U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
Commission File Number 0-20701
Compositech Ltd.
(Name of small business issuer in its charter)
Delaware 11-2710467
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Ricefield Lane, Hauppauge, New York 11788
(Address of principal executive offices)
Issuer's telephone number: (516) 436-5200
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Common Stock Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for fiscal year ended December 31, 1998: $414,396
As of March 23, 1999, there were 15,643,694 shares of the registrant's
Common Stock, $.01 par value outstanding. The aggregate market value of Common
Stock held by non-affiliates of the registrant, as of March 23, 1999 was
approximately $30,591,511.
Documents Incorporated By Reference: Portions of the issuer's Proxy Statement
for its 1998 Annual Meeting of Stockholders scheduled to be held on June 1,
1999, are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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PART I
Item 1. Description of Business
General
Compositech Ltd. (the "Company" or "Compositech") was founded in 1984 by
Jonas Medney, the Company's Chairman, and Fred Klimpl, its Vice Chairman, to
develop and market innovative superior copper-clad fiberglass epoxy laminates
used to make printed circuit boards required by the electronics industry. The
Company became a publicly owned corporation in 1996. The primary innovation of
Compositech was to replace the fiberglass cloth component of the laminate with a
more modern and structurally efficient fiberglass core resulting from a uniform,
orthogonally layered construction. Based on its own benchmark testing and
evaluations by customers and other potential users, the Company believes that it
has succeeded in developing a laminate that is superior to competitive
copper-clad fiberglass epoxy laminates.
From May through August 1997, the Company issued $6,505,000 of 5%
Convertible Debentures (the "Debentures") in a private placement and received
net proceeds of approximately $5.9 million for working capital and to obtain
additional production equipment. By April 23, 1998, the Debentures had been
fully converted into an aggregate of 4,586,957 shares of Common Stock.
On May 29, 1998, the Company issued $2,200,000 of 7% Series B Convertible
Preferred Stock, (the "Series B Stock") and received net proceeds of
approximately $1.9 million which were used for working capital and to purchase
production equipment. In 1999, Series B Stock shares, with a face value of
$1,950,000, were converted into 1,387,332 shares of Common Stock.
On June 23, 1998, Christopher F. Johnson was elected President and Chief
Executive Officer of the Company and elected to the Board of Directors. He
replaced Jonas Medney as Chief Executive Officer. Mr. Medney continues as
Chairman. Mr. Johnson has over thirty years of experience in sales and marketing
and general management with suppliers of specialty materials for printed circuit
fabrication.
Technology History
The Company's innovative laminates are produced using proprietary processes
and machinery, designed by the Company's engineering staff. The Company has
received grants of 29 patents covering its products, processes and apparatus,
including five in the United States, and has submitted five additional patent
applications. The most recent patents granted were a fifth one in Japan and one
in Kazakhstan. The patents on the laminates, processes and apparatus are
supplemented with other proprietary technology unprotected by patents and
considered by the Company to be of substantial value.
Compositech's laminate construction is structurally more efficient than
competitive copper-clad fiberglass epoxy laminates designated "FR-4", which is
the industry standard, resulting in enhanced smoothness and greater dimensional
stability. The Company believes, based on results of customers' evaluations,
that its improved products can economically substitute for the fiberglass woven
cloth epoxy laminates currently used in the electronics industry. According to
the Institute for Interconnecting and Packaging Electronic Circuits (the "IPC"),
this market exceeded $3.2 billion in 1997, the latest year for which data is
available.
The Company successfully constructed, debugged and operated its first pilot
plant production equipment for laminates with a panel size of 24" x 24" in 1991.
In 1991 and 1992, Compositech recruited an initial sales staff to develop the
market potential of its product, continued refining its product and designing
its production equipment to manufacture laminates with a panel size of 36" x 48"
and initiated a sampling
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program targeted at major potential customers. In 1994, the Company started up
and began debugging its first production module to manufacture 36" x 48"
laminates and, in 1995 and 1996, produced laminates on this equipment in limited
quantities for the purpose of making modifications to the production processes
and equipment constituting the module and reformulating the laminates produced
by the module. In the last quarter of 1996, the Company began installation of
advanced production equipment which was completed in 1997. Throughout 1997 and
1998, the Company worked on adjusting and enhancing its production equipment and
its manufacturing processes. In 1998, the Company added production equipment.
The Company also worked on solving problems with incoming raw materials and
interior environment which affect manufacturing yields. Sales consisted of
qualifying orders and small production runs.
Joint Ventures
On October 16, 1997, the Company closed a transaction with four Quebec
institutional investors (collectively, the "Quebec Investors") to form a 50/50
joint venture for the establishment of a plant in the greater Montreal area to
manufacture Compositech's laminates. The investor group is comprised of four
institutional investors: Societe generale de financement du Quebec, Fonds de
solidarite des travailleurs du Quebec (F.T.Q.), Societe Innovatech du Grand
Montreal and Fonds regional de solidarite Ile de Montreal. The project cost is
estimated to be approximately $24.5 million with an initial capitalization by
the parties of approximately $11 million with the balance to be in debt
financing from banks and governmental agencies. The Company's approximately $5.4
million capital investment in the joint venture was funded by the Quebec
Investors purchasing 1,066,192 shares of the Company's Common Stock. The Quebec
Investors have an option to sell their 50% interest in the joint venture to the
Company for a like number of shares and, under certain circumstances, the
Company has an option to purchase the interest for the same number of shares.
The plant is planned to start production in 2000 with an anticipated annual
production capacity of approximately 12 million square feet.
On February 9, 1998, the Company entered into a joint venture agreement and
patent, information and trademark agreement with a Taiwanese investor group led
by Cheng Xin Venture Capital Corporation (formerly Fidelity Venture Capital
Corp.) ("Cheng Xin") to establish a joint venture, under the name of Composite
Technologies, Inc., to manufacture the Company's laminates in Taiwan. The
Company received $1 million as a license down payment and is to receive
additional up-front license payments of $1 million, upon the achievement of
certain milestones. As part of the transaction, Composite Technologies, Inc.
acquired 587,372 shares of the Company's Common Stock for $1 million and agreed
to buy a like amount of shares for another $1 million within 30 days following
approval of the joint venture license by the science park where the joint
venture is proposed to be located. During 1998, the Company received an advance
of $500,000 against the latter purchase of shares, substantially all of which it
invested in the joint venture in accordance with the joint venture agreement.
The Company will receive an approximate 10% interest in the joint venture and
royalty payments based on sales. A related letter of intent with Cheng Xin
provides for entering into a contract with the Company for it to supply the
joint venture with the requisite manufacturing equipment.
Industry Overview
Initially, most circuit boards had circuits (traces) on one or two sides.
In the last ten years, rapid technological advances in both semiconductor design
and fabrication techniques have placed significant demands on the performance of
printed circuit boards. Greater circuit density, complexity and miniaturization
have increased demand for more sophisticated printed circuit boards. In response
to this demand, multilayer printed circuit boards were developed which
incorporate multiple layers of metallic traces. The several layers of circuitry
are aligned and bonded together in a stack to form a multilayer board with both
horizontal and vertical electrical interconnections. Further circuit board
sophistication is currently being achieved by increasing the number of layers
and by decreasing the width and separation of the traces,
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drilling and plating smaller holes to connect the internal trace layers and
precisely situating the traces and pads on the board surface to accommodate
surface mount components.
These trends in the printed circuit board industry have placed increasingly
rigorous demands on the electrical, thermal, chemical and mechanical properties
of laminates. Mechanical properties must be increasingly more uniform and
tightly controlled in order to align the various layers in a multilayer printed
circuit board. Electrical properties of laminates must be highly consistent and
predictable in order to avoid circuit timing malfunctions. Thermal stability is
also critical for attaching the components and for dense, high speed systems,
because of the heat generated.
Compositech's technology is targeted at the fiberglass laminate segment of
the laminate industry. According to the IPC, in 1997 the single- and
double-sided laminate market was approximately $1.1 billion and the
multilayer/high performance laminate market was approximately $2.1 billion,
totaling $3.2 billion. In these two segments, the United States' share was
approximately $988 million while experiencing a growth rate of 25%.
Products
Printed Circuit Board Laminates. Printed circuit boards are the basic
platforms used to interconnect the microprocessors, integrated circuits and
other components essential to the functioning of electronic products. They
consist of a pattern of electrical circuitry resulting from etching copper foil
laminated to a composite made of insulating materials usually comprised of
fiberglass and epoxy. The laminate itself, therefore, is the copper-clad,
fiberglass and epoxy core from which printed circuit boards are produced.
Compositech's Laminates. CL200+ is the first Compositech laminate. This
laminate uses the same basic raw materials as conventional laminates: fiberglass
yarn, epoxy resin and copper foil. Compositech combines these materials into a
unique, more efficient laminate. Conventional laminates are made from woven
fiberglass cloth in which the yarn is twisted and crimped in the weaving
process. The resultant weave pattern is impressed into the copper foil, thereby
roughening the surface of the laminate. In the construction of Compositech's
laminates, the filaments of fiberglass are wound in orthogonal layers of flat,
continuous parallel filaments. This construction creates the enhanced smoothness
and improved dimensional stability of Compositech's laminates.
High processing temperature tolerance is necessary for soldering components
to circuit boards. CL200+ uses a proprietary epoxy resin formulation that,
according to Company tests, results in a thermal rating over 200(degree)C,
principally because of the formulation, which is generally 20(degree)C to
80(degree)C higher than other copper-clad fiberglass epoxy laminates. Certain
laminates produced from materials other than fiberglass epoxy, addressing a
small, higher cost end of the market, have thermal ratings which equal or exceed
those of the Company's introductory CL200+ laminates.
Management believes that the benefits of Compositech's laminates should
enable the printed circuit board industry to:
o Decrease costs through reducing waste in the manufacture of existing boards
because the improved dimensional stability, temperature tolerances and
enhanced smoothness increase manufacturers' yields.
o Economically produce large printed circuit boards with high layer counts
because of the improved dimensional stability.
o Accelerate the development of new products requiring denser circuitry by
permitting finer lines and
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smaller pads. A pad is a portion of a conductive pattern which is usually,
but not exclusively, used for the connection and/or attachment of
components.
Compositech's Strategy
The Company's objective is to be the leading manufacturer of copper-clad
fiberglass epoxy laminates for electronics equipment. The Company expects to
achieve this position through the effective exploitation of its patented and
proprietary products and processes.
Management has targeted the $2.1 billion multilayer laminate market sector
for its initial sales efforts to establish its laminates as the leading-edge
technology for current and future economical production of printed circuit
boards.
Management believes that the strategic value of the Company's products to
its prospective customers is to enable them economically to produce increasingly
sophisticated circuit boards in a shorter time cycle. This combination of
benefits is a basic element of Compositech's product technology thrust.
The Company has patented and developed a flexible manufacturing process
that it believes can be exceptionally responsive to the ever-changing product
iterations required by the rapid introduction of new designs into the
electronics market. The manufacturing capacity can be expanded incrementally in
response to increased market demand.
Management believes that the Company's technology has global potential.
According to IPC data, approximately 70% of the 1997 world laminate market is
outside of North America. The Company plans to export its products and form
strategic alliances to manufacture and market its laminates internationally.
The foregoing strategic objectives represent anticipated accomplishments
dependent on future events. As in the case of all forward looking statements,
the Company can not ensure that it will achieve these goals.
Marketing and Customers
The Company's marketing efforts are directed to establishing good working
relations with leading-edge producers of printed circuit boards. According to
the IPC, in 1997 there were over 670 manufacturers of printed circuit boards in
North America with nine companies comprising approximately one-third of the
market. The Company has sold its laminates principally on a test basis to a
select group of these companies considered to be the key companies for
Compositech's growth. During the past three years, Compositech has encouraged
benchmark comparisons of its laminates with current laminates which have
included qualities such as dimensional stability, smoothness, flatness and
thermal processing. In virtually all of these evaluations, CL200+ has proven
superior to current laminates. Customers benefit from increased production yield
primarily by reducing waste caused by circuitry misalignment. These results have
led several manufacturers to begin to use CL200+ for current production
applications in limited quantities. Recently, sales have been affected by delays
in or cancellation of customers' programs for which Compositech's laminates had
been qualified or were in the process of being qualified and from delays in
testing and qualification programs from major customers.
During 1998, the Company received orders from Teradyne, Inc. for its CL200+
copper-clad laminates. The orders will enable Teradyne to do extensive material
testing and product evaluation in backplane programs that will include circuit
boards with as many as 48 circuit layers. The CL200+ laminates will be used for
expanded production testing and customer qualification of complex backplanes. A
backplane, sometimes known as a motherboard or backpanel, is a type of printed
circuit board which
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serves as the backbone of large electronic equipment, such as internet servers
and telecommunication switching equipment and often utilizes 20-, 30- and even
60-layer boards to which smaller printed circuit boards are connected.
Compositech's laminates are designed to be and have proven to be directly
substitutable for conventional laminates in the circuit board production process
as demonstrated by their use in production by customers. This compatibility
enables the circuit board manufacturer to substitute Compositech's laminates
with minimal process changes and without the need for additional equipment or
new process technology.
The Company markets to circuit board manufacturers in the United States and
Canada with its own direct sales force supplemented by independent sales
representatives. The Company's own sales force currently consists of its
President, its Vice President of Sales, its Technical Director and a marketing
associate. The Company plans to add to its sales force and use additional
independent sales representatives to expand sales.
The Company does not intend that its future business will be dependent upon
a single customer. In view of current production capacity the Company currently
is focusing its efforts on a growing number of select accounts. However, in
1998, Teradyne, Inc. and HADCO Corporation represented 48% and 37% respectively,
of the Company's net sales. The printed circuit board industry generally follows
a "just-in-time" strategy by purchasing laminates only as they are required for
production runs. Accordingly, the Company currently does not have a significant
backlog of sales commitments. The Company expects the backlog to increase in
relation to its planned sales expansion, including long term supply agreements
and warehouse stock points, located near customer locations, enabling
just-in-time delivery.
Competition
The laminate business is highly competitive. The Company has many
competitors of varying sizes and financial resources located in the United
States, Western Europe and Asia. Competition in the laminate market is based
upon factors such as product quality, performance, technological capability,
responsiveness to customers, delivery, service and price. The Company believes
there are more than 40 competitors worldwide, with more than ten in the United
States. The Company believes that its major domestic and international
competitors are ADI/Isola, AlliedSignal Laminate Systems (a subsidiary of
AlliedSignal, Inc.), Arlon Inc., General Electric Company, Hitachi Chemical Co.
Inc., Matsushita Electric Industrial Co., Nan Ya Plastics Corp., Nelco
International Corp. (a subsidiary of Park Electrochemical Corp.), Polyclad
Laminates, Inc. (a subsidiary of Cookson Group), Sumitomo Bakelite Co. Ltd., and
Toshiba Chemical Corp. The Company's competitors consist of companies that are
usually divisions or subsidiaries of some of the world's leading electronics and
manufacturing concerns and have significantly greater financial resources than
the Company.
The Company believes its patented and proprietary technology will enable it
to become an effective competitor by offering customers products with a higher
value. The unique physical characteristics of the Company's products should, in
the Company's opinion, allow it to penetrate the market and increase sales.
However, there is no assurance that the Company's products will prove to be
economically competitive or that the Company will continue to develop
technologically competitive products in the future.
Manufacturing
The Company occupies a leased building at 120 Ricefield Lane, Hauppauge,
New York, which includes its corporate offices, laboratory, machine shop,
engineering offices and manufacturing operations. The building is large enough
to allow the Company's production line to be expanded to meet near-term needs.
The technologically advanced products manufactured by the Company require clean
environments to ensure high yields. Clean rooms are utilized by the Company in
certain areas of the production line to
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control contamination from small particles.
Compositech's manufacturing process is unique and patented. The
manufacturing equipment has been designed by the Company's engineering staff.
Much of the equipment incorporates proprietary designs including hardware and
software. Management believes that the Company's manufacturing process
eliminates many manufacturing steps compared to the conventional manufacturing
process, including weaving fiberglass cloth.
The Company's manufacturing process enables the Company to control the
consistency of mechanical, thermal and electrical properties of laminates in
various thicknesses. In addition, the Company's process eliminates the use of
solvents as an integral part of the manufacturing process although it uses small
amounts of solvents for the sole purpose of cleaning some of its equipment.
Compositech's CL200+ laminate is comprised of copper, fiberglass and epoxy.
Other combinations of materials usable in this process include aramid fibers,
quartz fibers, carbon fibers, cyanate ester resins, polyimide resins and other
conductive metal foils.
The expansion of the Company's production facilities in 1997 and 1998
increased its annual capacity significantly. This expansion is the first
production-scale expansion undertaken by the Company, and consequently no
assurances can be made that the Company's production facilities will meet the
Company's production targets in a timely way or that the resultant product will
meet the high commercial standard needed for successful market penetration.
Furthermore, the expanded production facilities may not be able to provide
adequate efficiency and yield.
Materials and Sources of Supplies
The principal materials used in the manufacture of the Company's laminates
are copper foil, fiberglass yarn and specially formulated resins and chemicals.
The Company's policy is to identify and concentrate on a limited number of
chosen suppliers. The Company's major suppliers are Circuit Foil USA, Inc. for
copper foil; Advanced Glassfiber Yarns LLC (successor to Owens Corning) for
fiberglass yarn; John C. Dolph Company and Eastech Chemicals for resins; and
Lonza Inc. for certain chemicals. The Company attempts to develop and maintain
close working relationships with those chosen suppliers who comply with the
Company's stringent technical requirements and specifications. The Company has
identified alternative sources of supply for each of the required materials.
However, there exists a limited number of qualified suppliers of these
materials, and although the Company considers its relationships with its
suppliers to be satisfactory, a disruption of the supply of material from one or
more of the Company's principal suppliers could adversely affect its business.
Substitutes for some of these materials are not readily available, and an
inability to obtain essential materials, if prolonged, could materially
adversely affect the business of the Company.
In 1997, the Company encountered high levels of defects in incoming copper
foil. Although the Company is not experiencing high levels of defects currently,
no assurance can be made that it can obtain adequate quality supplies necessary
for its planned expansion.
Patents and Proprietary Information
The Company continues to build a patent estate to protect its technology.
To date, 29 patents have been granted in the United States and internationally.
The U.S. patents granted expire from 2007 to 2011. The foreign patents generally
have expiration dates from 2004 to 2009. Five patent applications in the U.S.
and internationally are currently pending. These patents and applications cover
the unique laminate product and the process and equipment used for producing the
laminates. The patents also cover a precision multilayer process and a circuit
transfer process. Additional inventions have been disclosed to the Company's
patent attorneys and may be the subject of future patent applications.
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In addition, the Company has developed extensive proprietary information
considered to be of substantial value. The Company has no patents for this
proprietary information. The Company believes that, although such information,
techniques and expertise are subject to misappropriation or obsolescence,
development of improved methods, processes and techniques by the Company will
continue on an ongoing basis.
The Company expended approximately $283,000 and $77,000 for research and
development during the years ended December 31, 1998 and 1997, respectively,
reflecting the Company's development efforts on new processes to manufacture its
patented laminates.
Environmental Matters
Unlike other laminate manufacturing operations, Compositech does not use
solvents as an integral part of its manufacturing process. However, the Company
uses copper and chemicals in its manufacturing process and limited amounts of
solvents for the sole purpose of cleaning some of its equipment and is subject
to a variety of applicable environmental laws. The Company believes that its
facilities comply in all material respects with applicable federal, state and
local environmental laws and believes that costs arising from compliance with
existing environmental laws will not have a material adverse effect on the
Company's operations. However, environmental laws could become more stringent
over time, imposing greater compliance costs and increasing risks and penalties
associated with a violation.
Employees
The Company has 80 full-time employees. None of the employees is subject to
collective bargaining agreements. Management considers its labor relations to be
satisfactory and believes that there is an adequate pool of labor available to
satisfy foreseeable hiring needs.
Important Factors Regarding Future Results
Information provided by the Company, including information contained in
this Annual Report, or by its spokespersons from time to time may contain
forward-looking statements concerning projected financial performance, market
and industry segment growth, product development and commercialization or other
aspects of future operations. Such statements, made pursuant to the safe harbor
established by recent securities legislation, are based on the assumptions and
expectations of the Company's management at the time such statements are made.
The Company cautions investors that its performance (and, therefore, any
forward-looking statement) is subject to risks and uncertainties. Various
important factors, including but not limited to the following, may cause the
Company's future results to differ materially from those projected in any
forward-looking statement.
Development Stage Company Until December 31, 1996; Ability to Continue as Going
Concern; Uncertainty of Future Financial Results
The Company was a development stage company through December 31, 1996 and
has had limited revenues from the sale of laminates, has incurred significant
losses and has had substantial negative cash flow since its inception. As of
December 31, 1998, the Company had an accumulated deficit of $33,954,155. The
Company's independent auditors have included an explanatory paragraph in their
report covering the December 31, 1998 financial statements, which expresses
substantial doubt about the Company's ability to continue as a going concern.
The Company will require additional funding to cover operating expenses and
expenditures for additional equipment until revenues from operations are
sufficient for these purposes. The Company expects that significant operating
losses will continue for a substantial part of 1999. No assurance can be given
that the Company will successfully complete expansion and
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enhancement of its production equipment, achieve broad commercial acceptance of
its product or generate sufficient revenues to achieve profitable operations.
Need for Additional Financing
The Company's available funds, without giving effect to alternative sources
of revenue, are not sufficient to raise the Company's production level to
profitability or provide sufficient working capital for expansion of sales. The
Company will need additional funding for operations in 1999 and additional
funding is being sought. Such additional funding may be raised through sources
including:
o license fees;
o sales of equipment in connection with licensing operations;
o joint ventures or other collaborative relationships; or
o equity or debt financing.
No assurance can be given that additional funding will be sufficient and
available or, if it is available, that it will be available on acceptable terms.
If additional funds are raised through the issuance of equity securities or
securities convertible into equity securities, the percentage ownership of then
current stockholders of the Company will be reduced and such securities may have
rights, preferences or privileges senior to those of the holders of Common
Stock.
If adequate funds are not available to satisfy either short-term or
long-term capital requirements, the Company may be required to limit its
operations significantly.
Liens on Assets and Patents
The Company's patents and certain other assets are subject to liens
securing outstanding debt of the Company as follows:
o Notes payable to stockholders in the amount of $100,000 and notes payable
to stockholders/directors/officers in the amount of $675,000 due January 2,
2000 (as extended) are collateralized by a second lien on U.S. Patents and
Patent Applications.
o Notes payable to stockholders/directors/officers in the amount of $745,000
due January 2, 2000 (as extended) are collateralized by a first lien on the
Company's patents, patent applications and certain production equipment.
o A term note of $500,000 obtained in March 1999 is collateralized by two
pieces of production equipment.
If there is a default under the notes, the Company could lose all or most
of its patents and certain production equipment. The potential loss of these
assets could force the Company to negotiate new and disadvantageous terms to
extend such notes.
Competition
The laminate manufacturing business is highly competitive. The Company's
competitors include major corporations, such as General Electric Company and
AlliedSignal Inc., which have substantial financial, marketing and technical
resources. In 1994, the Company granted patent immunity on its product patents
to AMP and Akzo Electronics Products NV, which, at the time, were operating a
joint venture which was developing a new process to make linear laminates. The
Company may need to raise substantial additional resources to compete
effectively. There is no assurance that the Company will be able to compete
successfully in the future.
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Management of Growth
The Company intends to expand significantly its overall level of
operations. Any such expansion, however, is expected to strain the Company's
management, technical, financial and other resources. To manage growth
effectively, the Company must:
o add manufacturing capacity;
o add personnel;
o maintain a high level of quality;
o achieve good manufacturing efficiency; and
o expand, train and manage its employee base.
The Company's failure to add capacity and manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Reliance Upon Key Personnel
The Company believes that its success will depend to a significant extent
upon the efforts of its executive officers and senior management as well as its
ability to attract and retain highly qualified managerial, technical and sales
personnel. The Company maintains and is the beneficiary of $2 million key person
life insurance policies on each of Jonas Medney, its Chairman, and Fred E.
Klimpl, its Vice Chairman. The loss or unavailability of its executive officers
or other senior management or the inability to attract, assimilate or retain
such personnel in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Single Manufacturing Facility
The Company's current laminate manufacturing operations are centralized in
one building in Hauppauge, New York, although the joint venture in Montreal
plans to build an additional larger plant in Montreal and the joint venture in
Taiwan plans to build a third plant. See Item 1. "Description of Business -
Joint Ventures". Because currently the Company does not operate multiple
facilities in different geographic areas, the ability to service large orders
may be affected. Further, a disruption of the Company's manufacturing operations
resulting from sustained process abnormalities, human error, government
intervention or a natural disaster such as fire, earthquake or flood could cause
the Company to cease or limit its manufacturing operations and consequently have
a material adverse effect on the Company's business, financial condition and
results of operations.
Uncertainty of Production Quality and Production Costs; Process Disruption
The Company has limited experience in producing laminates on its
production-scale modules. The Company recently added production modules to
increase production levels and achieve economies of scale. This expansion is the
first production-scale expansion undertaken by the Company, and consequently no
assurances can be made that the Company's production facilities will meet the
Company's production targets in a timely way or that the resultant product will
meet the high commercial standard needed for successful market penetration.
Furthermore, the expanded production facilities may not be able to provide
adequate efficiencies or produce high yields. In addition, the costs of
production may not be as low as management expects, in which case the Company
may not achieve profitable operations. The Company's business involves highly
complex manufacturing processes which are subject to disruption. Process
disruptions have occurred, resulting in delays in product shipments.
Process disruptions were due to:
o machine breakdowns;
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o lack of adequate interior atmospheric control of temperature and humidity;
o electric utility power failures;
o problems of breaking in an expanded workforce;
o contamination principally generated during installation of equipment and
development of processes;
o defective incoming copper foil.
No assurance can be given that disruptions will not occur in the future.
The loss of revenue and earnings to the Company from such a disruption could
have a materially adverse effect on its results of operations.
Dependence on Significant Customers
Due to current productive capacity, the Company has been focusing its
efforts on a growing number of select accounts. However, during 1998, Teradyne,
Inc. and HADCO Corporation accounted for 48% and 37%, respectively, of sales.
Loss of these customers could have a material adverse effect on the Company's
business.
Technological Change
The Company's laminates are used in the electronic printed circuit board
industry which could encounter competition from new technologies in the future
and reduce the number of circuit boards required in electronic equipment or
render existing interconnect technology less competitive or obsolete.
Availability of Materials; Price Fluctuations of Raw Materials; Dependence Upon
Third-Party Supplier
Raw materials used by the Company to produce laminates are purchased by the
Company and in certain circumstances the Company bears the risk of price
fluctuations. In addition, shortages of and defects in certain types of
materials have occurred in the past and may occur in the future. During 1997 the
Company experienced defects in incoming copper foil used to make laminates. The
Company has obtained an alternate source of supply and also has explored
solutions with the previous supplier. Future shortages, defects or price
fluctuations in raw materials could have a material adverse effect on the
Company's business, financial condition and results of operations. Advanced
Glassfiber Yarns LLC, a major fiberglass manufacturer, has developed and
continues to develop products to meet the Company's processing and product
requirements. Should this manufacturer not continue supplying the Company's
quality and quantity needs, the Company would have to secure another supplier.
Such event could have a material adverse effect on the Company's ability to
supply customers and could reduce expected sales and increase the costs of
manufacture. No assurances can be given that an alternative supplier could meet
the Company's quality and quantity needs on satisfactory terms.
Patents and Intellectual Property Protection
The Company believes that its patent estate and its know-how are important
for the protection of its technology. The Company can give no assurance that any
patents issued to the Company will not be challenged, invalidated or
circumvented or that such patents will provide substantial protection with
respect to the Company's product, process or competitive position. In addition,
certain proprietary information which is considered to be of substantial value
is not covered by patents and, along with the Company's other intellectual
property, is subject to misappropriation or obsolescence. In addition, the
Company granted certain immunities on its product patents to AMP and Akzo
Electronics Products NV which are potential competitors of the Company,. The
Company, under a license, granted HT Troplast AG ("HT"), a significant
stockholder of the Company, the exclusive right to produce and market
Compositech's laminates in Europe, the countries of the former Soviet Union and
Turkey. Although HT exited the laminate business, the license
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remains in effect. Pursuant to the agreement, the Company is obligated to sell
only through HT in such territories.
Environmental Compliance
The Company uses copper and chemicals in its manufacturing process and
limited amounts of solvents for the sole purpose of cleaning its equipment.
Although the Company believes that its facility complies in all material
respects with existing environmental laws and regulations, No assurance can be
given that violations will not occur. In the event of any future violations of
environmental law and regulations, the Company could be held liable for damages
and for the cost of remedial actions. In addition, environmental laws could
become more stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with a violation.
Control by Existing Stockholders
As at December 31, 1998, officers, directors and certain other significant
stockholders of the Company owned approximately 51% of the Company's Common
Stock and voting preferred stock, including stock options and warrants
exercisable within 60 days. It is expected that these stockholders will continue
to control the management and policies of the Company, including, without
limitation, the power to elect and remove a majority of directors of the Company
and the power to approve any action requiring common stockholder approval. In
addition, some of these officers, directors and other stockholders, in
connection with certain outstanding loans, have a security interest in the
Company's manufacturing equipment and all of the Company's patents and patent
applications or in the Company's U.S. patents and patent applications.
Quotation of the Common Stock on The Nasdaq SmallCap MarketSM; Possible Loss of
Quotation of the Common Stock
The Common Stock is quoted on The Nasdaq SmallCap MarketSM. The Company can
give no assurance that the Company will continue to meet the maintenance
criteria for continued listing of the Common Stock on The Nasdaq SmallCap
MarketSM. The minimum listing requirements for The Nasdaq SmallCap MarketSM
include, among other criteria:
o net tangible assets of at least $2.0 million, or market capitalization of
$35 million, or net income of $500,000 (in the latest fiscal year or two of
the last three fiscal years);
o a minimum bid price per share of $1.00;
o a market value of the public float of $1.0 million;
o 300 round lot shareholders; and
o two market makers.
Furthermore, The Nasdaq SmallCap MarketSM listing and maintenance criteria
may become more stringent over time and thus more difficult for the Company to
meet. Failure to meet the maintenance criteria may result in the discontinuance
of the inclusion of the Common Stock in The Nasdaq SmallCap MarketSM. In such
event, trading, if any, in the Common Stock may continue to be conducted in
non-Nasdaq over-the-counter markets and investors may find it more difficult to
dispose of, or to obtain accurate quotations as to the price of, the Common
Stock. The Common Stock would then be subject to the risk that it could become
characterized as low-priced or "penny stock," which characterization could
severely affect the ability of stockholders to sell their Common Stock.
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Penny Stock Regulation
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that current price
and volume information with respect to transactions in such securities is
provided by the exchange or system). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules generally require that prior to a transaction in a penny
stock the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that becomes subject to the penny stock rules. If the Common Stock becomes
subject to the penny stock rules, investors may find it more difficult to sell
their Common Stock.
Certain Restrictive Charter and Bylaw Provisions
The Company's Certificate of Incorporation and Bylaws allow the Board of
Directors, without approval of the stockholders, to issue shares of preferred
stock and to fix the rights and preferences of the preferred stock. The Board of
Directors can also prohibit stockholders of the Company from calling a special
meeting unless requested by at least a majority of the outstanding voting
shares. The certificate does not provide for cumulative voting for election of
directors. In addition, the Bylaws of the Company provide that while the removal
of a director or the entire board of directors, with or without cause, may be
accomplished by the holders of the majority of shares entitled to vote, any
director designated by HT, may only so be removed for cause. These provisions
could have the effect of deterring unsolicited takeovers or other business
combinations or delaying or preventing changes in control or management of the
Company. This may prevent transactions in which stockholders might otherwise
receive a premium for the securities over then-current market prices. In
addition, these provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests.
Item 2. Description of Property
The Company occupies approximately 33,000 square feet of leased office
space and manufacturing facilities in Hauppauge, New York. The lease for such
space has a five-year term expiring August 31, 2000, with a renewal option for
an additional five years.
Item 3. Legal Proceedings
No legal proceedings are currently pending against the Company.
Item 4. Submission of Matters to a Vote Of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year.
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Item 4A. Directors, Executive Officers, Promoters and Control Persons
The following table lists the Company's current directors and executive
officers.
Name Age Position(s) With the Company
---- --- ----------------------------
Jonas Medney 70 Director, Chairman
Fred E. Klimpl 64 Director, Vice-Chairman
Christopher F. Johnson 55 Director, President and Chief
Executive Officer
Samuel S. Gross 72 Director, Executive Vice President,
Secretary, Treasurer and Chief
Financial Officer
Willard T. Jackson(1)(2) 71 Director
Pierre Laflamme 52 Director
Robert W. Middleton (2) 60 Director
Heinz-Gerd Reinkemeyer (1) 61 Director
James W. Taylor (1) (2) 80 Director
- ----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The following table lists other management personnel:
Name Age Position(s) With the Company
---- --- ----------------------------
Richard E. DePoto 41 Vice President, Manufacturing
Operations
Richard Lucier 65 Vice President, Sales
Ralph W. Segalowitz 40 Vice President, Engineering
Kenneth J. Thompson 41 Controller
Lucille Mavrokefalos 46 Director of Administration and
Assistant Secretary
Management and Directors
Jonas Medney, Director and Chairman, has over 40 years of experience in the
composites industry and has more than 50 patents. Mr. Medney has been a director
and Chairman of the Company since its inception in 1984. He co-founded Lamtex
Industries, a public company which was a pioneer in filament-wound composites,
which was acquired by Koppers Company in 1963. He co-founded Fiberglass
Resources Corporation, a manufacturer of filament wound epoxy pipes and
conduits, with Mr. Klimpl. This company was acquired by Koch Industries in 1983.
Mr. Medney is a graduate of the Massachusetts Institute of Technology (B.S.
Mechanical Engineering).
Fred E. Klimpl, Director and Vice-Chairman, has over 35 years of experience
in the composites industry and has over 25 patents. Mr. Klimpl has been a
director of the Company since its inception in 1984. He was co-inventor and a
key manager in the development and marketing of the fiberglass underground
gasoline tank program for Owens-Corning Fiberglas Corp. He was subsequently
responsible for the start-up and marketing of a fiberglass pipe business for
Ciba-Geigy Corporation. Mr. Klimpl is a graduate of Lowell University (B.S.
Textile Engineering) and Stevens Institute of Technology (M.S. Industrial
Management).
Christopher F. Johnson, Director, President and Chief Executive Officer,
joined Compositech Ltd. in June of 1998 as president and CEO following a career
spanning thirty years with suppliers of specialty materials for printed circuit
fabrication. Prior to joining Compositech, he was a vice president and general
manager for Dexter Electronic Materials, a division of Dexter Corporation where
he was employed from 1993 to 1998. Before that, he held worldwide business
management positions with Hercules
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Incorporated and sales and marketing positions with DuPont. Mr. Johnson has been
active in The Institute for Interconnecting and Packaging Electronic Circuits
(IPC) serving on the Suppliers Council Steering Committee and a participant in
the Technical/Marketing Research Council (TMRC) of the IPC. Mr. Johnson is a
graduate of Purdue University with a BS in Industrial Education. He also
completed intensive senior management programs at Northwestern University's
Kellogg School of Business and the University of Virginia's Darden School of
Business.
Samuel S. Gross, Director, Executive Vice President, Secretary, Treasurer
and Chief Financial Officer, is a certified public accountant and has been
Executive Vice President and Treasurer of the Company since 1990. He had been a
consultant to the Company and a director since 1987. He was previously a partner
at Ernst & Young LLP where he was responsible for the Fiberglass Resources
Corporation account. Mr. Gross was affiliated with Ernst & Young LLP and its
predecessors for 39 years. He is a director of the National Mental Health
Association, Honorary Director and former Chairman of the Board of Directors of
the Mental Health Association in New York State, Inc., and a director and former
president of Long Island Transportation Management, Inc. Mr. Gross is a graduate
of City College of New York (B.B.A.).
Richard E. DePoto, Vice President, Manufacturing Operations, has been with
the Company since 1997. From 1981 to 1997 he was with AMP Circuits and its
predecessor companies at its Riverhead printed circuit board manufacturing
plant. He held various engineering positions and most recently Director of
Manufacturing and Manufacturing Engineering. He is a graduate of the State
University of New York at Stony Brook (B.S. Engineering/Chemistry).
Richard Lucier, Vice President, Sales, has been with the Company since
1992. He was Corporate Accounts Manager with Polyclad Laminates, Inc. (Cookson
Group) from 1989 to 1992 and Senior Vice President with Fortin-Westinghouse from
1980 to 1989. Prior to that time, he was employed at Honeywell, Raytheon and
GTE. He is a graduate of Northeastern University (B.S. Mechanical Engineering).
Ralph W. Segalowitz, Vice President, Engineering, has been with the Company
since 1990. From 1985 to 1990, he was with Robotic Vision Systems Inc., where
his final position was as a project manager responsible for automated
manufacturing systems. From 1981 to 1985, he was a product engineer with
Databit, Inc., a manufacturer of data transmission equipment. He is a graduate
of the State University of New York at Stony Brook (B.S. Mechanical Engineering
and M.S. in Industrial Management).
Kenneth J. Thompson, Controller, has been with the Company since 1996. From
1995 to 1996 he was Controller of Cameron Engineering, P.C. From 1991 to 1995 he
was with Loveshaw Corporation, most recently as Vice President, Finance. He is a
graduate of Adelphi University (B.B.A. Accounting).
Lucille Mavrokefalos, Director of Administration and Assistant Secretary
has been with the Company in various positions since 1988.
Board of Directors. The Board of Directors consists of Messrs. Medney,
Klimpl, Johnson and Gross and five outside directors: Willard T. Jackson, Pierre
Laflamme, Robert W. Middleton, Heinz-Gerd Reinkemeyer and James W. Taylor.
Willard T. Jackson, private investor, retired in 1988 as a partner of
Brundage, Story and Rose, a New York investment counseling firm in which he
became a partner in 1969. He has been a director since January 1988. Mr. Jackson
is a graduate of Middlebury College (A.B.) and Columbia University (M.B.A.). He
is a trustee emeritus of Middlebury College.
Pierre Laflamme was elected a director in October 1997. He has been Vice
President Development, High Technology at Societe generale de financement du
Quebec since May 1997. From 1985
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to May 1997, he was with the Solidarity Fund in Montreal, Canada, most recently
as Senior Vice President, Economic Development and Strategic Investments. From
1994 to 1996, he was on loan as Deputy Minister at Executive Council of the
Province of Quebec. He is a graduate of the Universite de Sherbrooke (B.A.) and
the Universite de Montreal (B.A. Architecture). Mr. Laflamme is the designee of
the Quebec Investors to the Board pursuant to terms of agreements in connection
with the joint venture in the greater Montreal area.
Robert W. Middleton was elected as a director in March 1996 and has acted
as an investment banker to the Company in its prior financings and with respect
to the Company's initial public offering. He has been Chairman of The Middleton
Group, LLC, a firm of investment bankers associated with Gemini Financial
Corporation, since October 1998. He was Managing Director-Corporate Finance of
Trautman & Company, Inc., an investment banking firm, from 1993 to October 1998.
From 1985 to October 1993, Mr. Middleton was, successively, Director of
Corporate Finance of Barclay Investments, Inc., and a Vice President at C.L.
