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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FEBRUARY 24, 2000
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Date of Report (Date of earliest event reported)
SMARTSOURCES.COM, INC.
(formerly Innovest Capital Sources Corporation,
Telco Communications, Inc. and Cody Capital Corporation)
(Exact Name of Registrant as Specified in Charter)
COLORADO 33-1933 3-D 84-1073083
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
2030 MARINE DRIVE, SUITE 100
NORTH VANCOUVER, BRITISH COLUMBIA V7P 1V7, CANADA
(Address of Principal Executive Offices, Including Zip Code)
(604) 986-0889
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(Registrant's telephone number,
including area code)
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SMARTSOURCES.COM, INC.
FORM 8-K
ITEM 5. OTHER EVENTS.
On February 24, 2000, we entered into a Securities Purchase Agreement
with an institutional investor, pursuant to which we issued warrants to purchase
330,000 shares of Common Stock exercisable at any time until February 24, 2005
at an exercise price of $11.10 per share and convertible debentures in the
aggregate principal amount of $5 million. In addition, at the time of each
conversion, the holder of the debentures has an investment option to purchase,
at the fixed conversion price described below, one additional share of Common
Stock for each share issuable upon conversion.
The debentures bear interest at a rate of 7% per annum commencing on
February 24, 2000 and mature on February 24, 2005. The principal amount of the
debentures (plus all accrued interest and additional amounts owed) is
convertible, in whole or in part, at the option of the holders, into shares of
Common Stock at a conversion price based on the trading price of Common Stock
over a fixed period prior to conversion of the debentures, up to a fixed
conversion price of $9.7125. The conversion price is subject to adjustment upon
the occurrence of certain events, including without limitation, if the Common
Stock is not listed on the American Stock Exchange or the Nasdaq SmallCap Market
by October 24, 2000 or on the Nasdaq National Market by February 24, 2001 or if
we default on certain provisions of the Registration Rights Agreement executed
in connection with the investment.
After August 24, 2000, if the conversion price is lower than the fixed
conversion price and certain other requirements are met, we may elect to pay
cash in lieu of Common Stock upon conversion of the debentures. In addition, if
specified defaults occur, the debentures are redeemable for cash, either
automatically or upon election of the holders of 50% of the outstanding
debentures, at 120% of the purchase price, plus interest and default payments,
which may be substantial. In the event that NASD rules apply and we do not
obtain the approval of our shareholders to issue shares in an amount in excess
of 20% of the outstanding shares of Common Stock, any debentures convertible for
shares in excess of this limit would also be redeemable for cash. Any redemption
for cash in lieu of shares could significantly impair our working capital.
Our press release of February 25, 2000, announcing the issuance and
sale of the debentures and warrants, as well as the Securities Purchase
Agreement, Registration Rights Agreement, the Convertible Debenture and Stock
Purchase Warrants, are filed as exhibits to this Current Report on Form 8-K.
This summary description of the transaction, as well as the press release, is
qualified in its entirety by reference to these documents filed as exhibits
hereto.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
The exhibits filed as a part of this report are listed on the Index to
Exhibits on page 4 of this report, which Index is incorporated in this Item 7 by
reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 8, 2000 SMARTSOURCES.COM
By: /s/ Darryl Cardey
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Darryl Cardey
Chief Financial Officer
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INDEX TO EXHIBITS
The following exhibits to this report are incorporated herein by
reference:
10.01 Securities Purchase Agreement by and among SmartSources.com, Inc. and
RGC International Investors, LDC, Rose Glen Capital Management, L.P.
and RGC General Partner Corp., dated as of February 24, 2000;
10.02 Convertible Debenture issued to RGC International Investors, LDC or
its registered assigns by SmartSources.com, Inc., dated as of February
24, 2000;
10.03 Stock Purchase Warrant issued to RGC International Investors, LDC or
its registered assigns by SmartSources.com, Inc., dated as of February
24, 2000; and
10.04 Registration Rights Agreement by and among SmartSources.com, Inc. and
RGC International Investors, LDC, Rose Glen Capital Management, L.P.
and RGC General Partner Corp., dated as of February 24, 2000.
99.01 Press Release issued by SmartSources.com, Inc. on February 25, 2000.
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EXHIBIT 10.01
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of February
24, 2000, by and among SmartSources.com, Inc., a Colorado corporation, with
headquarters located at 2030 Marine Drive, Suite 100, West Vancouver, British
Columbia, V7P1V7 ("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 Buyers desire to purchase and the Company desires to issue and
sell, upon the terms and conditions set forth in this Agreement, (i) convertible
debentures of the Company, in the form attached hereto as EXHIBIT "A", in the
aggregate principal amount of Five Million Dollars ($5,000,000) (together with
any debenture(s) issued in replacement thereof or otherwise with respect thereto
in accordance with the terms thereof, the "DEBENTURES"), convertible into shares
of common stock, no par value, of the Company (the "COMMON STOCK"), upon the
terms and subject to the limitations and conditions set forth in such Debentures
and (ii) warrants, in the form attached hereto as EXHIBIT "B", to purchase Three
Hundred Thirty Thousand (330,000) shares of Common Stock (the "WARRANTS");
C. 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;
D. 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. On the Closing Date (as
defined below), 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 as is set forth immediately below such Buyer's
name on the signature pages hereto.
b. FORM OF PAYMENT. On the Closing Date, (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) (the "PURCHASE PRICE") by wire transfer of
immediately available funds to the Company, in accordance with the Company's
written wiring instructions, against delivery of duly executed 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 such 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
February 24, 2000 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 Akerman, Senterfitt & Edison, P.A. at SunTrust
International Center, One S.E. Third Avenue, 28th Floor, Miami, Florida 33131,
or at such other location as may be agreed to by 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 of or otherwise pursuant to the Debentures (including, without
limitation, (i) such additional shares of Common Stock as are issuable as a
result of the events described in Articles I, II.D.3 and II.E of the Debentures
and Section 2(c) of the Registration Rights Agreement and (ii) the shares of
Common Stock issuable pursuant to the investment options described in Article
II.E of the Debentures (the "INVESTMENT OPTIONS")) (such shares of Common Stock
being collectively referred to herein as the "CONVERSION SHARES") and the
Warrants and the shares of Common Stock issuable upon exercise thereof (the
"WARRANT SHARES" and, collectively with the Debentures, the Warrants and the
Conversion Shares, the "SECURITIES") for its own account and not with a present
view towards the public sale or distribution thereof, except pursuant to sales
registered or exempted from registration under the 1933 Act; provided, however,
that by making the representations herein, the Buyer does not agree to hold any
of the Securities for any minimum or other specific term and reserves the right
to dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
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b. ACCREDITED INVESTOR STATUS. The Buyer is an "accredited investor"
as that term is defined in Rule 501(a) of Regulation D (an "ACCREDITED
INVESTOR").
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 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. 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 RE-SALE. The Buyer understands that (i) except as
provided in the Registration Rights Agreement, the sale or re-sale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the Buyer shall have delivered to the Company
an opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
the Securities to be sold or transferred may be sold or transferred pursuant to
an exemption from such registration, (c) the Securities are sold or transferred
to an "affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a
successor rule) ("RULE 144")) of the Buyer who agrees to sell or otherwise
transfer the Securities only in accordance with this Section 2(f) and who is an
Accredited Investor, or (d) the Securities are 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 re-sale 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.
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g. LEGENDS. The Buyer understands that the Debentures and the
Warrants and, until such time as the Conversion Shares (including the shares of
Common Stock issuable upon exercise of the Investment Options) and Warrant
Shares have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement or otherwise may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, the Conversion Shares (including the shares
of Common Stock issuable upon exercise of the Investment Options) 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 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
customary for opinions of counsel in comparable transactions, 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 re-sale under an effective registration
statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, or (b) such holder provides the Company with
an opinion of counsel, in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that a public sale or transfer
of such Security may be made without registration under the 1933 Act and such
sale or transfer is effected or (c) such holder provides the Company with
reasonable assurances that such Security can be sold pursuant to Rule 144. 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. This Agreement has been
duly executed and delivered on behalf of the Buyer, and this Agreement
constitutes, and upon execution and delivery by the Buyer of the Registration
Rights Agreement, such agreement will constitute, 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
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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 and the jurisdiction in which each is incorporated.
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 its ownership or use of property or 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.
"MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the
Securities, (ii) the business, operations, assets, financial condition, results
of operations, properties or prospects of the Company and its Subsidiaries, if
any, taken as a whole, (iii) the transactions contemplated hereby or by the
agreements or instruments to be entered into in connection herewith or (iv) the
authority or the ability of the Company to perform its obligation under this
Agreement, the Registration Rights Agreement, the Debentures or the Warrants.
"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.
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 issuable upon conversion of otherwise pursuant to the
Debentures (including upon exercise of the Investment Options contained therein)
and the Warrant Shares issuable upon exercise of or otherwise pursuant to the
Warrants) 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
stockholders 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 agreements and 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) 50,000,000 shares of Common Stock, of which
11,418,950 shares are issued and outstanding, 4,000,000 shares are reserved for
issuance pursuant to the Company's stock option plans, 1,450,000 shares 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 3,732,716 shares are reserved for issuance upon conversion of
or otherwise pursuant to the Debentures (including upon exercise of the
Investment Options) 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. 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
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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 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, (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 reserved for issuance and, when issued upon conversion of or
otherwise pursuant to the Debentures (including upon exercise of the Investment
Options) and upon exercise of or otherwise pursuant to the Warrants in
accordance with the terms thereof, will be validly issued, fully paid and
non-assessable, and free from all taxes, liens, claims and encumbrances and
shall not be subject to preemptive rights or other similar rights of
stockholders of the Company and will not impose personal liability upon the
holder thereof.
e. ACKNOWLEDGMENT OF DILUTION. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares upon conversion of or otherwise pursuant to
the Debentures (including upon exercise of the Investment Options) and upon
issuance of the Warrant Shares upon exercise of or otherwise pursuant to the
Warrants. The Company's directors and executive officers have studied and fully
understand the nature of the Securities being sold hereunder. The Company
further acknowledges that its obligation to issue Conversion Shares upon
conversion of or otherwise pursuant to the Debentures (including upon exercise
of the Investment Options) and the Warrant Shares upon exercise of or otherwise
pursuant to 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. Taking the foregoing into account, the Company's Board of Directors
has determined, in its good faith business judgment, that the issuance of the
Securities hereunder and under the Debentures and the Warrants and the
consummation of the transactions contemplated hereby and thereby are in the best
interest of the Company and its stockholders.
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f. NO CONFLICTS. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Debentures 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 (including those issuable upon exercise of
the Investment Options) 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) except as set forth on Schedule 3(f), 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, patent, patent license or instrument
to which the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and regulations of any self-
regulatory organizations to which the Company or its securities are subject)
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, governmental agency, regulatory agency, self
regulatory organization or stock market or any third party 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 or to issue and sell the Debentures and Warrants in
accordance with the terms hereof and to issue the Conversion Shares upon
conversion of or otherwise pursuant to the Debentures (including upon exercise
of the Investment Options) and the Warrant Shares upon exercise of or otherwise
pursuant to the Warrants. Except as disclosed in SCHEDULE 3(f), 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 Over-the-Counter Bulletin Board (the "OTC BB") and does not
reasonably anticipate that the Common Stock will cease trading on the OTC BB in
the foreseeable future (unless such cessation in trading is due to the fact the
Common Stock has been listed or included for quotation on the Nasdaq National
Market ("Nasdaq NMS"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New
York Stock Exchange ("NYSE") or the American Stock
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Exchange (the "AMEX"). The Company and its Subsidiaries are unaware of any facts
or circumstances which might give rise to any of the foregoing.
g. SEC DOCUMENTS; FINANCIAL STATEMENTS. Except as disclosed on
SCHEDULE 3(q), since September 30, 1997, the Company or its predecessors have
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 Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents (other than exhibits to
such documents) incorporated by reference therein, being hereinafter referred to
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. None of the statements made in any such SEC Documents is, or has
been, required to be amended or updated under applicable law (except for such
statements as have been amended or updated in subsequent filings prior to the
date hereof). As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with United States 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
September 30, 1999 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.
h. ABSENCE OF CERTAIN CHANGES. Since September 30, 1999, there have
been no changes or developments in the Company or its business that may have a
Material Adverse Effect.
i. ABSENCE OF LITIGATION. 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, or their officers or directors
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<PAGE> 9
in their capacity as such, that could have a Material Adverse Effect. SCHEDULE
3(i) contains a complete list and summary description of any pending or
threatened proceeding against or affecting the Company or any of its
Subsidiaries, without regard to whether it would 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.
j. PATENTS, COPYRIGHTS, ETC.
(i) Except as disclosed on SCHEDULE 3(j), the Company and each of
its Subsidiaries owns or possesses the requisite licenses or rights to use all
patents, patent applications, patent rights, inventions, know-how, trade
secrets, trademarks, trademark applications, service marks, service names, trade
names and copyrights ("INTELLECTUAL PROPERTY") reasonably necessary to enable it
to conduct its business as now operated (and, except as set forth in SCHEDULE
3(j) hereof, 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, except as set forth in SCHEDULE 3(j) hereof, 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 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.
