<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 1996 0-20706
DATA RACE, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-2272363
(State of Incorporation) (I.R.S.Employer Identification No.)
12400 Network Boulevard
San Antonio, Texas 78249
Telephone (210) 263-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
On February 5, 1997, there were 4,922,344 outstanding shares of Common Stock, no
par value.
1
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DATA RACE, Inc.
INDEX TO FORM 10-Q
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Interim Financial Statements (Unaudited):
Balance Sheets as of December 31, 1996 and June 30, 1996...... 3
Statements of Operations for the Three Months and Six Months
Ended December 31, 1996 and 1995............................... 4
Statements of Cash Flows for the Six Months
Ended December 31, 1996 and 1995............................... 5
Notes to Interim Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.............................................. 12
Item 2. Changes in Securities.......................................... 12
Item 3. Defaults Upon Senior Securities................................ 12
Item 4. Submission of Matters to a Vote of Security Holders............ 12
Item 5. Other Information.............................................. 13
Item 6. Exhibits and Reports on Form 8-K............................... 14
SIGNATURES.............................................................. 16
- ----------
2
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
- -------------------------------------
DATA RACE, Inc.
BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
As of
---------------------------------
Dec. 31, 1996 June 30, 1996
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 2,727,216 $ 3,990,435
Accounts receivable, net................................................. 2,009,441 2,034,874
Inventory................................................................ 1,487,762 4,111,209
Prepaid expenses and deposits............................................ 22,889 46,906
----------------- --------------
Total current assets.................................................... 6,247,308 10,183,424
Property and equipment, net........................................................ 2,034,135 2,198,954
Other assets, net.................................................................. 41,246 112,392
----------------- --------------
Total assets............................................................ $ 8,322,689 $ 12,494,770
----------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 1,094,444 $ 2,400,507
Accrued expenses......................................................... 1,588,894 1,652,641
Other taxes payable...................................................... - 166,156
Other current liabilities................................................ 177,501 319,923
----------------- --------------
Total current liabilities............................................... 2,860,839 4,539,227
Commitments and contingencies......................................................
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized............................. - -
Common stock - no par value, 20,000,000 shares authorized,
4,828,162 and 4,746,192 shares issued and outstanding at
December 31, and June 30, 1996, respectively............................. 24,588,389 24,379,642
Retained earnings (deficit).............................................. (19,126,539) (16,424,099)
----------------- --------------
Total shareholders' equity.............................................. 5,461,850 7,955,543
----------------- --------------
Total liabilities and shareholders' equity............................. $ 8,322,689 $ 12,494,770
----------------- --------------
</TABLE>
See accompanying notes to financial statements
3
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DATA RACE, Inc.
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, Six Months Ended Dec. 31,
------------------------------ ----------------------------
1996 1995 1996 1995
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue.......................... $ 4,425,040 $ 6,579,615 $ 12,368,244 $ 12,152,234
Cost of revenue........................ 3,173,650 4,864,650 9,689,459 9,224,512
------------- ------------ ------------ ------------
Gross profit......................... 1,251,390 1,714,965 2,678,785 2,927,722
------------- ------------ ------------ ------------
Operating expenses:
Engineering and product development... 1,209,885 1,259,619 2,425,405 2,125,843
Sales and marketing................... 743,974 932,584 1,677,566 1,883,386
General and administration............ 646,400 686,575 1,349,697 1,328,886
------------- ------------ ------------ ------------
Total operating expenses............. 2,600,259 2,878,778 5,452,668 5,338,115
------------- ------------ ------------ ------------
Operating loss....................... (1,348,869) (1,163,813) (2,773,883) (2,410,393)
------------- ------------ ------------ ------------
Other income (expense):
Interest income....................... 24,308 79,918 56,252 179,319
Other................................. 3,418 - 15,191 -
------------- ------------ ------------- ------------
Total other income................... 27,726 79,918 71,443 179,319
------------- ------------ ------------- ------------
Income (loss) before income taxes...... (1,321,143) (1,083,895) (2,702,440) (2,231,074)
Income tax benefit..................... - - - -
------------- ------------ ------------- ------------
Net income (loss).................... $ (1,321,143) $ (1,083,895) $ (2,702,440) $ (2,231,074)
------------- ------------ ------------- ------------
Net income (loss) per share.......... $ (0.27) $ (0.23) $ (0.57) $ (0.48)
------------- ------------ ------------- ------------
Weighted average shares outstanding.... 4,806,000 4,671,000 4,780,000 4,666,000
------------- -------------- ------------ ------------
</TABLE>
See accompanying notes to financial statements
4
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DATA RACE, Inc.
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended Dec. 31,
------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (2,702,440) $ (2,231,074)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................ 351,691 849,916
Decrease in accounts receivable.............................................. 25,433 3,064,411
Decrease in inventory........................................................ 2,623,447 2,560,899
Decrease (increase) in prepaid expenses, deposits and
other assets................................................................ 95,163 (1,193,586)
Decrease in accounts payable................................................. (1,306,063) (1,506,878)
Increase (decrease) in accrued expenses...................................... (63,747) 555,468
Increase (decrease) in other current liabilities............................. (308,578) 1,349
-------------- -------------
Net cash provided by (used in) operating activities......................... (1,285,094) 2,100,505
-------------- -------------
Cash flows from investing activities:
Purchase of property and equipment........................................... (220,910) (325,374)
Proceeds from sale of property and equipment................................. 34,038 -
Expenditures for capitalized software........................................ - (20,000)
-------------- -------------
Net cash used in investing activities....................................... (186,872) (345,374)
-------------- -------------
Cash flows from financing activities:
Stock option transactions.................................................... 208,747 76,549
-------------- -------------
Net cash provided by financing activities................................... 208,747 76,549
-------------- -------------
Net increase (decrease) in cash and cash equivalents........................... (1,263,219) 1,831,680
Cash and cash equivalents at beginning of period............................... 3,990,435 6,092,382
-------------- -------------
Cash and cash equivalents at end of period..................................... $ 2,727,216 $ 7,924,062
-------------- -------------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
DATA RACE, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
1) Summary of Significant Accounting Policies
- ----------------------------------------------
Description of Business
DATA RACE, Inc. ("DATA RACE" or the "Company") designs, manufactures, and
markets a line of communication products that meet the need for "Remote Access
to the Corporate Environment." These products include modems for notebook
computers that support data and fax connections, as well as voice connections
through speakerphone and answering machine functions, sold primarily to
manufacturers of notebook computers. Also included is a line of network
multiplexers which carry terminal, LAN, voice, and fax traffic between a
company's branch and headquarters offices, over a broad range of wide area
communications speeds and services. These networking products are sold through
distributors, resellers, and systems integrators throughout the world. The
Company is also developing a line of products for the telecommuter market that
employ the Company's modem and multiplexer technologies to allow the
telecommuter access to the corporate LAN, intranet, voice, and fax services.
The products will provide the telecommuter with much of the functionality of
three dedicated phone lines - one each for voice, fax and data transmission -
over a single standard telephone connection.
Basis of Presentation
The unaudited interim financial statements reflect all adjustments (consisting
of normal recurring accruals) that in the opinion of management are necessary
for a fair presentation of the financial position, results of operations and
cash flows for such periods. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto included
in the Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and
the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. The
balance sheet data as of June 30, 1996 included herein has been derived from
such audited financial statements. Interim period results are not necessarily
indicative of the results to be expected for any future periods or the full
year.
Earnings (loss) per share are computed using the weighted average number of
common and common equivalent shares (when dilutive) outstanding during each
period. Common equivalent shares include stock options and warrants.