King & Associates, Inc. Prior to that time, he was associated with Fahnestock &
Company from 1983 to 1985 and was a general partner from 1984-1985. From 1974 to
1983, Mr. Middleton held various positions with Burgess & Leith, Inc., including
Senior Vice President and Director, while serving as Manager of the New York
office. He attended Princeton University. Mr. Middleton is the designee of
Trautman & Company, Inc. to the Board pursuant to the terms of a financing
agreement.
Heinz-Gerd Reinkemeyer has been a director since 1990. He had been Director
of the Industrial Plastics Division of HT, a German manufacturer and subsidiary
of the Rutgers Group, which is an affiliate of the Veba Group. Currently, he is
a consultant for the Rutgers Group. Mr. Reinkemeyer has a degree in mechanical
engineering and from 1961 he had been with Dynamit Nobel, a manufacturer of
laminates, until it was acquired by HT in 1988. Mr. Reinkemeyer is the designee
of HT to the Board.
James W. Taylor has been a director since 1987. He is Chairman of the Board
of Reuter Manufacturing Inc., where he was President from 1992 to 1998. He is a
certified management consultant. He was a director from 1967 to 1973 and
President from 1970 to 1973 of the international management consulting firm,
Booz Allen & Hamilton. Mr. Taylor was President and a director of Bradford Trust
from 1973 to 1975. He has served as a director of Insilco Corporation, Times
Fiber Communications, Inc., The Enterprise Companies, Techalloy, Inc., Amphenol
Inc. and Knogo Corporation. He is a life trustee of Carnegie Mellon University.
He was a trustee of Beaver College and was a vice president and director of the
Association of Consulting Management Engineers and of the Institute of
Management Consultants. He holds a B.S. from Carnegie Mellon University.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock and Redeemable Warrants are traded on the Nasdaq
SmallCapSM Market under the symbols "CTEK" and "CTEKW", respectively.
The following sets forth the range of the high and low bid prices for the
Common Stock, as reported on the Nasdaq SmallCap Market :
1997
----
High Low
---- ---
First quarter 6 3/8 4 2/3
Second quarter 5 3/8 4 1/4
Third quarter 7 4 3/8
Fourth quarter 4 1/2 1 1/2
1998
----
High Low
---- ---
First quarter 2 19/32 1 3/8
Second quarter 2 5/8 1 5/8
Third quarter 1 7/8 1
Fourth quarter 1 3/4 1
There were approximately 191 holders of record of shares of Common Stock as
of March 22, 1999.
The Company has never paid cash dividends on its Common Stock. The Company
does not intend to pay cash dividends on its Common Stock in the foreseeable
future.
The following presents information concerning securities issuances of the
Company during the last fiscal year not previously reported by the Company in a
quarterly report on Form 10-QSB. See also Notes 4, 5, 6, 7, 8 and 15 to the
Financial Statements. The sales of all such securities were exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof, as transactions not involving a public offering.
In April 1998, the Company issued a warrant, to purchase 75,000 shares of
Common Stock at $2.6125 per share until April 23, 2003, to Trautman & Company,
Inc. (the "Placement Agent") as compensation in connection with the final
conversion of the Company's Debentures.
Effective May 29, 1998, the Company issued a warrant, to purchase 125,000
shares of its Common Stock at $2.50 per share until May 29, 2003, to the
Placement Agent, as consideration in connection with the Company's offering of
Series B Stock. In October 1998, this warrant was exercised with notes for
$312,500 due in December 1999, and the Company issued the Placement Agent
125,000 shares of Common Stock.
In November and December 1998, the Company sold 313,066 shares of its
Common Stock, and warrants to purchase 78,267 shares of Common Stock at $1.125
per share, exercisable until February 15,2001, to certain accredited investors
in a private placement, realizing $297,525, net of expenses. In the private
placement, the Company also sold 166,667 shares of its Common Stock, realizing
$138,000 net of expenses and issued a stock purchase option to purchase 600,000
shares of the Company's Common Stock for $0.90 per share (the "Option"), in a
negotiated transaction with an accredited investor. In connection
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<PAGE>
with the private placement, the Placement Agent received warrants to purchase
239,867 shares of the Company's Common Stock for $1.125 per share until February
15,2001. In March 1999, the Option was exercised and the Company issued 600,000
shares of its Common Stock for aggregate proceeds of $540,000.
In December 1998, the Company issued 39,678 shares of its Common Stock to
each of the Placement Agent and a consultant for advisory services rendered in
connection with a credit facility with Credit Bancorp.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company was founded in 1984 to develop copper-clad fiberglass epoxy
laminates used to manufacture printed circuit boards required by the electronics
industry. The Company has developed and is moving to commercialize its unique
nonwoven copper-clad fiberglass reinforced epoxy laminates. As part of its
development program, the Company patented the laminate, the process used to
manufacture the laminate and the equipment to produce the laminates. The first
prototype equipment was designed and assembled to produce 24" x 24" laminates.
In 1995, initial production scale prototype equipment to produce 36" x 48"
laminates was completed. In 1997, the Company completed the installation of
advanced 36" x 48" production equipment purchased with the proceeds of the
Company's Initial Public Offering in July 1996. In 1998 and continuing into
1999, the Company completed the installation of a second phase of 36" x 48"
production equipment purchased with the proceeds of the Debentures and the
Series B Stock.
During 1997 and 1998, the Company produced and sold its laminates in
limited quantities through a highly focused sales effort to gain production
experience and product performance data. However, this highly focused sales
effort left the Company vulnerable to order volatility. Throughout 1997 and
1998, the Company worked on adjusting and enhancing its production equipment and
its manufacturing processes. Production ramp up issues, coupled with order
volatility, led to a much slower than expected expansion in production capacity.
The Company continues to work on and is making progress on solving issues with
incoming raw materials and contamination which affect finished goods' yields and
production efficiencies.
In June 1998, the Company elected Christopher F. Johnson as president and
chief executive officer. The Company has significantly increased its sales
activities through the use of sales representatives and delivered sample
quantities to 48 qualified new customer opportunities in the second half of
1998. The Company's sales focus is on the high layer count, high density,
multilayer and backplane market segments. The Company's internal focus, which
had been on technology development in the past, has been reoriented to customer
satisfaction as the Company ramps up production capabilities to meet anticipated
customer demand. A major initiative to reach a long term supply agreement with a
significant printed wiring board fabricator is in progress and additional supply
agreements are being pursued. The Company is also pursuing discussions with
potential industrial partners to accelerate the commercialization of the
Company's products worldwide.
The production-scale expansion described above is the first undertaken by
the Company, and consequently no assurances can be made that the Company's
production facilities will meet the Company's production targets in a timely way
or that the resultant product will meet the high commercial standard needed for
successful market penetration. Furthermore, the expanded production facilities
may not be able to provide adequate efficiencies and produce high yields. In
addition, the costs of production may not be as low as management expects, in
which case the Company may not achieve profitable operations. The Company's
business involves highly complex manufacturing processes which are subject
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<PAGE>
to disruption. No assurance can be given that disruptions will not occur in the
future. The loss of revenue and earnings to the Company from such a disruption
could have a materially adverse effect on its results of operations.
In October 1997, the Company entered into a 50/50 joint venture with Quebec
Investors for the establishment of a plant in the greater Montreal area to
manufacture Compositech's laminates. The plant is planned to start production in
2000. See "Item 1 Joint Ventures". The Company's investment in the joint venture
was funded by the Quebec Investors purchasing 1,066,192 shares of the Company's
Common Stock.
In February 1998, the Company entered into joint venture and license
agreements with a Taiwanese investor group to manufacture Compositech's
laminates in Taiwan. See "Item 1 - Joint Ventures". The Company would have an
approximate 10% interest in the joint venture and receive license fees and
royalties. The plant is planned to start production in 2000.
Results of Operations - Years Ended December 31, 1998 and 1997
Sales of laminates decreased to $350,112 in 1998 from $507,403 in 1997. The
decrease resulted from the continued delay in or cancellation of customers'
programs for which Compositech's laminates were qualified or were in the process
of being qualified and from delays in testing and qualification programs from
potential major customers.
Licensing income for 1998, relating to the Taiwanese joint venture, totaled
$64,284, net of expenses. There was no licensing income in 1997.
Research and development expenses increased to $282,756 in 1998 from
$76,720 in 1997, reflecting the Company's development efforts on new processes.
Manufacturing expenses decreased to $4,248,421 for 1998 from $4,953,123 in 1997,
reflecting the reduced level of unit direct manufacturing costs as compared to
the same period last year, partially offset by higher levels of expenditures
related to process adjustments and enhancements and the costs of upgrading the
supervisory workforce.
Selling, general and administrative expenses decreased to $1,254,739 in
1998 from $1,519,763 in 1997. Decreases in legal and professional fees and
patent/trademark expenses were partially offset by increased advertising and
promotion expenses and costs incurred in relation to the recruitment of the
Company's new president and chief executive officer during the second quarter of
1998. During 1998 and 1997, approximately $389,000 and $107,000, respectively,
of selling, general and administrative expenses were charged to the Company's
Canadian joint venture, in accordance with the joint venture agreements,
pursuant to which the Company and its joint venture partners are planning to
establish a plant in the greater Montreal area to manufacture the Company's
laminates.
Interest income decreased to $49,335 in 1998 from $96,201 in 1997,
reflecting the decrease in the average monthly balances of the Company's cash
balances. Interest expense (net of interest capitalized) decreased to $131,693
in 1998 from $229,385 in 1997. The decrease is due to reductions in the prime
interest rate, which is the basis for some of the Company's long term loans
payable, as well as the conversion of the balance of the Debentures, which were
issued in May 1997, but not fully converted until April of 1998. Amortization of
debt discount and expenses decreased to $497,603 for 1998 from $1,326,218 in
1997, reflecting the amortization of costs associated with the Debentures,
including accelerated amortization as a result of debenture conversions that
concluded during the second quarter of 1998. Other income increased to $112,415
in 1998 from $5,147 in 1997. The increases reflect the receipt of refunds
related to property taxes and sales taxes applicable to prior periods as well as
adjustments of prior period professional fees.
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The equity in the operations of the Canadian joint venture increased to
$36,831 in 1998 from ($63,722) in 1997, representing the Company's 50% share of
the net profit (loss) of the joint venture which was formed in October 1997. The
profit resulted from interest income recorded by the joint venture on its short
term cash investments in excess of administrative and marketing costs incurred.
The foregoing resulted in the Company having a net loss of $5,810,595 in
1998 as compared with a net loss of $7,569,793 in 1997. The decreased loss was
primarily attributable to the decreased level of direct manufacturing costs, the
reduction in selling and general and administrative expenses and the reduction
in the amortization of debt discount and expenses relative to the Debentures, a
non-cash item.
Liquidity and Capital Resources
Prior to its initial public offering in 1996, the Company had financed its
operations through private placements of debt and equity securities and from
income from a patent immunity agreement. Some of this financing had come from
officers and directors of the Company. The Company has incurred significant
losses and has substantial negative cash flow since its inception. The Company's
independent auditors have included an explanatory paragraph in their report
covering the December 31, 1998 financial statements, which expresses substantial
doubt about the Company's ability to continue as a going concern. The Company
expects significant operating losses to continue in 1999. As of December 31,
1998, the Company had approximately $102,000 of available cash and cash
equivalents. During January through March 1999, in connection with a private
placement, the Company received net proceeds aggregating approximately $1.4
million through the sale of 1,077,068 shares of its Common Stock. In March 1999,
the Company closed on the first tranche of $500,000 of a $1.5 million term note
series, due in six months, convertible at maturity into Common Stock at the
Company's option. At March 26, 1999, the Company had approximately $650,000 of
cash and cash equivalents; however, the Company will require additional funding
to cover current operations, which require approximately $400,000 a month based
on current levels of production and sales, until revenues from operations are
sufficient.
Net cash and cash equivalents used in operating activities decreased to
$3,505,961 for 1998 from $5,925,165 for 1997. The net licensing fees received
from the Taiwan joint venture of $930,000 was the primary source of funds
provided by operating activities for 1998, with $777,249 deferred to future
periods for financial reporting purposes. Decreases in accounts receivable from
joint venture and in inventories as well as increases in deferred salaries,
accrued interest and accounts payable accounted for the balance of the
significant 1998 sources of cash.
Net cash and cash equivalents used in investing activities decreased to
$1,190,988 for 1998 from $5,384,809 for 1997. Capital expenditures for equipment
and advance payments for equipment decreased to $694,297 for 1998 from
$1,953,782 for 1997. The decrease is attributable to the reduced rate of
purchases of production equipment that constituted a significant portion of the
production expansion program that concluded in the second half of 1997.
Investments in joint ventures decreased to $467,487 for 1998 from $5,695,283 for
1997, reflecting the 1998 Taiwan and 1997 Montreal joint venture investments.
Maturities of short term U.S. Government securities during 1997 accounted for
$2,384,700 of the funds provided by investing activities.
Cash flows from financing activities decreased to $4,174,981 for 1998 from
$11,261.144 for 1997. The significant sources of funds provided by financing
activities during 1998, net of expenses, were: (i) the sale of Common Stock to
the Taiwanese joint venture, totaling $952,500 ; (ii) the sale of the Series B
Stock which provided $1,900,000 ; (iii) the sale of Common Stock through a
private placement during November and December of 1998, totaling $435,525 ; (iv)
the advance received from the
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<PAGE>
Taiwanese joint venture on the second half of their stock purchase obligation,
totaling $500,000 and (v) the loan through an insured credit facility, totaling
$395,025. The principal financing activities in the 1997 period were the sale of
the Company's Common Stock to the Canadian joint venture partners totaling
$5,351,763 net of expenses, net proceeds from the issuance of the Debentures of
$5,891,189 and net proceeds from the exercise of outstanding common stock
warrants in the amount of $47,420.
The Company is negotiating for additional funding. Such additional funding
may be raised through sources including license fees, sales of equipment in
connection with licensing operations, joint ventures or other collaborative
relationships, as well as equity or debt financing. No assurance can be given
that funding will be sufficient and available or, if it is available, that it
will be available on acceptable terms. If adequate funds are not available to
satisfy either short-term or long-term capital requirements, the Company may be
required to limit its operations significantly. No assurance can be given that
the Company will successfully complete expansion and enhancement of its
production equipment, achieve broad commercial acceptance of its product or
generate sufficient revenues to achieve profitable operations. No assurance can
be given that management has identified and made appropriate assumptions
regarding all factors that may affect the Company's business in the future.
Year 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 ("Year 2000"). Processing errors due to
software failure arising from calculations using the Year 2000 date are
recognized as a risk. The Company is currently assessing the risk, with respect
to the availability and integrity of its financial systems and the reliability
of its financial systems and the reliability of its operating systems, and is in
the process of communicating with third parties (e.g. major vendors and
customers) with whom it conducts business to assess whether they are or will be
Year 2000 compliant. To date, the Company has received favorable responses from
most of the third parties it communicated with, indicating that their companies
are either Year 2000 compliant or plan to be compliant within calendar year
1999.
The Company's information technology ("IT") systems consists of a series of
personal computers, linked via a network, which process data using purchased
software programs produced and maintained by large software vendors. The Company
believes its exposure to any material Year 2000 problems is relatively small
because its financial and operating software systems have been produced and
maintained by large software vendors, who have made updates available or updated
versions available that are Year 2000 compliant, at a nominal cost. The
Company's IT equipment is being presently evaluated for its Year 2000
capabilities and repair or renovation, if necessary, is scheduled to be
completed prior to the end of the third quarter of 1999. The vast majority of
the Company's production related non-IT systems use processors that have no date
related functionality, and accordingly, have no Year 2000 issues. The cost of
the Company's Year 2000 initiatives has not been or is not expected to be
material to the Company's results of operations or financial position.
Risks to the Company
No assurance can be given that the Company's systems or systems of other
companies on which the Company's operations rely will be converted on a timely
basis and will not have a material effect on the Company. The Company's most
reasonably likely worst-case scenario, given current uncertainties, would
involve minor disturbances in the supply of ancillary supplies and repair parts,
which would not have a material effect on the results or operations of the
Company. Of course, lack of readiness by electrical, gas and water utilities,
financial institutions or other providers of general infrastructure could
provide significant impediments to the Company's ability to carry on its normal
operations.
Contingency Plan
Although the Company has not yet established a comprehensive contingency
plan to address
21
<PAGE>
Year 2000 risks with its IT systems and with third parties upon which the
Company is dependent, the Company's Year 2000 compliance program is ongoing and
its ultimate scope, as well as the consideration of contingency plans, will
continue to be evaluated as new information becomes available.
Statements made herein about the implementation of the Company's Year 2000
program, the costs expected to be associated with that program and the results
that the Company expects to achieve constitute forward-looking information.
Accordingly, no assurance can be given that the Company's systems or systems of
other companies on which the Company's operations rely will be converted on a
timely basis and will not have a material effect on the Company.
Item 7. Financial Statements
The required Financial Statements and the notes thereto are contained in a
separate section of this report beginning with the page following the signature
page.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information called for by Item 9 with respect to Executive Officers of
the issuer appears as Item 4A under Part I of this Report.
Other information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
Item 10. Executive Compensation
The information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
The information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
23
<PAGE>
Item 13. Exhibits and Reports on Form 8K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Exhibit Note Number
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company. (3)
3.2 Amendment to the Restated Certificate of Incorporation of the Company (1)
3.3 By-Laws, As Amended, of the Company. (2)
3.4 Certificate of Designations for 7% Series B Convertible Preferred Stock dated as of May 29, 1998 (8)
4.1 Specimen Common Stock Certificate. (2)
4.2 Specimen Warrant Certificate. (2)
4.3 Representative's Unit Purchase Option dated as of July 9, 1996. (2)
4.4 Warrant Agreement dated as of July 9, 1996 between the Company and Continental Stock Transfer &
Trust Company. (2)
4.5 Form of 10% Secured Note. (2)
4.5.1 Security Agreement dated August 3, 1995 among the Company and certain secured parties. (2)
4.6 Form of Secured Note. (2)
4.6.1 Security and Intercreditor Agreement dated as of October 30, 1992 among the Company and certain
secured parties covering listed patent collateral. (2)
4.7 Notes issued by the Company between May 28, 1992 and February 16, 1993 in the aggregate amount of
$550,000 payable to Willard Jackson. (2)
4.8 Form of agreements between the Company and certain officers, directors and stockholder/creditors to
defer maturity of Secured Notes, 10% Secured Notes, and certain other notes. (1)
10.1 Lease Agreement dated August 29, 1990 between the Company and Ricefield Number Six. (2)
10.1.1 First Amendment of Lease dated June 30, 1995 between the Company and Ricefield Number Six. (2)
10.2 Patent Immunity Agreement dated March 15, 1994, among the Company and AKZO Electronic Products B.V.
and AMP Incorporated. (2)
10.3 Stock Purchase Agreement dated as of June 22, 1990, between the Company and HT Troplast AG. (2)
10.3.1 Amendment No. 1 to Stock Purchase Agreement dated June 22, 1990 between the Company and HT Troplast
AG (Amendment No. 1 dated January 10, 1996). (2)
10.4 Technical Cooperation Agreement between the Company and HT Troplast AG dated as of June 22, 1990. (2)
10.5 License Agreement between the Company and HT Troplast AG dated as of June 22, 1990. (2)
10.5.1 Amendment to the License Agreement dated May 18, 1994 between the Company and HT Troplast AG. (2)
10.6 Consent to the transfer of rights of Huls Troisdorf AG in respect of the Company to Mora
Beteiligungs AG (now HT Troplast AG) dated February 4, 1994. (2)
10.6.1 Acknowledgment of assumption of obligations of Huls Troisdorf AG in respect of the Company by
HT Troplast AG dated August 19, 1994. (2)
10.7 Form of Warrants issued on May 28, 1992. (2)
10.8 Form of Warrants issued on November 16, 1993. (2)
10.9 Form of Subscription Agreement for Series A Convertible Preferred Stock issued in 1994. (2)
10.10 Form of Warrants issued or amended between August 3, 1995 and March 12, 1996. (2)
10.11 Common Stock Purchase Agreement between the Company and Win Win Venture Capital Corporation dated
as of April 1, 1996. (2)
10.12 Agreements to defer salary between the Company and certain employees of the Company. (2)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Exhibit Note Number
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.13 Nonqualified Stock Option Plan dated April 12, 1988. (2)
*10.14 Stock Award Plan. (2)
*10.14.1 Compositech Ltd. Amended and Restated Stock Award Plan. (9)
*10.15 Employment Agreement dated as of January 1, 1996 between the Company and Samuel S. Gross. (2)
*10.16 Employment Agreement dated as of January 1, 1996 between the Company and Fred E. Klimpl. (2)
*10.17 Employment Agreement dated as of January 1, 1996 between the Company and Jonas Medney. (2)
*10.18 Common Stock Purchase Agreement between the Company and Win Win Venture Capital Corporation dated
as of June 26, 1996. (2)
10.19 Form of Securities Purchase Agreement between the Company and certain investors. (5)
10.20 Form of 5% Convertible Debenture between the Company and certain investors. (5)
10.21 Form of Registration Rights Agreement between the Company and certain investors. (5)
10.22 Form of Security Agreement between the Company and certain investors. (5)
10.23 Form of License Security Agreement between the Company and certain investors. (5)
10.24 Technology Licensing Agreement dated October 16, 1997, by and between the Company and Lamines CTEK (6)
Inc.
10.25 Subscription Agreement dated October 16, 1997, by and among: Societe Innovatech du Grand Montreal, (6)
Industries Devma Inc. (a subsidiary of Societe generale de financement du Quebec), Fonds de
solidarite des travailleurs du Quebec (F.T.Q.), Fonds regional de solidarite Ile de Montreal and
the Company.
10.26 Registration Rights Agreement dated October 16, 1997, by and among: Societe Innovatech du Grand (6)
Montreal, Industries Devma Inc., Fonds de solidarite des travailleurs du Quebec (F.T.Q.),
Fonds regional de solidarite Ile de Montreal and the Company.
10.27 Subscription Agreement dated October 16, 1997, by and between the Company and Lamines CTEK Inc. (6)
10.28 Shareholders Agreement dated October 16, 1997, among the Shareholders of Lamines CTEK Inc. (6)
10.29 Stock Exchange Agreement dated October 16, 1997, by and among: Societe Innovatech du Grand (6)
Montreal, Industries Devma Inc., Fonds de solidarite des travailleurs du Quebec (F.T.Q.),
Fonds regional de solidarite Ile de Montreal and the Company.
10.30 Sales Agency and Marketing Agreement dated October 16, 1997, by and between Lamines CTEK Inc. and (6)
the Company.
10.31 Agreement with respect to electing a nominee of the Quebec Investors to the Board of Directors of (6)
Compositech Ltd. dated October 16, 1997, by and among: Societe Innovatech du Grand Montreal,
Industries Devma Inc., Fonds de solidarite des travailleurs du Quebec (F.T.Q.), Fonds regional de
solidarite Ile de Montreal and the Company and certain of its principal shareholders.
10.32 Agreement to Form a Joint Venture by and between the Company and Fidelity Venture Capital Corp. and (7)
Fidelity Investors, dated February 9, 1998.
10.33 Patent, Information and Trademark Agreement by and between the Company and Compositech Taiwan (or (7)
Compositech Technologies, Inc.). Portions of the Exhibit have been omitted pursuant to a request
for confidential treatment.
10.33.1 Patent, Information and Trademark Agreement - Amendment No. 1 by and between the Company and (7)
Compositech Taiwan (or Compositech Technologies, Inc.).
10.34 Purchase Agreement by and between the Company and Compositech Taiwan (or Compositech Technologies, (7)
Inc.).
10.35 Convertible Preferred Stock Purchase Agreement dated as of May 29, 1998, between the Company and (8)
JNC Opportunity Fund Ltd.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Exhibit Note Number
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.36 Registration Rights Agreement dated as of May 29, 1998, between the Company and JNC Opportunity (8)
Fund Ltd.
10.37 Bridge Note Purchase Agreement dated March 16, 1999 between the Company and SovCap Equity Partners, (1)
Ltd.
10.38 Bridge Note dated March 16, 1999 between the Company and SovCap Equity Partners, Ltd. (1)
10.39 Attached Repricing Warrant dated March 16, 1999 between the Company and SovCap Equity Partners, Ltd. (1)
10.40 Common Stock Purchase Warrant dated March 16, 1999 between the Company and SovCap Equity Partners, (1)
Ltd.
10.41 Registration Rights Agreement dated March 16, 1999 between the Company and SovCap Equity Partners, (1)
Ltd.
10.42 Placement Agency Agreement dated March 16, 1999 between the Company and Sovereign Capital Advisors (1)
LLC.
10.43 Sovereign Warrant Agreement dated March 16, 1999 between the Company and Sovereign Capital Advisors (1)
LLC.
10.44 Sovereign Warrant Certificate dated March 16, 1999 between the Company and Sovereign Capital (1)
Advisors LLC.
23.1 Consent of Ernst & Young LLP (1)
27.1 Financial Data Schedules (Edgar version only) (1)
</TABLE>
- ----------
* Management contract, compensatory plan or arrangement.
(1) Filed herewith.
(2) Incorporated by reference to a previously filed Exhibit to the Company's
Registration Statement on Form SB-2, Reg. No. 333-3564-NY.
(3) Incorporated by reference to a previously filed Exhibit to the Company's
Form 10-KSB for the year ended December 31, 1996.
(4) Incorporated by reference to a previously filed Exhibit to the Company's
Form 10-QSB for the quarterly period ended June 30, 1997.
(5) Incorporated by reference to a previously filed Exhibit to the Company's
Registration Statement on Form S-3, Reg. No. 333-32241-NY filed on July 28,
1997.
(6) Incorporated by reference to a previously filed Exhibit to the Company's
Form 8-K dated October 27, 1997.
(7) Incorporated by reference to a previously filed Exhibit to the Company's
Form 10-KSB for the year ended December 31, 1997.
(8) Incorporated by reference to a previously filed Exhibit to the Company's
Form 8-K dated May 29, 1998.
(9) Incorporated by reference to a previously filed Exhibit to the Company's
Form 10-QSB for the quarterly period ended June 30, 1998.
(b) Form 8-K Reports:
Financial
Statements
Date of Report Item Reported Filed
-------------- --------------------------------------------- -----------
May 29, 1998 Item 5 - Other Events No
(Announcing sale of 7% Series B Convertible
Preferred Stock.)
26
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPOSITECH LTD.
Date: March 31, 1999 By: /S/ Jonas Medney
------------------------
Jonas Medney
Chairman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
/S/ Jonas Medney March 31, 1999
- ------------------------------------
Jonas Medney
Chairman of the Board, Director
/S/ Fred E. Klimpl March 31, 1999
- ------------------------------------
Fred E. Klimpl
Vice Chairman, Director
/S/ Christopher F. Johnson March 31, 1999
- ------------------------------------
Christopher F. Johnson
President; Chief Executive Officer; Director
(Principal Executive Officer)
/S/ Samuel S. Gross March 31, 1999
- ------------------------------------
Samuel S. Gross
Executive Vice President, Secretary,
Treasurer and Director
(Principal Financial and Accounting Officer)
/S/ Willard T. Jackson March 31, 1999
- ------------------------------------
Willard T. Jackson, Director
/S/ Pierre Laflamme March 31, 1999
- ------------------------------------
Pierre Laflamme, Director
/S/ Robert W. Middleton March 31, 1999
- ------------------------------------
Robert W. Middleton, Director
/S/ Heinz-Gerd Reinkemeyer March 31, 1999
- ------------------------------------
Heinz-Gerd Reinkemeyer, Director
/S/ James W. Taylor March 31, 1999
- ------------------------------------
James W. Taylor, Director
27
<PAGE>
Index to Financial Statements
Pages
-----
Report of Independent Auditors............................................. F2
Balance Sheets as of December 31, 1998 and 1997............................ F3
Statements of Operations for the years ended
December 31, 1998 and 1997................................................ F4
Statements of Stockholders' Equity for the years
ended December 31, 1998 and 1997......................................... F5
Statements of Cash Flows for the years ended
December 31, 1998 and 1997................................................ F6
Notes to Financial Statements.............................................. F7
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Compositech Ltd.
We have audited the accompanying balance sheets of Compositech Ltd. (the
"Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compositech Ltd. at December
31, 1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's existing
working capital is insufficient to cover continuing operating expenses and
expenditures for additional production equipment. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Melville, New York
February 12, 1999, except for Note 15
as to which the date is March 26, 1999
F-2
<PAGE>
COMPOSITECH LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 102,286 $ 624,254
Accounts receivable trade - net 27,273 44,725
Accounts receivable from joint venture 103,696 201,382
Inventories 254,784 401,922
Prepaid expenses and other 165,827 97,371
------------ ------------
Total current assets 653,866 1,369,654
Property and equipment at cost - net 5,721,215 5,276,672
Investment in joint ventures - net of accumulated amortization of $21,750 (1998) 5,562,090 5,631,561
Advance payments on construction-in-progress 16,753 274,253
Deferred debt expense - net of accumulated amortization of $154,858 (1997) 133,728 458,953
Other assets and other deferred charges, net of accumulated amortization
of $19,256 (1998) and $6,847 (1997) 151,110 134,796
------------ ------------
Total assets $ 12,238,762 $ 13,145,889
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 637,861 $ 609,278
Deferred salaries - $1,500 (1997) to officers 194,739 192,571
Accrued interest - all (1998) and $916 (1997) to stockholders 5,880 26,017
Other accrued liabilities 413,982 370,707
Deferred licensing income 64,248
Loan payable 438,917
------------ ------------
Total current liabilities 1,755,627 1,198,573
Non-current liabilities:
Notes payable to directors/stockholders 1,595,000 1,595,000
5% Convertible debentures, net of unamortized discount of $67,650 (1997) 5,762,350
Deferred salaries - officers 814,481 551,558
Accrued interest - directors/stockholders 248,948 100,159
Capital lease obligations 9,235 49,047
Deferred licensing income 713,001
Advances received on sale of common stock 500,000
Other liabilities 37,500
------------ ------------
Total non-current liabilities 3,880,665 8,095,614
7% Series B convertible preferred stock, par value $0.01; stated value $10,000
per share; authorized, issued and outstanding shares - 220 2,200,000
Commitments
Stockholders' equity :
Undesignated preferred stock; authorized 3,999,780 shares, none issued and outstanding
Series A convertible preferred stock, par value $3.00 per share; authorized shares - 714,161,
issued and outstanding shares - 550,995 (1998) and 614,161 (1997) 1,652,985 1,842,483
Common stock, par value $.01 per share; authorized shares - 50,000,000,
issued and outstanding shares - 13,150,128 (1998) and 7,767,921 (1997) 131,502 77,679
Additional paid-in capital 37,436,677 30,075,100
Cumulative foreign currency translation adjustment (552,039)
Deficit (33,954,155) (28,143,560)
------------ ------------
4,714,970 3,851,702
Less notes receivable received for issuance of common stock (312,500)
------------ ------------
Total stockholders' equity 4,402,470 3,851,702
------------ ------------
Total liabilities and stockholders' equity $ 12,238,762 $ 13,145,889
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
December 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Sales $ 350,112 $ 507,403
Licensing 64,284
------------ ------------
Total revenues 414,396 507,403
Costs and expenses:
Manufacturing 4,248,421 4,953,123
Selling, general and administrative 1,254,739 1,519,763
Research and development 282,756 76,720
------------ ------------
Total operating expenses 5,785,916 6,549,606
------------ ------------
(Loss) from operations (5,371,520) (6,042,203)
Other income (expenses):
Interest income 49,335 96,201
Interest expense
(net of interest capitalized of $101,000 (1998) and $107,000 (1997)) (131,693) (229,385)
Amortization of debt discount and expenses (497,603) (1,326,218)
Loss on disposal of property and equipment (8,360) (9,613)
Other income - net 112,415 5,147
------------ ------------
(475,906) (1,463,868)
------------ ------------
(Loss) from operations before equity in operations of joint venture (5,847,426) (7,506,071)
Equity in operations of joint venture 36,831 (63,722)
------------ ------------
Net (loss) (5,810,595) (7,569,793)
Preferred stock dividends, including amortization of discount on 7%
Series B convertible preferred stock of $314,286 406,686
------------ ------------
(Loss) attributable to common stockholders ($ 6,217,281) ($ 7,569,793)
============ ============
(Loss) per common share - basic and diluted ($ 0.54) ($ 1.18)
============ ============
Shares used in computing (loss) per common share 11,612,001 6,389,750
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Series A Convertible Foreign
Preferred Stock Common Stock Additional Currency
-------------------------------------------------------- Paid-in Translation
Shares Amount Shares Amount Capital Adjustment
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 684,161 $2,052,483 6,118,939 $ 61,189 $22,558,933
Conversion of Series A
Convertible Preferred
Stock to common stock (70,000) (210,000) 35,000 350 209,650
Discount on issuance of
5% Convertible Debentures 1,147,940
Issuance of warrants as
compensation for 5%
Convertible Debenture financing 91,070
Exercise of warrants 16,500 165 47,355
Issuance of common stock
through a private placement,
net of related costs of $75,154 1,066,192 10,662 5,341,101
Issuance of common stock upon
conversion of 5% Convertible
Debentures 531,290 5,313 669,687
Services received from stockholder 9,364
Net (loss) for the year ended
December 31, 1997
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 614,161 1,842,483 7,767,921 77,679 30,075,100
Conversion of Series A
Convertible Preferred Stock
to common stock (63,166) (189,498) 31,583 316 189,182
Issuance of common stock upon
conversion of 5% Convertible
Debentures 4,055,667 40,557 5,795,064
Issuance of common stock through
private placements, net of
related costs of $83,097 1,090,601 10,906 1,377,119
Expenses related to the issuance
of 7% Series B Convertible
Preferred Stock through a
private placement (300,000)
Record and amortize discount
on 7% Series B Convertible
Preferred Stock
Dividends declared on 7% Series B
Convertible Preferred Stock (92,400)
Exercise of a warrant for notes
receivable 125,000 1,250 311,250
Issuance of common stock as
compensation for loan financing 79,356 794 81,362
Foreign currency translation
adjustment (552,039)
Net (loss) for the year ended
December 31, 1998
Comprehensive (loss)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 550,995 $1,652,985 13,150,128 $131,502 $37,436,677 $(552,039)
============================================================================================
<CAPTION>
Total
Notes Stockholders'
Deficit Receivable Equity
---------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $(20,573,767) $ 4,098,838
Conversion of Series A
Convertible Preferred
Stock to common stock
Discount on issuance of
5% Convertible Debentures 1,147,940
Issuance of warrants as
compensation for 5%
Convertible Debenture financing 91,070
Exercise of warrants 47,520
Issuance of common stock
through a private placement,
net of related costs of $75,154 5,351,763
Issuance of common stock upon
conversion of 5% Convertible
Debentures 675,000
Services received from stockholder 9,364
Net (loss) for the year ended
December 31, 1997 (7,569,793) (7,569,793)
---------------------------------------------
Balance at December 31, 1997 (28,143,560) 3,851,702
Conversion of Series A
Convertible Preferred Stock
to common stock
Issuance of common stock upon
conversion of 5% Convertible
Debentures 5,835,621
Issuance of common stock through
private placements, net of
related costs of $83,097 1,388,025
Expenses related to the issuance
of 7% Series B Convertible
Preferred Stock through a
private placement (300,000)
Record and amortize discount
on 7% Series B Convertible
Preferred Stock
Dividends declared on 7% Series B
Convertible Preferred Stock (92,400)
Exercise of a warrant for notes
receivable (312,500)
Issuance of common stock as
compensation for loan financing 82,156
Foreign currency translation
adjustment (552,039)
Net (loss) for the year ended
December 31, 1998 (5,810,595) (5,810,595)
-----------
Comprehensive (loss) (6,362,634)
---------------------------------------------
Balance at December 31, 1998 $(33,954,155) $(312,500) $ 4,402,470
=============================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) ($ 5,810,595) ($ 7,569,793)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases 533,053 472,279
Loss on disposal of property and equipment 8,360 9,613
Amortization of debt discount and expenses 497,603 1,326,218
Equity in net income of joint venture (36,831) 63,722
Stockholder services credited to additional paid-in-capital 9,364
Changes in operating assets and liabilities:
Accounts receivable trade - net 17,452 21,568
Accounts receivable from joint venture 97,686 (164,494)
Inventories 147,138 (183,948)
Prepaid expenses and other (68,456) (30,491)
Other assets and other deferred charges (7,200)
Accounts payable 28,583 (82,485)
Deferred salaries 265,091 28,401
Accrued interest 128,652 64,360
Deferred licensing income 777,249
Other accrued liabilities (83,746) 110,521
------------ ------------
Net cash and cash equivalents (used) in operating activities (3,505,961) (5,925,165)
Cash Flows from Investing Activities
Purchase of property and equipment - net (694,297) (1,953,782)
Investment in joint ventures (467,487) (5,695,283)
Patent costs deferred (29,204) (120,444)
Short term investments - maturities 2,384,700
------------ ------------
Net cash and cash equivalents (used in) investing activities (1,190,988) (5,384,809)
Cash Flows from Financing Activities
Net proceeds from issuance of common stock 1,393,647 5,351,763
Net proceeds from issuance of 5% convertible debentures 29,000 5,891,189
Net proceeds from exercise of warrants 47,520
Net proceeds from issuance of 7% Series B convertible preferred stock 1,900,000
Net proceeds from loan payable 395,025
Advance received on sale of common stock 500,000
Payment of capital lease obligations (42,691) (29,328)
------------ ------------
Net cash and cash equivalents provided by financing activities 4,174,981 11,261,144
------------ ------------
(Decrease) in cash and cash equivalents (521,968) (48,830)
Cash and cash equivalents at beginning of year 624,254 673,084
------------ ------------
Cash and cash equivalents at end of year $ 102,286 $ 624,254
============ ============
Supplemental disclosures of cash flow information
Noncash financing activities:
Capital lease obligations for property and equipment acquisitions $ 91,336
============
Preferred Stock dividends, including amortization of discount
on 7% Series B convertible preferred stock of $314,286 $ 406,686
============
Issuance of common stock for notes receivable $ 312,500
============
Cash paid for:
Interest $ 104,039 $ 272,025
============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
COMPOSITECH LTD.
Notes to Financial Statements
December 31, 1998
1. Organization and Basis of Presentation, and Significant Accounting Policies
Organization and Basis of Presentation
Compositech Ltd. (the "Company"), a Delaware corporation, manufactures laminates
for printed circuit boards and designs the equipment used to manufacture the
laminates.
The Company requires additional funding from financing or other sources to cover
operating expenses and planned expenditures for equipment until sufficient
revenues are generated to cover such expenses. Management has plans to obtain
additional funding (see Note 15). The foregoing conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid
investments with maturities of three months or less.
Inventories
Inventories include raw materials, finished goods and inventories of spare
parts. Raw materials and finished goods inventories are stated at the lower of
cost or market based on the first-in, first-out method. Inventories of spare
parts are stated at the lower of cost or market based on specific item cost.
December 31
----------------------------
1998 1997
-------- --------
Raw Materials $122,577 $225,000
Finished Goods 86,800 123,000
Spare Parts 45,407 53,922
-------- --------
Total $254,784 $401,922
======== ========
Patents
The Company has obtained patents in the United States and internationally and
has filed additional patent applications. Such patent rights are of significant
importance to the Company to protect products, processes and equipment
developed. Costs incurred in connection with patents are being deferred and are
amortized over the life of the patents beginning upon issue. Costs related to
unsuccessful patent applications will be expensed.
