<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FRANKLIN TELECOMMUNICATIONS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3670 95-3733534
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================
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
-------------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Common Stock 4,091,033(1) $2.00 $8,182,066 $2,160.22
</TABLE>
<PAGE> 2
(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 warrant 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.
<PAGE> 3
PROSPECTUS
4,091,033 SHARES
FRANKLIN TELECOMMUNICATIONS CORP.
COMMON STOCK
These shares of common stock are being offered by Strong River
Investments, Inc. ("Strong River"). The shares are issuable upon conversion of
convertible promissory notes and upon exercise of a Warrant issued by the
Company in December 1999.
Strong River and its assignees (the "Selling Shareholders") 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 Shareholders' possible methods of sale, you should refer to the section
of this prospectus entitled "Plan of Distribution." The Selling Shareholders may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with the sale of their 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."
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 MARCH , 2000.
<PAGE> 4
You should rely only on information contained or incorporated by
reference in this prospectus. See "Information Incorporated by Reference" on
page 12. Neither we nor the Selling Shareholders 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. 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.
THE 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 the 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 the last three fiscal
years, and have a significant accumulated deficit. Our operating losses have
resulted from a number of factors, including reduced demand for 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 the 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 the shares is highly speculative and we
cannot assure you that you will realize any return on your investment or that
you will not lose your entire investment.
THE ARRANGEMENTS WITH THE SELLING SHAREHOLDERS COULD CAUSE DILUTION OF EXISTING
SHAREHOLDERS
As described in "The Selling Shareholders," we issued $2,500,000 in
Convertible Promissory Notes and a Warrant to purchase 1,000,000 shares of
Common Stock to Strong River in December of 1999. The Convertible Notes are
convertible into Common Stock at a conversion price equal to the lower of (i)
2.50 per share, or (ii) 92% of the average of the three lowest closing bid
prices of the Common Stock on the twenty-two trading days preceding the date of
conversion.
In addition to the built-in discount, the transaction may be dilutive of
existing shareholders if the market price of the Common Stock decreases, because
the conversion price of the Convertible
4
<PAGE> 5
Promissory Notes decreases as well. For example, if the average of the three
lowest closing bid prices during the testing period at a time of conversion is
$2.00 per share, the conversion price per share would be $1.84 per share.
The warrant is a three-year warrant that permits the Selling
Shareholders to purchase up to 1,000,000 shares at an exercise price of $2.50
per share. The exercise price is subject to adjustment on May 3, 2000 if the
closing sales price is lower than $2.50 per share on that date. In such event,
the exercise price is reduced to the lower of (i) 110% of the closing sales
price on May 3, 2000, or (ii) $2.50 per share, but no lower than $1.50 per
share. However, under the terms of the Convertible Notes, they may not be
converted to acquire shares to the extent the exercise would result in the
Selling Shareholders beneficially owning more than 4.999% of the outstanding
shares, although this may be waived by the Selling Shareholders.
The issuance of these shares of Common Stock, as well as subsequent
sales of shares of Common Stock in the open market, may cause the market price
of the Common Stock to fall and might impair our ability to raise additional
capital through sales of equity or equity-related securities.
OUR SUBSIDIARY, FNET, POSES CERTAIN RISKS.
Several years 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 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
Shareholders. While we may receive cash from the exercise of warrants covered by
this Prospectus, we can't be sure that we will
5
<PAGE> 6
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 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. The business could
be severely impacted if the Company 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.
6
<PAGE> 7
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
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
systemwide 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
7
<PAGE> 8
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 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 ITS 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
our 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
8
<PAGE> 9
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, US West and
BellSouth, advised Internet telephony providers that the regional companies
would impose access charges on Internet telephony traffic. In addition, US 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, US 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 the Company's
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 the Company's business. Many of our competitors are 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
9
<PAGE> 10
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 us.
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 of 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 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.
THE SELLING SHAREHOLDERS
In December of 1999 the Company entered into a Convertible Note Purchase
Agreement with Strong River Investments, Inc., a British Virgin Islands-based
investment company. Under the Convertible Note Purchase Agreement, the Company
issued $2,500,000 of Convertible Notes, and a Warrant to Purchase 1,000,000
shares of Common Stock. The Convertible Notes are convertible into Common Stock,
commencing on May 3, 2000, at a conversion price equal to the lower of (i) 2.50
per share, or (ii) 92% of the average of the three lowest closing bid prices of
the Common Stock on the twenty-two trading days preceding the date of
conversion. If the Company prepays the Convertible Notes on or before May 3,
2000, the Notes do not become convertible. If the Convertible Notes are
outstanding on December 3, 2002, they automatically convert into Common Stock in
accordance with the formula described above.
Interest on the Notes is payable quarterly, and may be paid, at the
option of the Company, in cash or in newly issued shares
The warrant is a three-year warrant that permits Strong River to
purchase up to 1,000,000 shares
The Selling Shareholders, together with any affiliate thereof, may not
beneficially own shares of Common Stock in excess of 4.999% of the outstanding
shares of Common Stock following a conversion of notes and exercise of warrants.
Such restrictions may be waived by a Selling Shareholder as to itself upon not
less than 61 days' notice to the Company.
10
<PAGE> 11
at an exercise price of $2.50 per share. The exercise price is subject to
adjustment on May 3, 2000 if the closing sales price is lower than $2.50 per
share on that date. In such event, the exercise price is reduced to the lower of
(i) 110% of the closing sales price on May 3, 2000, or (ii) $2.50 per share, but
no lower than $1.50 per share. However, under the terms of the Convertible
Notes, they may not be converted to acquire shares to the extent the exercise
would result in the Selling Shareholders beneficially owning more than 4.9% of
the outstanding shares, although this may be waived by the Selling Shareholder.
The Company is required to register the resale of all of the shares
issuable upon conversion of the Convertible Promissory Notes, as well as the
shares issuable upon exercise of the Warrants.
Strong River Investments, Inc. purchased an aggregate of $2.5 million of
convertible notes and warrants from the Company in a private placement
transaction which closed on December 3, 1999. As part of that private placement,
Strong River was issued notes that may be converted into our Common Stock and
warrants to acquire our Common Stock. The notes and the warrants are described
in more detail in pages 10 and 11 of this Prospectus. Holders of the notes and
warrants are prohibited from using them to convert into and acquire shares of
our Common Stock to the extent that such conversion or acquisition would result
in such holder, together with any affiliate thereof, beneficially owning in
excess of 4.999% of the outstanding shares of our Common Stock following such
conversion or acquisition. This restriction may be waived by the holder on not
less than 61 days' notice to the Company. Since the number of shares of our
Common Stock issuable upon conversion of the notes will change based upon
fluctuations of the market price of our Common Stock prior to a conversion, the
actual number of shares of our Common Stock that will be issued under the notes,
and consequently the number of shares of our Common Stock that will be
beneficially owned by Strong River, cannot be determined at this time. Because
of this fluctuating characteristic, we have agreed to register a number of
shares of our Common Stock that exceeds the number of shares beneficially owned
by Strong River. The number of shares of our Common Stock listed in the table
below as being beneficially owned by Strong River includes the shares of our
Common Stock that are issuable to them, subject to the 4.999% limitation, upon
conversion of their notes and exercise of their warrants. However, the 4.999%
limitation would not prevent Strong River from acquiring and selling in excess
of 4.999% of our Common Stock through a series of conversions and sales under
the registration statement and acquisitions and sales under the warrants.
The following table sets forth certain information as of December 31,
2000, regarding the beneficial ownership of the Common Stock by the Selling
Shareholders and as adjusted to give effect to the sale of the shares offered in
this prospectus.
<TABLE>
<CAPTION>
Shares Owned Prior Shares Owned
To Offering (1) After Offering(1)
------------------ -----------------
Selling Shares
Shareholder Number Percentage Offered (1) Number Percentage
----------- ------ ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Strong River
Investments, Inc. 4,091,033 14.08% 4,091,033 -0- -0-
</TABLE>
- -------------------
(1) The number of shares is an estimated one, based on 175% of 1,766,304
shares of Common Stock issuable upon conversion of the Convertible
Promissory Notes, including all interest for the term of the Notes, plus
1,000,000 shares issuable upon exercise of the Warrant.
The Selling Shareholders 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 Selling Shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Shareholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o broker-dealers may agree with the Selling Shareholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
11
<PAGE> 12
The Selling Shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Subject to certain limitations described in the Convertible Note
Purchase Agreement, the Selling Shareholders may also engage in short sales
against the box, puts and calls and other transactions in securities of the
Company or derivatives of Company securities and may sell or deliver shares in
connection with these trades. The Selling Shareholders may pledge their shares
to their brokers under the margin provisions of customer agreements. If a
Selling Stockholder defaults on a margin loan, the broker may, from time to
time, offer and sell the pledged shares.
Broker-dealers engaged by the Selling Shareholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Shareholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Shareholders. The Company has agreed to indemnify the Selling
Shareholders against certain losses, claims, damages and 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 Shareholders 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;
(2) Our Quarterly Reports on Form 10-Q for the three months ended
September 30, 1999
12
<PAGE> 13
and December 31, 1999; and
(3) 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.
13
<PAGE> 14
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 .............................. 4
The Business ............................................ 4
Risk Factors ............................................ 4
The Selling Shareholders ................................ 10
Plan of Distribution .................................... 11
Information Incorporated by Reference
and Other Available Information ........................ 12
Experts ................................................. 13
Legal Matters ........................................... 13
</TABLE>
4,091,033 SHARES
COMMON STOCK
FRANKLIN TELECOMMUNICATIONS CORP.
PROSPECTUS
MARCH , 2000
<PAGE> 15
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........................... $ 3,000
Registration fee............................................ 2,160
Legal fees and expenses..................................... 4,500
Accounting fees and expenses................................ 2,000
Transfer Agent fees......................................... 300
Miscellaneous............................................... 540
-------
Total............................................. $12,500
=======
</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.
10.2 Convertible Note Purchase Agreement, dated December 3, 1999,
between Registrant and Strong River Investments, Inc.
10.3 Warrant, dated December 3, 1999, issued to Strong River
Investments, Inc.
10.4 Registration Rights Agreement, dated December 3, 2000, between
the Registrant and Strong River Investments, Inc.
10.5 Form of 10% Convertible Note
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> 16
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.
(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.
<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 March 3,
2000.
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 March 3, 2000
- ---------------------------------------- Director
Frank W. Peters
(2) Principal Financial and Accounting
Officer
/s/ THOMAS RUSSELL Chief Financial Officer and a March 3, 2000
- ----------------------------------------- Director
Thomas Russell
(3) Directors
/s/ ROBERT S. HARP Director March 3, 2000
- ------------------------------------------
Robert S. Harp
/s/ HERB MITCHELL Director March 3, 2000
- ------------------------------------------
Herb Mitchell
</TABLE>
<PAGE> 18
EXHIBIT LIST
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.
10.2 Convertible Note Purchase Agreement, dated December 3, 1999,
between Registrant and Strong River Investments, Inc.
10.3 Warrant, dated December 3, 1999, issued to Strong River
Investments, Inc.
10.4 Registration Rights Agreement, dated December 3, 2000, between
the Registrant and Strong River Investments, Inc.
10.5 Form of 10% Convertible Note
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]
March 3, 2000
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 4,091,033
shares of the Company's Common Stock, without par value (the "Shares"), for
issuance upon conversion of its 10% Convertible Notes pursuant to a Convertible
Note Purchase Agreement, dated as of December 3, 1999 between the Company and
(the "Convertible Note Purchase Agreement"), and upon exercise of a Warrant
issued pursuant to the Convertible Note Purchase Agreement (the "Warrant").
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 Convertible Note Purchase
Agreement, the form of 10% Convertible Note, the Warrant, 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 upon conversion of the 10%
Convertible Notes in accordance with the Convertible Note Purchase Agreement,
and issuable upon exercise of the Warrant, 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
CONVERTIBLE NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of
December 3, 1999, among Franklin Telecommunications Corp., a California
corporation (the "Company"), and the investors signatory hereto on the date
hereof (each such investor is a "Purchaser" and all such investors are,
collectively, the "Purchasers").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchasers and the
Purchasers, severally and not jointly, desire to purchase from the Company, an
aggregate principal amount of $2,500,000 of the Company's 10% Convertible Notes,
due December 3, 2001 , which shall be in the form of Exhibit A (the "Notes") and
which are convertible into shares of the Company's common stock, no par value
per share (the "Common Stock") subject to conditions set forth therein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy are hereby acknowledged, the Company and the Purchasers agree as
follows:
ARTICLE I
PURCHASE AND SALE
1.1 The Closing.
(a) The Closing. (i) Subject to the terms and conditions set forth
in this Agreement, the Company shall issue and sell to the Purchasers and the
Purchasers shall, severally and not jointly, purchase from the Company the Notes
for an aggregate purchase price of $2,500,000. The closing of the purchase and
sale of the Notes (the "Closing") shall take place at the offices of Robinson
Silverman Pearce Aronsohn & Berman LLP ("Robinson Silverman"), 1290 Avenue of
the Americas, New York, New York 10104, immediately following the execution
hereof or such later date as the parties shall agree. The date of the Closing is
hereinafter referred to as the "Closing Date."
(ii) At the Closing, the parties shall deliver or shall cause to
be delivered the following: (A) the Company shall deliver to each Purchaser (1)
the Notes in the aggregate principal amount indicated below such Purchaser's
name on the signature page to this Agreement, registered in the name of such
Purchaser, (2) a Common Stock purchase warrant, in the form of Exhibit B,
registered in the name of such Purchaser, pursuant to which such Purchaser shall
have the right to acquire the number of shares of Common Stock indicated below
such Purchaser's name on the signature page to this Agreement, upon the terms as
set forth therein (collectively, the "Warrants"), (3) the legal opinion of
Haddan & Zepfel LLP outside counsel to the Company, in the form of Exhibit C,
and (4) all other documents, instruments and writings required to be delivered
at or prior to the Closing by the Company pursuant to this Agreement, including
an executed Registration Rights Agreement, dated the date hereof, among the
Company and the Purchasers, in the form of Exhibit D (the "Registration Rights
Agreement"), and the Irrevocable Transfer Agent
1
<PAGE> 2
Instructions, in the form of Exhibit E, delivered to and acknowledged by the
Company's transfer agent (the "Transfer Agent Instructions"); and (B) each
Purchaser shall deliver to the Company (1) the purchase price indicated below
such Purchaser's name on the signature page to this Agreement in United States
dollars in immediately available funds by wire transfer to an account designated
in writing by the Company for such purpose, and (2) all documents, instruments
and writings required to have been delivered at or prior to the Closing Date by
such Purchaser pursuant to this Agreement, including an executed Registration
Rights Agreement.
