location outside of the United States shall
also be made within five (5) Trading Days after the exercise of this Early Put
Warrant in full or in part.
b. This Early Put Warrant may not be exercised as to fractional
shares of Common Stock. In the event that the exercise of this Early Put
Warrant, in full or in part, would result in the issuance of any fractional
share of Common Stock, then in such event the Warrant Holder shall receive in
cash an amount equal to the Bid Price of such fractional share within five (5)
Trading Days.
Section 6. Representations, Additional Warranties and Covenants of the
Company.
a. The Company shall take all necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation for the
legal and valid issuance of this Early Put Warrant and the Early Put Warrant
Shares to the Warrant Holder.
b. At all times during the Exercise Period, the Company shall
take all steps reasonably necessary and within its control to insure that the
Common Stock remains listed or quoted on the Principal Market.
c. The Early Put Warrant Shares, when issued in accordance with
the terms hereof, will be duly authorized and, when paid for or issued in
accordance with the terms hereof, shall be validly issued, fully paid and
non-assessable.
d. The Company has authorized and reserved for issuance to the
Warrant Holder the requisite number of shares of Common Stock to be issued
pursuant to this Early Put Warrant. The Company shall at all times reserve and
keep available, solely for issuance and delivery as Early Put Warrant Shares
hereunder, such shares of Common Stock as shall from time to time be issuable as
Early Put Warrant Shares.
Section 7. Adjustment of the Exercise Price. The Exercise Price and,
accordingly, the number of Early Put Warrant Shares issuable upon exercise of
the Early Put Warrant, shall be subject to adjustment from time to time upon the
happening of certain events as follows:
a. Reclassification, Consolidation, Merger or Mandatory Share
Exchange. If the Company, at any time (a) between the Subscription Date and the
Effective Date applicable to the Early Put or (b) between each subsequent
issuance of a Put Notice by the Company and the applicable Effective Date
therefor (i) reclassifies or changes its Outstanding Capital Shares or (ii)
consolidates, merges or effects a mandatory share exchange with or into another
corporation (other than a merger or mandatory share exchange with another
corporation in which the Company is a continuing corporation and that does not
result in any reclassification or change, or as a result of a subdivision or
combination of Outstanding Capital Shares issuable upon exercise of this Early
Put Warrant), then in any such event the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefore, amend this Early Put Warrant or issue a new
warrant providing that the Warrant Holder shall have rights not less favorable
to the holder than those then applicable to this Early Put Warrant and to
receive upon exercise under such amendment of this Early Put Warrant or new
warrant, in lieu of each share of Common Stock theretofore issuable upon
exercise of this Early Put Warrant
<PAGE> 6
hereunder, the kind and amount of shares of stock, other securities, money or
property receivable upon such reclassification, change, consolidation, merger,
mandatory share exchange, sale or transfer by the holder of one share of Common
Stock issuable upon exercise of this Early Put Warrant had this Early Put
Warrant been exercised immediately prior to such reclassification, change,
consolidation, merger, mandatory share exchange or sale or transfer. Such
amended warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
7. The provisions of this Section 7a. shall similarly apply to successive
reclassifications, changes, consolidations, mergers, mandatory share exchanges
and sales and transfers.
b. Subdivision or Combination of Shares. If the Company, at any
time (a) between the Subscription Date and the Effective Date applicable to the
first Put or (b) between each subsequent issuance of a Put Notice by the Company
and the applicable Effective Date therefor, shall subdivide its Common Stock,
the number of shares of Common Stock issuable to the Investor hereunder shall be
proportionately increased as of the effective date of such subdivision, or, if
the Company shall take a record of holders of its Common Stock for the purpose
of so subdividing, as of such record date, whichever is earlier. If the Company,
at any time (a) between the Subscription Date and the Effective Date applicable
to the first Put or (b) between each subsequent issuance of a Put Notice by the
Company and the applicable Effective Date therefor, shall combine its Common
Stock, the number of shares of Common Stock issuable to the Investor hereunder
shall be proportionately decreased as of the effective date of such combination,
or, if the Company shall take a record of holders of its Common Stock for the
purpose of so combining, as of such record date, whichever is earlier.
c. Stock Dividends. If the Company, at any time while this Early
Put Warrant is unexpired and not exercised in full, shall pay a dividend in its
Capital Shares, or make any other distribution of its Capital Shares, then the
Exercise Price shall be adjusted, as of the date the Company shall take a record
of the holders of its Capital Shares for the purpose of receiving such dividend
or other distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying the
Exercise Price in effect immediately prior to such payment or other distribution
by a fraction:
(i) the numerator of which shall be the total number of
Outstanding Capital Shares immediately prior to such dividend or distribution,
and
(ii) the denominator of which shall be the total number of
Outstanding Capital Shares immediately after such dividend or distribution. The
provisions of this subsection c. shall not apply under any of the circumstances
for which an adjustment is provided in subsections a. or b.
d. Adjustment of Number of Shares. Upon each adjustment of the
Exercise Price pursuant to any provisions of this Section 7, the number of Early
Put Warrant Shares issuable hereunder at the option of the Warrant Holder shall
be calculated, to the nearest one hundredth of a whole share, multiplying the
number of Early Put Warrant Shares issuable prior to an adjustment by a
fraction:
<PAGE> 7
(i) the numerator of which shall be the Exercise Price
before any adjustment pursuant to this Section 7; and
(ii) the denominator of which shall be the Exercise Price
after such adjustment.
e. Liquidating Dividends, Etc. If the Company, at any time while
this Early Put Warrant is unexpired and not exercised in full, makes a
distribution of its assets or evidences of indebtedness to the holders of its
Capital Shares as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's assets (other
than under the circumstances provided for in the foregoing subsections a.
through g.) while an exercise is pending, then the Warrant Holder shall be
entitled to receive upon such exercise of the Early Put Warrant in addition to
the Early Put Warrant Shares receivable in connection therewith, and without
payment of any consideration other than the Exercise Price, an amount in cash
equal to the value of such distribution per Capital Share multiplied by the
number of Early Put Warrant Shares that, on the record date for such
distribution, are issuable upon such exercise of the Early Put Warrant (with no
further adjustment being made following any event which causes a subsequent
adjustment in the number of Early Put Warrant Shares issuable), and an
appropriate provision therefor shall be made a part of any such distribution.
The value of a distribution that is paid in other than cash shall be determined
in good faith by the Board of Directors of the Company.
f. Other Provisions Applicable to Adjustments Under this Section.
The following provisions will be applicable to the making of adjustments in any
Exercise Price hereinabove provided in this Section 7:
(i) Other Action Affecting Capital Shares. In case after
the date hereof the Company shall take any action affecting the number of
Outstanding Capital Shares, other than an action described in any of the
foregoing subsections a. through e. hereof, inclusive, which in the opinion of
the Company's Board of Directors would have a materially adverse effect upon the
rights of the Warrant Holder at the time of exercise of the Early Put Warrant,
the Exercise Price shall be adjusted in such manner and at such time as the
Board of Directors on the advice of the Company's independent public accountants
may in good faith determine to be equitable in the circumstances.
(ii) Notice of Certain Actions. In the event the Company
shall, at a time while the Incentive Warrant is unexpired and outstanding, take
any action which pursuant to subsections a. through e. of this Section 7 may
result in an adjustment of the Exercise Price, the Company shall give to the
Warrant Holder at its last address known to the Company written notice of such
action ten (10) days in advance of its effective date in order to afford to the
Warrant Holder an opportunity to exercise the Incentive Warrant prior to such
action becoming effective.
(iii) Notice of Adjustments. Whenever the Exercise Price
or number of Incentive Warrant Shares shall be adjusted pursuant to Section 7
hereof, the Company shall promptly make a certificate signed by its President or
a Vice President and by its Treasurer or
<PAGE> 8
Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in
reasonable detail the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Company's Board of Directors made any
determination hereunder), and the Exercise Price and number of Incentive Warrant
Shares purchasable at that Exercise Price after giving effect to such
adjustment, and shall promptly cause copies of such certificate to be mailed (by
first class and postage prepaid) to the Holder of the Incentive Warrant.
Section 8. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or By-Laws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Early Put Warrant, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Warrant Holder against impairment. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any Early Put
Warrant Shares above the amount payable therefor on such exercise, and (b) will
take all such action as may be reasonably necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable Early Put
Warrant Shares on the exercise of this Early Put Warrant.
Section 9. Rights As Stockholder. Prior to exercise of this Early Put
Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder
of the Company with respect to the Early Put Warrant Shares, including (without
limitation) the right to vote such shares, receive dividends or other
distributions thereon or be notified of stockholder meetings. However, in the
event of any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, the
Company shall mail to each Warrant Holder, at least ten (10) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
Section 10. Replacement of Early Put Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of the Early Put Warrant and, in the case of any such loss, theft or
destruction of the Early Put Warrant, upon delivery of an indemnity agreement or
security reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, on surrender and cancellation of such Early Put
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Early Put Warrant of like tenor.
Section 11. Choice of Law. This Agreement shall be construed under the
laws of the State of New York, without giving effect to conflict of law
provisions.
Section 12. Entire Agreement; Amendments. This Early Put Warrant, the
Incentive Warrant, the Registration Rights Agreement, and the Agreement contain
the entire understanding of the parties with respect to the matters covered
hereby and thereby. No provision of this Early
<PAGE> 9
Put Warrant may be waived or amended other than by a written instrument signed
by the party against whom enforcement of any such amendment or waiver is sought.
Section 13. Restricted Securities.
a. Registration or Exemption Required. This Early Put Warrant has
been issued in a transaction exempt from the registration requirements of the
Securities Act in reliance upon the provisions of Section 4(2) promulgated by
the SEC under the Securities Act. This Early Put Warrant and the Early Put
Warrant Shares issuable upon exercise of this Early Put Warrant may not be
resold except pursuant to an effective registration statement or an exemption to
the registration requirements of the Securities Act and applicable state laws.
b. Legend. Any replacement Early Put Warrants issued pursuant to
Section 2 hereof and any Early Put Warrant Shares issued upon exercise hereof,
shall bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND
HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION
WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN
OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE
AGREEMENT, DATED AS OF August 30, 1999, BETWEEN Franklin
Telecommunications Corp. AND CRESCENT INTERNATIONAL LTD. A COPY
OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM THE FRANKLIN TELECOMMUNICATIONS
CORP.'S EXECUTIVE OFFICES."
Removal of such legend shall be in accordance with the legend removal
provisions in the Agreement.
c. No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 13b. has been or shall be placed on the
share certificates representing the Early Put Warrant Shares and no instructions
or "stop transfer orders," so called, "stock transfer restrictions" or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Section 13.
<PAGE> 10
d. Assignment. Assuming the conditions of Section 13a. above
regarding registration or exemption have been satisfied, the Warrant Holder may
sell, transfer, assign, pledge or otherwise dispose of this Early Put Warrant,
in whole or in part. The Warrant Holder shall deliver a written notice to the
Company substantially in the form of the assignment form attached hereto as
Exhibit B (the "Assignment Notice"), indicating the person or persons to whom
this Early Put Warrant shall be assigned and the respective number of warrants
to be assigned to each assignee. The Company shall effect the assignment within
ten (10) days of receipt of such Assignment Notice, and shall deliver to the
assignee(s) designated by the Warrant Holder a Early Put Warrant or Early Put
Warrants of like tenor and terms for the specified number of shares.
e. Investor's Compliance. Nothing in this Section 13 shall affect
in any way the Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
Section 14. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile (with accurate confirmation generated by the transmitting facsimile
machine) at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
<PAGE> 11
if to the Company:
Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, CA 91361
Attention: Frank W. Peters
Telephone: (805) 373-8688
Facsimile: (805) 373-7373
with a copy (which shall not constitute notice) to:
Haddan & Zepfel LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Attention: Robert J. Zepfel, Esq.
Telephone: (949) 752-6100
Facsimile: (949) 752-6161
if to the Investor:
Crescent International Ltd.
c/o GreenLight (Switzerland) SA
84, av Louis-Casai, P.O. Box 42
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
Facsimile: +41 22 929 53 94
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 14 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto.
Section 15. Miscellaneous. This Early Put Warrant and any term hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. The headings in this Early Put Warrant are
for purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
<PAGE> 12
IN WITNESS WHEREOF, this Early Put Warrant was duly executed by the undersigned,
thereunto duly authorized, as of the date first set forth above.
Franklin Telecommunications Corp.
By: /s/ Thomas Russell
-------------------------------
Name: Thomas Russell
Title: Chief Financial Officer
Attested:
By: /s/ Helen West
--------------------------------
Name: Helen West
Title: Secretary
<PAGE> 13
EXHIBIT A TO THE EARLY PUT WARRANT
EXERCISE FORM
Franklin Telecommunications Corp.
The undersigned (the "Registered Holder") hereby irrevocably exercises
the right to purchase __________________ shares of Common Stock of Franklin
Telecommunications Corp., an entity organized and existing under the laws of the
State of California (the "Company"), evidenced by the attached Early Put
Warrant, and herewith makes payment of the Exercise Price with respect to such
shares in full in the form of (check the appropriate box) (i) Ucash or certified
check in the amount of $________; (ii) Ywire transfer to the Company's account
at __________________, _________, _________ (Account No.:_________); or (iii)
Y______ Early Put Warrant Shares, which represent the amount of Early Put
Warrant Shares as provided in the attached Early Put Warrant to be canceled in
connection with such exercise, all in accordance with the conditions and
provisions of said Early Put Warrant.
The undersigned requests that stock certificates for such Early Put
Warrant Shares be issued, and a Early Put Warrant representing any unexercised
portion hereof be issued, pursuant to this Early Put Warrant in the name of the
Registered Holder and delivered to the undersigned at the address set forth
below.
Dated:____________________________________
__________________________________________
Signature of Registered Holder
__________________________________________
Name of Registered Holder (Print)
__________________________________________
Address
<PAGE> 14
NOTICE
The signature to the foregoing Exercise Form must correspond to
the name as written upon the face of the attached Early Put Warrant in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE> 15
EXHIBIT B TO THE EARLY PUT WARRANT
ASSIGNMENT
(To be executed by the registered Warrant Holder (the "Registered
Holder") desiring to transfer the Early Put Warrant, in whole or in part.)