F-7
<PAGE>
Depreciation and Amortization
Equipment, furniture and fixtures are being depreciated on the straight-line
method over the estimated useful lives of the related assets which range from
five to ten years. Leasehold improvements are being amortized over the lesser of
their useful lives or the remaining term of the lease.
(Loss) Per Share
Basic and diluted loss per share are calculated in accordance with SFAS No. 128,
"Earnings per Share." Loss per share is based on the weighted average number of
shares of common stock outstanding. The conversion of the Series A Convertible
Preferred Stock, par value $3.00 per share (the "Series A Stock"), the 7% Series
B Convertible Preferred Stock, par value $0.01 (the "Series B Stock"), the 5%
Convertible Debentures (the "Debentures") and outstanding options and warrants
into common stock has not been assumed in the calculation of diluted loss per
share, as such conversion would be anti-dilutive.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
Reclassification
Certain prior year amounts have been reclassified or adjusted to conform to
current year financial statement presentation.
2. Property and Equipment
December 31
-----------------------
1998 1997
---------- ----------
Production equipment $5,774,374 $5,195,823
Laboratory equipment 160,535 160,535
Furniture, fixtures and equipment 424,464 422,735
Leasehold improvements 469,555 431,037
Construction-in-progress 862,099 343,665
Equipment under capital leases 212,106 212,106
---------- ----------
7,903,133 6,765,901
Less accumulated depreciation and amortization 2,181,918 1,489,229
========== ==========
$5,721,215 $5,276,672
========== ==========
F-8
<PAGE>
3. Investment in Joint Ventures
Canada
On October 16, 1997, the Company formed a 50/50 joint venture with four Quebec
institutional investors (collectively, the "Quebec Investors") for the
establishment of a plant in the greater Montreal area to manufacture
Compositech's laminates. The Quebec Investors are: Societe generale de
financement du Quebec, Fonds de solidarite des travailleurs du Quebec (F.T.Q.),
Societe Innovatech du Grand Montreal and Fonds regional de solidarite Ile de
Montreal. The project cost is estimated to be approximately $24.5 million with
an initial capitalization by the parties of approximately $11 million with the
balance to be in debt financing. The Company's $5,426,917 capital investment in
the joint venture was funded by the Quebec Investors purchasing 1,066,192 shares
of the Company's common stock at $5.09 per share. The Quebec Investors have an
option to sell their 50% interest in the joint venture to the Company for a like
number of shares and, under certain circumstances, the Company has an option to
purchase the interest for the same number of shares. The plant is planned to
start production in late 2000.
The investment in joint venture includes $269,853 in commission and legal costs,
incurred by the Company in connection with the negotiation and preparation of
the various joint venture agreements which is being amortized on a straight line
basis over fifteen years. Accumulated amortization as of December 31, 1998 was
$21,750. The Company records its investment in the joint venture using the
equity method of accounting. During the years ended December 31, 1998 and 1997,
the joint venture incurred net income (loss) of $73,663 and ($127,444),
respectively. The 1998 net profit was attributed to the excess of interest
income earned on cash balances over actual costs incurred.
During 1998 and 1997, $389,000 and $107,000, respectively, of selling, general
and administrative expenses were charged to the Canadian joint venture, in
accordance with the joint venture agreements. As of December 31, 1998
(unaudited), the total assets and total liabilities of the joint venture were
approximately $9,835,000 and $139,000 respectively. As of December 31, 1997
(unaudited), the total assets and total liabilities of the joint venture were
approximately $10,980,000 and $254,000, respectively. The majority of the
decrease in the net assets during 1998 is related to an approximate 8% currency
exchange rate decrease.
Taiwan
On February 9, 1998, the Company entered into a joint venture agreement and
patent, information and trademark agreement with a Taiwanese investor group led
by Cheng Xin Venture Capital Corp. (formerly Fidelity Venture Capital Corp.)
("Cheng Xin") to manufacture the Company's laminates in Taiwan. The Company
received $1 million as a license down payment and will receive additional
up-front license payments of $1 million upon the achievement of certain
milestones. The Company has recorded the license income, net of expenses
incurred, as deferred licensing income which it will amortize over the life of
the contract. As part of the transaction, the Company received approximately
$952,500, net of expenses, in a private placement with the joint venture, and
issued 610,868 shares of the Company's common stock, including commissions, and
is to issue a like amount of shares to the joint venture for $960,000, net of
expenses, within 30 days following approval of the joint venture license by a
governmental authority. The Company received an advance payment of $500,000 from
the joint venture towards the second half of the stock purchase and reinvested
F-9
<PAGE>
substantially all the proceeds as part of its investment in the joint venture.
The Company is awaiting receipt of the remaining balance of approximately
$460,000, net of expenses, which is related to the approval of the joint venture
license. The Company will receive an approximate 10% interest in the joint
venture and royalty payments based on sales. A related letter of intent with
Cheng Xin provides for entering into a contract with the Company for it to
supply the joint venture with the requisite manufacturing equipment. Licensing
income of $64,284 recorded during the year ended December 31, 1998 relates to
the joint venture.
4. Loan Payable
On December 29, 1998, the Company borrowed $438,917 under a credit facility
through Credit Bancorp, which was collateralized by approximately 1.7 million
shares of the Company's common stock owned by two of the Company's officers. The
loan is due in one year and bears interest at the rate of 6.01%, payable
quarterly. A default would occur if the Company fails to supplement the
collateral or partially repay the loan in the event the collateral falls in
value by 25% or more from the value as of the loan date. The Company has an
agreement with the two officers to issue replacement shares to them in the event
of any liquidation of the collateral by the lender and provide them with
registration rights, where necessary.
5. Long-Term Debt
<TABLE>
<CAPTION>
December 31
-----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Notes payable to stockholders due
January 2, 2000, as amended,
interest payable semi-annually
at prime rate plus 1 1/2% (9.25% at December 31,
1998 and 10.0% at December 31, 1997);
$775,000 collateralized by a second lien on U.S.
patents and patent applications $ 850,000 $ 850,000
10% Secured Notes, to stockholders, due
January 2, 2000, as amended, interest
payable annually, collateralized by patents,
patent applications and certain
production equipment 745,000 745,000
5% Convertible Debentures, due May 31, 2000,
interest payable quarterly, net of $ 67,650 (1997)
of unamortized debt discount, collateralized
by certain production equipment -- 5,762,350
---------- ----------
1,595,000 7,357,350
========== ==========
</TABLE>
From May 28 through August 5, 1997, the Company issued $6,505,000 of Debentures,
due May 31, 2000, in a private placement for which the Company received net
proceeds of approximately $5,900,000 after the payment of commissions and
expenses. Trautman & Company Inc. (formerly Trautman Kramer & Company, Inc.)
(the "Placement Agent"), received warrants to buy 182,140 shares of the
Company's common stock, at $6.00 per share, as partial compensation in
connection with the sale of Debentures. The value of the warrants were estimated
at $91,070
F-10
<PAGE>
and credited to additional paid-in capital. The debt discount resulting from the
warrants and the related commissions and expenses were amortized over the life
of the debentures.
Based on a SEC pronouncement, due to the difference between the fair market
value of the common stock on the dates the Debentures were sold and the earliest
discounted conversion price, the Company recognized deferred financing costs of
$1,147,940 which was amortized over the periods from issuance to August 26,
1997, the date on which the Debentures first became convertible. Management
believes that the proceeds received from the Debentures and the discount offered
on conversion of the debt is a fair representation of the net proceeds the
Company would otherwise expect to receive from an equity offering of a like
number of shares after consideration of all associated commissions, costs and
expenses.
During November and December 1997, $675,000 face amount of Debentures were
converted into 531,290 shares of common stock. During the four months ended
April 30, 1998, the remaining balance of the Debentures, with a face amount of
$5,830,000, were converted into 4,055,667 shares of common stock.
Interest and debt expense includes interest of $219,548 (1998) and $316,171
(1997) ) applicable to related parties.
6. 7% Series B Stock
On May 29, 1998, the Company issued 220 shares of 7% Series B Stock at $10,000
per share in a private placement, resulting in net proceeds of approximately
$1.9 million.
Holders of the Series B Stock are entitled to dividends on a cumulative basis,
payable quarterly in cash or common stock at the option of the Company, except
under certain specified conditions which require the payment of dividends in
cash. In the event of any voluntary or involuntary liquidation of the Company,
holders of the Series B Stock shall be entitled to receive the stated value of
$10,000 per share plus all due but unpaid dividends before any distribution or
payments are made to holders of the Series A Stock or common stock. The holders
of the Series B Stock do not have voting rights except in certain limited
circumstances in which their rights, powers or preferences could be adversely
affected.
Each share of the Series B Stock is convertible at the option of the holder into
shares of the Company's common stock from July 8, 1998 through May 29, 2000, at
which time any remaining shares will be automatically converted into common
stock. The conversion price for each share of the Series B Stock is the lesser
of $3.00 and 87 1/2% of the average five lowest daily trade prices of the
Company's common stock during the 20 trading days preceding the conversion date,
subject to a floor price of $1.50 per share, subject to decrease in certain
circumstances. The Certificate of Designations of the Series B Stock provides
for redemption in cash at the Company's option at any time and mandatory
redemption at the holder's option under certain circumstances relating to, among
others, the maintenance of listing of shares of the Company's common stock on a
major exchange. The redemption price would be generally equivalent to the amount
obtained if the Series B Stock was converted into common stock at the then
existing conversion price.
F-11
<PAGE>
In addition to a cash commission, the Company issued a warrant to the Placement
Agent to purchase 125,000 shares of its common stock at $2.50 per share
exercisable until May 29, 2003 as a finder's fee in connection with the
foregoing transaction. The Company has estimated that the value of the warrants
is not material.
Based on a SEC pronouncement, a portion of the proceeds of the issue
representing the discounted conversion feature as measured by the difference
between the fair market value of the common stock on the dates the Series B
Stock was sold and the earliest discounted conversion price has been allocated
to additional paid-in-capital. The discount resulting from the allocation of
proceeds has been recorded as an additional dividend of $314,286 which was
amortized over the period from issuance to July 8, 1998, the date on which the
Series B Stock first became convertible. Management believes that the proceeds
received from the Series B Stock and the discount offered on conversion of the
Series B Stock is a fair representation of the net proceeds the Company would
otherwise expect to receive from an equity offering of a like number of shares
after consideration of all associated commissions, costs and expenses.
7. Stockholders' Equity
The shares of the Series A Stock are convertible at any time at the option of
the stockholder into shares of common stock at the rate (subject to antidilution
adjustment) of one-half share of common stock for each share of Series A Stock.
Each share will automatically be converted into shares of common stock (at the
then applicable conversion rate) upon the consummation of an underwritten public
offering covering the sale of common stock with aggregate net proceeds of not
less than $10,000,000 with a price per share equal to or greater than $9.00 per
share.
The common stock and Series A Stock vote as one class, with each share of common
stock being entitled to one vote. Each holder of the Series A Stock is entitled
to the number of votes equal to the number of shares of common stock into which
a share of the preferred stock could have been converted as of the record date
for voting.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of the Series A Stock shall be entitled to
receive up to $3.00 per share, as adjusted, before any payments are made to the
holders of common stock. Each one-half share of common stock would then be
entitled to receive $3.00, as adjusted, from the remaining assets of the
Company. Any remaining assets will be distributed to the holders of all shares
of stock on a pro rata basis.
In November 1998 and December 1998, the Company sold 479,733 shares of its
common stock in a private placement, realizing $435,525, net of expenses.
F-12
<PAGE>
8. Warrants and Options
Warrants
In May 1997, Trautman & Company Inc., the placement agent, received warrants to
buy 182,140 shares of the Company's common stock, at $6.00 per share, as partial
compensation in connection with the sale of the Debentures. The warrants are
exercisable until May 28, 2002.
In connection with the extension of the maturity date of notes payable to
stockholders on September 30, 1997, the Company issued warrants to purchase
30,000 shares of common stock at $5.86 per share. Management estimates the fair
value of such warrants is nominal. The warrants are exercisable until September
30, 2002.
In October 1997, the Company issued warrants to buy 29,470 shares of the
Company's common stock, at $5.09 per share, as partial compensation for the
finder's fee in connection with the signing of the Canadian joint venture
agreement. Management estimates the fair value of such warrants is nominal. The
warrants are exercisable until October 16, 2001.
In December 1997, in connection with resolving a dispute, the Company issued
warrants to buy 36,000 shares of common stock at $3.00 per share. Management
estimates the fair value of such warrants is nominal. The warrants are
exercisable until August 3, 2000.
In September 1997, warrants to purchase 16,500 shares of the Company's common
stock were exercised at an exercise price of $3.00 per share, resulting in
proceeds of $ 47,355, net of expenses.
In April 1998, in connection with the final conversion of the Company's 5%
Convertible Debentures, the Company issued warrants to Trautman & Company, Inc.,
the placement agent, to buy 75,000 shares of common stock at $2.6125 per share.
Management estimates the fair value of such warrants is nominal. The warrants
are exercisable until April 24, 2003.
In October 1998, the Placement Agent exercised a warrant to buy 125,000 shares
of common stock at $2.50 per share in exchange for notes receivable, maturing in
December 1999.
During December 1998, the Company issued 79,356 shares of its common stock to
certain shareholders as compensation for advisory services rendered in
connection with the arrangement of a credit facility.
During November and December 1998, in connection with a private placement of its
common stock, the Company issued warrants to buy 318,134 shares of common stock
at $1.125 per share. Management estimates the fair value of such warrants is
nominal. The warrants are exercisable until February 15, 2001. In connection
with the same private placement, the Company issued a stock purchase option to
buy 600,000 shares of the Company's common stock for $0.90 per share,
exercisable until March 18, 1999.
F-13
<PAGE>
Stock Option Plan
Under the Company's 1988 non-qualified stock option plan, 150,000 shares of
common stock may be issued to selected key employees and non-employees,
including directors, providing services to the Company. Under the Company's 1994
Stock Award Plan as amended, 1,675,000 shares of common stock may be issued as
Incentive Stock Options, non-qualified options or restricted stock to selected
key employees or to non-employees, including directors, providing services to
the Company. All options granted have ten year terms and vest and become fully
exercisable between six months and three years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation", requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998
and 1997: risk-free interest rates of 4.72% and 5.52%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock of
.827 and .795; and a weighted-average expected life of the option of six years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The Company's pro forma information for 1998 and 1997 are as follows:
1998 1997
------------ ------------
Pro forma net (loss) ($6,802,111) ($7,953,996)
Pro forma (loss) per share -
basic and diluted ($0.59) ($1.27)
F-14
<PAGE>
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 770,490 $ 4.16 600,600 $ 4.08
Granted 814,100 $ 1.57 205,810 $ 4.60
Forfeited 101,920 $ 4.79 35,920 $ 5.26
------------------------------ ------------------------------
Outstanding - end of year 1,482,670 $ 2.70 770,490 $ 4.16
============================== ==============================
Exercisable - end of year 611,669 $ 3.63 491,528 $ 3.94
Weighted average fair value of
options granted during the year $ 1.15 $ 3.32
</TABLE>
A summary of options outstanding as of December 31, 1998 follows:
Weighted Average
Remaining
Options Options Contractual Life
Exercise Price Outstanding Exercisable (Years)
-------------- ----------- ----------- ----------------
$1.188 170,000 -- 9.71
1.375 229,000 -- 9.06
1.844 363,600 13,600 9.48
2.000 37,500 20,500 9.20
2.375 49,770 49,770 8.93
2.500 280,500 280,500 7.00
4.375 3,000 1,000 8.34
4.750 11,000 3,666 8.27
5.000 119,800 119,800 3.88
5.750 218,500 122,833 7.91
========= ========= ====
1,482,670 611,669 8.25
========= ========= ====
Included in the total outstanding as of December 31, 1998 are 409,800 options
for directors.
The Company has reserved 10,935,732 shares of common stock for conversions of
preferred stock and issuances for stock options, warrants, stock purchase option
agreements and stock exchange agreements.
F-15
<PAGE>
9. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the liability method is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
At December 31, 1998, the Company has net operating loss carryforwards ("NOL")
of approximately $31,164,000 for Federal income tax purposes, expiring at 2003
through 2018. In addition, the Company has research and development credits,
targeted job credits and alternative minimum tax credits of approximately
$1,140,000 which generally expire through 2013, to offset future taxes. The
Internal Revenue Code ("IRC") includes provisions which significantly limit
potential use of net operating losses and tax credits in situations where there
is a change in ownership, as defined, of more than 50% during a three-year
period. Accordingly, if a change in ownership occurs, the ultimate benefit
realized from these carryovers may be significantly reduced in total, and the
amount that may be utilized in any given year may be significantly limited.
Additionally, because there is a limit on the time during which NOL
carryforwards and tax credits may be applied against future taxable income, the
Company will not be able to take full advantage of these NOL's when the Company
generates taxable income.
As of December 31, 1998, the maximum utilization of the Company's $31.1 million
NOL has been calculated to be approximately $21.8 million, due to the
aforementioned limitations. As the Company has had cumulative losses and there
is no assurance of future taxable income, a valuation allowance has been
established to offset deferred tax assets. The components of the Company's net
deferred tax are as follows:
December 31
----------------------------
1998 1997
------------ ------------
Deferred tax assets:
Deferred salaries $ 343,000 $ 253,000
Net operating loss carryforwards 7,416,000 8,688,000
Research and development and other credits 1,140,000 1,121,000
------------ ------------
Total deferred tax assets 8,899,000 10,062,000
Less: valuation allowance (8,179,000) (9,642,000)
------------ ------------
Net deferred tax assets 720,000 420,000
Deferred tax liability:
Tax over book depreciation (720,000) (420,000)
============ ============
Net deferred tax $ -- $ --
============ ============
F-16
<PAGE>
10. Commitments
Operating Leases
At December 31, 1998, future minimum annual rentals for leases with initial or
remaining terms in excess of one year are as follows:
1999 $203,000
2000 134,000
2001 9,000
--------
$346,000
========
The Company leases its plant under a net lease expiring August 31, 2000. The
lease is renewable for an additional five years and requires that the Company
pay real estate taxes as additional rent.
Rent expense was approximately $247,000 in 1998 and $283,000 in 1997. The
foregoing amounts include $38,000 and $79,000, respectively, of real estate
taxes paid as additional rent.
Capital Leases
Future minimum lease payments under capital leases for equipment with a net book
value of approximately $105,000, included in property and equipment for the
years ending December 31, are as follows:
1999 $53,688
2000 9,463
-------
Total payments 63,151
Less: Amount representing interest 5,485
-------
Present value of minimum lease payments $57,666
=======
11. Officers' Life Insurance
The Company is the owner and beneficiary of insurance policies of $2,000,000
each on the lives of two of its officers for an aggregate of $4,000,000.
12. Dependence on a Major Supplier
Advanced GlassFiber Yarns LLC (successor to Owens Corning), a major fiberglass
manufacturer, has developed and continues to develop and supply products to meet
the Company's processing and product requirements. Should this manufacturer not
continue supplying the Company's quality and quantity needs, the Company would
have to rely on other suppliers, who are presently selling to the Company in
small quantities or going through vendor qualification. Such event could have a
material adverse effect on the Company's ability to supply customers on a timely
basis and could reduce expected sales and increase the costs of manufacture. No
assurances can be given that the alternative suppliers will meet the Company's
quality and quantity needs on satisfactory terms.
F-17
<PAGE>
13. Significant Customers
Customers who individually represent 10% or more of net sales for the respective
years are as follows:
Years Ended December 31
-----------------------
1998 1997
----- -----
Teradyne Inc. 48.2% 4.3%
HADCO Corporation 37.4% 74.8%
Merix Corporation 2.8% 17.6%
14. Retirement Plan
The Company established a defined contribution retirement plan ("the Plan") for
eligible employees under Section 401(k) of the Internal Revenue Code effective
January 1, 1998. Participants can make voluntary contributions up to a maximum
of 20% of their annual salary. The Company made no matching contributions to the
Plan in 1998.
15. Financing and Subsequent Events
Subsequent to December 31, 1998, the Company issued 1,387,331 shares of common
stock upon the conversion of 195 shares of the Company's Series B Stock
($1,950,000 face amount), resulting in increases of common stock of $13,873 and
additional paid-in capital of $1,936,127. The shares issued included the
applicable 7% dividend, paid in shares of common stock.
During January 1999, the Company authorized warrants to purchase 400,000 shares
of the Company's common stock at $1.25 per share, the market price of the stock
on the date of authorization, in exchange for consulting services.
Subsequent to December 31, 1998, the Company sold 1,064,568 shares of its common
stock, including 600,000 shares of its common stock pursuant to the exercise of
a stock purchase option (see Note 8 to the Financial Statements) in a private
placement, realizing approximately $1.4 million, net of expenses. In connection
with this private placement, the Company issued warrants to buy 505,928 shares
of common stock at prices ranging from $1.125 to $2.125 per share.
In March 1999, the Company closed on the first tranche of $500,000 of a $1.5
million term note series, due in six months, payable at maturity in cash or
common stock at the Company's option. In connection with this closing, the
Company issued warrants to buy 125,000 shares of common stock at $2.372 per
share, 110% of the closing bid price of the stock on the date of the initial
closing.
In addition to the funds mentioned in the preceding paragraph, the Company plans
to obtain additional funding from sources including license fees, sales of
equipment in connection with licensing operations, joint ventures or other
collaborative relationships, as well as equity or debt financing.
F-18
<PAGE>
On March 10, 1999, the Board of Directors authorized the issuance of warrants to
purchase 25,483 shares of the Company's common stock at $2.50 per share, the
market price of the stock on the date of authorization, in consideration of the
deferral of the payment of accrued interest as of December 31, 1998 to January
2, 2000. In addition, the Company's officers have agreed to extend the repayment
date of their deferred salaries, as of December 31, 1998, to January 2, 2000. As
a result of the foregoing, accrued interest-directors/stockholders of $248,948
and deferred salaries-officers of $814,481 as of December 31, 1998 were
classified as non current liabilities in the accompanying balance sheet.
At a special meeting held on March 26, 1999, the stockholders approved an
amendment of the Company's Amended and Restated Certificate of Incorporation,
increasing the number of authorized shares of common stock of the Company from
25,000,000, $0.01 par value, to 50,000,000 shares, $0.01 par value. Holders of
record as of February 12, 1999 of the Company's common stock and Series A
Convertible Preferred Stock were entitled to notice of, and to vote at, the
meeting.
F-19
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
COMPOSITECH LTD.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Compositech Ltd.
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out paragraph one of Article Fourth thereof and by substituting in lieu
of said paragraph the following new paragraph:
FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is 54,714,161 shares, consisting
of (A) 714,161 shares of Series A Convertible Preferred Stock, par value
$3.00 per share (the "Series A Preferred Stock"), (B) 4,000,000 shares of
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), and (C)
50,000,000 shares of Common Stock, par value $0.01 per share (the "Common
Stock").
3. The amendment of the Restated Certificate of Incorporation of the
Corporation hereby certified has been duly adopted and written consent has been
given in accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Compositech Ltd. has caused this Certificate to be
signed by Christopher F. Johnson, its President and Chief Executive Officer,
this 26th day of March, 1999.
By: /s/ Christopher F. Johnson
-------------------------------------
Christopher F. Johnson
President and Chief Executive Officer
EXHIBIT 4.8
October 23, 1998
Compositech Ltd.
I hereby agree to extend the due date of the following note as indicated below:
Amount Original Amended New
of Notes Due Date Due Date Due Date
- -------- -------- -------- --------
1/2/99 1/2/2000
Signed:
-------------------------------------
================================================================================
EXHIBIT 10.37
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
among
COMPOSITECH LTD.
(the "Company")
and
The Persons Listed On The Signature Pages Hereto
(the "Purchasers")
Dated as of March 16, 1999
================================================================================
This Series 1 Bridge Note Purchase And Security Agreement provides for the
offer, sale, and issuance of up to $1,500,000 in principal amount of Secured,
Convertible, Series 1 Bridge Financing Notes with detachable Warrants, and
attached Repricing Warrants.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Table of Contents.......................................................................i
ARTICLE 1. BRIDGE NOTES..............................................................2
Section 1.1. Authorization, Issuance, and Sale of Notes............................2
Section 1.2. Authorization and Issuance of Warrants................................2
Section 1.3. Form of Payment.......................................................2
Section 1.4. Closing...............................................................2
Section 1.5. Deliveries at Closing.................................................2
ARTICLE 2. SECURITY AGREEMENT........................................................3
Section 2.1. Grant of Security Interest............................................3
Section 2.2. Remedies Upon Default.................................................4
Section 2.3. Filing of UCC Financing Statement.....................................4
Section 2.4. Notice................................................................4
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................5
Section 3.1. Organization and Qualification........................................5
Section 3.2. Authorization, Enforcement, Compliance with Other Instruments.........5
Section 3.3. Capitalization........................................................6
Section 3.4. Issuance of Securities................................................6
Section 3.5. No Conflicts..........................................................6
Section 3.6. SEC Documents; Financial Statements..................................7
Section 3.7. Absence of Certain Changes............................................7
Section 3.8. Absence of Litigation.................................................8
Section 3.9. Purchase of Bridge Notes..............................................8
Section 3.10. No Undisclosed Events, Liabilities, Developments, or Circumstances....8
Section 3.11. No General Solicitation...............................................8
Section 3.12. No Integrated Offering................................................8
Section 3.13. Employee Relations....................................................9
Section 3.14. Intellectual Property Rights..........................................9
Section 3.15. Environmental Laws....................................................9
Section 3.16. Title. 9
Section 3.17. Insurance.............................................................10
Section 3.18. Regulatory Permits....................................................10
Section 3.19. Internal Accounting Controls..........................................10
Section 3.20. No Materially Adverse Contracts, Etc..................................10
Section 3.21. Tax Status............................................................10
Section 3.22. Certain Transactions..................................................10
Section 3.23. Dilutive Effect.......................................................11
Section 3.24. Fees and Rights of First Refusal......................................11
Section 3.25. Foreign Corrupt Practices Act.........................................11
Section 3.26. Disclosure............................................................11
ARTICLE 4. REPRESENTATION AND WARRANTIES OF PURCHASERs.................................11
Section 4.1. Investment Purpose....................................................11
Section 4.2. Accredited Investor Status............................................11
Section 4.3. Reliance on Exemptions................................................12
-i-
<PAGE>
Section 4.4. Information...........................................................12
Section 4.5. No Governmental Review................................................12
Section 4.6. Transfer or Resale....................................................12
Section 4.7. Legends...............................................................13
Section 4.8. Authorization Enforcement.............................................13
Section 4.9. Residence.............................................................13
Section 4.10. No Scheme to Evade Registration.......................................13
Section 4.11. Covenant Not to Trade.................................................14
ARTICLE 5. CONDITIONS OF INITIAL CLOSING...............................................14
Section 5.1. Transaction Agreements................................................14
Section 5.2. Opinion of Counsel....................................................14
Section 5.3. Representations and Warranties; No Default............................14
Section 5.4. Purchase and Loan Permitted by Applicable Laws........................15
Section 5.5. No Adverse Litigation.................................................15
Section 5.6. Approvals and Consents................................................15
Section 5.7. No Material Adverse Change............................................15
Section 5.8. Proceedings...........................................................15
Section 5.9. Secretary Certificate.................................................15
Section 5.10. Lien Search...........................................................16
Section 5.11. UCC Financing Statement...............................................16
Section 5.12. Transfer Agent Instructions...........................................16
ARTICLE 6. CONDITIONS TO ADDITIONAL CLOSINGS...........................................16
Section 6.1. Representations and Warranties; No Default............................16
Section 6.2. No Suspensions........................................................16
Section 6.3. Opinion of Counsel....................................................16
Section 6.4. Shareholder Approval..................................................16
Section 6.5. No Material Adverse Change............................................16
ARTICLE 7. AFFIRMATIVE COVENANTS.......................................................16
Section 7.1. Financial Information.................................................17
Section 7.2. Form D................................................................17
Section 7.3. Reporting Status......................................................17
Section 7.4. Inspection of Property................................................18
Section 7.5. Maintenance of Properties; Insurance..................................18
Section 7.6. Maintenance of Security Interest......................................18
Section 7.7. Expenses..............................................................18
Section 7.8. Authorized Shares of Common Stock, Reservation of Shares..............18
Section 7.9. Corporate Existence, Etc..............................................18
Section 7.10. Transfer Agents.......................................................19
Section 7.11. Shareholder Approval; Proxy...........................................19
Section 7.12. Transfer Agent Instructions...........................................19
Section 7.13. Payment of Taxes......................................................19
Section 7.14. Compliance with Laws, Etc.............................................20
Section 7.15. Use of Proceeds.......................................................20
Section 7.16. Registration Statement................................................20
Section 7.17. Listings..............................................................20
Section 7.18. Indemnification.......................................................20
-ii-
<PAGE>
ARTICLE 8. NEGATIVE COVENANTS...........................................................21
Section 8.1. Restrictions on Debt..................................................21
Section 8.2. Restrictions on Dividends.............................................22
Section 8.3. Restrictions on Transactions with Affiliates..........................22
Section 8.4. Restrictions on Investments...........................................22
Section 8.5. Restrictions on Sale and Lease-Back Transactions......................23
Section 8.6. Restrictions on Sales of Assets.......................................23
Section 8.7. Restrictions on Subsidiaries..........................................23
Section 8.8. Change in Business....................................................23
ARTICLE 9. Miscellaneous..............................................................23
Section 9.1. Counterparts..........................................................23
Section 9.2. Headings..............................................................23
Section 9.3. Severability..........................................................23
Section 9.4. Entire Agreement. Amendments..........................................23
Section 9.5. Notices...............................................................24
Section 9.6. Interest..............................................................24
Section 9.7. Successors and Assigns................................................24
Section 9.8. No Third Party Beneficiaries..........................................25
Section 9.9. Publicity.............................................................25
Section 9.10. Further Assurances....................................................25
Section 9.11. No Strict Construction................................................25
Section 9.12. Governing Law.........................................................25
</TABLE>
TABLE OF SCHEDULES AND EXHIBITS
Schedule 1 Disclosure Schedule
Exhibit A Form of Series 1 Bridge Note (with form of Repricing Warrant
attached)
Exhibit B Form of Warrant
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Escrow Agreement
Exhibit E Financing Statement
Exhibit F Form of Opinion of Company Counsel to Purchasers
Exhibit G List of Collateral
Exhibit H Form of Transfer Agent Instructions
-iii-
<PAGE>
TABLE OF DEFINED TERMS
Term Section
---- -------
Additional Closing Section 1.4
Additional Closing Date Section 1.4
Agreement Preamble
Bridge Notes Background
Bylaws Section 3.3
Charter Section 3.3
Charter Amendment Section 3.2 (a)
Closing Section 1.4
Collateral Section 2.1 (b)
Closing Date Section 1.4
Common Stock Background
Company Preamble
Compliance Certificate Section 1.5 (i)
Consents Section 5.6
Conversion Shares Background
Debt Article 8
Disclosure Schedule Article 3
Environmental Laws Section 3.15
Equipment Section 2.1 (a)
Escrow Agent Section 1.4
Escrow Agreement Section 1.5
Event of Default Section 2.2
Financial Statements Section 3.6
Financing Statement Section 1.5 (f)
First Closing Section 1.4
First Closing Date Section 1.4
Transfer Agent Instructions Section 1.5 (h)
Minimum Amount Section 1.4
Obligations Section 2.1
Preferred Stock Section 3.3
Purchaser Preamble
Purchase Price Section 1.1
Purchased Bridge Notes Section 1.1
Registration Period Section 7.3
Registration Rights Agreement Background
Regulation D Background
Repricing Shares Background
Repricing Warrants Background
Rule 144 Section 4.6 (b)
Secretary Certificate Section 1.5 (j)
Securities Article 3.2 (b)
SEC Documents Section 3.6
Transaction Agreement Section 3.2 (a)
Warrants Background
-iv-
<PAGE>
Warrant Shares Background
1933 Act Background
1934 Act Section 3.6
-v-
<PAGE>
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
THIS SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT (the "Agreement")
is made and entered into as of this 16th day of March, 1999, between COMPOSITECH
LTD., a Delaware corporation (the "Company") and the persons listed on the
Purchaser signature pages attached hereto (each of whom is individually referred
to as a "Purchaser" and all of whom collectively are referred to as the
"Purchasers").
Background
The Company has authorized the issuance, sale, and delivery of up to
$1,500,000 in original principal amount of the Company's Series 1 Secured
Convertible Bridge Financing Notes, in substantially the form attached hereto as
Exhibit A (the "Bridge Notes"). The Bridge Notes are convertible into shares of
the Company's common stock, par value $.01 (the "Common Stock"). The Common
Stock issuable upon conversion of the Bridge Notes is hereinafter referred to as
the "Conversion Shares"). The Bridge Notes have attached repricing rights
evidenced by a warrant in substantially the form of Attachment 1 to the Bridge
Notes (the "Repricing Warrant"), exercisable under certain circumstances for
additional shares of Common Stock (the "Repricing Shares") at the exercise price
of $.01. In connection with the issuance of the Bridge Notes, the Company has
authorized the issuance of Warrants, in substantially the form attached hereto
as Exhibit B (the "Warrants"), to purchase Common Stock. Each Purchaser will be
issued a Warrant at closing exercisable for 20,000 shares of Common Stock for
each $100,000 in principal amount of Bridge Notes purchased. The shares of
Common Stock issuable upon exercise of the Warrants are hereinafter referred to
as the "Warrant Shares." The proceeds of the Bridge Notes will be used to
provide the Company with operating capital, enhancement of equipment, and
expansion of the Company's sales and marketing efforts. The Bridge Notes are
secured by a pledge of certain equipment owned by the Company having a value of
approximately 200% of the principal amount of the Bridge Notes at any time
outstanding. Purchasers wish to purchase, upon the terms and conditions stated
in this Agreement, up to $1,500,000 in principal amount of the Bridge Notes,
with each Purchaser purchasing a Bridge Note in the principal amount set forth
on such Purchaser's signature page affixed to this Agreement. Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement in substantially the
form attached hereto as Exhibit C (the "Registration Rights Agreement") pursuant
to which the Company has agreed to provide certain registration rights in
respect of the Warrant Shares under the Securities Act of 1933, as amended
("1933 Act") and the rules and regulations promulgated thereunder, and
applicable state securities laws. The Company and the Purchasers are executing
and delivering this Agreement in reliance upon the exemption from securities
registration pursuant to Section 4(2), and/or Regulation D ("Regulation D").
Agreement
For and 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 Purchaser hereby agree as
follows:
-1-
<PAGE>
ARTICLE 1. BRIDGE NOTES.
Section 1.1 Authorization, Issuance, and Sale of Notes. The Company has
authorized the sale and issuance, in accordance with the terms of this
Agreement, of up to $1,500,000 in original principal amount of its Bridge Notes
at one or more closings. The Company agrees to issue and sell to each Purchaser
and each Purchaser agrees to purchase from the Company, at a Closing, a Bridge
Note in the principal amount (the "Purchased Bridge Notes") set forth adjacent
to the caption "Purchased Bridge Notes" on the signature page to this Agreement
of each Purchaser hereto at a purchase price (the "Purchase Price") of 100% of
the principal amount of Bridge Notes purchased.
Section 1.2 Authorization and Issuance of Warrants. The Company has
authorized the issuance and delivery of Warrants exercisable for up to 300,000
shares of Common Stock (20% of total principal amount of Bridge Notes) in
connection with the issuance, sale, and delivery of the Bridge Notes. The
Company agrees to issue and deliver to each Purchaser a Warrant exercisable for
20,000 shares of Common Stock for each $100,000 in principal amount of the
Bridge Notes purchased by such Purchaser.
Section 1.3 Form of Payment. On or before the Closing Date, each Purchaser
shall pay the Purchase Price for the Purchased Bridge Notes to be issued and
sold to such Purchaser at the Closing, by wire transfer of immediately available
funds to:
Bank: SunTrust Bank, Atlanta
Center: 008
Account No.: 9088000008
ABA Routing No.: 061000104
Attn: Rebecca Fisher
Re: Compositech Ltd.-Escrow Account
Section 1.4 Closing. All closings of the purchase and sale of the Purchased
Bridge Notes shall take place at the offices of Balboni Law Group LLC, 3475
Lenox Road, NE, Suite 990, Atlanta, Georgia 30326 , within five (5) business
days following the date that $100,000 (the "Minimum Amount") is held by SunTrust
Bank, Atlanta (the "Escrow Agent"), subject to notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Section 5 below (such
closing being called the "First Closing" and such date and time being called the
"First Closing Date"). Following the First Closing, the Company anticipates it
will continue to offer the Bridge Notes until the offering of the Bridge Notes
is terminated or all $1,500,000 in principal amount is purchased. From time to
time, one or more additional closings may occur at such time and date as is
mutually agreeable between the Purchasers purchasing Bridge Notes at such
closing and the Company (each such closing being called an "Additional Closing"
and such date and time being called an "Additional Closing Date", and all of
such closings are hereinafter referred to individually as a "Closing" and
collectively as the "Closings," and each date on which a Closing shall occur is
hereinafter referred to as a "Closing Date" and collectively as the "Closing
Dates"). Each Closing is expected to take place by exchange of faxed signature
pages with originals to follow by overnight delivery.
Section 1.5 Deliveries at Closing. At each Closing the Company shall
deliver to the Purchasers:
(a) the original of this Agreement;
-2-
<PAGE>
(b) Bridge Notes in definitive form with attached Repricing
Warrants, registered in the name of each Purchaser, or the designee of
such Purchaser, representing the Purchased Bridge Notes purchased by
such Purchaser;
(c) Warrants in definitive form, registered in the name of each
Purchaser, or the designee of such Purchaser;
(d) a copy of the Registration Rights Agreement;
(e) a copy of the Escrow Agreement (the "Escrow Agreement") in
substantially the form of Exhibit D hereto;
(f) a copy of the Financing Statement (the "Financing Statement")
in substantially the form of Exhibit E hereto;
(g) a copy of the opinion of counsel to the Company, in
substantially the form of Exhibit F hereto;
(h) a copy of the Irrevocable Transfer Agent Instructions
Agreement (the "Transfer Agent Instructions"), in substantially the
form of Exhibit H hereto;
(i) the Compliance Certificate of the Company (the "Compliance
Certificate"); and
(j) the Secretary Certificate of the Company (the "Secretary's
Certificate").
ARTICLE 2. SECURITY AGREEMENT.
The provisions of this Section 2 shall remain in effect so long as any of
the Bridge Notes shall remain outstanding.
Section 2.1 Grant of Security Interest. In order to secure the obligations
of the Company due to the Purchasers (such obligations are sometimes hereinafter
referred to as the "Obligations") under the Bridge Notes, in addition to the
general credit of the Company, the Company hereby grants to Purchasers,
effective at the First Closing a continuing first priority security interest in
and a general lien upon:
(a) the equipment listed on Exhibit G hereto (the "Equipment");
and
(b) all proceeds, as such term is defined in Section 9-306(1) of
the UCC and, in any event, shall include, without limitation, (i) any
and all proceeds of any insurance, indemnity, warranty, or guaranty
payable to the Company from time to time with respect to any of the
Equipment, (ii) any and all payments (in any form whatsoever) made or
due and payable to the Company from time to time in connection with
any requisitions, confiscation, condemnation, seizure, or forfeiture
of all or any part of the Equipment by any governmental authority (or
any person acting under color of governmental authority), and (iii)
any and all other amounts from time to time paid or payable under or
in connection with any of the Equipment (collectively, the
"Collateral").