6
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2) Inventory
- -------------
Inventory is valued at the lower of standard cost (approximates first-in, first-
out) or market (net realizable value). Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------------ -------------
<S> <C> <C>
Finished goods $ 476,257 $ 366,824
Work in process 787,490 2,778,064
Raw materials 224,015 966,321
------------------ -------------
Total inventory $ 1,487,762 $ 4,111,209
================== =============
</TABLE>
3) Line of Credit
- ------------------
In December 1996, the Company obtained a $1,500,000 revolving line of credit
from a financial institution. The line of credit has a term of one year and an
interest rate of prime plus 1%. The line of credit is secured by a first lien
on the Company's assets. The Company is restricted from drawing on the line of
credit until the Company obtains the lender's consent to the limited redemption
rights of the convertible preferred stock. See note 5 for discussion of
convertible preferred stock.
4) Litigation
- --------------
On November 28, 1995, Guy and Carolyn Caspary and Tarik Hussain filed a class
action shareholder lawsuit against the Company and certain of its officers -
Herbert T. Hensley, former Chairman of the Board, W. B. Barker, President and
Chief Executive Officer, Gregory T. Skalla, Vice President-Finance and Chief
Financial Officer, and Leven E. Staples, former Vice President and Chief
Technical Officer. The lawsuit was filed in the United States District Court in
San Antonio, Texas. The plaintiffs allege that the defendants violated certain
provisions of the federal securities laws, including Rule 10b-5 under the
Securities Exchange Act of 1934. The plaintiffs claim that during a class period
of January 26, 1995 through October 13, 1995, the Company issued misleading and
incomplete information to the investing public for the purpose of raising the
price of the Company's stock, thereby permitting some of the defendants to
profit from this rise by selling their stock at artificially inflated prices.
The plaintiffs claim that public statements made during the class period touting
the growth of the Company's backlog were misleading because the Company did not
also disclose that orders included in its backlog were subject to cancellation
and that revenues were likely to be short lived due to the limited duration of
shipments under the contract. On December 15, 1995, a lawsuit was filed with
identical allegations by Sylvio L. Marcoccia, on behalf of himself and all
others similarly situated. On February 23, 1996, the Caspary and Marcoccia cases
were consolidated, and the case is now styled In re Data Race, Inc. Securities
--------------------------------
Litigation.
- ----------
7
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The defendants answered the lawsuit denying any liability to the plaintiffs and
filed a counterclaim (which was subsequently dismissed) for abuse of process and
conspiracy to abuse process. The parties unsuccessfully attempted to mediate the
case in August 1996. Class certification was granted in October 1996.
Discovery is in progress. The Company believes that the case is absolutely
without merit and is vigorously defending against the claims made in the
lawsuit. Although the Company does not believe it probable that the resolution
of the matter will have a material adverse effect on the Company's financial
condition or results of operations, the Company is unable to predict the costs
to be incurred to resolve the lawsuit. The Company is required under certain
circumstances to indemnify the named officers against losses incurred as a
result of lawsuits against the named officers.
There were no material developments in the shareholder lawsuit in the quarter
ended December 31, 1996.
5) Subsequent Events
- --------------------
Subsequent to December 31, 1996, the Company received $5,000,000 from the
issuance of convertible preferred stock and related warrants to purchase 45,800
shares of common stock at an exercise price of $16 3/8. At such time, the
investors agreed to purchase an additional $2,500,000 of convertible preferred
stock and warrants by October 31, 1997, subject to the Company's satisfaction of
certain conditions.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations
Total revenue in the second quarter of fiscal 1997 decreased 33% to $4,425,000
from $6,580,000 in the comparable quarter of the prior year, primarily due to
the inclusion in the prior-year's quarterly results of cancellation fees from a
custom modem contract with IBM. Revenue also decreased by 44% from $7,943,000
in the first quarter of fiscal year 1997 primarily due to decreased custom modem
shipments to NEC Technologies, Inc. (NEC) and Texas Instruments (TI) as these
custom modems approach the end of their anticipated market lives.
The Company's contract with NEC has been extended to cover a new custom modem
for another notebook computer model. In addition, the Company has a contract to
supply custom modems for another manufacturer's unannounced notebook computer.
However, shipments under these custom modem contracts are not expected to reach
the levels of recent shipments to NEC and TI.
Gross profit margins were 28% for the quarter ended December 31, 1996, up from
26% for the quarter ended December 31, 1995. The increase was primarily due to
the higher gross margins in the network multiplexer business, which represented
an increased proportion of the revenue in the second quarter of fiscal 1997.
Engineering and product development expenses decreased 4% to $1,210,000 from
$1,260,000 in the comparable quarter of the prior year. Year-to-date
engineering and product development expenses increased 14% to $2,425,000 from
$2,126,000 for the comparable six-month period of the prior year, due primarily
to increased development expenses for a new telecommuter line, which were
partially offset by reduction in network multiplexer development expenses.
Sales and marketing expenses decreased 20% during the second quarter of fiscal
1997 to $744,000 from $933,000 during the comparable quarter of the prior year.
Year-to-date sales and marketing expenses also decreased 11% to $1,678,000 from
$1,883,000 for the comparable six-month period of the prior year. These
decreases were primarily due to reductions in network multiplexer sales and
marketing expense, partially offset by increased sales and marketing expenses
for a new telecommuter line.
General and administrative expenses decreased 6% to $646,000 during the second
quarter of fiscal 1997 from $687,000 during the comparable quarter of the prior
year. Year-to-date general and administrative expenses were essentially
unchanged from the comparable six-month period of the prior year.
The Company has made significant progress preparing for the launch of the new
telecommuter product line. During the last several months the Company has
strengthened
9
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its development, sales, and marketing staff. Although the Company is several
weeks behind its planned schedule, the Company has been delivering trial systems
to potential customers and the product is working reliably. The product will be
available for shipment immediately after it is formally launched February 10
through 12 at Demo '97, the leading computer industry conference focused
exclusively on emerging technologies. The Company plans to develop further
enhancements to the product's feature set and voice quality. The Company has yet
to receive orders or recognize revenue from the new telecommuter product line,
although it is optimistic that some of the trials can be converted to sales.
As is always the case with new product development efforts, there are numerous
risks associated with the development and launch of the Company's telecommuter
product line. In particular, market acceptance of the product concept,
alternative product offerings by others, and the Company's inability to deliver
product performance, including voice quality, sufficient to meet customers'
requirements, all could affect the timing and levels of revenue and profit from
the telecommuter products.
Liquidity and Capital Resources
During the first six months of fiscal 1997, the Company financed its operations
by drawing on available cash and cash equivalents. At December 31, 1996, the
Company had $2,727,000 in cash and cash equivalents. During the second quarter
of fiscal 1997 there were no significant cash inflows from investing or
financing activities. Expenditures for capital equipment for the first six
months of fiscal 1997 were $221,000.
In December 1996, the Company obtained a $1,500,000 revolving line of credit
from a financial institution. The line of credit has a term of one year and an
interest rate of prime plus 1%. The line of credit is secured by a first lien
on the Company's assets. The Company is prohibited from taking certain actions,
including paying dividends, without the lender's consent. In addition, the
Company is restricted from drawing on the line of credit until the Company
obtains the lender's consent to the limited redemption rights of the convertible
preferred stock.
In January 1997, the Company received $5,000,000 from the issuance of
convertible preferred stock and related warrants to purchase 45,800 shares of
common stock at an exercise price of $16 3/8. At such time, the investors
agreed to purchase an additional $2,500,000 of convertible preferred stock and
warrants by October 31, 1997, subject to the Company's satisfaction of certain
conditions. The convertible preferred stock is redeemable under certain
circumstances. See Item 5 for a more complete description of the terms of the
transaction.