1.2 Certain Defined Terms. For purposes of this Agreement, "Conversion
Price", "Original Issue Date", "Trading Day" and "Per Share Market Value" shall
have the meanings set forth in Exhibit A and "Business Day" shall mean any day
except Saturday, Sunday and any day which shall be a federal legal holiday or a
day on which banking institutions in the State of New York and the State of
California generally are authorized or required by law or other governmental
action to close. A "Person" means an individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or subdivision
thereof) or other entity of any kind.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company . The
Company hereby makes the following representations and warranties to the
Purchasers:
(a) Organization and Qualification. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of California, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in Schedule
2.1(a) (collectively, the "Subsidiaries"). Each of the Subsidiaries is an entity
duly (incorporated or otherwise), organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted. Each
of the Company and the Subsidiaries is duly qualified to do business and is in
good standing as a foreign corporation or other entity in each jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of the Securities (as
defined below) or any of this Agreement, the Registration Rights Agreement, the
Transfer Agent Instructions or the Warrants (collectively, the "Transaction
Documents"), (y) have or result in a material adverse effect on the results of
operations, assets, prospects, or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, or (z) adversely impair the
Company's ability to perform fully on a timely basis its obligations under any
of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse
Effect").
2
<PAGE> 3
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company. Each of
the Transaction Documents has been duly executed by the Company and, when
delivered (or filed, as the case may be) in accordance with the terms hereof,
will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms. Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective
certificate of incorporation, by-laws or other charter or organizational
documents.
(c) Capitalization. The number of authorized, issued and
outstanding capital stock of the Company is set forth in Schedule 2.1(c). Except
for FNet Corp., which 71% of its capital stock is owned by the Company, the
Company owns all of the capital stock of each Subsidiary. No securities of the
Company or any Subsidiary are entitled to preemptive or similar rights, nor is
any holder of securities of the Company or any Subsidiary entitled to preemptive
or similar rights arising out of any agreement or understanding with the Company
or any Subsidiary by virtue of any of the Transaction Documents. Except as
disclosed in Schedule 2.1(c), there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, except as a result of the purchase and sale of the
Securities, or rights or obligations convertible into or exchangeable for, or
giving any Person any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. To the knowledge of the Company, except as specifically disclosed
in the SEC Reports (as defined below) or Schedule 2.1(c), no Person or group of
related Persons beneficially owns (as determined pursuant to Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), or has the right to acquire by agreement with or by obligation binding
upon the Company, beneficial ownership of in excess of 5% of the Common Stock.
(d) Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the terms hereof and the
Warrants, shall have been duly and validly issued, fully paid and nonassessable,
free and clear of all liens, encumbrances and rights of first refusal of any
kind (collectively, "Liens"). The Company has, on the date hereof, and will at
all time while the Notes and Warrants are outstanding, maintain an adequate
reserve of duly authorized number of shares of Common Stock for issuance
hereunder upon conversion of the Notes and exercise of the Warrants that is not
less than the sum of (i) 200% of the aggregate number of shares of Common Stock
which would be issuable upon conversion in full of the Notes assuming such
conversion occurred at the Conversion Price on the Original Issue Date, and (ii)
the number of Underlying Shares issuable upon exercise in full of the Warrants
(such number of shares of Common Stock as contemplated in clauses (i)-(ii), the
"Initial Minimum"). All such shares of Common Stock shall be duly reserved for
issuance to the holders of the Notes and the Warrants. The shares of
3
<PAGE> 4
Common Stock issuable upon conversion of the Notes and exercise of the Warrants
are referred to herein as the "Underlying Shares." The Notes, the Warrants and
the Underlying Shares are collectively referred to herein as the "Securities."
When issued in accordance with the Notes and Warrants, the Underlying Shares
will be duly authorized, validly issued, fully paid and nonassessable, free and
clear of all liens.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of the Company's or any Subsidiary's certificate of
incorporation, bylaws or other charter documents (each as amended through the
date hereof), or (ii) subject to obtaining the Required Approvals (as defined
below), conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental authority
to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), as could not, individually or in the aggregate, have or
result in a Material Adverse Effect. The business of the Company is not being
conducted in violation of any law, ordinance or regulation of any governmental
authority, except for violations which, individually or in the aggregate, could
not have or result in a Material Adverse Effect.
(f) Filings, Consents and Approvals. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filings required pursuant to Section
3.11, (ii) the filing with the Securities and Exchange Commission (the
"Commission") of a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale of the Underlying
Shares by the Purchasers (the "Underlying Shares Registration Statement"), (iii)
the application(s) to the American Stock Exchange ("AMEX") for the listing of
the Underlying Shares with AMEX (and with any other national securities exchange
or market in which the Common Stock is then listed) in the time and manner
required thereby , (vi) applicable Blue Sky filings, and (v) in all other cases
where the failure to obtain such consent, waiver, authorization or order, or to
give such notice or make such filing or registration could not have or result
in, individually or in the aggregate, a Material Adverse Effect (the items
described in clauses (i)-(vi) are collectively, the "Required Approvals").
4
<PAGE> 5
(g) Litigation; Proceedings. Except as specified in the SEC
Reports, there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (federal, state, county, local or foreign) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is in violation of any statute, rule or regulation of any governmental
authority, except as could not individually or in the aggregate, have or result
in a Material Adverse Effect.
(i) Private Offering. Assuming the accuracy of the representations
and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). Neither the Company nor any Person acting on its
behalf has taken or is, to the knowledge of the Company, contemplating taking
any action which could subject the offering, issuance or sale of the Securities
to the registration requirements of the Securities Act including soliciting any
offer to buy or sell the Securities by means of any form of general solicitation
or advertising.
(j) SEC Reports; Financial Statements. The Company has filed all
reports required to be filed by it under the Securities Act of 1933, as amended
(the "Securities Act"), and the Exchange Act for the two years preceding the
date hereof (or such shorter period as the Company was required by law to file
such material) (the foregoing materials being collectively referred to herein as
the "SEC Reports" and, together with the Schedules to this Agreement the
"Disclosure Materials") on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Reports prior to the expiration
of any such extension. As of their respective dates, the SEC Reports complied in
all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Reports, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. All material
agreements to which the Company is a party or to which the property or assets of
the Company are subject have been filed as exhibits to the SEC Reports. The
financial statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing. Such
5
<PAGE> 6
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
("GAAP"), except as may be otherwise specified in such financial statements or
the notes thereto, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments. Since September 30,1999, except as specifically
disclosed in the SEC Reports, (a) there has been no event, occurrence or
development that has or that could result in a Material Adverse Effect, (b) the
Company has not incurred any liabilities (contingent or otherwise) other than
(x) liabilities incurred in the ordinary course of business consistent with past
practice and (y) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (c) the Company has not altered its method of
accounting or the identity of its auditors and (d) the Company has not declared
or made any payment or distribution of cash or other property to its
stockholders or officers or directors (other than in compliance with existing
Company stock or stock option plans) with respect to its capital stock, or
purchased, redeemed (or made any agreements to purchase or redeem) any shares of
its capital stock.
(k) Investment Company. The Company is not, and is not an Affiliate
(as defined in Rule 405 under the Securities Act) of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(l) Certain Fees. Except as payable to Brighton Capital, Ltd. by
the Company, no fees or commissions will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other person, with respect to the transactions contemplated by
this Agreement. The Purchasers shall have no obligation with respect to any fees
or with respect to any claims made by or on behalf of other Persons for fees of
a type contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement. The Company shall indemnify and
hold harmless the Purchasers, their employees, officers, directors, agents, and
partners, and its respective Affiliates, from and against all claims, losses,
damages, costs (including the costs of preparation and attorney's fees) and
expenses suffered in respect of any such claimed or existing fees, as such fees
and expenses are incurred.
(m) Form S-3 Eligibility. The Company is eligible to register its
Common Stock for resale under Form S-3 promulgated under the Securities Act.
(n) Listing and Maintenance Requirements. The Company has not, in
the two years preceding the date hereof received notice (written or oral) from
AMEX or any other stock exchange, market or trading facility on which the Common
Stock is or has been listed (or on which it has been quoted) to the effect that
the Company is not in compliance with the listing or maintenance requirements of
such exchange, market or trading facility. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such listing and maintenance requirements.
6
<PAGE> 7
(o) Patents and Trademarks. The Company and its Subsidiaries have,
or have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and rights
(collectively, the "Intellectual Property Rights") which are necessary or
material for use in connection with their respective business as described in
the SEC Reports and as contemplated to be conducted, and which the failure to so
have would have a Material Adverse Effect. Neither the Company nor any
Subsidiary has received a written notice that the Intellectual Property Rights
used by the Company or its Subsidiaries violates or infringes upon the rights of
any Person, to the best knowledge of the Company. All such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights.
(p) Exclusivity. The Company shall not issue and sell the Note to
any Person other than the Purchasers other than with the specific prior written
consent of the Purchasers.
(q) Seniority. Except as set forth in Schedule 2.1(p), no
indebtedness of the Company is senior to the Note in right of payment, whether
with respect to interest or upon liquidation, dissolution or otherwise.
(r) Regulatory Permits. The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Reports, except where the failure to possess
such permits could not, individually or in the aggregate, have or result in a
Material Adverse Effect ("Material Permits"), and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
(s) Registration Rights; Rights of Participation. Except as set
forth on Schedule 6(b) to the Registration Rights Agreement, the Company has not
granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(t) Title. Except as set forth in Schedule 2.1(q), the Company and
the Subsidiaries have good and marketable title in fee simple to all real
property and personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all Liens,
except for Liens as do not affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company and its Subsidiaries. Any real property and facilities held under
lease by the Company and its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.
7
<PAGE> 8
(u) Disclosure. The Company confirms that it has not provided the
Purchasers or their agents or counsel with any information that constitutes or
might constitute material non-public information. The Company understands and
confirms that the Purchasers shall be relying on the foregoing representations
in effecting transactions in securities of the Company. All disclosure provided
to the Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
2.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby for itself and for no other Purchaser, represents and warrants to the
Company as follows:
(a) Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations thereunder. The purchase by such Purchaser of the Securities
hereunder has been duly authorized by all necessary action on the part of such
Purchaser. Each of this Agreement and the Registration Rights Agreement has been
duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms.
(b) Investment Intent. Such Purchaser is acquiring the Securities
as principal for its own account for investment purposes only and not with a
view to or for distributing or reselling such Securities or any part thereof,
without prejudice, however, to such Purchaser's right, subject to the provisions
of this Agreement and the Registration Rights Agreement, at all times to sell or
otherwise dispose of all or any part of such Securities pursuant to an effective
registration statement under the Securities Act and in compliance with
applicable federal and state securities laws or under an exemption from such
registration. Nothing contained herein shall be deemed a representation or
warranty by such Purchaser to hold Securities for any amount of time.
(c) Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and at each exercise date
under the Warrants, it will be, an "accredited investor" as defined in Rule
501(a) under the Securities Act. Such Purchaser has not been formed solely for
the purpose of acquiring the Securities.
(d) Experience of such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
8
<PAGE> 9
(e) Ability of Purchaser to Bear Risk of Investment. Such
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) Access to Information. Such Purchaser acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment. Neither such
inquiries nor any other investigation conducted by or on behalf of any Purchaser
or its representatives or counsel shall modify, amend or affect a Purchaser's
right to rely on the truth, accuracy and completeness of the Disclosure
Materials and the Company's representations and warranties contained in the
Transaction Documents.
(g) General Solicitation. Such Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.
(h) Reliance . Such Purchaser understands and acknowledges that (i)
the Securities are being offered and sold to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and such Purchaser hereby consents to such
reliance.
The Company acknowledges and agrees that no Purchaser makes or has
made representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. Securities may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements of the Securities Act, and in compliance with any
applicable federal and state securities laws. In connection with any transfer of
Securities other than pursuant to an effective registration statement or to the
Company,
9
<PAGE> 10
except as otherwise set forth herein, the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration under the Securities Act. Notwithstanding the foregoing, the
Company, without requiring a legal opinion as described in the immediately
preceding sentence, hereby consents to and agrees to register on the books of
the Company and with any transfer agent for the securities of the Company any
transfer of Securities by a Purchaser to an Affiliate of such Purchaser or to
one or more funds or managed accounts under common management with such
Purchaser, and any transfer among any such Affiliates or one or more funds or
managed accounts, provided that the transferee certifies to the Company that it
is an "accredited investor" within the meaning of Rule 501(a) under the
Securities Act and that it is acquiring the Securities solely for investment
purposes (subject to the qualifications hereof). Any such transferee shall agree
in writing to be bound by the terms of this Agreement and shall have the rights
of the Purchaser under this Agreement and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor any
other legend if the conversion of Notes and exercise of the Warrants or other
issuance of Underlying Shares as contemplated hereby, by the Notes or the
Warrants occurs at any time while an Underlying Shares Registration Statement is
effective under the Securities Act or, in the event there is not an effective
Registration Statement at such time if such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue the legal opinion included in the
Transfer Agent Instructions to the Company's transfer agent on the day that such
Registration Statement is declared effective by the Commission. The Company
agrees that any Underlying Shares that are issued with a legend in accordance
with this Section 3.1(b), it will, within three (3) Trading Days after request
therefor by a Purchaser and the surrender by such Purchaser of the certificate
representing the Underlying Shares, provide such Purchaser with a certificate or
certificates representing such Underlying Shares, free from such legend at such
time as such legend would not
10
<PAGE> 11
have been required under this Section 3.1(b) had such issuance occurred on the
date of such request. The Company may not make any notation on its records or
give instructions to any transfer agent of the Company which enlarge the
restrictions of transfer set forth in this Section.
3.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of Underlying Shares upon (i) conversion of the Notes and (ii) exercise
of the Warrants will result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions. The
Company further acknowledges that its obligation to issue Underlying Shares upon
(x) conversion of the Notes and (y) exercise of the Warrants pursuant to the
terms thereof is unconditional and absolute regardless of the effect of any such
dilution.
3.3 Furnishing of Information. As long as the Purchasers own
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. So long as the Purchasers own Securities, if the Company is not
required to file reports pursuant to such laws, it will prepare and furnish to
the Purchasers and make publicly available in accordance with Rule 144(c)
promulgated under the Securities Act such information as is required for the
Purchasers to sell the Securities under Rule 144 promulgated under the
Securities Act. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell Underlying Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 promulgated under the Securities Act, including
the legal opinion referenced above in this Section. Upon the request of any such
Person, the Company shall deliver to such Person a written certification of a
duly authorized officer as to whether it has complied with such requirements.
3.4 Integration. The Company shall not, and shall use its best efforts
to ensure that, no Affiliate shall, sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers.
3.5 Increase in Authorized Shares. If on any date the Company would
be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from issuing 200% of the number of Underlying
Shares as would then be issuable upon (a) conversion in full of the Notes and
(b) exercise in full of the Warrants (the "Current Required Minimum") due to the
unavailability of a sufficient number of authorized but unissued or reserved
shares of Common Stock, then the Board of Directors of the Company shall
promptly (and in any case, within 30 Business Days from such date) prepare and
mail to the stockholders of the Company proxy materials requesting authorization
to amend the Company's articles of incorporation to increase the number of
shares of Common Stock which the Company is authorized to issue to at least such
number of shares as is reasonably adequate to enable the Company to comply with
its issuance, conversion, exercise and reservation of shares obligations as set
forth in this Agreement, the Notes and the
11
<PAGE> 12
Warrants (the sum of (x) the number of shares of Common Stock then outstanding
plus all shares of Common Stock issuable upon exercise of all outstanding
options, warrants and convertible instruments other than the Notes and the
Warrants, and (y) the Current Required Minimum, shall be a reasonable number).
