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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 30, 1998
AURA SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 0-17249 95-4106894
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation or Organization) File Number) Identification No.)
2335 ALASKA AVENUE, EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 643-5300
FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT: NOT APPLICABLE
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ITEM 5. OTHER EVENTS
On March 30, 1998, Aura Systems, Inc. (the "Registrant") issued and sold $8
million of Convertible Debentures (the "Debentures") to a single institutional
investor for cash. The Registrant will use the proceeds from the sale of the
Debentures for working capital and general corporate purposes. The Debentures
bear interest at the rate of 7% per annum, with the entire principal amount due
and payable on March 30, 2003, subject to prior redemption or conversion. The
Debentures are convertible, at the option of the holder, into the Registrant's
Common Stock initially at a fixed conversion price of $3.64 per share, which was
110% of the closing bid price of the Common Stock on the day prior to the
closing of the financing. If the average closing price for the five trading
days ended June 3, 1998 is less than $4.00, the fixed conversion price will be
$3.13. The Debentures are subject to prepayment at the option of the holder, at
any time after December 30, 1998, at a price equal to 115% of the principal
amount, and prior thereto if the price of the Common Stock falls below $1.75
between the closing and September 30, 1998, or below $2.00 between October 1,
1998 and December 30, 1998. In the event the Registrant fails to prepay the
Debentures within five days of the date fixed for prepayment, the conversion
price of the Debentures for all conversions taking place thereafter will be
equal to the lower of the lowest closing bid price of the Common Stock during
the 60 day trading period ending one day prior to any conversion date or the
fixed conversion price then in effect.
As part of the financing, the investor received 2,415,094 five-year
Warrants, exercisable at $3.64 per share (which was 110% of the closing bid
price on the day prior to closing). The Registrant has agreed to register the
resale of the Common Stock which may be issued to the investor upon conversion
of the Debentures or exercise of the Warrants.
Detailed information regarding the terms and conditions of this financing
is set forth in the Exhibits which accompany this Report, which are identified
in Item 7. The foregoing discussion is qualified in its entirety by the
provisions of the agreements between the Company and the Buyer which are filed
herewith as Exhibits and are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
4.1 Securities Purchase Agreement dated March 30, 1998, by and between
Aura Systems, Inc. and the Buyer.
4.2 Convertible Debenture dated March 30, 1998.
4.3 Stock Purchase Warrant dated March 30, 1998.
4.4 Registration Rights Agreement dated March 30, 1998, by and between
Aura Systems,
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Inc. and the Buyer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AURA SYSTEMS, INC.
(Registrant)
Date: April 9, 1998 By: /s/ Steven C. Veen
--------------------------------------
Steven C. Veen,
Chief Financial Officer
(Chief Financial and Accounting
Officer)
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EXHIBIT 4.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of March 30,
1998, by and among Aura Systems, Inc., a Delaware corporation, with headquarters
located at 2335 Alaska Avenue, El Segundo, California 90245 ("COMPANY"), and
each of the purchasers set forth on the signature pages hereto (the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
under Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT");
B. The Company has authorized the issuance to the Buyers of (i)
convertible debentures of the Company, in the form attached hereto as EXHIBIT
"A", in the aggregate principal amount of Eight Million Dollars ($8,000,000),
convertible into shares of common stock, $.005 par value per share, of the
Company (the "COMMON STOCK"), upon the terms and subject to the limitations and
conditions set forth in such debentures (collectively, together with any
debenture(s) issued in replacement thereof or as a dividend thereon or otherwise
with respect thereto in accordance with the terms thereof, the "DEBENTURES") and
(ii) warrants, in the form attached hereto as EXHIBIT "B", to purchase Two
Million Four Hundred Fifteen Thousand Ninety-Four (2,415,094) shares of Common
Stock (the "WARRANTS");
C. The Buyers desire to purchase and the Company desires to issue and
sell, upon the terms and conditions set forth in this Agreement, the Debentures
and Warrants, for an aggregate purchase price of Eight Million Dollars
($8,000,000);
D. Each Buyer wishes to purchase, upon the terms and conditions stated in
this Agreement, such principal amount of Debentures and number of Warrants as is
set forth immediately below its name on the signature pages hereto;
E. Contemporaneous with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement, in
the form attached hereto as EXHIBIT "C" (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws; and
NOW THEREFORE, the Company and each of the Buyers (severally and not
jointly) hereby agree as follows:
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1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.
--------------------------------------------
a. Purchase of Debentures and Warrants. The Company shall
-----------------------------------
issue and sell to each Buyer and each Buyer severally agrees to purchase from
the Company such principal amount of Debentures and number of Warrants for the
aggregate purchase price (the "PURCHASE PRICE") as is set forth immediately
below such Buyer's name on the signature pages hereto. The aggregate principal
amount of Debentures to be issued at the Closing (as defined below) is Eight
Million Dollars ($8,000,000) and the aggregate number of Warrants to be issued
at the Closing is Two Million Four Hundred Fifteen Thousand Ninety-Four
(2,415,094), for an aggregate purchase price of Eight Million Dollars
($8,000,000).
b. Form of Payment. On the Closing Date (as defined below),
---------------
(i) each Buyer shall pay the Purchase Price for the Debentures and the Warrants
to be issued and sold to it at the Closing (as defined below) by wire transfer
of immediately available funds to the Company, in accordance with the Company's
written wiring instructions, against delivery of the Debentures in the principal
amount equal to the Purchase Price and the number of Warrants as is set forth
immediately below such Buyer's name on the signature pages hereto, and (ii) the
Company shall deliver such Debentures and Warrants duly executed on behalf of
the Company, to the Buyer, against delivery of such Purchase Price.
c. Closing Date. Subject to the satisfaction (or waiver) of
------------
the conditions thereto set forth in Section 6 and Section 7 below, the date and
time of the issuance and sale of the Debentures and the Warrants pursuant to
this Agreement (the "CLOSING DATE") shall be 12:00 noon Eastern Standard Time on
March 30, 1998 or such other mutually agreed upon time. The closing of the
transactions contemplated by this Agreement (the "CLOSING") shall occur on the
Closing Date at the offices of Morgan, Lewis & Bockius LLP, 2000 One Logan
Square, Philadelphia, PA 19103, or at such other location as may be agreed to be
the parties.
2. BUYERS' REPRESENTATIONS AND WARRANTIES. Each Buyer severally
--------------------------------------
(and not jointly) represents and warrants to the Company solely as to such Buyer
that:
a. Investment Purpose. As of the date hereof, the Buyer is
------------------
purchasing the Debentures and the shares of Common Stock issuable upon
conversion thereof (the "CONVERSION SHARES") and the Warrants and the shares of
Common Stock issuable upon exercise thereof (the "WARRANT SHARES" and,
collectively with the Debentures, Warrants and Conversion Shares the
"SECURITIES") for its own account for investment only and not with a present
view towards the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act.
b. Accredited Investor Status. The Buyer is an "accredited
--------------------------
investor" as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Buyer understands that the
----------------------
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration
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requirements of United States federal and state securities laws and that the
Company is relying upon the truth and accuracy of, and the Buyer's compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Securities.
d. Information. The Buyer and its advisors, if any, have been
-----------
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by the Buyer or its advisors. The Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received what the Buyer believes to be satisfactory answers to
any such inquiries. Neither such inquiries nor any other due diligence
investigation conducted by Buyer or any of its advisors or representatives shall
modify, amend or affect Buyer's right to rely on the Company's representations
and warranties contained in Section 3 below. The Buyer understands that its
investment in the Securities involves a significant degree of risk.
e. Governmental Review. The Buyer understands that no United
-------------------
States federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Resale. The Buyer understands that (i) except
------------------
as provided in the Registration Rights Agreement, the Securities have not been
and are not being registered under the 1933 Act or any applicable state
securities laws, and may not be transferred unless (a) subsequently included in
an effective registration statement thereunder, (b) the Buyer shall have
delivered to the Company an opinion of counsel (which opinion shall be
reasonably acceptable to the Company) to the effect that the Securities to be
sold or transferred may be sold or transferred pursuant to an exemption from
such registration, (c) sold or transferred to an "affiliate" (as defined in Rule
144 promulgated under the 1933 Act (or a successor rule) ("RULE 144")) or (d)
sold pursuant to Rule 144; (ii) any sale of such Securities made in reliance on
Rule 144 may be made only in accordance with the terms of said Rule and further,
if said Rule is not applicable, any resale of such Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder (in each case, other than pursuant to the Registration
Rights Agreement). Notwithstanding the foregoing or anything else contained
herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.
---- ----
g. Legends. The Buyer understands that the Debentures and the
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Warrants and, until such time as the Conversion Shares and Warrant Shares have
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the Conversion Shares
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and Warrant Shares, may bear a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of the
certificates for such Securities):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be sold,
transferred or assigned in the absence of an effective registration
statement for the securities under said Act, or an opinion of counsel,
in form, substance and scope reasonably acceptable to the Company,
that registration is not required under said Act or unless sold
pursuant to Rule 144 under said Act."
The legend set forth above shall be removed and the Company shall
issue a certificate without such legend to the holder of any Security upon which
it is stamped, if, unless otherwise required by applicable state securities
laws, (a) such Security is registered for sale under an effective registration
statement filed under the 1933 Act, or (b) such holder provides the Company with
an opinion of counsel, in form, substance and scope reasonably acceptable to the
Company, to the effect that a public sale or transfer of such Security may be
made without registration under the 1933 Act or (c) such holder provides the
Company with reasonable assurances that such Security can be sold pursuant to
Rule 144 without any restriction as to the number of Securities acquired as of a
particular date that can then be immediately sold. The Buyer agrees to sell all
Securities, including those represented by a certificate(s) from which the
legend has been removed, in compliance with applicable prospectus delivery
requirements, if any.
h. Authorization; Enforcement. This Agreement and the
--------------------------
Registration Rights Agreement have been duly and validly authorized, executed
and delivered on behalf of the Buyer and are valid and binding agreements of the
Buyer enforceable in accordance with their terms.
i. Residency. The Buyer is a resident of the jurisdiction set
---------
forth immediately below such Buyer's name on the signature pages hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
---------------------------------------------
represents and warrants to each Buyer that:
a. Organization and Qualification. The Company and each of its
------------------------------
Subsidiaries (as defined below), if any, is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated, with full power and authority (corporate and other) to
own, lease, use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted. SCHEDULE 3(A) sets forth
a list of all of the Subsidiaries of the Company. The Company and each of its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary except where the failure to
be so qualified or in good standing would not have a Material Adverse Effect.
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"MATERIAL ADVERSE EFFECT" means any material adverse effect on the operations,
assets, financial condition or prospects of the Company or its Subsidiaries, if
any, taken as a whole, or on the transactions contemplated hereby or by the
agreements or instruments to be entered into in connection herewith.
"SUBSIDIARIES" means any corporation or other organization, whether incorporated
or unincorporated, in which the Company owns, directly or indirectly, any equity
or other ownership interest and in which such ownership interest entitles the
Company to elect a majority of the Board of Directors or which meets the
significance test under Regulation S-X of the 1933 Act.
b. Authorization; Enforcement. (i) The Company has all
--------------------------
requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants
and to consummate the transactions contemplated hereby and thereby and to issue
the Securities, in accordance with the terms hereof and thereof, (ii) the
execution and delivery of this Agreement, the Registration Rights Agreement, the
Debentures and the Warrants by the Company and the consummation by it of the
transactions contemplated hereby and thereby (including without limitation, the
issuance of the Debentures and the Warrants and the issuance and reservation for
issuance of the Conversion Shares and Warrant Shares issuable upon conversion or
exercise thereof) have been duly authorized by the Company's Board of Directors
and no further consent or authorization of the Company, its Board of Directors,
or its shareholders is required, (iii) this Agreement has been duly executed and
delivered by the Company, and (iv) this Agreement constitutes, and upon
execution and delivery by the Company of the Registration Rights Agreement, the
Debentures and the Warrants, each of such instruments will constitute, a legal,
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms.
c. Capitalization. As of the date hereof, the authorized
--------------
capital stock of the Company consists of (i) 200,000,000 shares of Common Stock
of which 80,110,369 shares are issued and outstanding, approximately 6,400,000
shares are reserved for issuance pursuant to the Company's stock option plans,
approximately 48,777,080 shares (including 19,877,080 shares reserved in respect
of $15,500,000 principal amount of debentures and 5,205,496 warrants issued
pursuant to purchase agreements between the Company, the Buyers and certain
other purchasers dated October 30, 1997 and December 31, 1997) are reserved for
issuance pursuant to securities (other than the Debentures and the Warrants)
exercisable for, or convertible into or exchangeable for shares of Common Stock
and 9,225,792 shares are reserved for issuance upon conversion of the Debentures
and exercise of the Warrants (subject to adjustment pursuant to the Company's
covenant set forth in Section 4(h) below); and (ii) no shares of preferred stock
are authorized, issued or outstanding. All of such outstanding shares of
capital stock are, or upon issuance will be, duly authorized, validly issued,
fully paid and nonassessable. No shares of capital stock of the Company are
subject to preemptive rights or any other similar rights of the stockholders of
the Company or any liens or encumbrances imposed through the actions or failure
to act of the Company. Except as disclosed in SCHEDULE 3(C), as of the
effective date of this Agreement, (i) there are no outstanding options,
warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any
character whatsoever relating to, or securities or rights convertible into or
exchangeable for any shares of
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capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
and (ii) there are no agreements or arrangements under which the Company or any
of its Subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act (except the Registration Rights Agreement) and
(iii) there are no anti-dilution or price adjustment provisions contained in any
security issued by the Company (or in any agreement providing rights to security
holders) that will be triggered by the issuance of the Debentures, the Warrants,
the Conversion Shares or Warrant Shares. The Company has furnished to the Buyer
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-
laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all
securities convertible into or exercisable for Common Stock of the Company and
the material rights of the holders thereof in respect thereto. The Company shall
provide the Buyer with a written update of this representation signed by the
Company's Chief Executive or Chief Financial Officer on behalf of the Company as
of the Closing Date.
d. Issuance of Shares. The Conversion Shares and Warrant
------------------
Shares are duly authorized and, upon issuance in accordance with their
respective terms of this Agreement (including the issuance of the Conversion
Shares upon conversion of the Debentures and the Warrant Shares upon exercise of
the Warrants in accordance with their respective terms) will be validly issued,
fully paid and non-assessable, and free from all taxes, liens and charges with
respect to the issue thereof and shall not be subject to preemptive rights or
other similar rights of stockholders of the Company. The term Conversion Shares
and Warrant Shares includes the shares of Common Stock issuable upon conversion
of the Debentures or exercise of the Warrants, including without limitation,
such additional shares, if any, as are issuable as a result of the events
described in Section 2(c) of the Registration Rights Agreement. The Company
understands and acknowledges the potentially dilutive effect to the Common Stock
upon the issuance of the Conversion Shares and Warrant Shares upon conversion or
exercise of the Debentures or Warrants. The Company further acknowledges that
its obligation to issue Conversion Shares and Warrant Shares upon conversion of
the Debentures or exercise of the Warrants in accordance with this Agreement,
the Debentures and the Warrants is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company.
e. No Conflicts. The execution, delivery and performance of
------------
this Agreement, the Registration Rights Agreement and the Warrants by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance and reservation
for issuance of the Conversion Shares and Warrant Shares) will not (i) conflict
with or result in a violation of any provision of the Certificate of
Incorporation or By-laws or (ii) violate or conflict with, or result in a breach
of any provision of, or constitute a default (or an event which with notice or
lapse of time or both could become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including
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federal and state securities laws and regulations) applicable to the Company or
any of its Subsidiaries or by which any property or asset of the Company or any
of its Subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect). Neither
the Company nor any of its Subsidiaries is in violation of its Certificate of
Incorporation, By-laws or other organizational documents and neither the Company
nor any of its Subsidiaries is in default (and no event has occurred which with
notice or lapse of time or both could put the Company or any of its Subsidiaries
in default) under, and neither the Company nor any of its Subsidiaries has taken
any action or failed to take any action that would give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party or by which any property or assets of the Company or any of its
Subsidiaries is bound or affected, except for possible defaults as would not,
individually or in the aggregate, have a Material Adverse Effect. The businesses
of the Company and its Subsidiaries, if any, are not being conducted, and shall
not be conducted so long as a Buyer owns any of the Securities, in violation of
any law, ordinance or regulation of any governmental entity. Except as
specifically contemplated by this Agreement and as required under the 1933 Act
and any applicable state securities laws, the Company is not required to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency or any regulatory or self regulatory agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement, the Debentures or the Warrants in
accordance with the terms hereof or thereof. All consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date hereof. The Company is not in violation of the listing requirements of
the Nasdaq National Market ("NASDAQ") and does not reasonably anticipate that
the Common Stock will be delisted by the Nasdaq in the foreseeable future. The
Company and its Subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing.
f. SEC Documents, Financial Statements. Since February 28,
-----------------------------------
1995, the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Exchange Act of 1934, as amended (the "1934 ACT")
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents (other than
exhibits) incorporated by reference therein, being hereinafter referred to
herein as the "SEC DOCUMENTS"). The Company has delivered to each Buyer true
and complete copies of the SEC Documents, except for such exhibits and
incorporated documents. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto.