-3-
<PAGE>
Section 2.2 Remedies Upon Default. Upon the occurrence or existence of an
"Event of Default" as defined in Section 9 of the Bridge Notes, each Purchaser
shall have the right to pursue all available remedies at law or in equity,
including without limitation:
(a) all of the rights and remedies available to a secured party
under the Uniform Commercial Code as adopted in the State of New York
and any other applicable law, all of which shall be cumulative and
none of which shall be exclusive to the fullest extent permitted by
law, and all other legal and equitable rights under this Agreement and
the Transaction Agreements which may be available to Purchasers, all
of which shall be cumulative;
(b) the right to take possession of the Collateral upon receipt
by the Company of 24 hours' written notice of Purchasers' intention to
do so, and to enter the offices of the Company during normal business
hours to take possession of the Collateral; the right of the Purchaser
to (a) enter upon the premises of Company or any of its subsidiaries,
or any other place or places where the Collateral is located and kept,
through self-help and without judicial process, without first
obtaining a final judgment or giving Company or any of its
subsidiaries notice and opportunity for a hearing on the validity of
the Purchaser's claim and without any obligation to pay rent to
Company or any of its subsidiaries, and remove the Collateral
therefrom to the premises of Purchaser or any agent of Purchaser, for
such time as Purchaser may desire, in order to effectively collect or
liquidate the Collateral; and/or (b) require Company to assemble the
Collateral and make it available to Purchaser at a place to be
designated by the Purchaser, in their sole discretion.
(c) the right to sell or otherwise dispose of all or any part of
the Collateral in its then condition, at public or private sale or
sales, with such notice as may be required by law, in lots or in bulk,
for cash or on credit, all as such Purchaser may deem advisable, and
purchase all or any part of the Collateral at public or, if permitted
by law, private sale and, in lieu of actual payment of such purchase
price, may set off the amount of such price against the Obligations,
and to apply the proceeds realized from such sale, after allowing two
(2) business days for collection, first to the reasonable costs,
expenses, and attorneys' fees and expenses incurred by such Purchaser
for collection and for acquisition, storage, sale, and delivery of the
Collateral, secondly to interest due upon the Obligations, and thirdly
to the principal of the Obligations; and
(d) the right to proceed by an action or actions at law or in
equity to obtain possession of the Collateral, to recover the
Obligations and amounts secured hereunder or to foreclose under this
Agreement and sell the Collateral or any portion thereof, pursuant to
a judgment or decree of a court or courts of competent jurisdiction,
all without the necessity of posting any bond.
Section 2.3 Filing of UCC Financing Statement. On, before, or as soon as
practicable after the First Closing, the Company shall execute and deliver for
filing one or more Financing Statements with the Secretary of State of New York
to perfect the security interest granted above.
Section 2.4 Notice. Any notice required to be given by Purchaser of a sale,
lease, or other disposition of the Collateral or any other intended action by
Purchaser, given to Company in the manner set forth in Section 9.5 below, at
least ten (10) days prior to such proposed action, shall constitute commercially
reasonable and fair notice thereof to Company.
-4-
<PAGE>
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
To induce the Purchasers to purchase the Bridge Notes, the Company
represents and warrants to each Purchaser, except as referenced on Schedule 1
hereto (the "Disclosure Schedule"), which reference shall set forth the specific
section to which the qualification relates and the statement which constitutes
the qualification, that:
Section 3.1. Organization and Qualification. The Company and its
subsidiaries are corporations duly organized, validly existing, and in good
standing under the laws of the jurisdiction in which they are incorporated, and
have the requisite corporate power to own their properties and to carry on their
business as now being conducted. Each of the Company and each subsidiary is duly
qualified as a foreign corporation to do business and is in good standing in
each jurisdiction in which the nature of the business conducted by it makes such
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.
Section 3.2. Authorization, Enforcement, Compliance with Other Instruments.
(a) The Company has the requisite corporate power and authority
to enter into and perform each of this Agreement, the Bridge Notes,
the Repricing Warrants, the Warrants, the Registration Rights
Agreement, the Escrow Agreement, the Transfer Agent Instructions, the
Financing Statement, and any related agreements (collectively, the
"Transaction Agreements" and individually a "Transaction Agreement"),
and to issue the Bridge Notes, the Repricing Warrants, and the
Warrants, and upon approval by the Company's stockholders and the
subsequent filing of an amendment to the Company's Charter at a
special meeting to be held by the Company on March 26, 1999 (the
"Charter Amendment"), the requisite power and authority to issue the
Conversion Shares, the Repricing Shares, and the Warrant Shares in
accordance with the terms hereof and thereof;
(b) the execution and delivery by the Company of each of the
Transaction Agreements and the consummation by it of the transactions
contemplated thereby, including without limitation the issuance of the
Bridge Notes, the Warrants, and the Repricing Warrants, and upon
approval and filing of the Charter Amendment, the reservation for
issuance and the issuance of the Conversion Shares issuable upon
conversion of the Bridge Notes and the reservation for issuance and
the issuance of the Repricing Shares and the Warrant Shares upon
exercise of the Repricing Warrants and the Warrants (the Bridge Notes,
the Repricing Warrants, the Warrants, the Conversion Shares, the
Repricing Shares, and the Warrant Shares are hereinafter collectively,
the "Securities") have been duly authorized by the Company's Board of
Directors and no further consent or authorization is required by the
Company, its Board of Directors, or its stockholders;
(c) each of the Transaction Agreements have been duly and validly
executed and delivered by the Company; and
(d) each of the Transaction Agreements constitute the valid and
binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation, or similar laws
relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
-5-
<PAGE>
Section 3.3. Capitalization. Immediately prior to Closing, the authorized
capital stock of the Company consisted of 29,714,161 shares of capital stock, of
which 25,000,000 shares are Common Stock, par value $.01, of which 14,973,016
shares are issued and outstanding, and 4,714,161 shares are preferred stock (the
"Preferred Stock"), of which 714,161 shares are Series A Preferred Stock, par
value $3.00 per share, of which 487,661 shares are issued and outstanding, 220
shares are 7% Series B Convertible Preferred Stock, par value $.01 per share and
stated value $10,000 per share, of which 25 shares are issued and outstanding,
and 3,999,780 shares are undesignated Preferred Stock, of which no shares are
issued or outstanding. All of such outstanding shares have been duly authorized
and validly issued and are fully paid and nonassessable. Except as described in
Section 3.3 of the Disclosure Schedule, no shares of Common Stock or preferred
stock are subject to preemptive rights or any other similar rights or any liens
or encumbrances suffered or permitted by the Company. Except as disclosed in
Section 3.3 of the Disclosure Schedule, as of the effective date of this
Agreement, (a) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls, or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings,
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, or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, (b) there are no outstanding debt securities, and (c) there are no
agreements or arrangements under which the Company or any of its subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act
(except the Registration Rights Agreement). There are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities in the manner contemplated by this
Agreement. The Company has furnished to the Purchaser true and correct copies
of: (x) the Company's Certificate of Incorporation, as amended prior to the date
here of (the "Charter") and as proposed to be amended pursuant to the Charter
Amendment, (y) the Company's Bylaws, as in effect on the date hereof (the
"Bylaws"), and (z) the terms of all securities convertible into or exercisable
for Common Stock and the material rights of the holders thereof in respect
thereto.
Section 3.4. Issuance of Securities. The Bridge Notes have been duly
authorized and are free from all transfer and issuance taxes, liens, and charges
with respect to the issue thereof. The Conversion Shares issuable upon approval
and filing of the Charter Amendment and conversion of the Bridge Notes have been
duly authorized and reserved for issuance. The Repricing Warrants have been duly
authorized and are free from all transfer and issuance taxes, liens, and charges
with respect to the issuance thereof. The Repricing Shares issuable upon
approval and filing of the Charter Amendment and exercise of the Repricing
Warrants have been duly authorized and reserved for issuance. The Warrants have
been duly authorized and are free from all transfer and issuance taxes, liens,
and charges with respect to the issuance thereof. The Warrant Shares issuable
upon exercise of the Warrants have been duly authorized and reserved for
issuance. Upon conversion of the Bridge Notes, the Conversion Shares will, and
upon exercise of the Repricing Warrants and the Warrants, the Repricing Shares
and the Warrant Shares will, be duly and validly issued, fully paid, and
nonassessable, and free from all transfer and issuance taxes, liens, and
charges, with respect to the issuance thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock.
Section 3.5. No Conflicts. Except as disclosed in Section 3.5 of the
Disclosure Schedule, the execution, delivery, and performance of the Transaction
Agreements by the Company, and the consummation by the Company of the
transactions contemplated thereby, will not (a) result in a violation of the
Charter or the Bylaws of the Company or (b) conflict with, constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of
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termination, amendment, acceleration, or cancellation of, any agreement,
indenture, or instrument to which the Company or any of its subsidiaries is a
party, or result in a violation of any law, rule, regulation, order, judgment,
or decree (including federal and state securities laws and regulations and the
rules and regulations of the principal market or exchange on which the Common
Stock is traded or listed) 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 as described in Section 3.5 of the Disclosure
Schedule, neither the Company nor any subsidiary is in violation of any term of,
or in default under, its Charter or the Bylaws or their organizational charter
or Bylaws, respectively, or any material contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree, or order or any statute,
rule, or regulation applicable to the Company or its subsidiaries. The business
of the Company and its subsidiaries is not being conducted, and shall not be
conducted in violation of any law, ordinance, or regulation of any governmental
entity. Except as specifically contemplated by this Agreement and as required
under the 1933 Act and any applicable state securities laws, the Company is not
required to obtain any consent, authorization, or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver, and perform any of its obligations under or contemplated by
the Transaction Agreements in accordance with the terms thereof. Except as
disclosed in Section 3.5 of the Disclosure Schedule, 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 and its subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.
Section 3.6. SEC Documents; Financial Statements. Since November 16, 1998,
the Company has 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
incorporated by reference therein, being hereinafter referred to as the "SEC
Documents"). The Company has made available to the Purchaser or its
representative true and complete copies of the SEC Documents. The Company (i) is
a "reporting issuer" as defined in Rule 902(1) of Regulation S and (ii) has a
class of securities registered under Section 12(b) or 12(g) of the 1934 Act or
is required to file reports pursuant to Section 15(d) of the 1934 Act, and has
filed all the materials required to be filed as reports pursuant to the Exchange
Act for the period the Company was required by law to file such material. As of
their respective dates, the financial statements of the Company included in the
SEC Documents (the "Financial Statements") 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 generally accepted accounting principles,
consistently applied, during the periods involved (except (a) as may be
otherwise indicated in such financial statements or the notes thereto, or (b) in
the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and present fairly, in all
material respects, the financial position of the Company as of the dates
thereof, and the results of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Purchaser which is not included in the SEC Documents, including, without
limitation, information referred to in Section 3.5 of this Agreement, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading.
Section 3.7. Absence of Certain Changes. Except as described in Section 3.7
of the Disclosure Schedule or the SEC Documents, there has been no material
adverse change and no material
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adverse development in the business, properties, operations, financial
condition, results of operations, or prospects of the Company or any subsidiary.
The Company has not taken any steps, and does not currently expect to take any
steps, to seek protection pursuant to any bankruptcy law nor does the Company or
any subsidiary have any knowledge or reason to believe that its creditors intend
to initiate involuntary bankruptcy proceedings.
Section 3.8. Absence of Litigation. There is no action, suit, 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, the Common Stock, or any of the Company's subsidiaries, wherein an
unfavorable decision, ruling or finding would (a) have a material adverse effect
on the transactions contemplated hereby, (b) adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under the Transaction Agreements, or (c) except as expressly set
forth in Schedule 3.8 of the Disclosure Schedule, have a material adverse effect
on the business, operations, properties, financial condition, or results of
operation of the Company and its subsidiaries taken as a whole.
Section 3.9. Purchase of Bridge Notes. The Company acknowledges and agrees
that the Purchaser is acting solely in the capacity of an arm's length purchaser
with respect to this Agreement and the transactions contemplated hereby. The
Company further acknowledges that the Purchaser is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
this Agreement and the transactions contemplated hereby and any advice given by
the Purchasers or any of their respective representatives or agents in
connection with this Agreement and the transactions contemplated hereby is
merely incidental to such Purchaser's purchase of the Bridge Notes or the
Conversion Shares. The Company further represents to the Purchaser that the
Company's decision to enter into this Agreement has been based solely on the
independent evaluation by the Company and its representatives.
Section 3.10. No Undisclosed Events, Liabilities, Developments, or
Circumstances. No event, liability, development, or circumstance has occurred or
exists, or is contemplated to occur, with respect to the Company or its
subsidiaries or their respective business, properties, prospects, operations, or
financial condition, which is material but which has not been publicly announced
or disclosed in writing to the Purchaser.
Section 8.11. No General Solicitation. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Bridge Notes or the Conversion Shares. The Company represents that it has not
offered the Bridge Notes or Conversion Shares to the Purchaser in the U.S. or,
to the best knowledge of the Company, to any person in the United States or any
U.S. person.
Section 3.12. 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 of the
Bridge Notes, the Conversion Shares, the Repricing Warrants, the Repricing
Shares, the Warrants, or the Warrant Shares under the 1933 Act or cause this
offering to be integrated with prior offerings by the Company for purposes of
the 1933 Act or any applicable stockholder approval provisions.
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Section 3.13. Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good.
Section 3.14. Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets, and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Section 3.14 of the
Disclosure Schedule, none of the Company's trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, government authorizations, trade
secrets, or other intellectual property rights have expired or terminated, or
are expected to expire or terminate prior to the first anniversary of this
Agreement. The Company and its subsidiaries do not have any knowledge of any
infringement by the Company or its subsidiaries of the trademark, trade name
rights, patents, patent rights, copyrights, inventions, licenses, service names,
service marks, service mark registrations, trade secret, or other similar rights
of others, or of any such development of similar or identical trade secrets, or
technical information by others and, except as set forth on Section 3.14 of the
Disclosure Schedule, there is no claim, action, or proceeding being made or
brought against, or to the Company's knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret, or other infringement, and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company and its subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality, and value of all of
their intellectual properties.
Section 3.15. Environmental Laws. The Company and its subsidiaries are (a)
in compliance with any and all applicable foreign, federal, state, and local
laws and regulations relating to the protection of human health and safety, the
environment, or hazardous, toxic substances, wastes, pollutants, or contaminants
("Environmental Laws"), (b) have received all permits, licenses, or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses, and (c) are in compliance with all terms and conditions
of any such permit, license, or approval.
Section 3.16. Title. 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 as described in Section 3.16 of the Disclosure
Schedule or as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries. Any real property and facilities held under lease
by the Company and its subsidiaries are held by them under valid, subsisting,
and enforceable leases with such exceptions as are not material, and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries. The Equipment is owned by the
Company free and clear of any and all encumbrances, liens, and adverse claims
whatsoever, has been at all times prior to the date hereof, and shall remain
from and after the date of this Agreement in the possession of the Company and
located at 120 Ricefield Lane, Hauppauge, New York 11788. The cost of the
Equipment is approximately 200% of the aggregate principal amount of the Bridge
Notes from time to time outstanding.
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Section 3.17. 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 been
refused any insurance coverage sought or applied for, and 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 materially and adversely affect the
condition, financial, or otherwise, or the earnings, business, or operations of
the Company and its subsidiaries, taken as a whole.
Section 3.18. Regulatory Permits. The Company and its subsidiaries possess
all certificates, authorizations, and permits issued by the appropriate federal,
state, or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization, or permit.
Section 3.19. Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (a) transactions are executed in accordance
with management's general or specific authorizations, (b) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (c) access to assets is permitted only in accordance with
management's general or specific authorization, and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
Section 3.20. No Materially Adverse Contracts, Etc. Neither the Company nor
any of its subsidiaries is subject to any charter, corporate, or other legal
restriction, or any judgment, decree, order, rule, or regulation which in the
judgment of the Company's officers has, or is expected in the future to have, a
material adverse effect on the business, properties, operations, financial
condition, results of operations, or prospects of the Company or its
subsidiaries. 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 on the business, properties,
operations, financial condition, results of operations, or prospects of the
Company or its subsidiaries.
Section 3.21. Tax Status. Except as set forth on Section 3.21 of the
Disclosure Schedule, the Company and each of its subsidiaries has made or filed
all federal and state income and all other tax returns, reports, and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes), and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports, and declarations, except those being contested in good faith,
and has set aside on its books amounts deemed 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.
Section 3.22. Certain Transactions. Except as set forth on Section 3.22 of
the Disclosure Schedule and in the SEC Documents, and except for arm's length
transactions pursuant to which the Company makes payments in the ordinary course
of business upon terms no less favorable than the
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Company could obtain from third parties and other than the grant of stock
options disclosed on Section 3.3 of the Disclosure Schedule, none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company (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.
Section 3.23. Dilutive Effect. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the Bridge
Notes will increase in certain circumstances. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Bridge
Notes in accordance with this Agreement and the Bridge Notes is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.
Section 3.24. Fees and Rights of First Refusal. The Company is not
obligated to offer the securities offered hereunder on a right of first refusal
basis or otherwise to any third parties including, but not limited to, current
or former shareholders of the Company, underwriters, brokers, agents, or other
third parties.
Section 3.25. Foreign Corrupt Practices Act. The Company has not made,
offered, or agreed to offer anything of value to any government official,
political party, or candidate for government office nor has it taken any action
which would cause the Company to be in violation of the Foreign Corrupt
Practices Act of 1977.
Section 3.26. Disclosure. Neither this Agreement nor any Schedule or
Exhibit hereto, contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained herein or therein not
misleading. None of the statements, documents, certificates or other items
prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.
ARTICLE 4. REPRESENTATION AND WARRANTIES OF PURCHASERS
Each Purchaser represents and warrants to the Company, with respect to such
Purchaser only that:
Section 4.1. Investment Purpose. Purchaser is acquiring the Securities for
its own account for investment only and not with a view towards, or for resale
in connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided however, that by
making the representations herein, Purchaser does not agree to hold any
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.
Section 4.2. Accredited Investor Status. Purchaser is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
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Section 4.3. Reliance on Exemptions. Purchaser understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
Purchaser's compliance with, the representations, warranties, agreements,
acknowledgments, and understandings of Purchaser set forth herein in order to
determine the availability of such exemptions and the eligibility of Purchaser
to acquire such securities.
Section 4.4. Information. Purchaser 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 such Purchaser. Purchaser and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by Purchaser or
its advisors, if any, or its representatives shall modify, amend, or affect such
Purchaser's right to rely on the Company's representations and warranties
contained in Section 3 hereof. Purchaser understands that its investment in the
Securities involves a high degree of risk. Purchaser has sought such accounting,
legal, and tax advice as it has considered necessary to make an informed
investment decision with respect to its acquisition of the Securities.
Section 4.5. No Governmental Review. Purchaser understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities, or
the fairness or suitability of the investment in the Securities, nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
Section 4.6. Transfer or Resale. Purchaser understands that except as
provided in the Registration Rights Agreement:
(a) the Securities, the Repricing Warrants, and the Warrants,
have not been and are not being registered under the 1933 Act or any
state securities laws, and may not be offered for sale, sold,
assigned, or transferred unless;
(i) subsequently registered thereunder;
(ii) Purchaser shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect
that such securities to be sold, assigned, or transferred may be
sold, assigned, or transferred pursuant to an exemption from such
registration; or
(iii) Purchaser provides the Company with reasonable
assurance that such securities can be sold, assigned, or
transferred pursuant to Rule 144 or promulgated under the 1933
Act (or a successor rule thereto);
(b) any sale of such securities made in reliance on Rule 144
promulgated under the 1933 Act (or a successor rule thereto) ("Rule
144") may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any resale of such securities
under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and
(c) 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
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conditions of any exemption thereunder.
Section 4.7. Legends. Purchaser understands that the certificates or other
instruments representing the Bridge Notes and, until such time as the sale of
the Conversion Shares have been registered under the 1933 Act as contemplated by
the Registration Rights Agreement, the stock certificates representing the
Conversion Shares shall bear a restrictive legend in substantially the following
form (and a stop transfer order may be placed against transfer of such stock
certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, OR ASSIGNED IN THE ABSENCE OF
AN EFFECTive REGIStratiON STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS 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 the Bridge Notes and the
Conversion Shares, upon which it is stamped, if, unless otherwise required by
state securities laws, (a) the sale of the Conversion Shares is registered under
the 1933 Act, (b) in connection with a sale transaction, such holder provides
the Company with an opinion of counsel, in a generally acceptable form, to the
effect that a public sale, assignment, or transfer of the Bridge Notes and the
Conversion Shares may be made without registration under the 1933 Act, or (c)
such holder provides the Company with reasonable assurances that the Bridge
Notes and the Conversion Shares can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date that
can then be immediately sold.
Section 4.8. Authorization Enforcement. This Agreement has been duly and
validly authorized, executed, and delivered on behalf of Purchaser and is a
valid and binding agreement of Purchaser enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
Section 4.9. Residence. Purchaser is a resident of that country specified
in its address on the Schedule of Purchaser.
Section 4.10. No Scheme to Evade Registration. Purchaser represents and
warrants to the Company that the acquisition of the Repricing Warrants and the
Repricing Shares, is not a transaction (or any element of a series of
transactions) that is part of a plan or scheme by the Purchaser to evade the
registration provisions of the 1933 Act.
(a) it is an "accredited investor" within the meaning of Rule 501
under the Securities Act;
(b) it has sufficient knowledge and experience to evaluate the risks
and merits of its investment in the Company and it is able financially to
bear the risks thereof;
(c) it has had an opportunity to ask questions of and receive answers
from and to discuss the Company's business, management, and financial
affairs with the Company's management;
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(d) the Securities are being acquired for its own account for the
purpose of investment and not with a view to or for sale in connection with
any distribution thereof;
(e) it was not offered nor made aware of the Company's interest in
issuing the Bridge Notes by any means of public advertisement or
solicitation;
(f) in connection with such Purchaser's purchase of the Securities, it
has been solely responsible for its own (i) due diligence investigation of
the Company and (ii) investment decision, and has not engaged or relied
upon any agent or "purchaser representative" to review or analyze the
Company's business and affairs or advise Purchaser with respect to the
merits of the investment;
(g) it has full power and authority to execute, deliver, and perform
this Agreement; and this Agreement will constitute the legal, valid, and
binding obligation of the Purchaser, enforceable against it in accordance
with their respective terms; and
(h) in the event that the Purchaser proposes to sell the Securities
pursuant to Rule 144A under the Securities Act, it will (A) take reasonable
steps to obtain the information required by such Rule to establish a
reasonable belief that the prospective purchaser is a "qualified
institutional buyer" as such term is defined in Rule 144A and (B) advise
the prospective purchaser that the Purchaser is relying on the exemption
from the registration provisions of the Securities Act available pursuant
to Rule 144A.
Section 4.10. Covenant Not to Trade. Each Purchaser for itself and on
behalf of each affiliate and associate of Purchaser covenants and agrees, not to
purchase, sell, make any short sale of, pledge, grant any option for the
purchase or sale of or otherwise trade any Common Stock prior to the conversion
of the Bridge Notes (other than a purchase of Common Stock from the Company
pursuant to the exercise of the Repricing Warrant or the Warrant), without the
prior written consent of the Company.
ARTICLE 5. CONDITIONS OF INITIAL CLOSING
The Purchaser's obligation to purchase and pay for the Securities is
subject to the satisfaction prior to or at the Closing of the following
conditions:
Section 5.1. Transaction Agreements. The Company shall have delivered to
Purchaser the Transaction Agreements as provided in Section 1.5, above, executed
by all the parties thereto, provided however, that the Company at its option may
deliver to Purchaser the Transfer Agent Instructions in accordance with Section
7.12 hereof.
Section 5.2. Opinion of Counsel. Purchaser shall have received from counsel
for the Company, an opinion in substantially the form of Exhibit F, addressed to
Purchaser, dated the Closing Date. To the extent that the opinion referred to in
the preceding sentence is rendered in reliance upon the opinion of any other
counsel, Purchaser shall have received a copy of such opinion of such other
counsel, dated the Closing Date and addressed to Purchaser, or a letter from
such other counsel, dated the Closing Date and addressed to Purchaser,
authorizing Purchaser to rely on such other counsel's opinion.
Section 5.3. Representations and Warranties; No Default. The
representations and warranties of the Company contained in this Agreement and
those otherwise made in writing by or on behalf of the Company in connection
with the transactions contemplated by this Agreement shall be true in all
material respects, except to the extent of changes caused by the transactions
contemplated herein;
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provided however, that there shall exist at the time of the Closing and after
giving effect to such transactions no default or Event of Default (as defined in
Section 9 of the Bridge Note).
Section 5.4. Purchase and Loan Permitted by Applicable Laws. The purchase
of, and payment for, all the Securities evidenced by or attendant to the Bridge
Notes shall not violate any applicable domestic law or governmental regulation
(including, without limitation, Section 5 of the Securities Act) and shall not
subject Purchaser to any tax, penalty, liability, or other onerous condition
under, or pursuant to, any applicable law or governmental regulation or order.
Section 5.5. No Adverse Litigation. There shall be no action, suit,
investigation, or proceeding, pending or, to the best of Purchaser's or the
Company's knowledge, threatened, against or affecting Purchaser, the Company,
any of Purchaser's or the Company's properties or rights, or any of Purchaser's
or the Company's affiliates, officers, or directors, by or before any court,
arbitrator, or administrative or governmental body which (i) seeks to restrain,
enjoin, prevent the consummation of, or otherwise affect the transactions
contemplated by this Agreement or (ii) questions the validity or legality of any
such transactions, or (iii) seeks to recover damages or obtain other relief in
connection with any such transactions, and, to the best of Purchaser's and the
Company's knowledge, there shall be no valid basis for any such action,
proceeding, or investigation, and Purchaser shall have received a certificate
executed by the chief executive officer of the Company, dated the Closing Date,
to such effect.
Section 5.6. Approvals and Consents. The Company shall have duly received
all authorizations, waivers, consents, approvals, licenses, franchises, permits,
and certificates (collectively, "Consents") by or of all federal, state, and
local governmental authorities and all material consents by or of all other
persons necessary or advisable for the issuance of the Bridge Notes, all such
consents shall be in full force and effect at the time of Closing, and Purchaser
shall have received a certificate executed by the chief executive officer of the
Company, dated the Closing Date, to such effect.
Section 5.7. No Material Adverse Change. Since Septenber 30, 1998, there
shall not have been any material adverse change in the business, condition
(financial or other), assets, properties, operations, or prospects of the
Company, and Purchaser shall have received a certificate executed by the chief
executive officer of the Company, dated the Closing Date, to such effect.
Section 5.8 Proceedings. All proceedings taken or to be taken in connection
with the transactions contemplated hereby, and all documents incident thereto
shall be reasonably satisfactory in form and substance to Purchaser and
Purchasers counsel, and Purchaser and Purchasers counsel shall have received all
such counterpart originals or certified or other copies of such documents as the
Purchaser or Purchasers' counsel may reasonably request.
Section 5.9 Secretary Certificate. Purchaser shall have received a
Secretary's Certificate from the Secretary or an Assistant Secretary of the
Company dated the Closing Date and certifying: (A) that attached thereto is a
true and complete copy of the Charter as then in effect, certified or bearing
evidence of filing by the Secretary of State of Delaware, and (B) a certificate
of said Secretary of State, dated as of a recent date as to the due
incorporation and good standing of the Company, the payment of all franchise
taxes by the Company, and listing all documents of the Company on file with said
Secretary of State; (C) that attached thereto is a true and complete copy of the
Bylaws of the Company as in effect on the date of such certification; (D) that
attached thereto is a true and complete copy of all resolutions adopted by the
Board of Directors or the shareholders of the Company authorizing the execution,
delivery, and performance of Transaction Agreements and the issuance, sale, and
delivery of the Securities, and that all such resolutions are in full force and
effect and are all the resolutions adopted in
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connection with the foregoing agreements and the transactions contemplated
thereby; (E) that the Charter has not been amended since the date of the last
amendment referred to in the certificate delivered pursuant to clause (A) above;
and (F) to the incumbency and specimen signature of each officer of the Company
executing all Transaction Agreements and any certificate or instrument furnished
pursuant hereto, and a certification by another officer of the Company as to the
incumbency and signature of the officer signing the certificate.
Section 5.10. Lien Search. The Company shall execute a lien search, the
results of which shall indicate that, upon filing of the appropriate required
UCC Financing Statements, Purchaser shall gain a priority security interest in
the Collateral.
Section 5.11. UCC Financing Statement. The Company shall have promptly
filed the appropriate UCC Financing Statement in the form, manner, time, and
place of filing required by the County and State where the Collateral is
situated, to properly perfect the security granted herein.
Section 5.12. Transfer Agent Instructions. The Transfer Agent Instructions,
in form and substance satisfactory to the Purchaser, shall have been delivered
to and acknowledged in writing by the Company's transfer agent.
ARTICLE 6. CONDITIONS TO ADDITIONAL CLOSINGS
Section 6.1. Representations and Warranties; No Default. The
representations and the warranties of the Company contained in this Agreement
and those otherwise made in writing by or on behalf of the Company in connection
with the transactions contemplated by this Agreement shall be true in all
material respects, except to the extent of changes caused by the transactions
contemplated herein; provided however, that there shall exist no Event of
Default under this Agreement or any of the Bridge Notes at the time of an
Additional Closing.
Section 6.2. No Suspensions. There shall be no suspensions of trading in or
in delisting (or pending delisting) of the Common Stock.
Section 6.3. Opinion of Counsel. Purchaser shall have received from counsel
for the Company, an opinion in substantially the form of Exhibit F, addressed to
Purchaser, dated the Additional Closing Date. To the extent that the opinion
referred to in the preceding sentence is rendered in reliance upon the opinion
of any other counsel, Purchaser shall have received a copy of such opinion of
such other counsel, dated the Additional Closing Date and addressed to
Purchaser, or a letter from such other counsel, dated the Additional Closing
Date and addressed to Purchaser, authorizing Purchaser to rely on such other
counsel's opinion.
Section 6.4. Shareholder Approval. Company, if required, must obtain
shareholder approval on placement so as to address the NASD 20% rule.
Section 6.5. No Material Adverse Change. Since date hereof, there shall not
have been any material adverse change in the business, condition (financial or
other), assets, properties, operations, or prospects of the Company, and
Purchaser.
ARTICLE 7. AFFIRMATIVE COVENANTS
The Company covenants that from and after the date of this Agreement
through the Closing and thereafter so long as the Bridge Notes remain
outstanding:
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Section 7.1. Financial Information. The Company shall furnish to Purchaser:
(a) within five (5) days after the filing thereof with the SEC, a copy
of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any
Current Reports on Form 8-K, and any registration statements or amendments
filed pursuant to the 1933 Act;
(b) within one (1) day after release thereof, copies of all press
releases issued by the Company or any of its subsidiaries;
(c) copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving
thereof to the stockholders;
(d) promptly upon any officer of the Company obtaining knowledge (i)
of any condition or event which constitutes an Event of Default, (ii) that
the holder of any Bridge Note has given any notice or taken any other
action with respect to a claimed Event of Default under this Agreement,
(iii) of any condition or event which, in the opinion of management of the
Company would have a material adverse effect on the business, condition
(financial or other), assets, properties, operations, or prospects of the
Company, other than conditions or events applicable to the economy as a
whole, (iv) that any person has given any notice to the Company or taken
any other action with respect to a claimed Event of Default, or (v) of the
institution of any litigation involving claims against the Company, unless
such litigation is defended by the insurance carrier without any
reservation of rights and is reasonably expected to be fully covered by a
creditworthy insurer, in an amount equal to or greater than $250,000 with
respect to any single cause of action or of any adverse determination in
any litigation involving a potential liability to the Company equal to or
greater than $100,000 with respect to any single cause of action, a
certificate executed by the chief executive officer of the Company
specifying the nature and period of existence of any such condition or
event, or specifying the notice given or action taken by such holder or
person and the nature of such claimed Event of Default, event or condition,
and what action the Company has taken, is taking, or proposes to take with
respect thereto; and
(e) with reasonable promptness, such other information and data with
respect to the Company as Purchaser may reasonably request.
Section 7.2 Form D. 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
Purchaser 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, or obtain exemption for the Securities
for, sale to the Purchaser at the Closing pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Purchaser on or prior
to the Closing Date.
Section 7.3. Reporting Status. Until the earlier of (a) the date as of
which the Investors (as that term is defined in the Registration Rights
Agreement) may sell all of the Conversion Shares without restriction pursuant to
Rule l44(k) promulgated under the 1933 Act (or successor thereto), or (b) the
date on which (i) the Investors shall have sold all the Conversion Shares and
(ii) none of the Bridge Notes is outstanding (the "Registration Period"), the
Company shall 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
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reports under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would otherwise permit such termination.
Section 7.4. Inspection of Property. The Company will permit any Person
designated by any Purchaser in writing, at Purchaser's expense, to visit and
inspect any of the properties of the Company, to examine the books and financial
records of the Company and make copies thereof or extracts therefrom and to
discuss its affairs, finances, and accounts with its officers and its
independent public accountants, all at reasonable times and upon reasonable
prior notice to the Company.
Section 7.5. Maintenance of Properties; Insurance. The Company will
maintain or cause to be maintained in good repair, working order, and condition
all properties used or useful in the business of the Company and from time to
time will make or cause to be made all appropriate repairs, renewals, and
replacements thereof. The Company will maintain or cause to be maintained, with
financially sound and reputable insurers (or, as to workers' compensation or
similar insurance, in an insurance fund or by self-insurance authorized by the
laws of the jurisdiction in question), insurance with respect to their
respective properties and businesses against loss or damage of the kinds
customarily insured against by corporations of established reputation engaged in
the same or similar businesses and similarly situated, of such type and in such
amounts as are customarily carried under similar circumstances by such other
corporations and as are in good faith believed by the Company to be sufficient
to prevent the Company from becoming a co-insurer within the terms of the
policies in question.
Section 7.6. Maintenance of Security Interest. The Company will maintain or
cause to be maintained a perfected first priority security interest in favor of
Purchasers in the Collateral having a value of approximately 200% of the
aggregate principal amount of the Bridge Notes then outstanding.
Section 7.7. Expenses. The Company and Purchasers shall pay all costs and
expenses incurred by such party in connection with the negotiation,
investigation, preparation, execution, and delivery of this Agreement, the other
Transaction Agreements, and all other documents executed in connection with the
issuance of the Bridge Notes. The fees, costs, and expenses of legal counsel to
Sovereign Capital, LLC (not to exceed $15,000 in fees plus all expenses for the
First Closing) shall be paid for by the Company at the First Closing, and the
fees and expenses for all subsequent Closings (not to exceed $2,000 in fees plus
all expenses for each subsequent Closing) shall be paid for by the Company at
each subsequent Closing.
Section 7.8. Authorized Shares of Common Stock, Reservation of Shares. The
Company shall at all times, so long as any of the Bridge Notes are outstanding
and upon approval and filing of the Charter Amendment, reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Bridge Notes, such number of shares
of Common Stock equal to or greater than 200% of the number of Conversion Shares
issuable upon conversion of the Bridge Notes which are then outstanding or which
could be issued at any time under this Agreement.
Section 7.9. Corporate Existence, Etc. The Company will at all times
preserve and keep in full force and effect its corporate existence, and rights,
licenses, and franchises material to its business, and will qualify to do
business as a foreign corporation in each jurisdiction where the failure to so
qualify would have a material adverse effect on the business, condition
(financial or other), assets, properties, or operations of the Company, taken as
a whole.
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Section 7.10. Transfer Agents. The Company covenants and agrees that, in
the event that the Company's agency relationship with the transfer agent should
be terminated for any reason prior to a date which is two (2) years after the
Closing Date, the Company shall immediately appoint a new transfer agent and
shall require that the transfer agent execute and agree to be bound by the terms
of the Transfer Agent Instructions.
Section 7.11. Shareholder Approval; Proxy. The Company covenants to submit
to its shareholders at its next shareholder meeting a proposal for ratification
of the issuance of the Bridge Notes and the Conversion Shares, if and as
required by the rules of the National Association of Securities Dealers, Inc.
(the "NASD") applicable to the transaction. All officers and directors will,
upon request of Purchaser, execute a proxy authorizing Purchaser or any designee
of Purchaser to vote all shares of Common Stock, the voting of which is
controlled by such officer or director, at any meeting (or any adjournment
thereof) at which Shareholder action is proposed to ratify the issuance of the
Bridge Notes and the Conversion Shares.
Section 7.12. Transfer Agent Instructions. The Company may deliver to
Purchaser the Transfer Agent Instructions, executed by the Company and the
Company's transfer agent, at any time up to thirty (30) days after the First
Closing. The Company shall issue the Transfer Agent Instructions to its transfer
agent to issue certificates, registered in the name of the Purchaser or its
respective nominee(s), for the Conversion Shares, the Repricing Shares, and the
Warrant Shares in such amounts as specified from time to time by the Purchaser
to the Company upon conversion of the Bridge Notes. Prior to registration of the
Conversion Shares under the 1933 Act, all such certificates shall bear the
restrictive legend specified in Section 4.7 of this Agreement. The Company
warrants that no instruction other than the Transfer Agent Instructions referred
to in this Section 7.12, and stop transfer instructions to give effect to
Section 4.6 hereof (in the case of the Conversion Shares, prior to registration
of such shares under the 1933 Act) will be given by the Company to its transfer
agent and that the Bridge Notes and the Conversion Shares 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 7.12 shall affect in any way the Purchaser's obligations and
agreement to comply with all applicable securities laws upon resale of the
Bridge Notes or Conversion Shares. If the Purchaser provides the Company with an
opinion of counsel, reasonably satisfactory in form, and substance to the
Company, that registration of a resale by the Purchaser of any of the Bridge
Notes or Conversion Shares is not required under the 1933 Act, the Company shall
permit the transfer, and, in the case of the Conversion Shares, promptly
instruct its transfer agent to issue one or more certificates in such name and
in such denominations as specified by the Purchaser. The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to
the Purchaser by vitiating the intent and purpose of the transaction
contemplated hereby. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 7.12 will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 7.12, that the Purchaser shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
Section 7.13. Payment of Taxes. The Company will pay all taxes,
assessments, and other governmental charges imposed upon it or any of its
properties or assets or in respect of any of its franchises, business, income,
or properties before any penalty or significant interest accrues thereon, and
all claims (including, without limitation, claims for labor, services,
materials, and supplies) for sums which have become due and payable and which by
law have or may become a lien upon any of its properties or assets, provided
that no such charge or claim need be paid if such claim is (i) being
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contested in good faith by appropriate proceedings promptly instituted and
diligently conducted, and (ii) the amount of such claim is accrued on the
financial statements of the Company or other appropriate provision is made as
shall be required by generally accepted accounting principles.
Section 7.14. Compliance with Laws, Etc. The Company will comply with the
requirements of all applicable laws, rules, regulations, and orders of any court
or other governmental authority (including, without limitation, those related to
environmental or ERISA compliance), noncompliance with which could materially
adversely affect the business, condition (financial or other), assets, property,
operations, or prospects of the Company.
Section 7.15. Use of Proceeds. The Company will use the proceeds from the
sale and issuance of the Bridge Notes as follows: ongoing working capital
requirements, enhancement of existing equipment, and expansion of the Company's
sales and marketing efforts.