In connection therewith, the Board of Directors shall (a) adopt proper
resolutions authorizing such increase, (b) recommend to and otherwise use its
best efforts to promptly and duly obtain stockholder approval to carry out such
resolutions (and hold a special meeting of the stockholders no later than the
earlier to occur of the 60th day after delivery of the proxy materials relating
to such meeting and the 90th day after request by a holder of Warrants to issue
the number of Underlying Shares in accordance with the terms hereof) and (c)
within five (5) Business Days of obtaining such stockholder authorization, file
an appropriate amendment to the Company's articles of incorporation to evidence
such increase.
3.6 Reservation and Listing of Underlying Shares. (a) The Company shall
(i) in the time and manner required by AMEX and such other national securities
exchange or market or trading or quotation facility on which the Common Stock is
then listed for trading, prepare and file with AMEX (and such other national
securities exchange or market or trading or quotation facility on which the
Common Stock is then listed for trading) an additional shares listing
application covering a number of shares of Common Stock which is not less than
the Initial Minimum, (ii) take all steps necessary to cause such shares of
Common Stock to be approved for listing in AMEX (as well as on any such other
national securities exchange or market or trading or quotation facility on which
the Common Stock is then listed) as soon as possible thereafter, and (iii)
provide to the Purchasers evidence of such listing, and the Company shall
maintain the listing of its Common Stock thereon. If the number of Underlying
Shares issuable upon conversion in full of the then outstanding Notes and upon
exercise of the then unexercised portion of the Warrants exceeds 85% of the
number of Underlying Shares previously listed on account thereof with AMEX (and
any such other required exchanges), then the Company shall take the necessary
actions to immediately list a number of Underlying Shares as equals no less than
the then Current Required Minimum with respect thereto.
(b) The Company shall maintain a reserve of shares of Common Stock
for issuance upon conversion of the Notes and upon exercise in full of the
Warrants in accordance with this Agreement, the Notes and the Warrants, in such
amount as may be required to fulfill its obligations in full under the
Transaction Documents, which reserve shall equal no less than the then Current
Required Minimum.
3.7 Conversion and Exercise Procedures. The Transfer Agent
Instructions, the Conversion Notices under the Note and Form of Election to
Purchase under the Warrants set forth the totality of the procedures with
respect to the conversion of the Notes and exercise of the Warrants, including
the form of legal opinion, if necessary, that shall be rendered to the Company's
transfer agent and such other information and instructions as may be reasonably
necessary to enable the Purchasers to convert the Notes and to exercise the
Warrants, as applicable.
3.8 Notice of Breaches. Each of the Company and the Purchasers shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement
12
<PAGE> 13
contained in any Transaction Document, as well as any events or occurrences
arising after the date hereof which would reasonably be likely to cause any
representation or warranty or other agreement of such party, as the case may be,
contained therein to be incorrect or breached as of the Closing Date. However,
no disclosure by a party pursuant to this Section shall be deemed to cure any
breach of any representation, warranty or other agreement contained in any
Transaction Document.
3.9 Right of First Refusal; Subsequent Registrations. The Company shall
not, directly or indirectly, without the prior written consent of the
Purchasers, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities or a transaction (a) intended to be exempt or not subject to
registration under the Securities Act and (b) that permits the holder thereof to
acquire (whether by conversion, reset, original purchase price, exchange or
otherwise) Common Stock at any time over the life of the security or investment
at a price that is less than the market price of the Common Stock at the time of
issuance of such security or investment (a "Subsequent Placement") until the
180th day after the Underlying Shares Registration Statement is first declared
effective by the Commission, except (i) the granting of options or warrants to
employees, officers and directors, and the issuance of shares upon exercise of
options granted, under any stock option plan heretofore or hereinafter duly
adopted by the Company, (ii) shares of Common Stock issuable upon exercise of
currently outstanding options and warrants and upon conversion of any currently
outstanding convertible securities of the Company, in each case to the extent
disclosed in Schedule 2.1(c) but not with respect to any amendment or
modification thereof, (iii) shares of Common Stock issued as payment of the
purchase price in connection with a Strategic Transaction (as defined below) and
(iv) shares of Common Stock issuable upon conversion of the Notes and upon
exercise of the Warrants in accordance with the Notes and the Warrants,
respectively, unless (A) the Company delivers to each Purchaser a written notice
(the "Subsequent Placement Notice") of its intention effect such Subsequent
Placement, which Subsequent Placement Notice shall describe in reasonable detail
the proposed terms of such Subsequent Placement, the amount of proceeds intended
to be raised thereunder, the Person with whom such Subsequent Placement shall be
effected, and attached to which shall be a term sheet or similar document
relating thereto and (B) such Purchaser shall not have notified the Company by
5:30 p.m. (New York City time) on the fifth (5th) Trading Day after its receipt
of the Subsequent Placement Notice of its willingness to cause such Purchaser to
provide (or to cause its sole designee to provide), subject to completion of
mutually acceptable documentation, financing to the Company on the same terms
set forth in the Subsequent Placement Notice. If the Purchasers shall indicate a
willingness to provide financing in excess of the amount set forth in the
Subsequent Placement Notice, then each Purchaser shall be entitled to provide
financing pursuant to such Subsequent Placement Notice up to an amount equal to
such Purchaser's pro rata portion of the aggregate number of Shares purchased by
such Purchaser under this Agreement, but the Company shall not be required to
accept financing from the Purchasers in an amount less than or in excess of the
amount set forth in the Subsequent Placement Notice. If the Purchasers shall
fail to notify the Company of their intention to enter into such negotiations
within such time period, the Company may effect the Subsequent Placement
substantially upon the terms and to the Persons (or Affiliates of such Persons)
set forth in the Subsequent Placement Notice; provided, that the Company shall
provide the Purchasers with a
13
<PAGE> 14
second Subsequent Placement Notice, and the Purchasers shall again have the
right of first refusal set forth above in this Section (a), if the Subsequent
Placement subject to the initial Subsequent Placement Notice shall not have been
consummated for any reason on the terms set forth in such Subsequent Placement
Notice within thirty (30) Trading Days after the date of the initial Subsequent
Placement Notice with the Person (or an Affiliate of such Person) identified in
the Subsequent Placement Notice. The rights of the Purchasers under this Section
shall apply to each Subsequent Placement contemplated by the Company or such
Subsidiary, regardless of any prior waivers or non-participation. For purposes
of this Section 3.9, a "Strategic Transaction" shall mean a transaction or
relationship in which the Company issues Common Stock to an entity which is,
itself or through its subsidiaries, an operating company in a business related
to the business of the Company and in which the Company receives material
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital.
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company as set forth in Schedule 6(b) of the
Registration's Rights Agreement to be registered, in the Underlying Shares
Registration Statement in accordance with the Registration Rights Agreement, and
(z) Common Stock permitted to be issued pursuant to paragraph (a)(i) - (iii) of
Section 3.9 (a), the Company shall not, for a period of not less than 90 Trading
Days after the date that the Underlying Shares Registration Statement is
declared effective by the Commission, without the prior written consent of the
Purchasers (i) issue or sell any of its or any of its Affiliates' equity or
equity-equivalent securities pursuant to Regulation S promulgated under the
Securities Act, or (ii) file a registration statement for the issuance or resale
of any securities of the Company. Any days that a Purchaser is not permitted or
unable to utilize the prospectus or otherwise to sell Underlying Shares under
the Underlying Shares Registration Statement shall be added to such 90 Trading
Day period for the purposes of this Section.
3.10 Certain Securities Laws Disclosures; Publicity. The Company shall:
(i) on the Closing Date, issue a press release acceptable to the Purchasers
disclosing the transactions contemplated hereby, (ii) file with the Commission a
Report on Form 8-K or Form 10-Q (as applicable) disclosing the transactions
contemplated hereby within ten (10) Business Days after the Closing Date, and
(iii) timely file with the Commission a Form D promulgated under the Securities
Act as required under Regulation D promulgated under the Securities Act and
provide a copy thereof to the Purchasers promptly after the filing thereof. The
Company shall, no less than two (2) Business Days prior to the filing of any
disclosure required by clauses (ii) and (iii) above, provide a copy thereof to
the Purchasers. The Company and the Purchasers shall consult with each other in
issuing any press releases or otherwise making public statements or filings and
other communications with the Commission or any regulatory agency or stock
market or trading facility with respect to the transactions contemplated hereby
and neither party shall issue any such press release or otherwise make any such
public statement, filings or other communications pertaining to the transactions
contemplated hereby without the prior written consent of the other, which
consent shall not be unreasonably withheld or delayed, except that no prior
consent shall be required if such
14
<PAGE> 15
disclosure is required by law and such consent can not reasonably be expected to
be received prior to the time required to complete such filing or make such
statement in accordance with such applicable law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement, filing or other communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of a Purchaser, or include the name
of a Purchaser in any filing with the Commission, or any regulatory agency,
trading facility or stock market without the prior written consent of such
Purchaser, except to the extent such disclosure (but not any disclosure as to
the controlling Persons thereof) is required by law, in which case the Company
shall provide such Purchaser with prior notice of such disclosure.
3.11 Transfer of Intellectual Property Rights. Except in connection
with the sale of all or substantially all of the assets of the Company, the
Company shall not transfer, sell or otherwise dispose of any Intellectual
Property Rights or allow any of the Intellectual Property Rights to become
subject to any Liens, or fail to renew such Intellectual Property Rights (if
renewable and it would otherwise lapse if not renewed), other than licensing
agreements in the ordinary course of business, without the prior written consent
of the Purchasers.
3.12 Use of Proceeds. The Company shall use the net proceeds from the
sale of Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables in the ordinary course consistent with past practice), to redeem any
Company equity or equity-equivalent securities or to settle any outstanding
litigation. Pending application of the proceeds of this placement in the manner
permitted hereby, the Company will invest such proceeds in interest bearing
accounts and/or short-term, investment grade interest bearing securities.
3.13 Reimbursement. If any Purchaser, other than by reason of its
gross negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which any of the Purchasers is a named party, the
Company will pay such Purchaser the charges, as reasonably determined by such
Purchaser, for the time of any officers or employees of such Purchaser devoted
to appearing and preparing to appear as witnesses, assisting in preparation for
hearings, trials or pretrial matters, or otherwise with respect to inquiries,
hearings, trials, and other proceedings relating to the subject matter of this
Agreement. The reimbursement obligations of the Company under this paragraph
shall be in addition to any liability which the Company may otherwise have,
shall extend upon the same terms and conditions to any Affiliates of the
Purchasers who are actually named in such action, proceeding or investigation,
and partners, directors, agents, employees and controlling persons (if any), as
the case may be, of the Purchasers and any such Affiliate, and shall be binding
upon and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither
15
<PAGE> 16
the Purchasers nor any such Affiliates, partners, directors, agents, employees
or controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company in connection with or
as a result of the consummation of the Transaction Documents except to the
extent that any losses, claims, damages, liabilities or expenses incurred by the
Company result from the gross negligence or willful misconduct of the applicable
Purchaser or entity in connection with the transactions contemplated by this
Agreement.
3.14 Limitations on Short Sales. Each Purchaser agrees that it will not
enter into any Short Sales (as hereinafter defined) from the period commencing
on the Closing Date and ending on the 150th day following the Closing Date. For
purposes of this Section 3.14, a "Short Sale" by a Purchaser shall mean a sale
of Common Stock by such Purchaser that is marked as a short sale, at a price
that is less than 90% of the then current market price of the Common Stock and
that is made at a time when there is no equivalent offsetting long position in
Common Stock held by the Purchaser. For purposes of determining whether there is
an equivalent offsetting long position in Common Stock held by a Purchaser, up
to 50% of the Warrant Shares that have not yet been issued pursuant to the
Warrant shall be deemed to be held long by the Purchaser, and the number Warrant
Shares then held by a Purchaser on any particular date of computation shall be
equal to the number of Warrant Shares issuable pursuant to the Warrant assuming
such holder exercised all of the outstanding Warrant Shares on such date.
ARTICLE
MISCELLANEOUS
4.1 Fees and Expenses. At the Closing the Company shall reimburse the
Purchasers for their legal fees and expenses incurred in connection with the
preparation and negotiation of the Transaction Documents by paying to Robinson
Silverman $25,000 for the preparation and negotiation of the Transaction
Documents. The $25,000 (less the $5,000 paid prior to the Closing) shall be
deducted from the proceeds of the purchase price payable to the Company and paid
directly by the Purchasers to Robinson Silverman. Other than the amounts
contemplated in the immediately preceding sentence, and except as otherwise set
forth in the Registration Rights Agreement, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all stamp and other taxes and duties levied in connection with the
issuance of the Securities.
4.2 Entire Agreement; Amendments. The Transaction Documents, together
with the Exhibits and Schedules thereto contain the entire understanding of the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules.
16
<PAGE> 17
4.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 8:00 p.m. (New York City
time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Agreement later than 8:00 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) the Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given. The address for such notices and
communications shall be as follows:
If to the Company: Franklin Telecommunication Corp.
733 Lakefield Road
Westlake Village, CA 91361
Facsimile No.: (805) 373-7373
Attn: Chief Financial Officer
With copies to: Haddan & Zepfel LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Facsimile No.: (949) 752-6161
Attn: Robert J. Zepfel, Esq.
If to a Purchaser: To the address set forth under such
Purchaser's name on the signature
pages hereto.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 Amendments; Waivers. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by both the Company and the Purchasers or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
17
<PAGE> 18
4.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Except as set forth in
Section 3.1(a), the Purchasers may not assign this Agreement or any of the
rights or obligations hereunder without the consent of the Company.
4.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 Governing Law. The corporate laws of the State of California shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
4.9 Survival. The representations, warranties, agreements and covenants
contained herein shall survive the Closing and the delivery, conversion of the
Notes and exercise of the Warrants.
4.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties
18
<PAGE> 19
will attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.
4.12 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchasers
will be entitled to specific performance of the obligations of the Company under
the Transaction Documents. Each of the Company and the Purchasers agree that
monetary damages may not be adequate compensation for any loss incurred by
reason of any breach of its obligations described in the foregoing sentence and
hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.
4.13 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document is several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert with respect to such obligations or
the transactions contemplated by the Transaction Document. Each Purchaser shall
be entitled to independently protect and enforce its rights, including without
limitation the rights arising out of this Agreement or out of the Transaction
Documents, and it shall not be necessary for any other Purchaser to be joined as
an additional party in any proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOLLOWS]
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Notes Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
FRANKLIN TELECOMMUNICATIONS CORP.