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Such financial statements have been prepared in accordance with generally
accepted accounting principles, consistently applied, during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto, or (ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be condensed or summary
statements) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Except as set forth in the financial
statements of the Company included in the SEC Documents, the Company has no
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to February 28, 1997 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
such financial statements, which, individually or in the aggregate, are not
material to the financial condition or operating results of the Company.
g. Absence of Certain Changes. Since February 28, 1997, there
--------------------------
has been no material adverse change and no material adverse development in the
assets, liabilities, business, properties, operations, financial condition,
results of operations or prospects of the Company or any of its Subsidiaries,
taken as a whole.
h. Absence of Litigation. Except as disclosed in Item 3 of the
---------------------
Company's Report on Form 10-K for the Fiscal Year ended February 28, 1997 and
Note 4 to the Company's Condensed Consolidated Financial Statements contained in
the Company's Quarterly Reports on Form 10-Q for the quarters ended November 30,
1997, August 31, 1997 and May 31, 1997, there is no action, suit, claim,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries that could have a Material
Adverse Effect. The Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
i. Patents, Copyrights, etc. The Company and each of its
------------------------
Subsidiaries owns or possesses the requisite licenses or rights to use all
patents, patent rights, inventions, know-how, trade secrets, trademarks, service
marks, service names, trade names and copyrights ("INTELLECTUAL PROPERTY")
necessary to enable it to conduct its business as now operated (and to the best
of the Company's knowledge, as presently contemplated to be operated in the
future); there is no claim or action by any person pertaining to, or proceeding
pending, or to the Company's knowledge threatened which challenges the right of
the Company or of a Subsidiary with respect to any Intellectual Property
necessary to enable it to conduct its business as now operated (and to the best
of the Company's knowledge, as presently contemplated to be operated in the
future); to the best of the Company's knowledge, the Company's or its
Subsidiaries, current and intended products, services and processes do not
infringe on any Intellectual Property or other rights held by any person; and
the Company is unaware of any facts or circumstances which might
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give rise to any of the foregoing. The Company and each of its Subsidiaries have
taken reasonable security measures to protect the secrecy, confidentiality and
value of their Intellectual Property.
j. No Materially Adverse Contracts, Etc. Neither the Company
------------------------------------
nor any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
k. Tax Status. The Company and each of its Subsidiaries has
----------
made or filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
l. Certain Transactions. Except for arm's length transactions
--------------------
pursuant to which the Company or any of its Subsidiaries makes payments in the
ordinary course of business upon terms no less favorable than the Company or any
of its Subsidiaries could obtain from third parties and other than the grant of
stock options disclosed on SCHEDULE 3(C), none of the officers, directors, or
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.
m. Disclosure. All information relating to or concerning the
----------
Company or any of its Subsidiaries set forth in this Agreement and provided to
the Buyers pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which,
under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed (assuming for this purposes that the Company's reports filed under the
9
<PAGE>
1934 Act are being incorporated into an effective registration statement filed
by the Company under the 1933 Act).
n. Acknowledgment Regarding Buyers' Purchase of Securities.
-------------------------------------------------------
The Company acknowledges and agrees that the Buyers are acting solely in the
capacity of arm's length purchasers with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that no
Buyer is acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Buyer or any of their respective
representatives or agents in connection with this Agreement and the transactions
contemplated hereby is merely incidental to the Buyers, purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into this Agreement has been based solely on the independent
evaluation of the Company and its representatives.
o. No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales in any security or solicited any offers to
buy any security under circumstances that would require registration under the
1933 Act of the issuance of the Securities to the Buyers. The issuance of the
Securities to the Buyers will not be integrated with any other issuance of the
Company's securities (past, current or future) which requires stockholder
approval under the rules of The Nasdaq Stock Market.
p. No Brokers. The Company has taken no action which would
----------
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments relating to this Agreement or the transactions contemplated
hereby.
q. Permits; Compliance. The Company and each of its
-------------------
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "COMPANY
PERMITS"), and there is no action pending or, to the knowledge of the Company,
threatened regarding suspension or cancellation of any of the Company Permits.
Neither the Company nor any of its Subsidiaries is in conflict with, or in
default or violation of, any of the Company Permits, except for any such
conflicts, defaults or violations which, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect. Since February
28, 1996, neither the Company nor any of its Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.
r. Environmental Matters.
---------------------
(i) There are, to the Company's knowledge, with respect to
the Company or any of its Subsidiaries or any predecessor of the Company, no
past or present
10
<PAGE>
violations of Environmental Laws (as defined below), releases of any material
into the environment, actions, activities, circumstances, conditions, events,
incidents, or contractual obligations which may give rise to any common law
environmental liability or any liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 or similar federal, state,
local or foreign laws and neither the Company nor any of its Subsidiaries has
received any notice with respect to any of the foregoing, nor is any action
pending or, to the Company's knowledge, threatened in connection with any of the
foregoing. The term "ENVIRONMENTAL LAWS" means all federal, state, local or
foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants contaminants, or toxic or hazardous substances or wastes
(collectively, "HAZARDOUS MATERIALS") into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.
(ii) Other than those that are or were stored, used or
disposed of in compliance with applicable law, no Hazardous Materials are
contained on or about any real property currently owned, leased or used by the
Company or any of its Subsidiaries, and no Hazardous Materials were released on
or about any real property previously owned, leased or used by the Company or
any of its Subsidiaries during the period the property was owned, leased or used
by the Company or any of its Subsidiaries, except in the normal course of the
Company's or any of its Subsidiaries' business.
(iii) There are no underground storage tanks on or under any
real property owned, leased or used by the Company or any of its Subsidiaries
that are not in compliance with applicable law.
s. Title to Property. The Company and its Subsidiaries have
-----------------
good and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is material to the
business of the Company and its Subsidiaries, in each case free and clear of all
liens, encumbrances and defects except such as would not have a Material Adverse
Effect. 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 would not have a Material Adverse Effect.
t. Insurance. The Company and each of its Subsidiaries are
---------
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect.
11
<PAGE>
u. Internal Accounting Controls. The Company and each of its
----------------------------
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
v. Foreign Current Practices. Neither the Company, nor any of
-------------------------
its Subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any Subsidiary has, in the course of his
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment to any foreign or domestic government
official or employee.
4. COVENANTS.
---------
a. Best Efforts. The parties shall use their best efforts to
------------
satisfy timely each of the conditions described in Section 6 and 7 of this
Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D
---------------------
with respect to the Securities as required under Regulation D and to provide a
copy thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Buyers at the
applicable closing pursuant to this Agreement under applicable securities or
"blue sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to each Buyer on or prior to the Closing Date.
c. Reporting Status; Eligibility to Use Form S-3; Accurate
-------------------------------------------------------
Disclosure. The Company's Common Stock is registered under Section 12(g) of the
- ----------
1934 Act. So long as any Buyer beneficially owns any of the Securities, the
Company shall timely file all reports required to be filed with the SEC pursuant
to the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would permit such termination. The Company currently
meets, and will take all necessary action to continue to meet, the "registrant
eligibility" requirements set forth in the general instructions to Form S-3.
The Company agrees to fully comply with the disclosure requirements of the 1933
Act and the 1934 Act and to file all reports, forms, statements and
12
<PAGE>
schedules thereunder in a manner such that at the time of filing, there are not
material misstatements of omissions therein, and to seek and maintain the
assistance of outside legal counsel and accountants on an ongoing basis
regarding the Company's disclosure obligations and public disclosures, including
SEC reports, shareholder communications, press releases and the like.
d. Use of Proceeds. The Company shall use the proceeds from
---------------
the sale of the Debentures and the Warrants for working capital and general
corporate purposes and shall not, directly or indirectly, use such proceeds for
any loan to or investment in any other corporation, partnership, enterprise or
other person (except in connection with its currently existing direct or
indirect Subsidiaries).
e. Additional Equity Capital; Right of First Refusal. Subject
-------------------------------------------------
to the exceptions described below, the Company will not, without the prior
written consent of Rose Glen Capital Management, L.P. ("RGC"), negotiate or
contract with any party to obtain additional equity financing (including debt
financing with an equity component) that involves (A) the issuance of Common
Stock at a discount to the market price of the Common Stock on the date of
issuance, (B) the issuance of convertible securities that are convertible into
an indeterminate number of shares of Common Stock, (C) the issuance of
securities which are putable to the Company at the option of the holder, other
than at cost or up to a 10% premium (plus accrued interest or dividends) in
connection with a default event (which event of default cannot arise as result
of the price of the Company's Common Stock) and (D) the issuance of securities
with warrant coverage in excess of 20%, during the period (the "LOCK-UP PERIOD")
beginning on the Closing Date and ending on the later of (i) ninety (90) days
from the Closing Date and (ii) sixty (60) days from the date the Registration
Statement (as defined in the Registration Rights Agreement) is declared
effective. In addition, subject to the exceptions described below, the Company
will not conduct any equity financing (including debt with an equity component)
("FUTURE OFFERINGS") during the period beginning on the Closing Date and ending
two hundred forty (240) days thereafter unless it shall have first delivered to
RGC, at least ten (10) business days prior to the closing of such Future
Offering, written notice describing the proposed Future Offering, including the
terms and conditions thereof, and providing RGC and its affiliates an option
during the ten (10) day period following delivery of such notice to purchase of
the securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this and
the immediately preceding sentence are collectively referred to as the "CAPITAL
RAISING LIMITATIONS"). In the event the terms and conditions of a proposed
Future Offering are amended in any material respect after delivery of the notice
to the Buyers concerning the proposed Future Offering, the Company shall deliver
a new notice to each Buyer describing the amended terms and conditions of the
proposed Future Offering and each Buyer thereafter shall have an option during
the ten (10) day period following delivery of such new notice to purchase its
pro rata share of the securities being offered on the same terms as contemplated
by such proposed Future Offering, as amended. The foregoing sentence shall
apply to successive amendments to the terms and conditions of any proposed
Future Offering. The Capital Raising Limitations shall not apply to any
transaction involving (i) issuances of securities in a firm commitment
underwritten public offering (excluding a continuous offering pursuant to Rule
415 under the 1933 Act), (ii) issuances of securities as consideration for a
merger, consolidation or sale of assets, or in connection with
13
<PAGE>
any strategic partnership or joint venture (the primary purpose of which is not
to raise equity capital), or in connection with and as consideration for the
disposition or acquisition of a business, product or license by the Company or
(iii) issuances of equity at a fixed price greater than $5.46. The Capital
Raising Limitations also shall not apply to the issuance of securities upon
exercise or conversion of the Company's options, warrants or other convertible
securities outstanding as of the date hereof or to the grant of additional
options or warrants, or the issuance of additional securities, under any Company
stock option or restricted stock plan approved by a majority of the Company's
disinterested directors.
f. Expenses. The Company shall pay to RGC a $15,000
--------
nonaccountable expense allowance to cover RGC's expenses in connection with the
negotiation, preparation, execution, delivery and performance of this Agreement
and the other agreements to be executed in connection herewith, including,
without limitation, attorneys' and consultants' fees and expenses.
g. Financial Information. The Company agrees to send the
---------------------
following reports to each Buyer until such Buyer transfers, assigns, or sells
all of the Securities: (i) within ten (10) days after the filing with the SEC, a
copy of its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and
any Current Reports on Form 8-K; (ii) within one (1) day after release, copies
of all press releases issued by the Company or any of its Subsidiaries; and
(iii) contemporaneously with the making available or giving to the stockholders
of the Company, copies of any notices or other information the Company makes
available or gives to such stockholders.
h. Reservation of Shares. The Company shall at all times have
---------------------
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the full conversion or exercise of the
outstanding Debentures and Warrants and issuance of the Conversion Shares and
Warrant Shares in connection therewith (based on the Conversion Price of the
Debentures or Exercise Price of the Warrants in effect from time to time). The
Company shall not reduce the number of shares of Common Stock reserved for
issuance upon conversion of Debentures and exercise of the Warrants without the
consent of each Buyer, which consent will not be unreasonably withheld. The
Company shall use its best efforts at all times to maintain the number of shares
of Common Stock so reserved for issuance at no less than two (2) times the
number that is then actually issuable upon full conversion of the Debentures and
exercise of the Warrants (based on the Conversion Price of the Debentures or
Exercise Price of the Warrants in effect from time to time). If at any time the
number of shares of Common Stock authorized and reserved for issuance is below
the number of Conversion Shares and Warrant Shares issued and issuable upon
conversion of the Debentures and exercise of the Warrants (based on the
Conversion Price of the Debentures or Exercise price of the Warrants then in
effect), the Company will promptly take all corporate action necessary to
authorize and reserve a sufficient number of shares, including, without
limitation, calling a special meeting of shareholders to authorize additional
shares to meet the Company's obligations under this Section 4(h), in the case of
an insufficient number of authorized shares, and using its best efforts to
obtain shareholder approval of an increase in such authorized number of shares.
14
<PAGE>
i. Listing. The Company shall promptly secure the listing of
-------
the Conversion Shares and Warrant Shares upon each national securities exchange
or automated quotation system, if any, upon which shares of Common Stock are
then listed (subject to official notice of issuance) and shall maintain, so long
as any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares and Warrant Shares from time to time issuable upon conversion
of the Debentures or exercise of the Warrants. The Company will obtain and
maintain the listing and trading of its Common Stock on Nasdaq, the Nasdaq
SmallCap Market ("NASDAQ SMALLCAP"), the New York Stock Exchange ("NYSE"), or
the American Stock Exchange ("AMEX") and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the National Association of Securities Dealers ("NASD") and such exchanges, as
applicable. The Company shall promptly provide to each Buyer copies of any
notices it receives from Nasdaq regarding the continued eligibility of the
Common Stock for listing on Nasdaq.
j. Corporate Existence. So long as a Buyer beneficially owns
-------------------
any Debentures or Warrants, the Company shall maintain its corporate existence
and shall not sell all or substantially all of the Company's assets, except in
the event of a merger or consolidation or sale of all or substantially all of
the Company's assets, where the surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
agreements and instruments entered into in connection herewith and (ii) is a
publicly traded corporation whose Common Stock is listed for trading on Nasdaq,
Nasdaq SmallCap, NYSE or AMEX.
k. No Integration. The Company will not conduct any future
--------------
offering that will be integrated with the issuance of the Securities solely for
purposes of Rule 4460(i) of the Nasdaq Stock Market.
l. Solvency. The Company (both before and after giving effect
--------
to the transactions contemplated by this Agreement) is solvent (i.e., its assets
----
have a fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not have, nor does it intend to take any action
that would impair, its ability to pay its debts from time to time incurred in
connection therewith as such debts mature. The Company did not receive a
qualified opinion from its auditors with respect to its most recent fiscal year
end and does not anticipate or know of any basis upon which its auditors might
issue a qualified opinion in respect of its current fiscal year.