(ii) All of the Company's computer software and computer
hardware, and other similar or related items of automated, computerized or
software systems that are used or relied on by the Company in the conduct of its
business or that were, or currently are being, sold or licensed by the Company
to customers (collectively, "INFORMATION TECHNOLOGY"), are Year 2000 Compliant.
For purposes of this Agreement, the term "YEAR 2000 COMPLIANT" means, with
respect to the Company's Information Technology, that the Information Technology
is designed to be used prior to, during and after the calendar Year 2000 A.D.,
and the Information Technology used during each such time period will accurately
receive, provide and process date and time data (including, but not limited to,
calculating, comparing and sequencing) from, into and between the 20th and 21st
centuries, including the years 1999 and 2000, and leap-year calculations, and
will not malfunction, cease to function, or provide invalid or incorrect results
as a result of the date or time data, to the extent that other information
technology, used in combination with the Information Technology, properly
exchanges date and time data with it. The Company has delivered to the Buyer
true and correct copies of all analyses, reports, studies and similar written
information, whether prepared by the Company or another party, relating to
whether the Information Technology is Year 2000 Compliant.
k. 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
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<PAGE> 10
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.
l. TAX STATUS. Except as set forth on SCHEDULE 3(l), the Company and
each of its Subsidiaries has made or filed all federal, state and foreign 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. The Company has not executed a waiver with respect to the statute of
limitations relating to the assessment or collection of any foreign, federal,
state or local tax. Except as set forth on SCHEDULE 3(l), none of the Company's
tax returns is presently being audited by any taxing authority.
m. CERTAIN TRANSACTIONS. Except as set forth on SCHEDULE 3(m) and
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.
n. 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 has
not been publicly announced or disclosed but under applicable law, rule or
regulation, requires public disclosure or announcement by the Company (assuming
for this purpose that the Company's reports filed under the 1934 Act are being
incorporated into an effective registration statement filed by the Company under
the 1933 Act).
o. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF SECURITIES. The
Company acknowledges and agrees that the Buyers are acting solely in the
capacity of arm's length
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<PAGE> 11
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 that any statement
made by any Buyer or any of their respective representatives or agents in
connection with this Agreement and the transactions contemplated hereby is not
advice or a recommendation and is merely incidental to the Buyers' purchase of
the Securities and has not been relied upon by the Company, its officers or
directors in any way. 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.
p. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration 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) for purposes of any stockholder
approval provisions applicable to the Company or its securities.
q. 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,
except for dealings with AB Phoenix, Inc., whose commissions and fees will be
paid for by the Company.
r. 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
reasonably 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 September 30,
1999, 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.
s. ENVIRONMENTAL MATTERS.
(i) Except as set forth in SCHEDULE 3(s), 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 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
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<PAGE> 12
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) Except as set forth in SCHEDULE 3(s), 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.
t. 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 are described in SCHEDULE 3(t) or 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.
u. 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.
v. 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
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<PAGE> 13
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.
w. FOREIGN CORRUPT 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.
x. 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 the ability to, 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.
y. NO INVESTMENT COMPANY. The Company is not, and upon the issuance
and sale of the Securities as contemplated by this Agreement will not be an
"investment company" required to be registered under the Investment Company Act
of 1940 (an "INVESTMENT COMPANY"). The Company is not controlled by an
Investment Company.
z. FORM SB-2 OR FORM S-1 ELIGIBILITY. The Company meets the
requirements for the use of Form SB-2 or Form S-1 for registration of the sale
by the Buyers of the Registrable Securities (as defined in the Registration
Rights Agreement). There exist no facts or circumstances of which the Company is
aware that would prohibit or delay the preparation and filing of a registration
statement on either Form SB-2 or Form S-1 with respect to the Registrable
Securities (as defined in the Registration Rights Agreement) within the time
periods referred to therein.
aa. NO GENERAL SOLICITATION. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby,
if any, nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
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<PAGE> 14
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
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. 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 will take all necessary action to
meet the "registrant eligibility" requirements set forth in the general
instructions to Form S-3 as soon as practicable after the date hereof and
thereafter to take all actions necessary to maintain such eligibility.
d. USE OF PROCEEDS. The Company shall use the proceeds from the sale
of the Debentures and the Warrants in the manner set forth in SCHEDULE 4(d)
attached hereto and made a part hereof 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 a majority- in-interest of the Buyers, negotiate or contract with any
party to obtain additional equity financing (including debt financing with an
equity component) during the period (the "LOCK-UP PERIOD") beginning on the
Closing Date and ending on one hundred eighty (180) days from the date the
Registration Statement (as defined in the Registration Rights Agreement) is
declared effective (subject to extension for any days in which sales of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
cannot be made pursuant to the Registration Statement (as defined in the
Registration Rights Agreement) occurring after the date on which such
Registration Statement is first declared effective by the SEC). 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 one hundred eighty
(180) days after the end of the Lock-up Period (subject to extension for any
days in which sales of all of the Registrable Securities cannot be made pursuant
to the Registration Statement occurring after the date on which such
Registration Statement is first declared effective by the SEC) unless it shall
have first delivered to each Buyer, at least fifteen (15) business days prior to
the closing of such Future Offering, written notice describing the proposed
Future Offering,
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<PAGE> 15
including the terms and conditions thereof and proposed definitive documentation
to be entered into in connection therewith, and providing each Buyer an option
during the ten (10) day period following delivery of such notice to purchase its
pro rata share (based on the ratio that the aggregate principal amount of
Debentures purchased by it hereunder bears to the aggregate principal amount of
all Debentures purchased hereunder) 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 sentence and the 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 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) or
(ii) issuances of securities as consideration for a merger, consolidation or
purchase of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or in
connection with the disposition or acquisition of a business, product or license
by the Company. 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
the stockholders of the Company.
f. EXPENSES. The Company shall pay to Rose Glen Capital Management,
L.P. ("ROSE GLEN") at the Closing a non-accountable expense allowance equal to
Thirty Thousand Dollars ($30,000) ($10,000 of which was previously advanced to
Rose Glen) for all expenses incurred by it 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 and travel 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 (or Form 10-KSB), its Quarterly Reports on Form
10-Q (or Form 10-QSB) 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 of the outstanding
Debentures and issuance of the Conversion Shares issuable upon conversion of or
otherwise pursuant to the Debentures (including sufficient shares to provide
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<PAGE> 16
for the full exercise of the Investment Options) (based on the lesser of the
Applicable Percentage multiplied by the Variable Conversion Price in effect from
time to time and the Applicable Percentage multiplied by the Fixed Conversion
Price in effect from time to time (each as defined in the Debentures)) and the
full exercise of the Warrants and the issuance of the Warrant Shares upon
exercise of or otherwise pursuant to the Warrants (based upon the Exercise Price
(as defined in the Warrants) 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 or otherwise pursuant to the Debentures (including
upon exercise of the Investment Options) and exercise of or otherwise pursuant
to the Warrants without the consent of each Buyer. 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 full exercise of
the Investment Option (based on the lesser of the Applicable Percentage
multiplied by the Variable Conversion Price in effect from time to time and the
Applicable Percentage multiplied by the Fixed Conversion Price in effect from
time to time (each as defined in the Debentures)) and full exercise of the
Warrants (based on the 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 issued and
issuable upon conversion of or otherwise pursuant to the Debentures and full
exercise of the Investment Options (based on the lesser of the Applicable
Percentage multiplied by the Variable Conversion Price in effect from time to
time and the Applicable Percentage multiplied by the Fixed Conversion Price in
effect from time to time (each as defined in the Debentures) and assuming the
full exercise of the Investment Options thereunder) and the number of Warrant
Shares issued or issuable upon exercise of or otherwise pursuant to the Warrants
(based on the Exercise Price of the Warrants in effect from time to time), 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 stockholders 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 stockholder
approval of an increase in such authorized number of shares.
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, so long as any Buyer owns
any of the Securities, shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Conversion Shares from time to
time issuable upon conversion of or otherwise pursuant to the Debentures
(including upon exercise of the Investment Options) and all Warrant Shares from
time to time issuable upon exercise of or otherwise pursuant to the Warrants.
The Company will so long as any Buyer owns any of the Securities, maintain the
listing and trading of its Common Stock on the OTC BB until the obligations
under Section 4(l) are met 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 any other exchanges, as
applicable. The Company shall promptly provide to each Buyer copies of any
notices it receives from OTC BB and any other exchanges or quotation systems on
which the Common Stock is then listed regarding the continued eligibility of the
Common Stock for listing on such exchanges and quotation systems.
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<PAGE> 17
j. CORPORATE EXISTENCE. So long as a Buyer beneficially owns any
Debentures or Warrants, the Company shall maintain its corporate existence and
shall not merge, consolidate or 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 (i) the successor or acquiring
entity and, if an entity different from the successor or acquiring entity, the
entity whose securities into which the Debentures shall become convertible
pursuant to Article II.C.2 of the Debentures, in such transaction assumes the
Company's obligations hereunder and under the agreements and instruments entered
into in connection herewith (including the Debentures and the Warrants) and (ii)
the entity whose securities into which the Debentures shall become convertible
pursuant to Article II.C.2 of the Debentures is a publicly traded corporation
whose Common Stock is listed for trading on Nasdaq NMS, Nasdaq SmallCap, NYSE or
AMEX.
k. NO INTEGRATION. The Company shall not make any offers or sales of
any security (other than the Securities) under circumstances that would require
registration of the Securities being offered or sold hereunder under the 1933
Act or cause the offering of the Securities to be integrated with any other
offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.
l. LISTING ON NASDAQ NMS, NASDAQ SMALLCAP, THE NYSE OR AMEX. The
Company will take all necessary action to promptly secure the listing or
quotation of the Common Stock on the Nasdaq NMS or, if the Company is not
eligible for the Nasdaq NMS, the Nasdaq SmallCap or AMEX and will thereafter, so
long as the Buyer owns any of the Securities, maintain the listing or quotation
of the Common Stock on the Nasdaq NMS, the Nasdaq SmallCap, the NYSE or the
AMEX.
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
conversion of the Debentures (including upon exercise of the Investment Options)
or exercise of the Warrants in accordance with the terms thereof (the
"IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the
Conversion Shares and Warrant Shares under the 1933 Act or the date on which the
Conversion Shares and Warrant Shares may be sold pursuant to Rule 144 without
any restriction as to the number of securities as of a particular date that can
then be immediately sold, all such certificates shall bear the restrictive
legend specified in Section 2(g) of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to 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 or
the date on which the Conversion Shares and Warrant Shares may be sold pursuant
to Rule 144 without any restriction as to the number of securities as of a
particular date that can then be immediately sold), 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 re-sale of the Securities. If a Buyer provides the
Company with
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(i) an opinion of counsel in form, substance and scope customary for opinions in
comparable transactions, to the effect that a public sale or transfer of such
Securities may be made without registration under the 1933 Act and such sale or
transfer is effected or (ii) the Buyer provides reasonable assurances that the
Securities can be sold pursuant to Rule 144, 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, free from any
restrictive legend, in such name and in such denominations as specified by such
Buyer.
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, which representations and
warranties shall be true and correct as of such 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 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.
- 18 -
<PAGE> 19
b. The Company shall have delivered to such Buyer duly executed
Debentures (in such denominations as the Buyer shall request, but in no event
shall in any Debenture be issued in an amount less than $1,000,000) 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, which representations and
warranties shall be true and correct as of such 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 the OTC BB and trading in the Common Stock on the
OTC BB shall not have been suspended by the SEC or the OTC BB.
g. The Buyer shall have received opinions 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-1"
and EXHIBIT "D-2" 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 construed
in accordance with the laws of the State of Delaware applicable to agreements
made and to be performed in the State of Delaware (without regard to principles
of conflict of laws). Both parties irrevocably consent to the jurisdiction of
the United States federal courts and the state courts located in Delaware with
respect to any suit or proceeding based on or arising under this Agreement, the
agreements entered into in connection herewith or the transactions contemplated
hereby or thereby
- 19 -
<PAGE> 20
and irrevocably agree that all claims in respect of such suit or proceeding may
be determined in such courts. Both parties irrevocably waive the defense of an
inconvenient forum to the maintenance of such suit or proceeding. Both parties
further agree that service of process upon a party mailed by first class mail
shall be deemed in every respect effective service of process upon the party in
any such suit or proceeding. Nothing herein shall affect either party's right to
serve process in any other manner permitted by law. Both parties agree that a
final non-appealable judgment in any such suit or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on such judgment or in any
other lawful manner.
b. COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be
executed in one 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 United States 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:
2030 Marine Drive
Suite 100
North Vancouver, B.C. V7P1V7
Attention: Chief Executive Officer
Facsimile: (604) 986-0869
- 20 -
<PAGE> 21
With copy to:
Wolin, Ridley & Miller LLP
3100 Bank One Center
1717 Main Street
Dallas, Texas 75201-4681
Attention: Norman Miller
Facsimile: (214) 939-4949
If to a Buyer: To the address set forth immediately below such
Buyer's name on the signature pages hereto.