By: /s/ TOM RUSSELL
---------------------------------
Name: Tom Russell
-------------------------------
Title: Vice President - CFO
------------------------------
20
<PAGE> 21
STRONG RIVER INVESTMENTS, INC.
By: /s/ KENNETH L. HENDERSON
--------------------------------
Name: Kenneth L. Henderson
Title: Attorney-in-Fact
Purchase Price for Notes
to be acquired at Closing: $2,500,000
Warrant Shares subject to
Warrant: 1,000,000
Address for Notice:
Strong River Investment, Inc.
c/o Gonzalez-Ruiz & Aleman (BVI)
Limited
Wickhams Cay I, Vanterpool Plaza
P.O. Box 873
Road Town, Tortolla. BVI
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and
(212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen, Esq.
21
<PAGE> 1
EXHIBIT 10.3
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
FRANKLIN TELECOMMUNICATIONS CORP.
WARRANT
Warrant No. 1 Dated: December 3, 1999
Franklin Telecommunications Corp., a California corporation (the
"Company"), hereby certifies that, for value received, Strong River Investments,
Inc, or its registered assigns ("Holder"), is entitled, subject to the terms set
forth below, to purchase from the Company up to a total of 1,000,000 shares of
common stock, no par value (the "Common Stock"), of the Company (each such
share, a "Warrant Share" and all such shares, the "Warrant Shares") at an
exercise price (as adjusted from time to time as provided in Section 9, the
"Exercise Price") equal to $2.50 per share (the "Initial Price"), provided, that
if on the 150th day immediately following the date hereof, the closing sales
price of the Common Stock shall be equal to or lower than $2.50 (such price the
"Adjustable Price"), the exercise price shall equal the lower of (i) 110% of the
Adjustable Price, and (ii) the Initial Price, provided, however, that such
exercise price shall not be lower than $1.50, at any time and from time to time
from and after the date hereof and through and including December 3, 2002 (the
"Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this Warrant,
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the Form
of Assignment attached
1
<PAGE> 2
hereto duly completed and signed, to the Transfer Agent or to the Company at the
office specified in or pursuant to Section 3(b). Upon any such registration or
transfer, a new warrant to purchase Common Stock, in substantially the form of
this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of
this Warrant so transferred shall be issued to the transferee and a New Warrant
evidencing the remaining portion of this Warrant not so transferred, if any,
shall be issued to the transferring Holder. The acceptance of the New Warrant by
the transferee thereof shall be deemed the acceptance of such transferee of all
of the rights and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Holder to the office of the Company specified in or pursuant to Section 3(b) for
one or more New Warrants, evidencing in the aggregate the right to purchase the
number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder on
any business day before 8:00 P.M., New York City time, at any time and from time
to time on or after the date hereof to and including the Expiration Date. At
8:00 P.M., New York City time on the Expiration Date, the portion of this
Warrant not exercised prior thereto shall be and become void and of no value.
Prior to the Expiration Date, the Company may not call or otherwise redeem this
Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 10, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its address for notice set forth in Section 13 and
upon payment of the Exercise Price multiplied by the number of Warrant Shares
that the Holder intends to purchase hereunder, in the manner provided hereunder,
all as specified by the Holder in the Form of Election to Purchase, the Company
shall promptly (but in no event later than 3 business days after the Date of
Exercise (as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise, free of restrictive legends except (i) either in the event that a
registration statement covering the resale of the Warrant Shares and naming the
Holder as a selling stockholder thereunder is not then effective or the Warrant
Shares are not freely transferable without volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act of 1933, as amended (the "Securities
Act"), or (ii) if this Warrant shall have been issued pursuant to a written
agreement between the original Holder and the Company, as required by such
agreement. Any person so designated by the Holder to receive Warrant Shares
shall be deemed to have become holder of record of such Warrant Shares as of the
Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
2
<PAGE> 3
c. This Warrant shall be exercisable, either in its entirety or,
from time to time, for a portion of the number of Warrant Shares. If less than
all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. The Company may not file any
registration statement with the Securities and Exchange Commission (other than
registration statements of the Company filed on Form S-8 or Form S-4, each as
promulgated under the Securities Act, pursuant to which the Company is
registering securities pursuant to a Company employee benefit plan or pursuant
to a merger, acquisition or similar transaction including supplements thereto,
but not additionally filed registration statements in respect of such
securities) at any time when there is not an effective registration statement
covering the resale of the Warrant Shares and naming the Holder as a selling
stockholder thereunder, unless the Company provides the Holder with not less
than 20 days notice of its intention to file such registration statement and
provides the Holder the option to include any or all of the applicable Warrant
Shares therein. The piggyback registration rights granted to the Holder pursuant
to this Section shall continue until all of the Holder's Warrant Shares have
been sold in accordance with an effective registration statement or upon the
Expiration Date. The Company will pay all registration expenses in connection
therewith.
5. Demand Registration Rights. During the Effectiveness Period (as
defined herein) if the Warrant Shares are not registered pursuant to an
effective registration statement, the Holder may make a written request for the
registration under the Securities Act (a "Demand Registration"), of all of the
Warrant Shares (the "Registrable Securities"), and the Company shall use its
best efforts to effect such Demand Registration as promptly as possible, but in
any case within 90 days thereafter. Any request for a Demand Registration shall
specify the aggregate number of Registrable Securities proposed to be sold and
shall also specify the intended method of disposition thereof. The right to
cause a registration of the Registrable Securities under this Section 5 shall be
limited to one such registration. In any registration initiated as a Demand
Registration, the Company will pay all of its registration expenses in
connection therewith. A Demand Registration shall not be counted as a Demand
Registration hereunder until the registration statement filed pursuant to the
Demand Registration has been declared effective by the Securities and Exchange
Commission and maintained continuously effective for a period of at least 360
days or such shorter period when all Registrable Securities included therein
have been sold in accordance with such registration statement, provided, however
that any days on which such registration statement is not effective or on which
the Holder is not permitted by the Company or any governmental authority to sell
Warrant Shares under such registration statement shall not count towards such
360 day period.
6. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however,
3
<PAGE> 4
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for
Warrant Shares or Warrants in a name other than that of the Holder. The Holder
shall be responsible for all other tax liability that may arise as a result of
holding or transferring this Warrant or receiving Warrant Shares upon exercise
hereof.
7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and indemnity, if
requested, satisfactory to it. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. Reservation of Warrant Shares. The Company covenants that it will at
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holder (taking into account the adjustments and
restrictions of Section 9). The Company covenants that all Warrant Shares that
shall be so issuable and deliverable shall, upon issuance and the payment of the
applicable Exercise Price in accordance with the terms hereof, be duly and
validly authorized, issued and fully paid and nonassessable.
9. Certain Adjustments. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 9. Upon each such adjustment of the Exercise
Price pursuant to this Section 9, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding,
(i) shall pay a stock dividend (except scheduled dividends paid on outstanding
preferred stock as of the date hereof which contain a stated dividend rate) or
otherwise make a distribution or distributions on shares of its Common Stock or
on any other class of capital stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock into a larger number of shares, or
(iii) combine outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such
4
<PAGE> 5
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property equal to the amount of Warrant Shares such Holder would have been
entitled to had such Holder exercised this Warrant immediately prior to such
reclassification or share exchange. The terms of any such reclassification or
share exchange shall include such terms so as to continue to give to the Holder
the right to receive the securities or property set forth in this Section 9(b)
upon any exercise following any such reclassification or share exchange.
(c) If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock (and not to holders of this
Warrant) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
9(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) If at any time the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), shall
issue shares of Common Stock or rights, warrants, options or other securities or
debt that is convertible into or exchangeable for shares of Common Stock
("Common Stock Equivalents"), entitling any person or entity to acquire shares
of Common Stock at a price per share less than the Exercise Price then in effect
(if the holder of the Common Stock or Common Stock Equivalent so issued shall at
any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights issued in connection with such issuance at a price
less than the prevailing Exercise Price or market price, such issuance shall be
deemed to have occurred for less than such Exercise Price or market price),
then, forthwith upon such issue or sale, the Exercise Price shall be reduced to
the price (calculated to the nearest cent) determined by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issuance, and (ii) the number of shares of
Common Stock which the aggregate consideration received (or to be received,
assuming exercise or conversion in full of such Common Stock
5
<PAGE> 6
Equivalents) for the issuance of such additional shares of Common Stock would
purchase at the Exercise Price, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares. For purposes hereof, all shares of Common Stock that
are issuable upon conversion, exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued. However, upon the expiration of any Common Stock
Equivalents the issuance of which resulted in an adjustment in the Exercise
Price pursuant to this Section, if any such Common Stock Equivalents shall
expire and shall not have been exercised, the Exercise Price shall immediately
upon such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but reflecting
any other adjustments in the Exercise Price made pursuant to the provisions of
this Section after the issuance of such Common Stock Equivalents) had the
adjustment of the Exercise Price made upon the issuance of such Common Stock
Equivalents been made on the basis of offering for subscription or purchase only
that number of shares of the Common Stock actually purchased upon the exercise
of such Common Stock Equivalents actually exercised.
(e) In case of any (1) merger or consolidation of the Company with
or into another Person, or (2) sale by the Company of more than one-half of the
assets of the Company (on a book value basis) in one or a series of related
transactions, or (3) tender or other offer or exchange (whether by the Company
or another Person) pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, stock, cash or property of
the Company or another Person; then the Holder shall have the right thereafter
to (A) exercise this Warrant for the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of Common Stock
following such merger, consolidation or sale, and the Holder shall be entitled
upon such event or series of related events to receive such amount of
securities, cash and property as the Common Stock for which this Warrant could
have been exercised immediately prior to such merger, consolidation or sales
would have been entitled, (B) in the case of a merger or consolidation, (x)
require the surviving entity to issue to the Holder a warrant entitling the
Holder to acquire shares of such entity's common stock, which warrant shall have
terms identical (including with respect to exercise) to the terms of this
Warrant and shall be entitled to all of the rights and privileges set forth
herein and the agreements pursuant to which this Warrant was issued (including,
without limitation, as such rights relate to the acquisition, transferability,
registration and listing of such shares of stock other securities issuable upon
exercise thereof), or (C) in the event of an exchange or tender offer or other
transaction contemplated by clause (3) of this Section, tender or exchange this
Warrant for such securities, stock, cash and other property receivable upon or
deemed to be held by holders of Common Stock that have tendered or exchanged
their shares of Common Stock following such tender or exchange, and the Holder
shall be entitled upon such exchange or tender to receive such amount of
securities, cash and property as the shares of Common Stock for which this
Warrant could have been exercised immediately prior to such tender or exchange
would have been entitled as would have been issued. In the case of clause (B),
the exercise price applicable for the newly issued warrant shall be based upon
the amount of securities, cash and property that each shares of Common Stock
would receive in such transaction and the Exercise Price immediately
6
<PAGE> 7
prior to the effectiveness or closing date for such transaction. The terms of
any such merger, sale, consolidation, tender or exchange shall include such
terms so as continue to give the Holder the right to receive the securities,
cash and property set forth in this Section upon any conversion or redemption
following such event. This provision shall similarly apply to successive such
events.
(f) For the purposes of this Section 9, the following clauses shall
also be applicable:
(i) Record Date. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in securities
convertible or exchangeable into shares of Common Stock, or (B) to subscribe for
or purchase Common Stock or securities convertible or exchangeable into shares
of Common Stock, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other distribution
or the date of the granting of such right of subscription or purchase, as the
case may be.
(ii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(g) All calculations under this Section 9 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(h) Whenever the Exercise Price is adjusted pursuant to Section 9(c)
above, the Holder, after receipt of the determination by the Appraiser, shall
have the right to select an additional appraiser (which shall be a nationally
recognized accounting firm), in which case the adjustment shall be equal to the
average of the adjustments recommended by each of the Appraiser and such
appraiser. The Holder shall promptly mail or cause to be mailed to the Company,
a notice setting forth the Exercise Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. Such adjustment
shall become effective immediately after the record date mentioned above.
(i) If:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of
any rights; or
7
<PAGE> 8
(iv) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution,
liquidation or winding up of the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
10. Payment of Exercise Price. The Holder may pay the Exercise Price in
cash or, in the event that a registration statement covering the resale of the
Warrant Shares and naming the holder thereof as selling stockholder thereunder
is not effective for the resale of the Warrant Shares at any time during the
term of this Warrant, pursuant to a cashless exercise, as follows:
(a) Cash Exercise. The Holder may deliver immediately available
funds; or
8
<PAGE> 9
(b) Cashless Exercise. The Holder may surrender this Warrant to the
Company together with a notice of cashless exercise, in which event the Company
shall issue to the Holder the number of Warrant Shares determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be
issued to the Holder.
Y = the number of Warrant Shares with
respect to which this Warrant is being
exercised.
A = the average of the closing sale prices
of the Common Stock for the five (5)
trading days immediately prior to (but
not including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
11. Certain Exercise Restrictions.
(a) A Holder may not exercise this Warrant to the extent such
exercise would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
promulgated thereunder) in excess of 4.999% of the then issued and outstanding
shares of Common Stock, including shares of Common Stock issuable upon such
exercise and held by such Holder after application of this Section. Since the
Holder will not be obligated to report to the Company the number of shares of
Common Stock it may hold at the time of an exercise hereunder, unless the
exercise at issue would result in the issuance of shares of Common Stock in
excess of 4.999% of the then outstanding shares of Common Stock without regard
to any other shares of Common Stock which may be beneficially owned by the
Holder or an affiliate thereof, the Holder shall have the authority and
obligation to determine whether the restriction contained in this Section will
limit any particular exercise hereunder and to the extent that the Holder
determines that the limitation contained in this Section applies, the
determination of which portion of this Warrant is exercisable shall be the
responsibility and obligation of the Holder. If the Holder has delivered a Form
of Election to Purchase for a number of Warrant Shares that would result in the
issuance in excess of the permitted amount hereunder, the Company shall notify
the Holder of this fact and shall honor the exercise for the maximum portion of
this Warrant permitted to be exercised on such Date of Exercise in accordance
with the periods described herein and disregard the balance of such Form of
Election to Purchase, as if never delivered The provisions of this Section may
be waived by a Holder (but only as to itself and not to any other Holder) upon
not less than 61 days prior notice to the Company. Other Holders shall be
unaffected by any such waiver.
(b) A Holder may not exercise this Warrant to the extent such
exercise would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules promulgated thereunder) in
9
<PAGE> 10
excess of 9.999% of the then issued and outstanding shares of Common Stock,
including shares of Common Stock issuable upon such exercise and held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Company the number of shares of Common Stock it may hold at the
time of an exercise hereunder, unless the exercise at issue would result in the
issuance of shares of Common Stock in excess of 9.999% of the then outstanding
shares of Common Stock without regard to any other shares of Common Stock which
may be beneficially owned by the Holder or an affiliate thereof, the Holder
shall have the authority and obligation to determine whether the restriction
contained in this Section will limit any particular exercise hereunder and to
the extent that the Holder determines that the limitation contained in this
Section applies, the determination of which portion of this Warrant is
exercisable shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Form of Election to Purchase for a number of Warrant
Shares that would result in the issuance in excess of the permitted amount
hereunder, the Company shall notify the Holder of this fact and shall honor the
exercise for the maximum portion of this Warrant permitted to be exercised on
such Date of Exercise in accordance with the periods described herein and
disregard the balance of such Form of Election to Purchase, as if never
delivered The provisions of this Section may be waived by a Holder (but only as
to itself and not to any other Holder) upon not less than 61 days prior notice
to the Company. Other Holders shall be unaffected by any such waiver.