During the fourth quarter of fiscal 1996, and continuing in the first and second
quarters of fiscal 1997, the Company took steps to reduce expenses and the
resulting drain on cash. However, operating losses continue to have a negative
impact on the Company's cash balance. As long as shipments of custom modem
products to OEMs dominate the
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Company's revenue, the Company expects to continue to have fluctuations in
reported revenue and resulting swings between profit and loss from the custom
modem products. In addition, as long as the Company continues to spend
significant resources on the new product line in advance of proportional
revenue, these expenditures will be a continuing drain on the Company's ability
to generate a profit.
The Company believes it has access to adequate funds to meet its current
operating obligations. However, the ability to make future capital expenditures
and fund the development and launch of new products, including the new
telecommuter line, are dependent on existing cash and some or all of the
following: demands on cash to support inventory for the custom modem business,
demands on cash arising from the redemption (if required) of the convertible
preferred stock, favorable settlement of the shareholder lawsuit, and the
Company's return to profitability. There can be no assurance that these factors
affecting cash will be resolved in a manner favorable to the Company.
Disclosure Regarding Forward Looking Statements
Except for the historical information, this report contains various
"forward-looking statements" which represent the Company's expectations or
beliefs concerning future events, including the market lives of notebook
computers and the timing and levels of revenue from custom modem contracts, the
Company's ability to further develop its telecommuter products on a timely
basis, customer acceptance of such products, and the timing and levels of
revenue and profit from such products. The Company cautions that these forward-
looking statements involve a number of risks and uncertainties and are qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include changing market
trends and market needs; uncertainty regarding the breadth of market acceptance
of the telecommuter products' performance; inability to resolve technical issues
or overcome other development obstacles with the telecommuter products;
insufficient capital; rapid or unexpected technological changes; new or
increased competition from companies with greater resources than the Company;
and certain other factors set forth in the Company's prior SEC filings,
including the Form 10-K for fiscal 1996. The Company's failure to succeed in its
efforts, including the successful release of its telecommuter products, could
have a material adverse effect on the Company's financial condition and
operations.
11
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PART II - OTHER INFORMATION
DATA RACE, Inc.
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
Reference is made to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, for information regarding a shareholder lawsuit
against the Company. There were no material developments in the shareholder
lawsuit during the quarter ended December 31, 1996.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
An annual meeting of shareholders of the Company was held on December 6, 1996.
Dr. W. B. Barker, Jeffery P. Blanchard, Matthew A. Kenny, George R. Grumbles,
and Marcelo A. Gumucio were elected as directors of the Company, each to hold
office until the next annual meeting of shareholders or until his successor has
been elected and qualified, subject to earlier resignation and removal.
Additionally, the shareholders approved the amendments to the DATA RACE, Inc.
Employee Stock Purchase Plan and ratified the appointment of KPMG Peat Marwick
LLP as independent accountants for the 1997 fiscal year.
The results of the voting at the annual meeting of the shareholders were as
follows:
Proposal No. 1
(Election of Directors)
<TABLE>
<CAPTION>
Nominee For Withheld Non- Votes
- ------- --- -------- ----------
<S> <C> <C> <C>
Dr. W. B. Barker 4,082,386 39,448 -
Jeffery P. Blanchard 4,077,696 44,138 -
Matthew A. Kenny 4,077,616 44,218 -
George R. Grumbles 4,084,116 37,718 -
Marcelo A. Gumucio 4,082,316 39,518 -
</TABLE>
12
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Proposal No. 2
(Approval of amendments to the Employee Stock Purchase Plan)
<TABLE>
<CAPTION>
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
3,843,658 162,046 21,380 94,750
</TABLE>
Proposal No. 3
(Ratification of KPMG Peat Marwick LLP as independent accountants)
<TABLE>
<CAPTION>
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
4,104,917 10,765 6,152 -
</TABLE>
ITEM 5. OTHER INFORMATION
- --------------------------
On January 10, 1997, the Company completed the first closing of a private
placement of its 1997 Series A Convertible Preferred Stock ("Preferred Stock")
and Stock Purchase Warrants ("Warrants") with Credit Suisse First Boston
Corporation, Capital Ventures International and Zanett Lombardier, Ltd. (the
"Investors"), at an aggregate price of $5,000,000. At such time, the Investors
agreed to purchase at a second closing, on or before October 31, 1997,
additional shares of Preferred Stock and Warrants at an aggregate price of
$2,500,000, subject to reduction to the extent that the total number of shares
of Common Stock underlying the Preferred Stock and Warrants issued at the first
closing and issuable at the second closing exceeds 15% of the outstanding shares
of Common Stock on January 10, 1997 (i.e., 724,219 shares). The second closing
is subject to certain conditions, including the collection by the Company of at
least $2 million by October 15, 1997, on account of revenues from its
telecommuter products. The Company intends to use the proceeds from the sale of
the Preferred Stock and Warrants for the development and launch of new products,
including the Company's telecommuter products, and for working capital.
The Preferred Stock bears no dividends, is non-voting except in limited
circumstances, has senior rights in liquidation, and is redeemable at the option
of the holders in limited circumstances upon the Company's breach of certain
covenants imposed by the Preferred Stock. The Preferred Stock is convertible
into Common Stock at the option of each holder beginning April 10, 1997, at a
discount from the then-prevailing average market price (as defined in the
Statement of Designations) of the Common Stock equal initially to 15%,
increasing on July 9, 1997 to 20%, and increasing on January 5, 1998, to the
lower of 25% or the average market price (as defined in the Statement of
Designations) of the Common Stock on the first anniversary of the first closing.
Upon conversions after the first anniversary, in certain circumstances the
holders will receive a premium on the Preferred Stock converted, payable in cash
or stock at the Company's option, equal to 1% per annum based on the number of
days elapsed since the first closing. Any Preferred Stock outstanding on January
10, 1999, will convert automatically into Common Stock. Pursuant to regulations
of the National Association of Securities Dealers, in the absence of shareholder
approval, the aggregate number of shares of Common Stock issuable upon
13
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conversion of the Preferred Stock and exercise of the Warrants may not exceed
19.99% of the outstanding shares of Common Stock on January 10, 1997 (i.e.,
965,925 shares); any Preferred Stock which may not be converted because of such
limitation must be redeemed by the Company.
The Warrants issued at the first closing are exercisable for an aggregate of
45,800 shares of Common Stock at a price of $16 3/8 per share through the third
anniversary of the date of issuance. The Warrants to be issued at the second
closing are exercisable for an aggregate of 22,900 shares of Common Stock on
substantially the same terms. The Warrants become exercisable in two equal
installments on July 10, 1997, and October 10, 1997, but only in the same
proportion which the number of shares of Preferred Stock then outstanding bears
to the number of shares of Preferred Stock initially issued.
The Company agreed to file a registration statement with respect to the shares
of Common Stock underlying the Preferred Stock and Warrants on or before
February 28, 1997, and to use its best efforts to cause such registration
statement to become effective on or before April 30, 1997.
The private placement was arranged by Zanett Securities, Inc. ("Zanett"), which
received a fee equal to 6% of the aggregate gross proceeds received by the
Company from the sale of the Preferred Stock and Warrants. Additionally,
pursuant to a separate consulting arrangement, the Company issued Warrants to
purchase 6,106 shares of Common Stock to a principal of Zanett. The Company
agreed to indemnify Zanett against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act").
The offer and sale of the Preferred Stock and Warrants were, and, in connection
with the second closing, will be, made in reliance upon Section 4(2) of the
Securities Act, the non-public offering exemption from the registration
requirements of the Securities Act.
Reference is made to the exhibits to this report for a more complete description
of the terms of the Preferred Stock and Warrants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits.
- --------------
3.7 Statement of Designations, Preferences and Rights of 1997 Series A
Convertible Preferred Stock, filed January 10, 1997.
3.8 Amendments to Bylaws of the Company.
10.24 Security and Loan Agreement, dated November 12, 1996, between the
Company and Imperial Bank.