FOR VALUED RECEIVED, the undersigned Warrant Holder of the
attached Early Put Warrant hereby sells, assigns or transfers unto the person(s)
named below (the "Assignee") the right to purchase ______________ shares of the
Common Stock of Franklin Telecommunications Corp. evidenced by the attached
Early Put Warrant and does hereby irrevocably constitute and appoint
______________________ (attorney) to transfer the number of shares specified of
the said Early Put Warrant on the books of the Company, with full power of
substitution in the premises.
The undersigned requests that such Early Put Warrant be issued,
and a Early Put Warrant representing any unsold, unassigned or non-transferred
portion hereof be issued, pursuant to this Early Put Warrant in the name of the
Registered Holder and delivered to the undersigned at the address set forth
below.
Dated:________________________________________
__________________________________________
Signature of Registered Holder
__________________________________________
Name of Registered Holder (Print)
__________________________________________
Address of Registered Holder
__________________________________________
Name of Assignee (Print)
__________________________________________
Address of Assignee (including zip code number)
<PAGE> 16
NOTICE
The signature to the foregoing Assignment must correspond to the
name as written upon the face of the attached Early Put Warrant in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE> 1
EXHIBIT 10.4
WARRANT
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A
TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE
COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF August 30,
1999, BETWEEN Franklin Telecommunications Corp. AND CRESCENT INTERNATIONAL
LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM Franklin Telecommunications Corp.'S
EXECUTIVE OFFICES.
August 30, 1999
Warrant to Purchase up to 400,000 Shares of Common Stock of Franklin
Telecommunications Corp. (hereinafter, the "Incentive Warrant").
Franklin Telecommunications Corp., an entity organized and existing
under the laws of the State of California (the "Company"), hereby agrees that
Crescent International Ltd. (the "Investor") or any other Warrant Holder is
entitled, on the terms and conditions set forth below, to purchase from the
Company at any time during the Exercise Period up to 400,000 fully paid and
nonassessable shares of Common Stock, no par value per share, of the Company
(the "Common Stock"), as the same may be adjusted from time to time pursuant to
Section 6 hereof, at the Exercise Price (hereinafter defined), as the same may
be adjusted pursuant to Section 6 hereof. The resale of the shares of Common
Stock or other securities issuable upon exercise or exchange of this Incentive
Warrant is subject to the provisions of the Registration Rights Agreement (as
defined below).
Section 1. Definitions.
"Aggregate Exercise Price" shall mean the Exercise Price
multiplied by the number of shares of Common Stock for which this Incentive
Warrant is being exercised.
"Agreement" shall mean the Stock Purchase Agreement, dated the
date hereof, between the Company and the Investor.
"Capital Shares" shall mean the Common Stock and any shares of
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
<PAGE> 2
"Cashless Exercise" shall have the meaning set forth in Section
2c. hereof.
"Exercise Date" shall mean either (i) the date this Incentive
Warrant, the Exercise Notice and the Aggregate Exercise Price are received by
the Company or (ii) the date advanced copy of the Exercise Notice is sent by
facsimile to the Company, provided that this Incentive Warrant, the original
Exercise Notice, and the Aggregate Exercise Price are received by the Company
within three (3) business days thereafter. If this Incentive Warrant, the
original Exercise Notice and the Aggregate Exercise Price are not received
within three (3) business days in accordance with clause (ii) above, the
Exercise Date shall be the date this Incentive Warrant, the original Exercise
Notice and the Aggregate Exercise Price are received by the Company.
"Exercise Notice" shall mean the exercise form attached hereto as
Exhibit A duly executed by the Warrant Holder.
"Exercise Period" shall mean that period beginning on the
Subscription Date and continuing until the expiration of the five-year period
thereafter; provided that such period shall be extended one day for each day
after the Subscription Date, that the Registration Statement covering (i) shares
purchased by the Investor through the first Put, (ii) the Early Put Warrant
Shares related to such Put and (iii) the Incentive Warrant Shares purchasable
through exercise of this Incentive Warrant, is not effective during the period
such Registration Statement is required to be effective pursuant to the
Registration Rights Agreement.
"Exercise Price" as of the date hereof shall mean $1.5525 per
share of Common Stock, subject to the adjustments provided for in Section 6 of
this Incentive Warrant.
"Per Share Warrant Value" shall mean the difference resulting
from subtracting the Exercise Price from the Bid Price of one share of Common
Stock on the Trading Day immediately preceding the Exercise Date.
"Registration Rights Agreement" shall mean the registration
rights agreement, dated the date hereof between the Company and the Investor.
"Subscription Date" shall mean the date on which the Agreement is
executed and delivered by the parties hereto.
"Warrant Holder" shall mean the Investor or any assignee or
transferee of all or any portion of this Incentive Warrant; and
other capitalized terms used but not defined herein shall have
their respective meanings set forth in the Agreement.
Section 2. Exercise; Cashless Exercise.
a. Method of Exercise. This Incentive Warrant may be exercised in
whole or in part (but not as to a fractional share of Common Stock), at any time
and from time to time during the Exercise Period, by the Warrant Holder by (i)
the surrender of this Incentive Warrant, the Exercise Notice and the Aggregate
Exercise Price to the Company at the address set forth in Section 13 hereof or
(ii) the delivery by facsimile of an executed and completed Exercise Notice to
the Company and delivery to the Company within three (3) business days
thereafter of this Incentive Warrant, the original Exercise Notice and the
Aggregate Exercise Price.
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<PAGE> 3
b. Payment of Aggregate Exercise Price. Subject to paragraph (c)
below, payment of the Aggregate Exercise Price shall be made by check or bank
draft payable to the order of the Company or by wire transfer to an account
designated by the Company. If the amount of the payment received by the Company
is less than the Aggregate Exercise Price, the Warrant Holder will be notified
of the deficiency and shall make payment in that amount within five (5) business
days of such notice. In the event the payment exceeds the Aggregate Exercise
Price, the Company will refund the excess to the Warrant Holder within three (3)
business days of both the receipt of such payment and the knowledge of such
excess.
c. Cashless Exercise. As an alternative to payment of the
Aggregate Exercise Price in accordance with Section 2b. above, the Warrant
Holder may elect to effect a cashless exercise by so indicating on the Exercise
Notice and including a calculation of the number of shares of Common Stock to be
issued upon such exercise in accordance with the terms hereof (a "Cashless
Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall
surrender this Incentive Warrant for that number of shares of Common Stock
determined by (i) multiplying the number of Incentive Warrant Shares for which
this Incentive Warrant is being exercised by the Per Share Warrant Value and
(ii) dividing the product by the Sale Price of one share of the Common Stock on
the Trading Day immediately preceding the Exercise Date.
d. Replacement Warrant. In the event that the Incentive Warrant
is not exercised in full, the number of Incentive Warrant Shares shall be
reduced by the number of such Incentive Warrant Shares for which this Incentive
Warrant is exercised, and the Company, at its expense, shall forthwith issue and
deliver to the Warrant Holder a new Incentive Warrant of like tenor in the name
of the Warrant Holder or as the Warrant Holder may request, reflecting such
adjusted number of Incentive Warrant Shares.
Section 3. Five Percent Limitation. The Warrant Holder may not exercise
this Incentive Warrant such that the number of Incentive Warrant Shares to be
received pursuant to such exercise aggregated with all other shares of Common
Stock then owned by the Warrant Holder beneficially or deemed beneficially owned
by the Warrant Holder would result in the Warrant Holder owning more than 4.9%
of all of such Common Stock as would be outstanding on such Exercise Date, as
determined in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder. As of any date prior to the Exercise
Date, the aggregate number of shares of Common Stock into which this Incentive
Warrant is exercisable, together with all other shares of Common Stock then
beneficially owned (as such term is defined in Rule 13(d) under the Exchange
Act) by such Warrant Holder and its affiliates, shall not exceed 4.9% of the
total outstanding shares of Common Stock as of such date.
Section 4. Delivery of Stock Certificates.
a. Subject to the terms and conditions of this Incentive Warrant,
as soon as practicable after the exercise of this Incentive Warrant in full or
in part, and in any event within five (5) Trading Days thereafter, the Company
at its expense (including, without limitation, the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate
or certificates for the number of validly issued, fully paid and non-assessable
Incentive Warrant Shares to which the Warrant Holder shall be entitled on such
exercise, together with any other stock or
3
<PAGE> 4
other securities or property (including cash, where applicable) to which the
Warrant Holder is entitled upon such exercise in accordance with the provisions
hereof; provided, however, that any such delivery to a location outside of the
United States shall also be made within five (5) Trading Days after the exercise
of this Incentive Warrant in full or in part.
b. This Incentive Warrant may not be exercised as to fractional
shares of Common Stock. In the event that the exercise of this Incentive
Warrant, in full or in part, would result in the issuance of any fractional
share of Common Stock, then in such event the Warrant Holder shall receive in
cash an amount equal to the Sale Price of such fractional share within five (5)
Trading Days.
Section 5. Representations, Warranties and Covenants of the Company.
a. The Company shall take all necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation for the
legal and valid issuance of this Incentive Warrant and the Incentive Warrant
Shares to the Warrant Holder.
b. From the date hereof through the last date on which this
Incentive Warrant is exercisable, the Company shall take all steps reasonably
necessary and within its control to insure that the Common Stock remains listed
or quoted on the Principal Market.
c. The Incentive Warrant Shares, when issued in accordance with
the terms hereof, will be duly authorized and, when paid for or issued in
accordance with the terms hereof, shall be validly issued, fully paid and
non-assessable.
d. The Company has authorized and reserved for issuance to the
Warrant Holder the requisite number of shares of Common Stock to be issued
pursuant to this Incentive Warrant. The Company shall at all times reserve and
keep available, solely for issuance and delivery as Incentive Warrant Shares
hereunder, such shares of Common Stock as shall from time to time be issuable as
Incentive Warrant Shares.
Section 6. Adjustment of the Exercise Price. The Exercise Price and,
accordingly, the number of Incentive Warrant Shares issuable upon exercise of
the Incentive Warrant, shall be subject to adjustment from time to time upon the
happening of certain events as follows:
a. Reclassification, Consolidation, Merger or Mandatory Share
Exchange. If the Company, at any time while this Incentive Warrant is unexpired
and not exercised in full, (i) reclassifies or changes its Outstanding Capital
Shares (other than a change in par value, or from par value to no par value per
share, or from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon exercise of
the Incentive Warrant) or (ii) consolidates, merges or effects a mandatory share
exchange with or into another corporation (other than a merger or mandatory
share exchange with another corporation in which the Company is a continuing
corporation and that does not result in any reclassification or change, other
than a change in par value, or from par value to no par value per share, or from
no par value per share to par value, or as a result of a subdivision or
combination of Outstanding Capital Shares issuable upon exercise of the
Incentive Warrant), then in any such event the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefore, amend this Incentive Warrant or issue a new
4
<PAGE> 5
Incentive Warrant providing that the Warrant Holder shall have rights not less
favorable to the holder than those then applicable to this Incentive Warrant and
to receive upon exercise under such amendment of this Incentive Warrant or new
Incentive Warrant, in lieu of each share of Common Stock theretofore issuable
upon exercise of the Incentive Warrant hereunder, the kind and amount of shares
of stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one share of Common Stock issuable upon exercise of
the Incentive Warrant had the Incentive Warrant been exercised immediately prior
to such reclassification, change, consolidation, merger, mandatory share
exchange or sale or transfer. Such amended Incentive Warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6. The provisions of this Section 6a.
shall similarly apply to successive reclassifications, changes, consolidations,
mergers, mandatory share exchanges and sales and transfers.
b. Subdivision or Combination of Shares. If the Company, at any
time while this Incentive Warrant is unexpired and not exercised in full, shall
subdivide its Common Stock, the Exercise Price shall be proportionately reduced
as of the effective date of such subdivision, or, if the Company shall take a
record of holders of its Common Stock for the purpose of so subdividing, as of
such record date, whichever is earlier. If the Company, at any time while this
Incentive Warrant is unexpired and not exercised in full, shall combine its
Common Stock, the Exercise Price shall be proportionately increased as of the
effective date of such combination, or, if the Company shall take a record of
holders of its Common Stock for the purpose of so combining, as of such record
date, whichever is earlier.
c. Stock Dividends. If the Company, at any time while this
Incentive Warrant is unexpired and not exercised in full, shall pay a dividend
in its Capital Shares, or make any other distribution of its Capital Shares,
then the Exercise Price shall be adjusted, as of the date the Company shall take
a record of the holders of its Capital Shares for the purpose of receiving such
dividend or other distribution (or if no such record is taken, as at the date of
such payment or other distribution), to that price determined by multiplying the
Exercise Price in effect immediately prior to such payment or other distribution
by a fraction:
(i) the numerator of which shall be the total number of
Outstanding Capital Shares immediately prior to such dividend or distribution,
and
(ii) the denominator of which shall be the total number of
Outstanding Capital Shares immediately after such dividend or distribution. The
provisions of this subsection c. shall not apply under any of the circumstances
for which an adjustment is provided in Sections 6a. or b.
d. Adjustment of Number of Shares. Upon each adjustment of the
Exercise Price pursuant to any provisions of this Section 6, the number of
Incentive Warrant Shares issuable hereunder at the option of the Warrant Holder
shall be calculated, to the nearest one hundredth of a whole share, multiplying
the number of Incentive Warrant Shares issuable prior to an adjustment by a
fraction:
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<PAGE> 6
(i) the numerator of which shall be the Exercise Price
before any adjustment pursuant to this Section 6; and
(ii) the denominator of which shall be the Exercise Price
after such adjustment.
e. Liquidating Dividends, Etc. If the Company, at any time while
this Incentive Warrant is unexpired and not exercised in full, makes a
distribution of its assets or evidences of indebtedness to the holders of its
Capital Shares as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's assets (other
than under the circumstances provided for in the foregoing subsections a.
through g.) while an exercise is pending, then the Warrant Holder shall be
entitled to receive upon such exercise of the Incentive Warrant in addition to
the Incentive Warrant Shares receivable in connection therewith, and without
payment of any consideration other than the Exercise Price, an amount in cash
equal to the value of such distribution per Capital Share multiplied by the
number of Incentive Warrant Shares that, on the record date for such
distribution, are issuable upon such exercise of the Incentive Warrant (with no
further adjustment being made following any event which causes a subsequent
adjustment in the number of Incentive Warrant Shares issuable), and an
appropriate provision therefor shall be made a part of any such distribution.