5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue
---------------------------
irrevocable instructions to its transfer agent to issue certificates, registered
in the name of each Buyer or its nominee, for the Conversion Shares and Warrant
Shares in such amounts as specified from time to time by each Buyer to the
Company upon proper conversion of the Debentures or exercise of the Warrants
(the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the
Conversion Shares and Warrant Shares under the 1933 Act, all such certificates
shall bear the restrictive legend specified in Section 2(g) of this Agreement.
The Company warrants that no
15
<PAGE>
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof (in the case of the Conversion Shares and Warrant Shares, prior to
registration of the Conversion Shares and Warrant Shares under the 1933 Act),
will be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way the Buyer's obligations and
agreement set forth in Section 2(g) hereof to comply with all applicable
prospectus delivery requirements, if any, upon resale of the Securities. If a
Buyer provides the Company with an opinion of counsel, reasonably satisfactory
to the Company in form, substance and scope, that registration of a resale by
such Buyer of any of the Securities is not required under the 1933 Act, the
Company shall permit the transfer, and, in the case of the Conversion Shares and
Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by such Buyer.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyers, by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section, that the Buyers shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate transfer, without the necessity of showing
economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation
----------------------------------------------
of the Company hereunder to issue and sell the Debentures and Warrants to a
Buyer at the Closing is subject to the satisfaction, at or before the Closing
Date of each of the following conditions thereto, provided that these conditions
are for the Company's sole benefit and may be waived by the Company at any time
in its sole discretion:
a. The applicable Buyer shall have executed this Agreement and
the Registration Rights Agreement, and delivered the same to the Company.
b. The applicable Buyer shall have delivered the Purchase Price
in accordance with Section 1(b) above.
c. The representations and warranties of the applicable Buyer
shall be true and correct in all material respects as of the date when made and
as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and the applicable Buyer shall
have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the applicable Buyer at or prior to the Closing
Date.
d. No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having
16
<PAGE>
authority over the matters contemplated hereby which prohibits the consummation
of any of the transactions contemplated by this Agreement.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation
-------------------------------------------------
of each Buyer hereunder to purchase the Debentures and Warrants at the Closing
is subject to the satisfaction, at or before the Closing Date of each of the
following conditions, provided that these conditions are for such Buyer's sole
benefit and may be waived by such Buyer at any time in its sole discretion:
a. The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Buyer.
b. The Company shall have delivered to such Buyer duly executed
Debentures (in such denominations as the Buyer shall request) and Warrants in
accordance with Section 1(b) above.
c. The Irrevocable Transfer Agent Instructions, in form and
substance satisfactory to a majority-in-interest of the Buyers, shall have been
delivered to and acknowledged in writing by the Company's Transfer Agent.
d. The representations and warranties of the Company shall be
true and correct in all material respects as of the date when made and as of the
Closing Date as though made at such time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Buyer
shall have received a certificate or certificates, executed by the chief
executive officer of the Company, dated as of the Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by such Buyer
including, but not limited to certificates with respect to the Company's
Certificate of Incorporation, By-laws and Board of Directors' resolutions
relating to the transactions contemplated hereby.
e. No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.
f. The Conversion Shares and Warrant Shares shall have been
authorized for quotation on Nasdaq and trading in the Common Stock on Nasdaq
shall not have been suspended by the SEC or Nasdaq.
17
<PAGE>
g. The Buyer shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer and in substantially the same form as EXHIBIT "D"
attached hereto.
h. The Buyer shall have received an officer's certificate
described in Section 3(c) above, dated as of the Closing Date.
8. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. Governing Law. This Agreement shall be governed by and
-------------
interpreted in accordance with the laws of the State of Delaware without regard
to the principles of conflict of laws. The parties hereto hereby submit to the
exclusive jurisdiction of the United States Federal Courts located in Delaware
with respect to any dispute arising under this Agreement, the agreements entered
into in connection herewith or the transactions contemplated hereby or thereby.
b. Counterparts; Signatures by Facsimile. This Agreement may
-------------------------------------
be executed in two or more counterparts, all of which shall be considered one
and the same agreement and shall become effective when counterparts have been
signed by each party and delivered to the other party. This Agreement, once
executed by a party, may be delivered to the other party hereto by facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
c. Headings. The headings of this Agreement are for
--------
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the
----------------------------
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than by
an instrument in writing signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given
-------
under the terms of this Agreement shall be sent by certified or registered mail
(return receipt requested) or delivered personally or by courier (including a
recognized overnight delivery service) or by facsimile and shall be effective
five days after being placed in the mail, if mailed by regular U.S. mail, or
upon receipt, if delivered personally or by courier (including a recognized
overnight
18
<PAGE>
delivery service) or by facsimile, in each case addressed to a party. The
addresses for such communications shall be:
If to the Company:
Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, California 90245
Attention: President
Facsimile: (310) 643-8719
With copy to:
Michael Froch
General Counsel
Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, California 90245
Facsimile: (310) 643-8719
If to a Buyer: To the address set forth immediately below such
Buyer's name on the signature pages hereto.
Each party shall provide notice to the other party of any change in
address.
g. Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties and their successors and assigns.
Neither the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its
rights hereunder to any person that purchases Securities in a private
transaction from a Buyer or to any of its "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company.
h. Third Party Beneficiaries. This Agreement is intended for
-------------------------
the benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. The representations and warranties of the Company
--------
and the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall
survive the closing hereunder notwithstanding any due diligence investigation
conducted by or on behalf of the Buyers.
j. Publicity. The Company and each of the Buyers shall have
---------
the right to review a reasonable period of time before issuance of any press
releases, SEC, Nasdaq or NASD filings, or any other public statements with
respect to the transactions contemplated hereby;
19
<PAGE>
provided, however, that the Company shall be entitled, without the prior
- -------- -------
approval of each of the Buyers, to make any press release or SEC, Nasdaq or NASD
filings with respect to such transactions as is required by applicable law and
regulations (although each of the Buyers shall be consulted by the Company in
connection with any such press release prior to its release and shall be
provided with a copy thereof and be given an opportunity to comment thereon).
k. Further Assurances. Each party shall do and perform, or
------------------
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. No Strict Construction. The language used in this Agreement
----------------------
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
m. Clarifications Regarding Prior Debentures. In the event
-----------------------------------------
that the Conversion Price of the debentures issued to the Buyer on October 31,
1997 and December 31, 1997 (the "PRIOR DEBENTURES") is determined in accordance
with Section 1.3 thereof, the parties acknowledge that the Conversion Price
shall be the lower of the price set forth in Section 1.2 thereof and the price
determined in accordance with Section 1.3 thereof. In addition, for purposes of
determining the aggregate number of shares of Common Stock issuable upon
conversion of the Prior Debentures pursuant to Section 1.8 thereof, if the
issuance of the Debenture is aggregated with either or both of the Prior
Debentures (and/or if the issuances of the Prior Debentures are aggregated with
one another) pursuant to the regulations of the Nasdaq Stock Market, the shares
of Common Stock issuable upon conversion of any such debentures shall be
aggregated with the shares of Common Stock issuable pursuant to the debentures
with which they are aggregated.
20
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21
<PAGE>
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused
this Agreement to be duly executed as of the date first above written.
AURA SYSTEMS, INC.
By: /s/ Gerald S. Papazian
--------------------------
Gerald S. Papazian
President
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P., Investment Manager
By: RGC General Partner Corp., as General Partner
By: /s/ Wayne D. Bloch
--------------------------
Wayne D. Bloch
Managing Director
RESIDENCE: Cayman Islands
ADDRESS:
c/o Rose Glen Capital Management, L.P.
3 Bala Plaza East, Suite 200
251 St. Asaphs Road
Bala Cynwyd, PA 19004
Facsimile: (610) 617-0570
Telephone: (610) 617-5900
AGGREGATE SUBSCRIPTION AMOUNT:
<TABLE>
<CAPTION>
<S> <C>
Aggregate Principal Amount of Debentures: $8,000,000
Number of Warrants: 2,415,094
Aggregate Purchase Price: $8,000,000
</TABLE>
22
<PAGE>
EXHIBIT 4.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID
ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE
TO THE BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.
CONVERTIBLE DEBENTURE
El Segundo, California
March 30, 1998 $8,000,000.00
FOR VALUE RECEIVED, AURA SYSTEMS, INC., a Delaware corporation
(hereinafter called the "Borrower") hereby promises to pay to the order of RGC
INTERNATIONAL INVESTORS, LDC or registered assigns (the "Holder") the sum of
Eight Million Dollars ($8,000,000), on March 30, 2003 (the "Maturity Date"), and
to pay interest on the unpaid principal balance hereof at the rate of seven
percent (7%) per annum from March 30, 1998 (the "Issue Date") until the same
becomes due and payable, whether at maturity or upon acceleration or by
prepayment or otherwise. Any amount of principal of or interest on this
Debenture which is not paid when due shall bear interest at the rate of twelve
percent (12%) per annum from the due date thereof until the same is paid
("Default Interest"). Interest shall accrue commencing on March 30, 1998, shall
be computed on the basis of a 365-day year and the actual number of days elapsed
and shall be payable at the time of optional conversion of the principal to
which such interest relates in accordance with Article I below. Any accrued and
unpaid interest on the Maturity Date shall be paid in full on the Maturity Date
together with the then outstanding principal balance hereof. All payments of
principal and accrued interest (to the extent not converted, at the sole option
of the Holder, into common stock, par value $.005 per share, of the Borrower
(the "Common Stock") in accordance with the terms hereof) shall be made in
lawful money of the United States of America. All payments shall be made at such
address as the Holder shall hereafter give to the Borrower by written notice
made in accordance with the provisions of this Debenture. Whenever any amount
expressed to be due by the terms of this Debenture is due on any day which is
not a business day, the same shall instead be due on the next succeeding day
which is a business day. As used in this Debenture, the term "business day"
shall mean any day other than a Saturday, Sunday or a day
<PAGE>
on which commercial banks in the city of New York, New York are authorized or
required by law or executive order to remain closed. Each capitalized term used
herein, and not otherwise defined, shall have the meaning ascribed thereto in
that certain Securities Purchase Agreement, dated March 30, 1998, pursuant to
which this Debenture was originally issued (the "Purchase Agreement"). The
Maturity Date shall be extended by one (1) day for each Trading Day (as defined
herein) occurring prior thereto and prior to the full conversion of this
Debenture that (i) sales cannot be made pursuant to the Registration Statement
(as defined in the Registration Rights Agreement (as defined below)) (whether by
reason of the Company's failure to properly supplement or amend the prospectus
included therein in accordance with the terms of the Registration Rights
Agreement or otherwise, including any Allowed Delay as described in the
Registration Rights Agreement) or (ii) any Event of Default (as defined in
Article III) exists, without regard to whether any cure periods have run.
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 CONVERSION RIGHT.
----------------
The Holder shall have the right from time to time, and at any time on
or prior to the Maturity Date, to convert at any time all or from time to time
any part of the outstanding and unpaid principal amount of this Debenture of at
least $50,000, or such lesser amount as shall remain unpaid at the time of the
conversion (at the sole option of the Holder, together with accrued interest
thereon that remains unpaid on the due date thereof, if any), into fully paid
and non-assessable shares of Common Stock, as such Common Stock exists on the
date of issuance of this Debenture, or any shares of capital stock of Borrower
into which such Common Stock shall hereafter be changed or reclassified (the
"Common Stock") at the conversion price determined as provided herein (the
"Conversion Price"); provided, however, that unless the Holder delivers a waiver
-------- -------
in accordance with the immediately following sentence, in no event shall the
Holder be entitled to convert any portion of this Debenture in excess of that
portion of this Debenture upon conversion of which the sum of (1) the number of
shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of this Debenture) and (2) the
number of shares of Common Stock issuable upon the conversion of the portion of
this Debenture with respect to which the determination of this proviso is being
made, would result in beneficial ownership by the Holder and its affiliates of
more than 4.9% of the outstanding shares of Common Stock. For purposes of the
first proviso to the immediately preceding sentence, (i) beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13 D-G thereunder, except as otherwise
provided in clause (1) of such proviso and (ii) the Holder may waive the
limitations set forth therein by written notice to the Borrower upon not less
than sixty-one (61) days prior notice (with such waiver taking
2
<PAGE>
effect only upon the expiration of such 61 day notice period). The number of
shares of Common Stock to be issued upon each conversion of this Debenture shall
be determined by dividing the Conversion Amount (as defined below) by the
Conversion Price in effect on the date a notice of conversion, in the form
attached hereto as Exhibit A (the "Notice of Conversion"), is delivered to the
Borrower by the Holder in accordance with Section 1.4 below (the "Conversion
Date"). The term "Conversion Amount" means, with respect to any conversion of
this Debenture, the sum of (1) the principal amount of this Debenture to be
converted in such conversion plus (2) at the sole option of the Holder, accrued
----
interest that remains unpaid as of the due date thereof, if any, on such
principal amount at the interest rates provided in this Debenture to the
Conversion Date plus (3) at the sole option of the Holder, Default Interest, if
----
any, on the interest referred to in the immediately preceding clause (2) plus
----
(4) at the Holder's option, any amounts owed to the Holder pursuant to Sections
1.4 and 1.5(g) hereof or pursuant to Section 2(c) of that certain Registration
Rights Agreement, dated as of March 30, 1998, executed in connection with the
initial issuance of this Debenture and the other Debentures issued on the Issue
Date (the "Registration Rights Agreement").
1.2 CONVERSION PRICE. Subject to Section 1.3 below, the Conversion
----------------
Price shall be $3.64; provided, however, that if the average Closing Price for
-------- -------
the five (5) Trading Days ending June 3, 1998 is less than $4.00, the Conversion
Price shall be $3.13 (subject, in each case, to equitable adjustments for stock
splits, stock dividends or rights offerings by the Borrower relating to the
Borrower's securities or the securities of any subsidiary of the Borrower,
combinations, recapitalization, reclassifications, extraordinary distributions
and similar events). "Trading Day" shall mean any day on which the Common Stock
is traded for any period on Nasdaq, or on the principal securities exchange or
other securities market on which the Common Stock is then being traded. The
"Closing Price" means, for any security as of any date, the last sale price on
Nasdaq as reported by Bloomberg Financial Markets or an equivalent, reliable
reporting service mutually acceptable to and hereafter designated by the Holders
of a majority in interest of the Debentures and the Borrower ("Bloomberg") or,
if Nasdaq is not the principal trading market for such security, the last sale
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg, or if the
foregoing do not apply, the last sale price of such security in the over-the-
counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no last sale price is reported for such security by Bloomberg,
then the average of the bid and ask prices of all active market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Price cannot be calculated for such security on such date on any
of the foregoing bases, the Closing price of such security on such date shall be
the fair market value as mutually determined by the Borrower and the Holders of
a majority in interest of Debentures being converted for which the calculation
of the closing Price is required in order to determine the Closing Price of such
Debentures.