Section 7.16. Registration Statement. The Company shall fulfill all its
obligations under and otherwise shall comply with all the terms of the
Registration Rights Agreement within the time frames specified therein.
Section 7.17. Listings. The Company shall promptly secure the listing of
the Conversion Shares, the Repricing Shares, and the Warrant Shares in
accordance with the Registration Rights Agreement, upon each national securities
exchange or automated quotation system, if any, upon which shares of Common
Stock are then listed (subject to official notice of issuance) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listings of all Conversion Shares, the Repricing Shares, and the Warrant Shares
form time to time issuable under the terms of the Bridge Notes, the Repricing
Warrants, the Warrants, and the Registration Rights Agreement. The Company shall
maintain the Common Stock's authorization for quotation in the over-the-counter
market. The Company shall promptly provide to Purchaser copies of any notices it
receives regarding the continued eligibility of the Common Stock for trading in
the over-the-counter market.
Section 7.18. Indemnification. In consideration of the Purchaser's
execution and delivery of this Agreement and acquiring the Bridge Notes, the
Warrant, the Conversion Shares, and the Warrant Shares hereunder and in addition
to all of the Company's other obligations under this Agreement, the Company
shall defend, protect, indemnify, and hold harmless the Purchaser and each other
holder of the Bridge Notes, the Warrant, the Conversion Shares, and the Warrant
Shares and all of their officers, directors, employees, and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "Indemnitees") from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities, and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements (the "Indemnified Liabilities"), incurred by the Indemnitees
or any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in any Transaction Agreement or any other certificate, instrument, or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement, or obligation of the Company contained in the Transaction Agreements,
or any other certificate, instrument or document contemplated hereby or thereby,
or (c) any cause of action, suit, or claim brought or made against such
Indemnitee and arising out of or resulting from the execution, delivery,
performance, or enforcement of this Agreement or any other instrument, document,
or agreement executed pursuant hereto by any of the Indemnitees, any transaction
financed or to be financed in whole or in part, directly or indirectly, with the
proceeds of the issuance of the Bridge Notes, or the status of the Purchaser or
holder of the Bridge Notes or the
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Conversion Shares, as an investor in the Company. To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
ARTICLE 8. NEGATIVE COVENANTS
The provisions of this Article 8 shall remain in effect so long
as the Bridge Notes shall remain outstanding. For purposes of this
Agreement, the capitalized term "Debt" of any Person shall mean:
(i) all indebtedness of such Person for borrowed money,
including without limitation obligations evidenced by bonds,
debentures, the Bridge Notes, or other similar instruments;
(ii) all indebtedness guaranteed in any manner by such
Person, or in effect guaranteed by such Person through an
agreement to purchase, contingent or otherwise;
(iii) all indebtedness secured by any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in
property owned by such Person, even though such Person has not
assumed or become liable for the payment of such indebtedness;
(iv) all indebtedness created or arising under any
conditional sale agreement or lease in the nature thereof
(including obligations as lessee under leases which shall have
been or should be, in accordance with generally accepted
accounting principles, recorded as capitalized leases) (but
excluding operating leases) or other title retention agreement
with respect to property acquired by such Person, even though the
rights and remedies of the seller or lender under such agreement
in the event of default are limited to repossession of such
property;
(v) all bankers' acceptances and letters of credit; and
(vi) liabilities in respect of unfunded vested benefits
under Plans covered by Title IV of ERISA.
Section 8.1. Restrictions on Debt. The Company will not create, assume, or
incur or become or at any time be liable in respect of, any Debt, except:
(a) the Bridge Notes issued pursuant to this Agreement;
(b) Debt outstanding on the date hereof to the extent reflected
on the most recent balance sheet of the Company or incurred in the
ordinary course of business thereafter; and
(c) Debt incurred in real estate leases; and
(d) purchase money security interests not to exceed $250,000 per
year.
Notwithstanding the foregoing provisions of Section 8.1, the Company will not
create, assume, or incur, or become or at any time be liable in respect of, any
Debt for money borrowed, advances made, or goods purchased, if the Purchaser of
such money or the Person making such advances or the vendor of such
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goods (or any Person who guarantees or becomes surety for all or any part of
such Debt or acquires any right or incurs any obligation to become, either
immediately or upon the occurrence of some future contingency, the owner of all
or any part thereof) shall have any right, by reason of any statute or
otherwise, to have any claim in respect of such Debt first satisfied out of the
general assets of the Company in priority to the claims of its general
creditors.
Section 8.2. Restrictions on Dividends. The Company will not (i) pay any
dividends, in cash or otherwise, on, (ii) make any distributions to holders of,
or (iii) purchase, redeem, or otherwise acquire any of its outstanding Common
Stock or Preferred Stock or set apart assets for a sinking or other analogous
fund for the purchase, redemption, retirement, or other acquisition of, any
shares of its Common Stock or Preferred Stock; provided however, that the
Company may, so long as at the time of and after giving effect thereof no Event
of Default has occurred and is continuing: (i) pay dividends on its outstanding
Preferred Stock in accordance with the Charter; (ii) with prior written approval
of Purchaser to repurchase shares of its Common Stock issued or to be issued by
the Company upon exercise of stock options granted to employees and directors of
the Company pursuant to the terms of plans adopted by the Board of Directors of
the Company; and (iii) pay cash in lieu of fractional shares of its Common Stock
on the exercise of outstanding warrants to purchase its Common Stock, pursuant
to the terms of such warrants.
Section 8.3. Restrictions on Transactions with Affiliates. The Company will
not make any loans or advances to any of its officers, directors, shareholders,
or affiliates, other than expense advances made by the Company to its officers
and employees in the ordinary course of business.
Section 8.4. Restrictions on Investments. Other than as permitted by this
Agreement, the Company will not purchase or acquire or invest in, or agree to
purchase or acquire or invest in the business, property, or assets of, or any
securities of, any other company or business, provided however, that the Company
may invest its Excess Cash as defined below in:
(a) securities issued or directly and fully guaranteed or insured
by the United States government or any agency thereof having
maturities of not more than one year from the date of acquisition;
(b) certificates of deposit or eurodollar certificates of
deposit, having maturities of not more than one hundred eighty days
from the date of acquisition, or one year from the date of acquisition
in the case of certificates of deposit or eurodollar certificates of
deposit being used to secure the Company's reimbursement obligations
under letters of credit (provided that nothing contained herein shall
be construed to permit letters of credit not otherwise permitted under
this Agreement);
(c) bank loan participations; and
(d) money market instruments having maturities of not more than
one hundred eighty days from the date of acquisition, or one year from
the date of acquisition in the case of money market instruments being
used to secure the Company's reimbursement obligations under letters
of credit (provided that nothing contained herein shall be construed
to permit letters of credit not otherwise permitted under this
Agreement);
in all cases of such credit quality as a prudent business person would invest
in. As used in this Section 8.4, Excess Cash shall mean that portion of the
proceeds of the Bridge Notes that has not been invested as described in Section
7.15 hereof.
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Section 8.5. Restrictions on Sale and Lease-Back Transactions. The Company
will not sell or transfer any of its properties to anyone with the intention of
taking back a lease of the same property or leasing other property for
substantially the same use as the property being sold or transferred; provided
however, that the Company may continue and extend its existing leasing
arrangements and may lease, under operating leases, fixtures, equipment, and
real estate in the ordinary course of business of the Company.
Section 8.6. Restrictions on Sales of Assets. The Company will not sell,
transfer, or dispose of any property except for sales of obsolete equipment
having a book value at the time of sale of not more than $100,000 in the
aggregate in any fiscal year.
Section 8.7. Restrictions on Subsidiaries. The Company will not, without
the written consent of Purchaser to organize, or transfer any assets to, any
Subsidiaries, provided that, if consent of the Purchaser is obtained and any
Subsidiaries are organized, or assets transferred, in compliance with this
Section 8.7, the Company will not permit such Subsidiaries to enter into any
transaction or agreement which would violate any of the provisions of this
Article 8 if such provisions were applicable to such Subsidiary.
Section 8.8. Change in Business. The Company will not cause or effect any
change in or addition to the primary business of the Company that has not been
approved by Purchaser, such that more than 10% of the net earnings of the
Company are derived from a business other than the business in which the Company
was engaged on the date hereof as reflected in the applicable last SEC Document
filed prior to the First Closing ("Change in Business").
Section 8.9. Permitted Actions under Article 8. The Company may undertake
an action otherwise prohibited under this Article 8, only if (i) the Company has
provided written notice of the proposed action to all Purchasers hereto, and has
provided to any Purchaser so requesting information with respect to the proposed
action, and (ii) the Company has obtained the prior written consent to any and
all such proposed actions from all the Purchasers hereto.
ARTICLE 9. MISCELLANEOUS.
Section 9.1. Counterparts. This Agreement may be executed in two or more
identical 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. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
Section 9.2. Headings. The headings of this Agreement are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Agreement.
Section 9.3. 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 in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
Section 9.4. Entire Agreement. Amendments. This Agreement supersedes all
other prior oral or written agreements between the Purchaser, the Company, their
affiliates and persons acting on
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their behalf with respect to the matters discussed herein, and 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 any Purchaser
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.
Section 9.5. Notices. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (a) upon
receipt, when delivered personally, (b) upon receipt, when sent by facsimile,
provided a copy is mailed by U.S. certified mail, return receipt requested, (c)
three (3) days after being sent by U.S. certified mail, return receipt
requested, or (d) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
Compositech, Ltd.
120 Ricefield Lane
Hauppauge, New York 11788
Attention: Samuel S. Gross, Executive Vice President
Telephone: (516) 436-5200
Facsimile: (516) 436-5203
With a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036
Attention: Edward F. Cox, Esq.
Telephone: (212) 336-2000
Facsimile: (212) 336-2222
If to any Purchaser, to its address and facsimile number on the signature
page of such Purchaser hereto, with copies to such Purchaser's counsel as set
forth on the signature page of such Purchaser hereto. Each party shall provide
five- (5) days prior written notice to the other party of any change in address
or facsimile number.
Section 9.6. Interest. In no event shall the amount of interest due or
payable hereunder or under the Bridge Notes exceed the maximum rate of interest
allowed by applicable law, and if any such payment is inadvertently made by the
Company or is inadvertently received by any holder of Bridge Notes, then such
excess sum shall be credited as a payment of principal, unless the applicable
holder of a Bridge Note shall notify the Company in writing that it elects to
have such excess sum returned forthwith. It is the express intent hereof that
the Company not pay and the holder of the Bridge Notes not receive, directly or
indirectly in any manner whatsoever, interest in excess of that which may
legally be paid by the Company under applicable law.
Section 9.7. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Purchasers. Any
Purchaser may assign its rights hereunder without the consent of the Company,
provided however,
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that any such assignment shall not release such Purchaser from its obligations
hereunder unless such obligations are assumed by such assignee and the Company
has consented to such assignment and assumption.
Section 9.8. No 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.
Section 9.9. Publicity. The Company and Purchasers shall have the right to
approve, before issuance, any press releases 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 Purchasers, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although the Purchaser shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release and shall be provided with a copy
thereof).
Section 9.10. 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.
Section 9.11. 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.
Section 9.12. Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York without regard
to the principles of conflict of laws. The parties agree that any appropriate
State court located in New Castle County, Delaware or the Federal courts located
in the District of Delaware, shall have jurisdiction of any case or controversy
arising under or in connection with this Agreement and shall be the proper forum
in which to adjudicate such case or controversy, and the parties further agree
to submit to the personal jurisdiction of such court.
IN WITNESS WHEREOF, Purchasers and the Company have caused this Series 1
Bridge Note Purchase and Security Agreement to be duly executed as of the date
first written above.
[Signatures on the following page]
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<PAGE>
COMPANY SIGNATURE PAGE
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
COMPANY
COMPOSITECH, LTD.
By:_________________________________________
Samuel S. Gross, Executive Vice President
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<PAGE>
PURCHASER SIGNATURE PAGE
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
PURCHASER
SOVCAP EQUITY PARTNERS, LTD.
By:__________________________
Barry W. Herman, Director
================================================================================
SovCap Equity Partners, Ltd.
Purchaser Name Cumberland House
Address and #27 Cumberland Street
Facsimile Number P.O. Box CB - 13016
Nassau, New Providence
The Bahamas
================================================================================
Principal Amount of Bridge $500,000
Notes Purchased
================================================================================
Purchaser's Legal Counsel Balboni Law Group LLC
Address and 3475 Lenox Road, Suite 990
Facsimile Number Atlanta, GA 30326
================================================================================
<PAGE>
SCHEDULE 1
DISCLOSURE SCHEDULE
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
-1-
<PAGE>
EXHIBIT A
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
Form of Series 1 Bridge Note (with form of Repricing Warrant attached as
Attachment 1)
Form Attached hereto.
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<PAGE>
EXHIBIT B
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
Form of Warrant
Form Attached hereto.
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<PAGE>
EXHIBIT C
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
Form of Registration Rights Agreement
Form Attached hereto.
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<PAGE>
EXHIBIT D
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
Form of Escrow Agreement
Form Attached hereto.
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<PAGE>
EXHIBIT E
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
Financing Statement
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<PAGE>
EXHIBIT F
TO
SERIES 1 BRIDGE NOTE PURCHASE AND SECURITY AGREEMENT
Form of Opinion of Company Counsel to Purchasers
Form Attached hereto.
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<PAGE>
EXHIBIT G
TO
SERIES 1 BRIDGE NOT PURCHASE AND SECURITY AGREEMENT
List of Collateral
Form Attached hereto.
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<PAGE>
EXHIBIT H
TO
SERIES 1 BRIDGE NOT PURCHASE AND SECURITY AGREEMENT
Form of Transfer Agent Instructions Agreement
Form Attached hereto.
EXHIBIT 10.38
THIS BRIDGE NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED
UNLESS REGISTERED UNDER SUCH ACT OR UNLESS THE COMPANY RECEIVES AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
COMPOSITECH LTD.
SERIES 1 BRIDGE FINANCING NOTE
No. S1BFN-1 $500,000.00 March 16, 1999
COMPOSITECH LTD., a Delaware corporation (such corporation, or any
successor permitted hereunder, the "Company"), for value received, hereby
promises to pay to SOVCAP EQUITY PARTNERS, LTD., or any subsequent holder hereof
(such holders, assignees, or any registered assignees, the "Holders"), the
principal sum of FIVE HUNDRED THOUSAND AND NO/100 DOLLARS (US $500,000.00), and
to pay interest on such principal sum, at the rate of eight percent (8%) per
annum (the "Note Rate") from the Original Issue Date (as defined below) until
the one hundred eightieth day after the Original Issue Date (the "Maturity
Date") and at the rate of eleven percent (11%) per annum (the "Default Rate")
after the Maturity Date until payment of all principal, premium, and accrued and
unpaid interest has been paid in full. Interest shall be payable on the Maturity
Date. All such interest shall be computed on the basis of the actual number of
days elapsed during any interest period in a year of 360 days. The date on which
this Series 1 Bridge Note shall have first been issued is referred to herein as
the "Original Issue Date."
Section 1. Description. This Bridge Note is one of a series of Series 1
Bridge Financing Notes that have been authorized by the Company (the "Series 1
Bridge Notes") and are alike except for principal amount and issue date, and are
in registered form. This Series 1 Bridge Note is convertible, into shares of the
Company's Common Stock, $.01 par value (the "Common Stock"), as provided herein,
and, effective upon any such conversion, the Common Stock so issued shall be
subject to all terms and conditions and shall enjoy all rights, privileges, and
preferences applicable to such Common Stock under the Company's Certificate of
Incorporation (the "Certificate of Incorporation"). The Common Stock issuable
upon conversion of this Series 1 Bridge Note (the "Conversion Shares") are
entitled to registration rights pursuant to a Registration Rights Agreement
between Holder, the Company, and certain other signatures thereto dated March
16, 1999 (the "Registration Rights Agreement"). This Series 1 Bridge Note is
secured by certain specified equipment of the Company having a value of
approximately 200% of the principal amount of this Series 1 Bridge Note pursuant
to the terms of a Series 1 Bridge Note Purchase and Security Agreement dated
March 16, 1999 (the "Purchase Agreement"), and is otherwise entitled to all of
the rights and benefits thereunder.
Section 2. Office for Registration and Conversion. The Company shall
maintain an office where this Series 1 Bridge Note shall be surrendered or
presented for registration of transfers or exchanges and conversions. This
office will initially be located at the offices of the Company at 120 Ricefield
Lane, Hauppauge, New York 11788. The Company shall keep a register of the Series
1 Bridge Notes and of their transfer and exchange, including the names and
addresses of Holders of the Series 1 Bridge Notes. Holder shall give the Company
notice of any change in Holder's address to the office indicated in this Section
2. Upon two (2) business days written request, the Company shall permit Holder
or its duly authorized representatives to inspect such register. Upon written
notice to Holder, the Company may change the address of the office to be
maintained by the Company pursuant to this Section 2 or appoint one or more
co-registrars, stock registrars, paying agents, or conversion agents to assist
the Company in performing its functions under the Series 1 Bridge Notes.
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<PAGE>
Section 3. Redemption.
(a) Mandatory Redemption. If this Series 1 Bridge Note is outstanding on
the Maturity Date, this Series 1 Bridge Note shall be due and payable as
follows:
(i) if on the Maturity Date a Registration Statement is effective with
respect to the Conversion Shares, the Company shall give written notice to
Holder of its intent to redeem the then outstanding principal amount of
this Series 1 Bridge Note, which notice shall state the election of the
Company to pay the redemption price in cash or by conversion of this Series
1 Bridge Note into Common Stock, in the manner contemplated by Section 3(c)
hereof. Regardless of the manner is which paid, the redemption price (the
"Maturity Date Redemption Price") shall be equal to 117.5% of the then
outstanding principal amount of this Series 1 Bridge Note plus accrued and
unpaid interest thereon at the Note Rate through and including the Maturity
Date and at the Default Rate after the Maturity Date through and including
the date the payment is disbursed (whether by issuance of Conversion Shares
or a payment in cash).
(ii) if on the Maturity Date a Registration Statement is not effective
with respect to the Conversion Shares, Holder may, in addition to all other
rights and remedies of Holder hereunder and under the Purchase Agreement,
elect to make written demand to the Company to redeem, all or part of the
then outstanding principal under this Series 1 Bridge Note. Such demand
shall specify Holder's election to accept payment of the redemption price
in cash or by conversion of this Series 1 Bridge Note into Common Stock, in
the manner contemplated by Section 3(c) hereof. The Company shall have two
(2) Business Days after its receipt of such demand to confirm its intention
to redeem this Series 1 Bridge Note by tendering to Holder either (A) cash
or (B) Conversion Shares (as specified in Holder's demand), in the manner
contemplated by Section 3(c) hereof. In either case the redemption price
shall be equal to the Maturity Date Redemption Price.
(iii) The date of any redemption under either subparagraph (i) or (ii)
above shall be referred to as a "Redemption Date."
(b) Voluntary Redemption. At any time from and after the Original Issue
Date up to but not including the Maturity Date, the Company may, at its option,
call and redeem this Series 1 Bridge Note, at the redemption price set forth in
subparagraph (i), below, plus accrued and unpaid interest on such redeemed
amount through and including the Voluntary Redemption Date, as such term is
defined below (such redemption being the "Voluntary Redemption"), under and in
accordance with the following terms and procedures:
(i) The Company at its option prior to the Maturity Date may redeem
this Series 1 Bridge Note at the Redemption Price set forth below plus all
accrued and unpaid interest on the principal amount through and including
the Voluntary Redemption Date (the "Voluntary Redemption Price") as of a
Voluntary Redemption Date:
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<PAGE>
<TABLE>
<CAPTION>
Redemption Date Redemption Price
<S> <C>
Original Issue Date through and including the 90th day after the 110%
Original Issue Date
91st day after the Original Issue Date through and including the 112 1/2%
120th day after the Original Issue Date
121st day after the Original Issue Date through and including the 115%
150th day after the Original Issue Date
151st day after the Original Issue Date through and including the 117 1/2%
date of redemption or conversion
</TABLE>
(ii) At least ten (10) days before a Voluntary Redemption, the Company
shall mail a notice of redemption to Holder, stating (A) the redemption
date, which shall be a business day in New York, New York (the "Voluntary
Redemption Date"), (B) the aggregate principal amount of this Series 1
Bridge Note to be redeemed, (C) the Voluntary Redemption Price, and (D) the
name and address of the Person to whom this Series 1 Bridge Note must be
presented to receive payment if required pursuant to paragraph (iv) below.
Once notice of redemption is mailed and the Company shall have complied
with paragraph (iii) below, the Voluntary Redemption Price shall become due
and payable on the Voluntary Redemption Date.
(iii) On or before the third (3rd) day prior to the Voluntary
Redemption Date, the Company shall deposit into a bank trust account for
the benefit of the Holder of this Series 1 Bridge Note money sufficient to
pay the Redemption Price and all accrued and unpaid interest.
(iv) The Company may, at its option, require as a condition to the
receipt of a payment pursuant to this Section 3(b) that Holder present the
Series 1 Bridge Notes to the Person specified in paragraph (ii) above for
surrender.
(v) No Voluntary Redemption of this Series 1 Bridge Note can be
effected after the 179th day after the Original Issue Date.
(c) Conversion into Common Stock in Lieu of Payments.
(i) In lieu of payment of cash to Holder pursuant to Section 3(a)(i) hereof
and Section 3(b) hereof, the Company may, elect to pay all or part of the
Maturity Date Redemption Price or the Voluntary Redemption Price in Conversion
Shares, under the terms of Section 3(d) hereof.
(ii) In lieu of cash, pursuant to Section 3(a)(ii) hereof, Holder may
require the Company to pay all or part of the Maturity Date Redemption Price in
Conversion Shares, under the terms of Section 3(d) hereof.
The Repricing Warrant shall apply to each share of Common Stock received by
Holder pursuant to this Section 3(c).
(d) The number of shares of Common Stock issuable in payment of the
Mandatory Redemption Price or the Voluntary Redemption Price is equal to the
quotient of the Mandatory
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<PAGE>
Redemption Price or the Voluntary Redemption Price (as the case may be) divided
by $2.34 (the "Conversion Price"). Fractional shares will not be issued. In lieu
of any fraction of a share, the Company shall deliver its check for the dollar
amount of the less-than full share remainder.
Section 4. Method of Payment.
(a) Interest accruing through and including the Maturity Date shall be
computed at the Note Rate. Interest accruing after the Maturity date shall be
computed at the Default Rate. Accrued and unpaid interest shall be due and
payable at the time the principal and premium of this Series 1 Bridge Note is
paid. All such interest shall be computed on the basis of the actual number of
days elapsed during any interest period in a year of 360 days. Interest shall
begin to accrue on the Original Issue Date.
(b) The Company shall pay interest and principal on this Series 1 Bridge
Note (except defaulted interest) to the Person who is the registered Holder of
this Series 1 Bridge Note on the day on which the interest or principal payment
is due. If the Company defaults in a payment of interest on this Series 1 Bridge
Note, it may pay the defaulted interest, plus any interest on the defaulted
interest if permitted provided by Section 4(d) below, to the Person who is the
registered Holder of this Series 1 Bridge Note on the date such payment is made.
(c) The Company shall pay interest by check payable in money of the United
States of America that at the time of payment is legal tender for public and
private debts. Payments of interest shall be mailed to Holder's address shown in
the register maintained pursuant to Section 2; provided however, that with
respect to the final payment of principal and accrued and unpaid interest
necessary to pay this Series 1 Bridge Note in full, to receive such payment
Holder must surrender this Series 1 Bridge Note for cancellation to the Company
or to a paying agent appointed by the Company. Principal and interest shall be
considered paid on the date due, and no interest shall accrue thereafter, if
there is on deposit on that date, in a bank trust account for the benefit of
Holder of this Series 1 Bridge Note, money sufficient to pay the Redemption
Price and all accrued and unpaid interest due under this Series 1 Bridge Note.
Section 5. Conversion Price and Adjustments.
(a) At anytime after the Maturity Date, Holder may convert all or any
portion of the Redemption Price and accrued and unpaid interest due on this
Series 1 Bridge Note into shares of Common Stock.
(b) If Holder elects to convert less than the full Redemption Price of this
Series 1 Bridge Note, such conversion shall be permitted only in one hundred
(100)-share increments unless the Company has given its contemporaneous consent
to conversion of an odd lot. The provisions hereof that apply to conversion of
the entire Redemption Price of this Series 1 Bridge Note shall also apply to
conversion of a portion of the Redemption Price. Upon surrender of the Series 1
Bridge Note for conversion in part, the Company shall issue new Series 1 Bridge
Notes in substantially the same form as this Series 1 Bridge Note, except that
the principal amount shall be reduced by the principal amount so converted
(exclusive of the redemption premium).
(c) The number of shares of Common Stock issuable upon conversion of this
Series 1 Bridge Note is equal to the quotient of the Redemption Price of this
Series 1 Bridge Note being converted divided by Conversion Price. Fractional
shares will not be issued. In lieu of any fraction of a share, the Company shall
deliver its check for the dollar amount of the less than full share remainder.
Accrued and unpaid interest shall be included in computing the number of
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<PAGE>
Conversion Shares issuable upon conversion of this Series 1 Bridge Note.
Interest shall cease to accrue on that portion of the Redemption Price converted
from and after the Conversion Date.
Section 6. Procedures for Conversion, and Issuance of Conversion Shares.
(a) Holders' Delivery Requirements. To convert this Series 1 Bridge Note
into Common Stock, (the "Conversion Date"), the Holder hereof shall (A) deliver
or transmit by facsimile, for receipt on or prior to 11:59 P.M., Eastern Time,
on such date, a copy of a fully executed notice of conversion in the form
attached hereto as Exhibit A (the "Conversion Notice") to the Company or its
designated Transfer Agent, and (B) surrender to a common carrier for delivery to
the Company or the Transfer Agent as soon as practicable following such date,
the original Series 1 Bridge Note being converted (or an indemnification
undertaking with respect to such shares in the case of the loss, theft, or
destruction of the Series 1 Bridge Note) and the originally executed Conversion
Notice. The date the Company receives the Conversion Note and this Series 1
Bridge Note is hereinafter the "Conversion Date."
(b) Company's Response. Upon receipt by the Company of a facsimile copy of
a Conversion Notice, the Company shall immediately send, via Facsimile, a
confirmation of receipt of such Conversion Notice to Holder. Upon receipt by the
Company or the Transfer Agent of the Series 1 Bridge Note to be converted
pursuant to a Conversion Notice, together with the originally executed
Conversion Notice, the Company or the Transfer Agent (as applicable) shall,
within five (5) business days following the date of receipt, (A) issue and
surrender to a common carrier for overnight delivery to the address as specified
in the Conversion Notice, a certificate, registered in the name of Holder or its
designee, for the number of shares of Common Stock to which Holder shall be
entitled or (B) credit the aggregate number of shares of Common Stock to which
such Holder shall be entitled to the Holder's or its designee's balance account
at The Depository Trust Company.
(c) Record Holder. The Person or persons entitled to receive the shares of
Common Stock issuable upon a conversion of this Series 1 Bridge Note shall be
treated for all purposes as the "Record Holder" or Holder of such shares of
Common Stock on the Conversion Date.
(d) Company's Failure to Timely Convert. If the Company shall fail to issue
to Holder within five (5) business days following the date of receipt by the
Company or the Transfer Agent of this Series 1 Bridge Note to be converted
pursuant to a Conversion Notice, a certificate for the number of shares of
Common Stock to which each Holder is entitled upon Holder's conversion of this
Series 1 Bridge Note, in addition to all other available remedies which such
Holder may pursue hereunder and under the Purchase Agreement between the Company
and the initial Holder of this Series 1 Bridge Note (including indemnification
pursuant to Section 7.18 thereof), the Company shall pay additional damages to
Holder on each day after the fifth (5th) business day following the date of
receipt by the Company or the Transfer Agent an amount equal to 1.0% of the
product of (A) the number of shares of Common Stock not issued to Holder and to
which Holder is entitled multiplied by (B) the Closing Bid Price of the Common
Stock on the business day following the date of receipt by the Company or the
Transfer Agent of the Conversion Notice. The foregoing notwithstanding, Holder
at its option may withdraw a Conversion Notice, and remain a Holder of this
Series 1 Bridge Note, if Holder has otherwise complied with this Section 6.
(e) If any adjustment to the Conversion Price to be made pursuant to
Section 7 becomes effective immediately after a record date for an event as
therein described, and conversion occurs prior to such event but after the
record date, the Company may defer issuing, delivering, or paying to Holder any
additional shares of Common Stock or check for any cash
-5-
<PAGE>
remainder required by reason of such adjustment until the occurrence of such
event, provided that the Company delivers to Holder a due bill or other
appropriate instrument evidencing the Holders' right to receive such additional
shares or check upon the occurrence of the event giving rise to the adjustment.
(f) Until such time as this Series 1 Bridge Note has been fully redeemed,
the Company shall reserve out of its authorized but unissued Common Stock enough
shares of Common Stock to permit the conversion of the entire Redemption Price
and all accrued and unpaid interest due on this Series 1 Bridge Note at any
time. All shares of Common Stock issued upon conversion of this Series 1 Bridge
Note shall be fully paid and nonassessable. The Company covenants that if any
shares of Common Stock, required to be reserved for purposes of conversion of
this Series 1 Bridge Note hereunder, require registration with or approval of
any governmental authority under any federal or state law or listing upon any
national securities exchange before such shares may be issued upon conversion,
the Company shall in good faith, as expeditiously as possible, endeavor to cause
such shares to be duly registered, approved or listed, as the case may be.
Section 7. Adjustments to Conversion Price. The Conversion Price shall be
subject to adjustment from time to time as follows:
(a) If the Company at any time subdivides (by any stock split, stock
dividend, recapitalization, or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time combines (by
combination, reverse stock split, or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.
(b) Prior to the consummation of any Organic Change (as defined
below), the Company will make appropriate provision (in form and substance
satisfactory to the Holder to insure that Holder will thereafter have the
right to acquire and receive in lieu of, or in addition to, (as the case
may be) the shares of Common Stock immediately theretofore acquirable and
receivable upon the conversion of this Holder's Series 1 Bridge Note, 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 the conversion of
this Series 1 Bridge Note had such Organic Change not taken place. In any
such case, the Company will make appropriate provision (in form and
substance satisfactory to Holder with respect to such Holder's rights and
interests to insure that the provisions of this Section 7b) and Sections
7(c) and 7(d) below will thereafter be applicable. The Company will not
effect any such consolidation, merger, or sale, unless prior to the
consummation thereof the successor entity (if other than the Company)
resulting from consolidation or merger or the entity purchasing such assets
assumes, by written instrument (in form and substance satisfactory to
Holder, the obligation to deliver to Holder such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, that
Holder may be entitled to acquire. For purposes of this Agreement, "Organic
Change" means any recapitalization, reorganization, reclassification,
consolidation, merger, or sale of all or substantially all of the Company's
assets to another Person (as defined below), or other similar transaction
which is effected in such a way that holders of Common Stock are entitled
to receive (either directly or upon subsequent liquidation) stock,
securities, or assets with respect to or in exchange for Common Stock; and
"Person" means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, and
a government or any department or agency thereof.
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<PAGE>
Section 8. Notices. The Company shall give the following notices at the
times specified:
(a) Immediately upon any adjustment of the Conversion Price, the
Company will give written notice thereof to Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(b) The Company will give written notice to Holder, at least twenty
(20) days prior to the date on which the Company closes its books or takes
a record (i) with respect to any dividend or distribution upon the Common
Stock, (ii) with respect to any pro rata subscription offer to Holder of
Common Stock, or (iii) for determining rights to vote with respect to any
Organic Change, dissolution, or liquidation.
(c) The Company will also give written notice to Holder at least
twenty (20) days prior to the date on which any Organic Change, Major
Transaction (as defined below), dissolution, or liquidation will take
place.
Section 9. Successors to the Company. The Company shall not consolidate or
merge with or into, or sell all or substantially all of its assets to, any
Person unless: (i) the Person is a corporation; (ii) such Person executes, and
mails to Holder a copy of, an instrument by which such Person or an affiliate
assumes the due and punctual payment of the principal of and interest on this
Series 1 Bridge Note and the performance and observance of all the obligations
of the Company under this Series1 Bridge Note; and (iii) immediately after
giving effect to the transaction, no Event of Default or event which after
notice or lapse of time or both would become an Event of Default shall have
occurred. Upon compliance with this Section 9, Successor Corporation shall
succeed to and be substituted for the Company under this Series 1 Bridge Note
with the same effect as if the Successor Corporation had been named as the
Company herein. Nothing in this Series 1 Bridge Note shall prevent any
consolidation or merger in which the Company is the surviving corporation, or
any acquisition by the Company by purchase or otherwise of all or any part of
the assets of any other Person, and no such consolidation, merger, or
acquisition shall require compliance with this Section 9.
Section 10. Events of Default and Remedies.
(a) As used herein, an "Event of Default" occurs if:
(i) The Company defaults in the payment of principal and/or interest
when the same becomes due and payable.
(ii) the Company fails to comply with any other provision contained in
this Series 1 Bridge Note, the Purchase Agreement, the Warrant, the
Repricing Warrant, or the Registration Rights Agreement, and such failure
is not cured within five (5) days after the Company receives written demand
from Holder to remedy the same;
(iii) the Company defaults in any payment of principal of or interest
on any Debt (excluding trade payables) in excess of $100,000 beyond any
period of grace provided with respect thereto and the effect of such
failure is to cause the holder of such Debt to accelerate the Debt such
that such Debt becomes due prior to its stated maturity;
(iv) any representation or warranty made in writing by or on behalf of
(i) the Company in the Purchase Agreement or in any writing furnished in
connection with or pursuant to the Purchase Agreement or in connection with
the transactions contemplated by this Agreement, or (ii) the Company in the
Registration Rights Agreement, or (iii) the Company in the Escrow
Agreement, shall be false in any material respect on the date as of which
made;
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<PAGE>
(v) the Company makes an assignment for the benefit of creditors or is
generally not paying its debts as such debts become due;
(vi) any order or decree for relief in respect of the Company is
entered under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution, or liquidation or similar
law, whether now or hereafter in effect (herein called the "Bankruptcy
Law"), of any jurisdiction;
(vii) the Company petitions or applies to any tribunal for, or
consents to, the appointment of, or taking possession by, a trustee,
receiver, custodian, liquidation, or similar official of the Company, or of
any substantial part of the assets of the Company, or commences a voluntary
case under the Bankruptcy Law of the United States or any proceedings
relating to the Company under the Bankruptcy Law of any other jurisdiction;
(viii) any petition or application described in Section 10(a)(vi)
above is filed, or any such proceedings are commenced, against the Company
and the Company by any act indicates its approval thereof, consent thereto
or acquiescence therein, or an order, judgment or decree is entered
appointing any such trustee, receiver, custodian, liquidator, or similar
official, or approving the petition in any such proceedings, and such
order, judgment, or decree remains unstayed and in effect for more than
sixty (60) days;
(ix) any order, judgment, or decree is entered in any proceedings
against the Company decreeing the dissolution of the Company and such
order, judgment, or decree remains unstayed and in effect for more than
sixty (60) days; or
(x) a final judgment (not fully covered by insurance) in an amount in
excess of $100,000 is rendered against the Company and, within ten (10)
business days after entry thereof, such judgment is not discharged or
execution thereof stayed pending appeal, or within ten (10) days after the
expiration of any such stay, such judgment is not discharged.
(b) Upon the occurrence of an Event of Default described in subsection
(vi), (vii), or (viii) of Section 10(a), the principal of and accrued interest
on this Series 1 Bridge Note shall automatically become immediately due and
payable, without presentment, demand, protest or other requirements of any kind,
all of which are hereby expressly waived by the Company. If any other Event of
Default exists, Holder may, in addition to the exercise of any right, power, or
remedy permitted to Holder by law, declare (by written notice or notices to the
Company) the entire principal of and all interest accrued on this Series 1
Bridge Note to be due and payable, and this Series 1 Bridge Note shall thereupon
become immediately due and payable, without presentment, demand, protest, or
other notice of any kind, all of which are hereby expressly waived by the
Company. Upon such declaration, the Company will immediately pay to Holder of
this Series 1 Bridge Note the then outstanding principal of and accrued and
unpaid interest on the Series 1 Bridge Notes. If at any time after acceleration
of the maturity of the Series 1 Bridge Notes, the Company shall pay all arrears
of interest and all payments on account of principal which shall have become due
other than by acceleration (with interest on principal and, to the extent
permitted by law, on overdue interest, at the rate specified in the Series 1
Bridge Notes) and all Events of Default (other than nonpayment of principal of
or interest on this Series 1 Bridge Note due and payable solely by virtue of
acceleration) shall be remedied or waived by Holder by written notice to the
Company may rescind and annul the acceleration and its consequences, but such
action shall not affect any subsequent Event of Default or impair any right
consequent thereon.
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<PAGE>
(c) A delay or omission by the Holder of this Series 1 Bridge Note in
exercising any right or remedy arising upon an Event of Default shall not impair
such right or remedy or constitute a waiver of or an acquiescence in the Event
of Default.
(d) If any Event of Default shall occur and be continuing, the Holder of
this Series 1 Bridge Note may proceed to protect and enforce their rights under
this Agreement and this Series 1 Bridge Note by exercising such remedies as are
available to such Holder either by suit in equity or by action at law, or both,
whether for specific performance of any covenant or other agreement contained in
this Agreement or in aid of the exercise of any power granted in this Agreement.
No remedy conferred in this Agreement upon Holder is intended to be exclusive of
any other remedy, and each and every such remedy shall be cumulative and shall
be in addition to every other remedy conferred herein or now or hereafter
existing at law or in equity or by statute or otherwise.
Section 11. Exchange, Transfer, Replacement or Cancellation.
(a) This Series 1 Bridge Note may be exchanged for an equal principal
amount of Series 1 Bridge Notes in denominations of US$25,000.00 or in greater
multiples of US$5,000.00 upon written request to the Company accompanied by
surrender of this Series 1 Bridge Note to the Company or to an agent designated
for that purpose. Any Series 1 Bridge Notes issued in exchange for this Series 1
Bridge Note shall be one of this Series 1 Bridge Note referred to in Section 1,
and shall be entitled to all the rights thereof.
(b) The Series 1 Bridge Notes may not be transferred except upon the
conditions specified in this Section 11(b), which conditions are intended to
insure compliance with the provisions of the Securities Act of 1933, as amended
(the "Securities Act"). Prior to any proposed transfer of this Series 1 Bridge
Note the Holder hereof shall give written notice to the Company of the proposed
disposition and shall furnish to the Company a statement of the circumstances
surrounding the proposed disposition and an opinion of counsel reasonably
satisfactory to the Company to the effect that (i) such disposition will not
require registration of such securities under the Securities Act or
qualification of such securities under the blue sky or state securities laws of
any state in which such qualification would be required, or (ii) appropriate
action necessary for compliance with the Securities Act or the blue sky or
securities laws of such states has been taken. The Holder hereof shall cause any
proposed transferee of such securities to agree to take and hold such securities
subject to the provisions and upon the conditions specified in this Section 11.
The Company or any co-registrar appointed by the Company may require the Holder
to furnish appropriate endorsements and/or transfer documents, including
information regarding any proposed transferee's name, address and social
security or taxpayer identification number, and to pay any issue or transfer
taxes or fees as may be required by law. The registered Holder of this Series 1
Bridge Note may be treated as its owner for all purposes.
