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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - November 12, 1997
DATA RACE, INC.
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation)
0-20706 74-2272363
(Commission File Number) (I.R.S. Employer
Identification No.)
12400 NETWORK BLVD.
SAN ANTONIO, TEXAS 78249
(210) 263-2000
(Address of Principal Executive Offices and Telephone Number,
Including Area Code)
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ITEM 5. OTHER EVENTS.
On November 12, 1997, DATA RACE, Inc. (the "Company") closed a $5,000,000
private placement of 8% convertible participating preferred stock and warrants
with four institutional investment firms. The investment firms have committed to
purchase an additional $3,000,000 of 8% convertible participating preferred
stock and warrants on similar terms by January 29, 1998, subject to certain
conditions. The proceeds from the sale of the preferred stock and warrants is
expected to be used primarily for the continuing roll-out of the Company's Be
There! personal multiplexer product line and for general corporate working
capital.
The convertible preferred stock is generally convertible into common stock
at a price equal to the lesser of a premium over the market price on the closing
date or a price computed at the time of conversion based on market prices prior
to the conversion date. The warrants become exercisable in two equal
installments, five months from the issuance date and nine months from the
issuance date, in proportion to the remaining number of shares of convertible
preferred stock then held by the investors. Under certain circumstances, the
Company may be required to redeem the convertible preferred stock and warrants.
The common stock underlying the convertible preferred stock and warrants carry
certain registration rights. Subject to certain exceptions, the investors are
prohibited from effecting short sales of the Company's common stock during the
six-month period following the initial closing of the private placement.
The additional $3,000,000 investment is subject to certain conditions,
including effective registration of the shares of common stock underlying the
convertible preferred stock and warrants, shareholder approval of the private
placement, the absence of certain changes in control of the Company, and the
absence of any material adverse change in the Company's business or prospects.
Loewenbaum & Company Incorporated acted as financial advisor and placement
agent in connection with the transaction.
A MORE COMPLETE DESCRIPTION OF THE PRIVATE PLACEMENT AND THE RIGHTS AND
RESTRICTIONS PERTAINING TO THE SECURITIES ISSUED IN THE PRIVATE PLACEMENT IS
CONTAINED IN THE DOCUMENTS FILED AS EXHIBITS TO THIS FORM 8-K.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
Exhibit Description
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3.1 Statement of Designations, Preferences and Rights of
Series C Convertible Participating Preferred Stock
10.1 Securities Purchase Agreement dated effective November
7, 1997 with Buyers listed therein
10.2 Registration Rights Agreement dated effective November
7, 1997 with Buyers listed therein
10.3 Form of Warrant issued to each Buyer party to the
Securities Purchase Agreement dated effective November
7, 1997
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATA RACE, Inc.
Date: November 20, 1997 By: /s/ GREGORY T. SKALLA
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Gregory T. Skalla,
Vice President-Finance, Chief Financial
Officer, Treasurer and Secretary
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EXHIBIT INDEX
Exhibit Description
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3.1 Statement of Designations, Preferences and Rights of Series
C Convertible Participating Preferred Stock
10.1 Securities Purchase Agreement dated effective November 7,
1997 with Buyers listed therein
10.2 Registration Rights Agreement dated effective November 7,
1997 with Buyers listed therein
10.3 Form of Warrant issued to each Buyer party to the Securities
Purchase Agreement dated effective November 7, 1997
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EXHIBIT 3.1
STATEMENT OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES C CONVERTIBLE PARTICIPATING PREFERRED STOCK
OF
DATA RACE, INC.
Pursuant to Article 2.13 of the
Texas Business Corporation Act
Data Race, Inc., a corporation organized and existing under the Texas
Business Corporation Act (the "COMPANY"), does hereby certify that the following
resolutions were adopted by the Board of Directors of the Company pursuant to
authority of the Board of Directors as required by Article 2.13 of the Texas
Business Corporation Act.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Company (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Articles of
Incorporation, the Board of Directors hereby authorizes a series of the
Company's previously authorized preferred Stock, no par value (the
"PREFERRED STOCK"), and hereby states the designation and number of shares,
and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series C Convertible Preferred Stock:
1. Designation, Amount and Dividends. The designation of this
---------------------------------
series, which consists of 8,000 shares of Preferred Stock, is the Series C
Convertible Preferred Stock (the "PREFERRED SHARES") and the stated value
shall be One Thousand Dollars ($1,000.00) per share (the "STATED VALUE").
The Preferred Shares shall not bear any dividends.
2. Holder's Conversion of Preferred Shares. A holder of Preferred
---------------------------------------
Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares
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of the Company's common stock, no par value per share (the "COMMON STOCK"),
on the following terms and conditions:
a. Conversion Right. Subject to the provisions of Section 11
----------------
below, at any time or times on or after the date which is the earlier of
(i) 90 days after the Issuance Date (as defined below) and (ii) the date
that the Registration Statement (as defined below) is declared effective by
the United States Securities and Exchange Commission (the "SEC"), any
holder of Preferred Shares shall be entitled to convert any whole number of
Preferred Shares into fully paid and nonassessable shares (rounded to the
nearest whole share in accordance with Section 2(i) below) of Common Stock,
at the Conversion Rate (as defined below); provided, however, that in no
event shall any holder be entitled to convert Preferred Shares in excess of
that number of Preferred Shares which, upon giving effect to such
conversion, would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such conversion. For
purposes of the foregoing proviso, the aggregate number of shares of Common
Stock beneficially owned by the holder and its affiliates shall include the
number of shares of Common Stock issuable upon conversion of the Preferred
Shares with respect to which the determination of such proviso is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (i) conversion of the remaining, nonconverted Preferred
Shares beneficially owned by the holder and its affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company (including, without limitation, any
warrants) subject to a limitation on conversion or exercise analogous to
the limitation contained herein beneficially owned by the holder and its
affiliates. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. Each
holder may waive the foregoing limitations with respect to its conversions
by written notice to the Company upon not less than 61 days prior notice
(with such waiver taking effect only upon the expiration of such 61 day
notice period).
b. Conversion Rate. The number of shares of Common Stock
---------------
issuable upon conversion of each of the Preferred Shares pursuant to
Sections (2)(a) and 2(h) shall be determined according to the following
formula (the "CONVERSION RATE"):
(.08)(N/365)(1,000) + 1,000
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Conversion Price
For purposes of this Statement of Designations, the following terms shall
have the following meanings:
(i) "CONVERSION PRICE" means, as of any Conversion Date
(as defined below) or other date of determination, the lower of the Fixed
Conversion Price and the Floating Conversion Price, each in effect as of such
date and subject to adjustment as provided herein;
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(ii) "FIXED CONVERSION PRICE" means 120% of the Market
Price on the date of issuance of the applicable Preferred Shares, subject to
adjustment as provided herein, and provided, however, that in the event that the
Market Price for the Common Stock on the date the Registration Statement is
declared effective by the SEC is less than 90% of the Market Price on the
Issuance Date, then thereafter, subject to adjustment as provided herein, Fixed
Conversion Price shall mean 120% of the Market Price on the date the
Registration Statement is declared effective by the SEC;
(iii) "FLOATING CONVERSION PRICE" means, as of any date of
determination, the amount obtained by multiplying the Conversion Percentage in
effect as of such date by the arithmetic average of the three (3) lowest Closing
Bid Prices during the 22 consecutive trading days immediately preceding such
date, subject to adjustment as provided herein;
(iv) "CONVERSION PERCENTAGE" means (A) as long as the
Common Stock is quoted on the Nasdaq National Market or listed on The New York
Stock Exchange, Inc. or The American Stock Exchange, Inc., 100%, (B) if the
Common Stock is quoted on the Nasdaq SmallCap Market, 80% and (C) if the Common
Stock is not quoted on the Nasdaq National Market or the Nasdaq SmallCap Market
or listed on The New York Stock Exchange, Inc. or The American Stock Exchange,
Inc., 60%; subject in each case to adjustment as provided herein;
(v) "MARKET PRICE" means, with respect to any security for
any date, arithmetic average of the Closing Bid Price for such security on each
of the five consecutive trading days immediately preceding such date;
(vi) "CLOSING BID PRICE" means, for any security as of any
date, the last closing bid price for such security on the Nasdaq National Market
as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq
National Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price of such security as reported
by Bloomberg, or, if no last closing trade price is reported for such security
by Bloomberg, the average of the bid prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Bid Price cannot be calculated for such security on such date on
any of the foregoing bases, the Closing Bid Price of such security on such date
shall be the fair market value as mutually determined by the Company and the
holders of a majority of the outstanding Preferred Shares. If the Company and
the holders of Preferred Shares are unable to agree upon the fair market value
of the Common Stock, then such dispute shall be resolved pursuant to Section
2(g)(iii) below with the term "Closing Bid Price" being substituted for the term
"Market Price." (All such determinations to be appropriately adjusted for any
stock dividend, stock split or other similar transaction during such period).
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(vii) "N" means the number of days from, but excluding, the
Issuance Date through and including the Conversion Date for the Preferred Shares
for which conversion is being elected; and
(viii) "ISSUANCE DATE" means, with respect to each Preferred
Share, the date of issuance of the applicable Preferred Share.
c. Effect of Failure to Obtain and Maintain Effectiveness of
---------------------------------------------------------
Registration Statement. If the registration statement (the "REGISTRATION
- ----------------------
STATEMENT") covering the resale of all of the shares of Common Stock issuable
upon conversion or exercise of the Preferred Shares and the Warrants (as defined
in the Securities Purchase Agreement), respectively, and required to be filed by
the Company pursuant to the Registration Rights Agreement between the Company
and the Buyers referred to therein (the "REGISTRATION RIGHTS AGREEMENT") is not
(i) filed within 30 days of the first Issuance Date of any Preferred Shares (the
"SCHEDULED FILING DATE"), (ii) declared effective by the SEC on or before 90
days after the first Issuance Date for any Preferred Shares (the "SCHEDULED
EFFECTIVE DATE"), or (iii) if after the Registration Statement has been declared
effective by the SEC, sales of all such shares of Common Stock cannot be made
pursuant to the Registration Statement (whether because of a failure to keep the
Registration Statement effective, to disclose such information as is necessary
for sales to be made pursuant to the Registration Statement, to register
sufficient shares of Common Stock or otherwise), then, as partial relief for the
damages to any holder by reason of any such delay in or reduction of its ability
to sell the underlying shares of Common Stock (which remedy shall not be
exclusive of any other remedies available at law or in equity), the Company
shall pay to each holder of Preferred Shares an amount in cash per Preferred
Share held equal to the product of (i) $1,000 multiplied by (ii) .02 multiplied
by (iii) the quotient of (x) the sum of (A) the number of days after the
Scheduled Filing Date and prior to the date that the Registration Statement is
filed with the SEC, (B) the number of days after the Scheduled Effective Date
and prior to the date that the Registration Statement is declared effective by
the SEC and (C) the number of days that sales cannot be made pursuant to the
Registration Statement after the Registration Statement has been declared
effective by the SEC, divided by (y) 30. The payments to which a holder shall
be entitled pursuant to this Section 2(c) are referred to herein as
"REGISTRATION DELAY PAYMENTS." Registration Delay Payments shall be paid within
five business days of the date incurred. In the event the Company fails to make
Registration Delay Payments in a timely manner, such Registration Delay Payments
shall bear interest at the rate of 2.0% per month (prorated for partial months)
until paid in full. If the Company fails to pay the Registration Delay
Payments, including any interest thereon, within 15 business days of the date
incurred, then the holder entitled to such payments shall have the right at any
time, so long as the Company continues to fail to make such payments, to require
the Company, upon written notice, to immediately issue, in lieu of the
Registration Delay Payments, including any interest thereon, the number of
shares of Common Stock equal to the quotient of (X) the sum of the Registration
Delay Payments and all interest accrued thereon divided by (Y) the Conversion
Price in effect on such Conversion Date as is specified by the holder in writing
to the Company.
d. Adjustment to Conversion Price -- Dilution and Other Events.
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In order to prevent dilution of the rights granted under this Statement of
Designations, the
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Conversion Price will be subject to adjustment from time to time as provided in
this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of
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Common Stock. If and whenever on or after the date of issuance of the Preferred
- ------------
Shares, the Company issues or sells, or is deemed to have issued or sold, any
shares of Common Stock (other than shares of Common Stock deemed to have been
issued by the Company in connection with Approved Issuances (as defined below))
for a consideration per share less than the Market Price in effect immediately
prior to such time (the "APPLICABLE PRICE"), then immediately after such issue
or sale, the Fixed Conversion Price shall be reduced to an amount equal to the
product of (x) the Fixed Conversion Price in effect immediately prior to such
issue or sale and (y) the quotient determined by dividing (1) the sum of (I) the
product of the Applicable Price and the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale, and (II)
the consideration, if any, received by the Company upon such issue or sale, by
(2) the product of (I) the Applicable Price and (II) the number of shares of
Common Stock Deemed Outstanding immediately after such issue or sale. For
purposes of determining the adjusted Fixed Conversion Price under this Section
2(d)(i), the following shall be applicable:
(A) Issuance of Options. If the Company in any
-------------------
manner grants any rights or options to subscribe for or to purchase Common
Stock (other than in connection with an Approved Issuance or upon
conversion of the Preferred Shares) or any stock or other securities
convertible into or exchangeable for Common Stock (such rights or options
being herein called "OPTIONS" and such convertible or exchangeable stock or
securities being herein called "CONVERTIBLE SECURITIES") and the price per
share for which Common Stock is issuable upon the exercise of such Options
or upon conversion or exchange of such Convertible Securities is less than
the Applicable Price, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such Options shall be deemed to be
outstanding and to have been issued and sold by the Company for such price
per share. For purposes of this Section 2(d)(i)(A), the "price per share
for which Common Stock is issuable upon exercise of such Options or upon
conversion or exchange of such Convertible Securities" is determined by
dividing (I) the total amount, if any, received or receivable by the
Company as consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the Company upon
the exercise of all such Options, plus in the case of such Options which
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the issuance
or sale of such Convertible Securities and the conversion or exchange
thereof, by (II) the total maximum number of shares of Common Stock
issuable upon exercise of such Options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such
Options. No adjustment of the Fixed Conversion Price shall be made upon the
actual issuance of such Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such Common
Stock upon conversion or exchange of such Convertible Securities.
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(B) Issuance of Convertible Securities. If the
----------------------------------
Company in any manner issues or sells any Convertible Securities and the
price per share for which Common Stock is issuable upon such conversion or
exchange is less than the Applicable Price, then the maximum number of
shares of Common Stock issuable upon conversion or exchange of such
Convertible Securities shall be deemed to be outstanding and to have been
issued and sold by the Company for such price per share. For the purposes
of this Section 2(d)(i)(B), the "price per share for which Common Stock is
issuable upon such conversion or exchange" is determined by dividing (I)
the total amount received or receivable by the Company as consideration for
the issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange
of all such Convertible Securities. No adjustment of the Fixed Conversion
Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such
issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Fixed Conversion Price had been or are
to be made pursuant to other provisions of this Section 2(d)(i), no further
adjustment of the Fixed Conversion Price shall be made by reason of such
issue or sale.
(C) Change in Option Price or Rate of Conversion. If
---------------------------------------------
the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange of
any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock change at any time,
the Fixed Conversion Price in effect at the time of such change shall be
readjusted to the Fixed Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold; provided that no adjustment shall be made if such
adjustment would result in an increase of the Fixed Conversion Price then
in effect.
(D) Certain Definitions. For purposes of determining
-------------------
the adjusted Fixed Conversion Price under this Section 2(d)(i), the
following terms have meanings set forth below:
(I) "APPROVED ISSUANCES" shall mean (i) a loan
from a commercial bank, (ii) any transaction involving the Company's
issuances of securities (A) as consideration in a merger or consolidation
or (B) as consideration for the acquisition of a business, product or
license or other assets by the Company, (iii) the issuance of Common Stock
in a firm commitment, underwritten public offering with commissions,
underwriting discounts and allowances not in excess of 7.0% of the gross
proceeds, (iv) the issuance of securities upon exercise or conversion of
the Company's options, warrants or other convertible securities outstanding
as of the date hereof, (v) the grant of additional options or warrants, or
the issuance of additional securities, under any Company stock option plan,
restricted stock plan, stock purchase plan or other plan or
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written compensation contract for the benefit of the Company's employees or
directors, or (vi) the issuance of securities pursuant to the Rights
Agreement, dated September 15, 1997, between the Company and ChaseMellon
Shareholder Services, L.L.C., as amended from time to time in accordance
with its terms (the "RIGHTS AGREEMENT").
(II) "COMMON STOCK DEEMED OUTSTANDING" means, at
any given time, the number of shares of Common Stock actually outstanding
at such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock issuable
upon conversion of the Preferred Shares.
(E) Treatment of Expired Options and Unexercised
--------------------------------------------
Convertible Securities. If, in any case, the total number of shares of
----------------------
Common Stock issuable upon the exercise of any Option or upon exercise,
conversion or exchange of any Convertible Security is not, in fact, issued
and the rights to exercise such Option or to exercise, convert or exchange
such Convertible Securities shall have expired or terminated, the Fixed
Conversion Price then in effect will be readjusted to the Fixed Conversion
Price which would have been effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination (other than
in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(F) Effect on Fixed Conversion Price of Certain
-------------------------------------------
Events. For purposes of determining the adjusted Fixed Conversion Price
------
under this Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If
-------------------------------------
any Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the amount received by the Company therefor,
before deduction of reasonable commissions, underwriting discounts or
allowances or other reasonable expenses paid or incurred by the Company in
connection with such issuance or sale. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such
security on the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity
in connection with any merger in which the Company is the surviving entity
the amount of consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving entity as
is attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
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unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable
appraiser selected by the Company. The determination of such appraiser
shall be deemed binding upon all parties absent manifest error.