10.25 General Security Agreement, dated November 12, 1996, between the
Company and Imperial Bank.
14
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10.26 Credit Terms and Conditions, dated November 12, 1996, between the
Company and Imperial Bank.
10.27 Securities Purchase Agreement, dated January 10, 1997, between the
Company, Capital Ventures International, Credit Suisse First Boston
Corporation, and Zanett Lombardier, Ltd.
10.28 Registration Rights Agreement, dated January 10, 1997, between the
Company, Capital Ventures International, Credit Suisse First Boston
Corporation, and Zanett Lombardier, Ltd.
10.29 Form of Stock Purchase Warrant issued on January 10, 1997, representing a
series of warrants issued by the Company to Capital Ventures
International, Credit Suisse First Boston Corporation, and Zanett
Lombardier, Ltd.
(b) Reports on Form 8-K.
- -------------------------
No reports on Form 8-K were filed during the quarter.
15
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DATA RACE, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
----------------------
Gregory T. Skalla, Vice President, Finance
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Date: February 10, 1997
16
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EXHIBIT 3.7
-----------
STATEMENT OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
1997 SERIES A CONVERTIBLE 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 "CORPORATION"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Corporation
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 Corporation (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 Corporation'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:
1997 Series A Convertible Preferred Stock:
I. Designation and Amount
----------------------
The designation of this series, which consists of 7,500 shares of Preferred
Stock, is the 1997 Series A Convertible Preferred Stock (the "SERIES A PREFERRED
STOCK") and the stated value shall be One Thousand Dollars ($1,000.00) per share
(the "STATED VALUE").
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II. Rank
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All shares of the Series A Preferred Stock shall rank (i) prior to the
Corporation's Common Stock, no par value (the "COMMON STOCK"); (ii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series A Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series A
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Preferred Stock) (collectively, with the Common Stock, "JUNIOR SECURITIES");
(iii) pari passu with any class or series of capital stock of the Corporation
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hereafter created (with the consent of the holders of Series A Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, on parity with the Series A Preferred Stock (the "PARI PASSU
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SECURITIES"); and (iv) junior to any class or series of capital stock of the
Corporation hereafter created (with the consent of the holders of Series A
Preferred Stock obtained in accordance with Article IX hereof) specifically
ranking, by its terms, senior to the Series A Preferred Stock (the "SENIOR
SECURITIES"), in each case as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
III. No Dividends
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The Series A Preferred Stock will bear no dividends, and the holders
of the Series A Preferred Stock shall not be entitled to receive dividends on
the Series A Preferred Stock.
IV. Liquidation Preference
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A. If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or State bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of sixty (60) consecutive days and, on account of any such event (a
"LIQUIDATION EVENT"), the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up, no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto the holders of shares of Series A Preferred
Stock shall have received the Liquidation Preference (as defined in Article
IV.C) with respect to each share. If upon the occurrence of a Liquidation
Event, the assets and funds available for distribution
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among the holders of the Series A Preferred Stock and holders of Pari Passu
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Securities shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series A Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares
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in proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate Liquidation Preference payable on all such shares.
B. At the option of each holder of Series A Preferred Stock, the
sale, conveyance or disposition of all or substantially all of the assets of the
Corporation, the effectuation by the Corporation of a transaction or series of
related transactions in which more than 50% of the voting power of the
Corporation is disposed of, or the consolidation, merger or other business
combination of the Corporation with or into any other Person (as defined below)
or Persons when the holders of the Company's voting stock immediately prior to
such consolidation, merger or business combination do not own at least at least
fifty percent (50%) of the voting power of the entity surviving such
consolidation, merger or business combination shall either: (i) be deemed to be
a liquidation, dissolution or winding up of the Corporation for purposes of this
Article IV; or (ii) be treated pursuant to Article VI.C hereof. "PERSON" shall
mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.
C. For purposes hereof, the "LIQUIDATION PREFERENCE" with respect to
a share of the Series A Preferred Stock shall mean the Stated Value thereof
divided by the Applicable Percentage (as defined in Article VI.B.) in effect on
the date of final distribution to the holder thereof, or with respect to any
deemed liquidation, dissolution or winding up of the Corporation pursuant to
Article IV.B, on the date of the applicable event. The Liquidation Preference
with respect to any Pari Passu Securities shall be as set forth in the
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Certificate of Designation filed in respect thereof.
V. Cash Redemption of Premium Amount; Redemption of Series A Preferred Stock
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A. The Corporation shall have the right, in its sole discretion,
upon receipt of a Notice of Conversion pursuant to Article VI.D, to redeem all
or any portion of the Premium Amount (as defined in Article VI.A below) subject
to such conversion for a sum of cash equal to the amount of the Premium Amount
being so redeemed; provided, however, that upon receipt of a Notice of
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Conversion, the Corporation shall notify such holder, on or before the second
(2nd) business day following the Corporation's receipt of such Notice of
Conversion, as to whether it will elect to redeem such Premium Amount in cash.
All cash redemption payments hereunder shall be paid in lawful money of the
United States of America at such address for the holder as appears on the record
books of the Corporation (or at such other address as such holder shall
hereafter give to the Corporation by written notice). In the event the
Corporation elects, pursuant to this Article V.A, to redeem all or any portion
of the Premium Amount in cash and fails to pay such holder the applicable
redemption amount to which such holder is entitled by delivering payment to such
holder within six (6) business days of receipt by the Corporation of the Notice
of Conversion, the Corporation shall
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forfeit its right to redeem in cash such Premium Amount and 110% of such Premium
Amount shall be converted into shares of Common Stock in accordance with Article
VI hereof.
B. In the event (i) the Common Stock (including the shares of Common
Stock issuable hereunder) is suspended from trading on any of, or is not listed
for trading on at least one of, the New York Stock Exchange, the American Stock
Exchange, or the Nasdaq National Market for a period of ten (10) Trading Days
(as defined below) in any nine (9) month period, (ii) the Registration Statement
required to be filed by the Corporation pursuant to Section 2(a) of the
Registration Rights Agreement (as defined below) has not been declared effective
by August 31, 1997 or such Registration Statement, after being so declared
effective, cannot be utilized by the holders of Series A Preferred Stock for the
resale of their Registrable Securities (as defined in the Registration Rights
Agreement) for more than thirty (30) days, (iii) the Corporation breaches the
covenant set forth in Section 4(k) of the Securities Purchase Agreement (as
defined below), or (iv) the Corporation fails (a) for any reason (other than by
operation of Article VI.A.(ii)(c)) to issue shares of Common Stock within seven
(7) business days after the later of the Conversion Date (as defined below) and
the delivery by the holder of the Preferred Stock Certificates (as defined
below) and any agreement and indemnity required by Article VI.D(b) (or makes an
announcement that it will not issue shares of Common Stock) to any holder of
Series A Preferred Stock upon exercise by a holder of its conversion rights in
accordance with the terms of this Certificate of Designation, (b) to transfer
any certificate for shares of Common Stock issued to the holders upon conversion
of the Series A Preferred Stock as and when required by this Certificate of
Designation, the Securities Purchase Agreement or the Registration Rights
Agreement, dated as of January 10, 1997, by and among the Corporation and the
other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT") or (c) to remove
any restrictive legend on any certificate or any shares of Common Stock issued
to the holders of Series A Preferred Stock upon conversion of the Series A
Preferred Stock as and when required by this Certificate of Designation, the
Securities Purchase Agreement, dated as of January 10, 1997, by and between the
Corporation and the other signatories thereto with respect to the original
issuance of the Series A Preferred Stock (the "SECURITIES PURCHASE AGREEMENT")
or the Registration Rights Agreement and, in the case of any of the events
described in clause (iv) (other than an announcement by the Corporation that it
will not issue shares of Common Stock pursuant to a conversion of Series A
Preferred Stock for which there shall be no cure period and for which the
Optional Redemption Event shall occur immediately), any such failure shall
continue uncured for seven (7) business days after the Corporation shall have
been notified thereof in writing by the holder (or, with respect to a failure
described in clause (iv)(a) above which is solely as a result of the
circumstances governed by the second paragraph of Article VI.E. below and the
Corporation is using all commercially reasonable efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable, such failure
continues for a period of at least sixty (60) days (each of the events described
in clauses (i), (ii), (iii) and (iv) above after expiration of the applicable
cure period (if any) being an "OPTIONAL REDEMPTION EVENT"); then, upon the
occurrence and during the continuation of any Optional Redemption Event, at the
option of each holder of shares of Series A Preferred Stock by written notice
(the "OPTIONAL REDEMPTION NOTICE") to the Corporation of such Optional
Redemption Event, the Corporation shall purchase for cash all of the then
outstanding shares of Series A Preferred Stock held by such holder for an amount
per share (the "OPTIONAL REDEMPTION
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AMOUNT") equal to the Redemption Price in effect at the time of the redemption
hereunder. The "REDEMPTION PRICE" with respect to each share of Series A
Preferred Stock shall mean an amount equal to the Stated Value thereof divided
by the Applicable Percentage in effect on the effective date of the redemption
hereunder. Each holder's right to receive the Optional Redemption Amount under
this Article V.B shall be in addition to such holder's right to receive the
Conversion Default Payments pursuant to Article VI.E through the date of
redemption hereunder.