12. Fractional Shares. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section, be issuable on
the exercise of this Warrant, the Company shall pay an amount in cash equal to
the Exercise Price multiplied by such fraction.
13. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 8:00 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 8:00 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
733 Lakefield Road, Westlake Village, California 91361, Attention: Chief
Financial Officer, or to Facsimile No.(805) 373-7373, or (ii) if to the Holder,
to the Holder at the address or facsimile number appearing on the Warrant
Register or such other address or facsimile number as the Holder may provide to
the Company in accordance with this Section.
10
<PAGE> 11
14. Warrant Agent. The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a
new warrant agent. Any corporation into which the Company or any new warrant
agent may be merged or any corporation resulting from any consolidation to which
the Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
15. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of
the parties hereto and their respective successors and assigns. This Warrant may
be amended only in writing signed by the Company and the Holder and their
successors and assigns.
(b) Subject to Section 15(a), above, nothing in this Warrant shall
be construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant. This
Warrant shall inure to the sole and exclusive benefit of the Company and the
Holder.
(c) The corporate laws of the State of California shall govern all
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity, enforcement and
interpretation of this Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. The Company and the Holder hereby
irrevocably submit to the exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, or that such suit,
action or proceeding is improper. Each of the Company and the Holder hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by receiving a copy thereof sent
to the Company at the address in effect for notices to it under this instrument
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do not constitute
a part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Warrant shall not in any way be
affected or impaired thereby and the parties will attempt in good faith to agree
upon a valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
11
<PAGE> 12
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
FRANKLIN TELECOMMUNICATIONS CORP.
By: /s/ Tom Russell
-------------------------------------
Name: Tom Russell
----------------------------------
Title: Vice President - CFO
---------------------------------
12
<PAGE> 13
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Franklin Telecommunications Corp.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of common stock, no par value, of Franklin Telecommunications Corp. (the
"Common Stock") and , if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
--------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: _______________ , __ Name of Holder:
(Print)
---------------------------------
(By:)
----------------------------------
(Name:)
(Title:)
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
13
<PAGE> 14
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Franklin
Telecommunications Corp. to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of Franklin
Telecommunications Corp. with full power of substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- -------------------------------------
14
<PAGE> 1
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December 3, 1999, among Franklin Telecommunications Corp., a
California corporation (the "Company"), and the investors signatory hereto (each
such investor is a "Purchaser" and all such investors are, collectively, the
"Purchasers").
This Agreement is made pursuant to the Convertible Notes Purchase
Agreement, dated as of the date hereof, among the Company and the Purchasers
(the "Purchase Agreement").
In consideration of the mutual covenants contained in the Purchase
Agreement and in this Agreement, the Company and the Purchasers hereby agree as
follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 6(e).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a federal legal holiday or a day on which banking institutions in the
State of New York and the State of California generally are authorized or
required by law or other governmental action to close.
"Closing Date" shall have the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, no par value per share
and any other securities into which such stock shall hereafter be redistributed
or recapitalized.
"Effectiveness Date" means the 150th day following the Closing Date.
1
<PAGE> 2
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the 90th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may be,
from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Notes" means the Convertible Notes issued to the Purchasers on the
Closing Date pursuant to the Purchase Agreement.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock issuable upon
conversion of the Note and exercise of the Warrants.
"Registration Statement" means the registration statement and any
additional registration statement contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
2
<PAGE> 3
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any rule or
regulation hereafter adopted by the Commission to replace such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any rule or
regulation hereafter adopted by the Commission to replace such Rule.
"Rule 424" means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any rule or
regulation hereafter adopted by the Commission to replace such Rule.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Special Counsel" means one special counsel to the Holders for which
the Holders will be reimbursed by the Company pursuant to Section 4.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means the Common Stock purchase warrants issued to the
Purchasers and the Common Stock purchase warrant issued to Brighton Capital,
Ltd., respectively, in connection with the transaction contemplated by the
Purchase Agreement.
2. Shelf Registration
a. On or prior to the Filing Date, the Company shall prepare and file
with the Commission a "Shelf" Registration Statement covering all Registrable
Securities for an offering to be made on a continuous basis pursuant to Rule
415. The Registration Statement shall be on Form S-3 (except if the Company is
not then eligible to register for resale the Registrable Securities on Form S-3,
in which case such registration shall be on another appropriate form in
accordance herewith as the Holders may consent). The Company shall use its best
efforts to cause the Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event prior to the Effectiveness Date, and shall use its best efforts to keep
such Registration Statement continuously effective under the Securities Act
until the date which is two (2) years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold without volume restrictions pursuant to Rule 144(k) as determined by
the counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company's transfer agent (the "Effectiveness
Period"), provided,
3
<PAGE> 4
that the Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able to
sell the Registrable Securities covered by such Registration Statement during
the Effectiveness Period, unless such action is required under applicable law or
the Company has filed a post-effective amendment to the Registration Statement
and the Commission has not declared it effective.
b. The initial Registration Statement required to be filed hereunder
shall include (but not be limited to) a number of shares of Common Stock equal
to the sum of (i) the number of shares of Common Stock issuable upon exercise in
full of the Warrants and (ii) 175% of the number of shares of Common Stock
issuable upon conversion in full of the outstanding principal amount of the
Notes, assuming for such purposes that all interest thereunder is paid in shares
of Common Stock, that the Notes are outstanding for three years and that such
conversion occurred on the Closing Date, the Filing Date or the date the Company
files an acceleration request with the Commission relating to the Registration
Statement, whichever yields the lowest Conversion Price (as defined in the
Notes) (the sum of (i) and (ii), the "Initial Minimum").
c. If the Holders of a majority of the Registrable Securities then
outstanding so elect, an offering of Registrable Securities pursuant to a
Registration Statement may be effected in the form of an Underwritten Offering.
In such event, and, if the managing underwriters advise the Company and such
Holders in writing that in their opinion the amount of Registrable Securities
proposed to be sold in such Underwritten Offering exceeds the amount of
Registrable Securities which can be sold in such Underwritten Offering, there
shall be included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
d. If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker that will administer the offering
will be selected by the Holders of a majority of the Registrable Securities
included in such offering upon consultation with the Company. No Holder may
participate in any Underwritten Offering hereunder unless such Holder (i) agrees
to sell its Registrable Securities on the basis provided in any underwriting
agreements approved by the Persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations hereunder,
the Company shall:
a. Prepare and file with the Commission on or prior to the Filing Date,
a Registration Statement on Form S-3 (or if the Company is not then eligible to
register for resale the Registrable Securities on Form S-3 such registration
shall be on another appropriate form in
4
<PAGE> 5
accordance herewith, or, in connection with an Underwritten Offering hereunder,
such other form agreed to by the Company and the Holders) which shall contain
the "Plan of Distribution" attached hereto as Annex A (except if otherwise
directed by the Holders), and cause the Registration Statement to become
effective and remain effective as provided herein; provided, that not less than
five (5) Business Days prior to the filing of a Registration Statement or any
related Prospectus or any amendment or supplement thereto (including any
document that would be incorporated or deemed to be incorporated therein by
reference), the Company shall, (i) furnish to the Holders, their Special Counsel
and any managing underwriters, copies of all such documents proposed to be
filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such Holders, their
Special Counsel and such managing underwriters, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to such Holders and such underwriters, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holders of a majority of the Registrable
Securities, their Special Counsel, or any managing underwriters, shall
reasonably object on a timely basis.
b. (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to the Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep the Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement, and as so
supplemented or amended to be filed pursuant to Rule 424 (or any similar
provisions then in force); (iii) respond as promptly as reasonably possible, and
in any event within ten (10) days, to any comments received from the Commission
with respect to the Registration Statement or any amendment thereto and as
promptly as reasonably possible provide the Holders true and complete copies of
all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
c. (i) File additional Registration Statements if the number of
Registrable Securities at any time exceeds 85% of the number of shares of Common
Stock then registered in a Registration Statement. The Company shall have thirty
(30) days to file such additional Registration Statements after its receipt of
notice of the requirement thereof which the Holders may give at any time when
the number of Registrable Securities exceeds 85% of the number of shares of
Common Stock then registered in a Registration Statement hereunder. In such
event, the Registration Statement required to be filed by the Company shall
include a number of shares of Common Stock equal to no less than the Initial
Minimum and any other Registrable Securities not then registered in a
Registration Statement.
5
<PAGE> 6
(ii) File such supplements or attach "stickers" to the Registration
Statement or Prospectus as and when required by the Commission to evidence a
material amount of resales by a Holder pursuant to a Prospectus. In connection
therewith, if such supplements or "stickers" are periodically required by the
Commission, the Company shall, within four (4) Business Days, file such
supplements or attach such "stickers" whenever a Holder has sold 50% of the
Registrable Securities covered by the then outstanding Prospectus (as last
supplemented or "stickered") in order to cover 100% of the number of the
outstanding Registrable Securities.
d. Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters as promptly as reasonably possible
(and, in the case of (i)(A) below, not less than five (5) Business Days (or, in
the case of a supplement or "sticker" required to be filed or attached pursuant
to Section 3(c)(ii), within one (1) Business Day) prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the
Holders); and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) and in the case of Underwritten Offerings, if at any time any of
the representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
e. Use its best efforts to avoid the issuance of, or, if issued, obtain
the withdrawal of (i) any order suspending the effectiveness of the Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
f. If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i)
6
<PAGE> 7
promptly incorporate in a Prospectus supplement or post-effective amendment to
the Registration Statement such information as such managing underwriters and
such Holders reasonably agree should be included therein, and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to take any
action pursuant to this Section 3(f) that would, in the opinion of counsel for
the Company, violate applicable law or be materially detrimental to the business
prospects of the Company.
g. Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
h. Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
i. Prior to any public offering of Registrable Securities, use its best
efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do any and
all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by a Registration
Statement; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
j. Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by the Purchase Agreement, of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered in such
names as any such managing underwriters or Holders may request.
k. Upon the occurrence of any event contemplated by Section 3(d)(vi),
as promptly as reasonably possible, prepare a supplement or amendment, including
a post-effective
7
<PAGE> 8
amendment, to the Registration Statement or a supplement to the related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference, and file any other required document so that, as thereafter
delivered, neither the Registration Statement nor such Prospectus will contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
l. Use its best efforts to cause all Registrable Securities relating to
such Registration Statement to be listed on the American Stock Exchange ("AMEX")
or on any other stock market or trading facility on which the shares of Common
Stock are traded, listed or quoted (each a "Subsequent Market") as and when
required pursuant to the Purchase Agreement.
m. Enter into such agreements (including an underwriting agreement in
form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to such
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings (subject to the scheduling of appropriate
exceptions to insure such representations and warranties are accurate), and
confirm the same if and when requested; (ii) in the case of an Underwritten
Offering obtain and deliver copies thereof to each Holder and the managing
underwriters, if any, of opinions of counsel to the Company and updates thereof
addressed to each Holder and each such underwriter, in form, scope and substance
reasonably satisfactory to any such managing underwriters and Special Counsel to
the selling Holders covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately prior to
the effectiveness of the Registration Statement, and, in the case of an
Underwritten Offering, at the time of delivery of any Registrable Securities
sold pursuant thereto, use its best reasonable efforts to obtain and deliver
copies to the Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in the Registration Statement), addressed to the Company in form
and substance as are customary in connection with Underwritten Offerings; (iv)
if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the selling
Holders and the underwriters, if any, than those set forth in Section 5 (or such
other provisions and procedures acceptable to the managing underwriters, if any,
and holders of a majority of Registrable Securities participating in such
Underwritten Offering); and (v) deliver such documents and certificates as may
be reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing underwriters to
evidence the continued validity of the representations and warranties made
pursuant to Section 3(m)(i) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.
8
<PAGE> 9
n. Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
o. Comply with all applicable rules and regulations of the Commission.
p. The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request. If the Registration Statement
refers to any Holder by name or otherwise as the holder of any securities of the
Company, then such Holder shall have the right to require (if such reference to
such Holder by name or otherwise is not required by the Securities Act or any
similar Federal statute then in force) the deletion of the reference to such
Holder in any amendment or supplement to the Registration Statement filed or
prepared subsequent to the time that such reference ceases to be required.
4. Registration Expenses
a. All fees and expenses incident to the performance of or compliance
with this Agreement by the Company, except as and to the extent specified in
Section 4(b), shall be borne by the Company whether or not pursuant to an
Underwritten Offering and whether or not the Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to the Registration Statement. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with the AMEX and any Subsequent Market on which
the Common Stock is then listed for trading, and (B) in compliance with state
securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Holders in connection with Blue Sky
qualifications or exemptions of the Registrable Securities and determination of
the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as the managing underwriters, if any, or the Holders of a
majority of
9
<PAGE> 10
Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is requested by the
managing underwriters, if any, or by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses of the Company, (iv) fees and disbursements of
counsel for the Company and Special Counsel for the Holders, (v) Securities Act
liability insurance, if the Company so desires such insurance, and (vi) fees and
expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement. In addition,
the Company shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required hereunder.
b. If the Holders require an Underwritten Offering pursuant to the
terms hereof, the Company shall be responsible for all costs, fees and expenses
in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
5. Indemnification
a. Indemnification by the Company. The Company shall, notwithstanding
any termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents (including any underwriters retained by such Holder
in connection with the offer and sale of Registrable Securities), brokers
(including brokers who offer and sell Registrable Securities as principal as a
result of a pledge or any failure to perform under a margin call of Common
Stock), investment advisors and employees of each of them, each Person who
controls any such Holder (within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
reasonable attorneys' fees) and expenses (collectively, "Losses"), as incurred,
arising out of or relating to any untrue or alleged untrue statement of a
material fact contained in the Registration Statement, any Prospectus or any
form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder
10
<PAGE> 11
expressly for use therein, or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto or (2) in the case of an
occurrence of an event of the type specified in Section 3(d)(ii)-(vi), the use
by such Holder of an outdated or defective Prospectus after the Company has
notified such Holder in writing that the Prospectus is outdated or defective and
prior to the receipt by such Holder of the Advice contemplated in Section 6(e).
The Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement.
b. Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus, or in any amendment or supplement thereto. In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
c. Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed
11
<PAGE> 12
in writing to pay such fees and expenses; or (2) the Indemnifying Party shall
have failed promptly to assume the defense of such Proceeding and to employ
counsel reasonably satisfactory to such Indemnified Party in any such
Proceeding; or (3) the named parties to any such Proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that a
conflict of interest is likely to exist if the same counsel were to represent
such Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
d. Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of
12
<PAGE> 13
allocation that does not take into account the equitable considerations referred
to in the immediately preceding paragraph. Notwithstanding the provisions of
this Section 5(d), no Holder shall be required to contribute, in the aggregate,
any amount in excess of the amount by which the proceeds actually received by
such Holder from the sale of the Registrable Securities subject to the
Proceeding exceeds the amount of any damages that such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
The indemnity and contribution agreements contained in this Section are
in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. Miscellaneous
a. Remedies. In the event of a breach by the Company or by a Holder, of
any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
b. No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specified in Schedule 6(b)
hereto, neither the Company nor any of its subsidiaries has previously entered
into any agreement granting any registration rights with respect to any of its
securities to any Person that have not been satisfied in full. Without limiting
the generality of the foregoing, without the written consent of the Holders of a
majority of the then outstanding Registrable Securities, the Company shall not
grant to any Person the right to request the Company to register any securities
of the Company under the Securities Act unless the rights so granted are subject
in all respects to the prior rights in full of the Holders set forth herein, and
are not otherwise in conflict or inconsistent with the provisions of this
Agreement.
c. No Piggyback on Registrations. Except as and to the extent specified
in Schedule 6(b) hereto, neither the Company nor any of its security holders
(other than the Holders in such capacity pursuant hereto) may include securities
of the Company in the Registration Statement other than the Registrable
Securities, and the Company shall not after the date hereof enter into any
agreement providing any such right to any of its security holders.
d. Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.
13
<PAGE> 14
e. Discontinued Disposition. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of any event of the kind described in Sections 3(d)(ii),
3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue
disposition of such Registrable Securities under the Registration Statement
until such Holder's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by Section 3(k), or until it is
advised in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.
f. Piggy-Back Registrations. If at any time when there is not an
effective Registration Statement covering all of the Registrable Securities then
outstanding and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder of Registrable
Securities written notice of such determination and, if within twenty (20) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered, provided such
registrable securities are not freely tradeable without volume restrictions
under Rule 144(k).
g. Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and the
Holders of at least two-thirds of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders and that does not directly or indirectly affect the rights of other
Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
h. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 8:00 p.m. (New York City
time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in the Purchase Agreement later than 8:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom
14
<PAGE> 15
such notice is required to be given. The address for such notices and
communications shall be as follows:
If to the Company: Franklin Telecommunication Corp.
733 Lakefield Road
Westlake Village, CA 91361
Facsimile No.: (805) 373-7373
Attn: Chief Financial Officer
With copies to: Haddan & Zepfel LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
Facsimile No.: (949) 752-6161
Attn: Robert J. Zepfel, Esq.
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the
stock transfer books of the Company or such other address as
may be designated in writing hereafter, in the same manner,
by such Person.
i. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. The Company may not assign its
rights or obligations hereunder without the prior written consent of each
Holder. Each Holder may assign their respective rights hereunder in the manner
and to the Persons as permitted under this Agreement and the Purchase Agreement.
j. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
k. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of any of the Transaction Documents) and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof.
15
<PAGE> 16
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.
l. Cumulative Remedies. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law.
m. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
n. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
o. Shares Held by the Company and its Affiliates. Whenever the consent
or approval of Holders of a specified percentage of Registrable Securities is
required hereunder, Registrable Securities held by the Company or its Affiliates
(other than any Holder or transferees or successors or assigns thereof if such
Holder is deemed to be an Affiliate solely by reason of its holdings of such
Registrable Securities) shall not be counted in determining whether such consent
or approval was given by the Holders of such required percentage.
p. Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and neither Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES TO FOLLOW]
16
<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
FRANKLIN TELECOMMUNICATIONS CORP.
By: /s/ TOM RUSSELL
---------------------------------
Name: Tom Russell
--------------------------------
Title: Vice President - CFO
------------------------------
17
<PAGE> 18
STRONG RIVER INVESTMENTS, INC.
By: /s/ KENNETH C. HENDERSON
------------------------------------
Name: Kenneth C. Henderson
------------------------------
Title: Attorney-in-Fact
-----------------------------
Address for Notice:
Strong River Investment, Inc.
c/o Gonzalez-Ruiz & Aleman (BVI) Limited
Wickhams Cay I, Vanterpool Plaza
P.O. Box 873
Road Town, Tortolla. BVI
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and
(212) 541-1432
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen, Esq.
18
<PAGE> 19
Annex A
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the
box, puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
19
<PAGE> 20
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
20
<PAGE> 1
EXHIBIT 10.5
NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. 1 $500,000
FRANKLIN TELECOMMUNICATIONS CORP.
10% CONVERTIBLE NOTE
DUE DECEMBER 3, 2002
THIS NOTE is one of a series of duly authorized and issued notes of
Franklin Telecommunications Corp., a California corporation, having a principal
place of business at 733 Lakefield Road, Westlake Village, California 91361 (the
"Company"), designated as its 10% Convertible Notes, due December 3, 2002, in
the aggregate principal amount of Two Million and Five Hundred Thousand Dollars
($2,500,000) (the "Notes").
FOR VALUE RECEIVED, the Company promises to pay to Strong
River Investments, Inc, or its registered assigns (the "Holder""), the
principal sum of Five Hundred Thousand Dollars ($500,000), on December
3, 2002 or such earlier date as the Notes are required or permitted to
be repaid as provided hereunder (such date, the "Maturity Date") and to
pay interest, in cash or shares of Common Stock (as defined in Section
5), to the Holder on the aggregate unconverted and then outstanding
principal amount of this Note, at the rate of 10% per annum, on and
after the Put Date (as defined herein), on each December 31, March 31,
June 30 and September 30 of each year during which any principal amount
of this Note remains outstanding (each a "Quarterly Date") and each
Conversion Date (as defined herein) (each of a Conversion Date and such
Quarterly Dates are referred to herein as an "Interest Payment Date").
Subject to the terms and conditions herein, the decision whether to pay
interest hereunder in Common Stock or cash shall be at the discretion
of the Company. Not less than ten (10) days prior to each Interest
Payment Date occurring subsequent to the Put Date, the Company shall
provide the Holder with written notice of its election to pay interest
hereunder either in (i) cash no later than three (3) Trading Days (as
defined in Section 5) following the applicable Interest Payment Date or
(ii) shares of Common Stock pursuant to the terms of Section 4(a)(i). A
failure of the Company to timely provide the aforementioned written
notice, shall result in the Company's obligation to pay interest
hereunder in shares of Common Stock pursuant to the terms of Section
4(a)(i) on the applicable Interest Payment Date. Any interest to be
paid in cash hereunder that is not paid within three (3) Trading Days
1
<PAGE> 2
following an Interest Payment Date shall continue to accrue and shall
entail a late fee, which must be paid in cash, at the rate of 18% per
annum or the lesser rate permitted by applicable law (such fees to
accrue daily, from the date such interest payment is due hereunder
through and including the date of payment). Interest shall accrue daily
commencing on the Original Issue Date (as defined in Section 5) until
payment in full of the principal sum, together with all accrued and
unpaid interest and other amounts which may become due hereunder, has
been made. Interest hereunder will be paid to the Person (as defined in
Section 5) in whose name this Note is registered on the records of the
Company regarding registration and transfers of Notes (the "Note
Register").
This Note is subject to the following additional provisions:
Section 1. This Note is exchangeable for an equal aggregate principal
amount of Notes of different authorized denominations, as requested by the
Holder surrendering the same. No service charge will be made for such
registration of transfer or exchange.
Section 2. This Note has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement (as
defined in Section 5) and may be transferred or exchanged only in compliance
with the Purchase Agreement. Prior to due presentment to the Company for
transfer of this Note, the Company and any agent of the Company may treat the
Person (as defined in Section 5), in whose name this Note is duly registered on
the Note Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Note is overdue,
and neither the Company nor any such agent shall be affected by notice to the
contrary.
Section 3. Events of Default.
(a) "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest
on or liquidated damages in respect of, any Notes, free of all claims
of subordination, as and when the same shall become due and payable
(whether on a Conversion Date, a Quarterly Date, the Maturity Date, by
acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of the Purchase Agreement, the Registration Rights Agreement (as
defined in Section 5) the Common Stock Purchase Warrant delivered to
the original Holder pursuant to the Purchase Agreement or any Notes,
and such failure or breach shall not, if subject to the probability of
cure by the Company, have been remedied within five (5) days after the
date on which notice of such failure or breach shall have been given;
2
<PAGE> 3
(iii) the Company or any of its subsidiaries shall commence or
there shall be commenced against the Company or any such subsidiary a
case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences
any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period
of 60 days; or the Company or any subsidiary thereof is adjudicated
insolvent or bankrupt; or any order of relief or other order approving
any such case or proceeding is entered; or the Company or any
subsidiary thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company or any
subsidiary thereof makes a general assignment for the benefit of
creditors; or the Company shall fail to pay, or shall state that it is
unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a
meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company or any subsidiary
thereof for the purpose of effecting any of the foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be
issued, or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding two hundred
thousand dollars ($200,000), whether such indebtedness now exists or
shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise become due and payable;
(v) the Common Stock shall either be delisted from the
American Stock Exchange ("AMEX") or suspended from trading on the AMEX,
without being relisted thereon or on the New York Stock Exchange, the
Nasdaq National Market or the Nasdaq SmallCap Market (each, a
"Subsequent Market") or having such suspension lifted and/or resuming
trading for three (3) consecutive Trading Days (as defined in Section
5);
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 5), shall agree to sell or dispose
all or in excess of 33% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction), or shall redeem or repurchase more than a de minimis
number of shares of Common Stock or other equity securities of the
Company (other than redemptions of Underlying Shares (as defined in
Section 5));
3
<PAGE> 4
(vii) an Underlying Shares Registration Statement (as defined
in Section 5) shall not have been declared effective by the Commission
(as defined in Section 5) on or prior to the Effectiveness Date under
the Registration Rights Agreement;
(viii) if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), the effectiveness of the Underlying
Shares Registration Statement lapses for any reason for more than an
aggregate of five (5) Trading Days (which need not be consecutive
days), or the Holder shall not be permitted to resell Registrable
Securities (as defined in the Registration Rights Agreement) under the
Underlying Shares Registration Statement for more than an aggregate of
five (5) Trading Days (which need not be consecutive Trading Days);
(ix) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as defined below) relating
thereto (other than an Event resulting from a failure of an Underlying
Shares Registration Statement to be declared effective by the
Commission on or prior to the Effectiveness Date under the Registration
Rights Agreement);
(x) the Company shall fail for any reason to deliver
certificates to a Holder prior to the twelfth (12th) day after a
Conversion Date pursuant to and in accordance with Section 4(b) or the
Company shall provide notice to the Holder, including by way of public
announcement, at any time, of its intention not to comply with requests
for conversions of any Notes in accordance with the terms hereof;
(xi) the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In (as defined herein) within seven
(7) days after notice is deemed delivered hereunder;
(xii) the Company shall issue in excess of an aggregate of
25,000 shares of Common Stock or shall issue Common Stock Equivalents
(as defined herein) entitling the holders thereof to acquire in excess
of an aggregate of 25,000 shares of Common Stock in connection with or
to any present or future lender or creditor of the Company or any
affiliate subsidiary thereof;
(xiii) except for (a) the issuance of up to 250,000 shares of
Common Stock in settlement any litigation and (b) the payment of up to
an aggregate of $250,000 in cash, the Company shall agree to pay or
settle any litigation or action for an amount in stock or cash that
exceeds the insurance coverage for such litigation or claim; or
(xvi) other than indebtedness and payables between the Company
and its subsidiaries, the Company shall, without the consent of the
Holders, restructure any material portion of its present or future debt
obligations or payables (for purposes of this subsection, it is agreed
that solely extending the time for repayment (as opposed to the amount
owed) of debt in any such extensions whereby the aggregate annual rate
of interest applicable to
4
<PAGE> 5
such debt (inclusive of the consideration, if any, for such extension),
does not exceed the prime rate of interest then in effect as announced
by The Chase Manhattan Bank, N.A. plus 3% shall not constitute a
restructuring of debt.
(b) During the time that any portion of this Note remains outstanding,
if any Event of Default occurs and is continuing, the full principal amount of
this Note (and, at the Holder's option, all other Notes then held by such
Holder), together with interest and other amounts owing in respect thereof, to
the date of acceleration shall become, immediately due and payable in cash. The
aggregate amount payable upon an Event of Default shall be equal to the sum of
(i) the Mandatory Prepayment Amount (as defined in Section 5) plus (ii) the
product of (A) the number of Underlying Shares issued in respect of conversions
hereunder or as payment of interest hereunder, in either case, within thirty
(30) days of the date of a declaration of an Event of Default and then held by
the Holder and (B) the Per Share Market Value (as defined in Section 5) on the
date prepayment is due or the date the full prepayment price is paid, whichever
is greater. Interest shall accrue on the prepayment amount hereunder from the
seventh (7th) day after such amount is due (being the date of an Event of
Default) through the date of prepayment in full thereof at the rate of 18% per
annum or such lesser maximum amount that is permitted to be paid by applicable
law, to accrue daily from the date such payment is due hereunder through and
including the date of payment. All Notes and Underlying Shares for which the
full prepayment price hereunder shall have been paid in accordance herewith
shall be promptly surrendered to or as directed by the Company. The Holder need
not provide and the Company hereby waives any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration
of any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
Section 4. Conversion.
(a) (i) Prepayment or Conversions. (A) On the 90th day following the
Original Issue Date (the "Put Date"), the Company will notify the Holder in
writing (the "Company Notification") of its intention to either (i) prepay the
aggregate principal amount outstanding and all interest and payments then due
hereunder no later than the 150th day following the Original Issue Date (such
day, the "Payment Date") for a cash payment equal to the Optional Prepayment
Price (as defined in Section 5) or (ii) at any time and from time to time, from
and after the Put Date until the Maturity Date, allow the Holder to convert all
or a portion of this Note into shares of Common Stock (subject to the
limitations on conversion set forth in Section 4(a)(iii) hereof) without any
further action by the Company. A failure on the part of the Company to either
timely deliver a Company Notification to the Holder or, if the Company shall
have elected the option pursuant to clause (i) of the immediately preceding
sentence and shall fail to pay the Optional Prepayment Price on or prior to the
Payment Date, then, as of the Payment Date, the Company will automatically be
deemed to have elected the option pursuant to clause (ii) of the immediately
preceding sentence. If the Company shall have elected the option pursuant to
clause (i) of the immediately preceding sentence, the Notes for which the full
prepayment price hereunder shall have been paid in accordance
5
<PAGE> 6
herewith shall be promptly surrendered to or as directed by the Company. If the
Company shall have elected the option pursuant to clause (ii) of the immediately
preceding sentence, the Note shall remain in effect in all respects thereof. The
number of shares of Common Stock issuable upon a conversion hereunder shall be
determined by adding the sum of (i) the quotient obtained by dividing (x) the
outstanding principal amount of this Note to be converted and (y) the Conversion
Price (as defined herein), and (ii) the amount equal to the product of (x) the
outstanding principal amount of this Note to be converted and (y)(I) the product
of (1) the quotient obtained by dividing 0.10 by 365 and (2) the number of days
for which such principal amount was outstanding, divided by (II) the Conversion
Price on the Conversion Date.