1.3 ADJUSTMENTS TO CONVERSION PRICE. If, pursuant to Section 4.1,
-------------------------------
the Borrower does not pay the Prepayment Amount (as defined in Section 4.1) to
the Holder by the
3
<PAGE>
twentieth (20th) day following the date of the Prepayment Notice (as defined in
Section 4.1), for any and all conversions taking place thereafter the Conversion
Price shall equal the lower of (i) the Conversion Price determined in accordance
with Section 1.2 and (ii) 100% of the Lowest Closing Bid Price (as defined
below) during the sixty (60) Trading Days (the "Pricing Period") ending one (1)
Trading Day prior to the Conversion Date. "Lowest Closing Bid Price" means, for
any security as of any date, the lowest closing bid price on Nasdaq as reported
by Bloomberg or if Nasdaq is not the principal trading market for such security,
the lowest closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing do not apply, the lowest closing bid price of
such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no lowest closing bid price
is reported for such security by Bloomberg, then the average of the bid prices
of any market makers for such security as reported in the "pink sheets" by the
National Quotation Bureau, Inc.
1.4 AUTHORIZED SHARES. The Borrower covenants that during the period
-----------------
the conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the full conversion of this Debenture and the other
Debentures issued on the Issue Date. As of the date of issuance of this
Debenture, 4,395,604 (2x required) authorized and unissued shares of Common
Stock have been duly reserved for issuance upon conversion of this Debenture and
the other Debentures issued on the Issue Date (the "Reserved Amount"). The
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable. The Borrower (i) acknowledges that it
has irrevocably instructed its transfer agent to issue certificates for the
Common Stock issuable upon conversion of this Debenture and (ii) agrees that its
issuance of this Debenture shall constitute full authority to its officers and
agents who are charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in accordance
with the terms and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of
Conversion, the Borrower does not have sufficient authorized but unissued shares
of Common Stock available to effect such conversion in accordance with the
provisions of this Article I (a "Conversion Default"), subject to Section 5.8,
the Borrower shall issue to the Holder all of the shares of Common Stock which
are then available to effect such conversion. The portion of this Debenture
which the Holder included in its Conversion Notice and which exceeds the amount
which is then convertible into available shares of Common Stock (the "Excess
Amount") shall, notwithstanding anything to the contrary contained herein, not
be convertible into Common Stock in accordance with the terms hereof until (and
at the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Borrower, at which time the Conversion Price in
respect thereof shall be the lower of (i) the Conversion Price on the Conversion
Default Date (as defined below) and (ii) the Conversion Price on the Conversion
Date thereafter elected by the Holder in respect thereof. The Borrower shall
pay to the Holder
4
<PAGE>
payments ("Conversion Default Payments") for a Conversion Default in the amount
of (N/365) x .24 x the Excess Amount on the Conversion Date in respect of the
Conversion Default (the "Conversion Default Date"), where N = the number of days
from the Conversion Default Date to the date (the "Authorization Date") that the
Borrower authorizes a sufficient number of shares of Common Stock to effect
conversion of the full outstanding principal balance of this Debenture. The
Borrower shall use its best efforts to authorize a sufficient number of shares
of Common Stock as soon as practicable following the earlier of (i) such time
that the Holder notifies the Borrower or that the Borrower otherwise becomes
aware that there are or likely will be insufficient authorized and unissued
shares to allow full conversion thereof and (ii) a Conversion Default. The
Borrower shall send notice to the Holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments for
each calendar month shall be paid in cash or shall be convertible into Common
Stock (at such time as there are sufficient authorized shares of Common Stock)
at the Market Price (as defined below), at the Holder's option, as follows:
(a) In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth day of the month following the
month in which it has accrued; and
(b) In the event Holder elects to take such payment in Common Stock,
the Holder may convert such payment amount into Common Stock at the Conversion
Price (as in effect at the time of conversion) at any time after the fifth day
of the month following the month in which it has accrued (at such time as there
are sufficient authorized shares of Common Stock) in accordance with the terms
of this Article I.
The Holder's election shall be made in writing to the Borrower at any
time prior to 12:00 Midnight, New York City Time, on the third day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) due to the Borrower's
failure to maintain a sufficient number of authorized shares of Common Stock.
"Market Price" means, for any security as of any date, the closing bid price on
Nasdaq as reported by Bloomberg or if Nasdaq is not the principal trading market
for such security, the closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the closing bid price
of such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, then the average of the bid prices of
any market makers for such security as reported in the "pink sheets" by the
National Quotation Bureau, Inc.
5
<PAGE>
1.5 METHOD OF CONVERSION.
--------------------
(a) This Debenture may be converted by the Holder in whole or in part
(provided such partial conversion is at least $50,000, or such lesser amount as
shall remain unpaid at the time of the conversion (at the sole option of the
Holder, together with accrued interest thereon that remains unpaid on the due
date thereof)) at any time from time to time after the Issue Date, by (A)
submitting to the Borrower a Notice of Conversion (by facsimile or other
reasonable means of communication dispatched on the Conversion Date prior to
12:00 Midnight, New York City Time) and (B) subject to Section 1.5(b),
surrendering this Debenture at the principal office of the Borrower.
(b) Notwithstanding anything to the contrary set forth herein, upon
conversion of this Debenture in accordance with the terms hereof, the Holder
shall not be required to physically surrender this Debenture to the Borrower
unless the entire unpaid principal amount of this Debenture is so converted.
The Holder and the Borrower shall maintain records showing the principal amount
so converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the Holder and the Borrower, so as not to require
physical surrender of this Debenture upon each such conversion. In the event of
any dispute or discrepancy, such records of the Borrower shall be controlling
and determinative in the absence of manifest error. Notwithstanding the
foregoing, if any portion of this Debenture is converted as aforesaid, the
Holder may not transfer this Debenture unless the Holder first physically
surrenders this Debenture to the Borrower, whereupon the Borrower will forthwith
issue and deliver upon the order of the Holder a new note of like tenor,
registered as the Holder (upon payment by the Holder of any applicable transfer
taxes) may request, representing in the aggregate the remaining unpaid principal
amount of this Debenture. The Holder and any assignee, by acceptance of this
Debenture, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture represented by this Debenture may
be less than the amount stated on the face hereof.
(c) The Borrower shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of shares
of Common Stock or other securities or property on conversion of this Debenture
in a name other than that of the Holder (or in street name), and the Borrower
shall not be required to issue or deliver any such shares or other securities or
property unless and until the person or persons (other than the Holder or the
custodian in whose street name such shares are to be held for the Holder's
account) requesting the issuance thereof shall have paid to the Borrower the
amount of any such tax or shall have established to the satisfaction of the
Borrower that such tax has been paid.
(d) Upon receipt by the Borrower from the Holder of a facsimile
transmission (or other reasonable means of communication) of a Notice of
Conversion meeting
6
<PAGE>
the requirements for conversion as provided in this Section 1.5, the Borrower
shall issue and deliver or cause to be issued and delivered to the Holder
certificates for the Common Stock issuable upon such conversion within three (3)
business days after such receipt (and, solely in the case of conversion of the
entire unpaid principal amount hereof, surrender of this Debenture) (such third
business day being hereinafter referred to as the "Deadline") in accordance with
the terms hereof and the Purchase Agreement (including, without limitation, in
accordance with the requirement that certificates for shares of Common Stock
issued on or after the effective date of the Registration Statement upon
conversion of this Debenture shall not bear any restrictive legend).
(e) Upon receipt by the Borrower of a Notice of Conversion, the Holder
shall be deemed to be the holder of record of the Common Stock issuable upon
such conversion, the outstanding principal amount and the amount of accrued and
unpaid interest on this Debenture shall be reduced to reflect such conversion,
and, unless the Borrower defaults on its obligations under this Article I, all
rights with respect to the portion of this Debenture being so converted shall
forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets, as herein provided, on such conversion. If
the Holder shall have given a Notice of Conversion as provided herein, the
Borrower's obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of the absence of any action
by the Holder to enforce the same, any waiver or consent with respect to any
provision thereof, the recovery of any judgment against any person or any action
to enforce the same, any failure or delay in the enforcement of any other
obligation of the Borrower to the holder of record, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other
circumstance which might otherwise limit such obligation of the Borrower to the
Holder in connection with such conversion. The date of receipt of such Notice
of Conversion shall be the Conversion Date so long as it is received before
12:00 Midnight, New York City Time, on such date.
(f) In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Borrower's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the Holder and its compliance with
the provisions contained in Section 1.1 and in this Section 1.5, the Borrower
shall use its best efforts to cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the Holder by crediting
the account of Holder's Prime Broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system.
(g) Without in any way limiting the Holder's right to pursue other
remedies, including actual damages and/or equitable relief, the parties agree
that if delivery of the Common Stock issuable upon conversion of this Debenture
is more than one (1) business day after the Deadline (other than a failure due
to the circumstances described in Section 1.4 above, which failure shall be
governed by such Section) the Borrower shall pay to the Holder
7
<PAGE>
$500 per day in cash, for each of the first two (2) days beyond the Deadline and
$2,500 per day in cash for each day thereafter that the Borrower fails to
deliver such Common Stock. Such cash amount shall be paid to Holder by the fifth
day of the month following the month in which it has accrued or, at the option
of the Holder (by written notice to the Borrower by the first day of the month
following the month in which it has accrued), shall be added to the principal
amount of this Debenture, in which event interest shall accrue thereon in
accordance with the terms of this Debenture and such additional principal amount
shall be convertible into Common Stock in accordance with the terms of this
Debenture.
1.6 CONCERNING THE SHARES. The shares of Common Stock issuable upon
---------------------
conversion of this Debenture may not be sold or transferred unless either (i)
such shares shall have been included in an effective registration statement
under the Act or (ii) the Borrower or its transfer agent shall have been
furnished with an opinion or other similar letter of legal counsel to the effect
that such sale or transfer is exempt from the registration requirements of the
Act or (iii) such shares are sold to an "affiliate" (as defined in Rule 144
promulgated under the Act (or a successor rule) ("Rule 144")) or (iv) such
shares are sold pursuant to Rule 144. Except as otherwise provided in the
Purchase Agreement (and subject to the removal provisions set forth below), each
certificate for shares of Common Stock issuable upon conversion of this
Debenture that has not been so included in an effective registration statement
or that has not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend substantially
in the following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN
OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT."
The legend set forth above shall be removed and the Borrower shall
issue to the Holder a new certificate therefor free of any transfer legend if
(i) the Borrower or its transfer agent shall have received an opinion or other
similar letter of counsel, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act and any applicable
state securities laws and the shares are so sold or transferred, or that the
Common Stock issuable upon conversion of this Debenture can be sold pursuant to
Rule 144 (or a successor rule) without any restriction as to the number of
shares of Common Stock acquired as of a particular date that can then be
immediately sold or (ii) in the case of the Common Stock issuable upon
conversion of this Debenture, a registration statement under the Act covering
such securities is in effect. Nothing in this Debenture shall (i) limit the
8
<PAGE>
Borrower's obligation under the Registration Rights Agreement or (ii) affect in
any way the Holder's obligations to comply with applicable prospectus delivery
requirements upon the resale of the securities referred to herein.
1.7 EFFECT OF CERTAIN EVENTS.
------------------------
(a) If, at any time when this Debenture is issued and
outstanding, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower, then the Holder of this Debenture
shall thereafter have the right to receive upon conversion of this Debenture,
upon the bases and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore issuable upon conversion,
such stock, securities or assets which the Holder would have been entitled to
receive in such transaction had this Debenture been converted immediately prior
to such transaction, and in any such case appropriate provisions shall be made
with respect to the rights and interests of the Holder of this Debenture to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Debenture) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter deliverable upon
the exercise hereof. The Borrower shall not effect any transaction described in
this Section 1.7 unless (a) it first gives, to the extent practicable, forty-
five (45) days prior written notice (but in any event at least thirty (30) days
prior written notice) of the record date of the special meeting of stockholders
to approve, or if there is no such record date, the consummation of, such
merger, consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the Holder shall be
entitled to convert this Debenture) and (b) the resulting successor or acquiring
entity (if not the Borrower) assumes by written instrument the obligations of
this Section 1.7(a). The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers or share exchanges.
(b) If the Borrower shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or otherwise (including
any dividend or distribution to the Borrower's shareholders in cash or shares
(or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-
off) (a "Distribution"), the Holder of this Debenture shall be entitled, upon
any conversion of this Debenture after the date of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the Holder with respect to the shares of Common
Stock issuable upon such conversion had such Holder been the holder of such
shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.
9
<PAGE>
(c) If, at any time when any Debentures are issued and outstanding,
the Borrower issues any convertible securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata to the
record holders of any class of Common Stock, then the Holder of this Debenture
will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such Holder could have acquired if such
Holder had held the number of shares of Common Stock acquirable upon complete
conversion of this Debenture (without regard to any limitations on conversion
contained herein) immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.
(d) If, at any time after the Issue Date, the Corporation sells Common
Stock or securities convertible into, or exchangeable for, Common Stock, other
than a sale pursuant to bona fide registered public offering of Common Stock by
the Corporation (not including a continuous offering pursuant to Rule 415 under
the Securities Act of 1933, as amended), and other than sales of shares to
underwriters (collectively, the "Other Common Stock"), then, if the effective or
maximum sales price of the Common Stock with respect to such transaction
(including the effective or maximum conversion, or exchange price) ("Other
Price") is less than the effective Conversion Price of the Debenture at such
time and such Other Common Stock is eligible for resale prior to June 30, 1999,
at the option of the Holder, the Corporation shall adjust the Conversion Price
applicable to the portion of the Debenture not yet converted in form and
substance reasonably satisfactory to the Holders so that the Conversion Price
shall not, in any event, be greater, after giving effect to all other
adjustments contained herein, than the Other Price. The adjustments to the
Conversion Price pursuant to this paragraph 1.7(d) shall not apply to the
issuance of Common Stock upon conversion or exchange of convertible securities
outstanding on the Issue Date.
(e) If the Conversion Price is determined in accordance with Section
1.3 and in the event that (1) the Borrower fails to obtain effectiveness with
the Securities and Exchange Commission of the Registration Statement (as defined
in the Registration Rights Agreement) prior to one hundred twenty (120) days
following the Issue Date, or (2) such Registration Statement lapses in effect,
or sales otherwise cannot be made thereunder, whether by reason of the
Borrower's failure or inability to amend or supplement the prospectus (the
"Prospectus") included therein in accordance with the Registration Rights
Agreement or otherwise, after such Registration Statement becomes effective
(including, without limitation, during an Allowed Delay (as defined in Section
3(f) of the Registration Rights Agreement)), then the Pricing Period shall be
comprised of, (i) in the case of an event described in clause (1), the sixty
(60) Trading Days preceding the 120th day following the Issue Date plus all
Trading Days through and including the third Trading Day following the date of
effectiveness of the Registration Statement; and (ii) in the case of an event
described in clause (2), the sixty (60) Trading Days preceding the date on which
the Holder is first notified that sales may not be made under the Prospectus,
plus all Trading Days through and including the third (3rd)
10
<PAGE>
Trading Day following the date on which the Holder is first notified that such
sales may again be made under the Prospectus.
(f) Upon the occurrence of each adjustment or readjustment of the
Conversion Price as a result of the events described in this Section 1.7, the
Borrower, at its expense, shall promptly compute such adjustment or readjustment
and prepare and furnish to the Holder of a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Borrower shall, upon the written
request at any time of the Holder, furnish to such Holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon conversion of the Debenture.