If the Corporation fails to pay the Optional Redemption Amount
for each share within five (5) business days of its receipt of an Optional
Redemption Notice, then the holder of Series A Preferred Stock delivering such
Optional Redemption Notice (i) shall be entitled to interest thereon at a rate
per annum equal to the lower of twenty-four percent (24%) and the highest rate
permitted by applicable law until the date of redemption hereunder, and (ii)
shall have the right at any time, so long as the Optional Redemption Event
continues, to require the Corporation, upon written notice, to immediately issue
(in accordance with the terms of Article VI below), in lieu of the Optional
Redemption Amount, with respect to each outstanding share of Series A Preferred
Stock held by such holder, the number of shares of Common Stock of the
Corporation equal to the Stated Value thereof, plus interest as aforesaid,
divided by the Conversion Price then in effect.
C. In the event the Corporation is prohibited from issuing shares of
Common Stock to any holder of Series A Preferred Stock upon exercise by a holder
of its conversion rights in accordance with the terms of this Certificate of
Designation by operation of Article VI.A.(ii)(c), the Corporation shall purchase
for cash those shares of Series A Preferred Stock which cannot be converted for
an amount per share (the "MANDATORY REDEMPTION AMOUNT") equal to (i) the
aggregate Stated Value of such shares of Series A Preferred Stock divided by
(ii) the Applicable Percentage in effect at the time of the attempted
conversion.
If the Corporation fails to pay the Mandatory Redemption Amount
for any share of Series A Preferred Stock within five (5) business days after
its receipt of the Notice of Conversion which results in such Mandatory
Redemption Amount becoming due and payable (the "MANDATORY REDEMPTION NOTICE
DATE"), then the holder entitled to such Mandatory Redemption Amount shall be
entitled to interest thereon at a rate per annum equal to the lower of twenty-
four percent (24%) and the highest rate permitted by applicable law until the
earlier of the date of redemption or conversion hereunder. If the Corporation
fails to pay the Mandatory Redemption Amount, plus all accrued interest thereon,
within fourteen (14) business days after the Mandatory Redemption Notice Date,
the Corporation shall, as soon as practicable thereafter, use its best efforts
to obtain the approval of its shareholders to issue Additional Shares above the
Cap Amount (as such terms are defined in Article VII.A.(ii)(c)) so that such
Additional Shares may be issued without violating Rule 4460(i) promulgated by
the National Association of Securities Dealers (or any successor rule or
regulation) ("NASD RULE 4460(I)") and, if such approval is not so obtained
within ninety (90) days after the Mandatory Redemption Notice Date and holders
of at least fifty (50%) percent of the outstanding Series A Preferred Stock so
request in a writing delivered to the Corporation, voluntarily terminate the
listing of its Common Stock on the Nasdaq National Market and cause its Common
Stock (including the shares of Common Stock issuable upon conversion or
otherwise with respect to the Series A Preferred Stock) to be eligible for
trading on the NASDAQ
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Small Cap Stock Market, or if the Nasdaq Small Cap Stock Market has a rule or
regulation which prohibits the issuance of the Additional Shares (e.g., a rule
similar to NASD Rule 4460(i)), on the OTC Bulletin Board. Upon the Corporation
becoming eligible to issue the Additional Shares as a result of its receipt of
shareholder approval as described above or the Corporation's Common Stock
(including the Additional Shares) becoming eligible for trading on the NASDAQ
Small Cap Stock Market or the OTC Bulletin Board, as applicable, each holder of
Series A Preferred Stock may, at any time prior to the Corporation's payment of
the Mandatory Redemption Amount and all accrued interest thereon, convert the
Mandatory Redemption Amount and all interest thereon into Common Stock based on
the lower of the Conversion Price in effect on the initial Conversion Date with
respect to such Series A Preferred Stock and the Conversion Price in effect at
the time of the conversion hereunder. For the avoidance of doubt, no actions
taken by the Corporation pursuant to this paragraph shall affect a holder's
right to require the Corporation to redeem such holders shares of Series A
Preferred Stock pursuant to this Article V.
D. Nothing in this Article V shall limit the holder's right to
pursue all other remedies available to such holder against the Corporation, at
law or in equity (including a decree of specific performance and/or other
injunctive relief).
VI. Conversion at the Option of the Holder
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A. (i) Subject to the limitations contained in Article VI.A (ii),
each holder of shares of Series A Preferred Stock may, at its option at any time
and from time to time on or after that date which is ninety (90) days after the
First Closing (as defined in the Securities Purchase Agreement), upon surrender
of the certificates therefor, convert any or all of its shares of Series A
Preferred Stock into shares of Common Stock as follows (an "OPTIONAL
CONVERSION"): (a) on or before the first anniversary of the First Closing, each
share of Series A Preferred Stock shall be convertible into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing (x)
the Stated Value thereof by (y) the then effective Conversion Price (as defined
below), and (b) after the first anniversary of the First Closing, each share of
Series A Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing (x) the sum of
(I) the Stated Value thereof, plus (II) in the event the Conversion Price is the
Maximum Conversion Price (as defined below) and unless the Corporation has
timely redeemed such Premium Amount in cash in accordance with Article V.A, the
product of the Stated Value, multiplied by .01, multiplied by a fraction, the
numerator of which is "N" and the denominator of which is 365 (where "N" equals
the number of days elapsed from the First Closing to and including the
Conversion Date (as defined below)) (the "PREMIUM AMOUNT") by (y) the then
effective Conversion Price; provided, however, that, except in the case of a
Mandatory Conversion pursuant to Article VII (in which case the remaining
provisions of this Article VI.A.(i) shall be inapplicable), in no event shall a
holder of shares of Series A Preferred Stock be entitled to convert any such
shares in excess of that number of shares upon conversion of which the sum of
(x) the number of shares of Common Stock beneficially owned by the holder and
its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the
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unconverted portion of the shares of Series A Preferred Stock or the unexercised
or unconverted portion of any other securities of the Corporation (including,
without limitation, the Warrants issued pursuant to the Securities Purchase
Agreement (the "WARRANTS")) subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (y) the number of shares of
Common Stock issuable upon the conversion of the shares of Series A Preferred
Stock with respect to which the determination of this proviso is being made
would result in beneficial ownership by the holder and its affiliates of more
than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso
contained in the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (x) of such proviso. The restriction contained in the proviso of this
Article V.A shall not be altered, amended, deleted or changed in any manner
whatsoever unless the holders of a majority of the Common Stock, voting as a
separate class, and each holder of Series A Preferred Stock shall approve such
alteration, amendment, deletion or change.