With copy to:
Bradley D. Houser
Akerman, Senterfitt & Edison, P.A.
SunTrust International Center
One S.E. Third Avenue, 28th Floor
Miami, Florida 33131-1704
Facsimile: (305) 374-5095
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. The Company agrees to indemnify and hold harmless
each of the Buyers and all their officers, directors, employees and agents for
loss or damage arising as a result of or related to any breach or alleged breach
by the Company of any of its representations, warranties and covenants set forth
in Sections 3 and 4 hereof or any of its covenants and obligations under this
Agreement or the Registration Rights Agreement, including advancement of
expenses as they are incurred.
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, filings with the SEC,
- 21 -
<PAGE> 22
NASD or any stock exchange or interdealer quotation system, or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of each
of the Buyers, to make any press release or public 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. REMEDIES. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to each Buyer, by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Agreement will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement, that each
Buyer shall be entitled, in addition to all other available remedies in law or
in equity, to an injunction or injunctions to prevent or cure any breaches of
the provisions of this Agreement and to enforce specifically the terms and
provisions of this Agreement, without the necessity of showing economic loss and
without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
- 22 -
<PAGE> 23
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused
this Agreement to be duly executed as of the date first above written.
SMARTSOURCES.COM., INC.
By: /s/ DARRYL CARDEY
----------------------------------------------------
Darryl Cardey
Chief Financial Officer and Vice President - Finance
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.,
Investment Manager
By: RGC General Partner Corp.,
as General Partner
By: /s/ STEVEN B. KATZNELSON
----------------------------------------------------
Steven B. Katznelson
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:
Principal Amount of Debentures: $5,000,000
Number of Warrants: 330,000
Aggregate Purchase Price: $5,000,000
- 23 -
<PAGE> 1
EXHIBIT 10.02
EXHIBIT A
TO
SECURITIES
PURCHASE
AGREEMENT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SECURITIES
MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR AN
OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF
COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT.
CONVERTIBLE DEBENTURE
February 24, 2000 $5,000,000.00
FOR VALUE RECEIVED, SMARTSOURCES.COM, INC., a corporation organized under
the laws of the State of Colorado (hereinafter called the "BORROWER"), hereby
promises to pay to the order of RGC INTERNATIONAL INVESTORS, LDC or its
registered assigns (the "HOLDER") the sum of Five Million Dollars
($5,000,000.00) on February 24, 2005 (the "MATURITY DATE") and to pay interest
on the unpaid principal balance hereof at the rate of seven percent (7%) per
annum from the date hereof (the "ISSUE DATE") until the same becomes due and
payable (which interest shall accrue on a daily basis), whether at maturity or
upon conversion, redemption, acceleration or otherwise. Any amount of principal
of or interest on this Debenture which, to the extent not converted in
accordance with the provisions hereof, is not paid when due shall bear interest
at the rate of seventeen percent (17%) per annum ("DEFAULT INTEREST") from the
due date thereof until the same is paid. Interest shall be calculated based on a
360-day year and shall commence accruing on the Issue Date and, to the extent
not converted in accordance with the provisions hereof, shall be payable in
arrears at such time as the outstanding principal balance hereof with respect to
which such interest has accrued becomes due and payable hereunder. All payments
of principal and interest (to the extent not converted into shares of the
Borrower's common stock, no par value ("COMMON STOCK"), in accordance with the
terms hereof) shall be made in, and all references herein to monetary
denominations shall refer to, 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. The Maturity Date is subject to extension, at the option of the
Holder, as provided in Article IV hereof. This Debenture is being issued by the
Borrower pursuant to the Securities Purchase Agreement, dated as of February 24,
2000, between
<PAGE> 2
the Borrower and the Holder (the "PURCHASE AGREEMENT"). Each capitalized term
used, but not otherwise defined, herein shall have the meaning ascribed thereto
in the Purchase Agreement. For purposes hereof, the term "DEBENTURES" shall be
deemed to refer to this Debenture, all other convertible debentures issued
pursuant to the Purchase Agreement and all convertible debentures issued in
replacement hereof or thereof or otherwise with respect hereto or thereto.
I. REDEMPTION
A. MANDATORY REDEMPTION. If any of the following events (each, a "MANDATORY
REDEMPTION EVENT") shall occur:
1. The Borrower fails to pay the principal hereof or interest thereon
when due on this Debenture, whether at maturity, upon mandatory prepayment
pursuant to Article I.B, upon acceleration or otherwise.
2. The Borrower (i) fails to issue shares of Common Stock to any
holder of the Debentures upon exercise by the holder of its conversion rights in
accordance with the terms of the Debentures (including upon exercise of or
otherwise pursuant to the Investment Options (as defined in Article II.E.
below)) (for a period of at least sixty (60) days if such failure is solely as a
result of the circumstances governed by the second paragraph of Article II.F
below and the Borrower is using its best efforts to authorize a sufficient
number of shares of Common Stock as soon as practicable), (ii) fails to transfer
or to cause its transfer agent to transfer (electronically or in certificated
form) any certificate for shares of Common Stock issued to any Holder upon
conversion of or otherwise pursuant to the Debentures (or upon exercise of or
otherwise pursuant to the Investment Options) as and when required by the
Debentures or the Registration Rights Agreement, dated as of February 24, 2000,
by and among the Borrower and the other signatories thereto (the "REGISTRATION
RIGHTS AGREEMENT"), (iii) fails to remove any restrictive legend (or to withdraw
any stop transfer instructions in respect thereof) on any certificate or any
shares of Common Stock issued to the holders of the Debentures upon conversion
of or otherwise pursuant to the Debentures (or upon exercise of or otherwise
pursuant to the Investment Options) as and when required by the Debentures, the
Purchase Agreement or the Registration Rights Agreement, or (iv) fails to
fulfill its obligations pursuant to Sections 4(c), 4(d), 4(e), 4(h), 4(i), 4(j),
or 5 of the Purchase Agreement (or makes any announcement, statement or threat
that it does not intend to honor the obligations described in this paragraph),
and any such failure shall continue uncured (or any announcement, statement or
threat not to honor its obligations shall not be rescinded in writing) for ten
(10) days after the Borrower shall have been notified thereof in writing by any
holder of the Debentures;
3. The Borrower fails to obtain effectiveness with the Securities and
Exchange Commission (the "SEC") prior to August 24, 2000 of the Registration
Statement (as defined in the Registration Rights Agreement, the "REGISTRATION
STATEMENT") required to be filed pursuant to Section 2(a) of the Registration
Rights Agreement, or fails to obtain the effectiveness of any additional
Registration Statement (required to be filed pursuant to Section 3(b)of the
Registration Rights Agreement) within sixty (60) days after the Registration
Trigger Date (as defined in the
2
<PAGE> 3
Registration Rights Agreement), or any such Registration Statement, after its
initial effectiveness and during the Registration Period (as defined in the
Registration Rights Agreement), lapses in effect or sales of all of the
Registrable Securities (as defined in the Registration Rights Agreement, the
"REGISTRABLE SECURITIES") otherwise cannot be made thereunder (whether by reason
of the Borrower's failure to amend or supplement the prospectus included therein
in accordance with the Registration Rights Agreement, the Borrower's failure to
file and obtain effectiveness with the SEC of an additional Registration
Statement required pursuant to Section 3(b) of the Registration Rights Agreement
or otherwise) for more than twenty (20) consecutive days or more than forty-five
(45) days in any twelve (12) month period after such Registration Statement
becomes effective;
4. The Borrower or any subsidiary of the Borrower shall make an
assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for all or substantially all of
its property or business; or such a receiver or trustee shall otherwise be
appointed;
5. 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;
6. The Borrower shall: (i) fail to maintain the listing of the Common
Stock on the Over-the-Counter Bulletin Board (the "OTC BB"); (ii) following the
date on which listing or quotation of the Common Stock on the Nasdaq National
Market ("Nasdaq"), the New York Stock Exchange (the "NYSE") or the American
Stock Exchange ("AMEX") or, if the Corporation is not eligible for Nasdaq, the
NYSE or AMEX, the Nasdaq SmallCap Market (the "Nasdaq SmallCap") has been
secured by the Corporation, fail to maintain such listing on any of Nasdaq,
Nasdaq SmallCap, the NYSE or AMEX;
7. The sale, conveyance or disposition of all or substantially all of
the assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of the
Borrower is disposed of (other than a disposition of more than 50% of the voting
power of the Borrower to the Holder), or the consolidation, merger or other
business combination of the Borrower with or into any other individual,
corporation, limited liability company, partnership, association, trust or other
entity or organization (each, a "PERSON") or Persons when the Borrower is not
the survivor; or
8. The Borrower breaches any covenant contained in Article III hereof
and such breach continues uncured for a period of ten (10) days after written
notice thereof to the Borrower from any holder of Debentures,
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs 1, 2, 3, 6, 7 or 8 at the option of
the holders of at least 50% of the then outstanding principal amount of the
Debentures exercisable by the delivery of written notice (the"MANDATORY
REDEMPTION NOTICE") to the Borrower of such Mandatory Redemption Event, or upon
the occurrence of any Mandatory Redemption Event specified in subparagraphs 4 or
5, the then
3
<PAGE> 4
outstanding Debentures shall become immediately redeemable and the Borrower
shall purchase each holder's outstanding Debentures for an amount equal to the
greater of (i) 120% multiplied by the sum of (a) the then outstanding principal
amount of the Debentures, plus (b) all accrued and unpaid interest thereon for
the period beginning on the Issue Date and ending on the date of payment of the
Mandatory Redemption Amount (the "MANDATORY REDEMPTION DATE"), plus (c) Default
Interest, if any, on the amounts referred to in clauses (a) and/or (b), plus (d)
all Conversion Default Payments (as defined in Article II.E below), Delivery
Default Payments (as defined in Article II.D.3 below) and any other amounts owed
to such holder pursuant to Section 2(c) of the Registration Rights Agreement,
and (ii) the "PARITY VALUE" of the Debentures to be redeemed, where parity value
means the product of (a) the highest number of shares of Common Stock issuable
upon conversion of or otherwise pursuant to such Debentures in accordance with
the terms hereof (without giving any effect to any limitations on conversions of
Debentures contained herein, and treating the Trading Day (as defined in Article
II.B.1) immediately preceding the Mandatory Redemption Date as the "CONVERSION
DATE" (as defined in Article II.D.5) for purposes of determining the lowest
applicable Conversion Price, unless the Mandatory Redemption Event arises as a
result of a breach in respect of a specific Conversion Date in which case such
Conversion Date shall be the Conversion Date), multiplied by (b) the highest
Closing Price (as defined below) for the Common Stock during the period
beginning on the date of first occurrence of the Mandatory Redemption Event and
ending one day prior to the Mandatory Redemption Date (the greater of such
amounts being referred to as the "MANDATORY REDEMPTION AMOUNT"). The Mandatory
Redemption Amount, together with all other ancillary amounts payable hereunder,
shall immediately become due and payable, all without demand, presentment or
notice (other than the Mandatory Redemption Notice), all of which hereby are
expressly waived, together with all costs, including, without limitation,
reasonable legal fees and expenses of collection, and Holder shall be entitled
to exercise all other rights and remedies available at law or in equity.
"CLOSING PRICE," as of any date, means the last sale price of the Common Stock
on the OTC BB as reported by Bloomberg Financial Markets or an equivalent
reliable reporting service mutually acceptable to and hereafter designated by
the holders of a majority of the outstanding principal amount of the Debentures
and the Borrower ("BLOOMBERG") or, if the OTC BB 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 no last sale price of such security is available
in any of the foregoing manners on the electronic bulletin board for such
security or in any of the foregoing manners, the average of the bid prices of
any market makers for such security that are listed in the "pink sheets" by the
National Quotation Bureau, Inc. If the Closing Price cannot be calculated for
such security on such date in the manner provided above, the Closing Price shall
be the fair market value as mutually determined by the Borrower and the holders
of a majority of the outstanding principal amount of the Debentures for which
the calculation of the Closing Price is required.