1.8 CERTAIN PAYMENTS IN LIEU OF CONVERSION. In the event this
--------------------------------------
Debenture becomes convertible at the Conversion Price determined in accordance
with Section 1.3 and, as a result, Rule 4460(i) of the rules of the Nasdaq Stock
Market is applicable to the issuance of Common Stock upon Conversion of this
Debenture then, in no event shall the Borrower issue more than the Maximum Share
Amount (as defined below and subject to adjustment as provided herein) upon
conversion of this Debenture, unless the Borrower shall have obtained
Stockholder Approval (as defined below) or a waiver of such requirement by the
Nasdaq Stock Market. For purposes of determining the aggregate number of shares
of Common Stock issuable upon conversion of this Debenture, if the issuance of
Common Stock hereunder is aggregated with the issuance of Common Stock under the
Prior Debentures (as defined in the Purchase Agreement) pursuant to the
regulations of the Nasdaq Stock Market, the shares of Common Stock issuable upon
conversion of the Prior Debentures shall be aggregated with the shares of Common
Stock issuable pursuant to this Debenture. As used herein, Stockholder Approval
means approval by the stockholders of the Borrower in accordance with Rule
4460(i) of the rules of the Nasdaq Stock Market. Once the Maximum Share Amount
has been issued (the date of which is hereinafter referred to as the "Maximum
Conversion Date"), unless the Borrower shall have obtained Stockholder Approval
or a waiver of such requirement by the Nasdaq Stock Market, in lieu of any
further right to convert this Debenture, and in full satisfaction of the
Borrower's obligations under this Debenture, the Borrower shall pay to the
Holder, within fifteen (15) business days of the Maximum Conversion Date, an
amount equal to the greater of (i) 130% times the sum of (a) the then
----- ---
outstanding principal amount of this Debenture immediately following the Maximum
Conversion Date plus (b) accrued and unpaid interest on such principal amount
----
plus (c) accrued and unpaid Default Interest, if any, on the amount referred to
- ----
in the immediately preceding clause (b) at the rate provided in this Debenture
plus (d) any optional amounts that may be added thereto at the Maximum
- ----
Conversion Date by the Holder in accordance with the terms hereof (the then
outstanding principal amount of this Debenture immediately following the Maximum
Conversion Date plus the amounts referred to in clauses (b), (c) and (d) above
----
shall collectively be referred to as the "Remaining Convertible Amount"), or
(ii) the Remaining Convertible Amount divided by the Conversion Price (based on
----------
the sixty (60) Trading Day period ending on the Trading Day
11
<PAGE>
which is one (1) Trading Day prior to the date of payment) multiplied by the
-------------
Closing Price of the Common Stock on the Trading Day immediately preceding the
date of payment. The Maximum Share Amount shall mean an aggregate of 16,014,062
shares of Common Stock (19.9% of the Borrower's outstanding shares of Common
Stock as of March 30, 1998), subject to equitable adjustment from time to time
for stock splits, stock dividends, combinations, capital reorganizations and
similar events relating to the Common Stock occurring after the date hereof.
With respect to each Holder of Debentures, the Maximum Share Amount shall refer
to such Holder's pro rata share thereof determined in accordance with Section
--------
5.8 below. In the event that Borrower obtains Stockholder Approval, the approval
of the Nasdaq Stock Market or otherwise concludes that it is able to increase
the number of shares to be issued above the Maximum Share Amount (such increased
number being the "New Maximum Share Amount"), the references to Maximum Share
Amount, above, shall be deemed to be, instead, references to the greater New
Maximum Share Amount. In the event that Stockholder Approval is not obtained or
a registration statement covering the additional shares of Common Stock which
constitute the New Maximum Share Amount is not effective prior to the Maximum
Share Amount being issued (if such registration statement is necessary to allow
for the public resale of such securities), the Maximum Share Amount shall remain
unchanged; provided, however, that the Holder may grant an extension of the
effective date of such registration statement. In the event this Debenture
becomes convertible in accordance with Section 1.3 and, as a result, Rule
4460(i) of the rules of the Nasdaq Stock Market apply, and in the event that (a)
the aggregate number of shares of Common Stock actually issued pursuant to this
Debenture and the other Debentures issued on the Issue Date represents at least
twenty percent (20%) of the Maximum Share Amount and (b) the sum of (x) the
aggregate number of shares of Common Stock actually issued pursuant to this
Debenture and the other Debentures issued on the Issue Date plus (y) the
----
aggregate number of shares of Common Stock that remain issuable pursuant to this
Debenture and the other Debentures issued on the Issue Date, represents at least
one hundred percent (100%) of the Maximum Share Amount (the "Triggering Event"),
the Borrower will use its best efforts to seek and obtain Stockholder Approval
(or obtain such other relief as will allow conversions hereunder in excess of
the Maximum Share Amount) as soon as practicable following the Triggering Event
and before the Maximum Conversion Date.
1.9 STATUS AS STOCKHOLDER. Upon submission of a Notice of Conversion
---------------------
by a Holder, (i) the shares covered thereby (other than the shares, if any,
which cannot be issued because their issuance would exceed such Holder's
allocated portion of the Reserved Amount) shall be deemed converted into shares
of Common Stock and (ii) the Holder's rights as a Holder of such converted
portion of this Debenture shall cease and terminate, excepting only the right to
receive certificates for such shares of Common Stock and to any remedies
provided herein or otherwise available at law or in equity to such Holder
because of a failure by the Borrower to comply with the terms of this
Debenture. Notwithstanding the foregoing, if a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Deadline with respect to a conversion of any
portion of this Debenture for any reason, then (unless the Holder otherwise
elects to retain its status as a
12
<PAGE>
holder of Common Stock by so notifying the Borrower), the Holder shall regain
the rights of a Holder of this Debenture with respect to such unconverted
portions of this Debenture and the Borrower shall, as soon as practicable,
return such unconverted Debenture to the holder or, if the Debenture has not
been surrendered, adjust its records to reflect that such portion of this
Debenture has not been converted. In all cases, the Holder shall retain all of
its rights and remedies (including, without limitation, (i) the right to receive
Conversion Default Payments pursuant to Section 1.4 the extent required thereby
for such Conversion Default and any subsequent Conversion Default and (ii) the
right to have the Conversion Price with respect to subsequent conversions
determined in accordance with Section 1.4) for the Borrower's failure to convert
this Debenture.
ARTICLE II. CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. Unless (i) no Event of Default
------------------------------
has occurred or is continuing, (ii) this Debenture is then prepayable pursuant
to Section 4.1, (iii) the Borrower has sufficient cash on hand to meet the
prepayment obligations of Section 4.1, and (iv) the Borrower provides the Holder
with fifteen (15) Trading Days prior written notice, the Borrower shall not,
without the Holder's written consent, (a) pay, declare or set apart for such
payment, any dividend or other distribution (whether in cash, property or other
securities) on shares of capital stock other than dividends on shares of Common
Stock solely in the form of additional shares of Common Stock or (b) directly or
indirectly or through any subsidiary make any other payment or distribution in
respect of its capital stock.
2.2 RESTRICTION ON STOCK REPURCHASES. Unless (i) no Event of Default
--------------------------------
has occurred or is continuing, (ii) this Debenture is then prepayable pursuant
to Section 4.1, (iii) the Borrower has sufficient cash on hand to meet the
prepayment obligations of Section 4.1, and (iv) the Borrower provides the Holder
with fifteen (15) Trading Days prior written notice, the Borrower shall not,
without the Holder's written consent, redeem, repurchase or otherwise acquire
(whether for cash or in exchange for property or other securities or otherwise)
in any one transaction or series of related transactions any shares of capital
stock of the Borrower or any warrants, rights or options to purchase or acquire
any such shares.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of
Default") shall occur:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails (a) to
------------------------------------
pay the principal hereof when due, whether at maturity, upon mandatory
prepayment pursuant to Section 1.8, upon acceleration or otherwise or (b) to pay
any installment of interest hereon when due and, in the case of this clause (b)
only, such failure continues for a period of five (5)
13
<PAGE>
days after the date of receipt of notice by the Company that such amount is due
(but in no event later than twenty (20) days from the due date thereof).
3.2 CONVERSION AND THE SHARES. The Borrower fails to issue shares of
-------------------------
Common Stock to the Holder (or announces that it will not honor its obligation
to do so) upon exercise by the Holder of the conversion rights of the Holder in
accordance with the terms of this Debenture (for a period of at least ninety
(90) days, if such failure is solely as a result of the circumstances governed
by Section 1.4 and the Borrower is using its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), fails to
transfer any certificate for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this Debenture or the
Registration Rights Agreement, or fails to remove any restrictive legend on any
certificate for any shares of Common Stock issued to the Holder upon conversion
of this Debenture as and when required by this Debenture, the Purchase Agreement
or the Registration Rights Agreement and any such failure shall continue uncured
(or any announcement or statement not to honor conversions shall not be
rescinded in writing) for ten (10) days after the Borrower shall have been
notified thereof in writing by the Holder.
3.3 FAILURE TO EFFECT REGISTRATION. The Borrower fails to obtain
------------------------------
effectiveness with the Securities and Exchange Commission of the Registration
Statement prior to September 30, 1998 or the Registration Statement lapses in
effect (or sales cannot otherwise be made thereunder) for more than fifteen (15)
consecutive Trading Days or thirty (30) Trading Days in any twelve (12) month
period after the Registration Statement becomes effective;
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant
-------------------
or other material term or condition contained in Sections 1.4, 1.7, 1.8 or 4.1
of this Debenture, or Sections 4(c), 4(e), 4(h), 4(i) or 4(j) of the Purchase
Agreement and such breach continues for a period of ten (10) days after written
notice thereof to the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any (i) representation
----------------------------------------
or warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement and the Registration
Rights Agreement), shall be false or misleading in any material respect when
made and the breach of which has (or with the passage of time will have) a
material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement or (ii)
press release or other public statement or filing is made by the Borrower or
that contains any material false or misleading statement or omission.
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the
-------------------
Borrower shall make an assignment for the benefit of creditors, or apply for or
consent to the
14
<PAGE>
appointment of a receiver or trustee for it or for a substantial part of its
property or business, or such a receiver or trustee shall otherwise be
appointed;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be
---------
entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $500,000, and shall remain
unvacated, unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the Holder, which consent will not be unreasonably
withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or
----------
liquidation proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower or any subsidiary of the Borrower; provided, however, that in the case
-------- -------
of any involuntary bankruptcy, such involuntary bankruptcy shall continue and
undischarged or undismissed for a period of sixty (60) days; or
3.9 DELISTING OF COMMON STOCK. The Common Stock is not listed on at
-------------------------
least one of the Nasdaq National Market, Nasdaq Small Cap Market, the New York
Stock Exchange, or the American Stock Exchange and such breach continues for a
period of ten (10) days after written notice thereof to the Borrower from the
Holder;
then, upon the occurrence and during the continuation of any Event of
Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7 or 3.9, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Debentures issued pursuant to the Securities Purchase Agreement, and
upon the occurrence of an Event of Default specified in Section 3.6 or 3.8, the
Debentures shall become immediately due and payable and the Borrower shall pay
to the Holder, in full satisfaction of its obligations hereunder, an amount
equal to the greater of (i) the Default Percentage (as defined below) times the
-----
sum of (w) the then outstanding principal amount of this Debenture plus (x)
- --- ----
accrued and unpaid interest on the unpaid principal amount of this Debenture to
the date of payment plus (y) Default Interest, if any, on the interest referred
----
to in the immediately preceding clause plus (z) any amounts owed to the Holder
----
pursuant to Sections 1.4 and 1.5(g) hereof or pursuant to Section 2(c) of the
Registration Rights Agreement (the then outstanding principal amount of this
Debenture to the date of payment plus the amounts referred to in clauses (x),
----
(y) and (z) shall collectively be known as the "Default Sum") or (ii) the
Default Sum divided by the then applicable Conversion Price multiplied by the
---------- -------------
Closing Price of the Common Stock on the date the Holders exercise their option
pursuant to this paragraph or the date of the occurrence of an event referred to
in Section 3.6 or 3.8 (the "Default Amount") and all other amounts payable
hereunder shall immediately become due and payable, all without demand,
presentment or notice, all of which hereby are expressly waived, together with
all costs, including, without limitation, legal fees and expenses, of
collection, and the Holder shall be entitled to exercise all other rights and
remedies available at law or in equity. The "Default Percentage" shall mean
115% for purposes of an Event of Default pursuant to Section 3.3 and 120% for
any other Event of Default.
15
<PAGE>
If the Borrower fails to pay the Default Amount within five (5)
business days of written notice that such amount is due and payable, then the
Holder shall have the right at any time, so long as the Borrower remains in
default (and so long and to the extent that there are sufficient authorized
shares), to require the Borrower, upon written notice, to immediately issue, in
lieu of the Default Amount, the number of shares of Common Stock of the Borrower
equal to the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. PREPAYMENT
4.1 PREPAYMENT. Subject to the terms of this Section 4.1, the Holder
----------
may demand prepayment, in whole or in part, of this Debenture upon twenty-five
(25) days prior written notice in accordance with this Section 4.1. Any notice
of prepayment (a "Prepayment Notice") shall be delivered to the Borrower and
shall state (1) that the Holder is exercising its right to demand prepayment of
this Debenture and (2) the date of prepayment, which shall be not more than
twenty-five (25) days from the date of the Prepayment Notice. On or prior to
the date fixed for prepayment (the "Prepayment Date"), the Borrower shall make
payment of the Prepayment Amount (as hereinafter defined) in cash to or upon the
order of the Holder as specified by the Holder in writing to the Borrower at
least one business day prior to the Prepayment Date. The "Prepayment Amount"
shall be equal to 115% times the sum of (a) the then outstanding principal
----- ---
amount of this Debenture plus (b) accrued and unpaid interest on the unpaid
----
principal amount of this Debenture to the date of payment plus (c) Default
----
Interest, if any, on the interest referred to in the immediately preceding
clause plus (d) any amounts owed to the Holder pursuant to Sections 1.4 and
----
1.5(g) hereof or pursuant to Section 2(c) of the Registration Rights Agreement.
Notwithstanding anything to the contrary contained in this Section 4.1, the
Holder shall at all times maintain the right to convert all or any part of this
Debenture in accordance with Article I, and any amounts so converted after
delivery to the Borrower of a Prepayment Notice and prior to the Prepayment Date
set forth in such notice and payment of the Prepayment Amount shall be deducted
from the amount which is otherwise subject to prepayment pursuant to the
Prepayment Notice. During the period beginning on the Issue Date and ending on
September 30, 1998, the Holders shall only be able to demand prepayment of this
Debenture pursuant to this Section 4.1 if the Market Price (as defined in
Section 1.4) of the Common Stock is below $1.75 for five (5) consecutive Trading
Days. During the period beginning on October 1, 1998 and ending on December 30,
1998, the Holders shall only be able to demand prepayment of this Debenture
pursuant to this Section 4.1 if the Market Price of the Common Stock is below
$2.00 for five (5) consecutive Trading Days. If the Borrower fails to pay to
the Borrower the Prepayment Amount within five (5) days of the Prepayment Date,
the Conversion Price in respect of any conversion occurring thereafter shall be
adjusted as set forth in Section 1.3. Notwithstanding anything to the contrary
contained in this Debenture, in additional to all other remedies available
hereunder or at law or in equity, if the Borrower fails to pay the Prepayment
Amount when due pursuant to this Section 4.1, the Holder shall maintain all
rights pursuant to Article III as well as all rights to convert this Debenture
pursuant to Article I.