(B) Notwithstanding anything to the contrary contained herein,
if on any Conversion Date:
(1) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as
treasury stock, is insufficient to pay interest hereunder in
shares of Common Stock;
(2) after the Interest Effectiveness Date (as defined in
Section 5) such shares of Common Stock (x) are not registered for
resale pursuant to an effective Underlying Shares Registration
Statement and (y) may not be sold without volume restrictions
pursuant to Rule 144(k) promulgated under the Securities Act (as
defined in Section 5), as determined by counsel to the Company
pursuant to a written opinion letter, addressed to the Company's
transfer agent in the form and substance acceptable to the
applicable Holder and such transfer agent (if the shares of Common
Stock are permitted by the Holder to be delivered under this
clause (2) prior to the Effectiveness Date (as defined in the
Registration Rights Agreement) and thereafter an Underlying Shares
Registration Statement shall be declared effective by the
Commission, the Company shall, within three (3) Trading Days after
the date of such declaration of effectiveness, exchange such
shares for shares of Common Stock that are free of restrictive
legends of any kind);
(3) the Common Stock is not listed or quoted on the AMEX
or on a Subsequent Market;
(4) the Company has failed to timely satisfy its
conversion obligations hereunder; or
(5) the issuance of such shares of Common Stock would
result in a violation of Sections 4(a)(iii)(A) and (B),
then, at the option of the Holder, the Company, in lieu of delivering shares of
Common Stock pursuant to Section 4(a)(i)(A)(ii), shall deliver, within three (3)
Trading Days of each applicable Conversion Date, an amount of cash equal to the
product of (a) the outstanding principal amount of the Notes to be converted on
such Conversion Date and (b) the product of (x) the quotient obtained by
dividing 0.10 by 365 and (y) the number of days for which such principal amount
was outstanding.
6
<PAGE> 7
(C) Subject to the provisions hereof, the Holder shall effect
conversions by surrendering the Notes (or such portions thereof) to be
converted, together with the form of conversion notice attached hereto as
Exhibit A (a "Conversion Notice") to the Company. Each Conversion Notice shall
specify the principal amount of Notes to be converted and the date on which such
conversion is to be effected, which date may not be prior to the date such
Conversion Notice is deemed to have been delivered hereunder (a "Conversion
Date"). If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that such Conversion Notice is deemed
delivered hereunder. Subject to Section 4(b), each Conversion Notice, once
given, shall be irrevocable. If the Holder is converting less than all of the
principal amount represented by the Note(s) tendered by the Holder with the
Conversion Notice, or if a conversion hereunder cannot be effected in full for
any reason, the Company shall honor such conversion to the extent permissible
hereunder and shall promptly deliver to such Holder (in the manner and within
the time set forth in Section 4(b)) a new Note for such principal amount as has
not been converted.
(ii) Automatic Conversion. Subject to the provisions in
this paragraph, the principal amount of Notes for which conversion notices have
not previously been received or for which prepayment has not been required
hereunder shall be automatically converted on December 3, 2002 (the "Automatic
Conversion Date") pursuant to Section 4(a)(i), at the Conversion Price on such
date. The conversion contemplated by this paragraph shall not occur if (a) (1)
an Underlying Securities Registration Statement is not then effective that names
the Holder as a selling stockholder thereunder or (2) the Holder is not
permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated under
the Securities Act, without volume restrictions, as evidenced by an opinion
letter of counsel acceptable to the Holder and the transfer agent for the Common
Stock; (b) there are not sufficient shares of Common Stock authorized and
reserved for issuance upon such conversion; and (c) the Company shall not have
defaulted on its covenants and obligations hereunder or under the Purchase
Agreement or Registration Rights Agreement. Notwithstanding anything herein to
the contrary, the Automatic Conversion Date shall be extended (on a day-for-day
basis) for any Trading Days that the Holder is unable to resell Underlying
Shares under an Underlying Securities Registration Statement due to (a) the
Common Stock not being listed for trading on the AMEX or any Subsequent Market,
(b) the failure of an Underlying Securities Registration Statement to be
declared effective by the Commission by the Effectiveness Date, or (c) if an
Underlying Securities Registration Statement shall have been declared effective
by the Commission, (x) the failure of such Underlying Securities Registration
Statement to remain effective at all times thereafter as to all Underlying
Shares, or (y) the suspension of the Holder's ability to resell Underlying
Shares thereunder. Notwithstanding anything to the contrary contained herein, a
conversion pursuant to this Section shall not be subject to the provisions of
Section 4(a)(iii)(A).
(iii) Certain Conversion Restrictions.
(A)(1) A Holder may not convert Notes or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment
7
<PAGE> 8
would result in the Holder, together with any affiliate thereof, beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act (as
defined in Section 5) and the rules promulgated thereunder) in excess of 4.999%
of the then issued and outstanding shares of Common Stock, including shares
issuable upon conversion of, and payment of interest on, the Notes held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Company the number of shares of Common Stock it may hold at the
time of a conversion hereunder, unless the conversion at issue would result in
the issuance of shares of Common Stock in excess of 4.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the principal amount of Notes are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for a principal amount of Notes that
would result in the issuance in excess of the permitted amount hereunder, the
Company shall notify the Holder of this fact and shall honor the conversion for
the maximum principal amount permitted to be converted on such Conversion Date
in accordance with the periods described in Section 4(b) and, at the option of
the Holder, either retain any principal amount tendered for conversion in excess
of the permitted amount hereunder for future conversions or return such excess
principal amount to the Holder. The provisions of this Section may be waived by
a Holder (but only as to itself and not to any other Holder) upon not less than
61 days prior notice to the Company. Other Holders shall be unaffected by any
such waiver.
(2) A Holder may not convert Notes or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
interest on, the Notes held by such Holder after application of this Section.
Since the Holder will not be obligated to report to the Company the number of
shares of Common Stock it may hold at the time of a conversion hereunder, unless
the conversion at issue would result in the issuance of shares of Common Stock
in excess of 9.999% of the then outstanding shares of Common Stock without
regard to any other shares which may be beneficially owned by the Holder or an
affiliate thereof, the Holder shall have the authority and obligation to
determine whether the restriction contained in this Section will limit any
particular conversion hereunder and to the extent that the Holder determines
that the limitation contained in this Section applies, the determination of
which portion of the principal amount of Notes are convertible shall be the
responsibility and obligation of the Holder. If the Holder has delivered a
Conversion Notice for a principal amount of Notes that would result in the
issuance of in excess of the permitted amount hereunder, the Company shall
notify the Holder of this fact and shall honor the conversion for the maximum
principal amount permitted to be converted on such Conversion Date in accordance
with the periods described in Section 4(b) and, at the option of the Holder,
either retain any principal amount tendered for conversion in excess of the
permitted amount hereunder for future conversions or return such excess
principal amount to the Holder. The provisions of this
8
<PAGE> 9
Section may be waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 61 days prior notice to the Company. Other Holders
shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading
on the AMEX and the Company has not obtained the Shareholder Approval (as
defined below), then the Company may not issue in excess of 5,156,765 shares of
Common Stock upon conversions of Notes or as payment of interest thereon in
shares of Common Stock, which number shall be subject to adjustment (such number
of shares, the "Issuable Maximum"). The Issuable Maximum equals 19.999% of the
number of shares of Common Stock outstanding immediately prior to the Original
Issue Date. If on any Conversion Date (A) the Common Stock is listed for trading
on the AMEX, (B) the Conversion Price then in effect is such that the aggregate
number of shares of Common Stock that would then be issuable upon conversion in
full of all then outstanding Notes and as payment of interest thereon in shares
of Common Stock, together with any shares of Common Stock previously issued upon
conversion of Notes and as payment of interest thereon, would exceed Issuable
Maximum, and (C) the Company shall not have previously obtained the vote of
shareholders (the "Shareholder Approval"), if any, as may be required by the
applicable rules and regulations of the American Stock Exchange (or any
successor entity) applicable to approve the issuance of shares of Common Stock
in excess of the Issuable Maximum pursuant to the terms hereof, then the Company
shall issue to the Holder so requesting a conversion a number of shares of
Common Stock equal to the Issuable Maximum and, with respect to the remainder of
the principal amount of Notes then held by such Holder for which a conversion in
accordance with the Conversion Price would result in an issuance of shares of
Common Stock in excess of the Issuable Maximum (the "Excess Principal"), the
Holder shall have the option to require the Company to either (1) use its best
efforts to obtain the Shareholder Approval applicable to such issuance as soon
as is possible, but in any event not later than the 60th day after such request,
or (2) pay cash to the converting Holder in an amount equal to the Mandatory
Prepayment Amount for the Excess Principal. If the converting Holder shall have
elected the first option pursuant to the immediately preceding sentence and the
Company shall have failed to obtain the Shareholder Approval on or prior to the
60th day after such request, then within three (3) days of such 60th day, the
Company shall pay cash to the converting Holder an amount equal to the Mandatory
Prepayment Amount for the Excess Principal. If the Company fails to pay the
Mandatory Prepayment Amount in full pursuant to this Section within seven (7)
days of the date payable, the Company will pay interest thereon at a rate of 18%
per annum (or such lesser maximum amount that is permitted to be paid by
applicable law) to the converting Holder, accruing daily from the Conversion
Date until such amount, plus all such interest thereon, is paid in full. The
Company and the Holder understand and agree that shares of Common Stock issued
to and then held by the Holder as a result of conversions of the Notes shall not
be entitled to cast votes on any resolution to obtain Shareholder Approval
pursuant hereto.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of Notes
(subject to the limitations set forth in Section 4(a)(iii) hereof), (ii) Notes
in a principal amount equal to the principal amount of Notes not converted, and
(iii) a bank check in the
9
<PAGE> 10
amount of accrued and unpaid interest (if the Company is required to pay accrued
interest in cash), provided, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
the principal amount of Notes until Notes are delivered for conversion to the
Company, or the Holder notifies the Company that such Notes have been lost,
stolen or destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, if
available, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third (3rd) Trading Day after a Conversion Date,
the Holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the principal amount of Notes tendered for conversion.
(ii) If the Company fails to deliver to the Holder such certificate
or certificates pursuant to Section 4(b)(i) by the fifth (5th) Trading Day after
the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $5,000 for each Trading Day after such
fifth (5th) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages or declare an Event of
Default pursuant to Section 3 herein for the Company's failure to deliver
certificates representing shares of Common Stock upon conversion within the
period specified herein and such Holder shall have the right to pursue all
remedies available to it at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holders from seeking to enforce damages
pursuant to any other Section hereof or under applicable law. Further, if the
Company shall not have delivered any cash due in respect of conversions of Notes
or as payment of interest thereon by the fifth (5th) Trading Day after the
Conversion Date, the Holder may, by notice to the Company, require the Company
to issue shares of Common Stock pursuant to Section 4(c), except that for such
purpose the Conversion Price applicable thereto shall be the lesser of the
Conversion Price on the Conversion Date and the Conversion Price on the date of
such Holder demand. Any such shares will be subject to the provision of this
Section.
(iii) In addition to any other rights available to the Holder, if
the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 4(b)(i) by the fifth (5th) Trading Day after the Conversion
Date, and if after such fifth (5th) Trading Day the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Underlying Shares which the Holder anticipated
receiving upon such conversion (a "Buy-In"), then the Company shall (A) pay in
cash to the Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the
product of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the market
price of the Common Stock at the time of the sale giving rise to such purchase
obligation and (B) at the option of the Holder, either
10
<PAGE> 11
reissue Notes in principal amount equal to the principal amount of the attempted
conversion or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of Notes with respect to which the market price of the
Underlying Shares on the date of conversion was a total of $10,000 under clause
(A) of the immediately preceding sentence, the Company shall be required to pay
the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c) The conversion price in effect on any Conversion Date (the
"Conversion Price") shall be the lesser of (i) 2.50 and (ii) 92% of the average
of the three (3) lowest Per Share Market Values for the twenty two (22) Trading
Days immediately preceding the Conversion Date, provided, that such twenty two
(22) Trading Day period shall be extended for the number of Trading Days during
such period in which (A) trading in the Common Stock is suspended by the AMEX or
a Subsequent Market on which the Common Stock is then listed, or (B) after the
date declared effective by the Commission, the Underlying Shares Registration
Statement is not effective, or (C) after the date declared effective by the
Commission, the Prospectus included in the Underlying Shares Registration
Statement may not be used by the Holder for the resale of Underlying Shares.
If (a) an Underlying Shares Registration Statement is not filed on or
prior to the Filing Date (as defined under the Registration Rights Agreement)
(if the Company files such Underlying Shares Registration Statement without
affording the Holder the opportunity to review and comment on the same as
required by Section 3(a) of the Registration Rights Agreement, the Company shall
not be deemed to have satisfied this clause (a)), or (b) the Company fails to
file with the Commission a request for acceleration in accordance with Rule
12d1-2 promulgated under the Exchange Act, within five (5) days of the date that
the Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed," or not subject to further review, or (c) the Underlying Shares
Registration Statement is not declared effective by the Commission on or prior
to the Effectiveness Date, or (d) such Underlying Shares Registration Statement
is filed with and declared effective by the Commission but thereafter ceases to
be effective as to all Registrable Securities at any time prior to the
expiration of the Effectiveness Period (as defined in the Registration Rights
Agreement), without being succeeded within ten (10) days by an amendment to such
Underlying Shares Registration Statement or by a subsequent Underlying Shares
Registration Statement filed with and declared effective by the Commission, or
(e) the Common Stock shall be delisted or suspended from trading on the AMEX or
on any Subsequent Market for more than three (3) days (which need not be
consecutive days), or (f) the conversion rights of the Holders are suspended for
any reason, or (g) an amendment to the Underlying Shares Registration Statement
is not filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in order
11
<PAGE> 12
for the Underlying Shares Registration Statement to be declared effective (any
such failure or breach being referred to as an "Event," and for purposes of
clauses (a), (c), (f) the date on which such Event occurs, or for purposes of
clause (b) the date on which such five (5) day period is exceeded, or for
purposes of clauses (d) and (g) the date which such 10 day-period is exceeded,
or for purposes of clause (e) the date on which such three day-period is
exceeded, being referred to as "Event Date"), then, on the Event Date and each
monthly anniversary thereof until such time as the applicable Event is cured,
the Company to pay to the Holder 3.0% of the aggregate principal amount of Notes
and interest accrued thereon then held by the Holder, in cash, as liquidated
damages and not as a penalty. The liquidated damages pursuant to the terms
hereof shall apply on a pro-rata basis for any portion of a month prior to the
cure of an Event. The provisions of this Section are not exclusive and shall in
no way limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any Notes are outstanding, (a)
shall pay a stock dividend or otherwise make a distribution or distributions on
shares of its Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then the Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any Notes are outstanding,
shall issue rights, options or warrants to all holders of Common Stock (and not
to Holders) entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Value at the record date
mentioned below, then the Conversion Price shall be multiplied by a fraction, of
which the denominator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made whenever
such rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive such
rights, options or warrants. However, upon the expiration of any such right,
option or warrant to purchase shares of the Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section, if
any such right, option or warrant shall expire and shall not have been
exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the
12
<PAGE> 13
provisions of this Section after the issuance of such rights or warrants) had
the adjustment of the Conversion Price made upon the issuance of such rights,
options or warrants been made on the basis of offering for subscription or
purchase only that number of shares of the Common Stock actually purchased upon
the exercise of such rights, options or warrants actually exercised.