(II) Integrated Transactions. In case any
-----------------------
Option is issued in connection with the issue or sale of other securities
of the Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration of $.01.
(III) Treasury Shares. The number of shares of
---------------
Common Stock outstanding at any given time does not include shares owned or
held by or for the account of the Company, and the disposition of any
shares so owned or held will be considered an issue or sale of Common
Stock.
(IV) Record Date. If the Company takes a
-----------
record of the holders of Common Stock for the purpose of entitling them (1)
to receive a dividend or other distribution payable in Common Stock,
Options or in Convertible Securities or (2) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date will
be deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(ii) Adjustment of Fixed Conversion Price upon Subdivision
-----------------------------------------------------
or Combination of Common Stock. 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 Fixed 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 Fixed Conversion Price in effect immediately prior to such
combination will be proportionately increased.
(iii) Intentionally omitted.
(iv) Reorganization, Reclassification, Consolidation,
------------------------------------------------
Merger or Sale. Any recapitalization, reorganization, reclassification,
--------------
consolidation, merger, sale of all or substantially all of the Company's
assets to another Person (as defined below) or other 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 is referred to
herein as "ORGANIC CHANGE." Prior to the consummation of any Organic
Change, the Company
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will make appropriate provision (in form and substance reasonably
satisfactory to the holders of a majority of the Preferred Shares then
outstanding) to insure that each of the holders of the Preferred Shares
will thereafter have the right to acquire and receive in lieu of or
addition to (as the case may be) the shares of Common Stock otherwise
acquirable and receivable upon the conversion of such holder's Preferred
Shares, such shares of stock, securities or assets that would have been
issued or payable in such Organic Change with respect to or in exchange for
the number of shares of Common Stock which would have been acquirable and
receivable upon the conversion of such holder's Preferred Shares had such
Organic Change not taken place (without taking into account any limitations
or restrictions on the timing or amount of conversions). In any such case,
the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Preferred
Shares then outstanding) with respect to such holders' rights and interests
to insure that the provisions of this Section 2(d) and Section 2(e) below
will thereafter be applicable to the Preferred Shares (including, in the
case of any such consolidation, merger or sale in which the successor
entity or purchasing entity is other than the Company, an immediate
adjustment of the Fixed Conversion Price to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, if the value
so reflected is less than the Fixed Conversion Price in effect immediately
prior to such consolidation, merger or sale and an immediate revision to
the Floating Conversion Price to reflect the price of the common stock of
the surviving entity and the market in which such common stock is traded).
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
reasonably satisfactory to the holders of a majority of the Preferred
Shares then outstanding), the obligation to deliver to each holder of
Preferred Shares such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire. "PERSON" shall mean 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.
(v) Certain Events. If any event occurs of the type
--------------
contemplated by the provisions of this Section 2(d) but not expressly
provided for by such provisions (including, without limitation, the
granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an
appropriate adjustment in the Conversion Price so as to protect the rights
of the holders of the Preferred Shares; provided that no such adjustment
will increase the Conversion Price as otherwise determined pursuant to this
Section 2(d).
(vi) Notices.
--------
(A) Immediately upon any adjustment of the Conversion
Price, the Company will give written notice thereof to each holder of
Preferred Shares, setting forth in reasonable detail and certifying the
calculation of such adjustment.
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(B) The Company will give written notice to each
holder of Preferred Shares 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 holders of Common Stock or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to each
holder of Preferred Shares at least twenty (20) days prior to the date on
which any Organic Change, dissolution or liquidation will take place and in
no event shall such notice be provided to such holder prior to such
information being made known to the public.
e. Purchase Rights. In addition to any adjustments of the
---------------
Conversion Price pursuant to Section 2(d) above, if at any time after the
Issuance Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the "PURCHASE
RIGHTS"), then the holders of Preferred Shares will be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete conversion of the Preferred
Shares (without taking into account any limitations or restrictions on the
timing or amount of conversions) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
f. Fixing of Conversion Price - Major Corporate Event
--------------------------------------------------
Announcement. Notwithstanding anything contained in Section 2(b) above, in the
- ------------
event (i) the Company makes a public announcement that it intends to consolidate
or merge with or into another Person or engage in a business combination
involving the issuance or exchange of 50% or more of the Company's outstanding
Common Stock, other than pursuant to an Exempt Major Transaction (as defined in
Section 3(c)(i) below) (ii) the Company makes a public announcement that it
intends to sell or transfer substantially all of the Company's assets, or (iii)
any person, group or entity (including the Company) publicly announces a
purchase, tender or exchange offer for 50% or more of the Company's outstanding
Common Stock (the transactions described in clauses (i), (ii) and (iii) above
are hereinafter referred to as "MAJOR CORPORATE EVENTS" and the date of the
announcement referred to in clause (i), (ii) or (iii) is hereinafter referred to
as the "ANNOUNCEMENT DATE"), then the Fixed Conversion Price shall, effective
upon the Announcement Date and continuing through the Adjusted Conversion Price
Termination Date (as defined below), be equal to the Conversion Price which
would have been applicable for a conversion by the holder pursuant to Section
2(a) occurring on the Announcement Date. From and after the Adjusted Conversion
Price Termination Date, the Conversion Price shall be determined as set forth in
Section 2(a). For purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE"
shall mean, with respect to any proposed Major Corporate Event for which a
public announcement as contemplated by this Section 2(f) has been made, the date
upon which
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<PAGE>
the Company or the person, group or entity (in the case of clause (iii) above)
publicly announces the consummation, termination or abandonment of the proposed
Major Corporate Event which was the subject of the previous public announcement.
g. Mechanics of Conversion. Subject to the Company's inability
-----------------------
to fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4 below:
(i) Holder's Delivery Requirements. To convert Preferred
------------------------------
Shares into full shares of Common Stock on any date (the "CONVERSION
DATE"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., Central Time on such date,
a copy of a fully executed notice of conversion in the form attached hereto
as Exhibit I (the "CONVERSION NOTICE"), to the Company, and (B) surrender
to a common carrier for delivery to the Company as soon as practicable
following such date, the original certificates representing the Preferred
Shares being converted (or an indemnification undertaking with respect to
such shares in the case of their loss, theft or destruction) (the
"PREFERRED STOCK CERTIFICATES") and the originally executed Conversion
Notice.
(ii) 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 such
holder. Upon receipt by the Company of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, together with the originally
executed Conversion Notice, the Company or its designated transfer agent
(the "TRANSFER AGENT") (as applicable) shall, on the next business day
following the date of receipt of both (or the second business day following
the date of receipt of both if received after 11:00 a.m. local time of the
Company), (I) 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 the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or
(II) credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account
with The Depository Trust Company. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion
is greater than the number of Preferred Shares being converted, then the
Company shall, as soon as practicable and in no event later than two
business days after receipt of the Preferred Stock Certificate(s) and at
its own expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute as to
------------------
the determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall promptly issue to the holder 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 as soon as possible, but in no event later than two (2) business
days after receipt of such holder's Conversion Notice. If such holder and
the Company are unable to agree upon the determination of the Market Price
or arithmetic calculation
-11-
<PAGE>
of the Conversion Rate within one (1) business day 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 Market Price to an independent, reputable
investment bank or (B) the disputed arithmetic calculation of the
Conversion Rate 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 the holder 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. The period of time in
which the Company is required to effect conversions or redemptions under
this Statement of Designations shall be tolled with respect to the subject
conversion or redemption pending resolution of any dispute by the Company
made in good faith and in accordance with this Section 2(g)(iii).
(iv) Record Holder. The person or persons entitled to
-------------
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within three
-----------------------------------
(3) business days of the Company's or the Transfer Agent's receipt of the
Preferred Stock Certificates to be converted and the Conversion Notice (the
"SHARE DELIVERY PERIOD") the Company shall fail to issue a certificate to a
holder or credit the holder's balance account with The Depository Trust
Company for the number of shares of Common Stock to which such holder is
entitled upon such holder's conversion of Preferred Shares or to issue a
new Preferred Stock Certificate representing the number of Preferred Shares
to which such holder is entitled pursuant to Section 2(g)(ii) (a
"CONVERSION FAILURE"), in addition to all other available remedies which
such holder may pursue hereunder and under the Securities Purchase
Agreement between the Company and the initial holders of the Preferred
Shares (the "SECURITIES PURCHASE AGREEMENT") (including indemnification
pursuant to Section 8 thereof), the Company shall pay additional damages to
such holder on each date after such third (3rd) business day that such
conversion is not timely effected in an amount equal 0.5 % of the product
of (A) the sum of the number of shares of Common Stock not issued to the
holder on a timely basis pursuant to Section 2(g)(ii) and to which such
holder is entitled and, in the event the Company has failed to deliver a
Preferred Stock Certificate to the holder on a timely basis pursuant to
Section 2(g)(ii), the number of shares of Common Stock issuable upon
conversion of the Preferred Shares represented by such Preferred Stock
Certificate, as of the last possible date which the Company could have
issued such Preferred Stock Certificate to such holder without violating
Section 2(g) (ii) and (B) the Closing Bid Price of the Common Stock on the
last possible date which the Company could have issued such Common Stock
and such Preferred Stock Certificate, as the case may be, to such holder
without violating Section 2(g)(ii). In addition to the foregoing, if for
any reason a holder has not received all of the shares of Common Stock
prior to the tenth (10th) business day after the expiration of the Share
Delivery Period with respect to a conversion of Preferred
-12-
<PAGE>
Shares, then the Fixed Conversion Price in respect of any Preferred Shares
held by such holder (including Preferred Shares submitted for conversion,
but for which shares of Common Stock have not been issued to such holder)
shall thereafter be the lesser of (i) the Fixed Conversion Price on the
Conversion Date specified in the Conversion Notice which resulted in a
Conversion Failure and (ii) the lowest Conversion Price in effect during
the period beginning on, and including, such Conversion Date through and
including the day such shares of Common Stock are delivered to the holder.
The Fixed Conversion Price shall thereafter be subject to further
adjustment for any other events described in this Section 2. If the
Company fails to pay the additional damages set forth in this Section
2(g)(v) within five business days of the date incurred, then the holder
entitled to such payments shall have the right at any time, so long as the
Company continues to fail to make such payments, to require the Company,
upon written notice, to immediately issue, in lieu of the cash additional
damages set forth in this Section 2(g)(v), the number of shares of Common
Stock equal to the quotient of (X) the aggregate amount of the additional
damages payments described above divided by (Y) the Conversion Price in
effect on such Conversion Date as is specified by the holder in writing to
the Company.
h. Mandatory Conversion. Subject to Section 11, if any
--------------------
Preferred Shares remain outstanding on the Mandatory Conversion Date (as
defined below), then all such Preferred Shares shall be converted as of
such date in accordance with this Section 2 as if the holders of such
Preferred Shares had given the Conversion Notice on the Mandatory
Conversion Date; provided, however, that if a Triggering Event has occurred
and is continuing on the Mandatory Conversion Date, then the Company shall,
within five business days following the Mandatory Conversion Date (unless
otherwise notified in writing by the holder of its request to have the
Preferred Shares converted into Common Stock), pay to each holder of
Preferred Shares then outstanding, in immediately available funds, an
amount equal to the Triggering Event Redemption Price as of the Mandatory
Conversion Date. All holders of Preferred Shares shall thereupon surrender
all Preferred Stock Certificates, duly endorsed for cancellation, to the
Company or the Transfer Agent, provided that the Company has complied with
its obligations under this Section 2(h). Notwithstanding the foregoing, if
the Common Stock is not designated for quotation on the Nasdaq National
Market or listed on The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc. but such events do not constitute a Triggering Event, then
the Mandatory Conversion Date shall be extended until the Common Stock is
so designated or listed. "MANDATORY CONVERSION DATE" means the date which
is two years after the applicable Issuance Date, subject to extension as
described in the immediately preceding sentence.
i. Fractional Shares. The Company shall not issue any fraction
-----------------
of a share of Common Stock upon any conversion. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a
fraction of a share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a fraction of a
-13-
<PAGE>
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
j. Taxes. The Company shall pay any and all taxes which may be
-----
imposed upon it with respect to the issuance and delivery of Common Stock
upon the conversion of the Preferred Shares.
3. Redemption at Option of Holders.
-------------------------------
a. Redemption Option Upon Major Transaction. In addition to all
----------------------------------------
other rights of the holders of Preferred Shares contained herein,
simultaneous with the occurrence of a Major Transaction (as defined below),
each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to 120% of the
Liquidation Preference (as defined in Section 8 below) ("MAJOR TRANSACTION
REDEMPTION PRICE").
b. Redemption Option Upon Triggering Event. In addition to all
---------------------------------------
other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred Shares at a price per Preferred
Share equal to the greater of (i) 120% of the Liquidation Preference and
(ii) the product of (A) the Conversion Rate at such time and (B) the
Closing Bid Price calculated as of the date immediately preceding such
Triggering Event on which the exchange or market on which the Common Stock
is traded is open ("TRIGGERING EVENT REDEMPTION PRICE" and, collectively
with "MAJOR TRANSACTION REDEMPTION PRICE," the "REDEMPTION PRICE").
c. "Major Transaction". A "MAJOR TRANSACTION" shall be deemed
-------------------
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person (excluding a
consolidation, merger or other business combination in which holders of the
Company's voting power immediately prior to the transaction continue after
the transaction to hold, directly or indirectly, the voting power of the
surviving entity or entities necessary to elect a majority of the members
of the board of directors (or their equivalent if other than a corporation)
of such entity or entities (an "EXEMPT MAJOR TRANSACTION"), and excluding a
short-form merger effected without the consent or recommendation of the
Company's Board of Directors).
(ii) the sale or transfer of all or substantially all of
the Company's assets or rights to the "Be There!" business or product line;
or
(iii) consummation of a purchase, tender or exchange offer
made to the holders of more than 50% of the outstanding shares of Common
Stock which
-14-
<PAGE>
requires or receives the consent or recommendation of the Company's Board
of Directors.
d. "Triggering Event". A "TRIGGERING EVENT" shall be deemed to
------------------
have occurred at such time as any of the following events:
(i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date that is 150 days
after the Issuance Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Preferred Shares for sale of all of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of ten consecutive trading
days, provided that the cause of such lapse or unavailability is not due to
factors solely within the control of such holder of Preferred Shares;
(iii) the Company undertakes any voluntary action to
terminate the quotation or listing of the Common Stock on the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc., unless such action is taken in connection with the
continued quotation or listing of the Common Stock on another of the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc.;
(iv) the Company's failure to deliver shares of Common
Stock within 15 days of its receipt of a Conversion Notice or the Company's
notice to any holder of Preferred Shares, including by way of public
announcement, at any time, of its intention not to comply with proper
requests for conversion of any Preferred Shares into shares of Common
Stock, other than due to any of the reasons set forth in Section 4(a)
below;
(v) the Company's stockholders fail to approve the
proposal contemplated by Section 4(j) of the Securities Purchase Agreement
on or before the earlier of the first meeting of the Company's stockholders
after the Issuance Date and January 29, 1998;
(vi) the Company breaches, in a material respect, any
representation or warranty or covenant or other material term or condition
of the Securities Purchase Agreement, the Registration Rights Agreement,
this Statement of Designations or any other agreement, document,
certificate or other instrument delivered in connection with the
transactions contemplated thereby and hereby, except to the extent that
such breach would not have a Material Adverse Effect and except, in the
case of a breach of a covenant which is curable, only if such breach
continues for a period of at least ten days; or
-15-
<PAGE>
(vii) if the Company pursuant to or within the meaning of
Title 11, U.S. Code, or any similar federal or state law for the relief of
debtors ("BANKRUPTCY LAW"), (I) commences a voluntary case, (II) consents
to the entry of an order for relief against it in any involuntary case,
(III) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law (a "CUSTODIAN") of
it or for all or substantially all of its property, (IV) makes a general
assignment for the benefit of its creditors, or (V) admits in writing that
it is generally unable to pay its debts as the same become due.
e. Mechanics of Redemption at Option of Buyer Upon Major
-----------------------------------------------------
Transaction. No sooner than 15 days nor later than 10 days prior to the
-----------
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier ("NOTICE OF MAJOR
TRANSACTION") to each holder of Preferred Shares. At any time after
receipt of a Notice of Major Transaction (or, in the event a Notice of
Major Transaction is not delivered at least 10 days prior to a Major
Transaction, at any time within 10 days prior to a Major Transaction), any
holder of Preferred Shares then outstanding may require the Company to
redeem, effective immediately prior to the consummation of such Major
Transaction, all of the holder's Preferred Shares then outstanding by
delivering written notice thereof via facsimile and overnight courier
("NOTICE OF REDEMPTION AT OPTION OF BUYER UPON MAJOR TRANSACTION") to the
Company, which Notice of Redemption at Option of Buyer Upon Major
Transaction shall indicate (i) the number of Preferred Shares that such
holder is electing to redeem and (ii) the applicable Major Transaction
Redemption Price, as calculated pursuant to Section 3(a) above.
f. Mechanics of Redemption at Option of Buyer Upon Triggering
----------------------------------------------------------
Event. Within one (1) day after the occurrence of a Triggering Event, the
-----
Company shall deliver written notice thereof via facsimile and overnight
courier ("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares.