B. TRADING MARKET REDEMPTION. If any Debentures cease to be convertible by
any holder of the Debentures as a result of the limitations described in Article
II.A.3 below (a "TRADING MARKET REDEMPTION EVENT"), and the Borrower has not,
prior to, or within thirty (30) days of, the date that such Trading Market
Redemption Event arises, either (i) obtained the Stockholder Approval (as
defined in Article II.A.3) or (ii) eliminated any prohibitions under applicable
law or the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization
4
<PAGE> 5
with jurisdiction over the Borrower or any of its securities on the Borrower's
ability to issue shares of Common Stock in excess of the Maximum Share Amount
(as defined in Article II.A.3), then the Borrower shall be obligated to redeem
immediately all of the then outstanding principal amount of the Debentures, in
accordance with this Article I.B. An irrevocable redemption notice (the "TRADING
MARKET REDEMPTION NOTICE") shall be delivered promptly to the holders of the
Debentures in accordance with the terms hereof and shall state (i) that the
Maximum Share Amount (as defined in Article II.A.3) has been issued upon
conversion of the Debentures, (ii) that the Borrower is obligated to redeem all
of the outstanding Debentures and (iii) the Mandatory Redemption Date, which
shall be a date within five (5) business days of the earlier of (a) the date of
the Trading Market Redemption Notice or (b) the date on which the holders of the
Debentures notify the Borrower of the occurrence of a Trading Market Redemption
Event. On the Mandatory Redemption Date, the Borrower shall make payment of the
Mandatory Redemption Amount (as defined in Article I.A above) in cash.
C. REDEMPTION IN LIEU OF CONVERSION. Notwithstanding anything to the
contrary contained in this Article I and subject to the terms of this Article
I.D, after August 24, 2000, if (i) the Closing Price of the Common Stock is less
than the Fixed Conversion Price (as defined in Article II.B.1) (the "REDEMPTION
THRESHOLD"), (ii) there is no Mandatory Redemption Event or Trading Market
Redemption Event and (iii) (a) any Registration Statement required to be filed
and be effective pursuant to the Registration Rights Agreement is then in effect
and has been in effect and sales of all of the Registrable Securities can be
made thereunder for at least thirty (30) Trading Days prior to the date the
Notice of Conversion is submitted and (b) the Borrower has a sufficient number
of authorized shares of Common Stock reserved for issuance upon full conversion
of the Debentures (including upon full exercise of the Investment Options), on
any day a Notice of Conversion (as defined in Article II.D below) is given, the
Borrower shall have the option, in lieu of issuing shares of Common Stock to the
holders upon conversion in accordance with the terms of Article II below, to
redeem all or any portion of principal amount of the Debentures submitted for
conversion for an amount in cash equal to the number of shares of Common Stock
that would have otherwise been issued upon conversion of the Debentures at the
applicable Conversion Price (as defined in Article II) multiplied by the
Redemption Market Price (as defined herein) (the "REDEMPTION IN LIEU OF
CONVERSION AMOUNT"). "REDEMPTION MARKET PRICE" shall be equal to the Closing
Price of the Common Stock on the Conversion Date. If the Closing Price of the
Common Stock is at any time below the Redemption Threshold (a "REDEMPTION IN
LIEU OF CONVERSION NOTICE TRIGGER DATE"), the Borrower shall promptly notify the
holders of the Debentures as to whether the Borrower will issue shares of Common
Stock, deliver cash in redemption or any combination thereof in respect of the
Debentures submitted for conversion pursuant to Article II. The Borrower will be
bound by such notice for a period of thirty (30) Trading Days (the "TERM") from
the date of such notice, at the end of which the Borrower may elect to renew
such notice. A failure to issue or renew within one (1) Trading Day of the
Redemption In Lieu of Conversion Notice Trigger Date or the end of a Term shall
be deemed to be an election to issue Common Stock upon conversion of the
Debentures during the subsequent Term. Any redemption amounts payable hereunder
shall be paid to the converting Holder within two (2) Trading Days of the
Conversion Date.
5
<PAGE> 6
D. FAILURE TO PAY REDEMPTION AMOUNTS. In the case of a Mandatory Redemption
Event or the delivery of a Redemption In Lieu of Conversion Notice, if the
Borrower fails to pay the Mandatory Redemption Amount or Redemption In Lieu of
Conversion Amount, as applicable, within five (5) business days of written
notice that such amount is due and payable, then (assuming there are sufficient
authorized shares) in addition to all other available remedies, the Holder shall
have the right at anytime, so long as the Mandatory Redemption Event continues,
or at any time after the Redemption In Lieu of Conversion Date, to require the
Borrower, upon written notice, to issue as soon as practicable thereafter (in
accordance with and subject to the terms of Article II below), in lieu of the
Mandatory Redemption Amount, Redemption In Lieu of Conversion Amount, as
applicable, the number of shares of Common Stock of the Borrower equal to such
applicable redemption amount divided by any Conversion Price (as defined below),
as chosen in the sole discretion of Holder, in effect from the date of the
Mandatory Redemption Event (or the date of delivery of a Redemption In Lieu of
Conversion Notice) until the date Holder elects to exercise its rights pursuant
to this Article I.D.
II. CONVERSION AT THE OPTION OF HOLDER
A. OPTIONAL CONVERSION
1. CONVERSION AMOUNT. Subject to Article II.A.2 below, the Holder may,
at its option at any time and from time to time, upon surrender of this
Debenture, convert all or any portion of this Debenture into Common Stock as set
forth below (an "OPTIONAL CONVERSION"). This Debenture shall be convertible into
such number of fully paid and nonassessable shares of Common Stock as such
Common Stock exists on the Issue Date, or any other shares of capital stock or
other securities of the Borrower into which such Common Stock is thereafter
changed or reclassified, as is determined by dividing (a) the Conversion Amount
(as defined below) by (b) the Conversion Price (as defined in Article II.B
below); provided, however, that in no event shall Holder be entitled to convert
this Debenture (or exercise Investment Options in connection with any such
conversion) to the extent that the sum of (x) the number of shares of Common
Stock beneficially owned by 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, the unexercised Investment Options or the
unexercised or unconverted portion of any other securities of the Borrower
(including, without limitation, the warrants issued by the Borrower pursuant to
the Purchase Agreement) subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (y) the number of shares of
Common Stock issuable upon the conversion of the portion of this Debenture (and
upon the exercise, if any, of Investment Options in connection therewith) with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by Holder and Holder's affiliates of more than 4.9% of
the outstanding shares of Common Stock. For purposes of the 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 13D-G thereunder, except as otherwise provided in clause
(x) of such proviso and (ii) such proviso may not be amended without (a) the
written consent of the Holder and the Borrower and (b) the approval of the
holders of a majority of Borrower's Common Stock present, or represented by
proxy,
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and voting at any meeting called to vote on such proviso. "CONVERSION AMOUNT"
means (i) the portion of the principal amount of this Debenture being converted,
plus (ii) all accrued and unpaid interest thereon for the period beginning on
the Issue Date and ending on the Conversion Date (as defined in Article II.B.1),
plus (iii) Default Interest, if any, on the amounts referred to in the
immediately preceding clauses (i) and/or (ii), plus (iv) any Conversion Default
Payments (as defined in Article II.E) and Delivery Default Payments (as defined
in Article II.D.3) payable with respect thereto, together with any other amounts
owed to Holder pursuant to Section 2(c) of the Registration Rights Agreement.
2. CONVERSION RESTRICTIONS. The Holder may convert this Debenture
beginning on August 24, 2000; provided, however, that the restriction on
conversion of this Debenture prior to August 24, 2000 shall not apply to
conversions taking place on any Conversion Date (i) on which the Trade Price (as
defined below) of the Common Stock is greater than or equal to either (a) one
hundred twenty percent (120%) of the then applicable Market Price (as defined in
Article II.B.1) or (b) $9.25 (subject to adjustment for stock splits, stock
dividends and similar transactions) or (ii) occurring on or after the date the
Borrower makes a public announcement that it intends to merge or consolidate
with any other corporation or sell or transfer substantially all of the assets
of the Borrower or (iii) occurring on or after the date any person, group or
entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower's Common Stock (or any other takeover scheme) or
(iv) occurring on or after the date on which there is a material adverse change
in the business, operation, assets, financial condition or prospects of the
Borrower or its subsidiaries, taken as a whole, or (v) occurring on or after the
occurrence of any Mandatory Redemption Event. "TRADE PRICE" means, for any
security as of any date, the trade price of the Common Stock on the OTC BB as
reported by Bloomberg Financial Markets or an equivalent reliable reporting
service mutually acceptable to and hereafter designated by the holders of a
majority of the outstanding principal amount of the Debentures and the Borrower
("BLOOMBERG") or, if the OTC BB is not the principal trading market for such
security, the trade price of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or, if no trade price of such security is available in any of the
foregoing manners, the bid price of any market maker for such security that is
listed in the "pink sheet" by the National Quotation Bureau, Inc. If the Trade
Price cannot be calculated for such security on such date in the manner provided
above, the Trade Price shall be the fair market value as mutually determined by
the Borrower and the holders of a majority of the outstanding principal amount
of the Debentures.
3. TRADING MARKET LIMITATION. Unless the Borrower either (i) is
permitted (or not prohibited) by the applicable rules and regulations of the
principal securities market on which the Common Stock is listed or traded to
issue shares of Common Stock upon conversion of or otherwise pursuant to the
Debentures in excess of the Maximum Share Amount (as defined below) or (ii) has
obtained stockholder approval of the issuance of shares of Common Stock upon
conversion of or otherwise pursuant to the Debentures and upon exercise of or
otherwise pursuant to the Investment Options in excess of the Maximum Share
Amount in accordance with applicable law and the rules and regulations of any
stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Borrower or any of its securities (the
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"STOCKHOLDER APPROVAL"), in no event shall the total number of shares of Common
Stock issued upon conversion of or otherwise pursuant to the Debentures and upon
exercise of or otherwise pursuant to the Investment Options (including any
shares of capital stock or rights to acquire shares of capital stock issued by
the Borrower which are aggregated or integrated with the Common Stock issued or
issuable upon conversion of or otherwise pursuant to the Debentures and upon
exercise of or otherwise pursuant to the Investment Options for purposes of any
such rule or regulation) exceed 2,282,648 (19.99% of the total shares of Common
Stock outstanding on the Issue Date) (the "MAXIMUM SHARE AMOUNT"), subject to
equitable adjustments from time to time for stock splits, stock dividends,
combinations, capital reorganizations and similar events relating to the Common
Stock occurring after the Issue Date. 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 Article V.I below. In the event that the sum of
(x) the aggregate number of shares of Common Stock actually issued upon
conversion of or otherwise pursuant to the Debentures and upon exercise of or
otherwise pursuant to the Investment Options plus (y) the aggregate number of
shares of Common Stock that remain issuable upon conversion of or otherwise
pursuant to the then outstanding Debentures at the then effective Conversion
Price, 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.
B. CONVERSION PRICE
1. CALCULATION OF CONVERSION PRICE. Subject to subparagraph 2 below,
the "CONVERSION PRICE" shall be (x) the Applicable Percentage, multiplied by (y)
the lesser of the Variable Conversion Price (as defined herein) and the Fixed
Conversion Price (as defined herein). The Conversion Price shall be subject to
adjustments pursuant to the provisions of Article II.C below. "VARIABLE
CONVERSION PRICE" shall mean the Market Price (as defined below). "MARKET PRICE"
shall mean the average of the Closing Bid Prices for any seven (7) Trading Days
(which need not be consecutive) (the "MARKET PRICE DAYS") during the thirty-five
(35) consecutive Trading Day period ending one (1) Trading Day prior to the date
the Notice of Conversion (as defined in Article II.D) is sent by the Holder to
the Borrower via facsimile (the "PRICING PERIOD"). The Market Price Days shall
be designated by the converting Holder (from among the days comprising the
Pricing Period) in the Notice of Conversion. "FIXED CONVERSION PRICE" shall mean
$9.7125. "APPLICABLE PERCENTAGE" shall mean 100%; provided, however, that if the
Common Stock (i) is not listed on the Nasdaq SmallCap or the Amex prior to
October 24, 2000, (ii) is not listed on the Nasdaq SmallCap or the AMEX prior to
October 24, 2000 and is not listed on Nasdaq prior to February 24, 2001
(provided that if the Common Stock is not listed on the Nasdaq SmallCap or the
AMEX prior to October 24, 2000 in accordance with clause (i) hereof but is
listed on Nasdaq prior to February 24, 2001, the Applicable Percentage will be
80% for the period beginning on October 24, 2000 and ending on the date prior to
February 24, 2001 on which the Common Stock is first listed on Nasdaq), or (iii)
if so listed on or prior to such dates, is at any time thereafter delisted from
Nasdaq, Nasdaq SmallCap or AMEX (other than delisting, for no more that two (2)
Trading Days, solely in connection with the simultaneous listing of the Common
Stock on the NYSE), the Applicable
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Percentage shall mean 80%: provided, further, however, that the Applicable
Percentage shall be further reduced by 2.5% for each Default Period (as defined
in the Registration Rights Agreement) (prorated for partial Default Periods) as
set forth in the Registration Rights Agreement. "Closing Bid Price" means, for
any security as of any date, the closing bid price on the OTC BB as reported by
Bloomberg or, if the OTC BB 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 no closing bid price of such security is available in any
of the foregoing manners, the average of the bid prices of any market makers for
such security that are listed in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on
such date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Borrower and the holders of a
majority of the principal amount of the Debentures being converted for which the
calculation of the Closing Bid Price is required in order to determine the
Conversion Price of such Debentures. "Trading Day" shall mean any day on which
the Common Stock is traded for any period on the OTC BB, or on the principal
securities exchange or other securities market on which the Common Stock is then
being traded.
2. CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding
anything contained in subparagraph 1 of this Paragraph B to the contrary, in the
event the Borrower (a) makes a public announcement that it intends to
consolidate or merge with any other corporation (other than a merger in which
the Borrower is the surviving or continuing corporation and its capital stock is
unchanged) or sell or transfer all or substantially all of the assets of the
Borrower or (b) any person, group or entity (including the Borrower) publicly
announces a tender offer to purchase 50% or more of the Borrower's Common Stock
(or any other takeover scheme) (the date of the announcement referred to in
clause (a) or (b) is hereinafter referred to as the "ANNOUNCEMENT DATE"), then
the Conversion Price shall, effective on the Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined below), be
equal, for each such date, to the lower of (x) the Conversion Price which would
have been applicable for an Optional Conversion occurring on the Announcement
Date and (y) the Conversion Price that would otherwise be in effect on such
date. From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in subparagraph 1 of this
Article II.B. For purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE"
shall mean, with respect to any proposed transaction or tender offer (or
takeover scheme) for which a public announcement as contemplated by this
subparagraph 2 has been made, the date upon which the Borrower (in the case of
clause (a) above) or the person, group or entity (in the case of clause (b)
above) consummates or publicly announces the termination or abandonment of the
proposed transaction or tender offer (or takeover scheme) which caused this
subparagraph 2 to become operative.
C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be subject
to adjustment from time to time as follows:
1. ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK DIVIDEND,
ETC. If at any time when this Debenture is outstanding, the number of
outstanding shares of Common Stock is increased or decreased by a stock split,
stock dividend, combination, reclassification rights
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offering below the Trading Price (as defined below) to all holders of Common
Stock or other similar event, which event shall have taken place during the
reference period for determination of the Conversion Price for any Optional
Conversion or Maturity, then the Conversion Price shall be calculated giving
appropriate effect to the stock split, stock dividend, combination,
reclassification or other similar event. In such event, the Borrower shall
notify the Transfer Agent of such change on or before the effective date
thereof. "TRADING PRICE," which shall be measured as of the record date in
respect of the rights offering, means (i) the average of the last reported sale
prices for the shares of Common Stock on the OTC BB as reported by Bloomberg, as
applicable, for the five Trading Days immediately preceding such date, or (ii)
if the OTC BB 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 Trading Price shall be the fair market value as reasonably
determined in good faith by (x) the Board of Directors of the Borrower or, (y)
at the option of the holders of a majority of the then outstanding principal
amount of the Debentures, by an independent investment bank of nationally
recognized standing in the valuation of businesses similar to the business of
the Borrower.
2. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when
this Debenture is outstanding and prior to the conversion of all Debentures,
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 (each, a "CHANGE OF CONTROL TRANSACTION"), then
Holder shall thereafter have the right to receive upon conversion of this
Debenture (and upon exercise of the Investment Options), upon the basis and upon
the terms and conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore issuable upon conversion (and upon exercise of the
Investment Options), such stock, securities or assets which Holder would have
been entitled to receive in such transaction had this Debenture been converted
(and had the Investment Options been exercised) in full immediately prior to
such transaction (without regard to any limitations on conversion contained
herein), and in any such case appropriate provisions shall be made with respect
to the rights and interests of Holder to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
this Debenture (and upon exercise of the Investment Options) shall thereafter be
applicable, as nearly as may be practicable in relation to any securities or
assets thereafter deliverable upon the conversion of this Debenture (and
exercise of the Investment Options). The Borrower shall not effect any
transaction described in this subparagraph 2 unless (i) it first gives, to the
extent practical, thirty (30) days' prior written notice (but in any event at
least fifteen (15) business 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 Change of Control Transaction (during which time
Holder shall be entitled to convert this Debenture (and exercise the Investment
Options)), which notice shall be given concurrently with the first public
announcement of such transaction, and (ii) the resulting successor or acquiring
entity (if not the Borrower) and, if an entity different from the successor or
acquiring
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entity, the entity whose capital stock or assets the holders of the Common Stock
are entitled to receive as a result of such Change of Control Transaction,
assumes by written instrument the obligations of the Borrower hereunder
(including under this subparagraph 2). The above provisions shall similarly
apply to successive consolidations, mergers, sales, transfers or share
exchanges.
3. ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III.A, 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"), then
Holder shall be entitled, upon any conversion of this Debenture (and upon any
exercise of Investment Options) 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 Holder with respect to the shares of Common
Stock issuable upon such conversion (or upon such exercise of Investment
Options) had Holder been the holder of such shares of Common Stock on the record
date for the determination of shareholders entitled to such Distribution.
4. PURCHASE RIGHTS. Subject to Article III.A, if at any time when this
Debenture is 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
Holder will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which Holder could have acquired if Holder
had held the number of shares of Common Stock acquirable upon complete
conversion of this Debenture (including upon exercise of the Investment Options)
(without regard to any limitations on conversion contained herein and based upon
the Conversion Price as would then be in effect) 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.
5. ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (a) the
Borrower fails to obtain effectiveness with the SEC of any Registration
Statement required to be filed pursuant to the Registration Rights Agreement on
or prior to the date on which such Registration Statement is required to become
effective pursuant to the terms of the Registration Rights Agreement, (b) any
such Registration Statement, after its initial effectiveness and during the
Registration Period, lapses in effect, or sales of all of the Registrable
Securities (as defined in the Registration Rights Agreement) 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 (including
without, limitation, during an Allowed Delay (as defined in Section 3(f) of the
Registration Rights Agreement)) or (c) a Trading Market Redemption Event occurs
(each of such events described in clauses (a), (b) and (c) being referred to as
an "EXTENDED LOOKBACK EVENT"), then, at the election of the Holder, the Pricing
Period shall be comprised of (x) in the case of an event described in clause
(a), the thirty-five (35) Trading Days preceding the date on which such
Registration Statement is required to become effective pursuant to the terms of
the Registration Rights Agreement, plus all Trading Days through
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and including the third (3rd) Trading Day following the actual date of
effectiveness of the Registration Statement, (y) in the case of an event
described in clause (b), the thirty-five (35) Trading Days preceding the date on
which Holder is first notified that sales may not be made under the Prospectus
plus all Trading Days through and including the third (3rd) Trading Day
following the date on which Holder is first notified that such sales may again
be made under the Prospectus or (z) in the case of an event described in clause
(c), the thirty-five (35) Trading Days preceding the occurrence of the Trading
Market Redemption Event, plus all Trading Days through and including the third
(3rd) Trading Day following the date the Stockholders' Approval is obtained or
the Borrower is permitted by the applicable rules and regulations of the
principle securities market on which the Common Stock is listed or traded to
issue shares in excess of the Maximum Share Amount (each of such periods
referred to in clauses (x), (y) and (z) being defined as an "EXTENDED LOOKBACK
PERIOD"). If Holder determines that sales may not be made pursuant to the
Prospectus (whether by reason of the Borrower's failure or inability to amend or
supplement the Prospectus or otherwise) it shall so notify the Borrower in
writing and, unless the Borrower provides such Holder with a written opinion of
the Borrower's counsel to the contrary, such determination shall be binding for
purposes of this paragraph. In the event that an Extended Lookback Event occurs
within three (3) Trading Day-period following the cure of any other Extended
Lookback Event, the Extended Lookback Periods shall be cumulative.
D. MECHANICS OF CONVERSION. In order to convert this Debenture into shares
of Common Stock, Holder shall: (1) submit a copy of the fully executed notice of
conversion in the form attached hereto as Exhibit A ("NOTICE OF CONVERSION") to
the Borrower by facsimile dispatched prior to Midnight, New York City time (the
"CONVERSION NOTICE DEADLINE"), on the date specified therein as the Conversion
Date (as defined in Article II.D.5) (or by other means resulting in, or
reasonably expected to result in, written notice to the Borrower on the date
specified therein as the Conversion Date) to the office of the Borrower or its
designated Transfer Agent for the Debentures, which notice shall specify the
principal amount of this Debenture to be converted, the applicable Conversion
Price and a calculation of the number of shares of Common Stock issuable upon
such conversion (including the number of shares issuable upon exercise of the
Investment Options, if any); and (2) subject to Article II.D.1 below, surrender
this Debenture along with a copy of the Notice of Conversion to the office of
the Borrower as soon as practicable thereafter. In the case of a dispute as to
the calculation of the Conversion Price, the Borrower shall promptly issue that
number of shares of Common Stock as is not disputed in accordance with
subparagraph (3) below. The Borrower shall submit the disputed calculations to
its outside accountant via facsimile within two (2) business days of receipt of
the Notice of Conversion. The accountant shall audit the calculations and notify
the Borrower and Holder of the results no later than 48 hours from the time it
receives the disputed calculations. The accountant's calculation shall be deemed
conclusive absent manifest error.
1. SURRENDER OF DEBENTURE UPON CONVERSION. Notwithstanding anything to
the contrary set forth herein, upon conversion of this Debenture in accordance
with the terms hereof, 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. Holder and the Borrower shall maintain records
showing the principal amount so converted and the dates of such conversions or
shall use
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such other method, reasonably satisfactory to 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,
Holder may not transfer this Debenture unless Holder first physically surrenders
this Debenture to the Borrower, whereupon the Borrower will forthwith issue and
deliver upon the order of Holder a new Debenture of like tenor, registered as
Holder may request, representing in the aggregate the remaining unpaid principal
amount of this Debenture. 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 may be less than the amount
stated on the face hereof.
2. LOST OR STOLEN DEBENTURES. Upon receipt by the Borrower of evidence
of the loss, theft, destruction or mutilation of this Debenture, and (in the
case of loss, theft or destruction) of indemnity reasonably satisfactory to the
Borrower, and upon surrender and cancellation of this Debenture, if mutilated,
the Borrower shall execute and deliver a new Debenture of like tenor and date.
3. DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the submission of a
Notice of Conversion, the Borrower shall, within two (2) business days after the
Conversion Date (the "DELIVERY PERIOD"), issue and deliver (or cause its
Transfer Agent to so issue and deliver) in accordance with the terms hereof and
the Purchase Agreement (including, without limitation, in accordance with the
requirements of Section 2(g) of the Purchase Agreement) to or upon the order of
Holder that number of shares of Common Stock for the portion of this Debenture
converted (and, if applicable, the number of shares of Common Stock issuable
upon exercise of Investment Options in connection therewith) as shall be
determined in accordance herewith. In addition to any other remedies available
to Holder, including actual damages and/or equitable relief, the Borrower shall
pay to Holder $2,000 per day in cash for each day beyond a two (2) day grace
period following the Delivery Period that the Borrower fails to deliver Common
Stock (a "DELIVERY DEFAULT") issuable upon conversion of this Debenture pursuant
to the Notice of Conversion until such time as the Borrower has delivered all
such Common Stock (the "DELIVERY DEFAULT PAYMENTS"). Such Delivery Default
Payments shall be paid to Holder by the fifth (5th) day of the month following
the month in which they have accrued or, at the option of Holder (by written
notice to the Borrower by the first day of the month following the month in
which they have accrued), shall be convertible into Common Stock in accordance
with the terms of this Article II.
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 written request of Holder and its compliance
with the provisions contained in Article II.A and in this Article II.D, the
Borrower shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to Holder by
crediting the account of Holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time
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periods for delivery and penalties described in the immediately preceding
paragraph shall apply to the electronic transmittals described herein.
4. NO FRACTIONAL SHARES. If any conversion of this Debenture would
result in a fractional share of Common Stock or the right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion of this Debenture
shall be the next higher number of shares.
5. CONVERSION DATE. The "CONVERSION DATE" shall be the date specified
in the Notice of Conversion, provided that the Notice of Conversion is submitted
by facsimile (or by other means resulting in, or reasonably expected to result
in, written notice) to the Borrower or its Transfer Agent before Midnight, New
York City time, on the date so specified, otherwise the Conversion Date shall be
the first business day after the date so specified on which the Notice of
Conversion is actually received by the Borrower or its Transfer Agent. The
person or persons entitled to receive the shares of Common Stock issuable upon
conversion of this Debenture (or exercise of Investment Options) shall be
treated for all purposes as the record holder or holders of such securities as
of the Conversion Date and all rights with respect to this Debenture (or portion
thereof) surrendered shall forthwith terminate except the right to receive the
shares of Common Stock or other securities or property issuable on such
conversion (or exercise) and except that the holders preferential rights as a
Holder of this Debenture shall survive to the extent the Borrower fails to
deliver such securities.