The value of a distribution that is paid in other than cash shall be determined
in good faith by the Board of Directors of the Company.
f. Other Provisions Applicable to Adjustments Under this Section.
The following provisions will be applicable to the making of adjustments in any
Exercise Price hereinabove provided in this Section 6:
(i) Other Action Affecting Capital Shares. In case after
the date hereof the Company shall take any action affecting the number of
Outstanding Capital Shares, other than an action described in any of the
foregoing subsections a. through e. hereof, inclusive, which in the opinion of
the Company's Board of Directors would have a materially adverse effect upon the
rights of the Warrant Holder at the time of exercise of the Incentive Warrant,
the Exercise Price shall be adjusted in such manner and at such time as the
Board or Directors on the advice of the Company's independent public accountants
may in good faith determine to be equitable in the circumstances.
(ii) Notice of Certain Actions. In the event the Company
shall, at a time while the Incentive Warrant is unexpired and outstanding, take
any action which pursuant to subsections a. through e. of this Section 6 may
result in an adjustment of the Exercise Price, the Company shall give to the
Warrant Holder at its last address known to the Company written notice of such
action ten (10) days in advance of its effective date in order to afford to the
Warrant Holder an opportunity to exercise the Incentive Warrant prior to such
action becoming effective.
(iii) Notice of Adjustments. Whenever the Exercise Price
or number of Incentive Warrant Shares shall be adjusted pursuant to Section 6
hereof, the Company shall promptly make a certificate signed by its President or
a Vice President and by its Treasurer or
6
<PAGE> 7
Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in
reasonable detail the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Company's Board of Directors made any
determination hereunder), and the Exercise Price and number of Incentive Warrant
Shares purchasable at that Exercise Price after giving effect to such
adjustment, and shall promptly cause copies of such certificate to be mailed (by
first class and postage prepaid) to the Holder of the Incentive Warrant.
Section 7. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or By-Laws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Incentive Warrant, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Warrant Holder against impairment. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any Incentive
Warrant Shares above the amount payable therefor on such exercise, and (b) will
take all such action as may be reasonably necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable Incentive
Warrant Shares on the exercise of this Incentive Warrant.
Section 8. Rights As Stockholder. Prior to exercise of this Incentive
Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder
of the Company with respect to the Incentive Warrant Shares, including (without
limitation) the right to vote such shares, receive dividends or other
distributions thereon or be notified of stockholder meetings. However, in the
event of any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, the
Company shall mail to each Warrant Holder, at least ten (10) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
Section 9. Replacement of Incentive Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of the Incentive Warrant and, in the case of any such loss, theft or
destruction of the Incentive Warrant, upon delivery of an indemnity agreement or
security reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, on surrender and cancellation of such Incentive
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Incentive Warrant of like tenor.
Section 10. Choice of Law. This Agreement shall be construed under the
laws of the State of New York, without giving effect to conflict of law
provisions.
Section 11. Entire Agreement; Amendments. This Incentive Warrant, the
Early Put Warrants, the Registration Rights Agreement, and the Agreement
together with Exhibits and schedules hereto contain the entire understanding of
the parties with respect to the matters
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<PAGE> 8
covered hereby and thereby. No provision of this Incentive Warrant may be waived
or amended other than by a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought.
Section 12. Restricted Securities.
a. Registration or Exemption Required. This Incentive Warrant has
been issued in a transaction exempt from the registration requirements of the
Securities Act in reliance upon the provisions of Section 4(2) promulgated by
the SEC under the Securities Act. This Incentive Warrant and the Incentive
Warrant Shares issuable upon exercise of this Incentive Warrant may not be
resold except pursuant to an effective registration statement or an exemption to
the registration requirements of the Securities Act and applicable state laws.
b. Legend. Any replacement Incentive Warrants issued pursuant to
Section 2 hereof and any Incentive Warrant Shares issued upon exercise hereof,
shall bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND
HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION
WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN
OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE
AGREEMENT, DATED AS OF August 30, 1999, BETWEEN Franklin
Telecommunications Corp. AND CRESCENT INTERNATIONAL LTD. A COPY
OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM THE FRANKLIN TELECOMMUNICATIONS
CORP.'S EXECUTIVE OFFICES."
Removal of such legend shall be in accordance with the legend removal
provisions in the Agreement.
c. No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 12b. has been or shall be placed on the
share certificates representing the Incentive Warrant Shares and no instructions
or "stop transfer orders," so called, "stock transfer restrictions" or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Section 12.
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<PAGE> 9
d. Assignment. Assuming the conditions of Section 12a. and 12b.
above regarding registration or exemption have been satisfied, the Warrant
Holder may sell, transfer, assign, pledge or otherwise dispose of this Incentive
Warrant, in whole or in part. The Warrant Holder shall deliver a written notice
to the Company substantially in the form of the assignment form attached hereto
as Exhibit B (the "Assignment Notice"), indicating the person or persons to whom
this Incentive Warrant shall be assigned and the respective number of warrants
to be assigned to each assignee. The Company shall effect the assignment within
ten (10) days of receipt of such Assignment Notice, and shall deliver to the
assignee(s) designated by the Warrant Holder a Incentive Warrant or Incentive
Warrants of like tenor and terms for the specified number of shares.
e. Investor's Compliance. Nothing in this Section 12 shall affect
in any way the Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
Section 13. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram or facsimile, addressed as set forth
below or to such other address as such party shall have specified by written
notice. Any notice or other communication required or permitted to be given
hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile (with accurate confirmation generated by the transmitting facsimile
machine) at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
if to the Company:
Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, CA 91361
Attention: Frank W. Peters
Telephone: (805) 373-8688
Facsimile: (805) 373-7373
with a copy (which shall not constitute notice) to:
Haddan & Zepfel LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Attention: Robert J. Zepfel, Esq.
Telephone: (949) 752-6100
Facsimile: (949) 752-6161
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<PAGE> 10
if to the Investor:
Crescent International Ltd.
c/o GreenLight (Switzerland) SA
84, av Louis-Casai, P.O. Box 42
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
Facsimile: +41 22 929 53 94
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 13 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto.
Section 14. Miscellaneous. This Incentive Warrant and any term hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. The headings in this Incentive Warrant are
for purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
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IN WITNESS WHEREOF, this Incentive Warrant was duly executed by
the undersigned, thereunto duly authorized, as of the date first set forth
above.
Franklin Telecommunications Corp.
By: /s/ Thomas Russell
-------------------------------
Name: Thomas Russell
Title: Chief Financial Officer
Attested:
By: /s/ Helen West
--------------------------------
Name: Helen West
Title: Secretary
11
<PAGE> 12
EXHIBIT A TO THE INCENTIVE WARRANT
EXERCISE FORM
Franklin Telecommunications Corp.
The undersigned (the "Registered Holder") hereby irrevocably exercises
the right to purchase __________________ shares of Common Stock of Franklin
Telecommunications Corp., an entity organized and existing under the laws of the
State of California, evidenced by the attached Incentive Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full in the
form of (check the appropriate box) (i) Ucash or certified check in the amount
of $________; (ii) Ywire transfer to the Company's account at
__________________, _________, _________ (Account No.:_________); or (iii)
Y______ Incentive Warrant Shares, which represent the amount of Incentive
Warrant Shares as provided in the attached Incentive Warrant to be canceled in
connection with such exercise, all in accordance with the conditions and
provisions of said Incentive Warrant.
The undersigned requests that stock certificates for such Incentive
Warrant Shares be issued, and a Incentive Warrant representing any unexercised
portion hereof be issued, pursuant to this Incentive Warrant in the name of the
Registered Holder and delivered to the undersigned at the address set forth
below.
Dated:______________________________________
____________________________________________
Signature of Registered Holder
____________________________________________
Name of Registered Holder (Print)
____________________________________________
Address
12
<PAGE> 13
NOTICE
The signature to the foregoing Exercise Form must correspond to the name
as written upon the face of the attached Incentive Warrant in every particular,
without alteration or enlargement or any change whatsoever.
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<PAGE> 14
EXHIBIT B TO THE INCENTIVE WARRANT
ASSIGNMENT
(To be executed by the registered Warrant Holder (the "Registered
Holder") desiring to transfer the Incentive Warrant, in whole or in part.)
FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached
Incentive Warrant hereby sells, assigns or transfers unto the person(s) named
below (the "Assignee") the right to purchase ______________ shares of the Common
Stock of Franklin Telecommunications Corp. evidenced by the attached Incentive
Warrant and does hereby irrevocably constitute and appoint
______________________ (attorney) to transfer the number of shares specified of
the said Incentive Warrant on the books of the Company, with full power of
substitution in the premises.
The undersigned requests that such Incentive Warrant be issued, and a
Incentive Warrant representing any unsold, unassigned or non-transferred portion
hereof be issued, pursuant to this Incentive Warrant in the name of the
Registered Holder and delivered to the undersigned at the address set forth
below.
Dated:______________________________________
____________________________________________
Signature of Registered Holder
____________________________________________
Name of Registered Holder (Print)
____________________________________________
Address of Registered Holder
____________________________________________
Name of Assignee (Print)
____________________________________________
Address of Assignee (including zip code number)
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<PAGE> 15
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the attached Incentive Warrant in every particular,
without alteration or enlargement or any change whatsoever.
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<PAGE> 1
EXHIBIT 10.5
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
August 30, 1999, is made and entered into by and between Franklin
Telecommunications Corp., an entity organized and existing under the laws of the
State of California (the "Company"), and Crescent International Ltd., a Bermuda
corporation (the "Investor").
WHEREAS, the Company and the Investor have entered into that certain
Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase
Agreement"), pursuant to which the Company will issue, from time to time, to the
Investor up to $6,500,000 worth of shares of Common Stock, no par value per
share, of the Company (the "Common Stock");
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investor entering into the Stock Purchase Agreement, the Company has issued to
the Investor an incentive warrant dated as of the date hereof, exercisable from
time to time within five (5) years following the date of issuance (the
"Incentive Warrant") for the purchase of an aggregate of up to 400,000 shares of
Common Stock at a price specified in such Incentive Warrant;
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investor entering into the Stock Purchase Agreement, the Company will issue to
the Investor an early put warrant, which may become exercisable from time to
time as described in the Stock Purchase Agreement (the "Early Put Warrant" and
together with the Incentive Warrant, the "Warrants") for the purchase of a
number of shares of Common Stock and at a price to be determined as described in
each such Early Put Warrant;
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investor's agreement to enter into the Stock Purchase Agreement, the Company has
agreed to provide the Investor with certain registration rights with respect to
the shares issued to the Investor and any additional shares of Common Stock
issued or distributed to the Investor by way of a dividend, stock split, or
other distribution in respect of the Shares, or acquired by way of any rights
offering or similar offering made in respect of the shares (collectively, the
"Registrable Securities");
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, in the Warrants, and in
the Stock Purchase Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, intending to be legally
bound hereby, the parties hereto agree as follows (capitalized terms used herein
and not defined herein shall have the respective meanings ascribed to them in
the Stock Purchase Agreement):
<PAGE> 2
ARTICLE I
REGISTRATION RIGHTS
Section 1.1. REGISTRATION STATEMENTS.
a. Filing of Registration Statements. The Company shall register
for resale all Put Shares issued or issuable to the Investor pursuant to the
Stock Purchase Agreement and all Warrant Shares issued or issuable upon full
exercise of the Warrants. Subject to the terms and conditions of this Agreement,
the Company shall effect such registration in the manner provided in either (i)
or (ii) below. The Company shall file with the SEC either:
(i) on or before September 15, 1999, a registration
statement (the "Initial Registration Statement") on such
form promulgated by the SEC for which the Company
qualifies, that counsel for the Company shall deem
appropriate and which form shall be available for the sale
of the shares of Common Stock purchased by the Investor
through the Early Put (the "Initial Shares"), the
Incentive Warrant Shares and the Early Put Warrant Shares.
The aggregate number of shares to be registered under the
Initial Registration Statement shall be equal to two
hundred percent (200%) of the Initial Shares, plus the
Incentive Warrant Shares. Prior to any subsequent put, the
Company shall file with the SEC a registration statement
(the "Subsequent Registration Statement" and together with
the Initial Registration Statement, the "Registration
Statements") on such form promulgated by the SEC for which
the Company qualifies, that counsel for the Company shall
deem appropriate and which form shall be available for the
sale of the shares of Common Stock to be purchased by the
Investor and any Warrant Shares which have not previously
been registered. The aggregate number of shares to be
registered under the Subsequent Registration Statement
shall be equal to 125% of (X-Y)/Z, where X is the Maximum
Commitment Amount, Y is the Investment Amount of the Early
Put and Z is 92% of the Minimum Bid Price; or
(ii) on or before September 15, 1999, a registration
statement (the "Combined Registration Statement") on such
form promulgated by the SEC for which the Company
qualifies, that counsel for the Company shall deem
appropriate and which form shall be available for the sale
of all Put Shares issued or issuable pursuant to the terms
of the Stock Purchase Agreement and all Warrant Shares
issued or issuable upon full exercise of the Warrants. The
aggregate number of shares to be registered under the
Combined Registration Statement shall be equal to 125% of
(A/B)+C, where A is the Maximum Commitment Amount, B is
92% of the Minimum Bid Price and C is the number of
Incentive Warrant Shares.
b. Effectiveness of the Registration Statements. The Company
shall use its best efforts either: (i) to have the Initial Registration
Statement declared effective by the SEC in no event later than ninety (90)
calendar days after the Subscription Date and to have the Subsequent
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<PAGE> 3
Registration Statement declared effective by the SEC in no event later than 150
calendar days after the Subscription Date, or (ii) to have the Combined
Registration Statement declared effective by the SEC in on event later than
ninety (90) calendar days after the Subscription Date. The Company shall ensure
that all Registration Statements remain in effect for a period ending 180 days
following the earlier of termination of the Commitment Period and termination of
the Investor's obligations pursuant to Section 2.4 of the Stock Purchase
Agreement; provided that such period shall be extended one day for each day
after the applicable Effective Date, that any Registration Statement covering
shares purchased by the Investor is not effective during the period such
Registration Statement is required to be effective pursuant to this Agreement;
and provided further that the Company shall not be required to ensure that any
Registration Statement covering shares purchased by the Investor remain in
effect for such 180 day period if the shares registered thereunder shall have
become freely tradable pursuant to Rule 144(k) of the Securities Act or have
otherwise been sold.