At any time after the earlier of a holder's receipt of a Notice of
Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Preferred Shares then outstanding may require the Company to
redeem all of the Preferred Shares by delivering written notice thereof via
facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER
UPON TRIGGERING EVENT") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of
Preferred Shares that such holder is electing to redeem and (ii) the
applicable Triggering Event Redemption Price, as calculated pursuant to
Section 3(b) above.
g. Payment of Redemption Price. Upon the Company's receipt of
---------------------------
a Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Preferred Shares, the Company shall immediately notify each
holder of Preferred Shares by facsimile of the Company's receipt of such
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or
Notice(s) of Redemption at Option of Buyer Upon Major Transaction and each
holder which has sent such a notice shall promptly submit to the
-16-
<PAGE>
Company or its Transfer Agent such holder's Preferred Stock Certificates
which such holder has elected to have redeemed. The Company shall deliver
the applicable Triggering Event Redemption Price, in the case of a
redemption pursuant to Section 3(f), to such holder within five business
days after the Company's receipt of a Notice of Redemption at Option of
Buyer Upon Triggering Event and, in the case of a redemption pursuant to
Section 3(e), the Company shall deliver the applicable Major Transaction
Redemption Price immediately prior to the consummation of the Major
Transaction; provided that a holder's Preferred Stock Certificates shall
have been so delivered to the Company; provided further that if the Company
is unable to redeem all of the Preferred Shares to be redeemed, the Company
shall redeem an amount from each holder of Preferred Shares being redeemed
equal to such holder's pro-rata amount (based on the number of Preferred
Shares held by such holder relative to the number of Preferred Shares
outstanding) of all Preferred Shares being redeemed. If the Company shall
fail to redeem all of the Preferred Shares submitted for redemption (other
than pursuant to a dispute as to the arithmetic calculation of the
Redemption Price), in addition to any remedy such holder of Preferred
Shares may have under this Statement of Designations and the Securities
Purchase Agreement, the applicable Redemption Price payable in respect of
such unredeemed Preferred Shares shall bear interest at the rate of 2.0%
per month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to a holder of
Preferred Shares submitted for redemption, such holder shall have the
option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption,
require the Company to promptly return to such holder(s) all of the
Preferred Shares that were submitted for redemption by such holder(s) under
this Section 3 and for which the applicable Redemption Price has not been
paid, by sending written notice thereof to the Company via facsimile (the
"VOID OPTIONAL REDEMPTION NOTICE"). Upon the Company's receipt of such
Void Optional Redemption Notice(s) and prior to payment of the full
applicable Redemption Price to such holder, (i) the Notice(s) of Redemption
at Option of Buyer Upon Triggering Event or the Notice(s) of Redemption at
Option of Buyer Upon Major Transaction, as the case may be, shall be null
and void with respect to those Preferred Shares submitted for redemption
and for which the applicable Redemption Price has not been paid, (ii) the
Company shall immediately return any Preferred Shares submitted to the
Company by each holder for redemption under this Section 3(g) and for which
the applicable Redemption Price has not been paid, (iii) the Fixed
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (A) the Fixed Conversion Price as in effect on the date on which
the Void Optional Redemption Notice(s) is delivered to the Company and (B)
the lowest Closing Bid Price during the period beginning on the date on
which the Notice(s) of Redemption of Option of Buyer Upon Major Transaction
or the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as
the case may be, is delivered to the Company and ending on the date on
which the Void Optional Redemption Notice(s) is delivered to the Company;
provided that no adjustment shall be made if such adjustment would result
in an increase of the Fixed Conversion Price then in effect, and (iv) the
Conversion Percentage in effect at such time shall be reduced by a number
of percentage points equal to the product of (A) .25 and (B) the number of
days in the period beginning on the date which is the last date on which
the Triggering Event Redemption Price or Major Transaction Redemption
Price, as the case may be,
-17-
<PAGE>
is required to be delivered in accordance with the foregoing provisions of
this Section 3(g) and ending on the date on which the Void Optional
Redemption Notice(s) is delivered to the Company. Notwithstanding the
foregoing, in the event of a dispute as to the determination of the Closing
Bid Price or the arithmetic calculation of the Redemption Price, such
dispute shall be resolved pursuant to Section 2(g)(iii) above with the term
"Closing Bid Price" being substituted for the term "Average Market Price"
and the term "Redemption Price" being substituted for the term "Conversion
Rate". A holder's delivery of a Void Optional Redemption Notice and
exercise of its rights following such notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of
such notice. Payments provided for in this Section 3 shall have priority
to payments to other stockholders, other than any required payments with
respect to shares of the Company's Series A Convertible Preferred Stock
which were outstanding on the Issuance Date, in connection with a Major
Transaction.
4. Inability to Fully Convert.
--------------------------
a. Holder's Option if Company Cannot Fully Convert. If, upon
-----------------------------------------------
the Company's receipt of a Conversion Notice or on the Mandatory Conversion
Date, the Company can not issue shares of Common Stock registered for
resale under the Registration Statement for any reason, including, without
limitation, because the Company (x) does not have a sufficient number of
shares of Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its Securities,
including without limitation the Exchange Cap, from issuing all of the
Common Stock which is to be issued to a holder of Preferred Shares pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares
of Common Stock registered for resale under the Registration Statement,
then the Company shall issue as many shares of Common Stock as it is able
to issue in accordance with such holder's Conversion Notice and pursuant to
Section 2(g) above and, with respect to the unconverted Preferred Shares,
the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at
a price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(g) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were
to be converted pursuant to such holder's Conversion Notice (provided that
a holder's voiding its Conversion Notice
-18-
<PAGE>
shall not effect the Company's obligations to make any payments which have
accrued prior to the date of such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y) above,
and the issuance of additional Conversion Shares at a Conversion Price
equal to the Market Price would not violate the rules or regulations of The
Nasdaq Stock Market, Inc., then, subject to Section 11, require the Company
to issue shares of Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 2(g) above at a Conversion Price equal to
the Market Price of the Common Stock on the date of such holder's Notice in
Response to Inability to Convert (as defined below).
b. Mechanics of Fulfilling Holder's Election. The Company shall
-----------------------------------------
immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which
cannot be fully satisfied as described in Section 4(a) above, a notice of
the Company's inability to fully satisfy such holder's Conversion Notice
(the "INABILITY TO FULLY CONVERT NOTICE"). Such Inability to Fully Convert
Notice shall indicate (i) the reason why the Company is unable to fully
satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory
Redemption Price. Such holder shall notify the Company of its election
pursuant to Section 4(a) above by delivering written notice via facsimile
to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT").
c. Payment of Redemption Price. If such holder shall elect to
---------------------------
have its shares redeemed pursuant to Section 4(a)(i) above, the Company
shall pay the Mandatory Redemption Price in cash to such holder within
thirty (30) days of the Company's receipt of the holder's Notice in
Response to Inability to Convert, provided that prior to the Company's
receipt of the holder's Notice in Response to Inability to Convert the
Company has not delivered a notice to such holder stating, to the
satisfaction of the holder, that the event or condition resulting in the
Mandatory Redemption has been cured and all Conversion Shares issuable to
such holder can and will be delivered to the holder in accordance with the
terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in
this Section 4(c) (other than pursuant to a dispute as to the determination
of the arithmetic calculation of the Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Statement of
Designations and the Securities Purchase Agreement, such unpaid amount
shall bear interest at the rate of 2.0% per month (prorated for partial
months) until paid in full. Until the full Mandatory Redemption Price is
paid in full to such holder, such holder may void the Mandatory Redemption
with respect to those Preferred Shares for which the full Mandatory
Redemption Price has not been paid and (i) receive back such Preferred
Shares, (ii) the Fixed Conversion Price of such returned Preferred Shares
shall be adjusted to the lesser of (A) the Fixed Conversion Price as in
effect on the date on which the holder voided the Mandatory Redemption and
(B) the lowest Closing Bid Price during the period beginning on the
Conversion Date and ending on the date the holder voided the
-19-
<PAGE>
Mandatory Redemption. Notwithstanding the foregoing, if the Company fails
to pay the applicable Mandatory Redemption Price within such thirty (30)
days time period due to a dispute as to the determination of the arithmetic
calculation of the Redemption Rate, such dispute shall be resolved pursuant
to Section 2(g)(iii) above with the term "Redemption Price" being
substituted for the term "Conversion Rate".
d. Pro-rata Conversion and Redemption. In the event the Company
----------------------------------
receives a Conversion Notice from more than one holder of Preferred Shares
on the same day and the Company can convert and redeem some, but not all,
of the Preferred Shares pursuant to this Section 4, the Company shall
convert and redeem from each holder of Preferred Shares electing to have
Preferred Shares converted and redeemed at such time an amount equal to
such holder's pro-rata amount (based on the number of Preferred Shares held
by such holder relative to the number of Preferred Shares outstanding) of
all Preferred Shares being converted and redeemed at such time.
e. Involuntary Delisting. In the event the Common Stock at any
---------------------
time is not designated for quotation on the Nasdaq National Market or
listed on The New York Stock Exchange, Inc. or The American Stock Exchange,
Inc. but such events do not constitute a Triggering Event, then in addition
to any other remedies the holders of Preferred Shares may have at law or in
equity, the Company shall pay to each holder of Preferred Shares an amount
in cash per Preferred Share on each day that the Common Stock is not so
designated or listed equal to the product of the Liquidation Preference
multiplied by 1.0%, provided that the Company shall not be required to make
such payments for more than 24 consecutive days. The Company's failure to
pay such amounts on each day they are due shall constitute a Triggering
Event for purposes of Section 3.
5. Reissuance of Certificates. In the event of a conversion or
--------------------------
redemption pursuant to this Statement of Designations of less than all of
the Preferred Shares represented by a particular Preferred Stock
Certificate, the Company shall promptly cause to be issued and delivered to
the holder of such Preferred Shares a preferred stock certificate
representing the remaining Preferred Shares which have not been so
converted or redeemed.
6. Reservation of Shares. The Company shall, so long as any of the
---------------------
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Preferred Shares, such number of shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all of the Preferred Shares then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 200% of
the number of shares of Common Stock for which the Preferred Shares are at
any time convertible. The initial number of shares of Common Stock
reserved for conversions of the Preferred Shares and each increase in the
number of shares so reserved shall be allocated pro rata among the holders
of the Preferred Shares based on the number of Preferred Shares held by
each holder at the time of issuance of the Preferred Shares or increase in
the number of reserved shares, as the case may be. In
-20-
<PAGE>
the event a holder shall sell or otherwise transfer any of such holder's
Preferred Shares, each transferee shall be allocated a pro rata portion of
the number of reserved shares of Common Stock reserved for such transferor.
Any shares of Common Stock reserved and which remain allocated to any
person or entity which does not hold any Preferred Shares shall be
allocated to the remaining holders of Preferred Shares, pro rata based on
the number of Preferred Shares then held by such holder.
7. Voting Rights. Holders of Preferred Shares shall have no voting
-------------
rights, except as required by law, including but not limited to the Texas
Business Corporation Act, and as expressly provided in this Statement of
Designations.
8. Liquidation, Dissolution, Winding-Up. In the event of any
------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Preferred Shares shall be entitled to receive
in cash out of the assets of the Company, whether from capital or from
earnings available for distribution to its stockholders (the "PREFERRED
FUNDS"), after all required payments with respect to shares of the
Company's Series A Convertible Preferred Stock which were outstanding on
the Issuance Date, but before any amount shall be paid to the holders of
any of the capital stock of the Company of any class junior in rank to the
Preferred Shares in respect of the preferences as to the distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the sum of (i) $1,000 and (ii) an
amount equal to the product of (.08) (N/365) ($1,000) (such sum being
referred to as the "LIQUIDATION PREFERENCE"); provided that, if the
Preferred Funds are insufficient to pay the full amount due to the holders
of Preferred Shares and holders of shares of other classes or series of
preferred stock of the Company that are of equal rank with the Preferred
Shares as to payments of Preferred Funds (the "PARI PASSU SHARES"), then
each holder of Preferred Shares and Pari Passu Shares shall receive a
percentage of the Preferred Funds equal to the full amount of Preferred
Funds payable to such holder as a liquidation preference, in accordance
with their respective Statement of Designations, Preferences and Rights, as
a percentage of the full amount of Preferred Funds payable to all holders
of Preferred Shares and Pari Passu Shares. The purchase or redemption by
the Company of stock of any class, in any manner permitted by law, shall
not, for the purposes hereof, be regarded as a liquidation, dissolution or
winding up of the Company. Neither the consolidation or merger of the
Company with or into any other Person, nor the sale or transfer by the
Company of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding up
of the Company. No holder of Preferred Shares shall be entitled to receive
any amounts with respect thereto upon any liquidation, dissolution or
winding up of the Company other than the amounts provided for herein;
provided that a holder of Preferred Shares shall be entitled to all amounts
previously accrued with respect to amounts owed hereunder.
9. Preferred Rank; Participation. (i) All shares of Common Stock
-----------------------------
shall be of junior rank to all Preferred Shares in respect to the
preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. The rights of the shares of
Common Stock shall be subject to the preferences and relative rights of the
Preferred Shares. Without the prior express written consent of the holders
of not less
-21-
<PAGE>
than three-fourths (3/4) of the then outstanding Preferred Shares, the
Company shall not hereafter authorize or issue additional or other capital
stock that is of senior or equal rank to the Preferred Shares in respect of
the preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. Without the prior express
written consent of the holders of not less than three-fourths (3/4) of the
then outstanding Preferred Shares, the Company shall not hereafter
authorize or make any amendment to the Company's Articles of Incorporation
or bylaws, or file any resolution of the board of directors of the Company
with the Texas Secretary of State containing any provisions, which would
adversely affect or otherwise impair the rights or relative priority of the
holders of the Preferred Shares relative to the holders of the Common Stock
or the holders of any other class of capital stock. In the event of the
merger or consolidation of the Company with or into another corporation,
the Preferred Shares shall maintain their relative powers, designations and
preferences provided for herein and no merger shall result inconsistent
therewith.
(ii) Subject to the rights of the holders, if any, of the Parri Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the
holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common
Stock; provided that the holders of the Preferred Shares shall be entitled
to such dividends and distributions only to the extent that they exceed an
amount per Preferred Share equal to the product of (.08) (N/365) ($1,000).
10. Restriction on Redemption and Cash Dividends with respect to
------------------------------------------------------------
Other Capital Stock. Until all of the Preferred Shares have been converted
-------------------
or redeemed as provided herein, except as permitted in the Rights
Agreement, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or cash distribution on, its Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
11. Limitation on Number of Conversion Shares. Notwithstanding any
-----------------------------------------
other provision herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares if the
issuance of such shares of Common Stock would exceed that number of shares
of Common Stock which the Company may issue upon Conversion of the
Preferred Shares (the "EXCHANGE CAP") without breaching the Company's
obligations under the rules or regulations of The Nasdaq Stock Market,
Inc., except that such limitation shall not apply in the event that the
Company (a) obtains the approval of its stockholders as required by NASD
Rule 4460 (or any successor rule or regulation) for issuances of Common
Stock in excess of such amount or (ii) obtains a written opinion from
outside counsel to the Company that such approval is not required, which
opinion shall be reasonably satisfactory to the holders of a majority of
the Preferred Shares then outstanding. Until such approval or written
opinion is obtained, no purchaser of Preferred Shares pursuant to the
Securities Purchase
-22-
<PAGE>
Agreement (the "PURCHASERS") shall be issued, upon conversion of Preferred
Shares, shares of Common Stock in an amount greater than the product of (i)
the Exchange Cap amount multiplied by (ii) a fraction, the numerator of
which is the number of Preferred Shares issued to such Purchaser pursuant
to the Securities Purchase Agreement and the denominator of which is the
aggregate amount of all the Preferred Shares issued to the Purchasers
pursuant to the Securities Purchase Agreement (the "CAP ALLOCATION
AMOUNT"). In the event that any Purchaser shall sell or otherwise transfer
any of such Purchaser's Preferred Shares, the transferee shall be allocated
a pro rata portion of such Purchaser's Cap Allocation Amount. In the event
that any holder of Preferred Shares shall convert all of such holder's
Preferred Shares into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Cap Allocation Amount, then the
difference between such holder's Cap Allocation Amount and the number of
shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares on a pro rata basis in proportion to the number of Preferred Shares
then held by each such holder.
12. Vote to Change the Terms of Preferred Shares. The affirmative
--------------------------------------------
vote at a meeting duly called for such purpose or the written consent
without a meeting, of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares, shall be required for any change to this
Statement of Designations or the Company's Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares.
13. Lost or Stolen Certificates. Upon receipt by the Company of
---------------------------
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall
not be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
14. Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Statement of Designations
-----------------
shall be cumulative and in addition to all other remedies available under
this Statement of Designations, at law or in equity (including a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving
rise to such remedy and nothing herein shall limit a holder's right to
pursue actual damages for any failure by the Company to comply with the
terms of this Statement of Designations. The Company covenants to each
holder of Preferred Shares that there shall be no characterization
concerning this instrument other than as expressly provided herein.
Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts
to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges
-23-
<PAGE>
that a breach by it of its obligations hereunder will cause irreparable
harm to the holders of the Preferred Shares and that the remedy at law for
any such breach may be inadequate. The Company therefore agrees that, in
the event of any such breach or threatened breach, the holders of the
Preferred Shares shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being
required.
15. Specific Shall Not Limit General; Construction. No specific
----------------------------------------------
provision contained in this Statement of Designations shall limit or modify
any more general provision contained herein. This Statement of
Designations shall be deemed to be jointly drafted by the Company and all
Buyers and shall not be construed against any person as the drafter hereof.
16. Failure or Indulgence Not Waiver. No failure or delay on the
--------------------------------
part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.
-24-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Statement of Designations
to be signed on behalf of the Company, as of the 7th day of November, 1997.
DATA RACE, INC.
By: /s/ GREGORY T. SKALLA
----------------------------------
Name: Gregory T. Skalla
Its: Vice President-Finance and
Chief Financial Officer
<PAGE>
EXHIBIT I
DATA RACE, INC.