E. INVESTMENT OPTIONS. On any Conversion Date relating to a conversion of
this Debenture by Holders, the Holder shall have the option to purchase one
additional share of Common Stock for every share of Common Stock issuable as a
result of such conversion, at an exercise price equal to the Fixed Conversion
Price (the option to purchase such additional shares shall be referred to herein
as the "Investment Options"). Holder (i) shall indicate on the Notice of
Conversion in respect of such Conversion Date that it is exercising its
Investment Option with respect to such conversion and shall specify the number
of shares of Common Stock with respect to which the Investment Option is being
so exercised, and (ii) shall pay to the Borrower, in immediately available
funds, on or within one (1) business day following the Conversion Date, the
aggregate purchase price for the shares of Common Stock issuable as a result of
the exercise of such Investment Options. The provisions of paragraphs A, D.3 (so
long as the Holder has delivered to the Borrower the aggregate purchase price
due in connection with the exercise of the Investment Options) and F of this
Article II shall apply to any exercise by the Holder of Investment Options.
F. RESERVATION OF SHARES. A number of shares of the authorized but unissued
Common Stock sufficient to provide for the conversion in full of the Debentures
outstanding (based on the lesser of the Applicable Percentage multiplied by the
Variable Conversion Price in effect from time to time and the Applicable
Percentage multiplied by the Fixed Conversion Price in effect from time to time)
and the exercise in full of the Investment Options shall at all times be
reserved by the Borrower, free from preemptive rights, for such conversion. As
of the Issue Date, 3,072,716 authorized and unissued shares of Common Stock have
been duly reserved for issuance upon conversion of the Debentures and upon
exercise of the Investment Options (the "RESERVED AMOUNT"). The Reserved Amount
shall be increased from time to time in accordance with the
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Borrower's obligations pursuant to Section 4(h) of the Purchase Agreement. In
addition, if the Borrower shall issue any securities or make any change in its
capital structure which would change the number of shares of Common Stock into
which the Debentures shall be convertible and for which the Investment Options
shall be exercisable, the Borrower shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of shares of
Common Stock authorized and reserved, free from preemptive rights, for
conversion of the Debentures and exercise of the Investment Options.
If at any time Holder submits a Notice of Conversion, and the Borrower does
not have sufficient authorized but unissued shares of Common Stock duly reserved
and available for issuance to effect such conversion in accordance with the
provisions of this Article II (including any Investment Options exercised in
connection therewith) (a "CONVERSION DEFAULT"), subject to Article V.I, the
Borrower shall issue to Holder all of the shares of Common Stock which are
available to effect such conversion. The portion of the principal amount of this
Debenture (or the number of shares of Common Stock including the Investment
Options) included in the Notice of Conversion 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 (or exercisable) into Common Stock in accordance with the terms
hereof until (and at Holder's option at any time after) the date additional
shares of Common Stock are authorized and duly reserved by the Borrower to
permit such conversion (or exercise), at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on the
Conversion Date elected by Holder in respect thereof. The Borrower shall use its
best efforts to effect an increase in the authorized number of shares of Common
Stock as soon as possible following the earlier of (x) such time that 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 hereof and (y) a Conversion Default. In addition, the Borrower shall
pay to Holder payments ("CONVERSION DEFAULT PAYMENTS") for a Conversion Default
in the amount of (a) .24, multiplied by (b) the Conversion Default Amount (as
defined below), multiplied by (c)(N/365), where N = the number of days from the
day Holder submits a Notice of Conversion giving rise to a Conversion Default
(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 Debentures. "CONVERSION DEFAULT AMOUNT" means the then
outstanding principal amount of all Debentures held by Holder plus the aggregate
accrued interest thereon as of the first day of the Conversion Default. The
Borrower shall send notice to 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 Payment for each
calendar month shall be paid in cash or shall be convertible into Common Stock
at the applicable Conversion Price, at the Borrower's option, as follows:
1. In the event Holder elects to take such payment in cash, cash
payment shall be made to Holder by the fifth (5th) day of the month following
the month in which it has accrued.
2. In the event the Holder elects to take such payment in Common
Stock, Holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the
15
<PAGE> 16
time of Conversion) at any time after the fifth day of the month following the
month in which it has accrued in accordance with the terms of this Article II
(so long as there is then a sufficient number of authorized shares of Common
Stock).
Holder's election shall be made in writing to the Borrower at any time
prior to 9:00 p.m, New York City time, on the third (3rd) day of the month
following the month in which Conversion Default payments have accrued. If no
election is made, Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the Borrower's failure
to maintain a sufficient number of authorized shares of Common Stock, and Holder
shall have the right to pursue all remedies available at law or in equity
(including a decree of specific performance and/or injunctive relief).
G. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article II,
the Borrower, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
Holder 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 Holder, furnish or cause
to be furnished to 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 this Debenture.
III. CERTAIN COVENANTS
A. DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall have any
obligation under this Debenture, 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 or (b) directly or indirectly through any subsidiary make any
other payment or distribution in respect of its capital stock.
B. RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall have any
obligation under this Debenture, 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.
C. BORROWINGS. So long as the Borrower shall have any obligation under this
Debenture, the Borrower shall not, without the written consent of the holders of
a majority of the then outstanding principal amount of the Debentures, create,
incur, assume or suffer to exist any liability for borrowed money, except (a)
borrowings in existence or committed on the date hereof and of which the
Borrower has informed Holder in writing prior to the date hereof, (b) borrowings
from a
16
<PAGE> 17
bona fide financial lending institution, (c) indebtedness to trade creditors
incurred in the ordinary course of business or (d) borrowings, the proceeds of
which shall be used to repay this Debenture.
D. SALE OF ASSETS. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the written consent of the
holders of a majority of the then outstanding principal amount of the
Debentures, sell, lease or otherwise dispose of any of its assets outside the
ordinary course of business. Any consent to the disposition of any assets may be
conditioned on a specified use of the proceeds of disposition.
E. ADVANCES AND LOANS. So long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the written consent of the
holders of a majority of the then outstanding principal amount of the
Debentures, lend money, give credit or make advances to any person, firm, joint
venture or corporation, including, without limitation, officers, directors,
employees, subsidiaries and affiliates of the Borrower, except loans, credits or
advances (a) in existence or committed on the date hereof and which the Borrower
has informed Holder in writing prior to the date hereof, and (b) made in the
ordinary course of business.
F. CONTINGENT LIABILITIES. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the written
consent of the holders of a majority of the then outstanding principal amount of
the Debentures, assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm, partnership,
joint venture or corporation, except by the endorsement of negotiable
instruments for deposit or collection and except assumptions, guarantees,
endorsements and contingencies (a) in existence or committed on the date hereof
and which the Borrower has informed Holder in writing prior to the date here of,
and (b) similar transactions in the ordinary course of business.
IV. MATURITY
The entire principal amount of the Debentures then outstanding
(together with any accrued and unpaid interest thereon, Default Interest,
Conversion Default Payments, Delivery Default Payments and all other amounts due
and payable by the Borrower pursuant to Section 2(c) of the Registration Rights
Agreement) on the Maturity Date, shall be paid by the Borrower to the Holder in
cash. At the option of the Holder, the Maturity Date shall be delayed by one (1)
Trading Day for each Trading Day occurring prior thereto and prior to the full
conversion of the Debentures that (i) any Registration Statement required to be
filed and to be effective pursuant to the Registration Rights Agreement is not
effective or sales of all of the Registrable Securities otherwise cannot be made
thereunder during the Registration Period (whether by reason of the Borrower's
failure to properly supplement or amend the prospectus included therein in
accordance with the terms of the Registration Rights Agreement or otherwise),
(ii) any Mandatory Redemption Event or Trading Market Redemption Event exists,
without regard to whether any cure periods shall have run or (iii) the Borrower
is in breach of any of its obligations pursuant to Section 4(h) of the Purchase
Agreement.
17
<PAGE> 18
V. MISCELLANEOUS
A. FAILURE OF INDULGENCE NOT WAIVER. No failure or delay on the part of
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 privilege.
B. NOTICES. Any notices required or permitted to be given under the terms
of this Debenture 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, or upon receipt or refusal of
receipt, if delivered personally or by courier or by facsimile, in each case
addressed to a party. The addresses for such communications shall be:
If to the Borrower:
SmartSources.com, Inc.
2030 Marine Drive, Suite 100
North Vancouver, B.C., V7P IV7
Attention: Chief Executive Officer
Facsimile: (604) 986-0869
With copy to:
Wolin, Ridley & Miller LLP
3100 Bank One Center
1717 Main Street
Dallas, Texas 75201-4681
Attention: Norman Miller
Facsimile: (214) 939-4949
If to Holder, to the address set forth immediately below Holder's name on
the signature pages to the Purchase Agreement or such other address as is
communicated to the Borrower by notice by Holder in accordance with the terms
hereof.
With copy to:
Bradley D. Houser
Akerman, Senterfitt & Eidson, P.A.
One Southeast Third Avenue, 28th Floor
Miami, Florida 33131
Facsimile: (305) 374-5095
18
<PAGE> 19
C. AMENDMENT PROVISION. The Debentures may be amended only by an instrument
in writing signed by the Borrower and the holders of a majority of the then
outstanding principal amount of the Debentures.
D. ASSIGNABILITY. This Debenture shall be binding upon the Borrower and its
successors and assigns and shall inure to the benefit of Holder and its
successors and assigns. In the event Holder shall sell or otherwise transfer any
portion of this Debenture, each transferee shall be allocated a pro rata portion
of such transferor's Maximum Share Amount and Reserved Amount. Any portion of
the Maximum Share Amount or Reserved Amount which remains allocated to any
person or entity which does not hold any Debentures shall be allocated to the
remaining holders of Debentures, pro rata based on the total principal amount of
Debentures then held by such holders.
E. COST OF COLLECTION. If default is made in the payment of this Debenture,
the Borrower shall pay Holder costs of collection, including reasonable
attorneys' fees.
F. GOVERNING LAW. This Debenture shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware (without regard to principles of
conflict of laws). The Borrower and Holder irrevocably consent to the
jurisdiction of the United States federal courts and state courts located in
Delaware in any suit or proceeding based on or arising under this Debenture, the
agreements entered into in connection herewith or the transactions contemplated
hereby or thereby and irrevocably agree that all claims in respect of such suit
or proceeding may be determined in such courts. The Borrower and Holder
irrevocably waive the defense of an inconvenient forum to the maintenance of
such suit or proceeding. The Borrower and Holder further agree that service of
process upon a party mailed by first class mail shall be deemed in every respect
effective service of process upon the party in any such suit or proceeding.
Nothing herein shall affect Holder's right to serve process in any other manner
permitted by law. The Borrower and Holder agree that a final non-appealable
judgment in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful manner.
G. DENOMINATIONS. At the request of 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 $25,000 as Holder shall request.
H. PAYMENT OF CASH; DEFAULTS. Whenever the Borrower is required to make any
cash payment to Holder under this Debenture (as a Conversion Default Payment or
otherwise but not including payments of principal and interest hereunder), such
cash payment shall be made to Holder within five Trading Days after delivery by
Holder of a notice specifying that Holder elects to receive such payment in cash
and the method (e.g., by check, wire transfer) in which such payment should be
made and appropriate delivery instructions, including any necessary wire
transfer instructions. If such payment is not delivered within such five-Trading
Day period, Holder shall thereafter be entitled to interest on the unpaid amount
at a per annum rate equal to the lower of 24% and the highest interest rate
permitted by applicable law until such amount is paid in full to Holder.
19
<PAGE> 20
I. PRO RATA ALLOCATIONS. The Maximum Share Amount and the Reserved Amount
(including any increases thereto) shall be allocated by the Borrower pro rata
among the holders of the Debentures based on the total principal amount of
Debentures originally issued to each holder of the Debentures. Each increase to
the Maximum Share Amount and the Reserved Amount shall be allocated pro rata
among the holders of the Debentures based on the total principal amount of
Debentures held by each holder at the time of the increase in the Maximum Share
Amount or Reserved Amount. In the event a holder shall sell or otherwise
transfer any of such holder's shares of the Debentures, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any the
Debentures shall be allocated to the remaining holders of shares of the
Debentures, pro rata based on the total principal amount of Debentures held by
such holders.
J. REMEDIES CUMULATIVE. The remedies provided in this Debenture shall be
cumulative and in addition to all other remedies available under this Debenture,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance giving rise to such remedy and nothing herein shall limit Holder's
right to pursue actual damages for any failure by the Borrower to comply with
the terms of this Debenture. The Borrower acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to Holder and that the
remedy at law for any such breach may be inadequate. The Borrower therefore
agrees, in the event of any such breach or threatened breach, Holder shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
K. USURY. Nothing herein contained, nor any transaction related hereto,
shall be construed or so operate as to require the Borrower to pay interest at a
greater rate than is now lawful in such case to contract for, or to make any
payment, or to do any act contrary to law. Should any interest or other charges
paid by the Borrower, or parties liable for the payment of this Debenture, in
connection with the loan evidenced by this Debenture, or any document delivered
in connection with said loan, result in the computation or earning of interest
in excess of the maximum rate of interest which is legally permitted by law,
then any and all such interest in excess of the maximum legal rate of interest
shall be and the same is hereby waived by the Holder hereof, and any and all
such interest in excess of the maximum legal rate which has been paid shall be
automatically credited against and in reduction of the balance due under this
Debenture, and the portion of said excess which exceeds the balance due under
this Debenture shall be paid by the Holder to the Borrower.