(c) If Holder claims this Series 1 Bridge Note has been lost, destroyed, or
wrongfully taken, the Company shall issue a replacement Series 1 Bridge Note
upon (i) receipt of any indemnity bond or other assurance requested by the
Company to protect it from any loss which it may suffer by reason of such
replacement or subsequent presentment of the original Series 1 Bridge Note, and
(ii) payment of any expenses reasonably incurred by the Company in replacing the
Series 1 Bridge Note.
Section 12. Amendments and Waivers. This Series 1 Bridge Note may, with the
consent of the Company and the Holder be amended or any provision thereof
waived.
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<PAGE>
Section 13. Notice. Any notice or communication hereunder shall be in
writing and delivered by first-class mail, return receipt requested, to each
Holder at its address shown in the register kept by the Company or any
co-registrar appointed by the Company and to the Company at the address of its
office to be maintained pursuant to Section 2. Failure to mail, or any defect
in, a notice or communication to any other Holder of this Series 1 Bridge Note
shall not affect its sufficiency with respect to the other Holders. If a notice
or communication is mailed to Holder in the manner provided above within the
time prescribed, it shall be deemed duly given and effective on the tenth (10th)
business day after it was deposited in the mail, whether or not Holder actually
receives it.
Section 14. No Recourse Against Others. A director, officer, employee, or
shareholder, as such, of the Company shall not have any liability for any
obligations of the Company under this Series 1 Bridge Note or for any claim
based on, in respect of or by reason of such obligations or their creation. The
Holder of this Series 1 Bridge Note by accepting this Series 1 Bridge Note
waives and releases all such liability and such waiver and release are part of
the consideration for the issue of the Series 1 Bridge Note.
Section 15. Governing Law. The Series 1 Bridge Notes shall be governed by
and construed in accordance with the laws of the State of New York, irrespective
of the choice of law provisions thereof. The parties agree that any appropriate
state court located in New Castle County, Delaware, or any Federal Court located
in Wilmington, Delaware, including without limitation to the United States
District Court of Delaware, shall have exclusive jurisdiction of any case or
controversy arising under or in connection with this Agreement and shall be a
proper forum in which to adjudicate such case or controversy. The parties
consent to the jurisdiction of such courts.
IN WITNESS WHEREOF, the parties have caused this Series 1 Bridge Financing
Note to be duly executed as of day and year first above written.
[Signatures on the following page]
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<PAGE>
COMPANY SIGNATURE PAGE
TO
SERIES 1 BRIDGE FINANCING NOTE
COMPOSITECH, LTD.
By:
----------------------------------------
Samuel S. Gross, Chief Financial Officer
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EXHIBIT 10.39
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAW AND NEITHER MAY BE SOLD OR OTHERWISE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) THE COMPANY SHALL HAVE RECEIVED A WRITTEN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER
SUCH SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
COMPOSITECH LTD.
ATTACHED REPRICING WARRANT
Warrant No. RPW-1 ____,000 shares
Original Issue Date: March 16, 1999
THIS CERTIFIES THAT, FOR VALUE RECEIVED, SOVCAP EQUITY PARTNERS, LTD. or
its assigns (the "Holder") is entitled to purchase, on the terms and conditions
hereinafter set forth, at any time or from time to time during the Exercise
Period, but not thereafter, a number of shares of the Common Stock, par value
$.01 (the "Common Stock"), of COMPOSITECH LTD., a Delaware corporation (the
"Company"), determined in accordance with Section 2 hereof, at a price of $.01
per share (the "Exercise Price"). Each share of Common Stock as to which this
Repricing Warrant is exercisable is a "Repricing Share" and all such shares are
collectively referred to as the "Repricing Shares." This Repricing Warrant shall
remain attached to the Series 1 Bridge Financing Note issued to Holder on the
Original Issue Date (the "Bridge Note"), until conversion of the Bridge Note, at
which time it shall automatically detach.
Section 1. Definitions.
The following capitalized terms are not defined elsewhere in this Repricing
Warrant, and are used herein with the meanings thereafter ascribed:
"Average Market Price" means, the arithmetic mean of the Closing Bid
Prices of the Common Stock for each trading day in a ten (10) trading day
period which ends on the Exercise Date.
"Closing Bid Price" means, the last closing bid price of the Common
Stock on the NASDAQ National Market (the "NASDAQ-NM") as reported by
Bloomberg Financial Markets ("Bloomberg"), or, if the NASDAQ-NM is not the
principal trading market for the Common Stock, the last closing bid price
of the Common Stock on the principal securities exchange or trading market
where the Common Stock is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price of the Common Stock
in the over-the-counter market on the pink sheets or bulletin board for the
Common Stock as reported by Bloomberg, or, if no closing bid price is
reported for the Common Stock by Bloomberg, the last closing trade price of
the Common Stock as reported by Bloomberg. If the Closing Bid Price cannot
be calculated for the Common Stock on such date on any of the foregoing
bases, the Closing Bid Price of the Common Stock on such date shall be the
fair market value as reasonably determined in good faith by the Board of
Directors of the Company (all as appropriately adjusted for any stock
dividend, stock split, or other similar transaction during such period);
"Conversion Date" means the date Bridge Note is converted into Common
Stock.
"Conversion Price" means $2.34, the conversion price of the Bridge
Note.
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"Conversion Shares" means the number of shares of Common Stock issued
upon conversion of the Bridge Note.
"Exercise Period" means a period which commences on the Conversion
Date and ends at 5:00 p.m. (Eastern Time) on the Expiration Date.
"Expiration Date" means the ninetieth (90th) day after the Conversion
Date, provided however, that the Expiration Date shall accelerate to the
twenty-first (21st) trading day after the Conversion Date, if and only if
the average Closing Bid Price of the Common Stock over a period of twenty
(20) trading days commencing on the Conversion Date is at least 120% of the
Conversion Price.
Section 2. Determination of Number of Repricing Shares. The number of
Repricing Shares issuable upon exercise of this Repricing Warrant shall be
determined on the Exercise Date. The number of Repricing Shares shall be equal
to: the number of Conversion Shares multiplied by a fraction, (a) the numerator
of which is 120% of the Conversion Price minus the Average Market Price and (b)
the denominator of which is the Average Market Price. In the case of a dispute
as to the determination of the Average Market Price or the arithmetic
calculation of the Exercise Price, the Company shall promptly issue to such
Holder(s) the number of shares of Common Stock that is not disputed and shall
submit the disputed determinations or arithmetic calculations to the holder via
facsimile within three (3) business days of receipt of such holder's Conversion
Notice. If such Holder(s) and the Company are unable to agree upon the
determination of the Average Market Price or arithmetic calculation of the
Exercise Price within two (2) business days of such disputed determination or
arithmetic calculation being submitted to the holder, then the Company shall
within one (1) business day submit via facsimile (A) the disputed determination
of the Average Market Price to an independent, reputable investment bank or (B)
the disputed arithmetic calculation of the Exercise Price to its independent,
outside accountant. The Company shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and such Holders of the results no later than forty-eight
(48) hours from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
manifest error.
Section 3. Exercise of Warrant; Conversion of Warrant; Election to Pay
Cash.
(a) This Warrant may, at the option of the Holder, be exercised in whole or
in part from time to time by delivery to the Company at its office at 120
Ricefield Lane, Hauppauge, New York 11788, Attention: President, or to any
transfer agent for the Common Stock, on or before 5:00 p.m., Eastern Time, on
the Expiration Date, (i) a written notice of such registered Holder's election
to exercise this Warrant (the "Exercise Notice"), which notice may be in the
form of the Notice of Exercise attached hereto, properly executed and completed
by the registered Holder or an authorized officer thereof, (ii) a check payable
to the order of the Corporation, in an amount equal to the product of the
Exercise Price multiplied by the number of Repricing Shares specified in the
Exercise Notice, and (iii) this Warrant (the items specified in (i), (ii), and
(iii) are collectively the "Exercise Materials").
(b) This Warrant may, at the option of the Holder, be converted into Common
Stock in whole but not in part, if and only if the Value of one share of Common
Stock on the Exercise Date (as defined in Section 1(c) hereof) is greater than
the Exercise Price, by delivery to the Company at the address designated in
Section 1(a) above or to any transfer agent for the Common Stock, on or before
5:00 p.m. Eastern Time on the Expiration Date, (i) a written notice of Holder's
election to convert this Warrant (the "Conversion Notice"), properly executed
and
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completed by the registered Holder or an authorized officer thereof, and (ii)
this Warrant (the items specified in (i) and (ii) are collectively the
"Conversion Materials"). The number of shares of Common Stock issuable upon
conversion of this Warrant is equal to the quotient of (x) the product of the
number of Repricing Shares then issuable upon exercise of this Warrant (assuming
an exercise for cash) multiplied by the difference between (A) the Average
Market Price minus (B) the then effective Exercise Price divided by (y) the
Average Market Price. Any fraction resulting from the calculation of the number
of Repricing Shares then issuable in a conversion of this Repricing Warrant
shall be truncated;
(c) Upon timely receipt of the Exercise Materials or Conversion Materials
(whichever is applicable), the Company shall, as promptly as practicable, and in
any event within five (5) business days after its receipt of the Exercise
Materials or Conversion Materials, execute or cause to be executed and delivered
to Holder a certificate or certificates representing the number of Repricing
Shares specified in the Exercise Notice or if Holder delivered a Conversion
Notice, the number of shares of Common Stock issuable upon conversion of this
Warrant (whichever is applicable), together with cash in lieu of any fraction of
a share, and, (x) if the Warrant is exercised in full, a copy of this Warrant
marked "Exercised," or (y) if the Warrant is partially exercised, a copy of this
Warrant marked "Partially Exercised" together with a new Warrant on the same
terms for the unexercised balance of the Repricing Shares, or (z) if the Warrant
is converted, a copy of this Warrant marked "Converted." The stock certificate
or certificates shall be registered in the name of the registered Holder of this
Warrant or such other name or names as shall be designated in the Exercise
Notice or Conversion Notice. The date on which the Warrant shall be deemed to
have been exercised or converted (the "Exercise Date"), and the date the person
in whose name any certificate evidencing the Common Stock issued upon the
exercise or conversion hereof is issued shall be deemed to have become the
holder of record of such shares, shall be the date the Corporation receives the
Exercise Materials or Conversion Materials, irrespective of the date of delivery
of a certificate or certificates evidencing the Common Stock issued upon the
exercise or conversion hereof, except that, if the date on which the Exercise
Materials or Conversion Materials are received by the Company is a date on which
the stock transfer books of the Company are closed, the Exercise Date shall be
the date the Company receives the Exercise Materials or Conversion Materials,
and the date such person shall be deemed to have become the holder of the Common
Stock issued upon the exercise or conversion hereof shall be the next succeeding
date on which the stock transfer books are open. All shares of Common Stock
issued upon the exercise or conversion of this Warrant will, upon issuance, be
fully paid and nonassessable and free from all taxes, liens, and charges with
respect thereto.
(d) If the Company shall fail to issue to Holder within five (5) business
days following the date of receipt by the Company or the Transfer Agent of the
Exercise Materials or the Conversion Materials, a certificate for the number of
shares of Common Stock to which such holder is entitled upon such holder's
exercise or conversion of this Warrant, in addition to all other available
remedies which such holder may pursue hereunder and under this Warrant and the
Series 1 Bridge Note Purchase and Security Agreement dated March 16, 1999
between the Company and the initial holder of this Warrant (the "Securities
Purchase Agreement") including indemnification pursuant to Section 7.18 thereof,
the Company shall pay additional damages to such holder on each day after the
Exercise Date, an amount equal to 1.0% of the product of (A) the number of
Repricing Shares not issued to Holder and to which Holder is entitled multiplied
by (B) the Closing Bid Price of the Common Stock on the Exercise Date. Such
damages shall be computed daily and are due and payable daily. Additionally,
notwithstanding anything in this Section 3 to the contrary, Holder may withdraw
an Exercise
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<PAGE>
Notice at any time prior to Holder's receipt of certificates evidencing the
Conversion Shares if Holder has otherwise complied with the requirements of this
Section 3.
(e) The Company may, in lieu of issuing the Repricing Shares pay Holder an
amount equal to the number of Repricing Shares issuable on the Exercise Date
multiplied by the Average Market Price (the "Payment Amount"). In such event,
the Company shall be obligated to deliver the Payment Amount to Holder within
five (5) business days following the Exercise Date. If the Company shall fail to
deliver the Payment Amount within five (5) business days after the Exercise
Date, in addition to all other available remedies which Holder may pursue at law
or equity, including indemnification pursuant to Section 7.18 of the Securities
Purchase Agreement, the Company shall pay additional damages to Holder on each
day after the Exercise Date, until the Payment Amount has been paid, an amount
equal to 1.0% of the Payment Amount. Such damages shall be computed daily and
are due and payable daily.
Section 4. Adjustments to Repricing Shares. The number of Repricing Shares
issuable upon the exercise hereof shall be subject to adjustment as follows:
(a) In the event the Company is a party to a consolidation, share
exchange, or merger, or the sale of all or substantially all of the assets
of the Company to, any person, or in the case of any consolidation or
merger of another corporation into the Company in which the Company is the
surviving corporation, and in which there is a reclassification or change
of the shares of Common Stock of the Company, this Warrant shall after such
consolidation, share exchange, merger, or sale be exercisable for the kind
and number of securities or amount and kind of property of the Company or
the corporation or other entity resulting from such share exchange, merger,
or consolidation, or to which such sale shall be made, as the case may be
(the "Successor Company"), to which a holder of the number of shares of
Common Stock deliverable upon the exercise (immediately prior to the time
of such consolidation, share exchange, merger, or sale) of this Warrant
would have been entitled upon such consolidation, share exchange, merger,
or sale; and in any such case appropriate adjustments shall be made in the
application of the provisions set forth herein with respect to the rights
and interests of the registered Holder of this Warrant, such that the
provisions set forth herein shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to the number and
kind of securities or the type and amount of property thereafter
deliverable upon the exercise of this Warrant. The above provisions shall
similarly apply to successive consolidations, share exchanges, mergers, and
sales. Any adjustment required by this Section 2 (a) because of a
consolidation, share exchange, merger, or sale shall be set forth in an
undertaking delivered to the registered Holder of this Warrant and executed
by the Successor Company which provides that the Holder of this Warrant
shall have the right to exercise this Warrant for the kind and number of
securities or amount and kind of property of the Successor Company or to
which the holder of a number of shares of Common Stock deliverable upon
exercise (immediately prior to the time of such consolidation, share
exchange, merger, or sale) of this Warrant would have been entitled upon
such consolidation, share exchange, merger, or sale. Such undertaking shall
also provide for future adjustments to the number of Repricing Shares and
the Exercise Price in accordance with the provisions set forth in Section 2
hereof.
(b) In the event the Company should at any time, or from time to time
after the Original Issue Date, fix a record date for the effectuation of a
stock split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common Stock, or
securities or rights convertible into, or entitling the holder thereof to
receive directly or
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<PAGE>
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such
holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
exercise or exercise thereof), then, as of such record date (or the date of
such dividend, distribution, split, or subdivision if no record date is
fixed), the number of Repricing Shares issuable upon the exercise hereof
shall be proportionately increased and the Exercise Price shall be
appropriately decreased by the same proportion as the increase in the
number of outstanding Common Stock Equivalents of the Company resulting
from the dividend, distribution, split, or subdivision. Notwithstanding the
preceding sentence, no adjustment shall be made to decrease the Exercise
Price below $.01 per Share.
(c) In the event the Company should at any time or from time to time
after the Original Issue Date, fix a record date for the effectuation of a
reverse stock split, or a transaction having a similar effect on the number
of outstanding shares of Common Stock of the Company, then, as of such
record date (or the date of such reverse stock split or similar transaction
if no record date is fixed), the number of Repricing Shares issuable upon
the exercise hereof shall be proportionately decreased and the Exercise
Price shall be appropriately increased by the same proportion as the
decrease of the number of outstanding Common Stock Equivalents resulting
from the reverse stock split or similar transaction.
(d) In the event the Company should at any time or from time to time
after the Original Issue Date, fix a record date for a reclassification of
its Common Stock, then, as of such record date (or the date of the
reclassification if no record date is set), this Warrant shall thereafter
be convertible into such number and kind of securities as would have been
issuable as the result of such reclassification to a holder of a number of
shares of Common Stock equal to the number of Repricing Shares issuable
upon exercise of this Warrant immediately prior to such reclassification,
and the Exercise Price shall be unchanged.
(e) The Company will not, by amendment of its Certificate of
Incorporation or through reorganization, consolidation, merger,
dissolution, issue, or sale of securities, sale of assets or any other
voluntary action, void or seek to avoid the observance or performance of
any of the terms of the Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such actions
as may be necessary or appropriate in order to protect the rights of the
Holder against dilution or other impairment. Without limiting the
generality of the foregoing, the Company (x) will not create a par value of
any share of stock receivable upon the exercise of the Warrant above the
amount payable therefor upon such exercise, and (y) will take all such
action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable shares upon the
exercise of the Warrant.
(f) When any adjustment is required to be made in the number or kind
of shares purchasable upon exercise of the Warrant, or in the Exercise
Price, the Company shall promptly notify the Holder of such event and of
the number of shares of Common Stock or other securities or property
thereafter purchasable upon exercise of the Warrants and of the Exercise
Price, together with the computation resulting in such adjustment.
(g) The Company covenants and agrees that all Repricing Shares which
may be issued will, upon issuance, be validly issued, fully paid, and
non-assessable. The Company further covenants and agrees that the Company
will at all times have authorized and reserved, free from preemptive
rights, a sufficient number of shares of its Common Stock to provide for
the exercise of the Warrant in full.
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Section 5. No Stockholder Rights. This Warrant shall not entitle the Holder
hereof to any voting rights or other rights as a stockholder of the Company.
Section 6. Transfer of Securities.
(a) This Warrant and the Repricing Shares and any shares of capital stock
received in respect thereof, whether by reason of a stock split or share
reclassification thereof, a stock dividend thereon, or otherwise, shall not be
transferable except upon compliance with the provisions of the Securities Act of
1933, as amended (the "Securities Act") and applicable state securities laws
with respect to the transfer of such securities. The Holder of this Warrant, by
acceptance of this Warrant, agrees to be bound by the provisions of Section 4
hereof and to indemnify and hold harmless the Company against any loss or
liability arising from the disposition of this Warrant or the Repricing Shares
issuable upon exercise hereof or any interest in either thereof in violation of
the provisions of this Warrant.
(b) Each certificate for the Repricing Shares and any shares of capital
stock received in respect thereof, whether by reason of a stock split or share
reclassification thereof, a stock dividend thereon or otherwise, and each
certificate for any such securities issued to subsequent transferees of any such
certificate shall (unless otherwise permitted by the provisions hereof) be
stamped or otherwise imprinted with a legend in substantially the following
form:
Legend for Repricing Shares or other shares of capital stock:
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAW AND NEITHER MAY BE SOLD OR OTHERWISE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) THE COMPANY SHALL HAVE RECEIVED A WRITTEN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER
SUCH SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
Section 7. Miscellaneous.
(a) The terms of this Warrant shall be binding upon and shall inure to the
benefit of any successors or assigns of the Company and of the holder or holders
hereof and of the Common Stock issued or issuable upon the exercise hereof.
(b) Except as otherwise provided herein, this Warrant and all rights
hereunder are transferable by the registered holder hereof in person or by duly
authorized attorney on the books of the Company upon surrender of this Warrant,
properly endorsed, to the Company. The Company may deem and treat the registered
holder of this Warrant at any time as the absolute owner hereof for all purposes
and shall not be affected by any notice to the contrary.
(c) Notwithstanding any provision herein to the contrary, Holder hereof may
not exercise, sell, transfer, or otherwise assign this Warrant unless the
Company is provided with an opinion of counsel satisfactory in form and
substance to the Company, to the effect that such exercise, sale, transfer, or
assignment would not violate the Securities Act or applicable state securities
laws.
(d) This Warrant may be divided into separate Warrants covering one share
of Common Stock or any whole multiple thereof, for the total number of shares of
Common Stock
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<PAGE>
then subject to this Warrant at any time, or from time to time, upon the request
of the registered holder of this Warrant and the surrender of the same to the
Company for such purpose. Such subdivided Warrants shall be issued promptly by
the Company following any such request and shall be of the same form and tenor
as this Warrant, except for any requested change in the name of the registered
holder stated herein.
(e) All notices, requests, demands, and other communications required or
permitted under this Warrant and the transactions contemplated herein shall be
in writing and shall be deemed to have been duly given, made, and received when
personally delivered the day after deposited with a recognized national
overnight delivery service prior to its dead-line for receiving packages for
next day delivery or upon the fifth day after deposited in the United States
registered or certified mail with postage prepaid, return receipt requested, in
each case addressed as set forth below:
If to the Company:
Compositech Ltd.
120 Ricefield Lane
Hauppauge, New York 11788
Attn: Samuel S. Gross
Facsimile: (516) 436-5203
If to the Holder hereof, to the address of such Holder appearing on the
books of the Company.
(f) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, irrespective of the choice of law provisions
thereof. The parties agree that any appropriate state court located in New
Castle County, Delaware, or any federal Court located in Wilmington, Delaware,
including without limitation to the United States District Court of Delaware,
shall have exclusive jurisdiction of any case or controversy arising under or in
connection with this Agreement and shall be a proper forum in which to
adjudicate such case or controversy. The parties consent to the jurisdiction of
such courts.
[Signatures on the following page]
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<PAGE>
SIGNATURE PAGE
TO
ATTACHED REPRICING WARRANT
IN WITNESS WHEREOF, the Company, has caused this Warrant to be executed in
its name by its duly authorized officers under its corporate seal, and to be
dated as of the date first above written.
COMPOSITECH LTD.
By:
-----------------------------------------
Samuel S. Gross, Executive Vice President
ATTEST:
- ------------------------
Secretary
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<PAGE>
ASSIGNMENT
(To be Executed by the Registered Holder to effect a Transfer of the
foregoing Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, and assigns and transfers
unto ___________________________________________________________________________
the foregoing Warrant and the rights represented thereto to purchase shares of
Common Stock of Compositech Ltd. in accordance with terms and conditions
thereof, and does hereby irrevocably constitute and appoint ________________
Attorney to transfer the said Warrant on the books of the Company, with full
power of substitution.
Holder:
_______________________________
_______________________________
Address
Dated: __________________, 19__
In the presence of:
_______________________________
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FORM OF NOTICE OF EXERCISE or conversion
[To be signed only upon exercise of Warrant]
To: COMPOSITECH LTD.
The undersigned registered Holder of the attached Warrant hereby
irrevocably elects to exercise the Warrant for, and to purchase thereunder,
_____ shares of Common Stock of Compositech Ltd., issuable upon exercise of said
Warrant and hereby surrenders said Warrant.
Choose One:
The Holder herewith delivers to Compositech Ltd., a check in the amount of
$______ representing the Exercise Price for such shares.
or
The Holder elects a cashless exercise pursuant to Section 2(b) of the
Warrant. The Average Market Price as of _______ was $_____.
The undersigned herewith requests that the certificates for such shares be
issued in the name of, and delivered to the undersigned, whose address is
________________________________.
Dated: ___________________
Holder:
_______________________________
_______________________________
By:____________________________
__________
NOTICE
The signature above must correspond to the name as written upon the face of
the within Warrant in every particular, without alteration or enlargement or any
change whatsoever.
EXHIBIT 10.40
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAW AND NEITHER MAY BE SOLD OR OTHERWISE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) THE COMPANY SHALL HAVE RECEIVED A WRITTEN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER
SUCH SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
COMPOSITECH LTD.
COMMON STOCK PURCHASE WARRANT
Warrant No. 1 100,000 shares
Original Issue Date: March 16, 1999
THIS CERTIFIES THAT, FOR VALUE RECEIVED, SOVCAP EQUITY PARTNERS, LTD. or
its assigns (the "Holder") is entitled to purchase, on the terms and conditions
hereinafter set forth, at any time or from time to time from the date hereof
until 5:00 p.m., Eastern Time, on the fifth (5th) anniversary of the Original
Issue Date set forth above, or if such date is not a day on which the Company is
open for business, then the next succeeding day on which the Company is open for
business (such date is the "Expiration Date"), but not thereafter, up to ONE
HUNDRED THOUSAND (100,000) shares of the Common Stock, par value $.01 (the
"Common Stock"), of COMPOSITECH LTD., a Delaware corporation (the "Company"), at
a price of $.____ {110% of Closing Bid Price on Original Issue Date} per share
(the "Exercise Price"), such number of shares and Exercise Price being subject
to adjustment upon the occurrence of the contingencies set forth in this
Warrant. Each share of Common Stock as to which this Warrant is exercisable is a
"Warrant Share" and all such shares are collectively referred to as the "Warrant
Shares."
Section 1. Exercise of Warrant; Conversion of Warrant.
(a) This Warrant may, at the option of the Holder, be exercised in whole or
in part from time to time by delivery to the Company at its office at 120
Ricefield Lane, Hauppauge, New York 11788, Attention: President, or to any
transfer agent for the Common Stock, on or before 5:00 p.m., Eastern Time, on
the Expiration Date, (i) a written notice of such registered Holder's election
to exercise this Warrant (the "Exercise Notice"), which notice may be in the
form of the Notice of Exercise attached hereto, properly executed and completed
by the registered Holder or an authorized officer thereof, (ii) a check payable
to the order of the Company, in an amount equal to the product of the Exercise
Price multiplied by the number of Warrant Shares specified in the Exercise
Notice, and (iii) this Warrant (the items specified in (i), (ii), and (iii) are
collectively the "Exercise Materials").
(b) Upon timely receipt of the Exercise Materials, the Company shall, as
promptly as practicable, and in any event within five (5) business days after
its receipt of the Exercise Materials, execute or cause to be executed and
delivered to Holder a certificate or certificates representing the number of
Warrant Shares specified in the Exercise Notice, together with cash in lieu of
any fraction of a share, and, (x) if the Warrant is exercised in full, a copy of
this Warrant marked "Exercised," or (y) if the Warrant is partially exercised, a
copy of this Warrant marked "Partially Exercised" together with a new Warrant on
the same terms for the unexercised balance of the Warrant Shares, or (z) if the
Warrant is converted, a copy of this Warrant marked "Converted." The stock
certificate or certificates shall be registered in the name of the registered
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Holder of this Warrant or such other name or names as shall be designated in the
Exercise Notice or Conversion Notice. The date on which the Warrant shall be
deemed to have been exercised or converted (the "Effective Date"), and the date
the person in whose name any certificate evidencing the Common Stock issued upon
the exercise or conversion hereof is issued shall be deemed to have become the
holder of record of such shares, shall be the date the Corporation receives the
Exercise Materials, irrespective of the date of delivery of a certificate or
certificates evidencing the Common Stock issued upon the exercise or conversion
hereof, except that, if the date on which the Exercise Materials are received by
the Company is a date on which the stock transfer books of the Company are
closed, the Effective Date shall be the date the Company receives the Exercise
Materials, and the date such person shall be deemed to have become the holder of
the Common Stock issued upon the exercise or conversion hereof shall be the next
succeeding date on which the stock transfer books are open. All shares of Common
Stock issued upon the exercise or conversion of this Warrant will, upon
issuance, be fully paid and nonassessable and free from all taxes, liens, and
charges with respect thereto.
(c) If the Company shall fail to issue to Holder within five (5) business
days following the Effective Date a certificate for the number of shares of
Common Stock to which such holder is entitled upon such holder's exercise or
conversion of this Warrant, in addition to all other available remedies which
such holder may pursue hereunder and the Series 1 Bridge Note Purchase and
Security Agreement between the Company and the initial holder of the Warrant
(the "Securities Purchase Agreement") including indemnification pursuant to
Section 7.18 thereof (all of which shall be cumulative), the Company shall pay
additional damages to such holder on each day after the Effective Date, an
amount equal to 1.0% of the product of (A) the number of Warrant Shares not
issued to Holder and to which Holder is entitled multiplied by (B) the Closing
Bid Price of the Common Stock on the Effective Date. Such damages shall be
computed daily and are due and payable daily. Additionally, notwithstanding
anything in this Section 1 to the contrary, Holder may withdraw an Exercise
Notice at any time prior to Holder's receipt of certificates evidencing the
Warrant Shares if Holder has otherwise complied with the requirements of this
Section 1.
Section 2. Adjustments to Warrant Shares. The number of Warrant Shares
issuable upon the exercise hereof shall be subject to adjustment as follows:
(a) In the event the Company is a party to a consolidation, share
exchange, or merger, or the sale of all or substantially all of the assets
of the Company to, any person, or in the case of any consolidation or
merger of another corporation into the Company in which the Company is the
surviving corporation, and in which there is a reclassification or change
of the shares of Common Stock of the Company, this Warrant shall after such
consolidation, share exchange, merger, or sale be exercisable for the kind
and number of securities or amount and kind of property of the Company or
the corporation or other entity resulting from such share exchange, merger,
or consolidation, or to which such sale shall be made, as the case may be
(the "Successor Company"), to which a holder of the number of shares of
Common Stock deliverable upon the exercise (immediately prior to the time
of such consolidation, share exchange, merger, or sale) of this Warrant
would have been entitled upon such consolidation, share exchange, merger,
or sale; and in any such case appropriate adjustments shall be made in the
application of the provisions set forth herein with respect to the rights
and interests of the registered Holder of this Warrant, such that the
provisions set forth herein shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to the number and
kind of securities or the type and amount of property thereafter
deliverable upon the exercise of this Warrant. The above provisions shall
similarly apply to successive consolidations, share
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<PAGE>
exchanges, mergers, and sales. Any adjustment required by this Section 2
(a) because of a consolidation, share exchange, merger, or sale shall be
set forth in an undertaking delivered to the registered Holder of this
Warrant and executed by the Successor Company which provides that the
Holder of this Warrant shall have the right to exercise this Warrant for
the kind and number of securities or amount and kind of property of the
Successor Company or to which the holder of a number of shares of Common
Stock deliverable upon exercise (immediately prior to the time of such
consolidation, share exchange, merger, or sale) of this Warrant would have
been entitled upon such consolidation, share exchange, merger, or sale.
Such undertaking shall also provide for future adjustments to the number of
Warrant Shares and the Exercise Price in accordance with the provisions set
forth in Section 2 hereof.
(b) In the event the Company should at any time, or from time to time
after the Original Issue Date, fix a record date for the effectuation of a
stock split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common Stock, or
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock
or the Common Stock Equivalents (including the additional shares of Common
Stock issuable upon exercise or exercise thereof), then, as of such record
date (or the date of such dividend, distribution, split, or subdivision if
no record date is fixed), the number of Warrant Shares issuable upon the
exercise hereof shall be proportionately increased and the Exercise Price
shall be appropriately decreased by the same proportion as the increase in
the number of outstanding Common Stock Equivalents of the Company resulting
from the dividend, distribution, split, or subdivision. Notwithstanding the
preceding sentence, no adjustment shall be made to decrease the Exercise
Price below $.01 per Share.
(c) In the event the Company should at any time or from time to time
after the Original Issue Date, fix a record date for the effectuation of a
reverse stock split, or a transaction having a similar effect on the number
of outstanding shares of Common Stock of the Company, then, as of such
record date (or the date of such reverse stock split or similar transaction
if no record date is fixed), the number of Warrant Shares issuable upon the
exercise hereof shall be proportionately decreased and the Exercise Price
shall be appropriately increased by the same proportion as the decrease of
the number of outstanding Common Stock Equivalents resulting from the
reverse stock split or similar transaction.
(d) In the event the Company should at any time or from time to time
after the Original Issue Date, fix a record date for a reclassification of
its Common Stock, then, as of such record date (or the date of the
reclassification if no record date is set), this Warrant shall thereafter
be convertible into such number and kind of securities as would have been
issuable as the result of such reclassification to a holder of a number of
shares of Common Stock equal to the number of Warrant Shares issuable upon
exercise of this Warrant immediately prior to such reclassification, and
the Exercise Price shall be unchanged.
(e) The Company will not, by amendment of its Certificate of
Incorporation or through reorganization, consolidation, merger,
dissolution, issue, or sale of securities, sale of assets or any other
voluntary action, void or seek to avoid the observance or performance of
any of the terms of the Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such actions
as may be necessary or appropriate in order to protect the rights of the
Holder against dilution or other impairment. Without limiting the
generality of
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<PAGE>
the foregoing, the Company (x) will not create a par value of any share of
stock receivable upon the exercise of the Warrant above the amount payable
therefor upon such exercise, and (y) will take all such action as may be
necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares upon the exercise of the
Warrant.
(f) When any adjustment is required to be made in the number or kind
of shares purchasable upon exercise of the Warrant, or in the Exercise
Price, the Company shall promptly notify the Holder of such event and of
the number of shares of Common Stock or other securities or property
thereafter purchasable upon exercise of the Warrants and of the Exercise
Price, together with the computation resulting in such adjustment.
(g) The Company covenants and agrees that all Warrant Shares which may
be issued will, upon issuance, be validly issued, fully paid, and
non-assessable. The Company further covenants and agrees that the Company
will at all times have authorized and reserved, free from preemptive
rights, a sufficient number of shares of its Common Stock to provide for
the exercise of the Warrant in full.
Section 3. No Stockholder Rights. This Warrant shall not entitle the Holder
hereof to any voting rights or other rights as a stockholder of the Company.
Section 4. Transfer of Securities.
(a) This Warrant and the Warrant Shares and any shares of capital stock
received in respect thereof, whether by reason of a stock split or share
reclassification thereof, a stock dividend thereon, or otherwise, shall not be
transferable except upon compliance with the provisions of the Securities Act of
1933, as amended (the "Securities Act") and applicable state securities laws
with respect to the transfer of such securities. The Holder of this Warrant, by
acceptance of this Warrant, agrees to be bound by the provisions of Section 4
hereof and to indemnify and hold harmless the Company against any loss or
liability arising from the disposition of this Warrant or the Warrant Shares
issuable upon exercise hereof or any interest in either thereof in violation of
the provisions of this Warrant.
(b) Each certificate for the Warrant Shares and any shares of capital stock
received in respect thereof, whether by reason of a stock split or share
reclassification thereof, a stock dividend thereon or otherwise, and each
certificate for any such securities issued to subsequent transferees of any such
certificate shall (unless otherwise permitted by the provisions hereof) be
stamped or otherwise imprinted with a legend in substantially the following
form:
Legend for Warrant Shares or other shares of capital stock:
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAW AND NEITHER MAY BE SOLD OR OTHERWISE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) THE COMPANY SHALL HAVE RECEIVED A WRITTEN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER
SUCH SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
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<PAGE>
Section 5. Miscellaneous.
(a) The terms of this Warrant shall be binding upon and shall inure to the
benefit of any successors or assigns of the Company and of the holder or holders
hereof and of the Common Stock issued or issuable upon the exercise hereof.
(b) Except as otherwise provided herein, this Warrant and all rights
hereunder are transferable by the registered holder hereof in person or by duly
authorized attorney on the books of the Company upon surrender of this Warrant,
properly endorsed, to the Company. The Company may deem and treat the registered
holder of this Warrant at any time as the absolute owner hereof for all purposes
and shall not be affected by any notice to the contrary.
(c) Notwithstanding any provision herein to the contrary, Holder hereof may
not exercise, sell, transfer, or otherwise assign this Warrant unless the
Company is provided with an opinion of counsel satisfactory in form and
substance to the Company, to the effect that such exercise, sale, transfer, or
assignment would not violate the Securities Act or applicable state securities
laws.
(d) This Warrant may be divided into separate Warrants covering one share
of Common Stock or any whole multiple thereof, for the total number of shares of
Common Stock then subject to this Warrant at any time, or from time to time,
upon the request of the registered holder of this Warrant and the surrender of
the same to the Company for such purpose. Such subdivided Warrants shall be
issued promptly by the Company following any such request and shall be of the
same form and tenor as this Warrant, except for any requested change in the name
of the registered holder stated herein.
(e) All notices, requests, demands, and other communications required or
permitted under this Warrant and the transactions contemplated herein shall be
in writing and shall be deemed to have been duly given, made, and received when
personally delivered the day after deposited with a recognized national
overnight delivery service prior to its dead-line for receiving packages for
next day delivery or upon the fifth day after deposited in the United States
registered or certified mail with postage prepaid, return receipt requested, in
each case addressed as set forth below:
If to the Company:
Compositech Ltd.
120 Ricefield Lane
Hauppauge, New York 11788
Attn: Samuel S. Gross
Facsimile: (516) 436-5203
If to the Holder hereof, to the address of such Holder appearing on the
books of the Company.
(f) This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, irrespective of the choice of law provisions
thereof. The parties agree that any appropriate state court located in New
Castle County, Delaware, or any federal Court located in Wilmington, Delaware,
including without limitation to the United States District Court
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<PAGE>
of Delaware, shall have exclusive jurisdiction of any case or controversy
arising under or in connection with this Agreement and shall be a proper forum
in which to adjudicate such case or controversy. The parties consent to the
jurisdiction of such courts.
[Signatures on the following page]
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<PAGE>
SIGNATURE PAGE
TO
COMPANY
COMMON STOCK PURCHASE WARRANT
IN WITNESS WHEREOF, the Company, has caused this Warrant to be executed in
its name by its duly authorized officers under its corporate seal, and to be
dated as of the date first above written.
COMPOSITECH LTD.
By:
-----------------------------------------
Samuel S. Gross, Executive Vice President
ATTEST:
- ---------------------
Secretary
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<PAGE>
ASSIGNMENT
(To be Executed by the Registered Holder to effect a Transfer of the
foregoing Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, and assigns and transfers
unto ___________________________________________________________________________
the foregoing Warrant and the rights represented thereto to purchase shares of
Common Stock of Compositech Ltd. in accordance with terms and conditions
thereof, and does hereby irrevocably constitute and appoint ________________
Attorney to transfer the said Warrant on the books of the Company, with full
power of substitution.
Holder:
_______________________________
_______________________________
Address
Dated: __________________, 19__
In the presence of:
_______________________________
<PAGE>
FORM OF NOTICE OF EXERCISE OR CONVERSION
[To be signed only upon exercise of Warrant]
To: COMPOSITECH LTD.
The undersigned registered Holder of the attached Warrant hereby
irrevocably elects to exercise the Warrant for, and to purchase thereunder,
_____ shares of Common Stock of Compositech Ltd., issuable upon exercise of said
Warrant and hereby surrenders said Warrant.
The Holder herewith delivers to Compositech Ltd., a check in the amount of
$______ representing the Exercise Price for such shares.
The undersigned herewith requests that the certificates for such shares be
issued in the name of, and delivered to the undersigned, whose address is
________________________________.
Dated: ___________________
Holder:
_______________________________
_______________________________
By:____________________________
________
NOTICE
The signature above must correspond to the name as written upon the face of
the within Warrant in every particular, without alteration or enlargement or any
change whatsoever.
EXHIBIT 10.41
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement"), is made and entered into
as of the 16th day of March, 1999, by and among COMPOSITECH LTD., a Delaware
corporation (the "Company"), and the Persons listed on the Purchaser Signature
Pages hereto (each of whom is individually referred to as a "Purchaser" and all
of whom collectively are referred to as the "Purchasers"). Defined terms used in
this Agreement and not otherwise defined herein shall have the meanings ascribed
to them in the Purchase Agreement.