c. Failure to Obtain or Maintain Effectiveness of Registration
Statements. In the event the Company fails for any reason to obtain the
effectiveness of any Registration Statement within the time periods set forth in
Section 1.1(b) (a "Tardy Registration Statement") or in the event that the
Company fails for any reason to maintain the effectiveness of any Registration
Statement (or the underlying prospectus) covering shares held by the Investor
(an "Ineffective Registration Statement" together with a Tardy Registration
Statement, a "Failed Registration Statement") (unless the Registrable Securities
covered by such Registration Statement shall have become freely tradable
pursuant to Rule 144(k) of the Securities Act or have been otherwise sold), for
a period ending 180 days following the earlier of termination of the Commitment
Period and termination of the Investor's obligations pursuant to Section 2.4 of
the Stock Purchase Agreement (provided that such period shall be extended one
day for each day after the applicable Effective Date, that the Registration
Statement covering shares purchased by the Investor, is not effective during the
period such Registration Statement is required to be effective pursuant to this
Agreement), at any time during any period of such ineffectiveness (an
"Ineffective Period"), then, in either event the Company shall pay to the
Investor in immediately available funds into an account designated by the
Investor an amount equal to two percent (2.0%) of the aggregate Purchase Price
of all of the Registrable Securities under any such Failed Registration
Statement then held by the Investor for each calendar month and for each portion
of a calendar month, pro rata, during an Ineffective Period. Such payments shall
be made on the first Trading Day after the earliest to occur of (i) the
expiration of the applicable Ineffective Period and (ii) the last day of each
calendar month during an Ineffective Period.
d. Restricted Period. While in possession of material non-public
information received from the Company, the Investor shall not dispose of any
Registrable Securities until such information is disclosed to the public (a
"Restricted Period"); provided that, if such Restricted Period exceeds one
hundred twenty (120) days, the liquidated damages described in Section 1.1(c)
hereof shall be increased to three percent (3.0%) until such restricted Period
shall have elapsed.
e. Failure to Register Sufficient Number of Shares. If the Early
Put Warrant shall become exercisable for a number of shares in excess of the
number of Early Put Warrant Shares included in the Initial Registration
Statement ("Excess Shares"), then the Company shall immediately amend such
Registration Statement (or file a new Registration Statement) to cover
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<PAGE> 4
the Excess Shares (such amended or new Registration Statement is referred to
herein as an "Excess Registration Statement") and the Company shall pay to the
Investor in immediately available funds into an account designated by the
Investor an amount equal to one and a half percent (1.5%) of the product of (x)
the number of Excess Shares multiplied by (y) the Bid Price of the Common Stock
on the applicable Effective Date, for each calendar month and for each portion
of a calendar month, pro rata, during the period from the Effective Date of the
applicable Registration Statement and the Effective Date of the applicable
Excess Registration Statement.
f. Liquidated Damages. The Company and the Investor hereby
acknowledge and agree that the sums payable under subsections 1.1(c), 1.1(d) and
1.1(e) hereof shall constitute liquidated damages and not penalties. The parties
further acknowledge that (i) the amount of loss or damages likely to be incurred
is incapable or is difficult to estimate precisely, (ii) the amounts specified
in such subsections bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred in connection with
any failure by the Company to obtain or maintain the effectiveness of a
Registration Statement, (iii) one of the reasons for the Company and the
Investor reaching an agreement as to such amounts was the uncertainty and cost
of litigation regarding the question of actual damages, and (iv) the Company and
the Investor are sophisticated business parties and have been represented by
sophisticated and able legal and financial counsel and negotiated this Agreement
at arm's length.
ARTICLE II
REGISTRATION PROCEDURES
Section 2.1. FILINGS; INFORMATION. The Company will effect the
registration of the Registrable Securities in accordance with the intended
methods of disposition thereof as furnished to the Company by any proposed
seller of such Registrable Securities. Without limiting the foregoing, the
Company in each such case will do the following as expeditiously as possible,
but in no event later than the deadline, if any, prescribed therefor in this
Agreement:
a. The Company shall (i) prepare and file with the SEC the
Registration Statement(s) covering the shares as described in subsection 1.1(a)
above; (ii) use its best efforts to cause such filed Registration Statement(s)
to become and remain effective (pursuant to Rule 415 under the Securities Act or
otherwise) for the period prescribed by Section 1.1(b); (iii) prepare and file
with the SEC such amendments and supplements to each Registration Statement and
the prospectus used in connection therewith as may be necessary to keep each
Registration Statement effective for the time period prescribed by Section
1.1(b); and (iv) comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by each Registration Statement
during such period in accordance with the intended methods of disposition by the
Investor set forth in each Registration Statement.
b. The Company shall file all necessary amendments to each
Registration Statement in order to effectuate the purpose of this Agreement, the
Stock Purchase Agreement, and the Warrants.
c. Five (5) Trading Days prior to filing each Registration
Statement or prospectus, or any amendment or supplement thereto (excluding
amendments deemed to result from the filing of documents incorporated by
reference therein), the Company shall deliver to the
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<PAGE> 5
Investor and one firm of counsel representing the Investor, in accordance with
the notice provisions of Section 4.8, copies of such Registration Statement as
proposed to be filed, together with exhibits thereto, which documents will be
subject to review and comment by the Investor and such counsel, and thereafter
deliver to the Investor and such counsel, in accordance with the notice
provisions of Section 4.8, such number of copies of such Registration Statement,
each amendment and supplement thereto (in each case including all exhibits
thereto), the prospectus included in such Registration Statement (including each
preliminary prospectus) and such other documents or information as the Investor
or counsel may reasonably request in order to facilitate the disposition of the
Registrable Securities.
d. The Company shall deliver, in accordance with the notice
provisions of Section 4.8, to each broker as directed by the Investor such
number of conformed copies of such Registration Statement and of each amendment
and supplement thereto (in each case including all exhibits and documents
incorporated by reference), such number of copies of the prospectus contained in
such Registration Statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 promulgated
under the Securities Act relating to the Registrable Securities, and such other
documents, as may be reasonably requested to facilitate the disposition of the
Registrable Securities.
e. After the filing of each Registration Statement, the Company
shall promptly notify the Investor of any stop order issued or threatened by the
SEC in connection therewith and take all commercially reasonable actions
required to prevent the entry of such stop order or to remove it if entered.
f. The Company shall use its best efforts to (i) register or
qualify the Registrable Securities under such other securities or blue sky laws
of such jurisdictions in the United States as the Investor may reasonably (in
light of its intended plan of distribution) request, and (ii) cause the
Registrable Securities to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary by
virtue of the business and operations of the Company and do any and all other
acts and things that may be reasonably necessary or advisable to enable the
Investor to consummate the disposition of the Registrable Securities; provided,
however, that the Company will not be required to qualify generally to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this paragraph (f), subject itself to taxation in any such jurisdiction,
or consent or subject itself to general service of process in any such
jurisdiction.
g. The Company shall immediately notify the Investor, but in no
event later than two (2) business days by facsimile and by overnight courier,
upon the occurrence of any of the following events in respect of a Registration
Statement or related prospectus in respect of an offering of Registrable
Securities: (i) receipt of any request for additional information by the SEC or
any other federal or state governmental authority during the period of
effectiveness of the Registration Statement for amendments or supplements to the
Registration Statement or related prospectus; (ii) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose; (iii) receipt 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; (iv) the
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<PAGE> 6
happening of any event that makes any statement made in such Registration
Statement or related prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of a Registration Statement, 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 not misleading, and that in the case of the related prospectus, 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 the light of the circumstances under which they were made, not
misleading; (v) the declaration by the SEC of the effectiveness of a
Registration Statement; and (vi) the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be appropriate, and
the Company shall promptly make available to the Investor any such supplement or
amendment to the related prospectus.
h. The Company shall enter into customary agreements and take
such other actions as are reasonably required in order to expedite or facilitate
the disposition of such Registrable Securities (whereupon the Investor may, at
its option, require that any or all of the representations, warranties and
covenants of the Company also be made to and for the benefit of the Investor).
i. The Company shall make available to the Investor (and will
deliver to Investor's counsel), subject to restrictions imposed by the United
States federal government or any agency or instrumentality thereof, copies of
all correspondence between the SEC and the Company, concerning any Registration
Statement, and, except during a Blackout Period, will also make available for
inspection by the Investor and any attorney, accountant or other professional
retained by the Investor (collectively, the "Inspectors"), all financial and
other records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers
and employees to supply all information reasonably requested by any Inspectors
in connection with any Registration Statement. Records that the Company
determines, in good faith, to be confidential and that it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in any Registration Statement or (ii) the disclosure or release of
such Records is requested or required pursuant to oral questions,
interrogatories, requests for information or documents or a subpoena or other
order from a court of competent jurisdiction or other process; provided,
however, that prior to any disclosure or release pursuant to clause (ii), the
Inspectors shall provide the Company with prompt notice of any such request or
requirement so that the Company may seek an appropriate protective order or
waive such Inspectors' obligation not to disclose such Records; and, provided,
further, that if failing the entry of a protective order or the waiver by the
Company permitting the disclosure or release of such Records, the Inspectors,
upon advice of counsel, are compelled to disclose such Records, the Inspectors
may disclose that portion of the Records that counsel has advised the Inspectors
that the Inspectors are compelled to disclose. The Investor agrees that
information obtained by it solely as a result of such inspections (not including
any information obtained from a third party who, insofar as is known to the
Investor after reasonable inquiry, is not prohibited from providing such
information by a contractual, legal or fiduciary obligation to the Company)
shall be deemed confidential and shall not be used by it as the basis for any
market transactions
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<PAGE> 7
in the securities of the Company or its affiliates unless and until such
information is made generally available to the public. The Investor further
agrees that it will, upon learning that disclosure of such Records is sought in
a court of competent jurisdiction, give notice to the Company and allow the
Company, at its expense, to undertake appropriate action to prevent disclosure
of the Records deemed confidential.
j. To the extent required by law or reasonably necessary to
effect a sale of Registrable Securities in accordance with prevailing business
practices at the time of any sale of Registrable Securities pursuant to a
Registration Statement, the Company shall deliver to the Investor a signed
counterpart, addressed to the Investor, of (1) an opinion or opinions of counsel
to the Company and (2) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering such matters
of the type customarily covered by opinions of comfort letters, as the case may
be, as the Investor therefor reasonably requests.
k. The Company shall otherwise comply with all applicable rules
and regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act.
l. The Company shall appoint a transfer agent and registrar for
all of the class that includes the Registrable Securities covered by a
Registration Statement not later than the effective date of a Registration
Statement.
m. The Company may require the Investor to furnish promptly in
writing to the Company such information as may be legally required in connection
with any registration including, without limitation, all such information as may
be requested by the SEC or the National Association of Securities Dealers. The
Investor agrees to provide such information requested in connection with any
registration within five (5) Trading Days after receiving such written request
and the Company shall not be responsible for any delays in obtaining or
maintaining the effectiveness of a Registration Statement caused by the
Investor's failure to timely provide such information. Each seller of
Registrable Securities shall notify the Company as promptly as practicable of
any inaccuracy or change in information previously furnished by such seller to
the Company or of the occurrence of any event, in either case as a result of
which any prospectus relating to the Registrable Securities contains or would
contain an untrue statement of a material fact regarding such seller or its
intended method of disposition of such Registrable Securities or omits to state
any material fact regarding such seller or such seller's intended method of
disposition of such Registrable Securities required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and promptly furnish to the Company
any additional information required to correct and update any previously
furnished information or required so that such prospectus shall not contain,
with respect to such seller or the disposition of such Registrable Securities,
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 the light
of the circumstances under which they were made, not misleading.
Section 2.2. REGISTRATION EXPENSES. In connection with each Registration
Statement, the Company shall pay all registration expenses incurred in
connection with the
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<PAGE> 8
registration thereunder (the "Registration Expenses"), including, without
limitation: (i) all registration, filing, securities exchange listing and fees
required by the National Association of Securities Dealers, (ii) all
registration, filing, qualification and other fees and expenses of compliance
with securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable Securities
required hereby), (iii) all of the Company's word processing, duplicating,
printing, messenger and delivery expenses, (iv) the Company's internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), (v) the fees and expenses
incurred by the Company in connection with the listing of the Registrable
Securities, (vi) reasonable fees and disbursements of counsel for the Company
and customary fees and expenses for independent certified public accountants
retained by the Company (including the expenses of any special audits or comfort
letters or costs associated with the delivery by independent certified public
accountants of such special audit(s) or comfort letter(s) requested pursuant to
Section 2.1(j) hereof), (vii) the fees and expenses of any special experts
retained by the Company in connection with such registration, (viii) premiums
and other costs of policies of insurance purchased at the discretion of the
Company against liabilities arising out of any public offering of the
Registrable Securities being registered, and (ix) any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
underwriting fees, discounts, transfer taxes or commissions, if any,
attributable to the sale of Registrable Securities, which shall be payable by
each holder of Registrable Securities pro rata on the basis of the number of
Registrable Securities of each such holder that are included in a registration
under this Agreement.
Section 2.3. BLACKOUT PERIOD. Investor agrees by acquisition of
Registrable Securities that, upon receipt of written notice from the Company of
the occurrence of any event of the kind described in Section 2.1(g)(iv), for a
period not to exceed 120 days (a "Blackout Period") the Investor shall forthwith
discontinue the Investor's offer of the Registrable Securities pursuant to the
Registration Statement relating to such Registrable Securities until the
Investor shall have received copies of the supplemented or amended prospectus
contemplated by Section 2.1(g)(iv) and, if so directed by the Company, will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in the Investor's possession, of the prospectus
relating to such Registrable Securities at the time of receipt of such notice.
In the event that any Investor uses a prospectus in connection with the offering
and sale of any of the Registrable Securities covered by such prospectus, such
Investor will use only the latest version of such prospectus provided by the
Company to the Investor.