CONVERSION NOTICE
Reference is made to the Statement of Designations, Preferences and Rights of
Series C Convertible Preferred Stock (the "STATEMENT OF DESIGNATIONS"). In
accordance with and pursuant to the Statement of Designations, the undersigned
hereby elects to convert the number of shares of Series C Convertible Preferred
Stock, no par value per share (the "PREFERRED SHARES"), of Data Race, Inc., a
Texas corporation (the "COMPANY"), indicated below into shares of Common Stock,
no par value per share (the "COMMON STOCK"), of the Company, by tendering the
stock certificate(s) representing the share(s) of Preferred Shares specified
below as of the date specified below.
Date of Conversion:_______________________________________________________
Number of Preferred Shares to be converted:_______________________________
Stock certificate no(s). of Preferred Shares to be converted:_____________
Please confirm the following information:
Conversion Price:_________________________________________________________
Number of shares of Common Stock
to be issued:_____________________________________________________________
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to: ______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
Facsimile Number: ______________________________________________________
Authorization: ______________________________________________________
By:___________________________________________________
Title:________________________________________________
Dated: ______________________________________________________
Account Number:
(if electronic book entry transfer):_____________________________________
Transaction Code Number
(if electronic book entry transfer):_____________________________________
<PAGE>
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of November 7,
1997, by and among DATA RACE, Inc., a Texas corporation, with headquarters
located at 12400 Network Boulevard, San Antonio, Texas 78249-3341 (the
"COMPANY"), and the investors listed on the Schedule of Buyers attached hereto
(individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("REGULATION D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 ACT");
B. The Company has authorized the following new series of its Preferred
Stock, no par value per share (the "PREFERRED STOCK"): the Company's Series C
Convertible Participating Preferred Stock (the "PREFERRED SHARES"), which shall
be convertible into shares of the Company's Common Stock, no par value per share
(the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in accordance with
the terms of the Company's Statement of Designations, Preferences and Rights of
the Preferred Shares, substantially in the form attached hereto as Exhibit A
---------
(the "STATEMENT OF DESIGNATIONS");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, initially an aggregate of 5,000 of the Preferred Shares (the
"INITIAL PREFERRED SHARES") in the respective amounts set forth opposite each
Buyer's name on the Schedule of Buyers and warrants, in substantially the form
attached hereto as Exhibit E (the "WARRANTS"), to acquire up to that number of
---------
shares of Common Stock equal to 15% of the aggregate Purchase Price for the
Initial Preferred Shares divided by the Market Price (as defined in the
Statement of Designations) on the Initial Closing Date (as defined below), which
Warrants shall expire three years after the date of issuance;
D. Subject to the terms and conditions set forth in this Agreement, the
Buyers wish to purchase an aggregate of an additional 3,000 of the Preferred
Shares (the "ADDITIONAL PREFERRED SHARES") in the respective amounts set forth
opposite each Buyer's name in the Schedule of Buyers and Warrants to acquire up
to that number of shares of Common Stock equal to 15% of the aggregate Purchase
Price for the Additional Preferred Shares divided by the Market Price on the
Additional Closing Date (as defined below) (the Initial Preferred Shares and the
Additional Preferred Shares are referred to in this Agreement as the "PREFERRED
SHARES"); and
E. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS
---------
AGREEMENT") pursuant to which the
<PAGE>
Company has agreed to provide certain registration rights under the 1933 Act and
the rules and regulations promulgated thereunder, and applicable state
securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
-------------------------------------
a. Purchase of Preferred Shares. Subject to the satisfaction (or
----------------------------
waiver) of the conditions set forth in Sections 6(a) and 7(a) below, the Company
shall issue and sell to each Buyer and each Buyer severally agrees to purchase
from the Company the respective number of Initial Preferred Shares set forth
opposite such Buyer's name on the Schedule of Buyers, along with Warrants to
acquire a number of shares of Common Stock equal to $150 divided by the Market
Price (as defined in the Statement of Designations) on the Initial Closing Date
(as defined below) for each Initial Preferred Share purchased (the "INITIAL
CLOSING"). Subject to the satisfaction (or waiver) of the conditions set forth
in Sections 1(c), 6(b) and 7(b) below, the Company shall issue and sell to each
Buyer and each Buyer severally agrees to purchase from the Company the
respective number of Additional Preferred Shares set forth opposite such Buyer's
name on the Schedule of Buyers, along with Warrants to acquire a number of
shares of Common Stock equal to $150 divided by the Market Price on the
Additional Closing Date (as defined below) for each Additional Preferred Share
purchased (the "ADDITIONAL CLOSING"). The Initial Closing and the Additional
Closing collectively are referred to in this Agreement as the "CLOSINGS." The
purchase price (the "PURCHASE PRICE") of each Preferred Share and the related
Warrant at each of the Closings shall be $1,000.
b. The Initial Closing Date. The date and time of the Initial
------------------------
Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Central Time, within
three (3) business days following the date hereof, subject to notification of
satisfaction (or waiver) of the conditions to the Initial Closing set forth in
Sections 6(a) and 7(a) below (or such later date as is mutually agreed to by the
Company and the Buyers). The Initial Closing shall occur on the Initial Closing
Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite
1600, Chicago, Illinois 60661-3693.
c. The Additional Closing Date. The date and time of the Additional
---------------------------
Closing (the "ADDITIONAL CLOSING DATE") shall be 10:00 a.m. Central Time, on the
fifth business day following the date of the receipt by each Buyer of the
Additional Share Notice (as defined below) following the later of (x) the date
the Registration Statement (as defined in the Registration Rights Agreement) is
declared effective by the SEC and (y) the date the Company's stockholders
approve the issuance of the Securities (as defined in Section 2(a) below) as
described in Section 4(j) below, subject to satisfaction (or waiver) of the
conditions to the Additional Closing set forth in Sections 6(b) and 7(b) and the
conditions set forth in this paragraph (or such later date as is mutually agreed
to by the Company and the Buyers). The Company shall deliver written notice
(the "ADDITIONAL SHARE NOTICE") to each Buyer of the events described in clauses
(x) and (y) of the preceding sentence on the first business day (the "ADDITIONAL
SHARE NOTICE DATE") following the occurrence of the later to occur of such
events.
-2-
<PAGE>
Notwithstanding the foregoing, no Buyer shall be required to purchase the
Additional Preferred Shares or the related Warrants unless each of the following
conditions is satisfied: (i) such Buyer shall have received the Additional
Share Notice on or before January 29, 1998; (ii) the Registration Statement
shall have been declared effective and shall remain effective at all times
during the period beginning on the Additional Share Notice Date and ending on
and including the Additional Share Closing Date; (iii) the provisions of Section
4(j) of this Agreement Shall have been satisfied; (iv) during the period
beginning on the date of this Agreement and ending on and including the
Additional Closing Date, there shall not have occurred a public announcement of
a Major Corporate Event (as defined in Section 2(f) of the Statement of
Designations) which has not been abandoned or terminated, a Triggering Event (as
defined in Section 3(d) of the Statement of Designations) or a Material Adverse
Change (as defined below); (v) at all times during the period beginning on the
date of this Agreement and ending on and including the Additional Closing Date,
the Common Stock shall have been designated on the Nasdaq National Market and
shall not have been suspended from trading and the Company shall not have been
notified of any pending or threatened proceeding or other action to delist or
suspend the Common Stock; and (vi) and the Company shall not have previously
delivered an Additional Share Notice. The Additional Closing shall occur on the
Additional Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe
Street, Suite 1600, Chicago, Illinois 60661-3693. The Initial Closing Date and
the Additional Closing Date collectively are referred to in this Agreement as
the "CLOSING DATES." "MATERIAL ADVERSE CHANGE" means any change, event, result
or happening involving, directly or indirectly, the Company or any of its
subsidiaries resulting in a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, including, without limitation, any of the events
listed in Schedule 1(c) hereto.
-------------
d. Form of Payment. On each of the Closing Dates, (i) each Buyer
---------------
shall pay the Purchase Price to the Company for the Preferred Shares and the
Warrants to be issued and sold to such Buyer at the respective Closing, by wire
transfer of immediately available funds in accordance with the Company's written
wire instructions, and (ii) the Company shall deliver to each Buyer, stock
certificates (in the denominations as such Buyer shall request) (the "STOCK
CERTIFICATES") representing such number of the Preferred Shares which such Buyer
is then purchasing (as indicated opposite such Buyer's name on the Schedule of
Buyers) along with the Warrants such Buyer is purchasing hereunder, duly
executed on behalf of the Company and registered in the name of such Buyer or
its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
--------------------------------------
Each Buyer represents and warrants with respect to only itself that:
a. Investment Purpose. Such Buyer (i) is acquiring the Preferred
------------------
Shares and the Warrants, (ii) upon conversion of the Preferred Shares, will
acquire the Conversion Shares then issuable and (iii) upon exercise of the
Warrants, will acquire the shares of Common Stock issuable upon exercise thereof
(the "WARRANT SHARES") (the Preferred Shares, the Conversion Shares, the
Warrants and the Warrant Shares collectively are referred to herein as the
-3-
<PAGE>
"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, such Buyer does
not agree to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of Securities at any time in accordance with
or pursuant to a registration statement or an exemption under the 1933 Act.
b. Accredited Investor Status. Such Buyer is an "accredited
--------------------------
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions. Such Buyer 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
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such securities.
d. Information. Such Buyer and its advisors, if any, have been
-----------
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer's right to rely on the Company's representations and
warranties contained in Section 3 below. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer 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.
e. No Governmental Review. Such Buyer 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.
f. Transfer or Resale. Such Buyer understands that except as
------------------
provided in the Registration Rights Agreement: (i) the Securities 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 (A)
subsequently registered thereunder, (B) such Buyer 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 (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act (or a successor rule thereto) ("RULE 144"); (ii) any sale of the
-4-
<PAGE>
Securities made in reliance on 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 the
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
g. Legends. Such Buyer understands that the certificates or other
-------
instruments representing the Preferred Shares and the Warrants and, until such
time as the sale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant Shares, except as set forth below, 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 Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the 1933 Act, (ii) 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 such Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that such
Securities 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. Each Buyer acknowledges, covenants and agrees to sell the
Securities represented by a certificate(s) from which the legend has been
removed, only pursuant to (i) a registration statement effective under the 1933
Act, or (ii) advice of counsel that such sale is exempt from registration
required by Section 5 of the 1933 Act.
h. Authorization; Enforcement. This Agreement has been duly and
--------------------------
validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement
-5-
<PAGE>
of such Buyer 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.
i. Residency. Such Buyer is a resident of that country specified on the
---------
Schedule of Buyers.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each of the Buyers that:
a. Organization and Qualification. The Company and its subsidiaries
------------------------------
(a complete list of which is set forth in Schedule 3(a)) are corporations duly
-------------
organized and validly existing 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 its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. As used in this
Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse effect on the
business, properties, assets, operations, results of operations, financial
condition or prospects of the Company and its subsidiaries, if any, taken as a
whole, or on the transactions contemplated hereby or by the agreements and
instruments to be entered into in connection herewith.
b. Authorization; Enforcement; Compliance with Other Instruments.
-------------------------------------------------------------
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Registration Rights Agreement, the Warrants and
each of the other agreements entered into by the parties hereto in connection
with the transactions contemplated by this Agreement (collectively, the
"TRANSACTION DOCUMENTS"), and to issue the Securities in accordance with the
terms hereof and thereof, (ii) the execution and delivery of the Transaction
Documents and the Statement of Designations by the Company and the consummation
by it of the transactions contemplated hereby and thereby, including without
limitation the issuance of the Preferred Shares and the Warrants and the
reservation for issuance and the issuance of the Conversion Shares and the
Warrant Shares issuable upon conversion or exercise thereof, have been duly
authorized by the Company's Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its
stockholders, (iii) the Transaction Documents have been duly executed and
delivered by the Company, (iv) the Transaction Documents 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, and (v)
prior to each of the Closing Dates, the Statement of
-6-
<PAGE>
Designations has been filed with the Secretary of State of the State of Texas
and will be in full force and effect, enforceable against the Company in
accordance with its terms.
c. Capitalization. As of the date hereof, the authorized capital
--------------
stock of the Company consists of (i) 20,000,000 shares of Common Stock, of which
as of November 6, 1997, 5,541,677 shares were issued and outstanding, 2,154,430
shares are issuable and reserved for issuance pursuant to the Company's stock
option and purchase plans and 24,816 shares are issuable and reserved for
issuance pursuant to securities (other than the Preferred Shares and the
Warrants) exercisable or exchangeable for, or convertible into, shares of Common
Stock plus an indeterminate number of shares of Common Stock issuable upon
conversion of the 805 outstanding shares of Series A Convertible Preferred
Stock, no par value per share, of the Company (the "SERIES A PREFERRED STOCK")
and (ii) 1,169,785 shares of preferred stock, which as of the date hereof, 805
were issued and outstanding. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except
as disclosed in Schedule 3(c), 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
Schedule 3(c), as of the effective date of this Agreement, (i) 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, (ii) there
are no outstanding debt securities and (iii) 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). Except as disclosed in Schedule 3(c), there are
-------------
no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities as described in this
Agreement. The Company has furnished to the Buyers true and correct copies of
the Company's Articles of Incorporation, as amended and as in effect on the date
hereof (the "ARTICLES OF INCORPORATION"), and the Company's By-laws, as in
effect on the date hereof (the "BY-LAWS"), and the terms of all securities
convertible into or exercisable for Common Stock and the material rights of the
holders thereof in respect thereto.
d. Issuance of Securities. The Preferred Shares are duly authorized
----------------------
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and non-assessable, (ii) free from all taxes, liens and
charges with respect to the issue thereof and (iii) entitled to the rights and
preferences set forth in the Statement of Designations. A number of shares of
Common Stock equal to 200% of the number of Conversion Shares issuable upon
conversion of the Preferred Shares and exercise of the Warrants outstanding on
the applicable Closing Date (after giving effect to the Preferred Shares and
Warrants issued on such Closing Date and assuming all such outstanding Preferred
Shares and Warrants were fully convertible or exercisable on such date
regardless of any limitation on the timing or amount of such
-7-
<PAGE>
conversions or exercises) initially have been duly authorized and reserved for
issuance (subject to adjustment pursuant to the Company's covenant set forth in
Section 4(f) below) upon conversion of the Preferred Shares and upon exercise of
the Warrants. Upon conversion or exercise in accordance with the Statement of
Designations or the Warrants, as the case may be, the Conversion Shares and the
Warrant Shares will be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock. The
issuance by the Company of the Securities is exempt from registration under the
1933 Act.
e. No Conflicts. Except as disclosed in Schedule 3(e), the
------------ -------------
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Statement of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby will not (i) result in a violation of the
Articles of Incorporation, any Statement of Designations, Preferences and Rights
of any outstanding series of Preferred Stock of the Company or the By-laws or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any material
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 disclosed in Schedule 3(e),
-------------
neither the Company nor its subsidiaries is in violation of any term of or in
default under the Articles of Incorporation, any Statement of Designations,
Preferences and Rights of any outstanding series of Preferred Stock or the By-
laws or their organizational charter or by-laws, respectively, or any contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
subsidiaries, except for possible conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations that would not individually or in
the aggregate have a Material Adverse Effect. The business of the Company and
its subsidiaries is not being conducted, and shall not be conducted, in
violation of any law, ordinance, regulation of any governmental entity, except
for possible violations the sanctions for which either individually or in the
aggregate would not have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act, the Company
is not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency or any regulatory
or self regulatory agency in order for it to execute, deliver or perform any of
its obligations under or contemplated by the Transaction Documents or to perform
its obligations under the Statement of Designations, in each case in accordance
with the terms hereof or thereof. Except as disclosed in Schedule 3(e), 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.
-8-
<PAGE>
f. SEC Documents; Financial Statements. Since June 30, 1994, 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 delivered to the Buyers or their respective representatives true and
complete copies of the SEC Documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have
been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of 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 Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) 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. Neither the
Company nor any of its subsidiaries or any of their officers, directors,
employees or agents have provided the Buyers with any material, nonpublic
information which will continue to be material, nonpublic information on the
date the Registration Statement is filed with the SEC.
g. Absence of Certain Changes. Except as disclosed in Schedule 3(g)
-------------------------- -------------
or in the SEC Documents filed at least ten days prior to the date hereof, since
June 30, 1997, there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition,
results of operations or prospects of the Company or its subsidiaries. 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
its subsidiaries have any knowledge or reason to believe that its creditors
intend to initiate involuntary bankruptcy proceedings.
h. 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,
-9-
<PAGE>
threatened against or affecting the Company, the Common Stock or any of the
Company's subsidiaries or any of the Company's or the Company's subsidiaries'
officers or directors in their capacities as such, except as expressly set forth
in Schedule 3(h) or in the SEC Documents filed at least ten days prior to the
-------------
date hereof. The Company is not in violation of the listing requirements of the
Nasdaq National Market and does not reasonably anticipate that the Common Stock
will be delisted by the Nasdaq National Market for the foreseeable future.
i. Acknowledgment Regarding Buyers' Purchase of Preferred Shares.