(ii) Conversion of shares of Series A Preferred Stock shall be
subject to the following limitations (each of which limitations shall be applied
independently and shall be cumulative):
(a) On or before the first anniversary of the First Closing,
unless the Corporation otherwise agrees in writing, a holder of Series A
Preferred Stock may not deliver a Notice of Conversion to the Corporation to
convert any share of Series A Preferred Stock to the extent that the Stated
Value of such share of Series A Preferred Stock together with the aggregate
Stated Value of all shares of Series A Preferred Stock converted into Common
Stock by such holder (I) during the thirty (30) calendar day period ending on
the Conversion Date (as defined below) with respect to the share of Series A
Preferred Stock as to which the determination hereunder is being made exceeds
the product of (y) forty percent (40%) multiplied by (z) the difference between
the aggregate Stated Value of all Series A Preferred Stock held at any time by
such holder (whether or not such shares have been converted into Common Stock)
less the aggregate Stated Value of all Series A Preferred Stock sold or
otherwise transferred by such holder prior to conversion and (II) during the
ninety (90) calendar day period ending on the Conversion Date with respect to
the share of Series A Preferred Stock as to which the determination hereunder is
being made exceeds the product of (y) seventy-five percent (75%) multiplied by
(z) the difference between the aggregate Stated Value of all Series A Preferred
Stock held at any time by such holder (whether or not such shares have been
converted into Common Stock) less the aggregate Stated Value of all Series A
Preferred Stock sold or otherwise transferred by such holder prior to
conversion;
(b) On any date (an "ELIGIBLE RESTRICTION DATE") on which
the Trading Quotient (as defined below) is less than eighty percent (80%), the
Corporation shall have the option, exercisable one time in any 180 day period by
written notice (a "RESTRICTION NOTICE") delivered to the Transfer Agent and each
holder of Series A Preferred Stock by reputable overnight courier at least one
(1) Trading Day prior to the commencement of the Restricted Period set forth in
the Restriction Notice, to prevent the conversion of any shares of Series A
Preferred Stock for a
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period of up to ten (10) consecutive Trading Days beginning on the first (1st)
Trading Day following the Eligible Restriction Date (the "RESTRICTED PERIOD").
Each Restriction Notice shall specify the Restricted Period and the Eligible
Restriction Date and provide a detailed calculation of the basis upon which the
Corporation may issue such Restriction Notice. "TRADING QUOTIENT" for any day
shall mean the quotient obtained by dividing (I) the average of the Closing Bid
Prices (as defined in Article VI.B.) for the Common Stock for the five (5)
consecutive Trading Days ending one Trading Day prior to the date on which the
determination is being made hereunder by (II) the average of the Closing Bid
Prices for the Common Stock for the ten (10) consecutive Trading Days ending one
Trading Day prior to the date on which the determination is being made
hereunder. Notwithstanding anything herein to the contrary, a holder may convert
Series A Preferred Stock during a Restricted Period to the extent necessary to
obtain a sufficient number of shares of Common Stock to cover any sales
transaction effectuated by such holder prior to the commencement of the
Restricted Period.
(c) Except as provided in Article V.C., in no event shall
the aggregate number of shares of Common Stock issued upon conversion or
otherwise with respect to any share of Series A Preferred Stock, together with
the aggregate number of shares of Common Stock issued upon exercise of any
warrants issued by the Corporation pursuant to the Securities Purchase Agreement
(the "WARRANTS"), exceed 965,625, subject to equitable adjustments from time to
time for the events described in Article VI.C.(a) (the "CAP AMOUNT"), unless,
prior to any issuance of shares of Common Stock which causes the Cap Amount to
be reached, (i) the Corporation shall have obtained the approval of its
shareholders for issuance in excess of such amount (the "ADDITIONAL SHARES") and
such approval is sufficient to satisfy any requirements imposed by NASD Rule
4460(i) and (ii) the resale of the Additional Shares by the holders of the
Series A Preferred Stock shall have been registered under the Securities Act of
1933, as amended (the "SECURITIES ACT"), pursuant to an effective registration
statement. Until such shareholder approval of the Additional Shares and
registration thereof shall have been effected, no Initial Investor (as defined
in the Registration Rights Agreement) shall be issued upon conversion or
exercise or otherwise with respect to shares of Series A Preferred Stock or the
Warrants, in the aggregate, more than that number of shares of Common Stock
equal to product of the Cap Amount multiplied by a fraction, the numerator of
which is the number of shares of Series A Preferred Stock issued to such Initial
Investor at the First Closing and the denominator of which is the aggregate
number of shares of Series A Preferred Stock issued at the First Closing (the
"ALLOCATION AMOUNT"). In the event any Initial Investor shall sell or otherwise
transfer any of such Initial Investor's shares of Series A Preferred Stock, each
such transferee shall be allocated a pro rata portion of the transferor Initial
Investor's Allocation Amount. In the event any holder shall convert all of such
holder's shares of Series A Preferred Stock and exercise all of such holder's
Warrants into a number of shares of Common Stock which, in the aggregate, is
less than such holder's Allocation Amount, then the difference between such
holder's Allocation Amount and the number of shares of Common Stock actually
issued to such holder shall be allocated to the respective Allocation Amounts of
the remaining holders of shares of Series A Preferred Stock, pro rata based on
the number of shares of Series A Preferred Stock then held by each such holder.
In the event the Corporation is prohibited from issuing shares of Common Stock
as a result of the operation of this Article VI.A. (ii)(c), the Corporation
shall redeem for cash those shares of Series A Preferred Stock which cannot be
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converted or otherwise issued in accordance with Article V.C. (and take such
other action as may be required by Article V.C.).
Notwithstanding the foregoing, at any time after the delivery to the
Corporation of an Optional Redemption Notice pursuant to Article V.B hereof, the
restrictions contained in subsections (a) and (b) of this Article VI.A(ii) shall
not be applicable and the holder may convert the Series A Preferred Stock
without restriction.
B. The "CONVERSION PRICE" with respect to any conversion of Series A
Preferred Stock having a Conversion Date prior to the first anniversary of the
First Closing shall be the Applicable Percentage (as hereinafter defined) of the
average of the closing bid prices for the Common Stock as reported by the Nasdaq
National Market, or on the principal securities market on which the Common Stock
is then being traded (the "CLOSING BID PRICE"), for the Trading Day Period (as
defined below) ending one Trading Day prior to the Conversion Date (the
"DISCOUNTED CONVERSION PRICE"), and the "CONVERSION PRICE" with respect to any
conversion of Series A Preferred Stock having a Conversion Date on or after the
first anniversary of the First Closing shall be the lesser of (i) the Discounted
Conversion Price and (ii) the average of the Closing Bid Prices for the Common
Stock for all of the Trading Days during the thirty (30) calendar days ending on
the calendar day immediately preceding the first anniversary of the First
Closing (the "MAXIMUM CONVERSION PRICE") (subject to equitable adjustments from
time to time pursuant to the antidilution provisions of Article VI.C below).
"TRADING DAY" shall mean any day on which the Common Stock is traded for any
period on the Nasdaq National Market or on the principal securities exchange or
other securities market on which the Common Stock is then being traded. The
"APPLICABLE PERCENTAGE" shall be determined in accordance with the following
schedule:
<TABLE>
<CAPTION>
Number of Days After First Closing Applicable Percentage
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<S> <C>
0 X less than 90 100%
90 less than or X less than 180 85%
equal to
180 less than or X less than 360 80%
equal to
360 less than or X 75%
equal to
</TABLE>
Where X represents the Conversion Date.