16
<PAGE>
ARTICLE V. MISCELLANEOUS
5.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
--------------------------------
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privileges. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.2 NOTICES. Any notice herein required or permitted to be given
-------
shall be in writing and may be personally served or delivered by courier or sent
by United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or three (3) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be Aura Systems,
Inc., 2335 Alaska Avenue, El Segundo, California 90245, facsimile number: (310)
643-8719. Both the Holder and the Borrower may change the address for service
by service of written notice to the other as herein provided.
5.3 AMENDMENTS. This Debenture and any provision hereof may only be
----------
amended by an instrument in writing signed by the Borrower and the Holder. The
term "Debenture" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Debentures issued pursuant to the
Purchase Agreement) as originally executed, or if later amended or supplemented,
then as so amended or supplemented.
5.4 ASSIGNABILITY. This Debenture shall be binding upon the Borrower
-------------
and its successors and assigns, and shall inure to be the benefit of the Holder
and its successors and assigns. Each transferee of this Debenture must be an
"accredited investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Debenture to the contrary, this Debenture may
be pledged as collateral in connection with a bona fide margin account or other
---- ----
lending arrangement.
5.5 RANK; COST OF COLLECTION. The obligation of the Borrower under
------------------------
this Debenture shall rank in right of payment on parity with all other
unsubordinated obligations of the Borrower for indebtedness for borrowed money
or the purchase price of property. If default is made in the payment of this
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
5.6 GOVERNING LAW. This Debenture shall be governed by the internal
-------------
laws of the State of Delaware, without regard to the principles of conflict of
laws.
17
<PAGE>
5.7 CERTAIN AMOUNTS. Whenever pursuant to this Debenture the
---------------
Borrower is required to pay an amount in excess of the outstanding principal
amount (or the portion thereof required to be paid at that time) plus accrued
and unpaid interest plus Default Interest on such interest, the Borrower and the
Holder agree that the actual damages to the Holder from the receipt of cash
payment on this Debenture may be difficult to determine and the amount to be so
paid by the Borrower represents stipulated damages and not a penalty and is
intended to compensate the Holder in part for loss of the opportunity to convert
this Debenture and to earn a return from the sale of shares of Common Stock
acquired upon conversion of this Debenture at a price in excess of the price
paid for such shares pursuant to this Debenture. The Borrower and the Holder
hereby agree that such amount of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the receipt of a cash
payment without the opportunity to convert this Debenture into shares of Common
Stock.
5.8 ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The
-------------------------------------------------------
Maximum Share Amount and the Reserved Amount (including any increases thereto)
shall be allocated pro rata among the Holders of Debentures based on the
principal amount of Debentures then held by each Holder relative to the
aggregate principal amount of the Debentures then outstanding.
5.9 DAMAGES SHARES. The shares of Common Stock that may be issuable
--------------
to the Holder pursuant to Sections 1.4 and 1.5(g) hereof and pursuant to Section
2(c) of the Registration Rights Agreement ("Damages Shares") shall be treated as
Common Stock issuable upon conversion of this Debenture for all purposes hereof
and shall be subject to all of the limitations and afforded all of the rights of
the other shares of Common Stock issuable hereunder, including without
limitation, the right to be included in the Registration Statement filed
pursuant to the Registration Rights Agreement. For purposes of calculating
interest payable on the outstanding principal amount hereof, except as otherwise
provided herein, amounts convertible into Damages Shares ("Damages Amounts")
shall not bear interest but must be converted prior to the conversion of any
outstanding principal amount hereof, until the outstanding Damages Amounts is
zero.
5.10 DENOMINATIONS. At the request of the Holder, upon surrender of
-------------
this Debenture, the Borrower shall promptly issue new Debentures in the
aggregate outstanding principal amount hereof, in the form hereof, in such
denominations of at least $100,000 as the Holder shall request.
5.11 PURCHASE AGREEMENT. By its acceptance of this Debenture, each
------------------
Holder agrees to be bound by the applicable terms of the Purchase Agreement.
5.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided below,
--------------------------
the Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common Stock.
The Borrower shall provide the Holder with prior notification of any meeting of
the Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the
18
<PAGE>
Borrower of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Borrower or any proposed
liquidation, dissolution or winding up of the Borrower, the Borrower shall mail
a notice to the Holder, at least twenty (20) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event (or such earlier notice as may be required by an event covered by
Section 1.7(a)), and a brief statement regarding the amount and character of
such dividend, distribution, right or other event to the extent known at such
time. The Borrower shall make a public announcement of any event requiring
notification to the Holder hereunder substantially simultaneously with the
notification to the Holder in accordance with the terms of this Section 5.12.
19
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in
its name by its duly authorized officer this 30th day of March, 1998.
AURA SYSTEMS, INC.
By: /s/ Gerald S. Papazian
-----------------------------------
Gerald S. Papazian
President
20
<PAGE>
Exhibit A
NOTICE OF CONVERSION
OF CONVERTIBLE DEBENTURE
TO: Aura Systems, Inc.
(1) Pursuant to the terms of the attached Convertible Debenture (the
"Debenture"), the undersigned hereby elects to convert $ principal
amount of the Debenture into shares of Common Stock of Aura Systems, Inc., a
Delaware corporation (the "Borrower"). Capitalized terms used herein and not
otherwise defined herein have the respective meanings provided in the Debenture.
(2) Please issue a certificate or certificates for the number of
shares of Common Stock into which such principal amount of the Debenture (plus
interest thereon to the extent not paid in cash in accordance with the terms of
the Debenture) is convertible (_____ shares, based on the Holder's calculation
attached hereto) in the name(s) specified immediately below or, if additional
space is necessary, on an attachment hereto:
_____________________________ _____________________________
Name Name
_____________________________ _____________________________
Address Address
_____________________________ _____________________________
SS or Tax ID Number SS or Tax ID Number
(3) Holder acknowledges and affirms that the Common Stock issued
pursuant to this Notice of Conversion has been or will be sold in accordance
with the requirements of the 1933 Act, if applicable, or pursuant to an
exemption under the 1933 Act.
(4) Capitalized terms used in this Notice of Conversion and not
otherwise defined herein shall have the respective meanings provided in the
Debenture.
Date_________________ _________________________________________________
Signature of Registered Holder (must be signed
exactly as name appears in the Debenture).
21
<PAGE>
EXHIBIT 4.3
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EXCEPT
AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE AGREEMENT DATED
AS OF MARCH 30, 1998, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE
SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF REGISTRATION UNDER SUCH ACT OR AN OPINION OF COUNSEL THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SUCH ACT. ANY SUCH SALE, ASSIGNMENT OR TRANSFER MUST ALSO COMPLY
WITH APPLICABLE STATE SECURITIES LAWS.
Right to
Purchase
2,415,094
Shares of
Common
Stock, par
value $.005
per share
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, RGC INTERNATIONAL INVESTORS, LDC,
or its registered assigns, is entitled to purchase from Aura Systems, Inc., a
Delaware corporation (the "Company"), at any time or from time to time during
the period specified in Paragraph 2 hereof, Two Million Four Hundred Fifteen
Thousand Ninety-Four (2,415,094) fully paid and nonassessable shares of the
Company's Common Stock, par value $.005 per share (the "Common Stock"), at an
exercise price of $3.64 per share (the "Exercise Price"), provided, however,
-------- -------
that if the average Closing Price (as defined in the Debenture) for the five (5)
Trading Days (as defined in the Debenture) ending June 3, 1998 (the "Future
Price") is below $4.00, the Exercise Price shall be the lesser of (i) $3.64 and
(ii) 101% of the Future Price. The term "Warrant Shares," as used herein,
refers to the shares of Common Stock purchasable hereunder. The Warrant Shares
and the Exercise Price are subject to adjustment as provided in Paragraph 4
hereof. The term Warrants means this Warrant and the other warrants issued
pursuant to that certain Securities Purchase Agreement, dated March 30, 1998,
<PAGE>
by and among the Company and the Buyers listed on the execution page thereof
(the "Securities Purchase Agreement").
This Warrant is subject to the following terms, provisions, and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
----------------------------------------------------------------
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), delivery to the Company of a written notice of an election to
effect a "Cashless Exercise" (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. Notwithstanding the foregoing, the
exercise of the Warrants are subject to the following restrictions: (i) up to
fifty percent (50%) of the Warrants shall become exercisable at the time that
the registration statement to be filed pursuant to the Registration Rights
Agreement (as defined in Paragraph 7 below) is declared effective; and (ii) the
remaining fifty percent (50%) Warrants shall become exercisable upon the
earliest of (w) the date the Holder waives its right to demand prepayment as set
forth in Section 4.1 of the Debenture (as defined in the Securities Purchase
Agreement), (x) the date the Debenture is fully converted, (y) the date the
option set forth in that certain side letter dated March 30, 1998 from the
Company to, and acknowledged by, RGC International Investors, LDC is exercised
in full and (z) March 30, 2000. The Warrant Shares so purchased shall be deemed
to be issued to the holder hereof or such holder's designee, as the record owner
of such shares, as of the close of business on the date on which this Warrant
shall have been surrendered, the completed Exercise Agreement shall have been
delivered, and payment shall have been made for such shares as set forth above.
Certificates for the Warrant Shares so purchased, representing the aggregate
number of shares specified in the Exercise Agreement, shall be delivered to the
holder hereof within a reasonable time, not exceeding three (3) business days,
after this Warrant shall have been so exercised. The certificates so delivered
shall be in such denominations as may be requested by the holder hereof and
shall be registered in the name of such holder or such other name as shall be
designated by such holder. If this Warrant shall have been exercised only in
part, then, unless this Warrant has expired, the Company shall, at its expense,
at the time of delivery of such certificates, deliver to the holder a new
Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
Notwithstanding anything in this Warrant to the contrary, in no event
shall the Holder of this Warrant be entitled to exercise a number of Warrants
(or portions thereof) in
-2-
<PAGE>
excess of the number of Warrants (or portions thereof) upon exercise of which
the sum of (i) the number of shares of Common Stock beneficially owned by the
Holder and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unexercised Warrants and
unconverted portions of the Debenture and (ii) the number of shares of Common
Stock issuable upon exercise of the Warrants (or portions thereof) with respect
to which the determination described herein is being made, would result in
beneficial ownership by the Holder and its affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the immediately preceding
sentence, (a) beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation
13D-G thereunder, except as otherwise provided in clause (i) hereof and (b) the
Holder may waive the limitations set forth therein by written notice to the
Company upon not less than sixty-one (61) days prior notice (with such waiver
taking effect only upon the expiration of such 61 day notice period).
2. PERIOD OF EXERCISE. This Warrant is exercisable at any time or from
------------------
time to time on or after the date on which this Warrant is issued and delivered
pursuant to the terms of the Securities Purchase Agreement and before 5:00 p.m.,
New York City time on the fifth (5th) anniversary of the date of issuance (the
"Exercise Period").
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance
-----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
(b) RESERVATION OF SHARES. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of the
-------
shares of Common Stock issuable upon exercise of the Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment
--------------------------
of its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance
-3-
<PAGE>
or performance of any of the terms to be observed or performed by it hereunder,
but will at all times in good faith assist in the carrying out of all the
provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the holder of this Warrant in order to protect the
exercise privilege of the holder of this Warrant against dilution or other
impairment, consistent with the tenor and purpose of this Warrant. Without
limiting the generality of the foregoing, the Company (i) will not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Exercise Price then in effect, and (ii) will take all such
actions as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant.
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.
4. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Paragraph 4.
In the event that any adjustment of the Exercise Price as required herein
results in a fraction of a cent, such Exercise Price shall be rounded up to the
nearest cent.
(a) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON ISSUANCE OF
------------------------------------------------------------------
COMMON STOCK. Except as otherwise provided in Paragraphs 4(c) and 4(e) hereof,
- ------------
if and whenever on or after the date of issuance of this Warrant, the Company
issues or sells, or in accordance with Paragraph 4(b) hereof is deemed to have
issued or sold, any shares of Common Stock for no consideration or for a
consideration per share (before deduction of reasonable expenses or commissions
or underwriting discounts or allowances in connection therewith) less than the
Market Price (as hereinafter defined) on the date of issuance (a "Dilutive
Issuance"), then immediately upon the Dilutive Issuance, the Exercise Price will
be reduced to a price determined by multiplying the Exercise Price in effect
immediately prior to the Dilutive Issuance by a fraction, (i) the numerator of
which is an amount equal to the sum of (x) the number of shares of Common Stock
actually outstanding immediately prior to the Dilutive Issuance, plus (y) the
quotient of the aggregate consideration, calculated as set forth in Paragraph
4(b) hereof, received by the Company upon such Dilutive Issuance divided by the
Market Price in effect immediately prior to the Dilutive Issuance, and (ii) the
denominator of which is the total number of shares of Common Stock Deemed
Outstanding (as defined below) immediately after the Dilutive Issuance.
(b) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Paragraph 4(a) hereof, the
following will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any manner
-----------------------------
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to
-4-
<PAGE>
subscribe for or to purchase Common Stock or other securities convertible into
or exchangeable for Common Stock ("Convertible Securities") (such warrants,
rights and options to purchase Common Stock or Convertible Securities are
hereinafter referred to as "Options") and the price per share for which Common
Stock is issuable upon the exercise of such Options is less than the Market
Price on the date of issuance or grant of such Options, then the maximum total
number of shares of Common Stock issuable upon the exercise of all such Options
will, as of the date of the issuance or grant of such Options, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of the preceding sentence, the "price per share for which
Common Stock is issuable upon the exercise of such Options" is determined by
dividing (i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or granting of all such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise of all such Options, plus, in the case of Convertible
Securities issuable upon the exercise of such Options, the minimum aggregate
amount of additional consideration payable upon the conversion or exchange
thereof at the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Options (assuming full conversion of
Convertible Securities, if applicable). No further adjustment to the Exercise
Price will be made upon the actual issuance of such Common Stock upon the
exercise of such Options or upon the conversion or exchange of Convertible
Securities issuable upon exercise of such Options.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities, whether or not immediately
convertible (other than where the same are issuable upon the exercise of
Options) and the price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Market Price on the date of issuance,
then the maximum total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities will, as of the date
of the issuance of such Convertible Securities, be deemed to be outstanding and
to have been issued and sold by the Company for such price per share. For the
purposes of the preceding sentence, the "price per share for which Common Stock
is issuable upon such conversion or exchange" is determined by dividing (i) the
total amount, if any, received or receivable by the Company as consideration for
the issuance or sale of all such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the conversion or exchange thereof at the time such Convertible Securities
first become convertible or exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No further adjustment to the Exercise Price will be made
upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If there is
-----------------------------------------
a change at any time in (i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the conversion or exchange of
any Convertible Securities; or (iii) the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock
-5-
<PAGE>
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
--------------------------------------------------------
SECURITIES. If, in any case, the total number of shares of Common Stock
- ----------
issuable upon exercise of any Option or upon conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to convert or exchange such Convertible Securities shall have expired
or terminated, the Exercise Price then in effect will be readjusted to the
Exercise Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination (other than in respect of
the actual number of shares of Common Stock issued upon exercise or conversion
thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance, grant or sale. In
case any Common Stock, Options or Convertible Securities are issued or sold for
a consideration part or all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be the fair value of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. In case any Common Stock,
Options or Convertible Securities are issued in connection with any acquisition,
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined in good faith by the Board of Directors of the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No adjustment to
------------------------------------------
the Exercise Price will be made (i) upon the exercise of any warrants, options
or convertible securities granted, issued and outstanding on the date of
issuance of this Warrant; (ii) upon the grant or exercise of any stock or
options which may hereafter be granted or exercised under any employee benefit
plan of the Company now existing or to be implemented in the future, so long as
the issuance of such stock or options is approved by a majority of the
independent members of the Board of Directors of the Company or a majority of
the members of a committee of independent directors established for such
purpose; or (iii) upon the exercise of the Warrants.