-------------------------------------------------------------
The Company acknowledges and agrees that each of the Buyers is acting solely in
the capacity of arm's length purchaser with respect to the Transaction Documents
and the transactions contemplated thereby. The Company further acknowledges
that each Buyer is not acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by any of the Buyers or
any of their respective representatives or agents in connection with the
Transaction Documents and the transactions contemplated thereby is merely
incidental to such Buyer's purchase of the Securities. The Company further
represents to each Buyer that the Company's decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or
---------------------------------------------------
Circumstances. No event, liability, development or circumstance has occurred or
exists, with respect to the Company or its subsidiaries or their respective
business, properties, prospects, operations or financial condition, that would
be required to be disclosed by the Company under applicable securities laws on a
registration statement filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly announced.
k. 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
Securities.
l. 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 any of
the Securities under the 1933 Act or cause this offering of Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of The Nasdaq Stock Market, Inc., nor will the
Company or any of its subsidiaries take any action or steps that would require
registration of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.
m. Employee Relations. Neither the Company nor any of its
------------------
subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. Neither the
Company nor any of its subsidiaries
-10-
<PAGE>
is a party to a collective bargaining agreement, and the Company and its
subsidiaries believe that relations with their employees are good.
n. 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 Schedule 3(n), 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 necessary to conduct its business as now or as proposed to be
conducted have expired or terminated, or are expected to expire or terminate
within two years from the date of this Agreement. The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or its
subsidiaries of 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 Schedule 3(n), 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.
o. Environmental Laws. The Company and its subsidiaries (i) are 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 or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the three
foregoing cases, the failure to so comply would have, individually or in the
aggregate, a Material Adverse Effect.
p. 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 such as are described in Schedule 3(p) or such 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 or any of its
subsidiaries. Any real property and facilities held under lease by the Company
or any of its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material
-11-
<PAGE>
and do not interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries.
q. 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.
r. Regulatory Permits. The Company and its subsidiaries possess all
------------------
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, 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.
s. Internal Accounting Controls. The Company and each of its
----------------------------
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
t. No Materially Adverse Contracts, Etc. Neither the Company nor
-------------------------------------
any of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
u. Tax Status. Except as set forth on Schedule 3(u), 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 provision
reasonably adequate for the payment of all taxes for periods
-12-
<PAGE>
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.
v. Certain Transactions. Except as set forth on Schedule 3(v) and
-------------------- -------------
in the SEC Documents filed at least ten days prior to the date hereof 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 Company
could obtain from third parties and other than the grant of stock options
disclosed on Schedule 3(c), none of the officers, directors, or employees of the
-------------
Company is presently a party to any transaction with the Company or any of its
subsidiaries (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
w. Dilutive Effect. The Company understands and acknowledges that
---------------
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that, subject to such
limitations as are expressly set forth in the Transaction Documents, its
obligation to issue Conversion Shares upon conversion of the Preferred Shares in
accordance with this Agreement and the Statement of Designations and its
obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants, is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.
x. No Other Agreements. The Company has not, directly or
-------------------
indirectly, made any agreements with any Buyers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except
as set forth in the Transaction Documents.
4. COVENANTS.
---------
a. Best Efforts. Each party shall use its best efforts timely to
------------
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. 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
Buyer promptly after such filing. The Company shall, on or before each of the
Closing Dates, 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 Buyers at each of the Closings 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 Buyers on or prior to
the Closing Date.
-13-
<PAGE>
c. Reporting Status. Until the earlier of (i) the date which is one
----------------
year after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares and the
Warrant Shares 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 Conversion Shares and the Warrant Shares and (B) none of
the Preferred Shares or Warrants 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 reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale
---------------
of the Preferred Shares for working capital and general corporate purposes.
e. Financial Information. The Company agrees to send the following
---------------------
to each Investor (as that term is defined in the Registration Rights Agreement)
during the Registration Period: (i) within two (2) 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 (other than on Form S-8) filed pursuant to the 1933 Act; (ii) on the
same day as the release thereof, facsimile copies of all press releases issued
by the Company or any of its subsidiaries and (iii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
f. Reservation of Shares. The Company shall take all action
---------------------
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 200% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares and the Warrant Shares.
g. Right of First Refusal. Subject to the exceptions described
----------------------
below, the Company and its subsidiaries shall not contract with any party for
any equity financing (including any debt financing with an equity component) or
issue any equity securities of the Company or any subsidiary or securities
convertible or exchangeable into or for equity securities of the Company or any
subsidiary (including debt securities with an equity component) in any form
("FUTURE OFFERINGS") during the period beginning on the Closing Date and ending
on and including the date which is 365 days after the Closing Date, unless it
shall have first delivered to each Buyer or a designee appointed by such Buyer
written notice (the "FUTURE OFFERING NOTICE") describing the proposed Future
Offering, including the terms and conditions thereof, and providing each Buyer
an option to purchase up to its Aggregate Percentage (as defined below), as of
the date of delivery of the Future Offering Notice, in the Future Offering (the
limitations referred to in this sentence are collectively referred to as the
"CAPITAL RAISING LIMITATION"). For purposes of this Section 4(g), "AGGREGATE
PERCENTAGE" at any time with respect to any Buyer shall mean the percentage
obtained by dividing (i) the aggregate number of Preferred Shares purchased by
such Buyer at the Closings by (ii) the aggregate number of
-14-
<PAGE>
Preferred Shares purchased by all Buyers at the Closings. A Buyer can exercise
its option to participate in a Future Offering by delivering written notice
thereof to participate to the Company within ten (10) business days of receipt
of a Future Offering Notice, which notice shall state the quantity of securities
being offered in the Future Offering that such Buyer will purchase, up to its
Aggregate Percentage, and that number of securities it is willing to purchase in
excess of its Aggregate Percentage. In the event that one or more Buyers fail
to elect to purchase up to each such Buyer's Aggregate Percentage then each
Buyer which has indicated that it is willing to purchase a number of securities
in excess of its Aggregate Percentage shall be entitled to purchase its pro rata
portion (determined in the same manner as described in the preceding sentence)
of the securities in the Future Offering which one or more Buyers have not
elected to purchase. In the event the Buyers fail to elect to fully participate
in the Future Offering within the periods described in this Section 4(g), the
Company shall have 45 days thereafter to sell the securities of the Future
Offering respecting which such Buyer's rights were not exercised, upon terms and
conditions, no more favorable to the purchasers thereof than specified in the
Future Offering Notice. In the event the Company has not sold such securities
of the Future Offering within such 45 day period, the Company shall not
thereafter issue or sell such securities without first offering such securities
to the Buyers in the manner provided in this Section 4(g). The Capital Raising
Limitation shall not apply to (i) a loan from a commercial bank, (ii) any
transaction involving the Company's issuances of securities (A) as consideration
in a merger or consolidation, (B) in connection with any strategic partnership
or joint venture (the primary purpose of which is not to raise equity capital),
or (C) as consideration for the acquisition of a business, product or license or
other assets by the Company, (iii) the issuance of Common Stock in a firm
commitment, underwritten public offering, (iv) the issuance of securities upon
exercise or conversion of the Company's options, warrants or other convertible
securities outstanding as of the date hereof, (v) the grant of additional
options or warrants, or the issuance of additional securities, under any Company
stock option plan, restricted stock plan, stock purchase plan or other plan or
written compensation contract for the benefit of the Company's employees or
directors, or (vi) the issuance of securities pursuant to the Rights Agreement,
dated September 15, 1997, between the Company and ChaseMellon Shareholder
Services, L.L.C., as amended from time to time in accordance with its terms (the
"RIGHTS AGREEMENT"). The Buyers shall not be required to participate or
exercise their right of first refusal with respect to a particular Future
Offering in order to exercise their right of first refusal with respect to later
Future Offerings.
h. Listing. The Company shall promptly secure the listing of all of
-------
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system (including
the Nasdaq National Market), if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall use its best efforts
to maintain, so long as any other shares of Common Stock shall be so listed,
such listing of all Registrable Securities from time to time issuable under the
terms of the Transaction Documents and the Statement of Designations. The
Company shall use its best efforts to maintain the Common Stock's authorization
for quotation on the Nasdaq National Market, The New York Stock Exchange, Inc.
("NYSE") or The American Stock Exchange, Inc. ("AMEX"). Neither the Company nor
any of its subsidiaries shall take any action which would
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<PAGE>
be reasonably expected to result in the delisting or suspension of the Common
Stock on the Nasdaq National Market, NYSE or AMEX. The Company shall promptly
provide to each Buyer copies of any notices it receives from the Nasdaq National
Market, NYSE or AMEX regarding the continued eligibility of the Common Stock for
listing on such automated quotation system or securities exchange. The Company
shall pay all fees and expenses in connection with satisfying its obligations
under this Section 4(h).
i. Expenses. Subject to Section 9(l) below, following the Closing,
--------
the Company shall reimburse the Buyers for the Buyers' reasonable expenses
(including attorneys fees and expenses) in connection with negotiating and
preparing the Transaction Documents and consummating the transactions
contemplated thereby.
j. Proxy Statement. The Company shall hold its next meeting of
---------------
stockholders on or before January 15, 1998 or, in the event the proxy statement
described in the following sentence is reviewed by the SEC, January 29, 1998
(the "STOCKHOLDER MEETING DEADLINE"). The Company shall provide each
stockholder entitled to vote at such meeting of stockholders of the Company, a
proxy statement, which has been previously reviewed by the Buyers and a counsel
of their choice, soliciting each such stockholder's affirmative vote at such
annual stockholder meeting for approval of the Company's issuance of all of the
Securities pursuant to the Statement of Designations and the Warrants and the
Company shall use its best efforts to solicit its stockholders' approval of such
issuance of the Securities and cause the Board of Directors of the Company to
recommend to the stockholders that they approve such proposal. Such proxy
statement shall not seek approval of any matters other than the approval
described in the preceding sentence, the election of directors, the approval of
a stock option plan of the Company for up to 500,000 shares of Common Stock and
such other matters which broker votes have discretionary authority to approve.
The Company shall file such proxy statement with the SEC as soon as possible but
in no event later than November 19, 1997 (the "PROXY STATEMENT FILING DUE
DATE"). If the Company fails to file the proxy statement referred to above by
the Proxy Statement Filing Due Date or fails to hold a meeting of its
stockholders by the Stockholder Meeting Deadline, then, as partial relief (which
remedy shall not be exclusive of any other remedies available at law or in
equity), the Company shall pay to each holder of Preferred Shares an amount in
cash per Preferred Share equal to the product of (i) $1,000 multiplied by (ii)
.02 multiplied by (iii) the quotient of (x) the sum of (A) the number of days
after the Proxy Statement Filing Due Date and prior to the date that the proxy
statement referred to above is filed with the SEC and (B) the number of days
after the Stockholder Meeting Deadline and prior to the date that a meeting of
the Company's stockholders is held, divided by (y) 30. The payments referred to
above shall be paid within five business days of the date incurred. In the
event the Company fails to make such payments in a timely manner, such payments
shall bear interest at the rate of 2.0% per month (pro rated for partial months)
until paid in full.
k. Filing of Form 8-K. On or before the fifth (5th) business day
------------------
following each of the Closing Dates, the Company shall file a Form 8-K with the
SEC describing the terms
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<PAGE>
of the transaction contemplated by the Transaction Documents and consummated at
such Closing, in each case in the form required by the 1934 Act.
l. Limitation on Short Sales of the Common Stock. Each Buyer
---------------------------------------------
severally agrees that during the period beginning on the Initial Closing Date
and ending on the date which is 180 days after the Initial Closing Date, such
Buyer agrees that it will not enter into, directly or indirectly, any "short
sale" (as such term is defined in Rule 3b-3 of the 1934 Act) of Common Stock;
provided, however, that the restrictions on short sales set forth above shall
not apply (i) at any time during which the last reported bid price for the
Common Stock (as reported by Bloomberg Financial Markets "BLOOMBERG") is not
less than the product of (A) 1.1 and (B) the Market Price (as defined in Section
1(b) of the Statement of Designations) for the Common Stock as of the Closing
Date, (ii) if there has been any Material Adverse Change (as defined in Section
2(j) of the Statement of Designations) or Triggering Event (as defined in
Section 3(d) of the Statement of Designations), (iii) if a potential Major
Corporate Event is publicly announced or (iv) the Company is in default under
the Statement of Designations for failing to effect any requested conversion or
redemption of any Preferred Shares pursuant to the Statement of Designations.
m. Limitation on Filing Registration Statements. The Company shall
--------------------------------------------
not file a registration statement (other than the Registration Statement
pursuant to the terms of the Registration Rights Agreement, a registration
statement on Form S-4 relating to the Reorganization (as defined in Schedule
--------
4(m)) or a registration statement on Form S-8) covering the sale or resale of
- ----
shares of Common Stock with SEC during the period beginning on the date hereof
and ending on the date which is the earlier of (i) 90 days after the Additional
Closing Date and (ii) May 5, 1998. Notwithstanding the foregoing, the Company
shall not file with the SEC the Form S-4 registration statement relating to the
Reorganization before the later of (x) the date on which the preliminary proxy
statement relating to the approval of the issuance of the Securities (as
described in Section 4(j)) has been approved by the SEC (or the period of time
in which the SEC has to review the preliminary proxy statement has expired) and
(y) the date on which the SEC declares the Registration Statement effective.
n. Corporate Indebtedness. So long as any Buyer beneficially owns
----------------------
any Preferred Shares, the Company shall not (i) incur any indebtedness pursuant
to its line of credit with Imperial Bank unless and until the Company receives a
waiver, in form and substance satisfactory to the holders of the Preferred
Shares, the ("WAIVER") of the covenant contained in the documentation executed
by the Company in connection with that certain Security and Loan Agreement dated
November 12, 1996, between the Company and Imperial Bank prohibiting the Company
from making any distribution with respect to, or purchasing, redeeming or
retiring, the Preferred Shares or Warrants or (ii) incur any indebtedness for
borrowed money except pursuant to lines of credit, with reputable financial
institutions, which do not contain any terms which may have the effect of
impairing the rights of the holders of the Preferred Shares, whether such lines
of credit now exist or are hereafter established.
-17-
<PAGE>
o. Rights Agreement. The Company specifically represents, warrants
----------------
and agrees that, in accordance with Section 1 of the Rights Agreement and clause
(iii) of the definition of "Acquiring Person" contained therein, regardless of
the number of Conversion Shares and Warrant Shares of which each Buyer is deemed
the Beneficial Owner (as defined in the Rights Agreement), none of the Buyers is
intended to be or will be deemed to be an Acquiring Person within the meaning of
the Rights Plan because of the acquisition of the Securities (including the
Conversion Shares and the Warrant Shares) pursuant to this Agreement, and the
acquisition of the Securities (including the Conversion Shares and the Warrant
Shares) pursuant to this Agreement, shall not, under any circumstances, trigger
a Distribution Date within the meaning of the Rights Plan; provided, however,
that only Securities (including the Conversion Shares and the Warrant Shares)
acquired pursuant to this Agreement shall be deemed excluded from the number of
Common Shares (as defined in the Rights Agreement) deemed beneficially owned by
each Buyer in determining whether such Buyer is an Acquiring Person within the
meaning of the Rights Plan.
5. TRANSFER AGENT INSTRUCTIONS.
---------------------------
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
and the Warrant Shares in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Preferred Shares or exercise of the
Warrants (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration
of the Conversion Shares and the Warrant Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof (in the case of the
Conversion Shares and the Warrant Shares, prior to registration of the
Conversion Shares and the Warrant Shares under the 1933 Act) will be given by
the Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section 5 shall affect in any way each Buyer's obligations and agreements
set forth in Section 2(g) to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Securities. If a Buyer provides the
Company with an opinion of counsel, in generally acceptable form, that
registration of a resale by such Buyer of any of such Securities is not required
under the 1933 Act, the Company shall permit the transfer, and, in the case of
the Conversion Shares and the Warrant Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denominations
as specified by such Buyer and without any restrictive legends. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an
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<PAGE>
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.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
a. Initial Closing Date. The obligation of the Company hereunder to
--------------------
issue and sell the Initial Preferred Shares to each Buyer at the Initial Closing
is subject to the satisfaction, at or before the Initial Closing Date, of each
of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of the Transaction Documents
and delivered the same to the Company.
(ii) The Statement of Designations shall have been filed with the
Secretary of State of the State of Texas.
(iii) Such Buyer shall have delivered to the Company the Purchase
Price for the Initial Preferred Shares and the related Warrants being
purchased by such Buyer at the Initial Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by
the Company.
(iv) The representations and warranties of such Buyer shall be true
and correct as of the date when made and as of the Initial Closing Date as
though made at that time (except for representations and warranties that
speak as of a specific date), and such Buyer shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or
complied with by such Buyer at or prior to the Initial Closing Date.
b. Additional Closing Dates. The obligation of the Company
------------------------
hereunder to issue and sell the Additional Preferred Shares to each Buyer at the
Additional Closing is subject to the satisfaction, at or before the Additional
Closing Date, of each of the following conditions, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion by providing each Buyer with prior written
notice thereof:
(i) Such Buyer shall have delivered to the Company the Purchase
Price for the Additional Preferred Shares and the related Warrants being
purchased by such Buyer at the Additional Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by
the Company.
(ii) The representations and warranties of such Buyer shall be true
and correct as of the date when made and as of the Additional Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date), and such
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<PAGE>
Buyer shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by such Buyer at or prior to the
Additional Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
-------------------------------------------------
a. Initial Closing Date. The obligation of each Buyer hereunder to
--------------------
purchase the Initial Preferred Shares at the Initial Closing is subject to the
satisfaction, at or before the Initial Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to such Buyer.
(ii) The Statement of Designations shall have been filed with the
Secretary of State of the State of Texas, and a copy thereof certified by
such Secretary of State shall have been delivered to such Buyer.
(iii) The Common Stock shall be authorized for quotation on the
Nasdaq National Market, NYSE or AMEX, trading in the Common Stock shall not
have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX
on the Initial Closing Date.
(iv) The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Initial Closing Date as
though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or
complied with by the Company at or prior to the Initial Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Financial
Officer of the Company, dated as of the Initial Closing Date, to the
foregoing effect and as to such other matters as may be reasonably
requested by such Buyer including, without limitation, an update as of the
Initial Closing Date regarding the representation contained in Section 3(c)
above.