ARTICLE III
INDEMNIFICATION AND CONTRIBUTION
Section 3.1. INDEMNIFICATION BY THE COMPANY.
a. The Company agrees to indemnify and hold harmless the
Investor, its partners, affiliates, officers, directors, employees and duly
authorized agents, and each Person or entity, if any, who controls the Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, together with the partners, Affiliates, officers, directors,
employees and duly authorized agents of such controlling Person or entity
(collectively, the "Controlling Persons"), from and against any and all losses,
claims, damages, liabilities, costs
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<PAGE> 9
and expenses (including, without limitation, any and all reasonable attorneys'
fees and disbursements and costs and expenses of investigating and defending any
such claim and any and all amounts paid in settlement of, any action, suit or
proceeding between any of the indemnified parties and any indemnifying parties
or between any indemnified party and any third party, or otherwise, or any claim
asserted) (collectively, "Damages"), joint or several, and any action or
proceeding in respect thereof to which the Investor, its partners, affiliates,
officers, directors, employees and duly authorized agents, and any Controlling
Person, may become subject under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise, as and
when incurred, insofar as such Damages (or actions or proceedings in respect
thereof) (i) arise out of, or are based upon, any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement, or
in any preliminary prospectus, final prospectus, summary prospectus, documents
filed under the Exchange Act and deemed to be incorporated by reference into any
Registration Statement, application or other document executed by or on behalf
other Company or based on written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Registrable Securities
under the securities or blue sky laws thereof or filed with the SEC, amendment
or supplement relating to the Registrable Securities or (ii) arise out of, or
are based upon, any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and shall reimburse the Investor, its partners, affiliates,
officers, directors, employees and duly authorized agents, and each such
Controlling Person, for any legal and other expenses reasonably incurred by the
Investor, its partners, affiliates, officers, directors, employees and duly
authorized agents, or any such Controlling Person, as incurred, in investigating
or defending or preparing to defend against any such Damages or actions or
proceedings; provided, however, that the Company shall not be liable to the
extent that any such Damages arise out of the Investor's failure to send or give
a copy of the final prospectus or supplement to the persons asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
person if such statement or omission was corrected in such final prospectus or
supplement; provided, further, that the Company shall not be liable to the
extent that any such Damages arise out of or are based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in such
Registration Statement, or any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company by the Investor or any other
person who participates as a seller or as an underwriter in the offering or sale
of such securities, in either case, in any questionnaire or other request by the
Company, or otherwise specifically stating that it is for use in the preparation
thereof.
b. The Investor agrees to indemnify and hold harmless the
Company, its partners, affiliates, officers, directors, employees and duly
authorized agents, and the Controlling Persons, from and against any and all
Damages, joint or several, and any action or proceeding in respect thereof to
which the Company, its partners, affiliates, officers, directors, employees and
duly authorized agents, and any Controlling Person, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, as and when incurred, insofar as such
Damages (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement or alleged untrue statement of a material fact
provided in writing to the Company by the Investor expressly for use in any
Registration Statement, preliminary prospectus, final prospectus or summary
prospectus of the
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<PAGE> 10
Company filed in any jurisdiction in order to qualify the Registrable Securities
under the securities or blue sky laws thereof or filed with the SEC and shall
reimburse the Company, its partners, affiliates, officers, directors, employees
and duly authorized agents, and each such Controlling Person, for any legal and
other expenses reasonably incurred by the Company, its partners, affiliates,
officers, directors, employees and duly authorized agents, or any such
Controlling Person, as incurred, in investigating or defending or preparing to
defend against any such Damages or actions or proceedings; provided, however,
that the Investor shall not be liable to the extent that any such Damages arise
out of the Company's failure to send or give a copy of the final prospectus or
supplement to the persons asserting an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such person if such
statement or omission was corrected in such final prospectus or supplement;
provided, further, that the Investor shall not be liable to the extent that any
such Damages arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in such Registration
Statement, or any such preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement made by the Company or any other person who
participates as a seller or as an underwriter in the offering or sale of such
securities.
Section 3.2. METHOD OF ASSERTING INDEMNIFICATION CLAIMS. All claims for
indemnification by any Indemnified Party (as defined below) under Section 3.1
shall be asserted and resolved as follows:
a. In the event any claim or demand in respect of which any
person claiming indemnification under any provision of Section 3.1 (an
"Indemnified Party") might seek indemnity under Section 3.1 is asserted against
or sought to be collected from such Indemnified Party by a person other than the
Company, the Investor or any affiliate of the Company (a "Third Party Claim"),
the Indemnified Party shall deliver a written notification, enclosing a copy of
all papers served, if any, and specifying the nature of and basis for such Third
Party Claim and for the Indemnified Party's claim for indemnification that is
being asserted under any provision of Section 3.1 against any person (the
"Indemnifying Party"), together with the amount or, if not then reasonably
ascertainable, the estimated amount, determined in good faith, of such Third
Party Claim (a "Claim Notice") with reasonable promptness to the Indemnifying
Party. If the Indemnified Party fails to provide the Claim Notice with
reasonable promptness after the Indemnified Party receives notice of such Third
Party Claim, the Indemnifying Party shall not be obligated to indemnify the
Indemnified Party with respect to such Third Party Claim to the extent that the
Indemnifying Party's ability to defend has been irreparably prejudiced by such
failure of the Indemnified Party. The Indemnifying Party shall notify the
Indemnified Party as soon as practicable within the period ending thirty (30)
calendar days following receipt by the Indemnifying Party of either a Claim
Notice or an Indemnity Notice (as defined below) (the "Dispute Period") whether
the Indemnifying Party disputes its liability or the amount of its liability to
the Indemnified Party under Section 3.1 and whether the Indemnifying Party
desires, at its sole cost and expense, to defend the Indemnified Party against
such Third Party Claim.
(i) If the Indemnifying Party notifies the Indemnified
Party within the Dispute Period that the Indemnifying Party desires to defend
the Indemnified Party with respect to the Third Party Claim pursuant to this
Section 3.2(a), then the Indemnifying Party shall have the right to defend, with
counsel reasonably satisfactory to the Indemnified Party, at the sole cost
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<PAGE> 11
and expense of the Indemnifying Party, such Third Party Claim by all appropriate
proceedings, which proceedings shall be vigorously and diligently prosecuted by
the Indemnifying Party to a final conclusion or will be settled at the
discretion of the Indemnifying Party (but only with the consent of the
Indemnified Party in the case of any settlement that provides for any relief
other than the payment of monetary damages or that provides for the payment of
monetary damages as to which the Indemnified Party shall not be indemnified in
full pursuant to Section 3.1). The Indemnifying Party shall have full control of
such defense and proceedings, including any compromise or settlement thereof;
provided, however, that the Indemnified Party may, at the sole cost and expense
of the Indemnified Party, at any time prior to the Indemnifying Party's delivery
of the notice referred to in the first sentence of this clause (i), file any
motion, answer or other pleadings or take any other action that the Indemnified
Party reasonably believes to be necessary or appropriate to protect its
interests; and provided further, that if requested by the Indemnifying Party,
the Indemnified Party will, at the sole cost and expense of the Indemnifying
Party, provide reasonable cooperation to the Indemnifying Party in contesting
any Third Party Claim that the Indemnifying Party elects to contest. The
Indemnified Party may participate in, but not control, any defense or settlement
of any Third Party Claim controlled by the Indemnifying Party pursuant to this
clause (i), and except as provided in the preceding sentence, the Indemnified
Party shall bear its own costs and expenses with respect to such participation.
Notwithstanding the foregoing, the Indemnified Party may take over the control
of the defense or settlement of a Third Party Claim at any time if it
irrevocably waives its right to indemnity under Section 3.1 with respect to such
Third Party Claim.
(ii) If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the Indemnifying Party desires
to defend the Third Party Claim pursuant to Section 3.2(a), or if the
Indemnifying Party gives such notice but fails to prosecute vigorously and
diligently or settle the Third Party Claim, or if the Indemnifying Party fails
to give any notice whatsoever within the Dispute Period, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party, the Third Party Claim by all appropriate proceedings, which
proceedings shall be prosecuted by the Indemnified Party in a reasonable manner
and in good faith or will be settled at the discretion of the Indemnified Party
(with the consent of the Indemnifying Party, which consent will not be
unreasonably withheld). The Indemnified Party will have full control of such
defense and proceedings, including any compromise or settlement thereof;
provided, however, that if requested by the Indemnified Party, the Indemnifying
Party will, at the sole cost and expense of the Indemnifying Party, provide
reasonable cooperation to the Indemnified Party and its counsel in contesting
any Third Party Claim which the Indemnified Party is contesting. Notwithstanding
the foregoing provisions of this clause (ii), if the Indemnifying Party has
notified the Indemnified Party within the Dispute Period that the Indemnifying
Party disputes its liability or the amount of its liability hereunder to the
Indemnified Party with respect to such Third Party Claim and if such dispute is
resolved in favor of the Indemnifying Party in the manner provided in clause
(iii) below, the Indemnifying Party will not be required to bear the costs and
expenses of the Indemnified Party's defense pursuant to this clause (ii) or of
the Indemnifying Party's participation therein at the Indemnified Party's
request, and the Indemnified Party shall reimburse the Indemnifying Party in
full for all reasonable costs and expenses incurred by the Indemnifying Party in
connection with such litigation. The Indemnifying Party may participate in, but
not control, any defense or settlement controlled by the Indemnified Party
pursuant to this clause (ii), and the Indemnifying Party shall bear its own
costs and expenses with respect to such participation.
11
<PAGE> 12
(iii) If the Indemnifying Party notifies the Indemnified
Party that it does not dispute its liability or the amount of its liability to
the Indemnified Party with respect to the Third Party Claim under Section 3.1 or
fails to notify the Indemnified Party within the Dispute Period whether the
Indemnifying Party disputes its liability or the amount of its liability to the
Indemnified Party with respect to such Third Party Claim, the Damages in the
amount specified in the Claim Notice shall be conclusively deemed a liability of
the Indemnifying Party under Section 3.1 and the Indemnifying Party shall pay
the amount of such Damages to the Indemnified Party on demand. If the
Indemnifying Party has timely disputed its liability or the amount of its
liability with respect to such claim, the Indemnifying Party and the Indemnified
Party shall proceed in good faith to negotiate a resolution of such dispute, and
if not resolved through negotiations within the period of thirty (30) calendar
days immediately following the Dispute Period, such dispute shall be resolved by
arbitration in accordance with Section 3.3.
b. In the event any Indemnified Party should have a claim under
Section 3.1 against the Indemnifying Party that does not involve a Third Party
Claim, the Indemnified Party shall deliver a written notification of a claim for
indemnity under Section 3.1 specifying the nature of and basis for such claim,
together with the amount or, if not then reasonably ascertainable, the estimated
amount, determined in good faith, of such claim (an "Indemnity Notice") with
reasonable promptness to the Indemnifying Party. The failure by any Indemnified
Party to give the Indemnity Notice shall not impair such party's rights
hereunder except to the extent that the Indemnifying Party demonstrates that it
has been irreparably prejudiced thereby. If the Indemnifying Party notifies the
Indemnified Party that it does not dispute the claim or the amount of the claim
described in such Indemnity Notice or fails to notify the Indemnified Party
within the Dispute Period whether the Indemnifying Party disputes the claim or
the amount of the claim described in such Indemnity Notice, the Damages in the
amount specified in the Indemnity Notice will be conclusively deemed a liability
of the Indemnifying Party under Section 3.1 and the Indemnifying Party shall pay
the amount of such Damages to the Indemnified Party on demand. If the
Indemnifying Party has timely disputed its liability or the amount of its
liability with respect to such claim, the Indemnifying Party and the Indemnified
Party shall proceed in good faith to negotiate a resolution of such dispute, and
if not resolved through negotiations within the period of thirty (30) calendar
days immediately following the Dispute Period, such dispute shall be resolved by
arbitration in accordance with Section 3.3.
Section 3.3. ARBITRATION. Any dispute under this Agreement (including,
without limitation, pursuant Section 3.2) or the Warrants shall be submitted to
arbitration and shall be finally and conclusively determined by the decision of
a board of arbitration consisting of three (3) members (the "Board of
Arbitration") selected as hereinafter provided. Each of the Company, on the one
hand, and the Investor and/or any other Indemnified Party, on the other hand,
shall select one (1) member and the third member shall be selected by mutual
agreement of the other members, or if the other members fail to reach agreement
on a third member within twenty (20) days after their selection, such third
member shall thereafter be selected by the American Arbitration Association upon
application made to it for such purpose by the other members. The Board of
Arbitration shall meet on consecutive business days in New York City, New York
or such other place as a majority of the members of the Board of Arbitration
determines more appropriate, and shall reach and render a decision in writing
(concurred in by a majority of the members of the Board of Arbitration). In
connection with rendering its decision, the Board of Arbitration shall adopt and
follow such rules and procedures as a majority of the
12
<PAGE> 13
members of the Board of Arbitration deems necessary or appropriate. To the
extent practical, decisions of the Board of Arbitration shall be rendered no
more than thirty (30) calendar days following commencement of proceedings with
respect thereto. The Board of Arbitration shall cause its written decision to be
delivered to the Company and the Investor and/or any other Indemnified Party.
Any decision made by the Board of Arbitration (either prior to or after the
expiration of such thirty (30) calendar day period) shall be final, binding and
conclusive on the Company and the Investor and/or any other Indemnified Party
and entitled to be enforced to the fullest extent permitted by law and entered
in any court of competent jurisdiction. The non-prevailing party to any
arbitration shall bear the expense of both parties in relation thereto,
including but not limited to the parties' attorneys' fees, if any, and the
expenses and fees of the Board of Arbitration.
Section 3.4. OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding paragraphs of this Article 3 (with appropriate
modifications) shall be given by the Company with respect to any required
registration or other qualification of securities under any federal or state law
or regulation of any governmental authority other than the Securities Act. The
provisions of this Article III shall be in addition to any other rights to
indemnification, contribution or other remedies which an Indemnified Party may
have pursuant to law, equity, contract or otherwise.
Section 3.5. CONTRIBUTION. If the indemnification and reimbursement
obligations provided for in any section of this Article III is unavailable or
insufficient to hold harmless the Indemnified Parties in respect of any Damages
referred to herein, then the 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 Damages as between the Company on the one
hand and the Investor or seller on the other, in such proportion as is
appropriate to reflect the relative fault of the Company and of the Investor or
seller in connection with such statements or omissions, as well as other
equitable considerations. The relative fault of the Company on the one hand and
of the Investor or seller on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Investor agree that it would not be just and
equitable if contribution pursuant to this Section 3.4 were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
Damages referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 3.4, the Investor or seller shall in no event be required to contribute
any amount in excess of the amount by which the total price at which the
Registrable Securities of the Investor or seller were sold to the public (less
underwriting discounts and commissions) exceeds the amount of any damages which
the Investor or seller 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
13
<PAGE> 14
(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.