"TRADING DAY PERIOD" shall mean ten (10) consecutive Trading Days; provided,
however, that the Trading Day Period for purposes of determining any Conversion
Price on a Conversion Date occurring during any thirty (30) calendar day period
immediately following a thirty (30) calendar day period in which the Trading
Quotient for each day in such period is less than 1.00 shall be either five (5)
or ten (10) consecutive Trading Days, whichever generates the lower Conversion
Price.
C. The Conversion Price shall be subject to adjustment from time to
time as follows:
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(a) Adjustment to Maximum Conversion Price Due to Stock Split,
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Stock Dividend, Etc. If at any time on or after the first anniversary of the
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First Closing when any Series A Preferred Stock is issued and outstanding, the
number of outstanding shares of Common Stock is increased by a stock split,
stock dividend, combination, reclassification or other similar event, the
Maximum Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a reverse stock split,
combination or reclassification of shares, or other similar event, the Maximum
Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof.
(b) Adjustment to Conversion Price. If at any time when any
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Series A Preferred Stock is issued and outstanding, the number of outstanding
shares of Common Stock is increased or decreased by a stock split, stock
dividend, combination, reclassification, below-Market Price (as defined in
Article VI.G) rights offering to all holders of Common Stock or other similar
event, which event shall have taken place during the reference period for
determination of the Conversion Price for any Optional Conversion or Mandatory
Conversion of the Series A Preferred Stock, then the Discounted Conversion Price
or Maximum Conversion Price, as the case may be, shall be calculated giving
appropriate and equitable effect to the stock split, stock dividend,
combination, reclassification or other similar event for all Trading Days
utilized to calculate the Conversion Price.
(c) Adjustment Due to Merger, Consolidation, Etc. If, at any
---------------------------------------------
time when any Series A Preferred Stock is issued and outstanding, there shall be
(i) any reclassification or change of the outstanding shares of Common Stock
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination), (ii)
any consolidation or merger of the Corporation with any other corporation (other
than a merger in which the Corporation is the surviving or continuing
corporation and its capital stock is unchanged), (iii) any sale or transfer of
all or substantially all of the assets of the Corporation or (iv) any share
exchange pursuant to which all of the outstanding shares of Common Stock are
converted into other securities or property, then the holders of Series A
Preferred Stock shall thereafter have the right to receive upon conversion of
Series A Preferred Stock, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such shares of stock and/or securities
and/or other property as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore purchasable and
receivable upon the conversion of Series A Preferred Stock held by such holders
had such merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of the Series A Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion of the
Series A Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect any
transaction described in this subsection (c) unless (i) each holder of Series A
Preferred Stock has received written notice of such transaction at least thirty
-10-
<PAGE>
(30) days prior thereto and in no event later than ten (10) days prior to the
record date for the determination of shareholders entitled to vote with respect
thereto, and (ii) the resulting successor or acquiring entity (if not the
Corporation) assumes by written instrument the obligations of this subsection
(c). The above provisions shall apply regardless of whether or not there would
have been a sufficient number of shares of Common Stock authorized and available
for issuance upon conversion of the shares of Series A Preferred Stock
outstanding as of the date of such transaction, and shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(d) Adjustment Due to Distribution. In case the Corporation
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 of
return of capital or otherwise (including any dividend or distribution to the
Corporation's shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e. a spin-off) but other than a distribution of
Rights described in subparagraph (e) below) (a "DISTRIBUTION"), then, after the
date of record for determining shareholders entitled to such Distribution, but
prior to the date of Distribution, the holders of Series A Preferred Stock shall
be entitled, upon conversion of shares of Series A Preferred Stock, to receive
the amount of such assets which would have been payable to the holder had such
holder been the holder of such shares of Common Stock on the record date for the
determination of shareholders entitled to such Distribution. The Maximum
Conversion Price for shares of Series A Preferred Stock not converted prior to
the date of Distribution will be reduced to a price determined by decreasing the
Maximum Conversion Price in effect immediately prior to the record date of the
Distribution by an amount equal to the fair market value of the assets so
distributed per share of Common Stock (calculated as if all shares of Common
Stock issuable upon conversion of outstanding shares of Series A Preferred Stock
had been converted as of the record date of the Distribution). For purposes of
determining the fair market value of any assets so distributed, the fair market
value of any cash distributed shall be the amount of such cash, the fair market
value of any security distributed shall be the Market Price of such security as
determined pursuant to Article VI.G. and the fair market value of any other
assets so distributed shall be determined by an expert of national reputation in
appraising the value of assets of the type so distributed, which expert shall be
selected by the Corporation and be reasonably acceptable to holders of a
majority of the shares of Series A Preferred Stock then outstanding, with the
costs of such expert to be borne by the Corporation.
(e) Adjustment Due to Rights Issue. If, at any time when
-------------------------------
Series A Preferred Stock is issued and outstanding, the Corporation shall
distribute any rights, options or warrants ("RIGHTS") to all holders of its
Common Stock entitling them for a period beginning on or after the record date
for such distribution to purchase shares of Common Stock at a price per share
less than the Market Price (as defined in Article VI.G) as of the date such
Right first becomes exercisable (the "EXERCISABILITY DATE"), then the Maximum
Conversion Price for shares of Series A Preferred Stock not converted prior to
such Exercisability Date shall be reduced to a price determined by multiplying
the Maximum Conversion Price in effect immediately prior to the Exercisability
Date by a fraction, (i) the numerator of which is an amount equal to the sum of
(x) the number of shares of Common Stock actually outstanding immediately prior
to the Exercisability Date plus (y) the
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<PAGE>
aggregate minimum consideration receivable by the Corporation upon the exercise
of all such Rights, divided by the Market Price in effect immediately prior to
the Exercisability Date and (ii) the denominator of which is the total number of
shares of Common Stock Deemed Outstanding (as defined below) immediately after
the Exercisability Date. For purposes of this Article VI.C.(e), "COMMON STOCK
DEEMED OUTSTANDING" shall mean the number of shares of Common Stock actually
outstanding plus the maximum total number of shares of Common Stock issuable
upon the exercise, conversion or exchange of all Rights or securities issuable
upon exercise of Rights.
D. In order to convert Series A Preferred Stock into full shares of
Common Stock, a holder shall: (i) fax a copy of the fully executed notice of
conversion in the form attached hereto ("NOTICE OF CONVERSION") to the
Corporation at the office of the Corporation that the holder elects to convert
the same, which notice shall specify the number of shares of Series A Preferred
Stock to be converted, the applicable Conversion Price and a calculation of the
number of shares of Common Stock issuable upon such conversion (assuming
conversion of the Premium Amount, if any) prior to Midnight, New York City time
(the "CONVERSION NOTICE DEADLINE") on the Conversion Date; and (ii) surrender
the original certificates representing the Series A Preferred Stock being
converted (the "PREFERRED STOCK CERTIFICATES"), duly endorsed, along with a copy
of the Notice of Conversion as soon as practicable thereafter to the office of
the Corporation or the Transfer Agent, if any, for the Series A Preferred Stock.
The Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Corporation or its Transfer Agent as
provided above, or the holder notifies the Corporation or its Transfer Agent
that such certificates have been lost, stolen or destroyed (subject to the
requirements of subparagraph (a) below). In the case of a dispute as to the
calculation of the Conversion Price, the Corporation shall promptly issue such
number of shares of Common Stock that are not disputed in accordance with
subparagraph (b) below. The Corporation shall submit the disputed calculations
to its outside accountant via facsimile within two (2) business days of receipt
of the Notice of Conversion. The accountant shall audit the calculations and
notify the Corporation and the holder of the results no later than 48 hours from
the time it receives the disputed calculations. The accountant's calculation
shall be deemed conclusive, absent manifest error.