(v) Such Buyer shall have received the opinion of the Company's
counsel dated as of the Initial Closing Date, in form, scope and substance
reasonably satisfactory to such Buyer and in substantially the form of
Exhibit C attached hereto.
---------
(vi) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates (in such denominations as such Buyer
shall request) for the Preferred Shares being purchased by such Buyer at
the Initial Closing.
-20-
<PAGE>
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer (the "RESOLUTIONS").
(viii) As of the Initial Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to at
least 200% of the number of Conversion Shares issuable upon conversion of
the Preferred Shares and exercise of the Warrants outstanding on the
Initial Closing Date (after giving effect to the Preferred Shares and
Warrants to be issued on the Initial Closing Date and assuming all such
Preferred Shares and Warrants were fully convertible or exercisable on such
date regardless of any limitation on the timing or amount of such
conversions or exercises).
(ix) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within 10
days of the Initial Closing.
(xi) The Company shall have delivered to such Buyer certified copies
of its Articles of Incorporation and Bylaws, each as in effect at the
Initial Closing.
(xii) The Company shall have delivered to such Buyer copies of proxy
agreements, in a form reasonably acceptable to such Buyer, executed by each
executive officer and director of the Company pursuant to which such
persons agree to vote in favor of the matters described in Section 4(j).
(xiii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
b. Additional Closing Dates. The obligation of each Buyer
------------------------
hereunder to purchase the Additional Preferred Shares at the Additional
Closing is subject to the satisfaction, at or before the Additional Closing
Date, of each of the following conditions, provided that these conditions
are for each Buyer's sole benefit and may be waived by such Buyer at any
time in its sole discretion:
(i) The Statement of Designations shall be in full force and effect
and shall not have been amended since the Initial Closing Date, and a copy
thereof certified by the Secretary of State of the State of Texas shall
have been delivered to such Buyer.
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<PAGE>
(ii) The Common Stock shall be authorized for quotation on the
Nasdaq National Market, NYSE or AMEX, trading in the Common Stock shall not
have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX
on the Additional Closing Date.
(iii) The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Additional Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or
complied with by the Company at or prior to the Additional Closing Date.
Such Buyer shall have received a certificate, executed by the Chief
Financial Officer of the Company, dated as of the Additional Closing Date,
to the foregoing effect and as to such other matters as may be reasonably
requested by such Buyer including, without limitation, an update as of the
Additional Closing Date regarding the representation contained in Section
3(c) above.
(iv) Such Buyer shall have received the opinion of the Company's
counsel dated as of the Additional Closing Date, in form, scope and
substance reasonably satisfactory to such Buyer and in substantially the
form of Exhibit C attached hereto.
---------
(v) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates (in such denominations as such Buyer
shall request) for the Preferred Shares being purchased by such Buyer at
the Additional Closing.
(vi) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer (the "RESOLUTIONS").
(vii) As of the Additional Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to at
least 200% of the number of Conversion Shares issuable upon conversion of
the Preferred Shares and exercise of the Warrants outstanding on the
Additional Closing Date (after giving effect to the Preferred Shares and
Warrants to be issued on such Additional Closing Date and assuming all such
outstanding Preferred Shares and Warrants were fully convertible or
exercisable on such date regardless on any limitation on the timing or
amount of such conversions or exercises).
(viii) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent.
-22-
<PAGE>
(ix) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within 10
days of the Additional Closing.
(x) The Company shall have delivered to such Buyer certified copies
of its Articles of Incorporation and Bylaws, each as in effect at the
Additional Closing.
(xi) The conditions of Section 1(c) of this Agreement shall have
been satisfied.
(xii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
---------------
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their stockholders,
officers, directors, employees and direct or indirect investors and any of the
foregoing person's agents or other representatives (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 any Indemnitee 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 the Transaction Documents or
the Statement of Designations 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 Documents or the
Statement of Designations 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 in accordance with its terms or enforcement of
this Agreement against the Company 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 Securities or the status of such Buyer or holder
of the Securities 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.
-23-
<PAGE>
9. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. 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. Each party hereby irrevocably submits to
the non-exclusive jurisdiction of the state and federal courts sitting the City
of New York, borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
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.
b. 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.
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all
----------------------------
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on 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 Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an
-24-
<PAGE>
instrument in writing signed by the party against whom enforcement is sought.
No such amendment shall be effective to the extent that it applies to less than
all of the holders of the Preferred Shares then outstanding. No consideration
shall be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents or the
Statement of Designations unless the same consideration also is offered to all
of the parties to the Transaction Documents or holders of Preferred Shares, as
the case may be.
f. 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 (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically generated and kept on file by the
sending party); (iii) three (3) days after being sent by U.S. certified mail,
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:
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249-3341
Telephone: 210-263-2000
Facsimile: 210-263-2075
Attention: Chief Financial Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telephone: 210-270-0800
Facsimile: 210-224-2035
Attention: Matthew Bair, Esq.
If to the Transfer Agent:
ChaseMellon Shareholder Services, L.L.C.
2323 Bryan Street, Suite 2300
Dallas, Texas 75201
Telephone: 214-965-2236
Facsimile: 214-965-2233
Attention: Mona Vorhees
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<PAGE>
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number.
g. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares. Except as in compliance with
Section 3 of the Statement of Designations, the Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the holders of two-thirds (2/3) of the Preferred Shares then
outstanding including by merger or consolidation. A Buyer may assign some or
all of its rights hereunder to affiliates or associates of such Buyer, without
the consent of the Company, and to others, with the consent of the Company;
provided, however, that any such assignment shall not release such Buyer from
its obligations hereunder unless such obligations are assumed by such assignee
and the Company has consented to such assignment and assumption.
Notwithstanding anything to the contrary contained in this Agreement, Buyer
shall be entitled to pledge the Securities in connection with a bona fide margin
account.
h. 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.
i. Survival. Unless this Agreement is terminated under Section
--------
9(l), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions set forth in Section 8, shall survive the
Closing. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer 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 any Buyer, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although each Buyer 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).
k. Further Assurances. Each party shall do and perform, or cause to
------------------
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
-26-
<PAGE>
l. Termination. In the event that the Initial Closing shall not have
-----------
occurred with respect to a Buyer on or before three (3) business days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 9(l), the Company shall remain obligated to reimburse the non-
breaching Buyers for the expenses described in Section 4(i) above.
m. Placement Agent. The Company acknowledges that it has engaged
---------------
Loewenbaum & Company Incorporated (f/k/a Southcoast Capital Corporation) as
placement agent in connection with the sale of the Preferred Shares and the
related Warrants. The Company shall be responsible for the payment of any
placement agent's fees or broker's commissions relating to or arising out of the
transactions contemplated hereby, to the extent such placement agent or brokers
were engaged by the Company. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorneys' fees and out of pocket expenses) arising in connection with any such
claim.
n. 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.
-27-
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
DATA RACE, INC. NELSON PARTNERS
By: /s/GREGORY T. SKALLA By: /s/ NITIN AGGARWAL
------------------------------ ------------------------------------
Name: Gregory T. Skalla Name: Nitin Aggarwal
Its: Vice President and Chief Its: Officer
Financial Officer
OLYMPUS SECURITIES, LTD.
By: /s/ NITIN AGGARWAL
------------------------------------
Name: Nitin Aggarwal
Its: Director
CC INVESTMENTS, LDC
By: /s/ DANIEL ASHER
------------------------------------
Name: Daniel Asher
Its: Director
CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management
Its: Authorized Agent
By: /s/ JOHANN H. KOEHNE
------------------------------------
Name: Johann H. Koehne
Its: Investment Manager
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
NUMBER OF
INVESTOR ADDRESS PREFERRED SHARES INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER INITIAL/ADDITIONAL AND FACSIMILE NUMBER
- --------------------------------- ---------------------------------- -------------------- ---------------------------------------
<S> <C> <C> <C>
Nelson Partners %Leeds Management Services 840/504 Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Kenneth P. Simpler
Facsimile: (441) 292-2239 Kenneth C. Griffin
Residence: Bermuda Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attention: Robert J. Brantman, Esq.
Facsimile: (312) 902-1061
Olympus Securities, Ltd. %Leeds Management Services 1,035/621 Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Kenneth P. Simpler
Facsimile: (441) 292-2239 Kenneth C. Griffin
Residence: Bermuda Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Capital Ventures International %Heights Capital Management 1,250/750
425 California Street, Suite 1100
San Francisco, California 94104
Attn: Michael Spolan
Facsimile: (415) 403-6525
Residence: Cayman Islands
CC Investments, LDC c/o Citco Fund Services 1,875/1,125 Castle Creek Partners, LLC
P.O. Box 31106, SMB 333 West Wacker Drive
Corporate Centers Suite 1410
Grand Cayman, Cayman Islands Chicago, Illinois 60606
Attn: _________________ Attn: John D. Zigelman
Facsimile: 345-949-3877 Facsimile: (312) 435-2636
</TABLE>
<PAGE>
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of November 7,
1997, by and among DATA RACE, Inc., a Texas corporation, with headquarters
located at 12400 Network Boulevard, San Antonio, Texas 78249-3341 (the
"COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively, the
"BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the Company
has agreed, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to (i) issue and sell to the Buyers shares of the Company's
Series C Convertible Participating Preferred Stock (the "PREFERRED SHARES"),
which will be convertible into shares of the Company's common stock, no par
value per share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in
accordance with the terms of the Company's Statement of Designations,
Preferences and Rights of the Series C Convertible Participating Preferred Stock
(the "STATEMENT OF DESIGNATIONS"), and (ii) issue Warrants (the "WARRANTS")
which will be exercisable to purchase shares of Common Stock (the "WARRANT
SHARES"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
-----------
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means a Buyer and any transferee or assignee thereof
to whom a Buyer 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.
<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 and the
Warrant Shares issued or issuable upon conversion of the Preferred Shares and
exercise of the Warrants respectively, any shares of capital stock issued
pursuant to terms of the Statement of Designations or Warrants at the option of
the holder of Preferred Shares or Warrants in lieu of the payment by the Company
of cash penalties (the "PENALTY SHARES") and any shares of capital stock issued
or issuable with respect to the Conversion Shares, the Warrant Shares, the
Penalty Shares the Warrants or the Preferred Shares as a result of any stock
split, stock dividend, recapitalization, exchange or similar event or otherwise,
regardless of any limitation on conversions of Preferred Shares or the exercise
of the Warrants .
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 Securities Purchase Agreement.
2. REGISTRATION.
------------
a. Mandatory Registration. The Company shall prepare, and, as soon
----------------------
as practicable but in no event later than 30 days after the date of issuance of
the relevant Preferred Shares, 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 the Investors holding a majority of
the Registrable Securities and the provisions of Section 2(c), which consent
will not be unreasonably withheld), covering the resale of all of the
Registrable Securities, which 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 upon conversion of the Preferred Shares or
exercise of the Warrants (i) to prevent dilution resulting from stock splits,
stock dividends or similar transactions and (ii) by reason of changes in the
Conversion Price or Conversion Rate of the Preferred Shares in accordance with
the terms thereof. Such Registration Statement shall initially register for
resale 3,020,000 shares of Common Stock, subject to adjustment as provided in
Section 3(b). 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(s) declared effective by the SEC as soon as practicable, but in no
event later than 90 days after the issuance of the relevant Preferred Shares.
-2-
<PAGE>
b. Allocation of Registrable Securities. The initial number of
------------------------------------
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time of such establishment or increase, as the case may be.
In the event an Investor shall sell or otherwise transfer any of such holder's
Registrable Securities, each transferee shall be allocated a pro rata portion of
the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
in a Registration Statement and which remain allocated to any person or entity
which does not hold any Registrable Securities shall be allocated to the
remaining Investors, pro rata based on the number of Registrable Securities then
held by such Investors. For the avoidance of doubt, the number of Registrable
Securities held by any Investor shall be determined as if all Preferred Shares
and Warrants then outstanding were converted into or exercised for Registrable
Securities.
c. Counsel and Investment Bankers. Subject to Section 5 hereof, in
------------------------------
connection with any offering pursuant to Section 2, the Investors 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. The Company shall reasonably cooperate with any
such counsel and investment bankers.
d. 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(d) written notice of
the Company's intention to file a Registration Statement and of such Investor's
rights under this Section 2(d) 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(d) shall be construed to limit any registration
required under Section 2(a). The obligations of the Company under this Section
2(d) 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(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering.
d. Priority in Piggy-Back Registration Rights in connection with
-------------------------------------------------------------
Registrations for Company Account. If the registration referred to in Section
- ---------------------------------
2(d) is to be an underwritten public offering and the managing underwriter(s)
advise the Company in writing, that in their
-3-
<PAGE>
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: (1)
first, all securities the Company proposes to sell for its own account, (2)
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 (3)
third, the securities requested to be registered by the Investors and other
holders of securities entitled to participate in the registration, as of the
date hereof, 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 and
------------------------
covenants that on and after the date hereof it meets and will meet the
requirements for the use of Form S-3 for registration of the sale by the
Investors of the Registrable Securities and the Company 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 the Company (i) with the consent of the Investors
holding a majority of the Registrable Securities pursuant to Section 2(a), shall
register the sale of the Registrable Securities on another appropriate form and
(ii) the Company shall undertake to register the Registrable Securities on Form
S-3 as soon as such form is available, provided that the Company shall maintain
the effectiveness of the Registration Statement then in effect until such time
as a Registration Statement on Form S-3 covering the Registrable Securities has
been declared effective by the SEC.
f. Rule 416. The Company and the Investors each acknowledge that an
--------
indeterminate number of Registrable Securities shall be registered pursuant to
Rule 416 under the 1933 Act so as to include in such Registration Statement any
and all Registrable Securities which may become issuable (i) to prevent dilution
resulting from stock splits, stock dividends or similar transactions and (ii) if
permitted by law, by reason of reductions in the Conversion Price (as defined in
the Statement of Designations) of the Preferred Stock in accordance with the
terms thereof, including, without limitation, the terms which cause the Floating
Conversion Price (as defined in the Statement of Designations) to decrease as
the bid price of the Common Stock decreases (collectively, the "RULE 416
SECURITIES"). In this regard, the Company agrees to use all reasonable efforts
to ensure that the maximum number of Registrable Securities which may be
registered pursuant to Rule 416 under the 1933 Act are covered by the
Registration Statement and, absent guidance from the SEC or other definitive
authority to the contrary, the Company shall use all reasonable efforts to
affirmatively support and to not take any position adverse to the position that
the Registration Statement filed hereunder covers all of the Rule 416
Securities. If the Company determines that the Registration Statement filed
hereunder does not cover all of the Rule 416 Securities, the Company shall
immediately provide to each Investor written setting forth the basis for the
Company's position and the authority therefor.
-4-
<PAGE>
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(d) 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 thirtieth (30th) day after the date of issuance of any Preferred Shares
for the registration of Registrable Securities pursuant to Section 2(a)) and use
its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as possible after such filing
(but in no event later than 90 days after the issuance of any Preferred Shares
for the registration of Registrable Securities pursuant to Section 2(a)), and
keep such Registration Statement effective pursuant to Rule 415 at all times
until the earlier 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
Preferred Shares or Warrants is outstanding (the "REGISTRATION PERIOD"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, 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 a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
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 such Registration Statement
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 such Registration Statement. In the event the
number of shares available under a Registration Statement filed pursuant to this
Agreement is insufficient to cover all of the Registrable Securities, the
Company shall amend such 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 Company reasonably elects to rely). The Company
shall use it 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 Preferred Shares and exercise of the
Warrants is greater than the quotient
-5-
<PAGE>
determined by dividing (i) the number of shares of Common Stock available for
resale under such Registration Statement by (ii) 1.5. For purposes of the
calculation set forth in the foregoing sentence, any restrictions on the
convertibility of the Preferred Shares or exerciseability of the Warrants shall
be disregarded and such calculation shall assume that the Preferred Shares and
the Warrants are then convertible and exercisable, respectively, into shares of
Common Stock at the then prevailing Conversion Rate (as defined in the Company's
Statement of Designations) and Warrant Exercise Price (as defined in the
Warrant), respectively, if applicable.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement and its legal counsel
without charge (i) promptly after the same is prepared and filed with the SEC at
least one copy of such Registration Statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits, the prospectus included in such Registration
Statement (including each preliminary prospectus) and, with regards to such
Registration Statement(s), 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 copies of any preliminary or final prospectus, as such
Investor may reasonably request from time to time 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 a Registration Statement 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 (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) 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.
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,
-6-
<PAGE>
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
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 such
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 threat of any proceeding for such purpose.
h. The Company shall permit each Investor and a single firm of
counsel, initially Katten Muchin & Zavis 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 a
Registration Statement and all amendments and supplements thereto at least four
(4) business 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 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 any Investor, the Company shall use its best
efforts to furnish to such Investor, on the date of the effectiveness of the
Registration Statement and thereafter from time to time on such dates as an
Investor may reasonably request (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
-7-
<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, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
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 of which
the Inspector has knowledge. 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 Agreement 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.
l. 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 securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq National Market or, 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 SmallCap Market for such Registrable
-8-
<PAGE>
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(l).
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.
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 for 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 (i) 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 any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) 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 (iii) 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 make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
s. 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.
-9-
<PAGE>
t. Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that the Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
---------
4. OBLIGATIONS OF THE INVESTORS.
----------------------------
a. At least seven (7) days prior to the first anticipated filing
date of a Registration Statement, the Company shall notify each Investor in
writing of the information the Company requires from each such Investor if such
Investor elects to have any of such Investor's Registrable Securities included
in such 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 any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. In the event any Investor elects to participate in an
underwritten public offering pursuant to Section 2, each such 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 and, if requested by the
underwriters, customary lock-up arrangements (on terms no more restrictive than
the lock-up arrangements applicable to the management of the Company), 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 such Registration Statement.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(g) or
the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any 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).