ARTICLE IV
MISCELLANEOUS
Section 4.1. OUTSTANDING REGISTRATION RIGHTS. Except for the agreement
dated November 24, 1997, in which the Company has granted registration rights to
Swartz Investments, L.L.C., the Company represents and warrants to the Investor
that there is not in effect on the date hereof any other agreement by the
Company pursuant to which any holders of securities of the Company have a right
to cause the Company to register or qualify such securities under the Securities
Act or any securities or blue sky laws of any jurisdiction.
Section 4.2. TERM. The registration rights provided to the holders of
Registrable Securities hereunder shall terminate at such time as all Registrable
Securities have been issued and have ceased to be Registrable Securities.
Notwithstanding the foregoing, paragraphs (c) and (d) of Section 1.1, Article
III, Section 4.8, and Section 4.9 shall survive the termination of this
Agreement.
Section 4.3. RULE 144. If the Company is required to file reports under
the Exchange Act, the Company will file in a timely manner, information,
documents and reports in compliance with the Securities Act and the Exchange Act
and will, at its expense, promptly take such further action as holders of
Registrable Securities may reasonably request to enable such holders of
Registrable Securities to sell Registrable Securities without registration under
the Securities Act within the limitation of the exemptions provided by (a) Rule
144 under the Securities Act ("Rule 144"), as such Rule may be amended from time
to time, or (b) any similar rule or regulation hereafter adopted by the SEC. If
at any time the Company is not required to file such reports, it will, at its
expense, forthwith upon the written request of any holder of Registrable
Securities who intends to make a sale under Rule 144, make available adequate
current public information with respect to the Company within the meaning of
paragraph (c)(2) of Rule 144 or such other information as necessary to permit
sales pursuant to Rule 144. Upon the request of the Investor, the Company will
deliver to the Investor a written statement, signed by the Company's principal
financial officer, as to whether it has complied with such requirements. This
Section 4.3 shall terminate at the same time as the registration rights as
provided in Section 4.2.
Section 4.4. CERTIFICATE. The Company will, at its expense, forthwith
upon the request of any holder of Registrable Securities, deliver to such holder
a certificate, signed by the Company's principal financial officer, stating (a)
the Company's name, address and telephone number (including area code), (b) the
Company's Internal Revenue Service identification number, (c) the Company's
Commission file number, (d) the number of shares of each class of stock
outstanding as shown by the most recent report or statement published by the
Company, and (e) whether the Company has filed the reports required to be filed
under the Exchange Act for a period of at least ninety (90) days prior to the
date of such certificate and in addition has filed the most recent annual report
required to be filed thereunder.
14
<PAGE> 15
Section 4.5. AMENDMENT AND MODIFICATION. Any provision of this Agreement
may be waived, provided that such waiver is set forth in a writing executed by
both parties to this Agreement. 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 Company has obtained the written consent of the holders of a majority
of the then outstanding Registrable Securities. Notwithstanding the foregoing,
the waiver of any provision hereof with respect to a matter that relates
exclusively to the rights of holders of Registrable Securities whose securities
are being sold pursuant to a Registration Statement and does not directly or
indirectly affect the rights of other holders of Registrable Securities may be
given by holders of at least a majority of the Registrable Securities being sold
by such holders; provided that the provisions of this sentence may not be
amended, modified or supplemented except in accordance with the provisions of
the immediately preceding sentence. No course of dealing between or among any
Person having any interest in this Agreement will be deemed effective to modify,
amend or discharge any part of this Agreement or any rights or obligations of
any person under or by reason of this Agreement.
Section 4.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement
and all of the provisions hereof shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. The Investor
may assign its rights under this Agreement to any subsequent holder the
Registrable Securities, provided that the Company shall have the right to
require any holder of Registrable Securities to execute a counterpart of this
Agreement and agree to be bound by the provisions of this Agreement as a
condition to such holder's claim to any rights hereunder. This Agreement,
together with the Stock Purchase Agreement, the Warrants and the exhibits and
schedules to such agreements together set forth the entire agreement and
understanding between the parties as to the subject matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them.
Section 4.7. SEPARABILITY. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
Section 4.8. NOTICES. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and shall be (i) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (ii) delivered by reputable air courier
service with charges prepaid, or (iii) transmitted by hand delivery, telegram or
facsimile, addressed as set forth below or to such other address as such party
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier
15
<PAGE> 16
service, fully prepaid, addressed to such address, or upon actual receipt of
such mailing, whichever shall first occur. The addresses for such communications
shall be:
If to the Company:
Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, CA 91361
Attention: Frank W. Peters
Telephone: (805) 373-8688
Facsimile: (805) 373-7373
with a copy (which shall not constitute notice) to:
Haddan & Zepfel LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Attention: Robert J. Zepfel, Esq.
Telephone: (949) 752-6100
Facsimile: (949) 752-6161
if to the Investor:
Crescent International Ltd.
c/o GreenLight (Switzerland) SA
84, av Louis-Casai, P.O. Box 42
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
Facsimile: +41 22 929 53 94
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Sara Hanks, Esq./
Earl S. Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 4.8 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the
other party hereto.
Section 4.9. GOVERNING LAW. This Agreement shall be construed under the
laws of the State of New York, without giving effect to conflict of law
provisions.
16
<PAGE> 17
Section 4.10. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not constitute a part of this Agreement,
nor shall they affect their meaning, construction or effect.
Section 4.11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
Section 4.12. FURTHER ASSURANCES. Each party shall cooperate and take
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
Section 4.13. ABSENCE OF PRESUMPTION. This Agreement shall be construed
without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing any instrument to be
drafted.
Section 4.14. REMEDIES. In the event of a breach or a threatened breach
by any party to this Agreement of its obligations under this Agreement, any
party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement and
granted by law. The parties agree that the provisions of this Agreement shall be
specifically enforceable, it being agreed by the parties that the remedy at law,
including monetary damages, for breach of any such provision may be inadequate
compensation for any loss.
17
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed by the undersigned, thereunto duly authorized,
as of the date first set forth above.
Crescent International Ltd.
By: /s/ Maxi Brezzi /s/ Omar A. Ali
---------------------------------------
GreenLight (Switzerland) S.A.
as Investor's manager
Name:
Title:
Franklin Telecommunications Corp.
By: /s/ Thomas Russell
----------------------------------------
Name: Thomas Russell
Title: Chief Financial Officer
18
<PAGE> 1
EXHIBIT 10.6
AMENDMENT TO STOCK PURCHASE AGREEMENT
This is an amendment (the "Amendment"), dated September 15, 1999,
by and between CRESCENT INTERNATIONAL LIMITED (the "Investor"), an entity
organized and existing under the laws of Bermuda, and FRANKLIN
TELECOMMUNICATIONS CORP. (the "Company"), a corporation organized and existing
under the laws of the State of California, to the Stock Purchase Agreement (the
"Agreement"), dated August 30, 1999, by and between the Investor and the
Company. All capitalized terms used and not otherwise defined herein shall have
the same meanings as when used in the Agreement.
WHEREAS, pursuant to the terms of the Agreement, the Investor has
purchased and the Company has issued and sold $1,000,000 worth of Common Stock
through the Early Put;
WHEREAS, pursuant to the terms of this Amendment, the Investor
shall purchase and the Company shall issue and sell an additional $1,000,000
worth of Common Stock under the Early Put; and
NOW, THEREFORE, the parties agree as follows:
1. Section 2.1(c) of the Agreement is amended and restated in its entirety to
read as follows:
(c) Early Put. The Company shall issue and sell and the Investor
shall purchase, on the Subscription Date, shares of the Common Stock for
an Investment Amount of $1,000,000 at the Purchase Price on the
Subscription Date, and the Company shall issue and sell and the Investor
shall purchase, on September 15, 1999, shares of the Common Stock for an
Investment Amount of $1,000,000 at the Purchase Price on the
Subscription Date (all such shares in this Section 2.1(c) being referred
to herein as the "Early Put Shares"). For the purpose only of such Early
Put, the Investor waives the requirements of Section 2.2, and the
conditions set forth in paragraphs (a) and (b) of Section 7.2 hereof.
2. Section 2.4 of the Agreement is amended and restated in its entirety to read
as follows:
Section 2.4. Termination of Agreement and Investment Obligation.
The Company shall have the right to terminate this Agreement at any time
upon thirty (30) days' written notice to the Investor. The Investor
shall have the right to immediately terminate this Agreement (including
with respect to any Put, notice of which has been given but the
applicable Closing Date has not yet occurred) in accordance with Section
6.12 or in the event that: (i) the Registration Statement with respect
to shares of Common Stock purchased through the Early Put is not
effective within ninety-seven (97) days following the Subscription Date,
(ii) a Registration Statement with respect to shares of Common Stock
purchased through any subsequent Put is not effective within
ninety-seven (97) days following the applicable Closing Date, (iii)
there shall occur any stop order or suspension of the effectiveness of
the Registration Statement for an aggregate of thirty (30) Trading Days
during the Commitment Period, (iv) the Company shall
<PAGE> 2
at any time fail to comply with the requirements of Section 6.2, 6.3,
6.4, 6.5, 6.6, 6.8 or 6.9.
3. Section 7.2(a) of the Agreement is amended and restated in its entirety to
read as follows:
(a) Registration of the Registrable Securities with the SEC. As
set forth in the Registration Rights Agreement, the Company shall have
filed with the SEC either:
(i) a Registration Statement covering the resale of the
Common Stock purchased by the Investor through the Early
Put that shall have been declared effective by the SEC
in no event later than ninety-seven (97) days after the
Subscription Date, and a Registration Statement covering
the resale of the Common Stock purchased by the Investor
through all subsequent Puts that shall have been
declared effective by the SEC prior to any subsequent
Put; or
(ii) a Combined Registration Statement (as defined in
the Registration Rights Agreement) that shall have been
declared effective by the SEC in no event later than
ninety-seven (97) days after the Subscription Date.
IN WITNESS WHEREOF, this Amendment has been entered into on the
day and year first herein written.
CRESCENT INTERNATIONAL LIMITED
By: /s/ Maxi Brezzi /s/ Omar A. Ali
-------------------------------------
Name:
Title:
FRANKLIN TELECOMMUNICATIONS CORP.
By: Thomas Russell
-------------------------------------
Name: Thomas Russell
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 10.7
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
This is an amendment (the "Amendment"), dated September 15, 1999,
by and between CRESCENT INTERNATIONAL LIMITED (the "Investor"), an entity
organized and existing under the laws of Bermuda, and FRANKLIN
TELECOMMUNICATIONS CORP. (the "Company"), a corporation organized and existing
under the laws of the State of California, to the Registration Rights Agreement
(the "Agreement"), dated August 30, 1999, by and between the Investor and the
Company. All capitalized terms used and not otherwise defined herein shall have
the same meanings as when used in the Stock Purchase Agreement, dated August 30,
1999, by and between the Investor and the Company (the "Purchase Agreement").
WHEREAS, pursuant to the terms of the Purchase Agreement, the
Investor purchased and the Company issued and sold $1,000,000 worth of Common
Stock on the Subscription Date;
WHEREAS, pursuant to the terms of an amendment to the Purchase
Agreement dated as of the date hereof (the "Purchase Agreement Amendment"), the
Investor purchased and the Company issued and sold an additional $1,000,000
worth of Common Stock; and
WHEREAS, the Investor and the Company desire to extend the date
by which the Registrable Securities shall be registered for resale;
NOW, THEREFORE, the parties agree as follows:
1. Section 1.1(a) of the Agreement is amended and restated in its entirety to
read as follows:
a. Filing of Registration Statements. The Company shall register
for resale all Put Shares issued or issuable to the Investor pursuant to
the Stock Purchase Agreement and all Warrant Shares issued or issuable
upon full exercise of the Warrants. Subject to the terms and conditions
of this Agreement, the Company shall effect such registration in the
manner provided in either (i) or (ii) below.
The Company shall file with the SEC either:
(i) on or before September 22, 1999, a registration
statement (the "Initial Registration Statement") on such
form promulgated by the SEC for which the Company
qualifies, that counsel for the Company shall deem
appropriate and which form shall be available for the sale
of the shares of Common Stock purchased by the Investor
through the Early Put (the "Initial Shares"), the
Incentive Warrant Shares and the Early Put Warrant Shares.
The aggregate number of shares to be registered under the
Initial Registration Statement shall be equal to two
hundred percent (200%) of the Initial Shares, plus the
Incentive Warrant Shares. Prior to any subsequent put, the
Company shall file with the SEC a registration statement
(the "Subsequent Registration Statement" and together with
the Initial Registration Statement, the "Registration
Statements") on such form promulgated by the SEC for which
the Company qualifies, that counsel for the Company shall
deem appropriate and which form shall be available for the
sale of the shares of Common Stock to be purchased by
<PAGE> 2
the Investor and any Warrant Shares which have not
previously been registered. The aggregate number of
shares to be registered under the
<PAGE> 3
Subsequent Registration Statement shall be equal to 125%
of (X-Y)/Z, where X is the Maximum Commitment Amount, Y is
the Investment Amount of the Early Put and Z is 92% of the
Minimum Bid Price; or
(ii) on or before September 22, 1999, a registration
statement (the "Combined Registration Statement") on such
form promulgated by the SEC for which the Company
qualifies, that counsel for the Company shall deem
appropriate and which form shall be available for the sale
of all Put Shares issued or issuable pursuant to the terms
of the Stock Purchase Agreement and all Warrant Shares
issued or issuable upon full exercise of the Warrants. The
aggregate number of shares to be registered under the
Combined Registration Statement shall be equal to 125% of
(A/B)+C, where A is the Maximum Commitment Amount, B is
92% of the Minimum Bid Price and C is the number of
Incentive Warrant Shares.