20
<PAGE> 21
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in its
name by its duly authorized officer as of the date first above written.
SMARTSOURCES.COM, INC.
By: /s/ DARRYL CARDEY
-------------------------------------------
Darryl Cardey,
Chief Financial Officer and
Vice President - Finance
21
<PAGE> 22
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debentures)
The undersigned hereby irrevocably elects to convert $________principal
amount of the Debenture (defined below) into shares of common stock, par value
$_____ per share ("COMMON STOCK"), of SmartSources.com, Inc., a Colorado
corporation (the "BORROWER") according to the conditions of the convertible
debentures of the Borrower dated as of _______ __, 200_ (the "DEBENTURES"), as
of the date written below. If securities are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates. No
fee will be charged to the Holder for any conversion, except for transfer taxes,
if any.
The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
TRANSFER").
Name of DTC Prime Broker:
----------------------------------------------
Account Number:
--------------------------------------------------------
[ ] In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Borrower issue a certificate or certificates for the
number of shares of Common Stock set forth below (which numbers are
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:
------------------------------------------------------------------
Address:
---------------------------------------------------------------
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Debentures shall be made pursuant to registration of the securities under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.
Date of Conversion:
---------------------------
Market Price Days:
----------------------------
Applicable Conversion Price:
------------------
Number of Shares of Common Stock to be Issued
Pursuant to (i) Conversion of the Debentures:
--------------
(ii) Conversion of Conversion Default Payments, Delivery
Default Payments and/or payments pursuant to Section 2(c) of
the Registration Rights Agreement:
----------
Signature:
------------------------------------
Name:
-----------------------------------------
Address:
--------------------------------------
*Subject to Article II.D of the Debenture(s), the Borrower is not required to
issue shares of Common Stock until the original Debenture(s) (or evidence of
loss, theft or destruction thereof) to be converted are received by the Borrower
or its Transfer Agent. The Borrower shall issue and deliver shares of Common
Stock to an overnight courier not later than three business days following
receipt of the original Debenture(s) to be converted, and shall make payments
pursuant to the Debentures for the number of business days such issuance and
delivery is late.
A-1
<PAGE> 1
EXHIBIT 10.03
EXHIBIT B
TO
SECURITIES
PURCHASE
AGREEMENT
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 THAT SECURITIES PURCHASE
AGREEMENT DATED AS OF FEBRUARY 24, 2000 BY AND AMONG THE PARTIES
REFERENCED BELOW, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN
OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE, CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS
NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER
SUCH ACT.
Right to
Purchase
330,000
Shares of
Common
Stock, no par
value
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, RGC International Investors,
LDC, or its registered assigns, is entitled to purchase from SmartSources.com,
Inc., a Colorado corporation (the "Company"), at any time or from time to time
during the period specified in Paragraph 2 hereof, THREE HUNDRED THIRTY
THOUSAND (330,000) fully paid and nonassessable shares of the Company's Common
Stock, no par value per share (the "Common Stock"), at an exercise price of
$11.10 per share (the "Exercise 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 February
24, 2000, by and among the Company and the Buyers listed on the execution page
thereof (the "Securities Purchase Agreement").
<PAGE> 2
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. 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 (or an election to effect a Cashless Exercise has been made) 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 two (2)
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 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 the unexercised or unconverted portion of any other
securities of the Company (including the Debentures (as defined in the
Securities Purchase Agreement)) subject to a limitation on conversion or
exercise analogous to the limitation contained herein) 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 this
Section 1, 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. Notwithstanding
anything in this Warrant to the contrary, the restriction on the Holder set
forth in this paragraph shall not be amended without (i) without the
2
<PAGE> 3
written consent of the Holder and the Company and (ii) the approval of the
holders of a majority of Borrower's Common Stock present, or represented by
proxy, and voting at any meeting called to vote on the amendment of such
restriction.
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 (the "Issue Date")
and before 5:00 p.m., New York City time on the fifth (5th) anniversary of the
Issue Date (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 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.
3
<PAGE> 4
(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 Issue Date 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 (or deemed
issuance) of such Common Stock (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 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
4
<PAGE> 5
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 of such Convertible Securities,
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 (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.
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<PAGE> 6
(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.
(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
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<PAGE> 7
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 or acquiring entity (if other than the Company) and, if
an entity different from the successor or acquiring entity, the entity whose
capital stock or assets the holders of the Common Stock of the Company are
entitled to receive as a result of such consolidation, merger or sale or
conveyance 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.
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<PAGE> 8
(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
8
<PAGE> 9
Company) when the same shall take place. Such notice shall also specify the
date on which the holders of Common Stock shall be 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
Over-the-Counter Bulletin Board (the "OTC BB") for the five (5)
trading days immediately preceding such date as reported by Bloomberg
Financial Markets or an equivalent reliable reporting service mutually
acceptable to and hereafter designated by the holder of this Warrant
and the Company ("Bloomberg"), or (ii) if the OTC BB 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 Company 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 Company. 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.
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<PAGE> 10
(iii) "COMMON STOCK," for purposes of this Paragraph 4,
includes the Common Stock, no par value 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, no
par value per share, in respect of which this Warrant is exercisable,
or shares resulting from any 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 February
24, 2000, 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
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<PAGE> 11
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 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 for resale under
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 the Warrant Shares as are set forth in Section 2 of the
Registration Rights Agreement.
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<PAGE> 12
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 or by recognized overnight mail courier,
postage prepaid and addressed, to the office of the Company at 2030 Marine
Drive, Suite 100, North Vancouver, B.C. V7P 1V7, Attention: Chief Executive
Officer, 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 IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN THE STATE OF DELAWARE (WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS). BOTH PARTIES IRREVOCABLY CONSENT TO THE JURISDICTION OF THE
UNITED STATES FEDERAL COURTS AND THE STATE COURTS LOCATED IN DELAWARE WITH
RESPECT TO ANY SUIT OR PROCEEDING BASED ON OR ARISING UNDER THIS AGREEMENT, THE
AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY AND IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH SUIT
OR PROCEEDING MAY BE DETERMINED IN SUCH COURTS. BOTH PARTIES IRREVOCABLY WAIVE
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY
MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE
OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL
AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT
OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER.
12
<PAGE> 13
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.
(d) REMEDIES CUMULATIVE. The remedies provided in this Warrant
shall be cumulative and in addition to all other remedies available under this
Warrant, at law or in equity (including a decree of specific performance and/or
other injunctive relief), no remedy contained herein shall be deemed a waiver
of compliance giving rise to such remedy and nothing herein shall limit
Holder's right to pursue actual damages for any failure by the Company to
comply with the terms of this Warrant. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to Holder and
that the remedy at law for any such breach may be inadequate. The Company
therefore agrees, in the event of any such breach or threatened breach, Holder
shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 14
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer.
SMARTSOURCES.COM, INC.,
a Colorado corporation
By: /s/ DARRYL CARDEY
-----------------------------------
Darryl Cardey,
Chief Financial Officer and
Vice President - Finance
Dated as of February 24, 2000
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<PAGE> 15
FORM OF EXERCISE AGREEMENT
Dated:_____, 200_
To: SmartSources.com, Inc.
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.
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<PAGE> 16
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: _______, 200_
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.
16
<PAGE> 1
Exhibit 10.04
EXHIBIT C
to
Securities
Purchase
Agreement
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of February
24, 2000, by and among SmartSources.com, Inc., a Colorado corporation, with its
headquarters located at 2030 Marine Drive, Suite 100, North Vancouver, B.C. V7P
IV7 (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 of the Company's common
stock, no par value per share (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 330,000 shares of Common Stock, upon the terms and
conditions and subject to the limitations and conditions set forth in the
Warrants dated February 24, 2000; 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> 2
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 (a) the
Conversion Shares issued or issuable upon conversion of or
otherwise pursuant to the Debentures (including, without
limitation, any shares issued or issuable upon exercise of the
Investment Options (as defined in the Debenture) or pursuant
to Articles I, II.D.3 and II.F of the Debentures and Section
2(c) herein) issued and issuable, (b) Warrant Shares issued or
issuable upon exercise of or otherwise pursuant to the
Warrants issued or issuable and (c) 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(S)" means a
registration statement(s) 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 (the "FILING 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 SB-2 or Form S-1 (or, if Form SB-2 or
Form S-1 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, which Registration Statement, to the extent
allowable under the 1933 Act and the rules and regulations promulgated
thereunder (including Rule 416), shall state that such Registration
Statement also covers such indeterminate number of additional shares of
Common Stock as
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<PAGE> 3
may become issuable upon conversion of or otherwise pursuant to the
Debentures (including, but not limited to, shares issued or issuable
upon exercise of the Investment Options) and exercise of or otherwise
pursuant to the Warrants to prevent dilution resulting from stock
splits, stock dividends or similar transactions. The number of shares
of Common Stock initially included in such Registration Statement shall
be no less than two (2) times the sum of (i) the aggregate number of
Conversion Shares that are then issuable upon conversion of or
otherwise pursuant to the Debentures (including upon exercise of the
Investment Options under the Debentures) (in each case based on the
lesser of the Applicable Percentage (as defined in the Debentures)
multiplied by the Variable Conversion Price (as defined in the
Debentures) and the Applicable Percentage multiplied by the Fixed
Conversion Price (as defined in the Debentures) then in effect) and
(ii) the Warrant Shares that are then issuable upon exercise of or
otherwise pursuant to the Warrants, without regard to any limitation on
the Investor's ability to convert the Debentures or exercise the
Warrants. The Company acknowledges that the number of shares initially
included in the Registration Statement represents a good faith estimate
of the maximum number of shares issuable upon conversion of or
otherwise pursuant to the Debentures (including upon exercise of the
Investment Options under the Debentures) and exercise of or otherwise
pursuant to the Warrants. The Registration Statement (and each
amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided to (and subject to the
approval of) the Initial Investors and their counsel prior to its
filing or other submission.
b. UNDERWRITTEN OFFERING. If any offering pursuant
to a Registration Statement pursuant to Section 2(a) hereof involves an
underwritten offering, the Investors who hold a majority-in-interest of
the Registrable Securities subject to such underwritten offering, with
the consent of a majority-in-interest of the Initial Investors, shall
have the right to select, at their own expense, one legal counsel and
an investment banker or bankers and manager or managers to administer
the offering, which investment banker or bankers or manager or managers
shall be reasonably satisfactory to the Company. In the event that any
Investors elect not to participate in such underwritten offering, the
Registration Statement covering all of the Registrable Securities shall
contain appropriate plans of distribution reasonably satisfactory to
the Investors participating in such underwritten offering and the
Investors electing not to participate in such underwritten offering
(including, without limitation, the ability of non-participating
Investors to sell from time to time at any time during the
effectiveness of such Registration Statement).
c. PAYMENTS BY THE COMPANY. The Company shall use
its best efforts to obtain effectiveness of the Registration Statement
as soon as practicable, but in any event not later than the one hundred
twentieth (120th) day after the Closing Date (the "REGISTRATION
DEADLINE"). If (i) the Registration Statement covering the Registrable
Securities required to be filed by the Company pursuant to Section 2(a)
hereof is not declared effective by the SEC by the Registration
Deadline, or (ii) after the Registration Statement has been declared
effective by the SEC, sales of all of the Registrable Securities cannot
be made pursuant to the Registration Statement, (iii) the Common Stock
is not listed or included for
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<PAGE> 4
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 on one of such markets or (iv) the Common Stock
ceases to be traded on the Over-the-Counter Bulletin Board (the "OTC
BB") prior to being listed or included for quotation on one of the
aforementioned markets, 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 Registrable Securities, the principal
amount of Debentures from which such Registrable Securities were
converted) ("OUTSTANDING PRINCIPAL AMOUNT") multiplied by twenty-five
thousandths (0.25) times the sum of: (i) the number of months (prorated
for partial months) after the end of the Registration 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; (ii) the number of months
(prorated for partial months) during the Registration Period (as
defined below) that sales of all of the Registrable Securities 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 (including Section 3(b)
hereof or otherwise), but excluding any days during an Allowed Delay
(as defined in Section 3(f)); and (iii) the number of months (prorated
for partial months) that the Common Stock is not listed or included for
quotation on the OTC BB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX or that
trading thereon is halted after the Registration Statement has been
declared effective (each of such monthly periods described in clauses
(i), (ii) and (iii) being referred to herein as a "DEFAULT PERIOD").