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<PAGE>
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements 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.
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 accounting fees, and
fees and disbursements of counsel for the Company and fees and disbursements of
one counsel for the Investors, shall be paid by the Company; provided, however,
that the Company shall not be obligated to pay more than $2,500 of the fees and
disbursements of one counsel for the Investors for each Registration Statement
that is filed.
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 of,
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
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<PAGE>
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 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
omission 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 it; (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
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<PAGE>
the indemnity agreement contained in this Section 6(b) and the agreement with
respect to contribution contained in 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.
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 indemnifying
party shall pay for only one separate legal counsel for the Indemnified Persons
or the Indemnified Parties, as applicable, and such counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates, if the Investors are
entitled to indemnification hereunder, or the Company, if the Company is
entitled to indemnification hereunder, as applicable. 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,
-13-
<PAGE>
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.
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6; (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of 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.
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
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<PAGE>
any time permit the Investors to sell securities of the Company to the public
without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
---------------------------------
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) 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; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
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 (2/3) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Registrable
Securities. No consideration shall be offered or paid to any person to amend or
consent to a waiver or modification of any provision of any of this Agreement
unless the same consideration also is offered to all of the parties to this
Agreement.
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<PAGE>
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 confirmation
of transmission is mechanically generated and kept on file by the sending
party); (iii) three (3) days after being sent by U.S. certified mail, 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:
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249-3341
Telephone: 210-263-2000
Facsimile: 210-263-2075
Attention: Chief Financial Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telephone: 210-270-0800
Facsimile: 210-224-2035
Attention: Matthew Bair, Esq.
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers attached hereto, with copies to such Buyer's counsel as set
forth on the Schedule of Buyers.
Each party shall provide five (5) days prior notice to the other party of any
change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
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<PAGE>
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. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting the City of New York,
borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
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 Securities 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 Securities Purchase Agreement supersede all prior agreements
and understandings among the parties hereto with respect to the subject matter
hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit 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.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors
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<PAGE>
holding a majority of the Registrable Securities, determined as if all of the
Preferred Shares and the Warrants then outstanding have been converted into or
exercised for Registrable Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
DATA RACE, INC. NELSON PARTNERS
By: /s/GREGORY T. SKALLA By: /s/ NITIN AGGARWAL
------------------------------ ------------------------------------
Name: Gregory T. Skalla Name: Nitin Aggarwal
Its: Vice President and Chief Its: Officer
Financial Officer
OLYMPUS SECURITIES, LTD.
By: /s/ NITIN AGGARWAL
------------------------------------
Name: Nitin Aggarwal
Its: Director
CC INVESTMENTS, LDC
By: /s/ DANIEL ASHER
------------------------------------
Name: Daniel Asher
Its: Director
CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management
Its: Authorized Agent
By: /s/ JOHANN H. KOEHNE
------------------------------------
Name: Johann H. Koehne
Its: Investment Manager
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<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
INVESTOR ADDRESS INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER
- ------------------------------- ------------------------------------ ----------------------------------------
<S> <C> <C>
Nelson Partners c/o Leeds Management Services Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Kenneth P. Simpler
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attention: Robert J. Brantman, Esq.
Facsimile: (312) 902-1061
Olympus Securities, Ltd. c/o Leeds Management Services Citadel Investment Group, L.L.C.
129 Front Street, 5th Floor 225 West Washington Street
Hamilton HM12 Bermuda Chicago, Illinois 60606
Attn: Anne Dupuy Attention: Kenneth P. Simpler
Facsimile: (441) 292-2239 Kenneth C. Griffin
Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attention: Robert J. Brantman, Esq.
Facsimile: (312) 902-1061
CC Investments, LDC c/o Citco Fund Services Castle Creek Partners, LLC
P.O. Box 31106, SMB 333 West Wacker Drive
Corporate Centers Suite 1410
West Bay Road Chicago, Illinois 60606
Grand Cayman, Cayman Islands Attention: John D. Zigelman
Attn: ___________________ Facsimile: (312) 435-2636
Facsimile: 345-949-3877
Capital Ventures
International c/o Heights Capital Management
425 California Street, Suite 1100
San Francisco, California 94104
Attn: Michael Spolan
Facsimile: (415) 403-6525
Residence: Cayman Islands
</TABLE>
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<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
ATTN:_________________
RE: DATA RACE, INC.
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Ladies and Gentlemen:
We are counsel to DATA RACE, Inc., a Texas corporation (the "COMPANY"), and
have represented the Company in connection with that certain Securities Purchase
Agreement (the "PURCHASE AGREEMENT") entered into by and among the Company and
the buyers named therein (collectively, the "HOLDERS") pursuant to which the
Company issued to the Holders shares of its Series C Convertible Participating
Preferred Stock, no par value per share, (the "PREFERRED SHARES") and warrants
to purchase an aggregate of _________ shares of the Company's common stock, no
par value per share (the "COMMON STOCK"), subject to adjustment (the
"WARRANTS"). Pursuant to the Purchase Agreement, the Company also has entered
into a Registration Rights Agreement with the Holders (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Preferred Shares and exercise of the Warrants, under the Securities Act of 1933,
as amended (the "1933 ACT"). In connection with the Company's obligations under
the Registration Rights Agreement, on ____________ ___, 1997, the Company filed
a Registration Statement on Form S-3 (File No. 333-_____________) (the
"REGISTRATION STATEMENT") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names each of the Holders as
a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
AKIN, GUMP, STRAUSS, HAUER
& FELD, L.L.P.
By:____________________________
cc: [LIST NAMES OF HOLDERS]
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EXHIBIT 10.3
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT 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 FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO
COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS.
DATA RACE, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.:______________________ Number of Shares: _________
Date of Issuance: ____________ __, 199_
DATA RACE, Inc., a Texas corporation (the "COMPANY"), hereby certifies that, for
Ten United States Dollars ($10.00) and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, ________________,
the registered holder hereof or its permitted assigns, is entitled, subject to
the terms set forth below, to purchase from the Company upon surrender of this
Warrant, at any time or times on or after the date hereof, but during the period
specified in Section 1(d) hereof and not after 11:59 P.M. Eastern Time on the
Expiration Date (as defined herein) ________________ (____________) [15% OF THE
AGGREGATE PURCHASE PRICE FOR THE PREFERRED SHARES DIVIDED BY THE MARKET PRICE ON
THE CLOSING DATE] fully paid nonassessable shares of Common Stock (as defined
herein) of the Company (the "WARRANT SHARES") at the purchase price per share
provided in Section 1(b) below (the "WARRANT EXERCISE PRICE"); provided,
however, that in no event shall the holder be entitled to exercise this Warrant
for a number of Warrant Shares in excess of that number of Warrant Shares which,
upon giving effect to such exercise, would cause the aggregate number of shares
of Common Stock beneficially owned by the holder and its affiliates to exceed
4.9% of the outstanding shares of the Common Stock following such exercise. For
purposes of the foregoing proviso, the aggregate number of shares of Common
Stock beneficially owned by the holder and its affiliates shall include the
number of shares of Common Stock issuable upon exercise of this Warrant with
respect to which the determination of such proviso is being made, but shall
exclude shares of Common Stock which would be issuable upon (i) exercise of the
remaining,
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unexercised Warrants beneficially owned by the holder and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by the holder and its
affiliates (including, without limitation, any convertible notes or preferred
stock) subject to a limitation on conversion or exercise analogous to the
limitation contained herein. Except as set forth in the preceding sentence, for
purposes of this paragraph, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. The holder may waive the foregoing limitations by written notice to
the Company upon not less than 61 days prior notice (with such waiver taking
effect only upon the expiration of such 61 day notice period).
Section 1.
(a) Securities Purchase Agreement. This Warrant is one of the
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Warrants (the "PREFERRED SHARE WARRANTS") issued pursuant to Section 1 of that
certain Securities Purchase Agreement dated as of November __, 1997, among the
Company and the Buyers referred to therein (the "SECURITIES PURCHASE
AGREEMENT").
(b) Definitions. The following words and terms as used in this
-----------
Warrant shall have the following meanings:
"MARKET PRICE" means, with respect to any security for any date,
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the arithmetic average of the Closing Bid Price (as defined below) for such
security for the five consecutive trading days immediately preceding such date.
"CLOSING BID PRICE" means, for any security as of any date, the
-----------------
last closing bid price for such security on the Nasdaq National Market as
reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq
National Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price for such security as
reported by Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the holders of the Preferred Shares. If the Company and the holders of the
Preferred Shares are unable to agree upon the fair market value of the Common
Stock, then such dispute shall be resolved pursuant to Section 2(a) of this
Warrant with the term "Closing Bid Price" being substituted for the term "Market
Price." (All such determinations to be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period.)
"APPROVED ISSUANCES" shall mean (i) a loan from a commercial
------------------
bank, (ii) any transaction involving the Company's issuances of securities (A)
as consideration in a merger
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or consolidation or (B) as consideration for the acquisition of a business,
product or license or other assets by the Company, (iii) the issuance of Common
Stock in a firm commitment, underwritten public offering with commissions,
underwriting discounts and allowances not in excess of 7.0% of the gross
proceeds, (iv) the issuance of securities upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof, (v) the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option plan,
restricted stock plan, stock purchase plan or other plan or written compensation
contract for the benefit of the Company's employees or directors, or (vi) the
issuance of securities pursuant to the Rights Agreement, dated September 15,
1997, between the Company and ChaseMellon Shareholder Services, L.L.C., as
amended from time to time in accordance with its terms (the "RIGHTS AGREEMENT").
"COMMON STOCK" means (i) the Company's common stock, no par value
------------
per share, and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock.
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the
-------------------------------
number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Sections
8(b)(i) and 8(b)(ii) hereof regardless of whether the Options (as defined below)
or Convertible Securities (as defined below) are actually exercisable or
convertible at such time, but excluding any shares of Common Stock issuable upon
exercise of the Preferred Share Warrants.
"EXPIRATION DATE" means the date three years from the date of
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this Warrant or, if such date falls on a Saturday, Sunday or other day on which
banks are required or authorized to be closed in the City of New York or the
State of New York (a "HOLIDAY"), the next preceding date that is not a Holiday.
"OTHER SECURITIES" means (i) those warrants of the Company issued
----------------
prior to, and outstanding on, the date of issuance of this Warrant, (ii) the
Preferred Shares (as defined below), (iii) the Company's Series A Convertible
Preferred Stock outstanding on the date of this Warrant (the "SERIES A PREFERRED
STOCK") and (iv) the shares of Common Stock issued upon conversion of the
Preferred Shares and the Series A Preferred Stock.
"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.
"PREFERRED SHARES" means the shares of the Company's Series C
----------------
Convertible Participating Preferred Stock issued pursuant to the Securities
Purchase Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
--------------
"REGISTRATION RIGHTS AGREEMENT" means that certain Registration
-----------------------------
Rights Agreement dated November __, 1997, among the Company and the Buyers
referred to therein.
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"STATEMENT OF DESIGNATIONS" means the Company's Statement of
-------------------------
Designations, Preferences and Rights of the Series C Convertible Preferred
Stock.
"WARRANT" means this Warrant and all Warrants issued in
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exchange, transfer or replacement of any thereof.
"WARRANT EXERCISE PRICE" shall be equal to the Fixed Conversion
----------------------
Price (as defined in the Statement of Designations) in effect as of the issuance
of this Warrant, which Warrant Exercise Price shall be subject to adjustment
only as hereinafter provided.
"WARRANT PERIOD" means the period beginning on the date hereof
--------------
and ending on and including the Expiration Date.
(c) Other Definitional Provisions.
-----------------------------
(i) Except as otherwise specified herein, all references herein
(A) to the Company shall be deemed to include the Company's successors and (B)
to any applicable law defined or referred to herein, shall be deemed references
to such applicable law as the same may have been or may be amended or
supplemented from time to time.
(ii) When used in this Warrant, the words "HEREIN," "HEREOF,"
and "HEREUNDER," and words of similar import, shall refer to this Warrant as a
whole and not to any provision of this Warrant, and the words "SECTION,"
"SCHEDULE," and "EXHIBIT" shall refer to Sections of, and Schedules and Exhibits
to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender
includes the masculine or feminine, and the singular number includes the plural,
and vice versa.
(d) Vesting of Warrant.
------------------
(i) On the date which is 150 days after the date hereof, this
Warrant shall become, and thereafter during the Warrant Period shall remain,
exercisable with respect to Fifty percent (50%) of that number of Warrant Shares
equal to the product obtained by multiplying (A) the total number of Warrant
Shares initially issuable hereunder (as adjusted pursuant to the antidilution
provisions contained in Section 8 hereof) by (B) the quotient of (x) the
aggregate number of shares of Preferred Stock issued to the initial holder of
this Warrant pursuant to the Securities Purchase Agreement and which remain
outstanding on the date which is 150 days after the date hereof divided by (y)
the aggregate number of shares of Preferred Stock issued to such holder pursuant
to the Securities Purchase Agreement (such resulting number of shares is
referred to herein as the "INITIAL VESTED SHARES").
(ii) On the date which is 270 days after the date hereof, this
Warrant shall become, and thereafter during the Warrant Period shall remain,
exercisable with respect to an additional number of Warrant Shares equal to
Fifty percent (50%) of that number of Warrant Shares equal to the product
obtained by multiplying (A) the total number of Warrant Shares initially
issuable hereunder (as adjusted pursuant to the antidilution provisions
contained
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in Section 8 hereof) by (B) the quotient of (x) the aggregate number of shares
of Preferred Stock issued to the initial holder of this Warrant pursuant to the
Securities Purchase Agreement and which remain outstanding on the date which is
270 days after the date hereof divided by (y) the aggregate number of shares of
Preferred Stock issued to such holder pursuant to the Securities Purchase
Agreement (such resulting number of shares is referred to herein as the
"SUBSEQUENT VESTED SHARES").
(iii) The right to exercise this Warrant with respect to that
number of Warrant Shares equal to the difference between (A) the total number of
Warrant Shares initially issuable hereunder (after giving effect to any
adjustment as provided herein) and (B) the sum of the Initial Vested Shares and
the Subsequent Vested Shares (the "VESTED SHARES") shall be deemed to have been
forfeited by the holder hereof.
Section 2. Exercise of Warrant.
-------------------
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any business day on or after the opening of
business on the date hereof and prior to 11:59 P.M. Eastern Time on the
Expiration Date by (i) delivery to the Company of a written notice, in the form
of the subscription notice attached as Exhibit A hereto, of such holder's
election to exercise this Warrant, which notice shall specify the number of
Warrant Shares to be purchased, (ii) payment to the Company of an amount equal
to the Warrant Exercise Price multiplied by the number of Warrant Shares as to
which the Warrant is being exercised (plus any applicable issue or transfer
taxes) (the "AGGREGATE EXERCISE PRICE") in cash or by check or by wire transfer
or, if the Warrant Shares to be issued are not registered for resale in
accordance with the Registration Rights Agreement or a Triggering Event (as
defined in the Statement of Designations) shall have occurred, by notifying the
Company that it should subtract from the number of Warrant Shares issuable to
the holder upon such exercise an amount of Warrant Shares having a last reported
sale price (as reported by Bloomberg) on the date immediately preceding the date
of the subscription notice equal to the Aggregate Exercise Price of the Common
Stock being acquired upon exercise, and (iii) the surrender of this Warrant, at
the principal office of the Company; provided, that if such Warrant Shares are
to be issued in any name other than that of the registered holder of this
Warrant, such issuance shall be deemed a transfer and the provisions of Section
7 shall be applicable. In the event of any exercise of the rights represented
by this Warrant in compliance with this Section 2(a), a certificate or
certificates for the Warrant Shares so purchased, in such denominations as may
be requested by the holder hereof and registered in the name of, or as directed
by, the holder, shall be delivered at the Company's expense to, or as directed
by, such holder as soon as practicable after such rights shall have been so
exercised, and in any event no later than three business days after such
exercise. In the case of a dispute as to the determination of the Warrant
Exercise Price or the last reported sale price (as reported by Bloomberg) of a
security or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the holder 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 one business day of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price or the last reported sale price (as
reported by Bloomberg) or
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arithmetic calculation of the Warrant Shares within one day of such disputed
determination or arithmetic calculation being submitted to the holder, then the
Company shall immediately submit via facsimile (i) the disputed determination of
the Warrant Exercise Price or the last reported sale price (as reported by
Bloomberg) to an independent, reputable investment banking firm or (ii) the
disputed arithmetic calculation of the Warrant Shares to its independent,
outside accountant. The Company shall cause the investment banking firm or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results no later than forty-eight
(48) hours from the time it receives the disputed determinations or
calculations. Such investment banking firm's or accountant's determination or
calculation, as the case may be, shall be deemed conclusive absent manifest
error.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than ten business days after any exercise and at its own
expense, issue a new Warrant identical in all respects to the Warrant exercised
except (i) it shall represent rights to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under the Warrant exercised, less
the number of Warrant Shares with respect to which such Warrant is exercised,
and (ii) the holder thereof shall be deemed for all corporate purposes to have
become the holder of record of such Warrant Shares immediately prior to the
close of business on the date on which the Warrant is surrendered and payment of
the amount due in respect of such exercise and any applicable taxes is made,
irrespective of the date of delivery of certificates evidencing such Warrant
Shares, except that, if the date of such surrender and payment is a date when
the stock transfer books of the Company are properly closed, such person shall
be deemed to have become the holder of such Warrant Shares at the opening of
business on the next succeeding date on which the stock transfer books are open.
(c) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.