If the Company or any subsidiary thereof, as applicable with respect to
Common Stock Equivalents (as defined below), at any time while Notes are
outstanding, shall issue shares of Common Stock or rights, warrants, options or
other securities or debt that is convertible into or exchangeable for shares of
Common Stock ("Common Stock Equivalents"), entitling any Person to acquire
shares of Common Stock at a price per share less than the Conversion Price (if
the holder of the Common Stock or Common Stock Equivalent so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights issued in connection with such issuance at a price
less than the prevailing Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price) then in effect, then the Conversion
Price shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such shares of Common Stock or such Common Stock Equivalents plus the number
of shares of Common Stock which the offering price for such shares of Common
Stock or Common Stock Equivalents would purchase at the Conversion Price, and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of shares
of Common Stock so issued or issuable, provided, that for purposes hereof, all
shares of Common Stock that are issuable upon conversion, exercise or exchange
of Common Stock Equivalents shall be deemed outstanding immediately after the
issuance of such Common Stock Equivalents. Such adjustment shall be made
whenever such shares of Common Stock or Common Stock Equivalents are issued.
However, upon the expiration of any Common Stock Equivalents the issuance of
which resulted in an adjustment in the Conversion Price pursuant to this
Section, if any such Common Stocks Equivalents shall expire and shall not have
been exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section after the
issuance of such Common Stock Equivalents) had the adjustment of the Conversion
Price made upon the issuance of such Common Stock Equivalents been made on the
basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such Common Stock
Equivalents actually exercised.
If the Company, at any time while Notes are outstanding, shall
distribute to all holders of Common Stock (and not to Holders) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Conversion Price at which Notes shall
thereafter be convertible shall be determined by multiplying the Conversion
Price in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market Value
on such record date less the then fair market value at such record date of the
13
<PAGE> 14
portion of such assets or evidence of indebtedness so distributed applicable to
one outstanding share of the Common Stock as determined by the Board of
Directors in good faith; provided, however, that in the event of a distribution
exceeding ten percent (10%) of the net assets of the Company, if the Holders of
a majority in interest of the Notes dispute such valuation, such fair market
value shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Company) (an "Appraiser") selected in good faith by the
holders of a majority in interest of Notes then outstanding; and provided,
further, that the Company, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser. In either case the adjustments shall be described in a
statement provided to the Holders of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
In case of any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is converted into other
securities, cash or property, the Holders shall have the right thereafter to, at
their option, (A) convert the then outstanding principal amount, together with
all accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Note only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of the Common Stock
following such reclassification or share exchange, and the Holders of the Notes
shall be entitled upon such event to receive such amount of securities, cash or
property as the shares of the Common Stock of the Company into which the then
outstanding principal amount, together with all accrued but unpaid interest and
any other amounts then owing hereunder in respect of this Note could have been
converted immediately prior to such reclassification or share exchange would
have been entitled or (B) require the Company to prepay the aggregate of its
outstanding principal amount of Notes, plus all interest and other amounts due
and payable thereon, at a price determined in accordance with Section 3(b). The
entire prepayment price shall be paid in cash. This provision shall similarly
apply to successive reclassifications or share exchanges.
No adjustments in the Conversion Price shall be required if such
adjustment is less than $0.01; provided, however, that any adjustments which by
reason of this Section are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 4 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be.
Whenever the Conversion Price is adjusted pursuant to any of Section
4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice setting
forth the Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
If (A) the Company shall declare a dividend (or any other distribution)
on the Common Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or a
14
<PAGE> 15
redemption of the Common Stock; (C) the Company shall authorize the granting to
all holders of the Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any rights; (D) the approval of
any stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company; then, in each case, the Company shall cause to be
filed at each office or agency maintained for the purpose of conversion of the
Notes, and shall cause to be mailed to the Holders at their last addresses as
they shall appear upon the stock books of the Company, at least 20 calendar days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Notes during the 20-day period
commencing the date of such notice to the effective date of the event triggering
such notice.
(xi) In case of any (1) merger or consolidation of the Company with or
into another Person that would constitute a Change of Control Transaction, or
(2) sale, directly or indirectly, by the Company of more than one-half of the
assets of the Company (on an as valued basis) in one or a series of related
transactions, or (3) tender or other offer or exchange (whether by the Company
or another Person) pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, stock, cash or property of
the Company or another Person; then a Holder shall have the right to (A) if
permitted under Section 3(b) hereof, exercise its rights of prepayment under
Section 3(b) with respect to such event, (B) convert its aggregate principal
amount of Notes then outstanding into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common
Stock following such merger, consolidation or sale, and such Holder shall be
entitled upon such event or series of related events to receive such amount of
securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of Notes could have been converted immediately prior
to such merger, consolidation or sales would have been entitled, (C) in the case
of a merger or consolidation, (x) require the surviving entity to issue shares
of convertible preferred stock or convertible debentures with such aggregate
stated value or in such face amount, as the case may be, equal to the aggregate
principal amount of Notes then held by such Holder, plus all accrued and unpaid
interest and other amounts owing thereon, which newly issued shares of preferred
stock or debentures shall have terms identical (including with respect to
conversion) to the terms of this Note (except, in the case of preferred stock,
as may be required to reflect the differences between equity and debt) and
15
<PAGE> 16
shall be entitled to all of the rights and privileges of a Holder of Notes set
forth herein and the agreements pursuant to which the Notes were issued
(including, without limitation, as such rights relate to the acquisition,
transferability, registration and listing of such shares of stock other
securities issuable upon conversion thereof), and (y) simultaneously with the
issuance of such convertible preferred stock or convertible debentures, shall
have the right to convert such instrument only into shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger or consolidation, or (D) in the event of an
exchange or tender offer or other transaction contemplated by clause (3) of this
Section, tender or exchange its aggregate principal amount of Notes for such
securities, stock, cash and other property receivable upon or deemed to be held
by holders of Common Stock that have tendered or exchanged their shares of
Common Stock following such tender or exchange, and such Holder shall be
entitled upon such exchange or tender to receive such amount of securities, cash
and property as the shares of Common Stock into which such aggregate principal
amount of Notes could have been converted (taking into account all then accrued
and unpaid dividends) immediately prior to such tender or exchange would have
been entitled as would have been issued. In the case of clause (C), the
conversion price applicable for the newly issued shares of convertible preferred
stock or convertible debentures shall be based upon the amount of securities,
cash and property that each share of Common Stock would receive in such
transaction and the Conversion Price in effect immediately prior to the
effectiveness or closing date for such transaction. The terms of any such
merger, sale, consolidation, tender or exchange shall include such terms so as
to continue to give the Holders the right to receive the securities, cash and
property set forth in this Section upon any conversion or redemption following
such event. This provision shall similarly apply to successive such events.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of the Notes and payment of interest on
the Notes, each as herein provided, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holders, not less
than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Notes and payment of interest hereunder. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and, if the Underlying Shares Registration Statement has been
declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of the Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time. If the
Company elects not, or is unable, to make such a cash payment, the Holder shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.
16
<PAGE> 17
(f) The issuance of certificates for shares of the Common Stock on
conversion of the Notes shall be made without charge to the Holders thereof for
any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of such Notes so converted and the Company shall
not be required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
(g) Any and all notices or other communications or deliveries to be
provided by the Holders of the Notes hereunder, including, without limitation,
any Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to the Company, at the
address indicated on the first page of this Note, attention Chief Financial
Officer, or such other address or facsimile number as the Company may specify
for such purposes by notice to the Holder delivered in accordance with this
Section. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to each Holder of
the Notes at the facsimile telephone number or address of such Holder appearing
on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 8:00 p.m. (New York City time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 8:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) four days after deposit in the United States mail, (iv) the
Business Day following the date of mailing, if send by nationally recognized
overnight courier service, or (v) upon actual receipt by the party to whom such
notice is required to be given.
Section 5. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York or the State of California are authorized or required by law or other
government action to close.
"Change of Control Transaction" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in
excess of 33.33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
17
<PAGE> 18
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, the direct or indirect consolidation or
sale of all or substantially all of the assets of the Company in one or a series
of related transactions, unless following such transaction, the holders of the
Company's securities continue to hold at least 66.66% of such securities
following such transaction or (iv) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for any of
the events set forth above in (i), (ii) or (iii).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, no par value per share, of the
Company and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Interest Effectiveness Date" means the earlier to occur of (x) the
Effectiveness Date and (y) the date that an Underlying Shares Registration
Statement is declared effective by the Commission.
"Mandatory Prepayment Amount" for any Notes shall equal the sum of (i)
the greater of (A) 115% of the principal amount of Notes to be prepaid, plus all
accrued and unpaid interest thereon, and (B) the principal amount of Notes to be
prepaid, plus all accrued and unpaid interest thereon, divided by the Conversion
Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise
due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever
is less, multiplied by the Per Share Market Value on (x) the date the Mandatory
Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory
Prepayment Amount is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such Notes.
"Optional Prepayment Price" shall equal the sum of (i) the principal
amount of Notes to be prepaid, plus all accrued and unpaid interest thereon, and
(ii) all other amounts, expenses, costs and liquidated damages due in respect of
such Notes.
"Original Issue Date" shall mean the date of the first issuance of the
Notes regardless of the number of transfers of any Note and regardless of the
number of instruments which may be issued to evidence such Note.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of Common Stock on such date on the AMEX or on such
Subsequent Market on which the shares of Common Stock are then listed or quoted,
or if there is no such price on such date, then the closing bid price on the
AMEX or on such Subsequent Market on the date nearest preceding such date
(provided, that if at any time the Common Stock is listed on the AMEX, if the
Per Share Market Values in a Trading Day shall be less than the closing sales
price as reported by the AMEX for such Trading Day by more than $0.1666, then
the Per Share Market Value for such Trading Day shall be deemed $0.1666 less
than the closing sales price as reported by the AMEX for such Trading Day),
18
<PAGE> 19
or (b) if the shares of Common Stock are not then listed or quoted on the AMEX
or a Subsequent Market, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the shares of
Common Stock are not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant conversion
period, as determined in good faith by the Holder, or (d) if the shares of
Common Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the Holders
of a majority in interest of the principal amount of Notes then outstanding.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Note Purchase Agreement,
dated as of the Original Issue Date, between the Company and the original Holder
of Notes, as amended, modified or supplemented from time to time in accordance
with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Notes, as amended, modified or supplemented from time to time
in accordance with its terms.
"Securities Act" means the Securities Act of 1933, as amended.
"Trading Day" means (a) a day on which the shares of Common Stock are
traded on the AMEX or on such Subsequent Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock are not
listed on the AMEX or a Subsequent Market, a day on which the shares of Common
Stock are traded in the over-the-counter market, as reported by the OTC Bulletin
Board, or (c) if the shares of Common Stock are not quoted on the OTC Bulletin
Board, a day on which the shares of Common Stock are quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the shares of
Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof,
then Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government action to close.
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of Notes or as payment of interest in accordance with the terms
hereof.
"Underlying Shares Registration Statement" means a registration
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.
19
<PAGE> 20
Section 6. Except as expressly provided herein, no provision of this
Note shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, interest and liquidated damages (if any)
on, this Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Note is a direct obligation of the Company. This Note ranks
pari passu with all other Notes now or hereafter issued under the terms set
forth herein. As long as there are Notes outstanding, the Company shall not and
shall cause it subsidiaries not to, without the consent of the Holders, (i)
amend its certificate of incorporation, bylaws or other charter documents so as
to adversely affect any rights of the Holders; (ii) repay, repurchase or offer
to repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent permitted
or required under the Transaction Documents; or (iii) enter into any agreement
with respect to any of the foregoing. Except pursuant to the provisions of
Section 4(a)(i)(A), the Company may not prepay the outstanding principal amount
on the Notes.
Section 7. This Note shall not entitle the Holder to any of the rights
of a stockholder of the Company, including without limitation, the right to
vote, to receive dividends and other distributions, or to receive any notice of,
or to attend, meetings of stockholders or any other proceedings of the Company,
unless and to the extent converted into shares of Common Stock in accordance
with the terms hereof.
Section 8. If this Note shall be mutilated, lost, stolen or destroyed,
the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Note, or in lieu of or in substitution for a lost,
stolen or destroyed note, a new Note for the principal amount of this Note so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Note, and of the ownership hereof, and
indemnity, if requested, all reasonably satisfactory to the Company.
Section 9. Except as set forth in Schedule 2.1(q) to the Purchase
Agreement, no indebtedness of the Company is senior to this Note in right of
payment, whether with respect to interest, damages or upon liquidation or
dissolution or otherwise. The Company will not and will not permit any of its
subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom that is senior in any respect to the obligations
under this Note.
Section 10. This Note shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to conflicts of
laws thereof. The Company and the Holders hereby irrevocably submit to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or that such suit, action or proceeding is
improper. Each of the Company and the Holder hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under this
20
<PAGE> 21
instrument and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
Section 11. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note. Any waiver must be
in writing.
Section 12. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
Section 13. If it shall be found that any interest or other amount
deemed interest due hereunder shall violate applicable laws governing usury, the
applicable rate of interest or due hereunder shall be reduced to the maximum
permitted rate of interest under such law.
Section 14. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
21
<PAGE> 22
IN WITNESS WHEREOF, the Company has caused this Convertible Note to be
duly executed by a duly authorized officer as of the date first above indicated.
FRANKLIN TELECOMMUNICATIONS CORP.
By: /s/ Tom Russell
---------------------------------
Name: Tom Russell
--------------------------------
Title: Vice President - CFO
-------------------------------
Attest:
By: /s/ Helen West
---------------------------------
Name: Helen West
--------------------------------
Title: Corporate Secretary
-------------------------------
22
<PAGE> 23
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Note)
The undersigned hereby elects to convert the attached Note into shares of common
stock, no par value (the "Common Stock"), of Franklin Telecommunications Corp
(the "Company") according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
Date to Effect Conversion
Principal Amount of Notes to be Converted
Number of shares of Common Stock to be
Issued
Applicable Conversion Price
Signature
Name
Address
1
<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 20, 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
March 3, 2000