-6-
<PAGE>
(c) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any
------------------------------------------
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Paragraph 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) CONSOLIDATION, MERGER OR SALE. In case of any consolidation of
-----------------------------
the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company, then as a condition of such consolidation, merger or sale or
conveyance, adequate provision will be made whereby the holder of this Warrant
will have the right to acquire and receive upon exercise of this Warrant in lieu
of the shares of Common Stock immediately theretofore acquirable upon the
exercise of this Warrant, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will make appropriate provision to insure
that the provisions of this Paragraph 4 hereof will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
consolidation, merger or sale or conveyance unless prior to the consummation
thereof, the successor corporation (if other than the Company) assumes by
written instrument the obligations under this Paragraph 4 and the obligations to
deliver to the holder of this Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the holder may be entitled to
acquire.
(f) DISTRIBUTION OF ASSETS. In case the Company shall declare or make
----------------------
any distribution of its assets (including cash) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise, then,
after the date of record for determining stockholders entitled to such
distribution, but prior to the date of distribution, the holder of this Warrant
shall be entitled upon exercise of this Warrant for the purchase of any or all
of the shares of Common Stock subject hereto, to receive the amount of such
assets which would have been payable to the holder had such holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
-7-
<PAGE>
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which
--------------------
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
(j) OTHER NOTICES. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings)
to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all its assets to, another
corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the
date on which the holders of Common Stock shall be
-8-
<PAGE>
entitled to receive such dividend, distribution, or subscription rights or to
exchange their Common Stock for stock or other securities or property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, or winding-up, as the case may be. Such notice
shall be given at least 30 days prior to the record date or the date on which
the Company's books are closed in respect thereto. Failure to give any such
notice or any defect therein shall not affect the validity of the proceedings
referred to in clauses (i), (ii), (iii) and (iv) above.
(k) CERTAIN EVENTS. If any event occurs of the type contemplated by
--------------
the adjustment provisions of this Paragraph 4 but not expressly provided for by
such provisions, the Company will give notice of such event as provided in
Paragraph 4(g) hereof, and the Company's Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of shares of Common
Stock acquirable upon exercise of this Warrant so that the rights of the Holder
shall be neither enhanced nor diminished by such event.
(l) CERTAIN DEFINITIONS.
-------------------
(i) "Common Stock Deemed Outstanding" shall mean the number of
-------------------------------
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) pursuant to Paragraph
4(b)(i) hereof, the maximum total number of shares of Common Stock issuable upon
the exercise of Options, as of the date of such issuance or grant of such
Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the maximum
total number of shares of Common Stock issuable upon conversion or exchange of
Convertible Securities, as of the date of issuance of such Convertible
Securities, if any.
(ii) "Market Price," as of any date, (i) means the average of
------------
the last reported sale prices for the shares of Common Stock on the Nasdaq
National Market ("Nasdaq") for the five (5) trading days immediately preceding
such date as reported by Bloomberg, L.P. ("Bloomberg"), or (ii) if Nasdaq is not
the principal trading market for the shares of Common Stock, the average of the
last reported sale prices on the principal trading market for the Common Stock
during the same period as reported by Bloomberg, or (iii) if market value cannot
be calculated as of such date on any of the foregoing bases, the Market Price
shall be the fair market value as reasonably determined in good faith by (a) the
Board of Directors of the Corporation or, at the option of a majority-in-
interest of the holders of the outstanding Warrants by (b) an independent
investment bank of nationally recognized standing in the valuation of businesses
similar to the business of the corporation. The manner of determining the Market
Price of the Common Stock set forth in the foregoing definition shall apply with
respect to any other security in respect of which a determination as to market
value must be made hereunder.
(iii) "Common Stock," for purposes of this Paragraph 4, includes
------------
the Common Stock, par value $.005 per share, and any additional class of stock
of the Company having no preference as to dividends or distributions on
liquidation, provided that the shares purchasable pursuant to this Warrant shall
include only shares of Common Stock, par value $.005 per share, in respect of
which this Warrant is exercisable, or shares resulting from any
-9-
<PAGE>
subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Paragraph 4(e) hereof, the stock or other securities or
property provided for in such Paragraph.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
----------------------------------------------
(a) RESTRICTION ON TRANSFER. This Warrant and the rights granted to
-----------------------
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Paragraph 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Paragraph 7(f) hereof and to the applicable
provisions of the Securities Purchase Agreement. Until due presentment for
registration of transfer on the books of the Company, the Company may treat the
registered holder hereof as the owner and holder hereof for all purposes, and
the Company shall not be affected by any notice to the contrary.
Notwithstanding anything to the contrary contained herein, the registration
rights described in Paragraph 8 are assignable only in accordance with the
provisions of that certain Registration Rights Agreement, dated as of March 30,
1998, by and among the Company and the other signatories thereto (the
"Registration Rights Agreement").
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant
------------------------------------------------
is exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Paragraph 7(e) below, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the holder hereof at the time of such surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such
-10-
<PAGE>
mutilation, upon surrender and cancellation of this Warrant, the Company, at its
expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Paragraph 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Paragraph 7.
(e) REGISTER. The Company shall maintain, at its principal executive
--------
offices (or such other office or agency of the Company as it may designate by
notice to the holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of
-----------------------------------------
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act of 1933, as amended (the "Securities Act") and under applicable state
securities or blue sky laws, the Company may require, as a condition of allowing
such exercise, transfer, or exchange, (i) that the holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a) promulgated under the Securities
Act; provided that no such opinion, letter or status as an "accredited investor"
shall be required in connection with a transfer pursuant to Rule 144 under the
Securities Act. The first holder of this Warrant, by taking and holding the
same, represents to the Company that such holder is acquiring this Warrant for
investment and not with a view to the distribution thereof.
8. REGISTRATION RIGHTS. The initial holder of this Warrant (and certain
-------------------
assignees thereof) is entitled to the benefit of such registration rights in
respect of this Warrant and the Warrant Shares as are set forth in Section 2 of
the Registration Rights Agreement.
9. NOTICES. All notices, requests, and other communications required or
-------
permitted to be given or delivered hereunder to the holder of this Warrant shall
be in writing, and shall be personally delivered, or shall be sent by certified
or registered mail or by recognized overnight mail courier, postage prepaid and
addressed, to such holder at the address shown for such holder on the books of
the Company, or at such other address as shall have been furnished to the
Company by notice from such holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail
-11-
<PAGE>
or by recognized overnight mail courier, postage prepaid and addressed, to the
office of the Company at 2335 Alaska Avenue, El Segundo, California 90245,
Attention: President, or at such other address as shall have been furnished to
the holder of this Warrant by notice from the Company. Any such notice, request,
or other communication may be sent by facsimile, but shall in such case be
subsequently confirmed by a writing personally delivered or sent by certified or
registered mail or by recognized overnight mail courier as provided above. All
notices, requests, and other communications shall be deemed to have been given
either at the time of the receipt thereof by the person entitled to receive such
notice at the address of such person for purposes of this Paragraph 9, or, if
mailed by registered or certified mail or with a recognized overnight mail
courier upon deposit with the United States Post Office or such overnight mail
courier, if postage is prepaid and the mailing is properly addressed, as the
case may be.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW.
11. MISCELLANEOUS.
-------------
(a) AMENDMENTS. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and the holder hereof.
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(c) CASHLESS EXERCISE. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised by presentation and surrender of
this Warrant to the Company at its principal executive offices with a written
notice of the holder's intention to effect a cashless exercise, including a
calculation of the number of shares of Common Stock to be issued upon such
exercise in accordance with the terms hereof (a "Cashless Exercise"). In the
event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the
holder shall surrender this Warrant for that number of shares of Common Stock
determined by multiplying the number of Warrant Shares to which it would
otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
-12-
<PAGE>
WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
AURA SYSTEMS, INC.
/s/ Gerald S. Papazian
------------------------------------
Gerald S. Papazian
President
Dated as of March 30, 1998
-13-
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated:
--------, ----.
To:
-----------------------------
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase ________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of, or, if the resale of such Common Stock by the undersigned is not
currently registered pursuant to an effective registration statement under the
Securities Act of 1933, as amended, by surrender of securities issued by the
Company (including a portion of the Warrant) having a market value (in the case
of a portion of this Warrant, determined in accordance with Section 11(c) of the
Warrant) equal to $_________. Please issue a certificate or certificates for
such shares of Common Stock in the name of and pay any cash for any fractional
share to:
Name:
----------------------------------------
Signature:
-----------------------------------
Address:
-------------------------------------
-------------------------------------
Note: The above signature should correspond
exactly with the name on the face of the
within Warrant.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
-14-
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ______________
________________________ as agent and attorney-in-fact to transfer said Warrant
on the books of the within-named corporation, with full power of substitution in
the premises.
Dated:
---------------------, ----,
In the presence of
- ------------------
Name:
---------------------------------------
Signature:
-----------------------------
Title of Signing Officer or Agent (if any):
----------------------------------------
Address:
------------------------------
------------------------------
Note: The above signature should correspond
exactly with the name on the face of
the within Warrant.
-15-
<PAGE>
EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of March 30,
1998, by and among Aura Systems, Inc., a Delaware corporation, with headquarters
located at 2335 Alaska Avenue, El Segundo, California 90245 (the "COMPANY"), and
each of the undersigned (together with their respective affiliates and any
assignee or transferee of all of their respective rights hereunder, the "INITIAL
INVESTORS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties hereto of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the
Company has agreed, upon the terms and subject to the conditions contained
therein, to issue and sell to the Initial Investors (i) convertible debentures
(the "DEBENTURES") that are convertible into shares (the "CONVERSION SHARES") of
the Company's common stock (the "COMMON STOCK"), upon the terms and subject to
the limitations and conditions set forth in such Debentures and (ii) warrants
(the "WARRANTS") to acquire Two Million Four Hundred Fifteen Thousand Ninety-
Four (2,415,094) shares of Common Stock (the "WARRANT SHARES"), upon the terms
and conditions and subject to the limitations and conditions set forth in the
Warrants dated March 30, 1998; and
B. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 ACT"), and applicable state securities laws;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the
Initial Investors hereby agree as follows:
<PAGE>
1. DEFINITIONS.
-----------
a. As used in this Agreement, the following terms shall have the
following meanings:
(i) "INVESTORS" means the Initial Investors and any transferee
or assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
(iii) "REGISTRABLE SECURITIES" means the Conversion Shares,
Warrants and Warrant Shares issued or issuable and any shares of capital stock
issued or issuable as a dividend on or in exchange for or otherwise with respect
to any of the foregoing.
(iv) "REGISTRATION STATEMENT" means a registration statement of
the Company under the 1933 Act.
b. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
------------
a. Mandatory Registration. The Company shall prepare, and, on or
----------------------
prior to the date which is thirty (30) days after the date of the Closing under
the Securities Purchase Agreement (the "CLOSING DATE"), file with the SEC a
Registration Statement on Form S-3 (or, if Form S-3 is not then available, on
such form of Registration Statement as is then available to effect a
registration of the Registrable Securities, subject to the consent of the
Initial Investors, which consent will not be unreasonably withheld) covering the
resale of the Registrable Securities including the Warrants and Registrable
Securities underlying the Debentures and the Warrants issued or issuable
pursuant to the Securities Purchase Agreement and covering the issuance of the
Warrants Shares upon exercise of the Warrants, which Registration Statement, to
the extent allowable under the 1933 Act and the Rules promulgated thereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Debentures and exercise of the Warrants (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions or (ii) by reason of changes in the Conversion Price of the
Debentures or the Exercise Price of the Warrants in accordance with the terms
thereof. The number of shares of Common Stock initially
2
<PAGE>
included in such Registration Statement shall be no less than one and one-half
(1 1/2) times the sum of the number of Conversion Shares and Warrant Shares that
are then issuable upon conversion of the Debentures and exercise of the Warrants
without regard to any limitation on the Investor's ability to convert the
Debentures or exercise the Warrants.
b. [Intentionally Omitted]
c. Payments by the Company. The Company shall use its best efforts
-----------------------
to obtain effectiveness of the Registration Statements as soon as practicable.
If (i) the Registration Statement is not filed with the SEC within thirty (30)
days after the Closing Date (the "REGISTRATION FILING DEADLINE"), (ii) the
Registration Statement(s) covering the Registrable Securities required to be
filed by the Company pursuant to Section 2(a) hereof is not declared effective
by the SEC within one hundred twenty (120) days after the Closing Date (the
"EFFECTIVE DATE DEADLINE") or if, after the Registration Statement has been
declared effective by the SEC, sales cannot be made pursuant to the Registration
Statement, or (iii) the Common Stock is not listed or included for quotation on
the Nasdaq National Market ("NASDAQ"), the Nasdaq SmallCap Market ("NASDAQ
SMALLCAP"), the New York Stock Exchange (the "NYSE") or the American Stock
Exchange (the "AMEX") after being so listed or included for quotation, then the
Company will make payments to the Investors in such amounts and at such times as
shall be determined pursuant to this Section 2(c) as partial relief for the
damages to the Investors by reason of any such delay in or reduction of their
ability to sell the Registrable Securities (which remedy shall not be exclusive
of any other remedies available at law or in equity). The Company shall pay to
each holder of the Debentures or Registerable Securities an amount equal to the
then outstanding principal amount of the Debentures (and, in the case of holders
of Registerable Securities, the principal amount of Debentures from which such
Registerable Securities were converted) ("OUTSTANDING PRINCIPAL AMOUNT")
multiplied by the Applicable Percentage (as defined below) times the sum of: (i)
the number of months (prorated for partial months) after the Registration Filing
Deadline, and prior to the date the Registration Statement is filed with the
SEC; (ii) the number of months (prorated for partial months) after the Effective
Date Deadline and prior to the date the Registration Statement is declared
effective by the SEC, provided, however, that there shall be excluded from such
period any delays which are solely attributable to changes required by the
Investors in the Registration Statement with respect to information relating to
the Investors, including, without limitation, changes to the plan of
distribution, or to the failure of the Investors to conduct their review of the
Registration Statement pursuant to Section 3(h) below in a reasonably prompt
manner; (iii) the number of months (prorated for partial months) that sales
cannot be made pursuant to the Registration Statement after the Registration
Statement has been declared effective (including, without limitation, when sales
cannot be made by reason of the Company's failure to properly supplement or
amend the prospectus included therein in accordance with the terms of this
Agreement or otherwise for any reason outside the Investors' control, but
excluding Allowed Delays (as defined in Section 3(f)); and (iv) the number of
months (prorated for partial months) that the Common Stock is not listed or
included for quotation on the Nasdaq, Nasdaq SmallCap, NYSE or AMEX or that
trading thereon is halted after the Registration Statement has been declared
effective. (For example, if the Registration Statement is filed prior
3
<PAGE>
to the Registration Filing Deadline, but becomes effective one (1) month after
the Effective Date Deadline, the Company would pay $20,000 for each $1,000,000
of Outstanding Principal Amount. If thereafter, sales could not be made pursuant
to the Registration Statement for an additional period of one (1) month, the
Company would pay an additional $20,000 for each $1,000,000 of Outstanding
Principal Amount.) Such amounts shall be paid in cash or, at each Investor's
option, may be added to the principal amount of the Debentures and thereafter be
convertible into Common Stock at the "CONVERSION PRICE" (as defined in the
Debentures) in accordance with the terms of the Debentures. Any shares of Common
Stock issued upon conversion of such amounts shall be Registrable Securities. If
the Investor desires to convert the amounts due hereunder into Registrable
Securities, it shall so notify the Company in writing within two (2) business
days of the date on which such amounts are first payable in cash and such
amounts shall be so convertible (pursuant to the mechanics set forth under
Article I of the Debentures), beginning on the last day upon which the cash
amount would otherwise be due in accordance with the following sentence.