2. Section 1.1(b) of the Agreement is amended and restated in its entirety to
read as follows:
b. Effectiveness of the Registration Statements. The Company
shall use its best efforts either: (i) to have the Initial Registration
Statement declared effective by the SEC in no event later than
ninety-seven (97) calendar days after the Subscription Date and to have
the Subsequent Registration Statement declared effective by the SEC in
no event later than 150 calendar days after the Subscription Date, or
(ii) to have the Combined Registration Statement declared effective by
the SEC in on event later than ninety-seven (97) calendar days after the
Subscription Date. The Company shall ensure that all Registration
Statements remain in effect for a period ending 180 days following the
earlier of termination of the Commitment Period and termination of the
Investor's obligations pursuant to Section 2.4 of the Stock Purchase
Agreement; provided that such period shall be extended one day for each
day after the applicable Effective Date, that any Registration Statement
covering shares purchased by the Investor is not effective during the
period such Registration Statement is required to be effective pursuant
to this Agreement; and provided further that the Company shall not be
required to ensure that any Registration Statement covering shares
purchased by the Investor remain in effect for such 180 day period if
the shares registered thereunder shall have become freely tradable
pursuant to Rule 144(k) of the Securities Act or have otherwise been
sold.
<PAGE> 4
IN WITNESS WHEREOF, this Amendment has been entered into on the day and
year first herein written.
CRESCENT INTERNATIONAL LIMITED
By: /s/ Maxi Brezzi /s/ Omar A. Ali
-------------------------------------
Name:
Title:
FRANKLIN TELECOMMUNICATIONS CORP.
By: Thomas Russell
-------------------------------------
Name: Thomas Russell
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 10.8
[LETTERHEAD OF FRANKLIN TELECOMMUNICATIONS CORP.]
Crescent International Limited
c/o Greenlight (Switzerland) SA
84, av Louis-Casai, P.O. Box 161
1216 Geneva, Cointrin
Switzerland
Ladies and Gentlemen:
Reference: is made to that certain Stock Purchase Agreement, dated as of August
30, 1999 (the "Agreement"), by and between Crescent International Ltd.
("Crescent") and Franklin Telecommunications Corp. Capitalized terms used in
this letter not otherwise defined have the same meanings as in the Agreement.
During the past several days you and we have had discussions regarding the
Agreement. Upon conclusion of these discussions you and we agreed to increase
the Investment Amount of the Early Put from $1,000,000 to $2,000,000. In
addition, we agreed to amend the Agreement and the Registration Rights Agreement
to extend the date by which the Registrable Securities shall be registered for
resale. Finally, you have agreed to deliver to us for cancellation the Early Put
Warrant issued on the Subscription Date on the condition that we issue to you an
Early Put Warrant in the form attached hereto as Exhibit A. Accordingly, upon
receipt of the Early Put Warrant issued on the Subscription Date, we will
immediately issue to you an Early Put Warrant in the form attached hereto as
Exhibit A.
<PAGE> 2
Kindly confirm that the foregoing accurately sets forth your understanding of
our agreement on the above-referenced matters by countersigning in the space
provided below.
Very truly yours,
FRANKLIN TELECOMMUNICATIONS CORP.
By: Thomas Russell
------------------------------------
Name: Thomas Russell
Title: Chief Financial Officer
AGREED AND ACCEPTED:
CRESCENT INTERNATIONAL LIMITED
By: /s/ Maxi Brezzi /s/ Omar A. Ali
------------------------------------
Name:
Title:
<PAGE> 3
EXHIBIT A
FORM OF EARLY PUT WARRANT
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A
TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE
COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF AUGUST 30,
1999, BETWEEN FRANKLIN TELECOMMUNICATIONS CORP. AND CRESCENT INTERNATIONAL
LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM FRANKLIN TELECOMMUNICATIONS CORP.'S
EXECUTIVE OFFICES.
August 30, 1999
Warrant to Purchase Shares of Common Stock of Franklin
Telecommunications Corp. (hereinafter an "Early Put Warrant"), up to a total
number determined in accordance with Section 2(b) hereof.
Franklin Telecommunications Corp., an entity organized and existing
under the laws of the State of California (the "Company"), hereby agrees that
Crescent International Ltd. (the "Investor") or any other Warrant Holder is
entitled, on the terms and conditions set forth below, to purchase from the
Company at any time during the Exercise Period up to a total number, determined
in accordance with Section 2(b) hereof, of fully paid and nonassessable shares
of Common Stock, no par value per share, of the Company (the "Common Stock"), as
the same may be adjusted from time to time pursuant to Section 7 hereof, at the
Exercise Price (hereinafter defined), as the same may be adjusted pursuant to
Section 7 hereof. The resale of the shares of Common Stock or other securities
issuable upon exercise or exchange of this Early Put Warrant is subject to the
provisions of the Registration Rights Agreement (as defined below).
Section 1. Definitions.
"Agreement" shall mean the Stock Purchase Agreement, dated the date hereof,
between the Company and the Investor.
"Capital Shares" shall mean the Common Stock and any shares of any other class
of common stock whether now or hereafter authorized, having the right to
participate in the distribution of earnings and assets of the Company.
<PAGE> 4
"Exercise Date" shall mean either (i) the date this Early Put Warrant, the
Exercise Notice and the Aggregate Exercise Price are received by the Company or
(ii) the date advanced copy of the Exercise Notice is sent by facsimile to the
Company, provided that this Early Put Warrant, the original Exercise Notice, and
the Aggregate Exercise Price are received by the Company within three (3)
business days thereafter. If this Early Put Warrant, the original Exercise
Notice and the Aggregate Exercise Price are not received within three (3)
business days in accordance with clause (ii) above, the Exercise Date shall be
the date this Incentive Warrant, the original Exercise Notice and the Aggregate
Exercise Price are received by the Company.
"Exercise Notice" shall mean the exercise form attached hereto as Exhibit A duly
executed by the Warrant Holder.
"Exercise Period" shall mean the period beginning on the Effective Date
applicable to the Put Closing and continuing until the two-year period
thereafter; provided that such period shall be extended one day for each day
after the applicable Effective Date, that the Registration Statement covering
(i) shares purchased by the Investor through the applicable Put and (ii) the
Early Put Warrant Shares related to such Put and purchasable by exercise of this
Early Put Warrant, is not effective during the period such Registration
Statement is required to be effective pursuant to the Registration Rights
Agreement.
"Exercise Price" as of the date hereof shall mean $0.01 per share of Common
Stock, subject to the adjustments provided for in Section 7 of this Early Put
Warrant.
"Per Share Early Put Warrant Value" shall mean the difference resulting from
subtracting the Exercise Price from the Bid Price of one share of Common Stock
on the Trading Day immediately preceding the Exercise Date.
"Put Closing" shall mean the closing of the purchase and sale of 966,184 shares
of Common Stock for an investment amount equal to $1,000,000 which occurred on
August 30, 1999, and the closing of the purchase and sale of 966,184 shares of
Common Stock for an investment amount equal to $1,000,000 which occurred on
September 14, 1999, for a total Investment Amount of $2,000,000.
"Registration Rights Agreement" shall mean the registration rights agreement,
dated the date hereof between the Company and the Investor.
"Subscription Date" shall mean the date on which the Agreement is executed and
delivered by the parties hereto.
"Warrant Holder" shall mean the Investor or any assignee or transferee of all or
any portion of this Early Put Warrant; and other capitalized terms used but not
defined herein shall have their respective meanings set
forth in the Agreement.
Section 2. Exercisability.
a. Timing. If the Purchase Price on the Effective Date applicable
to the Put Closing is lower than the Purchase Price on the Subscription Date
with respect to such Put, this Early Put Warrant shall become immediately
exercisable, subject to clause c. below.
<PAGE> 5
b. Number of Shares. The number of shares of Common Stock for
which this Early Put Warrant is exercisable (the "Early Put Warrant Shares")
shall be determined by subtracting (x) the Investment Amount divided by the
Purchase Price on the Subscription Date from (y) the Investment Amount divided
by the Purchase Price on the Effective Date applicable to the Put Closing.
c. Cash Payment in Lieu of Exercise. In the event that the
Investor gives notice of exercise of this Early Put Warrant (in whole or in
part) in accordance with Section 3 hereof, then the Company may, in lieu of
issuance of shares of Common Stock pursuant to such exercise, pay to the
Investor the Cash-Out Price (as defined below) for any or all of the shares of
Common Stock purchasable by the Investor through the exercise of this Early Put
Warrant. In the event that the Investor gives notice of exercise of this Early
Put Warrant (in whole or in part) in accordance with Section 3 hereof and the
number of Early Put Warrant Shares related to the Put Closing to be purchased
pursuant to such exercise exceeds the number of shares registered pursuant to
Section 1.1a. of the Registration Rights Agreement (the "Excess Shares"), then
the Company may, in lieu of issuance of shares of Common Stock pursuant to such
exercise, pay to the Investor the Cash-Out Price (as defined below) for any or
all of the Excess Shares.
d. Notice of Cash Payment in Lieu of Exercise. In the event that
the Company elects to pay cash in lieu of exercise for any Early Put Warrant
Shares or any Excess Shares in accordance with Section 2c. (the "Cash-Out
Option"), the Company shall promptly give notice to the Investor of such
election which notice shall be given no later than one business day following
notice of the Investor's intention to exercise this Early Put Warrant and which
notice shall set forth the number of shares of Common Stock for which the
Company elects the Cash-Out Option.
e. Method of Cash-Out; Effect of Cash-Out. In the event that the
Company chooses the Cash-Out Option, then in lieu of delivering stock
certificates as provided in Section 5 hereof, the Company shall deliver by wire
transfer of immediately available funds to an account designated by the Investor
as soon as practicable after the exercise of this Early Put Warrant (in full or
in part), and in any event within three (3) Trading Days thereafter, the
Cash-Out Price (as defined below) for any and all shares of Common Stock for
which the Company elects the Cash-Out Option.
"Cash-Out Price" shall mean the product of (x) the Bid
Price of one share of Common Stock on the Trading Day immediately preceding the
Exercise Date multiplied by (y) the number of shares of Common Stock for which
the Company proposes to pay cash in lieu of exercise pursuant to Section 2c.
Section 3. Exercise; Cashless Exercise.
a. Method of Exercise. This Early Put Warrant may be exercised in
whole or in part (but not as to a fractional share of Common Stock), at any time
and from time to time during the Exercise Period, by the Warrant Holder by (i)
the surrender of this Early Put Warrant, the Exercise Notice and the Aggregate
Exercise Price to the Company at the address set forth in Section 14 hereof or
(ii) the delivery by facsimile of an executed and completed Exercise Notice to
the Company and delivery to the Company within three (3) business days
thereafter of this Early Put Warrant, the original Exercise Notice and the
Aggregate Exercise Price.
<PAGE> 6
b. Payment of Aggregate Exercise Price. Subject to paragraph (c)
below, payment of the Aggregate Exercise Price shall be made by check or bank
draft payable to the order of the Company or by wire transfer to an account
designated by the Company. If the amount of the payment received by the Company
is less than the Aggregate Exercise Price, the Warrant Holder will be notified
of the deficiency and shall make payment in that amount within five (5) business
days of such notice. In the event the payment exceeds the Aggregate Exercise
Price, the Company will refund the excess to the Warrant Holder within three (3)
business days of both the receipt of such payment and the knowledge of such
excess.
c. Cashless Exercise. As an alternative to payment of the
Aggregate Exercise Price in accordance with Section 3b. above, the Warrant
Holder may elect to effect a cashless exercise by so indicating on the Exercise
Notice and including a calculation of the number of shares of Common Stock to be
issued upon such exercise in accordance with the terms hereof (a "Cashless
Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall
surrender this Early Put Warrant for that number of shares of Common Stock
determined by (i) multiplying the number of Early Put Warrant Shares for which
this Early Put Warrant is being exercised by the Per Share Early Put Warrant
Value and (ii) dividing the product by the Bid Price of one share of the Common
Stock on the Trading Day immediately preceding the Exercise Date.
d. Replacement Early Put Warrant. In the event that the Early Put
Warrant is not exercised in full, the number of Early Put Warrant Shares shall
be reduced by the number of such Early Put Warrant Shares for which this Early
Put Warrant is exercised, and the Company, at its expense, shall forthwith issue
and deliver to the Warrant Holder a new Early Put Warrant of like tenor in the
name of the Warrant Holder or as the Warrant Holder may request, reflecting such
adjusted number of Early Put Warrant Shares.
Section 4. Five Percent Limitation. The Warrant Holder may not exercise
this Early Put Warrant such that the number of Early Put Warrant Shares to be
received pursuant to such exercise aggregated with all other shares of Common
Stock then owned by the Warrant Holder beneficially or deemed beneficially owned
by the Warrant Holder would result in the Warrant Holder owning more than 4.9%
of all of such Common Stock as would be outstanding on such Exercise Date, as
determined in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder. As of any date prior to the Exercise
Date, the aggregate number of shares of Common Stock into which this Early Put
Warrant is exercisable, together with all other shares of Common Stock then
beneficially owned (as such term is defined in Rule 13(d) under the Exchange
Act) by such Warrant Holder and its affiliates, shall not exceed 4.9% of the
total outstanding shares of Common Stock as of such date.
Section 5. Delivery of Stock Certificates.
a. Subject to the terms and conditions of this Early Put Warrant,
as soon as practicable after the exercise of this Early Put Warrant in full or
in part, and in any event within five (5) Trading Days thereafter, the Company
at its expense (including, without limitation, the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate
or certificates for the number of validly issued, fully paid and non-assessable
Early Put Warrant Shares to
<PAGE> 7
which the Warrant Holder shall be entitled on such exercise, together with any
other stock or other securities or property (including cash, where applicable)
to which the Warrant Holder is entitled upon such exercise in accordance with
the provisions hereof; provided, however, that any such delivery to a location
outside of the United States shall also be made within five (5) Trading Days
after the exercise of this Early Put Warrant in full or in part.
b. This Early Put Warrant may not be exercised as to fractional
shares of Common Stock. In the event that the exercise of this Early Put
Warrant, in full or in part, would result in the issuance of any fractional
share of Common Stock, then in such event the Warrant Holder shall receive in
cash an amount equal to the Bid Price of such fractional share within five (5)
Trading Days.
Section 6. Representations, Additional Warranties and Covenants of the
Company.
a. The Company shall take all necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation for the
legal and valid issuance of this Early Put Warrant and the Early Put Warrant
Shares to the Warrant Holder.
b. At all times during the Exercise Period, the Company shall
take all steps reasonably necessary and within its control to insure that the
Common Stock remains listed or quoted on the Principal Market.
c. The Early Put Warrant Shares, when issued in accordance with
the terms hereof, will be duly authorized and, when paid for or issued in
accordance with the terms hereof, shall be validly issued, fully paid and
non-assessable.
d. The Company has authorized and reserved for issuance to the
Warrant Holder the requisite number of shares of Common Stock to be issued
pursuant to this Early Put Warrant. The Company shall at all times reserve and
keep available, solely for issuance and delivery as Early Put Warrant Shares
hereunder, such shares of Common Stock as shall from time to time be issuable as
Early Put Warrant Shares.