(For example, if the Registration Statement becomes effective one (1)
month after the Registration Deadline, the Company would pay $25,000
for each $1,000,000 of Outstanding Principal Amount. If thereafter,
sales of all of the Registrable Securities could not be made pursuant
to the Registration Statement for an additional period of one (1)
month, the Company would pay an additional $25,000 for each $1,000,000
of Outstanding Principal Amount.) In addition, the Applicable
Percentage (as defined in the Debenture) shall be reduced by 2.5% for
each Default Period (prorated for partial periods) as described in the
Debentures. Such amounts shall be paid in cash or, at each Investor's
option, may be added to the Conversion Amount (as defined in the
Debentures) of the Debentures pursuant to Section II.A.1. 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
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<PAGE> 5
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.
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
determine to file with the SEC a Registration Statement relating to an
offering for its own account or the account of others under the 1933
Act of any of its 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 for which the holders of such
securities are not entitled by contract 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 contractual right to
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
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<PAGE> 6
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 any
Registration Statement to be filed pursuant to Section 2(a) in
accordance with the terms of this Agreement.
e. ELIGIBILITY FOR FORM SB-2 OR FORM S-1;
CONVERSION TO FORM S-3. The Company represents and warrants that it (i)
meets the registrant eligibility and transaction requirements for the
use of Form SB-2 or Form S-1 for registration of the sale by the
Initial Investors and any other Investors of the Registrable
Securities. The Company agrees to file all reports required to be filed
by the Company with the SEC in a timely manner so as to become eligible
and thereafter to maintain its eligibility for the use of Form S-3. Not
later than ten (10) days after the Company first meets the registration
eligibility and transaction requirements for the use of Form S-3 (or
any successor form) for registration of the offer and sale by the
Initial Investors and any other Investors of Registrable Securities,
the Company shall file a Registration Statement on Form S-3 (or such
successor form) with respect to the Registrable Securities covered by
the Registration Statement filed on Form SB-2 or Form S-1, whichever
is applicable, filed pursuant to Section 2(a) (and include in such
Registration Statement on Form S-3 the information required by Rule 429
under the 1933 Act) or convert the Registration Statement filed on Form
SB-2 or Form S-1 pursuant to Section 2(a) to a Form S-3 pursuant to
Rule 429 under the 1933 Act and use its best efforts to have such
Registration Statement (or such amendment) declared effective as soon
as practicable thereafter.
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 as soon as practicable after the Closing Date (but no
later than the Filing Date), a Registration Statement 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 (but in no event later than the Registration
Deadline), and keep the Registration Statement (and, following the
effectiveness of the Registration Statement on Form S-3 referred to in
Section 2(a), such later 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)
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<PAGE> 7
may be immediately sold to the public without registration or
restriction (including without limitation as to volume by each holder
thereof) 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 Statements and the prospectus used in connection
with the Registration Statements as may be necessary to keep the
Registration Statements effective at all times during the Registration
Period, and, during such period, comply with the provisions of the 1933
Act with respect to the disposition of all Registrable Securities of
the Company covered by the Registration Statements 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 Statements. In the event that
on any Trading Day (as defined in the Debentures) (the "REGISTRATION
TRIGGER DATE") 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 or
otherwise pursuant to the Debentures (including upon exercise of the
Investment Options under the Debentures) (based on the lesser of the
Applicable Percentage multiplied by the Variable Conversion Price and
the Applicable Percentage multiplied by the Fixed Conversion Price
(each as defined in the Debentures) then in effect) and exercise of or
otherwise pursuant to the Warrants, in each case without giving effect
to any limitations on the Investors' ability to convert the Debentures
or exercise the Warrants, 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 two
hundred percent (200%) of all of the Registrable Securities so issued
or issuable (without giving effect to any limitations on conversion
contained in the Debentures or exercise contained in the Warrants) as
of the Registration Trigger Date, 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 Statement to become effective as soon as practicable
following the filing thereof, but in any event within sixty (60) days
of the Registration Trigger Date. The provisions of Section 2(c) above
shall be applicable with respect to the Company's obligations under
this Section 3(b).
c. The Company shall furnish to each Investor whose
Registrable Securities are included in a Registration Statement and
such Investor's legal counsel (i) promptly after the same is prepared
and publicly distributed, filed with the SEC, or received by the
Company, one copy of each 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
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<PAGE> 8
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
each 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 each Registration Statement or any
amendment thereto to be declared effective by the SEC as soon as
practicable and shall 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 any such
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 Statements 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 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. In the event Investors who hold a
majority-in-interest of the Registrable Securities being offered in the
offering (with the approval of a majority-in-interest of the Initial
Investors) select underwriters for the offering, the Company shall
enter into and perform its obligations under an underwriting agreement,
in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of
such offering.
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 any Registration Statement,
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<PAGE> 9
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 any
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 ten (10) 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, in 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
such 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 any 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 (with the fees of such
counsel being paid pursuant to the expense allowance set forth in
Section 4(f) of the Securities Purchase Agreement) to review such
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 objects
and will not request acceleration of such Registration Statement
without prior notice to such counsel. The sections of such Registration
Statement 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 practicable, 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 the Registration Statement.
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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 any 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 a 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 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.
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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 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) to the extent the securities of the same class or
series are not then listed on a national securities exchange, secure
the designation and quotation, of all the Registrable Securities
covered by the Registration Statement on Nasdaq or the Nasdaq SmallCap
or, if not eligible for Nasdaq or the Nasdaq SmallCap, on the OTC BB
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 the Registrable Securities
not later than the effective date of the 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
such 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 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.
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p. At the request of the holders of a
majority-in-interest of the Registrable Securities, the Company shall
prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to a Registration Statement and any
prospectus used in connection with the Registration Statement as may be
necessary in order to change the plan of distribution set forth in such
Registration Statement.
q. Except for those commitments of the Company to
register its Common Stock set forth on Schedule 3(q) of this Agreement,
the Company shall not, and shall not agree to, allow the holders of any
securities of the Company to include any of their securities in any
Registration Statement under Section 2(a) hereof or any amendment or
supplement thereto under Section 3(b) hereof without the consent of the
holders of a majority-in-interest of the Registrable Securities. In
addition, the Company shall not offer any securities for its own
account or the account of others in any Registration Statement under
Section 2(a) hereof or any amendment or supplement thereto under
Section 3(b) hereof without the consent of the holders of a
majority-in-interest of the Registrable Securities.
r. The Company shall take all other reasonable
actions necessary to expedite and facilitate disposition by the
Investors of Registrable Securities pursuant to a Registration
Statement.
s. The Company shall comply with all applicable
laws related to a Registration Statement and offering and sale of
securities and all applicable rules and regulations of governmental
authorities in connection therewith (including without limitation the
1933 Act and or the Securities Exchange Act of 1934, as amended (the
"1934 ACT") and the rules and regulations promulgated by the SEC).
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 the Registration Statement, the Company
shall notify each Investor of the information the Company requires from
each such Investor.
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<PAGE> 13
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 Statements 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 Statements.
c. In the event Investors holding a
majority-in-interest of the Registrable Securities being registered
(with the approval of the Initial Investors) determine to engage the
services of an underwriter, each Investor agrees to enter into and
perform such Investor's obligations under an underwriting agreement, in
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing
underwriter of such offering and take such other actions as are
reasonably required in order to expedite or facilitate the disposition
of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from such Registration Statement.
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.
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, the
fees and disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel selected by the Initial Investors pursuant to
Sections 2(b) and 3(h) hereof shall be borne by the Company.
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<PAGE> 14
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 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 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 such Registration Statement or any such amendment
thereof or supplement thereto; (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
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<PAGE> 15
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 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
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<PAGE> 16
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
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
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<PAGE> 17
investors to sell securities of the Company to the public without registration
("RULE 144"), the Company agrees to:
a. make and keep current 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 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
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<PAGE> 18
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 United States 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:
SmartSources.com, Inc.
2030 Marine Drive, Suite 100
North Vancouver, B.C., V7P IV7
Attention: Chief Executive Officer
Facsimile: (604) 986-0869
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With copy to:
Wolin, Ridley & Miller LLP
3100 Bank One Center
1717 Main Street
Dallas, Texas 75201-4681
Attention: Norman Miller
Facsimile: (214) 939-4949
If to an Investor: to the address set forth immediately below such Investor's
name on the signature pages to the Securities Purchase Agreement.
With copy to:
Bradley D. Houser
Akerman, Senterfitt & Eidson, P.A.
One Southeast Third Avenue, 28th Floor
Miami, Florida 33131
Facsimile: (305) 374-5095
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 governed by and
construed in accordance with the laws of the State of Delaware
applicable to agreements made and to be performed in the State of
Delaware (without regard to principles of conflict of laws). Both
parties irrevocably consent to the jurisdiction of the United States
federal courts and the state courts located in Delaware with respect to
any suit or proceeding based on or arising under this Agreement, the
agreements entered into in connection herewith or the transactions
contemplated hereby or thereby and irrevocably agree that all claims in
respect of such suit or proceeding may be determined in such courts.
Both parties irrevocably waive the defense of an inconvenient forum to
the maintenance of such suit or proceeding. Both parties further agree
that service of process upon a party mailed by first class mail shall
be deemed in every respect effective service of process upon the party
in any such suit or proceeding. Nothing herein shall affect either
party's right to serve process in any other manner permitted by law.
Both parties agree that a final non-appealable judgment in any such
suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
e. This Agreement and the Securities Purchase
Agreement (including all schedules and exhibits thereto) constitute the
entire agreement among the parties hereto with
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<PAGE> 20
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 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 Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to each Investor
by vitiating the intent and purpose of the transactions contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law
for breach of its obligations hereunder will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of any of
the provisions hereunder, that each Investor shall be entitled, in
addition to all other available remedies in law or in equity, to an
injunction or injunctions to prevent or cure breaches of the provisions
of this Agreement and to enforce specifically the terms and provisions
hereof, without the necessity of showing economic loss and without any
bond or other security being required.
l. 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.
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<PAGE> 21
m. 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.
n. The initial number of Registrable Securities
included in any Registration Statement and each increase to the number
of Registrable Securities included therein shall be allocated pro rata
among the Investors based on the number of Registrable Securities held
by each Investor at the time of such establishment or increase, as the
case may be. In the event an Investor shall sell or otherwise transfer
any of such holder's Registrable Securities, each transferee shall be
allocated a pro rata portion of the number of Registrable Securities
included in a Registration Statement for such transferor. Any shares of
Common Stock included on a Registration Statement and which remain
allocated to any person or entity which does not hold any Registrable
Securities shall be allocated to the remaining Investors, pro rata
based on the number of shares of Registrable Securities then held by
such Investors. For the avoidance of doubt, the number of Registrable
Securities held by an Investor shall be determined as if all the
Debentures and Warrants then outstanding and held by an Investor were
converted into or exercised for Registrable Securities.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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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.
SMARTSOURCES.COM, INC.
By: /s/ DARRYL CARDEY
---------------------------------------
Darryl Cardey,
Chief Financial Officer and Vice President - Finance
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.,
Investment Manager
By: RGC General Partner Corp.,
as General Partner
By: /s/ STEVEN B. KATZNELSON
---------------------------------------
Steven B. Katznelson
Managing Director
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EXHIBIT 99.01
SmartSources.com Closes $5 Million Financing
Sunnyvale, CA - February 25, 2000. SmartSources.com Inc. (OTCBB:SSXX, FSE:SMQ),
an Internet technology & services company, announced today that the Company has
completed a $5 Million, private placement to an institutional investor. Under
certain circumstances, the investor has the right to invest up to an additional
$5 million.
The private placement consists of a $5 Million, 5 year, 7% Convertible
Debenture, convertible into SmartSources.com common stock and warrants to
purchase 330,000 shares of common stock at an exercise price of $11.10. The
debentures are convertible into common stock at a conversion price based on the
market price of the common stock preceding conversion, up to a conversion price
of $9.71. After August 24, 2000, if the closing price of the common stock is
less than $9.71 the Company has the right to issue cash instead of common stock
upon conversion of the debentures.
"This provides SmartSources.com with the resources to aggressively implement
the roll-out of our kServer(TM) technology," stated Chairman and CEO, Nathan
Nifco. "Our intention is to become the dominant service provider of vertical
market Enterprise Information Portals to the Travel, Financial Services and
International Trade industries. This funding will take us a long way towards
that goal."
About SmartSources.com:
SmartSources.com is an Internet technology & services company providing
web-based solutions for communication & content management challenges through
Enterprise Information Portals (EIPs). The company's proprietary kServer(TM)
technology allows for the creation of multi-site, multi-user, flexible web
applications in a browser-based environment. The knowledge base structure
stores content in a robust environment, making it ideal for search algorithms.
A suite of built-in services for database access, e-commerce, knowledge
management and content syndication easily facilitates the construction of
complicated web applications such as EIPs. Additional information can be
obtained by visiting the Company's web-site at www.SmartSources.com.
For more information on SmartSources.com Inc., please contact Jill Brand at
1-888-689-9891, Jennifer Gardiner (the Stockpage.com) at 1-800-797-5683, or
Jimmy Holton (Continental Capital & Equities) at 1-407-682-2001.
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