Payments of cash pursuant hereto shall be made within five (5) days after the
end of each period that gives rise to such obligation, provided that, if any
such period extends for more than thirty (30) days, interim payments shall be
made for each such thirty (30) day period. The term "APPLICABLE PERCENTAGE"
means two hundredths (.020) for any other purpose.
d. Piggy-Back Registrations. Subject to the last sentence of this
------------------------
Section 2(d), if at any time prior to the expiration of the Registration Period
(as hereinafter defined) the Company shall file with the SEC a Registration
Statement relating to an offering for its own account or the account of others
under the 1933 Act of any of its equity securities (other than on Form S-4 or
Form S-8 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), the Company shall send to each Investor who is entitled to registration
rights under this Section 2(d) written notice of such determination and, if
within fifteen (15) days after the effective date of such notice, such Investor
shall so request in writing, the Company shall include in such Registration
Statement all or any part of the Registrable Securities such Investor requests
to be registered, except that if, in connection with any underwritten public
offering for the account of the Company the managing underwriter(s) thereof
shall impose a limitation on the number of shares of Common Stock which may be
included in the Registration Statement because, in such underwriter(s)'
judgment, marketing or other factors dictate such limitation is necessary to
facilitate public distribution, then the Company shall be obligated to include
in such Registration Statement only such limited portion of the Registrable
Securities with respect to which such Investor has requested inclusion hereunder
as the underwriter shall permit. Any exclusion of Registrable Securities shall
be made pro rata among the Investors seeking to include Registrable Securities
in proportion to the number of Registrable Securities sought to be included by
such Investors; provided, however, that the Company shall not exclude any
-------- -------
Registrable Securities unless the Company has first excluded all outstanding
securities, the holders of which are not entitled to inclusion of such
securities in such Registration Statement or are not entitled to pro rata
inclusion with the Registrable Securities; and provided, further, however, that,
-------- ------- -------
after giving effect to the immediately preceding proviso, any exclusion of
Registrable Securities shall be made pro rata with holders of other securities
having the right to
4
<PAGE>
include such securities in the Registration Statement other than holders of
securities entitled to inclusion of their securities in such Registration
Statement by reason of demand registration rights. No right to registration of
Registrable Securities under this Section 2(d) shall be construed to limit any
registration required under Section 2(a) hereof. If an offering in connection
with which an Investor is entitled to registration under this Section 2(d) is an
underwritten offering, then each Investor whose Registrable Securities are
included in such Registration Statement shall, unless otherwise agreed by the
Company, offer and sell such Registrable Securities in an underwritten offering
using the same underwriter or underwriters and, subject to the provisions of
this Agreement, on the same terms and conditions as other shares of Common Stock
included in such underwritten offering. Notwithstanding anything to the contrary
set forth herein, the registration rights of the Investors pursuant to this
Section 2(d) shall only be available in the event the Company fails to timely
file, obtain effectiveness or maintain effectiveness of the Registration
Statement to be filed pursuant to Section 2(a) in accordance with the terms of
this Agreement.
e. Eligibility for Form S-3. The Company represents and warrants
------------------------
that it meets the registrant eligibility and transaction requirements for the
use of Form S-3 for registration of the sale by the Initial Investors and any
other Investors of the Registrable Securities and the Company shall file all
reports required to be filed by the Company with the SEC in a timely manner so
as to maintain such eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY.
--------------------------
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly, and file with the SEC not
later than thirty (30) days after the Closing Date, a Registration Statements
with respect to the number of Registrable Securities provided in Section 2(a),
and thereafter use its best efforts to cause such Registration Statement
relating to Registrable Securities to become effective as soon as possible after
such filing, and keep the Registration Statement effective pursuant to Rule 415
at all times until such date as is the earlier of (i) the date on which all of
the Registrable Securities have been sold and (ii) the date on which the
Registrable Securities (in the opinion of counsel to the Initial Investors) may
be immediately sold without restriction (including without limitation as to
volume by each holder thereof) without registration under the 1933 Act (the
"REGISTRATION PERIOD"), which Registration Statement (including any amendments
or supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such
5
<PAGE>
period, comply with the provisions of the 1933 Act with respect to the
disposition of all Registrable Securities of the Company covered by the
Registration Statement until such time as all of such Registrable Securities
have been disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof as set forth in the Registration Statement. In the
event the number of shares available under a Registration Statement filed
pursuant to this Agreement is insufficient to cover all of the Registrable
Securities issued or issuable upon conversion of the Debentures, the Company
shall amend the Registration Statement, or file a new Registration Statement (on
the short form available therefore, if applicable), or both, so as to cover all
of the Registrable Securities, in each case, as soon as practicable, but in any
event within twenty (20) business days after the necessity therefor arises
(based on the market price of the Common Stock and other relevant factors on
which the Company reasonably elects to rely). The Company shall use its best
efforts to cause such amendment and/or new Registration Statements to become
effective as soon as practicable following the filing thereof. The provisions of
Section 2(c) above shall be applicable with respect to such obligation, with the
one hundred twenty (120) days pursuant to Section 2(c) running from the day
after the date on which the Company reasonably first determines (or reasonably
should have determined) the need therefor.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC, and each item of correspondence from the SEC or the
staff of the SEC, in each case relating to such Registration Statement (other
than any portion of any thereof which contains information for which the Company
has sought confidential treatment), and (ii) such number of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor. The Company will immediately notify each Investor by
facsimile of the effectiveness of the Registration Statement or any post-
effective amendment. The Company will promptly respond to any and all comments
received from the SEC, with a view towards causing any Registration Statement or
any amendment thereto to be declared effective by the SEC as soon as practicable
and shall promptly file an acceleration request as soon as practicable following
the resolution or clearance of all SEC comments or, if applicable, following
notification by the SEC that the Registration Statement or any amendment thereto
will not be subject to review.
d. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as the Investors who hold a majority in interest of the Registrable
Securities being offered reasonably request, (ii) prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during
6
<PAGE>
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
- -------- -------
therewith or as a condition thereto to (a) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (b) subject itself to general taxation in any such jurisdiction,
(c) file a general consent to service of process in any such jurisdiction, (d)
provide any undertakings that cause the Company undue expense or burden, or (e)
make any change in its charter or bylaws, which in each case the Board of
Directors of the Company determines to be contrary to the best interests of the
Company and its stockholders.
e. [Intentionally Omitted]
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor of the happening of any event, of which
the Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request; provided that, for not more than fifteen (15) consecutive
trading days (or a total of not more than thirty (30) trading days in any twelve
(12) month period), the Company may delay the disclosure of material non-public
information concerning the Company (as well as prospectus or Registration
Statement updating) the disclosure of which at the time is not, in the good
faith opinion of the Company, the best interests of the Company (an "ALLOWED
DELAY"); provided, further, that the Company shall promptly (i) notify the
Investors in writing of the existence of (but in no event, without the prior
written consent of an Investor, shall the Company disclose to such investor any
of the facts or circumstances regarding) material non-public information giving
rise to an Allowed Delay and (ii) advise the Investors in writing to cease all
sales under the Registration Statement until the end of the Allowed Delay. Upon
expiration of the Allowed Delay, the Company shall again be bound by the first
sentence of this Section 3(f) with respect to the information giving rise
thereto.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest possible moment and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof.
h. The Company shall permit a single firm of counsel designated by
the Initial Investors to review the Registration Statement and all amendments
and supplements thereto (as well as all requests for acceleration or
effectiveness thereof) a reasonable period of time prior to their filing with
the SEC, and not file any document in a form to which such counsel reasonably
7
<PAGE>
objects and will not request acceleration of any Registration Statement without
prior notice to such counsel. The sections of the Registration Statements
covering information with respect to the Investors, the Investor's beneficial
ownership of securities of the Company or the Investors intended method of
disposition of Registrable Securities shall conform to the information provided
to the Company by each of the Investors.
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the 1933 Act) covering a twelve-month
period beginning not later than the first day of the Company's fiscal quarter
next following the effective date of each Registration Statement.
j. At the request of any Investor, the Company shall furnish, on the
date that Registrable Securities are delivered to an underwriter, if any, for
sale in connection with the Registration Statement or, if such securities are
not being sold by an underwriter, on the date of effectiveness thereof (i) an
opinion, dated as of such date, from counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
underwriters, if any, and the Investors and (ii) a letter, dated such date, from
the Company's independent certified public accountants in form and substance as
is customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriters, if any, and
the Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Initial Investors, (iv) one firm of attorneys
and one firm of accountants or other agents retained by all other Investors, and
(v) one firm of attorneys retained by all such underwriters (collectively, the
"INSPECTORS") all pertinent financial and other records, and pertinent corporate
documents and properties of the Company (collectively, the "RECORDS"), as shall
be reasonably deemed necessary by each Inspector to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
-------- -------
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (b) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction, or (c)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that
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<PAGE>
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the Company
and allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential. Nothing herein (or in any other confidentiality agreement between
the Company and any Investor) shall be deemed to limit the Investor's ability to
sell Registrable Securities in a manner which is otherwise consistent with
applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
m. The Company shall (i) cause all the Registrable Securities
covered by the Registration Statement (other than the Warrants) to be listed on
each national securities exchange on which securities of the same class or
series issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure the designation and quotation, of all the Registrable Securities
covered by the Registration Statements (other than the Warrants) on the Nasdaq
or, if not eligible for the Nasdaq on the Nasdaq SmallCap and, without limiting
the generality of the foregoing, to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Securities.
n. The Company shall provide a transfer agent and registrar, which
may be a single entity, for each Registrable Securities not later than the
effective date of Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to a Registration Statement, and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities
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<PAGE>
is ordered effective by the SEC, the Company shall deliver, and shall cause
legal counsel selected by the Company to deliver, to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an instruction in the
form attached hereto as EXHIBIT 1 and an opinion of such counsel in the form
attached hereto as EXHIBIT 2.
p. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS.
----------------------------
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least three
(3) business days prior to the first anticipated filing date of each
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
c. [Intentionally Omitted]
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
10
<PAGE>
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
------------------------
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualification fees, printers and accounting fees and the fees and disbursements
of counsel for the Company shall be borne by the Company. Subject to Section
4(f) of the Securities Purchase Agreement, the Investors shall be responsible
for their own legal fees.
6. INDEMNIFICATION.
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities,
(ii) the directors, officers, partners, employees, agents and each person who
controls any Investor within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 ACT"), if any, (iii) any underwriter
(as defined in the 1933 Act) for the Investors, and (iv) the directors,
officers, partners, employees and each person who controls any such underwriter
within the meaning of the 1933 Act or the 1934 Act, if any (each, an
"INDEMNIFIED PERSON"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "CLAIMS") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading; (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading; or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state
11
<PAGE>
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities (the matters in the foregoing clauses (i)
through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions
set forth in Section 6(c) with respect to the number of legal counsel, the
Company shall reimburse the Indemnified Person, promptly as such expenses are
incurred and are due and payable, for any reasonable legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof; (ii) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld; and (iii) with respect to any
preliminary prospectus, shall not inure to the benefit of any Indemnified Person
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, such corrected prospectus was timely made
available by the Company pursuant to Section 3(c) hereof, and the Indemnified
Person was promptly advised in writing not to use the incorrect prospectus prior
to the use giving rise to a Violation and such Indemnified Person,
notwithstanding such advice, used it. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such stockholder or underwriter within the meaning of the 1933 Act or
the 1934 Act (collectively and together with an Indemnified Person, an
"INDEMNIFIED PARTY"), against any Claim to which any of them may become subject,
under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out
of or is based upon any Violation by such Investor, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and subject to
Section 6(c) such Investor will reimburse any legal or other expenses (promptly
as such expenses are incurred and are due and payable) reasonably incurred by
them in connection with investigating or defending any such Claim; provided,
--------
however, that the indemnity agreement contained in this Section 6(b) shall not
- -------
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
-------- ------- -------
liable under this
12
<PAGE>
Agreement (including this Section 6(b) and Section 7) for only that amount as
does not exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Indemnified Party if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
on a timely basis in the prospectus, as then amended or supplemented.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
-------- -------
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The indemnifying party shall pay for only one
separate legal counsel for the Indemnified Persons or the Indemnified Parties,
as applicable, and such legal counsel shall be selected by Investors holding a
majority-in-interest of the Registrable Securities included in the Registration
Statement to which the Claim relates (with the approval of a majority-in-
interest of the Initial Investors), if the Investors are entitled to
indemnification hereunder, or the Company, if the Company is entitled to
indemnification hereunder, as applicable. The failure to deliver written notice
to the indemnifying party within a reasonable time of the commencement of any
such action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that (i) no
-------- -------
contribution shall be made under circumstances where the maker would not
13
<PAGE>
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of such fraudulent misrepresentation, and (iii) contribution (together
with any indemnification or other obligations under this Agreement) by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
--------------------------
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the investors to sell securities of the Company
to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
---------------------------------
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the
14
<PAGE>
Company to be bound by all of the provisions contained herein, (v) such transfer
shall have been made in accordance with the applicable requirements of the
Securities Purchase Agreement, and (vi) such transferee shall be an "ACCREDITED
INVESTOR" as that term defined in Rule 501 of Regulation D promulgated under the
1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
--------------------------------
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with written consent of the Company, each of the Initial
Investors (to the extent such Initial Investor still owns Registrable
Securities) and Investors who hold a majority interest of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
-------------
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the terms
hereof shall be sent by certified or registered mail (return receipt requested)
or delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile and shall be effective five days after being placed in
the mail, if mailed by regular U.S. mail, or upon receipt, if delivered
personally or by courier (including a recognized overnight delivery service) or
by facsimile, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
Aura Systems, Inc.
2335 Alaska Avenue
El Segundo, California 90245
Attention: President
Facsimile: (310) 643-8719
With copy to:
Michael Froch
General Counsel
Aura Systems, Inc.
2335 Alaska Avenue
15
<PAGE>
El Segundo, California 90245
Facsimile: (310) 643-8719
If to an Investor: to the address set forth immediately below such Investor's
name on the signature pages to the Securities Purchase Agreement.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof. The parties hereto hereby submit to the exclusive
jurisdiction of the United States Federal Courts located in Delaware with
respect to any dispute arising under this Agreement or the transactions
contemplated hereby.
e. This Agreement and the Securities Purchase Agreement (including
all schedules and exhibits thereto) constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement and the Securities
Purchase Agreement supersede all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the
16
<PAGE>
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
j. Except as otherwise provided herein, all consents and other
determinations to be made by the Investors pursuant to this Agreement shall be
made by Investors holding a majority of the Registrable Securities, determined
as if the all of the Debentures then outstanding have been converted into for
Registrable Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
17
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned Initial Investors
have caused this Agreement to be duly executed as of the date first above
written.
AURA SYSTEMS, INC.
By: /s/ Gerald S. Papazian
--------------------------------
Gerald S. Papazian
President
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P., Investment Manager
By: RGC General Partner Corp., as General Partner
By: /s/ Wayne D. Bloch
--------------------------------
Wayne D. Bloch
Managing Director
18