Background
In connection with the consummation of the transactions contemplated by
that certain Series 1 Bridge Note Purchase and Security Agreement (the "Purchase
Agreement") by and among the Company and the Purchasers of even date herewith,
the Company has agreed, upon the terms and subject to the conditions of the
Purchase Agreement, to issue and sell to the Purchasers from time to time up to
$1,500,000 in original principal amount of the Company's Series 1 Bridge Notes
(the "Series 1 Bridge Notes"), which are convertible into shares of the
Company's common stock, $.01 par value per share (the "Common Stock"), together
with Purchaser Warrants (the "Purchaser Warrants") to Purchaser of Common Stock,
and to issue Repricing Warrants (the "Repricing Warrants") to Purchasers, and to
issue to Agent a Placement Agent Warrant (the "Placement Agent Warrant). The
Common Stock issuable upon conversion of the Series 1 Bridge Notes is
hereinafter referred to as the "Conversion Shares", the Common Stock issuable
upon exercise of the Purchaser Warrants is hereinafter referred to as the
"Purchaser Warrant Shares", the Common Stock issuable upon exercise of the
Repricing Warrants is hereinafter called the "Repricing Warrant Shares", and the
Common Stock issuable upon exercise of the Placement Agent Warrant is
hereinafter called the "Placement Warrant Shares". To induce the Purchasers to
execute and deliver the Purchase Agreement, the Company has agreed to file a
Registration Statement covering the Conversion Shares and the Warrant Shares
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.
Agreement
For and 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 the Purchasers hereby agree as
follows:
Section 1. Definitions. As used in this Agreement, the following
capitalized terms are used with the meanings there after ascribed:
(a) "Investor" means any Purchaser and any transferee or assignee
thereof to whom any Purchaser assigns its rights under this Agreement and
who agrees to become bound by the provisions of this Agreement in
accordance with Section 9.
(b) "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof, or a governmental agency.
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<PAGE>
(c) "Register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
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(s) by the United States
Securities and Exchange Commission (the "SEC").
(d) "Registrable Securities" means the Conversion Shares, the
Purchaser Warrant Shares, the Repricing Warrant Shares, the Placement
Warrant Shares, and any shares of capital stock issued or issuable with
respect to the Conversion Shares, the Purchaser Warrant Shares, or the
Repricing Warrant Shares, as a result of any stock split, stock dividend,
recapitalization, exchange, or similar event.
(e) "Registration Statement" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Purchase Agreement.
Section 2. Registration.
(a) Mandatory Registration. The Company shall prepare and file with the SEC
a Registration Statement or Registration Statements (as is necessary) on Form
S-3 (or, if such form is unavailable for such a registration, on such other form
as is available for such a registration, subject to the consent of each
Purchaser and the provisions of Section 2(e), which consent will not be
unreasonably withheld), covering the resale of all of the Registrable
Securities, within thirty (30) days after the first to occur of (1) the
issuance, sale, and delivery of $1,500,000 in original principal amount of
Bridge Notes, or (2) the date the Company receives written notice from Sovereign
Capital Advisors, LLC of termination of further offers of the Bridge Notes (the
"Filing Deadline"). The Registration Statement(s) shall state that, in
accordance with Rule 416 promulgated under the 1933 Act, such Registration
Statement(s) also covers such indeterminate number of additional shares of
Common Stock as may become issuable (i) upon conversion of the Series 1 Bridge
Notes and exercise of the Purchaser Warrants to prevent dilution resulting from
stock splits, stock dividends, or similar transactions, and (ii) by reason of
the Repricing Warrants in accordance with the terms thereof. Such Registration
Statement shall initially register for resale at least 1,316,025 shares of
Common Stock, comprised of 641,025 shares for Conversion Shares, 300,000 shares
for Purchaser Warrant Shares, 75,000 shares for Placement Warrant Shares, and
300,000 shares of Common Stock to cover the Repricing Warrant Shares, all of
which is subject to adjustment as provided in Section 3(b), and such registered
shares of Common Stock shall be allocated among the Investors pro rata based on
the total number of Registrable Securities issued or issuable as of each date
that a Registration Statement, as amended, relating to the resale of the
Registrable Securities is declared effective by the SEC. The Company shall use
its best efforts to have the Registration Statement declared effective by the
SEC within ninety (90) days after the Filing Deadline (the "Registration
Deadline"). The Company shall permit the registration statement to become
effective within five (5) business days after receipt of a "no review" notice
from the SEC. Such Registration Statement shall be kept current and effective
for a period of twelve (12) months from the Closing Date. If a Registration
Statement with respect to the Common Stock is not effective on the Maturity Date
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<PAGE>
(as such term is defined in the Series 1 Bridge Note), the Company agrees to and
shall pay a cash penalty equal to two percent (2%) per month of the outstanding
principal amount of the Series 1 Bridge Notes, payable monthly and pro-rated for
partial months until the Registration Statement is effective.
(b) Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) involves an underwritten offering, the
Purchasers shall have the right to select one legal counsel and an investment
banker or bankers and manager or managers to administer their interest in the
offering, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company.
(c) Piggy-Back Registrations. If at any time prior to the expiration of the
Registration Period (as hereinafter defined) the Company proposes 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 securities (other than on
Form S-4 or Form S-8 or their then equivalents relating to 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 promptly send to each Investor who is entitled
to registration rights under this Section 2(c) written notice of the Company's
intention to file a Registration Statement and of such Investor's rights under
this Section 2(c) and, if within twenty (20) days after receipt 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, subject to the priorities set forth in
Section 2(d) below. No right to registration of Registrable Securities under
this Section 2(c) shall be construed to limit any registration required under
Section 2(a). The obligations of the Company under this Section 2(c) may be
waived by Investors holding a majority of the Registrable Securities. If an
offering in connection with which an Investor is entitled to registration under
this Section 2(c) is an underwritten offering, then each Investor whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters and, subject
to the provisions of this Agreement, on the same terms and conditions as other
shares of Common Stock included in such underwritten offering, provided however,
if the Company shall effect a registration on Form S-3 for securities or related
derivatives thereto that have been issued, sold, and delivered prior to the date
hereof, the Company shall not obligated to give notice of or include any shares
of Common Stock belonging to any Investor in such registration.
(d) Priority in Piggy-Back Registration Rights in connection with
Registrations for Company Account. If the registration referred to in Section
2(c) is to be an underwritten public offering for the account of the Company and
the managing underwriter(s) advise the Company in writing, that in their
reasonable good faith opinion, marketing or other factors dictate that a
limitation on the number of shares of Common Stock which may be included in the
Registration Statement is necessary to facilitate and not adversely affect the
proposed offering, then the Company shall include in such registration: (i)
first, all securities the Company proposes to sell for its own account, (ii)
second, up to the full number of securities proposed to be registered for the
account of the holders of securities entitled to inclusion of their securities
in the Registration Statement by reason of demand registration rights, and (iii)
third, the securities requested to be registered by the Investors and other
holders of securities entitled to participate
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<PAGE>
in the registration, drawn from them pro rata based on the number each has
requested to be included in such registration.
(e) Eligibility for Form S-3. The Company represents, warrants covenants
that it has filed and shall file all reports required to be filed by the Company
with the SEC in a timely manner so as to obtain and maintain such eligibility
for the use of Form S-3. In the event that Form S-3 is not available for sale by
the Investors of the Registrable Securities, then (i) the Company, with the
consent of each Investor pursuant to Section 2(a), shall register the sale of
the Registrable Securities on another appropriate form, such as Form SB-2 and
(ii) the Company shall undertake to register the Registrable Securities on Form
S-3 as soon as such form is available.
Section 3. Related Obligations. Whenever an Investor has requested that any
Registrable Securities be registered pursuant to Section 2(c) or at such time as
the Company is obligated to file a Registration Statement with the SEC pursuant
to Section 2(a), the Company will use its best efforts to effect the
registration of the Registrable Securities in accordance with the intended
method of disposition thereof and, pursuant thereto, the Company shall have the
following obligations:
(a) The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or
prior to the Filing Deadline), for the registration of Registrable
Securities pursuant to Section 2(a) and use its best efforts to cause such
Registration Statement(s) relating to Registrable Securities to become
effective as soon as possible after such filing by the ninetieth (90th) day
following the issuance of Series 1 Bridge Notes for the registration of
Registrable Securities pursuant to Section 2(a) hereof, and keep the
Registration Statement(s) effective pursuant to Rule 415 at all times until
the later of (i) the date as of which the Investors may sell all of the
Registrable Securities without restriction pursuant to Rule 144(k)
promulgated under the 1933 Act (or successor thereto) or (ii) the date on
which (A) the Investors shall have sold all the Registrable Securities and
(B) none of the Series 1 Bridge Notes is outstanding (the "Registration
Period"), which Registration Statement(s) (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,
in light of the circumstances in which they were made, not misleading.
(b) The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement(s) and the prospectus(es) used in connection with the
Registration Statement(s), which prospectus(es) are to be filed pursuant to
Rule 424 promulgated under the 1933 Act, as may be necessary to keep the
Registration Statement(s) 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 Statement(s) until such time as all of
such Registrable Securities shall have been disposed of in accordance with
the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement(s). In the event the number of shares
available under a Registration Statement filed pursuant to this Agreement
is insufficient to cover all of the Registrable Securities, the Company
shall amend the Registration Statement, or file a new Registration
Statement (on the short form available therefor, if applicable), or both,
so as to cover all of the Registrable Securities, in each case, as soon as
practicable, but in any event within fifteen (15) days after the necessity
therefor arises (based on the market price of the Common Stock and other
relevant factors on which the
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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. For purposes
of the foregoing provision, the number of shares available under a
Registration Statement shall be deemed "insufficient to cover all of the
Registrable Securities" if at any time the number of Registrable Securities
issued or issuable upon conversion of the Series 1 Bridge Notes together
with the number of Registrable Securities issued or issuable upon exercise
of the Purchaser Warrants and the Repricing Warrants is greater than the
quotient determined by dividing (i) the number of shares of Common Stock
available for resale under such Registration Statement by (ii) {2.0}. For
purposes of the calculation set forth in the foregoing sentence, any
restrictions on the convertibility of the Series 1 Bridge Notes or exercise
of the Purchaser Warrants and the Repricing Warrants shall be disregarded
and such calculation shall assume that the Series 1 Bridge Notes are then
convertible into shares of Common Stock at the then prevailing Conversion
Rate (as defined in the Series 1 Bridge Notes) and that the Purchaser
Warrants and the Repricing Warrants are exercised at the then current
exercise price.
(c) The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement(s) and its legal
counsel, without charge, (i) promptly after the same is prepared and filed
with the SEC at least one copy of the Registration Statement and any
amendment thereto, including financial statements and schedules, all
documents incorporated therein by reference and all exhibits, the
prospectus(es) included in such Registration Statement(s) (including each
preliminary prospectus) and, with regards to the Registration Statement,
any correspondence by or on behalf of the Company to the SEC or the staff
of the SEC and any correspondence from the SEC or the staff of the SEC to
the Company or its representatives, (ii) upon the effectiveness of any
Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such
other number of copies as such Investor may reasonably request), and (iii)
such other documents, including any preliminary prospectus, as such
Investor may reasonably request in order to facilitate the disposition of
the Registrable Securities owned by such Investor.
(d) The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement(s)
under such other securities or "blue sky" laws of such jurisdictions in the
United States as any Investor reasonably requests, (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) hereof, (B) subject itself to general
taxation in any such jurisdiction, or (C) file a general consent to service
of process in any such jurisdiction. The Company shall promptly notify each
Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the
securities or "blue sky" laws of any jurisdiction in the United States or
its receipt of actual notice of the initiation or threatening of any
proceeding for such purpose.
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<PAGE>
(e) In the event Investors who hold a majority of the Registrable
Securities being offered in the offering 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 in writing of the happening of any
event, of which the Company has knowledge, as a result of which, the
prospectus included in a Registration Statement, as then in effect,
includes an untrue statement of a material fact or omission to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and promptly prepare a supplement or amendment to the
Registration Statement to correct such untrue statement or omission, and
deliver ten (10) copies of such supplement or amendment to each Investor
(or such other number of copies as such Investor may reasonably request).
The Company shall also promptly notify each Investor in writing (i) when a
prospectus or any prospectus supplement or post-effective amendment has
been filed, and when a Registration Statement or any post-effective
amendment has become effective (notification of such effectiveness shall be
delivered to each Investor by facsimile on the same day of such
effectiveness and by overnight mail), (ii) of any request by the SEC for
amendments or supplements to a Registration Statement or related prospectus
or related information, and (iii) of the Company's reasonable determination
that a post-effective amendment to a Registration Statement would be
appropriate.
(g) The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration
Statement, or the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction and, if such an order or suspension
is issued, to obtain the withdrawal of such order or suspension at the
earliest possible moment, and to notify each Investor who holds Registrable
Securities being sold (and, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution
thereof, or its receipt of actual notice of the initiation, or threatened
initiation of any proceeding for such purpose.
(h) The Company shall permit each Investor a single firm of counsel or
such other counsel as thereafter designated as selling stockholders'
counsel by the Investors who hold a majority of the Registrable Securities
being sold, to review and comment upon the Registration Statement(s) and
all amendments and supplements thereto at least seven (7) days prior to
their filing with the SEC, and not file any document in a form to which
such counsel reasonably objects. The Company shall not submit a request for
acceleration of the effectiveness of a Registration Statement(s) or any
amendment or supplement thereto without the prior approval of such counsel,
which consent shall not be unreasonably withheld.
(i) At the request of the Investors who hold a majority of the
Registrable Securities being sold, the Company shall furnish, on the date
that Registrable Securities are delivered to an underwriter, if any, for
sale in connection with the Registration Statement (i) if required by an
underwriter, 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, and (ii) an
opinion, dated as of such date, of counsel representing the Company for
purposes of
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<PAGE>
such Registration Statement, in form, scope, and substance as is
customarily given in an underwritten public offering, addressed to the
underwriters and the Investors.
(j) 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 Investors, and (iv) 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 strict
confidence and shall not make any disclosure (except to an Investor) or use
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 or is
otherwise required under the 1933 Act, (B) the release of such Records is
ordered pursuant to a final, non-appealable subpoena or 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. 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.
(k) 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 final, non-appealable 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 written notice to such Investor and allow such Investor,
at the Investor's expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
(1) The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by a 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, (ii) to secure designation and quotation of all the Registrable
Securities covered by the Registration Statement on the Nasdaq National
Small Cap Market, (iii) if, despite the Company's best efforts to satisfy
the preceding clause (i) or (ii), the Company is unsuccessful in satisfying
the preceding clause (i) or (ii) to secure the inclusion for quotation on
the Nasdaq [National Small Cap] Market for such Registrable Securities or,
(iv) if, despite the Company's best efforts to satisfy the preceding clause
(iii), the Company is unsuccessful in satisfying the preceding clause
(iii), to secure the inclusion for quotation on the over-the-counter market
for such Registrable Securities,
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<PAGE>
and, without limiting the generality of the foregoing, in the case of
clause (iii) or (iv), 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. The Company shall pay all fees
and expenses in connection with satisfying its obligation under this
Section 3(1).
(m) The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any
managing underwriter or underwriters, to facilitate the timely preparation
and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a
Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the managing underwriter
or underwriters, if any, or, if there is no managing underwriter or
underwriters, the Investors may reasonably request and registered in such
names as the managing underwriter or underwriters, if any, or the Investors
may request. Not later than the date on which any Registration Statement
registering the resale of Registrable Securities is declared effective, the
Company shall deliver to its transfer agent instructions, accompanied by
any reasonably required opinion of counsel, that permit sales of unlegended
securities in a timely fashion that complies with then mandated securities
settlement procedures for regular way market transactions.
(n) 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.
(o) The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of such
Registration Statement.
(p) If requested by the managing underwriters or an Investor, the
Company shall immediately incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters and
the Investors agree should be included therein relating to the sale and
distribution of Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities being sold
to such underwriters, the purchase price being paid therefor by such
underwriters, and with respect to any other terms of the underwritten (or
best efforts underwritten) offering of the Registrable Securities to be
sold in such offering; make all required filings of such prospectus
supplement or post-effective amendment as soon as notified of the matters
to be incorporated in such prospectus supplement or post-effective
amendment; and supplement or make amendments to any Registration Statement
if requested by a shareholder or any underwriter of such Registrable
Securities.
(q) The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to consummate the disposition of such
Registrable Securities.
(r) The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
Section 4. Obligations of the Investors.
(a) At least seven (7) days prior to the first anticipated filing date of
the Registration Statement, the Company shall notify each Investor in writing of
the information the Company
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requires from each such Investor if such Investor elects to have any of such
Investor's Registrable Securities included in the Registration Statement. 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.
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement(s) hereunder, unless such Investor has notified the Company in writing
of such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
(c) In the event Investors holding a majority of the Registrable Securities
being registered 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 notifies the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement(s).
(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(g) or the first
sentence of 3(f), such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement(s) covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(g) or the first
sentence of 3(f) and, if so directed by the Company, such Investor shall deliver
to the Company (at the expense of the Company) or destroy 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 approved by the Investors
entitled hereunder to approve such arrangements, (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.
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Section 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 qualifications
fees, printers and printing fees, accounting fees, and fees and disbursements of
counsel for the Company and fees and disbursements of one counsel for the
Investors, shall be borne by the Company.
Section 6. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless, and defend each Investor who holds
such Registrable Securities, the directors, officers, partners, employees,
agents, and each Person, if any, who controls any Investor within the
meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and any underwriter (as defined in the 1933 Act) for the
Investors, and the directors and officers of, and each Person, if any, who
controls, any such underwriter within the meaning of the 1933 Act or the
1934 Act (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities, judgments, fines, penalties, charges, costs,
attorneys' fees, amounts paid in settlement or expenses, joint or several,
(collectively, "Claims") incurred in investigating, preparing, or defending
any action, claim, suit, inquiry, proceeding, investigation, or appeal
taken from the foregoing by or before any court or governmental,
administrative, or other regulatory agency, body or the SEC, whether
pending or threatened, whether or not an indemnified party is or may be a
party thereto ("Indemnified Damages"), to which any of them may become
subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based
upon: (i) any untrue statement or alleged untrue statement of a material
fact in a Registration Statement or any post-effective amendment thereto or
in any filing made in connection with the qualification of the offering
under the securities or other "blue sky" laws of any jurisdiction in which
Registrable Securities are offered ("Blue Sky Filing"), or the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which the statements therein were made, 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 pursuant to a Registration
Statement (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in
Section 6(d) with respect to the number of legal counsel, the Company shall
reimburse the Investors and each such underwriter or controlling person,
promptly as such expenses are incurred and are due and payable, for any
legal fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person or
underwriter for such Indemnified Person expressly for use in connection
with the preparation of the Registration Statement or any such amendment
thereof or supplement thereto, if such prospectus was timely
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made available by the Company pursuant to Section 3(c); (ii) with respect
to any preliminary prospectus, shall not inure to the benefit of any such
person from whom the person asserting any such Claim purchased the
Registrable Securities that are the subject thereof (or to the benefit of
any person controlling such person) if the untrue statement or mission of
material fact contained in the preliminary prospectus was corrected in the
prospectus, as then amended or supplemented, if such prospectus was timely
made available by the Company pursuant to Section 3(c), 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 (iii) shall not be available to the
extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company, and
(iv) 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. 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 to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same
manner as is 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 (collectively and together with an Indemnified Person, an
"Indemnified Party"), against any Claim or Indemnified Damages to which any
of them may become subject, under the 1933 Act, the 1934 Act, or otherwise,
insofar as such Claim or Indemnified Damages arise out of or are based upon
any Violation, 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(d),
such Investor will reimburse any legal or other expenses 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) and Section 7 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
Section 6(b) for only that amount of a Claim or Indemnified Damages 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) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers, and similar securities
industry professionals participating in any distribution, to the same
extent as provided above, with respect to information such persons so
furnished in writing expressly for inclusion in the Registration Statement.
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(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a
Claim such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as
the case may be; provided however, that an Indemnified Person or
Indemnified Party shall have the right to retain its own counsel with the
fees and expenses to be paid by the indemnifying party, if, in the
reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified
Party and the indemnifying party would be inappropriate due to actual or
potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The Company shall pay reasonable fees for only one separate
legal counsel for the Investors, and such legal counsel shall be selected
by the Investors holding a majority in interest of the Registrable
Securities included in the Registration Statement to which the Claim
relates. The Indemnified Party or Indemnified Person shall cooperate fully
with the indemnifying party in connection with any negotiation or defense
of any such action or claim by the indemnifying party and shall furnish to
the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or
claim. The indemnifying party shall keep the Indemnified Party or
Indemnified Person fully apprised at all times as to the status of the
defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action, claim
or proceeding effected without its written consent, provided however, that
the indemnifying party shall not unreasonably withhold, delay or condition
its consent. No indemnifying party shall, without the consent of the
Indemnified Party or Indemnified Person, consent to entry of any judgment
or enter into any settlement or other compromise which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to
such Indemnified Party or Indemnified Person of a release from all
liability in respect to such claim or litigation. Following indemnification
as provided for hereunder, the indemnifying party shall be subrogated to
all rights of the Indemnified Party or Indemnified Person with respect to
all third parties, firms, or corporations relating to the matter for which
indemnification has been made. 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 prejudiced in its ability to defend
such action.
(e) 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 and when bills are received or Indemnified
Damages are incurred.
(f) The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
Section 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
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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 fraudulent
misrepresentation, and (iii) contribution 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.
Section 8. Reports Under The 1934 Act. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the 1933 Act or any
other similar rule or regulation of the SEC that may at any time permit the
investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so
long as the Company remains subject to such requirements (it being
understood that nothing herein shall limit the Company's obligations under
the 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.
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Section 9. Assignment of Registration Rights. The rights to have the
Company register Registrable Securities pursuant to 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) immediately 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 Purchase Agreement; (vi) such transferee shall be an "accredited investor"
as that term is defined in Rule 501 of Regulation D promulgated under the 1933
Act; and (vii) in the event the assignment occurs subsequent to the date of
effectiveness of the Registration Statement required to be filed pursuant to
Section 2(a), the transferee agrees to pay all reasonable expenses of amending
or supplementing such Registration Statement to reflect such assignment.
Section 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 the
written consent of the Company and Investors who hold two-thirds of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.
Section 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 consents, waivers, or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed
by U.S. certified mail, return receipt requested; (iii) three (3) days after
being sent by U.S. certified mall, return receipt requested, or (iv) one (1) day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company:
Compositech Ltd.
120 Ricefield Lane
Hauppauge, New York 11788
Attn: Samuel S. Gross, Executive Vice President
Telephone: (516) 436-5200
Facsimile: (516) 436-5203
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with a copy (which shall not constitute notice) to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036
Attention: Edward F. Cox, Esq.
Telephone: (212) 336-2000
Facsimile: (212) 336-2222
If to a Purchaser, to its address and facsimile number on the Schedule of
Purchasers, with copies to such Purchaser's counsel as set forth on the Schedule
of Purchasers. Each party shall provide five (5) days prior written notice to
the other party of any change in address or facsimile number.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, 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 interpreted in accordance with
the laws of the State of New York without regard to the principles of conflict
of laws. 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 in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
(e) This Agreement and the Purchase Agreement constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
thereof. There are no restrictions, promises, warranties, or undertakings, other
than those set forth or referred to herein and therein. This Agreement, and the
Purchase Agreement, and the Certificate of Designations 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, this Agreement shall inure to
the benefit and of and be binding upon the permitted 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 identical 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.
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[Signatures begin on next page]
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COMPANY SIGNATURE PAGE
TO
REGISTRATION RIGHTS AGREEMENT
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY:
COMPOSITECH LTD.
By:
------------------------------------------
Samuel S. Gross, Executive Vice President
[Purchasers Signature on Following Pages]
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PURCHASER SIGNATURE PAGE
TO
REGISTRATION RIGHTS AGREEMENT
PURCHASER:
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
================================================================================
SovCap Equity Partners, Ltd.
Purchaser Name Cumberland House
Address and #27 Cumberland Street
Facsimile Number P.O. Box CB - 13016
Nassau, New Providence
The Bahamas
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Principal Amount of Bridge Notes $500,000
Purchased
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Purchaser's Legal Counsel Balboni Law Group LLC
Address and 3475 Lenox Road, Suite 990
Facsimile Number Atlanta, GA 30326
Attn: Gerardo M. Balboni II
Facsimile No.: (404) 812-3120
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
EXHIBIT 10.42
PLACEMENT AGENCY AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 16th day of March 1999, by and
between COMPOSITECH LTD., a Delaware corporation (the "Company"), and SOVEREIGN
CAPITAL ADVISORS, LLC, a Nevada limited liability company (the "Agent").
Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings ascribed to them in the Series 1 Bridge Note Purchase and
Security Agreement of even date herewith (the "Purchase Agreement") among the
Company and Purchasers thereto.
Background
The Company proposes to issue and sell Series 1 Secured Bridge Notes (the
"Securities") resulting in gross proceeds to the Company of up to $1,500,000
(the "Offering") in a transaction not involving a public offering and without
registration under the Securities Act of 1933, as amended (the "Act"), pursuant
to exemptions from the registration requirements of the Act under Section 4(2)
of the Act and Regulation D promulgated under the Act ("Regulation D"). Agent
has offered to assist the Company to structure the Offering and the Securities,
and introduce the Company to prospective investors on a "best efforts basis."
The Company desires to secure the services of Agent on the terms and conditions
hereinafter set forth.
Agreement
For and in consideration of the mutual covenants herein, and other good and
valuable consideration, the receipt and legal sufficiency of which is hereby
acknowledged, the parties hereto agree:
Section 1. Engagement of Agent.
Section 3.4. Appointment. The Company hereby appoints Agent as its
exclusive agent in connection with the proposed issuance and sale by the Company
of securities resulting in gross proceeds to the Company of up to $1,500,000.
Agent, on the basis of the representations and warranties herein contained, and
upon and subject to the terms and conditions herein set forth, accepts such
appointment. This appointment shall be irrevocable for the period commencing
March 16, 1999 and ending upon the first to occur of (i) the completion or
termination of the Offering hereunder or (ii) one hundred eighty (180) days from
the date hereof, which period maybe extended by the consent of the Company and
Agent (the "Offering Period").
Section 3.4. Compensation. The Company shall pay to Agent at each Closing a
finder's fee of seven percent (7 %) of the gross proceeds derived from the
offer, sale, and issuance of the Securities or any other securities issued by
the Company issued by the Company during the Offering Period (the "Gross
Proceeds"). Additionally, Agent shall receive a warrant (the "Placement Agent
Warrant") in substantially the form of Exhibit A hereto, granting to Agent the
right to purchase Common Stock equivalent to five percent (5%) of the total
amount raised by the Agent under the Offering.
Section 3.5. Reimbursement of Expenses. The Company agrees to pay the
out-of-pocket expenses of Agent including the fees and expenses of counsel to
Agent for the preparation of the Transaction Agreements. The Company agrees that
the amount
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of such fees and expenses shall be deducted by Escrow Agent from the proceeds of
the issuance and sale of the Securities.
Section 1.4. Limited Role of Agent. Agent has acted only as an advisor to
the Company, Agent has advised the Company on the structure of the Offering and
Securities, and has identified potential investors. The Company has offered the
Securities to the investors and has negotiated directly with the investors in
the Offering. Agent will use best efforts to introduce the Company only to
"accredited investors" as defined in Regulation D. Wherever possible Agent will
introduce the Company to prospective investors who are not "U.S. Persons," as
defined in Regulation S.
Section 1.5. Right of First Refusal. The Company hereby grants Agent a
right of first refusal to act as placement agent for certain future private
financings of the Company, namely future offerings of (i) convertible securities
or (ii) debt securities, offered to non-employees of the Company, and applies to
any such transaction by the Company that is not contemplated to exceed
$1,500,000. The Agent's right of first refusal under this Section 1.5 shall
continue until the later to occur of one hundred eighty days following the final
Closing of the Offering or the date on which a registration of the Company's
Common Stock becomes effective. In the event that the Company wishes to
undertake a transaction described in this Section 1.5, the Company shall send
Agent a written notice of the proposed transaction (whether the transaction is
initiated by the Company or is offered to the Company by a third party) in
sufficient specificity to allow Agent to understand the proposed transaction
clearly. This notice must be delivered to Agent at least twenty days prior to
the proposed closing of the transaction. Agent shall have ten days from receipt
of that notice to determine whether or not it wishes to exercise its right of
first refusal with respect to that transaction. Agent shall notify the Company
in writing of its decision to exercise or waive its right of first refusal with
respect to the transaction described in the notice. If Agent waives its right of
first refusal with respect to a particular transaction, the Company may proceed
with that transaction, provided however, that if the terms of the transaction
are changed in any material way from the terms set forth in the notice to Agent,
Agent's right of first refusal shall commence again. Agent's waiver of its
rights of first refusal with respect to any specific transaction shall not act
as a waiver of its rights with respect to future transactions within the
applicable time period.
Section 1.6. Confidentiality. The Company agrees to maintain the
confidentiality of all prospective investors identified to the Company by Agent,
except as required by applicable law. For a period of two (2) years from the
Closing, the Company will not solicit or enter into any financing transaction
with such investors without the written consent of Agent and payment to Agent of
compensation no less than the compensation to be paid to Agent hereunder for
raising a like amount.
Section 1.7. Remedies. In the event that Company breaches Section 1.5
hereof or Section 1.6 hereof, Agent shall be entitled to receive compensation in
respect of the financing giving rise to the breach of this Agreement at the
rates set forth in Section 1.2 hereof.
Section 2. Conduct of the Offering.
Section 2.1. Offering Documents. The Company shall utilize a Series 1
Secured Bridge Note Purchase Agreement (the "Purchase Agreement"), a Series 1
Secured Bridge Note in the form of Exhibit A to the Purchase Agreement (the
"Bridge Notes"), a Repricing Warrant to be issued with each Bridge Note in the
form of Exhibit B to the Purchase Agreement (the "Warrants"), a Registration
Rights Agreement in the form of Exhibit C to the Purchase Agreement the
("Registration Rights Agreement"), an Escrow Agreement in the form of Exhibit D
to the Purchase Agreement (the "Escrow
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Agreement"), a form of opinion of Company counsel in the form of Exhibit E to
the Purchase Agreement (the "Company Opinion"), a Form of Transfer Agent
Instructions in the form of Exhibit H to the Purchase Agreement (the "Transfer
Agent Instructions"), a certificate of the Company's Secretary (the "Secretary
Certificate") and a certificate of the Company's chief executive officer
("Compliance Certificate") (collectively, the Purchase Agreement and all
Exhibits thereto, the Secretary Certificate and the Compliance Certificate are
herein after referred to as the "Transaction Agreements") in connection with the
Offering. The Company and its counsel have reviewed, commented upon, and
approved the Transaction Agreements.
Section 2.2. Public Information. The Company within a reasonable amount of
time prior to any Closing, shall make available to each prospective investor
with a copy of all information required by Rule 502(b)(2)(ii) of Regulation D
promulgated pursuant to the Securities Act (collectively, "SEC Documents"). The
SEC Documents have been prepared in conformity with the requirements (to the
extent applicable) of the Securities and Exchange Act of 1934, as amended (the
"Act") and the rules and regulations ("Rules and Regulations") of the Commission
promulgated thereunder. As used in this Agreement, the term "Offering Documents"
means collectively the SEC Documents and the Transaction Agreements, and all
amendments, exhibits, and supplements thereto, together with any other documents
which are provided to Agent by, or approved for Agent's use by, the Company for
this Offering.
Section 2.3. Accuracy of Offering Documents. The Offering Documents, at the
time of delivery to Purchasers, conformed in all material respects with the
requirements, to the extent applicable, of the Act and the applicable Rules and
Regulations, and did not include any untrue statement of a material fact, or
omit to state any material fact required to be stated therein, or necessary, to
make the statements therein, in light of the circumstances under which they were
made, not misleading. At each Closing, the Offering Documents will contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations for the purposes of the proposed Offering, and all
statements of material fact contained in the Offering memorandum will be true
and correct, and the Offering Documents will not include any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the Company does
not make any representations or warranties as to the information contained in or
omitted from the Offering Documents in reliance upon written information
furnished on behalf of Agent specifically for use therein. Agent has no
responsibility for the contents, accuracy, or adequacy of the Offering
Documents, or for the compliance of the Offering Documents, with the
requirements of Rule 502(b)(2)(ii) of Regulation D promulgated pursuant to the
Securities Act.
Section 2.4. Duty to Amend. If, at any time during the Offering, or such
longer period as the Offering Documents are required to be delivered under the
Act, any event occurs or any event known to the Company relating to or affecting
the Company shall occur as a result of which the Offering Documents as then
amended or supplemented would include an untrue statement of a material fact, or
omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or if it
is necessary at any time after the date hereof to amend or supplement the
Offering Documents to comply with the Act or the applicable Rules and
Regulations, the Company shall forthwith notify Agent thereof and shall prepare
such further amendment or supplement to the Offering Documents as may be
required and shall furnish and deliver to Agent and to others, whose names and
addresses are designated by Agent, all at the cost of the Company, a reasonable
number of copies of the amendment or supplement or of the amended or
supplemented Offering Documents which, as so amended or supplemented, will not
contain an untrue statement of a
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<PAGE>
material fact or omit to state any material fact necessary in order to make the
Offering Documents not misleading in the light of the circumstances when it is
delivered to a purchaser or prospective purchaser, and which will comply in all
respects with the requirements (to the extent applicable) of the Act and the
applicable Rules and Regulations.
Section 2.5. Escrow of Funds. Pursuant to the Escrow Agreement, executed by
the Company, the person named as escrow agent in the Escrow Agreement (the
"Escrow Agent"), and the prospective investors who have executed signature pages
to the Purchase Agreement, the Registration Rights Agreement, and the Escrow
Agreement (the "Purchasers"), the purchase price for the Securities to be
purchased as reflected on the Purchaser Signature Page to the Purchase Agreement
shall be wired to the Escrow Agent to be held by the Escrow Agent as provided in
the Escrow Agreement.
Section 2.6. Approval of Investors. Prior to each closing, the Company
shall have the right to approve each Purchaser. If the Company withholds
approval of any Purchaser, the purchase price wired to Escrow Agent by such
Purchaser shall be returned to such Purchaser along with the Purchaser Signature
Pages of such Purchaser to the Purchase Agreement, the Registration Rights
Agreement, and the Escrow Agreement. The right to withhold approval of any
Purchaser shall be deemed to have been waived if the Company authorizes the
Escrow Agent to disburse funds provided by any Purchaser at any closing.
Section 2.7. Delivery of Securities. Securities in such form that, subject
to applicable transfer restrictions as described in the Purchase Agreement, they
can be negotiated by the holders thereof (issued in such denominations and in
such names as the Purchasers of the Securities may request shall be delivered by
the Company to the counsel for Placement Agent, with copies made available to
Agent for checking at least one (1) full business day prior to the Closing Date,
it being understood that the directions from Agent to the Company shall be given
at least two (2) full business days prior to the Closing Date. The Securities
shall be delivered at the Initial Closing and at each Subsequent Closing.
Section 2.8. Initial Closing. The Initial Closing (the "Initial Closing")
shall occur at such time as (a) Purchasers have delivered to the Company (care
of Balboni Law Group LLC, counsel for Agent) executed Purchaser Signature Pages
to each of the Purchase Agreement, the Registration Rights Agreement, and the
Escrow Agreement, (b) the Company has not withheld approval the Purchasers, and
(c) all other conditions to the obligation of the Purchasers and the Company to
close the transactions contemplated by the Purchase Agreement have been
satisfied or waived.
Section 2.9. Subsequent Closings. In the event that the Initial Closing
shall be for an amount of Securities that is less than the amount of the
Offering, the Offering may be continued, and additional Closings may be held
(each a "Subsequent Closing") throughout the Offering Period, provided that (a)
Purchasers have delivered to the Company (care of Balboni Law Group LLC, counsel
for Agent) executed Purchaser Signature Pages to each of the Purchase Agreement,
the Registration Rights Agreement, and the Escrow Agreement, (b) the Company has
not withheld approval from the Purchasers, and (c) all other conditions to the
obligation of the Purchasers and the Company to close the transactions
contemplated by the Purchase Agreement have been satisfied or waived.
Section 2.10. Disbursements at Closing. At each Closing, the Company shall
execute a Release Notice that authorizes the Escrow Agent to receive expenses of
the Offering in the amounts specified, and effect a wire transfer of the net
proceeds of such Closing to the Company or another entity designated therein by
the Company. The authorization of the Company to release the funds held by the
Escrow Agent is the Company's authorization to release the executed Transaction
Agreements and
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Securities to the Purchasers. One complete set of executed Transaction Documents
will be delivered to the Company.
Section 2.11. Time and Place of Closings. The Initial Closing and any
Subsequent Closing shall be held at the offices of Balboni Law Group LLC, 3475
Lenox Road, Suite 990, Atlanta, Georgia 30326, at 10:00 a.m. on such dates as
are fixed in accordance with this Agreement and the Purchase Agreement. The
Closing Date may be changed by mutual agreement of Agent and the Company. The
Company agrees to rely on faxed signature pages from the Purchasers, without the
requirement of obtaining an originally signed version of any of the Transactions
Agreements to which a Purchaser is a Party.
Section 3. Conditions of Agent's Obligations.
Agent's obligations hereunder shall be subject to the accuracy, as of the
Closing Date, of the representations and warranties on the part of the Company
contained in this Agreement, to the fulfillment of or compliance by the Company
with all covenants and conditions hereof, and to the following additional
conditions:
(a) There shall be no outstanding objection to any Transaction
Agreement by the Company or its counsel or any Purchaser or its
counsel.
(b) The Company shall not have disclosed that the Offering
Documents, or any amendment thereof or supplement thereto, contains an
untrue statement of fact, which, in the opinion of counsel to Agent,
is material, or omits to state a fact, which, in the opinion of such
counsel, is material and is required to be stated therein, or is
necessary to make the statements therein, under the circumstances in
which they were made, not misleading.
(c) Between the date hereof and the Closing Date, the Company
shall not have sustained any loss on account of fire, explosion,
flood, accident, calamity, or any other cause of such character as
would materially adversely affect its business or property considered
as an entire entity, whether or not such loss is covered by insurance.
(d) There shall be no litigation instituted or overtly threatened
against the Company, and there shall be no proceeding instituted or
threatened against the Company before or by any federal or state
commission, regulatory body, or administrative agency, or other
governmental body, domestic or foreign, wherein an unfavorable ruling,
decision, or finding would materially adversely affect the business,
franchises, license, permits, operations, or financial condition or
income of the Company considered as an entity.
(e) Except as contemplated herein or as set forth in the Offering
Documents, during the period subsequent to the most recent financial
statements contained in the Offering Documents, if any, and prior to
the Closing Date, the Company (i) shall have conducted its business in
the usual and ordinary manner as the same is being conducted as of the
date hereof and (ii) except in the ordinary course of business, the
Company shall not have incurred any liabilities or obligations (direct
or contingent) or disposed of any assets, or entered into any material
transaction, or suffered or experienced any substantially adverse
change in its condition, financial or otherwise. At the Closing Date,
the equity account of the Company shall be substantially the same as
reflected in the most recent balance sheet contained in the Offering
Documents without considering the proceeds from the sale of the
Securities other than as may be set forth in the Offering Documents.
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(f) The authorization of the Securities by the Company and all
proceedings and other legal matters incident thereto and to this
Agreement shall be reasonably satisfactory in all respects to Agent
and its counsel.
(g) The Company shall have furnished Agent a copy of the Company
opinion with respect to the sufficiency of all corporate proceedings
and other legal matters relating to this Agreement as Agent may
reasonably require.