(d) If the Company shall fail for any reason or for no reason to
issue to the holder on a timely basis as described in this Section 2, a
certificate for the number of shares of Common Stock to which the holder is
entitled upon the holder's exercise of this Warrant or a new Warrant for the
number of shares of Common Stock to which such holder is entitled pursuant to
Section 2(b) hereof, the Company shall, in addition to any other remedies under
this Warrant or the Securities Purchase Agreement or otherwise available to such
holder, including any indemnification under Section 8 of the Securities Purchase
Agreement, pay as additional damages in cash to such holder on each date after
the third (3rd) business day following receipt by the Company of the exercise
notice (together with the Exercise Price and this Warrant) that such exercise is
not timely effected in an amount equal to 0.5% of the product of (A) the sum of
the number of shares of Common Stock not issued to the holder on a timely basis
and to which the holder is entitled and, in the event the Company has failed to
timely deliver a new Warrant, the number of shares represented by the portion of
this Warrant which is not being converted, as the case may be, and (B) the
average of the Closing Bid Prices for the three consecutive trading days
immediately preceding the last possible date which the Company could have issued
such Common Stock to the holder without violating this Section 2. If the Company
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fails to pay the additional damages set forth in this Section 2(d) within five
business days of the date incurred, then the holder entitled to such payments
shall have the right at any time, so long as the Company continues to fail to
make such payments, to require the Company, upon written notice, to immediately
issue, in lieu of the cash additional damages set forth in this Section 2(g),
the number of shares of Common Stock equal to the quotient of (X) the aggregate
amount of the additional damages payments described above divided by (Y) the
Conversion Price (as defined in the Statement of Designations) in effect on such
Conversion Date (as defined in the Statement of Designations) as is specified by
the holder in writing to the Company.
Section 3. Covenants as to Common Stock. The Company hereby covenants and
----------------------------
agrees as follows:
(a) This Warrant is, and any Preferred Share Warrants issued in
substitution for or replacement of this Warrant will upon issuance be, duly
authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.
(c) During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly secure the listing of the shares of
Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(e) The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. No impairment of the designations, preferences and rights of the
Preferred Shares contained in the Company's Statement of Designations or any
waiver thereof which has an adverse effect on the rights
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granted hereunder shall be given effect until the Company has taken appropriate
action (satisfactory to the holders of Preferred Share Warrants representing a
majority of the shares of Common Stock issuable upon the exercise of such
Preferred Share Warrants then outstanding) to avoid such adverse effect with
respect to this Warrant. Without limiting the generality of the foregoing, the
Company (i) will not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Warrant Exercise Price
then in effect, and (ii) will take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets.
Section 4. Taxes. The Company shall pay any and all taxes which may be
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payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise
---------------------------------------
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities or as a stockholder of the Company,
whether such liabilities are asserted by the Company or by creditors of the
Company. Notwithstanding this Section 5, the Company will provide the holder of
this Warrant with copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving thereof
to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by the
-------------------------
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment and not with a view to, or for sale in
connection with, any distribution hereof or of any of the shares of Common Stock
or other securities issuable upon the exercise thereof, and not with any present
intention of distributing any of the same. The holder of this Warrant further
represents, by acceptance hereof, that, as of this date, such holder is an
"ACCREDITED INVESTOR" as such term is defined in Rule 501(a)(1) of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
(an "ACCREDITED INVESTOR"). Upon exercise of this Warrant, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. Notwithstanding the foregoing, by making the
representations herein, the holder does not agree to hold the Warrant or the
Warrant Shares for any minimum or other
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specified term and reserves the right to dispose of the Warrant and the Warrant
Shares at any time in accordance with or pursuant to a registration statement or
an exemption under the Securities Act. If such holder cannot make such
representations because they would be factually incorrect, it shall be a
condition to such holder's exercise of the Warrant that the Company receive such
other representations as the Company considers reasonably necessary to assure
the Company that the issuance of its securities upon exercise of the Warrant
shall not violate any United States or state securities laws.
Section 7. Ownership and Transfer.
----------------------
(a) The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
the holder hereof), a register for this Warrant, in which the Company shall
record the name and address of the person in whose name this Warrant has been
issued, as well as the name and address of each transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder thereof for all purposes, notwithstanding any notice to the
contrary, but in all events recognizing any transfers made in accordance with
the terms of this Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable to affiliates or associates of the holder hereof, without the
written consent of the Company, and to other Persons, with the consent of the
Company, which consent shall not be unreasonably withheld, in whole or in part,
upon surrender of this Warrant, together with a properly executed warrant power
in the form of Exhibit B attached hereto; provided, however, that any transfer
or assignment shall be subject to the conditions set forth in Section 7(c)
below.
(c) The holder of this Warrant understands that this Warrant has
not been and is not expected to be, registered under the Securities Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (a) subsequently registered thereunder, or (b) such holder
shall have delivered to the Company an opinion of counsel, in generally
acceptable form, to the effect that the securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration; provided that (i) any sale of such securities made in
reliance on Rule 144 promulgated under the Securities Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (ii)
neither the Company nor any other person is under any obligation to register the
Preferred Share Warrants under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder.
(d) The Company is obligated to register the Warrant Shares for
resale under the Securities Act pursuant to the Registration Rights Agreement
and the initial holder of this Warrant (and certain assignees thereof) is
entitled to the registration rights in respect of the Warrant Shares as set
forth in the Registration Rights Agreement.
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Section 8. Adjustment of Warrant Exercise Price and Number of Shares. In
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order to prevent dilution of the rights granted under this Warrant, the Warrant
Exercise Price and the number of shares of Common Stock issuable upon exercise
of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price and Number of Shares upon
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Issuance of Common Stock. If and whenever on or after the date of issuance of
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this Warrant, the Company issues or sells, or is deemed to have issued or sold,
any shares of Common Stock (other than shares of Common Stock deemed to have
been issued by the Company in connection with Approved Issuances or upon
exercise or conversion of the Other Securities) for a consideration per share
less than the Market Price in effect immediately prior to such time (the
"APPLICABLE PRICE"), then immediately after such issue or sale the Warrant
Exercise Price shall be reduced to an amount equal to the product of (x) the
Warrant Exercise Price in effect immediately prior to such issue or sale and (y)
the quotient determined by dividing (1) the sum of (I) the product derived by
multiplying the Applicable Price by the number of shares of Common Stock Deemed
Outstanding immediately prior to such issue or sale, plus (II) the
consideration, if any, received by the Company upon such issue or sale, by (2)
the product derived by multiplying the (I) Applicable Price by (II) the number
of shares of Common Stock Deemed Outstanding immediately after such issue or
sale. Upon each such adjustment of the Warrant Exercise Price hereunder, the
number of shares of Common Stock acquirable upon exercise of this Warrant shall
be adjusted to the number of shares determined by multiplying the Warrant
Exercise Price in effect immediately prior to such adjustment by the number of
shares of Common Stock acquirable upon exercise of this Warrant immediately
prior to such adjustment and dividing the product thereof by the Warrant
Exercise Price resulting from such adjustment.
(b) Effect on Warrant Exercise Price of Certain Events. For
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purposes of determining the adjusted Warrant Exercise Price under Section 8(a)
above, the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants
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any rights or options to subscribe for or to purchase Common Stock (other than
in connection with an Approved Issuance or Other Securities) or any stock or
other securities convertible into or exchangeable for, directly or indirectly,
Common Stock (such rights or options being herein called "OPTIONS" and such
convertible or exchangeable stock or securities being herein called "CONVERTIBLE
SECURITIES") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Applicable Price, then the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of this Section 8(b)(i), the "price per share for which
Common Stock is issuable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities" is determined by dividing (A) the total
amount, if any, received or receivable by the Company as consideration for the
granting of such Options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such Options, plus
in the case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional
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<PAGE>
consideration, if any, payable to the Company upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by (B) the total
maximum number of shares of Common Stock issuable upon exercise of such Options
or upon the conversion or exchange of all such Convertible Securities issuable
upon the exercise of such Options. No adjustment of the Warrant Exercise Price
shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon such conversion or exchange is less than the
Applicable Price, then the maximum number of shares of Common Stock issuable
upon conversion or exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For the purposes of this Section 8(b)(ii), the "price per share for which
Common Stock is issuable upon such conversion or exchange" is determined by
dividing (A) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (B) the total maximum number
of shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No adjustment of the Warrant Exercise Price shall be
made upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the
Warrant Exercise Price had been or are to be made pursuant to other provisions
of this Section 8(b), no further adjustment of the Warrant Exercise Price shall
be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the
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purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock change at any time, the Warrant Exercise Price
in effect at the time of such change shall be readjusted to the Warrant Exercise
Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold and the number of shares of Common
Stock acquirable hereunder shall be correspondingly readjusted; provided that no
adjustment shall be made if such adjustment would result in an increase of the
Warrant Exercise Price then in effect.
(c) Treatment of Expired Options and Unexercised Convertible
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Securities. If, in any case, the total number of shares of Common Stock
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issuable upon the exercise of any Option or upon exercise, conversion or
exchange of any Convertible Security is not, in fact, issued and the rights to
exercise such Option or to exercise, convert or exchange such Convertible
Securities shall have expired or terminated, the Exercise Price then in effect
will be readjusted to the Exercise Price which would have been effect at the
time of such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately
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<PAGE>
prior to such expiration or termination (other than in respect of the actual
number of shares of Common Stock issued upon exercise or conversion thereof),
never been issued.
(d) Effect on Warrant Exercise Price of Certain Events. For purposes
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of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b),
the following shall be applicable:
(i) Calculation of Consideration Received. If any Common Stock,
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Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance or sale. In
case any Common Stock, Options or Convertible Securities are issued or sold for
a consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price (as defined in
the Statement of Determinations) of such securities on the date of receipt. In
case any Common Stock, Options or Convertible Securities are issued to the
owners of the non-surviving entity in connection with any merger in which the
Company is the surviving entity the amount of consideration therefor will be
deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration
other than cash or securities will be determined jointly by the Company and the
holders of Warrants representing a majority of the shares of Common Stock
issuable upon exercise of such Warrants then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable appraiser
selected by the Company. The determination of such appraiser shall be final and
binding upon all parties.
(ii) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $.01.
(iii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or for
the account of the Company, and the disposition of any shares so owned or held
will be considered an issue or sale of Common Stock.
(iv) Record Date. If the Company takes a record of the holders
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of Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been
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<PAGE>
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(e) Adjustment of Warrant Exercise Price upon Subdivision or
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Combination of Common Stock. If the Company at any time after the date of
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issuance of this Warrant 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 Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant 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 Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of shares
of Common Stock obtainable upon exercise of this Warrant will be proportionately
decreased.
(f) Reorganization, Reclassification, Consolidation, Merger or Sale.
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Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets to another Person (as
defined below) or other 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 is referred to herein as "ORGANIC CHANGE." Prior to the
consummation of any Organic Change, the Company will make appropriate provision
(in form and substance reasonably satisfactory to the holders of the Preferred
Share Warrants representing a majority of the shares of Common Stock issuable
upon exercise of such Preferred Share Warrants then outstanding) to insure that
each of the holders of the Preferred Share Warrants will thereafter have the
right to acquire and receive in lieu of or addition to (as the case may be) the
shares of Common Stock immediately theretofore acquirable and receivable upon
the exercise of such holder's Preferred Share Warrants, 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 exercise of such holder's Preferred Share Warrants had such
Organic Change not taken place. In any such case, the Company will make
appropriate provision (in form and substance reasonably satisfactory to the
holders of the Preferred Share Warrants representing a majority of the shares of
Common Stock issuable upon exercise of such Preferred Share Warrants then
outstanding) with respect to such holders' rights and interests to insure that
the provisions of this Section 8 and Section 9 below will thereafter be
applicable to the Preferred Share Warrants (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is other than the Company, an immediate adjustment of the Warrant Exercise Price
to the value for the Common Stock reflected by the terms of such consolidation,
merger or sale, and a corresponding immediate adjustment in the number of shares
of shares of Common Stock acquirable and receivable upon exercise of the
Preferred Share Warrants, if the value so reflected is less than the Warrant
Exercise Price in effect immediately prior to such consolidation, merger or
sale). 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 reasonably
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<PAGE>
satisfactory to the holders of Preferred Share Warrants representing a majority
of shares of Common Stock issuable upon exercise of the Preferred Share Warrants
then outstanding), the obligation to deliver to each holder of Preferred Share
Warrants such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire.
(g) Distribution of Assets. If the Company shall declare or make any
----------------------
distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, by way or return of capital or
otherwise (including any dividend or distribution to the Company's stockholders
of cash or shares (or rights to acquire shares) of capital stock of a
subsidiary) (a "DISTRIBUTION"), at any time after the issuance of this Warrant,
then the holder of this Warrant shall be entitled upon exercise of this Warrant
for the purchase of any or all of the shares of Common Stock subject hereto,
after the record date for determining shareholders entitled to receive such
Distribution, to receive the amount of such assets (or rights) which would have
been payable to the holder had such holder been the holder of such shares of
Common Stock on the record date for determination of stockholders entitled to
such Distribution.
(h) Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 8 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the Warrant
Exercise Price and the number of shares of Common Stock obtainable upon exercise
of this Warrant so as to protect the rights of the holders of the Preferred
Share Warrants; provided that no such adjustment will increase the Warrant
Exercise Price or decrease the number of shares of Common Stock obtainable as
otherwise determined pursuant to this Section 8.
(i) Notices.
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(i) Immediately upon any adjustment of the Warrant Exercise Price,
the Company will give written notice thereof to the holder of this Warrant,
setting forth in reasonable detail and certifying the calculation of such
adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least twenty (20) days prior to the date on which the Company closes
its books or takes a record (A) with respect to any dividend or distribution
upon the Common Stock, (B) with respect to any pro rata subscription offer to
holders of Common Stock or (C) for determining rights to vote with respect to
any Organic Change, dissolution or liquidation, except that in no event shall
such notice be provided to such holder prior to such information being made
known to the public.
(iii) The Company will also give written notice to the holder of
this Warrant at least twenty (20) days prior to the date on which any Organic
Change, dissolution or liquidation will take place.
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Section 9. Purchase Rights. In addition to any adjustments pursuant to
---------------
Section 8 above, if at any time after the date of this Warrant the Company
grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the "PURCHASE RIGHTS"), then the holder of
this Warrant will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete exercise of this Warrant immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such Purchase Rights.
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
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is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as the Warrant so lost, stolen, mutilated or destroyed.
Section 11. Notice. Any notices consents, waivers or other communications
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required or permitted to be given under the terms of this Warrant 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 days
after being sent by U.S. certified mail, 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:
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249-3341
Telephone: 210-263-2000
Facsimile: 210-263-2075
Attention: Chief Financial Officer
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Telephone: 210-270-0800
Facsimile: 210-224-2035
Attention: Matthew Bair, Esq.
If to a holder of this Warrant, to it at the address set forth below
such holder's signature on the signature page hereof.
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<PAGE>
Each party shall provide five (5) days' prior written notice to the other party
of any change in address or facsimile number.
Section 12. Miscellaneous. This Warrant and any term hereof may be
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changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought. The headings in this Warrant are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Warrant shall be governed by and interpreted under the
laws of the State of New York.
Section 13. Limitation on Number of Warrant Shares. The Company shall not
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be obligated to issue any Warrant Shares upon exercise of this Warrant if the
issuance of such shares of Common Stock would exceed that number of shares of
Common Stock which the Company may issue upon exercise of this Warrant (the
"EXCHANGE CAP") without breaching the Company's obligations under the rules or
regulations of The Nasdaq Stock Market, Inc., except that such limitation shall
not apply in the event that the Company (a) obtains the approval of its
stockholders as required by NASD Rule 4460 ( or any successor rule or
regulation) for issuances of Common Stock in excess of such amount or (ii)
obtains a written opinion from outside counsel to the Company that such approval
is not required, which opinion shall be reasonably satisfactory to the holders
of Warrants representing a majority of the Warrant Shares then issuable upon
exercise of outstanding Warrants. Until such approval or written opinion is
obtained, the holder of this Warrant shall not be issued, upon exercise of this
Warrant, Warrant Shares to the extent the number of shares of Common Stock
issued to such holder upon conversion of Preferred Shares plus the number of
Warrant Shares issued upon exercise of this Warrant would be greater than such
holder's Cap Allocation Amount (as defined in the Statement of Designations).
In the event the Company is prohibited from issuing Warrant Shares as a result
of the operation of this Section 13, the Company shall redeem for cash those
Warrant Shares which can not be issued at a price equal to the difference
between the Market Price and the Exercise Price of such Warrant Shares as of the
date of the attempted exercise.
Section 14. Date. The date of this Warrant is __________, 199__. This
----
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
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DATA RACE, INC.
By:______________________________
Name: __________________________
Title: __________________________
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EXHIBIT A TO WARRANT
--------------------
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
DATA RACE, INC.
The undersigned Holder hereby exercises the right to purchase _____________
of the shares of Common Stock ("Warrant Shares") of DATA RACE, INC. a Texas
corporation (the "Company"), evidenced by the attached Warrant (the "Warrant").
Capitalized terms used herein and not otherwise defined shall have the
respective meanings set forth in the Warrant.
1. Form of Exercise Price. The Holder intends that payment of the
Exercise Price shall be made as:
______________ a Cash Exercise with respect to_________________
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Warrant Shares; and/or
______________ a Cashless Exercise with respect to ____________
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Warrant Shares (to the extent permitted by the
terms of the Warrant).
2. Payment of Exercise Price. In the event that the Holder has elected a
Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, the Holder shall pay the sum of $___________________ to the
Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the Holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date:_______________________
____________________________
Name of Registered Holder
By: _______________________
Name:
Title:
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