Section 7. Adjustment of the Exercise Price. The Exercise Price and,
accordingly, the number of Early Put Warrant Shares issuable upon exercise of
the Early Put Warrant, shall be subject to adjustment from time to time upon the
happening of certain events as follows:
a. Reclassification, Consolidation, Merger or Mandatory Share
Exchange. If the Company, at any time (a) between the Subscription Date and the
Effective Date applicable to the Early Put or (b) between each subsequent
issuance of a Put Notice by the Company and the applicable Effective Date
therefor (i) reclassifies or changes its Outstanding Capital Shares or (ii)
consolidates, merges or effects a mandatory share exchange with or into another
corporation (other than a merger or mandatory share exchange with another
corporation in which the Company is a continuing corporation and that does not
result in any reclassification or change, or as a result of a subdivision or
combination of Outstanding Capital Shares issuable upon exercise of this Early
Put Warrant), then in any such event the Company, or such successor or
purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefore, amend this Early Put Warrant or issue a new
warrant providing that the Warrant Holder shall have rights not less favorable
to the holder than those then applicable to this Early Put Warrant
<PAGE> 8
and to receive upon exercise under such amendment of this Early Put Warrant or
new warrant, in lieu of each share of Common Stock theretofore issuable upon
exercise of this Early Put Warrant hereunder, the kind and amount of shares of
stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one share of Common Stock issuable upon exercise of
this Early Put Warrant had this Early Put Warrant been exercised immediately
prior to such reclassification, change, consolidation, merger, mandatory share
exchange or sale or transfer. Such amended warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 7. The provisions of this Section 7a. shall
similarly apply to successive reclassifications, changes, consolidations,
mergers, mandatory share exchanges and sales and transfers.
b. Subdivision or Combination of Shares. If the Company, at any
time (a) between the Subscription Date and the Effective Date applicable to the
first Put or (b) between each subsequent issuance of a Put Notice by the Company
and the applicable Effective Date therefor, shall subdivide its Common Stock,
the number of shares of Common Stock issuable to the Investor hereunder shall be
proportionately increased as of the effective date of such subdivision, or, if
the Company shall take a record of holders of its Common Stock for the purpose
of so subdividing, as of such record date, whichever is earlier. If the Company,
at any time (a) between the Subscription Date and the Effective Date applicable
to the first Put or (b) between each subsequent issuance of a Put Notice by the
Company and the applicable Effective Date therefor, shall combine its Common
Stock, the number of shares of Common Stock issuable to the Investor hereunder
shall be proportionately decreased as of the effective date of such combination,
or, if the Company shall take a record of holders of its Common Stock for the
purpose of so combining, as of such record date, whichever is earlier.
c. Stock Dividends. If the Company, at any time while this Early
Put Warrant is unexpired and not exercised in full, shall pay a dividend in its
Capital Shares, or make any other distribution of its Capital Shares, then the
Exercise Price shall be adjusted, as of the date the Company shall take a record
of the holders of its Capital Shares for the purpose of receiving such dividend
or other distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying the
Exercise Price in effect immediately prior to such payment or other distribution
by a fraction:
(i) the numerator of which shall be the total number of
Outstanding Capital Shares immediately prior to such dividend or distribution,
and
(ii) the denominator of which shall be the total number of
Outstanding Capital Shares immediately after such dividend or distribution. The
provisions of this subsection c. shall not apply under any of the circumstances
for which an adjustment is provided in subsections a. or b.
d. Adjustment of Number of Shares. Upon each adjustment of the
Exercise Price pursuant to any provisions of this Section 7, the number of Early
Put Warrant Shares issuable hereunder at the option of the Warrant Holder shall
be calculated, to the nearest one hundredth of a whole share, multiplying the
number of Early Put Warrant Shares issuable prior to an adjustment by a
fraction:
<PAGE> 9
(i) the numerator of which shall be the Exercise Price
before any adjustment pursuant to this Section 7; and
(ii) the denominator of which shall be the Exercise Price
after such adjustment.
e. Liquidating Dividends, Etc. If the Company, at any time while
this Early Put Warrant is unexpired and not exercised in full, makes a
distribution of its assets or evidences of indebtedness to the holders of its
Capital Shares as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's assets (other
than under the circumstances provided for in the foregoing subsections a.
through g.) while an exercise is pending, then the Warrant Holder shall be
entitled to receive upon such exercise of the Early Put Warrant in addition to
the Early Put Warrant Shares receivable in connection therewith, and without
payment of any consideration other than the Exercise Price, an amount in cash
equal to the value of such distribution per Capital Share multiplied by the
number of Early Put Warrant Shares that, on the record date for such
distribution, are issuable upon such exercise of the Early Put Warrant (with no
further adjustment being made following any event which causes a subsequent
adjustment in the number of Early Put Warrant Shares issuable), and an
appropriate provision therefor shall be made a part of any such distribution.
The value of a distribution that is paid in other than cash shall be determined
in good faith by the Board of Directors of the Company.
f. Other Provisions Applicable to Adjustments Under this Section.
The following provisions will be applicable to the making of adjustments in any
Exercise Price hereinabove provided in this Section 7:
(i) Other Action Affecting Capital Shares. In case after
the date hereof the Company shall take any action affecting the number of
Outstanding Capital Shares, other than an action described in any of the
foregoing subsections a. through e. hereof, inclusive, which in the opinion of
the Company's Board of Directors would have a materially adverse effect upon the
rights of the Warrant Holder at the time of exercise of the Early Put Warrant,
the Exercise Price shall be adjusted in such manner and at such time as the
Board of Directors on the advice of the Company's independent public accountants
may in good faith determine to be equitable in the circumstances.
(ii) Notice of Certain Actions. In the event the Company
shall, at a time while the Incentive Warrant is unexpired and outstanding, take
any action which pursuant to subsections a. through e. of this Section 7 may
result in an adjustment of the Exercise Price, the Company shall give to the
Warrant Holder at its last address known to the Company written notice of such
action ten (10) days in advance of its effective date in order to afford to the
Warrant Holder an opportunity to exercise the Incentive Warrant prior to such
action becoming effective.
(iii) Notice of Adjustments. Whenever the Exercise Price
or number of Incentive Warrant Shares shall be adjusted pursuant to Section 7
hereof, the Company shall promptly make a certificate signed by its President or
a Vice President and by its Treasurer or
<PAGE> 10
Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in
reasonable detail the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Company's Board of Directors made any
determination hereunder), and the Exercise Price and number of Incentive Warrant
Shares purchasable at that Exercise Price after giving effect to such
adjustment, and shall promptly cause copies of such certificate to be mailed (by
first class and postage prepaid) to the Holder of the Incentive Warrant.
Section 8. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or By-Laws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Early Put Warrant, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Warrant Holder against impairment. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any Early Put
Warrant Shares above the amount payable therefor on such exercise, and (b) will
take all such action as may be reasonably necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable Early Put
Warrant Shares on the exercise of this Early Put Warrant.
Section 9. Rights As Stockholder. Prior to exercise of this Early Put
Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder
of the Company with respect to the Early Put Warrant Shares, including (without
limitation) the right to vote such shares, receive dividends or other
distributions thereon or be notified of stockholder meetings. However, in the
event of any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, the
Company shall mail to each Warrant Holder, at least ten (10) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
Section 10. Replacement of Early Put Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of the Early Put Warrant and, in the case of any such loss, theft or
destruction of the Early Put Warrant, upon delivery of an indemnity agreement or
security reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, on surrender and cancellation of such Early Put
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Early Put Warrant of like tenor.
Section 11. Choice of Law. This Agreement shall be construed under the
laws of the State of New York, without giving effect to conflict of law
provisions.
Section 12. Entire Agreement; Amendments. This Early Put Warrant, the
Incentive Warrant, the Registration Rights Agreement, and the Agreement contain
the entire understanding of the parties with respect to the matters covered
hereby and thereby. No provision of this Early
<PAGE> 11
Put Warrant may be waived or amended other than by a written instrument signed
by the party against whom enforcement of any such amendment or waiver is sought.
Section 13. Restricted Securities.
a. Registration or Exemption Required. This Early Put Warrant has
been issued in a transaction exempt from the registration requirements of the
Securities Act in reliance upon the provisions of Section 4(2) promulgated by
the SEC under the Securities Act. This Early Put Warrant and the Early Put
Warrant Shares issuable upon exercise of this Early Put Warrant may not be
resold except pursuant to an effective registration statement or an exemption to
the registration requirements of the Securities Act and applicable state laws.
b. Legend. Any replacement Early Put Warrants issued pursuant to
Section 2 hereof and any Early Put Warrant Shares issued upon exercise hereof,
shall bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND
HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION
WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN
OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE
AGREEMENT, DATED AS OF August 30, 1999, BETWEEN FRANKLIN
TELECOMMUNICATIONS CORP. AND CRESCENT INTERNATIONAL LTD. A COPY
OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM THE FRANKLIN TELECOMMUNICATIONS
CORP.'S EXECUTIVE OFFICES."
Removal of such legend shall be in accordance with the legend removal
provisions in the Agreement.
c. No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 13b. has been or shall be placed on the
share certificates representing the Early Put Warrant Shares and no instructions
or "stop transfer orders," so called, "stock transfer restrictions" or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Section 13.
<PAGE> 12
d. Assignment. Assuming the conditions of Section 13a. above
regarding registration or exemption have been satisfied, the Warrant Holder may
sell, transfer, assign, pledge or otherwise dispose of this Early Put Warrant,
in whole or in part. The Warrant Holder shall deliver a written notice to the
Company substantially in the form of the assignment form attached hereto as
Exhibit B (the "Assignment Notice"), indicating the person or persons to whom
this Early Put Warrant shall be assigned and the respective number of warrants
to be assigned to each assignee. The Company shall effect the assignment within
ten (10) days of receipt of such Assignment Notice, and shall deliver to the
assignee(s) designated by the Warrant Holder a Early Put Warrant or Early Put
Warrants of like tenor and terms for the specified number of shares.
e. Investor's Compliance. Nothing in this Section 13 shall affect
in any way the Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
Section 14. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile (with accurate confirmation generated by the transmitting facsimile
machine) at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
<PAGE> 13
if to the Company:
Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, CA 91361
Attention: Frank W. Peters
Telephone: (805) 373-8688
Facsimile: (805) 373-7373
with a copy (which shall not constitute notice) to:
Hadden & Zepfel LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Attention: Robert J. Zepfel, Esq.
Telephone: (949) 752-6100
Facsimile: (949) 752-6161
if to the Investor:
Crescent International Ltd.
c/o GreenLight (Switzerland) SA
84, av Louis-Casai, P.O. Box 42
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
Facsimile: +41 22 929 53 94
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 14 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto.
Section 15. Miscellaneous. This Early Put Warrant and any term hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. The headings in this Early Put Warrant are
for purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
<PAGE> 14
IN WITNESS WHEREOF, this Early Put Warrant was duly executed by the undersigned,
thereunto duly authorized, as of the date first set forth above.
Franklin Telecommunications Corp.
By:________________________________
Name:
Title:
Attested:
By:________________________________
Name:
Title: Secretary
<PAGE> 15
EXHIBIT A TO THE EARLY PUT WARRANT
EXERCISE FORM
Franklin Telecommunications Corp.
The undersigned (the "Registered Holder") hereby irrevocably exercises
the right to purchase __________________ shares of Common Stock of Franklin
Telecommunications Corp., an entity organized and existing under the laws of the
State of California (the "Company"), evidenced by the attached Early Put
Warrant, and herewith makes payment of the Exercise Price with respect to such
shares in full in the form of (check the appropriate box) (i) Ycash or certified
check in the amount of $________; (ii) Ywire transfer to the Company's account
at __________________, _________, _________ (Account No.:_________); or (iii)
Y______ Early Put Warrant Shares, which represent the amount of Early Put
Warrant Shares as provided in the attached Early Put Warrant to be canceled in
connection with such exercise, all in accordance with the conditions and
provisions of said Early Put Warrant.
The undersigned requests that stock certificates for such Early Put
Warrant Shares be issued, and a Early Put Warrant representing any unexercised
portion hereof be issued, pursuant to this Early Put Warrant in the name of the
Registered Holder and delivered to the undersigned at the address set forth
below.
Dated:____________________________________
__________________________________________
Signature of Registered Holder
__________________________________________
Name of Registered Holder (Print)
__________________________________________
Address
<PAGE> 16
NOTICE
The signature to the foregoing Exercise Form must correspond to
the name as written upon the face of the attached Early Put Warrant in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE> 17
EXHIBIT B TO THE EARLY PUT WARRANT
ASSIGNMENT
(To be executed by the registered Warrant Holder (the "Registered
Holder") desiring to transfer the Early Put Warrant, in whole or in part.)
FOR VALUED RECEIVED, the undersigned Warrant Holder of the
attached Early Put Warrant hereby sells, assigns or transfers unto the person(s)
named below (the "Assignee") the right to purchase ______________ shares of the
Common Stock of Franklin Telecommunications Corp. evidenced by the attached
Early Put Warrant and does hereby irrevocably constitute and appoint
______________________ (attorney) to transfer the number of shares specified of
the said Early Put Warrant on the books of the Company, with full power of
substitution in the premises.
The undersigned requests that such Early Put Warrant be issued,
and a Early Put Warrant representing any unsold, unassigned or non-transferred
portion hereof be issued, pursuant to this Early Put Warrant in the name of the
Registered Holder and delivered to the undersigned at the address set forth
below.
Dated:_________________________________________
_______________________________________________
Signature of Registered Holder
_______________________________________________
Name of Registered Holder (Print)
_______________________________________________
Address of Registered Holder
_______________________________________________
Name of Assignee (Print)
_______________________________________________
Address of Assignee (including zip code number)
<PAGE> 18
NOTICE
The signature to the foregoing Assignment must correspond to the
name as written upon the face of the attached Early Put Warrant in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report, dated August 23, 1999, which appears in the
Annual Report on Form 10-K of Franklin Telecommunications Corp. and subsidiaries
for the year ended June 30, 1999. We also consent to the reference to our Firm
under the caption "Experts" in the aforementioned Registration Statement.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
September 22, 1999