(h) The Company shall have furnished to Agent the opinion, dated
the Initial Closing, addressed to Agent, from counsel to the Company,
as required by the Purchase Agreement.
(i) The Company shall have furnished to Agent a copy of the
Compliance Certificate and the Secretary Certificate each dated as of
the Closing Date.
Section 4. Representations and Warranties of the Company.
For the purpose of inducing Agent to enter into this and perform this
Agreement, the Company hereby represents and warrants to and agrees with Agent
as follows:
Section 4.1. Corporation Condition. The Company's condition is as described
in its Offering Documents, except for changes in the ordinary course of business
and normal year-end adjustments that are not in the aggregate materially adverse
to the Company. The Offering Documents, taken as a whole, present fairly the
business and financial position of the Company as of the Closing Date.
Section 4.2. No Material Adverse Change. Except as may be reflected in or
contemplated by the Offering Documents, subsequent to the dates as of which
information is given in the Offering Documents, and prior to the Closing Date,
there shall not have been any material adverse change in the condition,
financial or otherwise, or in the results of operations of the Company or in its
business taken as a whole.
Section 4.3. No Defaults. Except as disclosed in the Offering Documents or
in writing to Agent, the Company is not in default in any material respect in
the performance of any material obligation, agreement, or condition contained in
any debenture, note, or other evidence of indebtedness or any indenture or loan
agreement of the Company. The execution and delivery of this Agreement, and the
consummation of the transactions herein contemplated, and compliance with the
terms of this Agreement, will not conflict with, or result in, a breach of any
of the terms, conditions, or provisions of, or constitute a default under, the
Certificate of Incorporation or bylaws of the Company (in any respect that is
material to the Company), any material note, indenture, mortgage, deed of trust,
or other agreement or instrument to which the Company is a party or by which the
Company or any property of the Company is bound, or to the Company's knowledge,
any existing law, order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality, agency, or body, arbitration tribunal
or court, domestic or foreign, having jurisdiction over the Company or any
property of the Company. The consent, approval, authorization, or order of any
court or governmental instrumentality, agency or body is not required for the
consummation of the transactions herein contemplated except such as may be
required under the Act or under the blue sky or securities laws of any state or
jurisdiction.
Section 4.4. Incorporation and Standing. The Company is, and at the Closing
Date will be, duly formed and validly existing in good standing as a corporation
under the laws of the State of
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Delaware and with full power and authority (corporate and other) to own its
properties and conduct its business, present and proposed, as described in the
Offering Documents; the Company, has full power and authority to enter into this
Agreement; and the Company is duly qualified and in good standing as a foreign
entity in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the Company or its properties.
Section 4.5. Legality of Securities. Prior to the Closing Date, the
Securities will have been duly and validly authorized and issued, will be valid,
binding and enforceable against the Company in accordance with their terms, and
will conform in all material respects to the statements with regard thereto
contained in the Offering Documents.
Section 4.6. Legality of Conversion Shares. The Common Stock into which the
Securities are convertible, when converted in accordance with the Securities
will be duly and validly issued and outstanding, fully paid, and non-assessable
and conform in all material respects to the statements with regard thereto
contained in the Offering Documents.
Section 4.7. Litigation. Except as set forth in the Offering Documents,
there is now, and at the Closing Date there will be, no action, suit, or
proceeding before any court or governmental agency, authority or body pending
or, to the knowledge of the Company, threatened, which might result in judgments
against the Company not adequately covered by insurance or which collectively
might result in any material adverse change in the condition (financial or
otherwise) or business of the Company or which would materially adversely affect
the properties or assets of the Company.
Section 4.8. Finders. The Company does not know of any outstanding claims
for services in the nature of a finder's fee or origination fees with respect to
the sale of the Securities hereunder for which Agent may be responsible, and the
Company will indemnify Agent from any liability for such fees by any party who
has a claim for such compensation from the Company and for which person Agent is
not legally responsible.
Section 4.9. Tax Returns. The Company has filed all federal and state tax
returns which are required to be filed, and has paid all taxes shown on such
returns and on all assessments received by it to the extent such taxes have
become due. All taxes with respect to which the Company is obligated have been
paid or adequate accruals have been set up to cover any such unpaid taxes.
Section 4.10. Authority. The execution and delivery by the Company of this
Agreement have been duly authorized by all necessary action, and this Agreement
is the valid, binding, and legally enforceable obligation of the Company subject
to standard qualifications as to the availability of equitable remedies, the
effect of bankruptcy and other laws relating to the protection of debtors and
public policy opinions promulgated by the Commission with respect to
indemnification against liabilities under the Act.
Section 4.11. Actions by the Company. The Company will not take any action
which will impair the effectiveness of the transactions contemplated by this
Agreement.
Section 5. Covenants of the Company.
The Company covenants and agrees with Agent that:
Section 5.1. Restrictions on Amendments. After the date hereof, the Company
will not at any time, prepare and distribute any amendment or supplement to the
Offering Documents, of which
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amendment or supplement Agent shall not previously have been advised and Agent
and its counsel furnished with a copy within a reasonable time period prior to
the proposed adoption thereof, or to which Agent shall have reasonable objected
in writing on the ground that it is not in compliance with the Act or the Rules
and Regulations (if applicable).
Section 5.2. Expenses of Offering. The Company will pay, whether or not the
transactions contemplated by the Transaction Agreements are consummated, all
costs and expenses incident to the Transaction Agreements, including all
expenses incident to the authorization of the Securities, their issue and
delivery to the Escrow Agent, any original issue taxes in connection therewith,
all transfer taxes, if any, incident to the initial sale of the Securities, the
fees and expenses of Agent's and the Company's counsel (except as provided
below) and accountants, and the cost of reproduction and furnishing to Agent
copies of the Offering Documents as herein provided, provided however, that the
Company shall not be responsible for the payment of fees and expenses incurred
by Agent's counsel, if Agent is unable to procure Purchaser Signature Pages to
the Transaction Agreements from a Purchaser that the Company was willing to
accept.
Section 5.3. Availability of Information. Prior to the Closing Date, the
Company will cooperate with Agent in such investigation as it may make or cause
to be made of all of the properties, business, and operations of the Company in
connection with the Offering of the Securities. The Company will make available
to it in connection therewith such information in its possession as Agent may
reasonably request and will make available to Agent such persons as Agent shall
deem reasonably necessary and appropriate in order to verify or substantiate any
such information so supplied.
Section 5.4. Reports and Filings. The Company shall be responsible for
making any and all filings required by the blue sky authorities and filings
required by the laws of the jurisdictions in which the subscribers who are
accepted for purchase of Securities are located, if any. Agent shall assist
Company in this respect, but such filings shall be the responsibility of
Company.
Section 5.5. No Undisclosed Events, Liabilities, Developments, or
Circumstances. The Company's condition is as described in its Offering
Documents, except for changes in the ordinary course of business and normal
year-end adjustments that are not individually or in the aggregate materially
adverse to the Company. The Offering Documents, taken as a whole, will present
fairly the business and financial position of the Company as of each Closing
Date.
Section 5.6. No Material Adverse Change. Except as may be reflected in or
contemplated by the Offering Documents, subsequent to the dates as of which
information is given in the Offering Documents, and prior to each Closing Date,
there shall not have been any material adverse change in the condition,
financial, or otherwise, or in the results of operations of the Company or in
its business taken as a whole.
Section 6. Indemnification.
Section 6.1. Indemnification of Agent. The Company agrees to indemnify and
hold harmless Agent, each person who controls Agent within the meaning of
Section 15 of the Act and Agent's employees, accountants, attorneys and agents
(the "Agent's Indemnitees") against any and all losses, claims, damages, or
liabilities, joint or several, to which they or any of them may become subject
under the Act or any other statute or at common law for any legal or other
expenses (including the costs of any investigation and preparation) incurred by
them in connection with any litigation, whether or not resulting in any
liability, but only insofar as such losses, claims, damages, liabilities, and
litigation arise out of or are based upon any untrue statement of material fact
contained in the Offering Documents or
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any amendment or supplement thereto or any application or other document filed
in any state or jurisdiction in order to qualify the Securities under the Blue
Sky or securities laws thereof, or the omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, under
the circumstances under which they were made, not misleading, all as of the date
of the Offering Documents or of such amendment as the case may be; provided
however, that the indemnity agreement contained in this Section 6.1 shall not
apply to amount paid in settlement of any such litigation, if such settlements
are made without the consent of the Company, nor shall it apply to Agent's
Indemnitees in respect to any such losses, claims, damages, or liabilities
arising out of or based upon any such untrue statement or alleged untrue
statement or any such omission or alleged omission, if such statement or
omission was made in reliance upon information furnished in writing to the
Company by Agent specifically for use in connection with the preparation of the
Offering Documents or any such amendment or supplement thereto or any
application or other document filed in any state or jurisdiction in order to
qualify the Securities under the Blue Sky or securities law thereof. This
indemnity agreement is in addition to any other liability which the Company may
otherwise have to Agent's Indemnitees. Agent's Indemnitees agree, within ten
(10) days after the receipt by them of written notice of the commencement of any
action against them in respect to which indemnity may be sought from the Company
under this Section 6.1, to notify the Company in writing of the commencement of
such action; provided however, that the failure of Agent's Indemnitees to notify
the Company of any such action shall not relieve the Company from any liability
which it may have to Agent's Indemnitees on account of the indemnity agreement
contained in this Section 6.1, and further shall not relieve the Company from
any other liability which it may have to Agent's Indemnitees, and if Agent's
Indemnitees shall notify the Company of the commencement thereof, the Company
shall be entitled to participate in (and, to the extent that the Company shall
wish, to direct) the defense thereof at its own expense, but such defense shall
be conducted by counsel of recognized standing and reasonably satisfactory to
Agent's Indemnitees, defendant or defendants, in such litigation. The Company
agrees to notify Agent's Indemnitees promptly of the commencement of any
litigation or proceedings against the Company or any of the Company's officers
or directors of which the Company may be advised in connection with the issue
and sale of any of the Securities and to furnish to Agent's Indemnitees, at
their request, to provide copies of all pleadings therein and to permit the
Company's Indemnitees to be observers therein and apprise Agent's Indemnitees of
all developments therein, all at the Company's expense.
Section 6.2. Indemnification of Company. Agent agrees, in the same manner
and to the same extent as set forth in Section 6.1 above, to indemnify and hold
harmless the Company, and the Company's and Company's employees, accountants,
attorneys, and agents (the "Company's Indemnitees") with respect to (a) any
statement in or omission from the Offering Documents or any amendment or
supplement thereto or any application or other document filed in any state or
jurisdiction in order to qualify the Securities under the Blue Sky or securities
laws thereof, or any information furnished pursuant to Section 2.2 hereof, if
such statement or omission was made in reliance upon information furnished in
writing to the Company by Agent on its behalf specifically for use in connection
with the preparation thereof or supplement thereto, or (b) any untrue statement
of a material fact made by Agent or its agents not based on statements in the
Offering Documents or authorized in writing by the Company, or with respect to
any misleading statement made by Agent or its agents resulting from the omission
of material facts which misleading statement is not based upon the Offering
Documents, or information furnished in writing by the Company or, (c) any breach
of any representation, warranty, or covenant made by Agent in this Agreement.
Agent's liability hereunder shall be limited to the amount received by it for
acting as Agent in connection with the Offerings. Agent shall not be liable for
amounts paid in settlement of any such litigation if such settlement was
effected without its consent. In case of the commencement of any action in
respect of which indemnity may be sought from Agent, the Company's Indemnitees
shall have the same obligation to give notice as set forth in Section 6.1 above,
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subject to the same loss of indemnity in the event such notice is not given, and
Agent shall have the same right to participate in (and, to the extent that it
shall wish, to direct) the defense of such action at its own expense, but such
defense shall be conducted by counsel of recognized standing reasonably
satisfactory to the Company. Agent agrees to notify the Company's Indemnitees
and, at their request, to provide copies of all pleadings therein and to permit
the Company's Indemnitees to be observers therein and apprise them of all the
developments therein, all at Agent's expense.
Section 7. Termination.
Section 7.1. Termination by Agent. This Agreement may be terminated at any
time during the Offering Period by Agent by written notice to the Company, if
the Company shall have failed or been unable to comply with any of the terms,
conditions, or provisions of the Transaction Agreements to be performed,
complied with, or fulfilled by the Company within the respective times, if any,
herein provided for, unless compliance therewith or performance or satisfaction
thereof shall have been expressly waived by Agent in writing.
Section 7.2. Termination by Company. This Agreement may be terminated by
the Company at the conclusion of the Offering Period by notice to Agent if Agent
shall have failed or been unable to comply with any of the terms, conditions, or
provisions of this Agreement to be performed, complied with, or fulfilled by
Agent within the respective times, if any, herein provided for, unless
compliance therewith or performance or satisfaction thereof shall have been
expressly waived by the Company in writing.
Section 7.3. Termination for Force Majeure Events. This Agreement may be
terminated by Agent by notice to the Company at any time, if, in the reasonable,
good faith judgment of Agent, payment for and delivery of the Securities is
rendered impracticable or inadvisable because: (a) additional material
governmental restrictions not in force and effect on the date hereof shall have
been imposed upon trading in securities generally; (b) a war or other national
calamity shall have occurred; or (c) the condition of the market (either
generally or with reference to the sale of the Securities to be offered hereby)
or the condition of any matter affecting the Company or any other circumstance
is such that it would be undesirable, impracticable or inadvisable, in the
judgment of Agent, to proceed with this Agreement or with the Offering.
Section 7.4. Termination without Liability. Any termination of this
Agreement pursuant to this Section 7 shall be without liability of any character
(including, but not limited to, loss of anticipated profits or consequential
damages) on the part of any party thereto, except that the Company shall remain
obligated to pay the costs and expenses provided to be paid by it specified in
Sections 1.3 and 5.2, and the Company and Agent shall be obligated to pay,
respectively, all losses, claims, damages, or liabilities, joint or several,
under Section 6.1 in the case of the Company and Section 6.2 in the case of
Agent.
Section 8. Miscellaneous.
Section 8.1. Notices. Whenever notice is required by the provisions of this
Agreement to be given, such notice shall be in writing, addressed:
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If to Company:
Compositech Ltd.
120 Ricefield Lane
Hauppauge, New York 11788
Attn: Samuel S. Gross
Telephone: (516) 436-5200
Facsimile: (516) 436-5203
With a copy (which shall not constitute notice) to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036
Attention: Edward F. Cox, Esq.
Telephone: (212) 336-2000
Facsimile: (212) 336-2222
If to Agent:
Sovereign Capital Advisors, LLC
3340 Peachtree Road, N.E.
Suite 1965
Atlanta, Georgia 30326
Attention: Don Odom
Tel: (404) 814-3737
Fax: (404) 812-3738
With a copy (which shall not constitute notice) to:
Balboni Law Group LLC
3475 Lenox Road
Suite 990
Atlanta, Georgia 30326
Attention: Gerardo M. Balboni II, Esq.
Tel: (404) 812-3100
Fax: (404) 812-3101
8.2. Benefit. This Agreement is made solely for the benefit of Agent and
the Company, their respective officers and directors and any controlling person
referred to in Section 15 of the Act and their respective successors and
assigns, and no other person may acquire or have any right under or by virtue of
this Agreement, including, without limitation, the holders of any Securities.
The term "successor" or the term "successors and assigns" as used in this
Agreement shall not include any purchasers, as such, of any of the Securities.
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8.3. Survival. The respective indemnities, agreements, representations,
warranties, covenants and other statements of the Company and Agent, or the
officers, directors or controlling persons of the Company and Agent as set forth
in or made pursuant to this Agreement and the indemnity agreements of the
Company and Agent contained in Section 6 hereof shall survive and remain in full
force and effect, regardless of (a) any investigation made by or on behalf of
the Company or Agent or any such officer, director or controlling person of the
Company or of Agent; (b) delivery of or payment for the Securities; or (c) the
Closing Date, and any successor of the Company or Agent or any controlling
person, officer or director thereof, as the case may be, shall be entitled to
the benefits hereof.
8.4. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Georgia without regard to the
principles of conflict of laws. Any dispute or controversy between the parties
arising in connection with this Agreement or the subject matter contemplated by
this Agreement shall be resolved by arbitration before a three-member panel of
the American Arbitration Association in accordance with the commercial
arbitration rules of said forum and the Federal Arbitration Act, 9 U.S.C. 1 et
seq., with the resulting award being final and conclusive. Said arbitrators
shall be empowered to award all forms of relief and damaged claimed, including,
but not limited to, attorney's fees, expenses of litigation and arbitration,
exemplary damages, and prejudgment interest. The parties further agree that any
arbitration action between them shall be heard in Atlanta, Georgia, and
expressly consent to the jurisdiction and venue of the Superior Court of Fulton
County, Georgia, and the United States District Court for the Northern District
of Georgia, Atlanta Division for the adjudication of any civil action asserted
pursuant to this Agreement.
8.5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
8.6. Confidential Information. All confidential financial or business
information (except publicly available or freely usable material otherwise
obtained from another source) respecting either party will be used solely by the
other party in connection with the within transactions, be revealed only to
employees or contractors of such other party who are necessary to the conduct of
such transactions, and be otherwise held in strict confidence.
8.7. Public Announcements. Prior to the Closing Date, neither party hereto
will issue any public announcement concerning the within transactions without
the approval of the other party.
8.8. Finders. The parties acknowledge that no person has acted as a finder
in connection with the transactions contemplated herein and each will agree to
indemnify the other with respect to any other claim for a finder's fee in
connection with the Offering.
8.9. Recitals. The recitals to this Agreement are a material part hereof,
and each recital is incorporated into this Agreement by reference and made apart
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to
be executed as of the day and year first above written.
[Signatures on the following page]
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COMPANY SIGNATURE PAGE
TO
PLACEMENT AGENCY AGREEMENT
THE COMPANY:
COMPOSITECH LTD.
By:_______________________________
Samuel S. Gross, Executive Vice
President
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AGENT SIGNATURE PAGE
TO
PLACEMENT AGENCY AGREEMENT
AGENT:
SOVEREIGN CAPITAL ADVISORS, LLC
By:______________________________
Don Odom
By:______________________________
Paul Hamm
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EXHIBIT 10.43
Sovereign WARRANT AGREEMENT
THIS WARRANT AGREEMENT ("Agreement") dated as of March 16, 1999, between
COMPOSITECH LTD., a Delaware corporation (the "Company"), and SOVEREIGN CAPITAL
ADVISORS, LLC, a Nevada company (hereinafter referred to as "Sovereign").
Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings ascribed to them in the Series 1 Bridge Note Purchase and
Security Agreement of even date herewith (the "Purchase Agreement") among the
Company and the Purchasers thereto.
Background
The Company has engaged Sovereign to assist the Company in connection with
the Company's offering (the "Offering") of up to $1,500,000 in principal amount
of Series 1 Secured Convertible Bridge Notes, funded through a series of
Subsequent Advances (the "Series 1 Bridge Notes"). The Company expects the
Offering to be consummated over a series of closings (each of which is a
"Closing"). The Warrant Certificates ("Warrants") issued pursuant to this
Agreement are being issued by the Company to Sovereign and/or its designees, in
consideration for, the services of Sovereign in connection with the Offering,
with one Warrant issued at each of the Closings.
Agreement
For and in consideration of the premises, the agreements herein set forth
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
Section 1. Issuance of Warrant Certificates. The Company hereby agrees
to issue to Sovereign and/or its designees (the "Holders") at each Closing
in the Offering, a warrant to purchase a number of shares of Common Stock,
par value $0.01 per share, of the Company (the "Warrant Shares") equal to
five percent (5%) of the principal amount of the Series 1 Bridge Notes
issued at such Closing, or five percent (5%) of the principal amount of any
Subsequent Advance made under any Subsequent Closing, if any, at any time
or from time to time during a five (5) year period which commences on the
date the issuance date of the Warrant and ends 5:00 P.M., Eastern Time, on
the fifth (5th) anniversary of the issuance date of such Warrant (the
"Warrant Exercise Term"). The exercise price of the Warrant shall be equal
to one hundred ten percent (110%) of the Closing Bid Price at each Closing
(the "Exercise Price").
Section 2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this
Agreement shall be in the form set forth as Exhibit A, attached hereto and
made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this
Agreement.
Section 3. Exercise of Warrants.
3.1. Cash Exercise. The Exercise Price may be paid in cash or by check
to the order of the Company, or any combination of cash or check, subject
to adjustment as provided in Article 7 herein. Upon surrender of the
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Warrant Certificate to be exercised with the annexed Form of Exercise
Notice duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Warrant Shares purchased, at the Company's
executive offices currently located at 120 Ricefield Lane, Hauppauge, New
York 11788, the Holder of a Warrant Certificate shall be entitled to
receive a certificate or certificates for the Shares so purchased. The
purchase rights represented by each Warrant Certificate are exercisable at
the option of the Holder hereof, in whole or in part (but not as to
fractional shares of the Common Stock) at any time prior to the expiration
of the Warrant Exercise Term. In the case of the purchase of less than all
the Shares purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance
of the Shares purchasable thereunder. The date of issuance of the Common
Stock issuable upon exercise of the Warrants shall be the date the Company
receives the payment of the Exercise Price, a Warrant Certificate, and the
Election to Purchase.
3.2. Reserved.
Section 4. Issuance of Certificates. Upon the exercise of the
Warrants, the issuance of certificates for the Shares shall be made
forthwith (and in any event within five business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which
may be payable in respect of the issuance thereof, and such certificates
shall be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided however, that the Company shall not be required to
pay any tax other than that related to income which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder, and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to satisfaction of
the Company that such tax has been paid. The Warrant Certificates and the
certificates representing the Shares shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
Chairman or Vice Chairman of the Board of Directors, Chief Executive
Officer, President, or Vice President of the Company under its corporate
seal reproduced thereon, attested to by the manual or facsimile signature
of the present or any future Secretary or Assistant Secretary of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or
transfer. The Warrant Certificates and, upon exercise of the Warrants, in
part or in whole, certificates representing the Shares shall bear a legend
substantially similar to the following:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND MAY NOT BE OFFERED OR SOLD EXCEPT (I) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, (II) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (III) UPON THE DELIVERY
BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, STATING THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
Section 5. Price.
5.1. Adjusted Exercise Price. The adjusted Exercise Price shall be the
price which shall result from time to time from any and all adjustments of
the initial Exercise Price specified in Section 3.1 hereof in accordance
with the provisions of Article 7 hereof.
Section 6. Registration Rights. The Warrants and Warrant Shares have
not been registered for purposes of public distribution under the
Securities Act of 1933, as amended, but as
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Registrable Securities (as such term is defined in the Registration Rights
Agreement) are subject to all the terms and provisions of the Registration
Rights Agreement.
Section 7. Adjustments of Exercise Price and Number of Shares.
7.1. Subdivision and Combination. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
7.2. Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Article 7, the number of
Shares issuable upon the exercise of each Warrant shall be adjusted to the
nearest full Share by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Shares
issuable upon exercise of the Warrants immediately prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
7.3. Reclassification, Consolidation, Merger, etc. In case of any
reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or in the case of
any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the
Company is the surviving corporation and which does not result in any
reclassification or change of the outstanding shares of Common Stock,
except a change as a result of a subdivision or combination of such shares
or a change in par value, as aforesaid), or in the case of a sale or
conveyance to another corporation of the property of the Company as an
entirety, the Holders shall thereafter have the right to purchase the kind
and number of shares of stock and other securities and property receivable
upon such reclassification, change, consolidation, merger, sale, or
conveyance as if the Holders were the owners of the shares of Common Stock
underlying the Warrants immediately prior to any such events at a price
equal to the product of (x) the number of shares issuable upon exercise of
the Warrants and (y) the Exercise Price in effect immediately prior to the
record date for such reclassification, change, consolidation, merger, sale,
or conveyance as if such Holders had exercised the Warrants.
7.4. No Adjustment of Exercise Price in Certain Cases. No adjustment
of the Exercise Price shall be made:
(a) Upon the issuance or sale of shares of Common Stock upon the
exercise of the Warrants; or
(b) Upon (i) the issuance of options pursuant to the Company's
employee stock option plan in effect on the date hereof or the
issuance or sale by the Company of any shares of Common Stock pursuant
to the exercise of any such options, or (ii) the issuance or sale by
the Company of any shares of Common Stock pursuant to the exercise of
any options or warrants previously issued and outstanding on the date
hereof; or
(c) Upon the issuance of shares of Common Stock pursuant to
contractual obligations existing on the date hereof; or
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(d) If the amount of said adjustment shall be less than 2 cents
(2(cent)) per Share, provided however, that in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the
next subsequent adjustment which, together with any adjustment so
carried forward, shall amount to at least 2 cents (2(cent)) per Share.
7.5. Dividends and Other Distributions with Respect to Outstanding
Securities. In the event that the Company shall at any time prior to the
exercise of all Warrants declare a dividend (other than a dividend
consisting solely of shares of Common Stock or a cash dividend or
distribution payable out of current or retained earnings) or otherwise
distribute to its shareholders any monies, assets, property, rights,
evidences of indebtedness, securities (other than shares of Common Stock),
whether issued by the Company or by another person or entity, or any other
thing of value, the Holder or Holders of the unexercised Warrants shall
thereafter be entitled, in addition to the shares of Common Stock or other
securities receivable upon the exercise thereof, to receive, upon the
exercise of such Warrants, the same monies, property, assets, rights,
evidences of indebtedness, securities, or any other thing of value that
they would have been entitled to receive at the time of such dividend or
distribution. At the time of any such dividend or distribution, the Company
shall make appropriate reserves to ensure the timely performance of the
provisions of this Subsection 7.7.
7.6. Subscription Rights for Shares of Common Stock or Other
Securities. In the case the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of all the
Warrants issue any rights to subscribe for shares of Common Stock or any
other securities of the Company or of such affiliate to all the
shareholders of the Company, the Holders of the unexercised Warrants shall
be entitled, in addition to the shares of Common Stock or other securities
receivable upon the exercise of the Warrants, to receive such rights at the
time such rights are distributed to the other shareholders of the Company.
Section 8. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender
hereof by the registered Holder at the principal executive office of the
Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Shares in such
denominations as shall be designated by the Holder thereof at the time of
such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction, or mutilation of any Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation
of the Warrants, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
Section 9. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of
Common Stock and shall not be required to issue scrip or pay cash in lieu
of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock.
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Section 10. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of
Common Stock, solely for the purpose of issuance upon the exercise of the
Warrants, such number of shares of Common Stock as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise
of the Warrants and payment of the Exercise Price therefor, all shares of
Common Stock issuable upon such exercise shall be duly and validly issued,
fully paid, nonassessable and not subject to the preemptive rights of any
shareholder. As long as the Warrants shall be outstanding, the Company
shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants to be listed on or quoted on the
electronic bulletin board, by NASDAQ or listed on such national securities
exchanges as requested by Sovereign.
Section 11. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holder or Holders the
right to vote or to consent or to receive notice as a shareholder in
respect of any meetings of shareholders for the election of directors or
any other matter, or as having any rights whatsoever as a shareholder of
the Company. If, however, at any time prior to the expiration of the
Warrants and their exercise, any of the following events shall occur:
(a) the Company shall make a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe
therefor; or
(c) a dissolution, liquidation, or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the date fixed as
a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription fights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation,
winding up or sale. Such notice shall specify such record date or the date
of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action
taken in connection with the declaration or payment of any such dividend or
distribution, or the issuance of any convertible or exchangeable securities
or subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
Section 12. Notices. All notices, requests, consents, and other
communications hereunder shall be in writing and shall be deemed to have
been duly made when delivered, or mailed by registered or certified mall,
return receipt requested:
(a) If to a registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 of
this Agreement or to such other address as the Company may designate
by notice to the Holders.
-5-
<PAGE>
Section 13. Supplements and Amendments. The Company and Sovereign may
from time to time supplement or amend this Agreement without the approval
of any Holders of Warrant Certificates in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective
or inconsistent with any provisions herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and
Sovereign may deem necessary or desirable and which the Company and
Sovereign deem not to adversely affect the interests of the Holders of
Warrant Certificates.
Section 14. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company and the Holders inure to the
benefit of their respective successors and assigns hereunder.
Section 15. Termination. This Warrant Agreement shall terminate on the
date when all Warrants issued pursuant to this Agreement shall have been
exercised and all the Shares issuable upon exercise of the Warrants have
been resold to the public; provided however, that the provisions of Article
6 shall survive such termination until the fifth (5th) anniversary of the
date of issuance of the last warrant issued pursuant to this Agreement.
Section 16. Governing Law. This Agreement and each Warrant Certificate
hereunder shall be governed by and construed in accordance with the laws of
the State of New York, irrespective of the choice of law provisions
thereof. The parties agree that any appropriate state court located in New
Castle County, Delaware, or any federal Court located in Wilmington
Delaware, including without limitation to the United States District Court
of Delaware, shall have exclusive jurisdiction of any case or controversy
arising under or in connection with this Agreement and shall be a proper
forum in which to adjudicate such case or controversy. The parties consent
to the jurisdiction of such courts.
Section 17. Benefits of This Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the
Company and Sovereign and any other registered holder or holders of the
Warrant Certificates, Warrants, or the Shares any legal or equitable right,
remedy or claim under this Agreement; and this Agreement shall be for the
sole and exclusive benefit of the Company and Sovereign and any other
holder or holders of the Warrant Certificates, Warrants, or the Shares.
Section 18. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and such counterparts shall together constitute
but one and the same instrument.
[Signatures on Following Pages]
-6-
<PAGE>
COMPANY SIGNATURE PAGE
TO
SOVEREIGN WARRANT AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
COMPOSITECH LTD.
By:
-----------------------------
Samuel S. Gross
Its: Chief Financial Officer
-7-
<PAGE>
SOVEREIGN SIGNATURE PAGE
TO
SOVEREIGN WARRANT AGREEMENT
SOVEREIGN CAPITAL ADVISORS, LLC
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
-8-
<PAGE>
EXHIBIT A
TO
SOVEREIGN WARRANT AGREEMENT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR
SOLD EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
ACT, (II) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR
ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (III) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, STATING THIAT
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., EASTERN TIME, MARCH ___, 2004
No. SCA __
WARRANT CERTIFICATE
This Warrant Certificate certifies that SOVEREIGN CAPITAL ADVISORS, LLC
("Sovereign") or registered assigns, is the registered holder of __________
Warrants to purchase, at any time from March 16, 1999 until 5:00 P.M. Eastern
Time on March ___, 2004 ("Expiration Date"), up to ____________ shares
("Shares") of fully-paid and non-assessable common stock, par value $.01
("Common Stock"), of Compositech Ltd., a Delaware corporation (the "Company"),
at the Initial Exercise Price, subject to adjustment in certain events (the
"Exercise Price"), of $_______ per Share upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the Warrant
Agreement dated as of March 16, 1999 between the Company and Sovereign (the
"Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by
certified or official bank check in New York Clearing House funds payable to the
order of the Company, or any combination of cash or check.
No Warrant may be exercised after 5:00 P.M., Eastern Daylight Time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events,
the Exercise Price and/or number of the Company's securities issuable thereupon
may, subject to certain conditions, be adjusted. In such event, the Company
will, at the, request of the holder, issue a new Warrant Certificate evidencing
the adjustment in the Exercise Price and the number and/or type of securities
issuable upon the exercise of the Warrants; provided however, that the failure
of the Company to issue such new
-9-
<PAGE>
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferees) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
[Signature On Following Page]
-10-
<PAGE>
COMPANY SIGNATURE PAGE
TO
EXHIBIT A
TO
SOVEREIGN WARRANT AGREEMENT
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated: March ___, 1999
COMPOSITECH LTD.
By:
------------------------------
Samuel S. Gross
Its: Chief Financial Officer
-11-
<PAGE>
[FORM OF EXERCISE NOTICE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____________ Shares and
herewith tenders in payment for such Shares cash or a certified or official bank
check payable in New York Clearing House Funds to the order of
_____________________ in the amount of $_______________ all in accordance with
the terms hereof. The undersigned requests that a certificate for such Shares be
registered in the name of whose address
is_____________________________________________ and that such Certificate be
delivered to _________________________________________ whose address is
- ------------------------.
Dated:______________________ Signature:________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
_________________________________
_________________________________
(Insert Social Security or Other
Identifying Number of Holder)
-12-
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _______________________________ hereby sells, assigns
and transfers unto _____________________________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title, and interest therein,
and does hereby irrevocably constitute and appoint ________________________,
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated:______________________ Signature:________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
_________________________________
_________________________________
(Insert Social Security or Other
Identifying Number of Holder)
-13-
EXHIBIT 10.44
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR
SOLD EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
ACT, (II) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR
ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (III) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, STATING THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS Certificate IS
Restricted IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., EASTERN STANDARD TIME, MARCH 16, 2004
No.SCA-1 One Warrant
SOVEREIGN WARRANT CERTIFICATE
This Warrant Certificate certifies that Sovereign Capital Advisors, LLC
("Sovereign") or registered assigns, is the registered holder of One (1) Warrant
to purchase, at any time from March 16,1999, until 5:00 P.M. Eastern Standard
Time on March 16, 2004 ("Expiration Date"), up to Twenty Five Thousand (25,000)
shares ("Shares") of fully-paid and non-assessable common stock, par value $.01
("Common Stock"), of Compositech Ltd., a Delaware corporation (the "Company"),
at the Initial Exercise Price, subject to adjustment in certain events (the
"Exercise Price"), of $___per Share upon surrender of this Warrant Certificate
and payment of the Exercise Price at an office or agency of the Company, but
subject to the conditions set forth herein and in the warrant agreement dated as
of March 16, 1999 between the Company and Sovereign (the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the Company,
or any combination of cash or check.
No Warrant may be exercised after 5:00 P.M., Eastern Standard Time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events,
the Exercise Price and/or number of the Company's securities issuable thereupon
may, subject to certain conditions, be adjusted. In such event, the Company
will, at the, request of the holder, issue a new Warrant Certificate evidencing
the adjustment in the Exercise Price and the number and/or type of securities
issuable upon the exercise of the Warrants; provided however, that the failure
of the Company to issue such new Warrant Certificates shall not in any way
change, alter, or otherwise impair, the rights of the holder as set forth in the
Warrant Agreement.
-1-
<PAGE>
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferees) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
[Signature On Following Page]
-2-
<PAGE>
COMPANY SIGNATURE PAGE
TO
SOVEREIGN WARRANT CERTIFICATE
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated: March 16, 1999
COMPOSITECH LTD.
By:
----------------------------------------
Samuel S. Gross, Chief Financial Officer
-3-
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____________ Shares and
herewith tenders in payment for such Shares cash or a certified or official bank
check payable in New York Clearing House Funds to the order of
_____________________ in the amount of $_______________ all in accordance with
the terms hereof. The undersigned requests that a certificate for such Shares be
registered in the name of whose address
is_____________________________________________ and that such Certificate be
delivered to _________________________________________ whose address is
________________________.
Dated:_____________________________ Signature: ____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
__________________________________
__________________________________
(Insert Social Security or Other
Identifying Number of Holder)
-4-
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _______________________________ hereby sells, assigns
and transfers unto_____________________________________________________________
___________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title, and interest therein,
and does hereby irrevocably constitute and appoint
__________________________________, Attorney, to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated:_____________________________ Signature: ____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
__________________________________
__________________________________
(Insert Social Security or Other
Identifying Number of Holder)
-5-
<TABLE>
<CAPTION>
COMPOSITECH LTD.
COMPUTATION OF LOSS PER COMMON SHARE
EXHIBIT 11
Year Ended
December 31
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
BASIC
Shares used in computing (loss) per share 11,611,675 6,389,750
Net (loss) ($ 5,810,595) ($ 7,569,793)
Preferred Stock dividend, including amortization of discount on 7% Series B
Convertible Preferred Stock of $314,286 406,686
------------ ------------
(Loss) available for common stockholders ($ 6,217,281) ($ 7,569,793)
============ ============
(Loss) per common share ($ 0.54) ($ 1.18)
============ ============
DILUTED
Shares used in computing (loss) per share (1) 11,611,675 6,389,750
(Loss) available for common stockholders ($ 6,217,281) ($ 7,569,793)
ADD : Dividend on 7% convertible preferred stock 406,686
Interest expense on 5% convertible debentures 61,146 153,663
Amortization of debt discount and expenses - 5% convertible debentures 497,603 1,326,218
------------ ------------
Total ($ 5,251,846) ($ 6,089,912)
============ ============
(Loss) per common share ($ 0.45) ($ 0.95)
============ ============
</TABLE>
(1) Conversions of the 5% convertible debentures and the 7% convertible
preferred stock are not assumed in the computation because because their
inclusion would be antidilutive.
EXHIBIT 23.1 - CONSENT OF ERNST & YOUNG LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-32241) of Compositech Ltd. and in the related Prospectus of our
report dated February 12, 1999, except for Note 15 as to which the date is March
26, 1999, with respect to the financial statements of Compositech Ltd. included
in this Annual Report (Form 10-KSB) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Melville, New York
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-KSB
for the year ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 102,286
<SECURITIES> 0
<RECEIVABLES> 27,273
<ALLOWANCES> 0
<INVENTORY> 254,784
<CURRENT-ASSETS> 653,866
<PP&E> 7,903,133
<DEPRECIATION> 2,181,918
<TOTAL-ASSETS> 12,238,762 <F1>
<CURRENT-LIABILITIES> 1,755,627
<BONDS> 0
2,200,000 <F2>
1,652,985
<COMMON> 131,502
<OTHER-SE> 36,884,638
<TOTAL-LIABILITY-AND-EQUITY> 12,790,801 <F1>
<SALES> 350,112
<TOTAL-REVENUES> 414,396
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,785,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 629,296 <F3>
<INCOME-PRETAX> (6,217,281)<F4>
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,217,281)<F4>
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
<FN>
<F1> Includes <$552,039> cumulative foreign currency translation
adjustment, applicable to the net assets of the Canadian joint venture
[ Tag # 18 & Tag # 25 ]
<F2> Represents balance of Series B 7% Convertible Preferred Stock [Tag #21]
<F3> Interest expense includes $497,603 of amortization of debt discount
and expenses, a non-cash item [ Tag # 32 ]
<F4> Represents loss available for common stockholders, after deducting
$406,686 of Preferred Stock dividends, including amortization of
discount on the 7% Series B convertible preferred stock of $314,286 [
Tag # 33 & Tag # 39 ]
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-KSB
for the year ended December 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 624,254
<SECURITIES> 0
<RECEIVABLES> 44,725
<ALLOWANCES> 0
<INVENTORY> 201,382
<CURRENT-ASSETS> 1,369,654
<PP&E> 6,765,901
<DEPRECIATION> 1,489,229
<TOTAL-ASSETS> 13,145,889
<CURRENT-LIABILITIES> 1,198,573
<BONDS> 5,762,350 <F1>
0
1,842,483
<COMMON> 77,679
<OTHER-SE> 30,075,100
<TOTAL-LIABILITY-AND-EQUITY> 13,145,889
<SALES> 507,403
<TOTAL-REVENUES> 507,403
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,549,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,555,603 <F2>
<INCOME-PRETAX> (7,569,793)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,569,793)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
<FN>
<F1> Represents balance of 5% Convertible Debentures, net of unamortized
discount of $67,650
<F2> Interest expense includes $1,326,218 of amortization of debt discount
and expenses, a non-cash item [ Tag # 32 ]
</FN>
</TABLE>