(a) Lost or Stolen Certificates. Upon receipt by the
----------------------------
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series A Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Corporation, and upon surrender and cancellation
of the Preferred Stock Certificate(s), if mutilated, the Corporation shall
execute and deliver new Preferred Stock Certificate(s) of like tenor and date.
However, the Corporation shall not be obligated to reissue such lost or stolen
Preferred Stock Certificate(s) if the holder contemporaneously requests the
Corporation to convert such Series A Preferred Stock.
(b) Delivery of Common Stock Upon Conversion. Upon the
-----------------------------------------
surrender of Preferred Stock Certificates as described above from a holder of
Series A Preferred Stock accompanied by a Notice of Conversion, the Corporation
shall issue and, within two (2) business days after the later of the Conversion
Date and the date of such surrender (or, in the case of lost,
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<PAGE>
stolen or destroyed certificates, after provision of agreement and
indemnification pursuant to subparagraph (a) above) (the "DELIVERY PERIOD"),
deliver to or upon the order of the holder (i) that number of shares of Common
Stock for the portion of the shares of Series A Preferred Stock converted as
shall be determined in accordance herewith and (ii) a certificate representing
the balance of the shares of Series A Preferred Stock not converted, if any.
In the event (x) the Corporation fails for any reason to deliver during the
Delivery Period shares of Common Stock to a holder upon a conversion of shares
of Series A Preferred Stock in accordance with the provisions of this Article
VI.D. (after giving effect to any limitations contained herein) and (y) after
the applicable Delivery Period with respect to such conversion, such holder
purchases shares of Common Stock to deliver to satisfy a sale by such holder of
shares of Common Stock which such holder anticipated receiving upon such
conversion (a "BUY-IN"), such holder shall be entitled to (in addition to any
other remedies available to the holder) a payment equal to the amount, if any,
by which the Aggregate Buy-In Price Differential (as defined below) exceeds the
aggregate payments made to such holder pursuant to Article VI.E. as a result of
such conversion default. The "AGGREGATE BUY-IN DIFFERENTIAL" with respect to any
Buy-In shall mean the amount, if any, by which (I) the holder's aggregate
purchase price for the shares of Common Stock constituting the Buy-In exceeds
(II) the aggregate net proceeds received by such holder from the sale of the
shares of Common Stock issued upon the effectuation of the conversion which gave
rise to the Buy-In (the "BUY-IN CONVERSION SHARES"). For example, if a holder
purchases 10 shares of Common Stock at a price of $20 per share in a Buy-In and
later sells 10 shares of Common Stock received upon conversion of the shares of
Series A Preferred Stock giving rise to the Buy-In at a price of $18 per share,
the Aggregate Buy-In Price Differential with respect to such Buy-In would equal
$20 (i.e., $200 - $180). Such cash amount shall be paid to such holder by the
fifth (5th) day of the month following the month in which it has accrued. Each
holder of Series A Preferred Stock shall use all commercially reasonable efforts
to sell Buy-In Conversion Shares in an expeditious manner after its receipt of
such Conversion Shares, it being understood that a holder's ability to so effect
such sales shall be dependent upon market conditions then in effect.
(c) No Fractional Shares. If any conversion of Series A
--------------------
Preferred Stock would result in a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon conversion of the Series A Preferred Stock shall be the next
higher number of shares.
(d) Conversion Date. The "CONVERSION DATE" shall be the date
---------------
specified in the Notice of Conversion, provided that if the advance copy of the
Notice of Conversion is not submitted by facsimile (or by other means resulting
in notice) to the Corporation before Midnight, New York City time, on the
Conversion Date indicated in the Notice of Conversion, then the Conversion Date
shall be the date the Corporation receives the Notice of Conversion. Upon
submission by a holder of Series A Preferred Stock of a Notice of Conversion
with respect to shares of Series A Preferred Stock, such shares shall be deemed
converted into shares of Common Stock and the holder's rights as a holder of
such converted shares of Series A Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
in
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<PAGE>
accordance with and subject to this Article VI.D. Notwithstanding the foregoing,
if the holder has not received certificates for such shares of Common Stock
prior to the tenth (10th) day after the later of the Conversion Date and the
delivery by the holder of the Preferred Stock Certificates and any agreement and
indemnity required by Article VI.D(b) above, then the holder may notify the
Corporation in writing of such failure and if the holder has not received
certificates for such shares of Common Stock prior to the tenth (10th) day after
the date of such notice, then (i) the holder shall regain the rights of a holder
of Series A Preferred Stock with respect to the shares to which the Notice of
Conversion relates and shall retain all of such holder's rights and remedies
(including, without limitation, the right to receive cash payments pursuant to
Article VI.D(b) above and VI.E below to the extent required thereby) with
respect to the Corporation's failure to deliver such shares of Common Stock and
(ii) the Conversion Price in respect of each of the shares identified in the
Notice of Conversion shall thereafter be the lesser of (A) the Conversion Price
on the Conversion Date set forth in the initial Notice of Conversion and (B) the
Conversion Price on the Conversion Date subsequently selected by the holder in
respect thereof by submission to the Corporation of a subsequent Notice of
Conversion.
E. A number of shares of the authorized but unissued Common Stock
sufficient to provide for the conversion of the Series A Preferred Stock
outstanding at the then current Conversion Price shall at all times be reserved
by the Corporation, free from preemptive rights, for such conversion. If the
Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the Series A Preferred Stock shall be convertible at the then
current Conversion Price, the Corporation shall at the same time also make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Series A Preferred Stock on the new basis. If, at
any time, a holder of shares of Series A Preferred Stock submits a Notice of
Conversion and the Corporation does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article VI, the Corporation shall issue to the holder all
of the shares of Common Stock which are available to effect such conversion
(including, with the holder's written consent, any shares underlying outstanding
Warrants held by such Holder ("BORROWED SHARES")) and shall thereafter use its
best efforts to obtain, as soon as practicable, shareholder approval to
authorize the issuance of sufficient shares of Common Stock to effect conversion
of the Series A Preferred Stock outstanding.
If, at any time, a holder of shares of Series A Preferred Stock
submits a Notice of Conversion and the Corporation fails to deliver, within
seven (7) business days after the later of the Conversion Date and the delivery
by the holder of the Preferred Stock Certificates and any agreement and
indemnity required by Article VI.D(b), shares of Common Stock (or makes an
announcement that it will not issue shares of Common Stock) in accordance with
the provisions of this Article VI (a "CONVERSION DEFAULT"), the Corporation
shall pay to the holder payments ("CONVERSION DEFAULT PAYMENTS") for a
Conversion Default in the amount of (a) (N/365), multiplied by (b) the aggregate
Stated Value of all shares of Series A Preferred Stock held by such holder
(together with the aggregate Stated Value of all shares of Series A Preferred
Stock held by such
-14-
<PAGE>
holder which were included in the Notice of Conversion that would not have been
converted but for the Borrowed Shares) on the first day of the Conversion
Default (the "CONVERSION DEFAULT DATE"), multiplied by (c) .24, where (i) N =
the number of days from the expiration of the Delivery Period to the date that
the Corporation effects the conversion of the full number of shares of Series A
Preferred Stock (or, with respect to any shares so converted using Borrowed
Shares, the date the Corporation authorizes a sufficient number of shares of
Common Stock to permit the issuance of the Borrowed Shares).
If, at any time, a holder of shares of Series A Preferred Stock
submits a Notice of Conversion and the Corporation fails to deliver, within
fourteen (14) business days after the later of the Conversion Date and the
delivery by the holder of the Preferred Stock Certificates and any agreement and
indemnity required by Article VI.D(b), shares of Common Stock (or makes an
announcement that it will not issue shares of Common Stock, in which case there
shall be no fourteen (14) business day grace period) in accordance with the
provisions of this Article VI), the Conversion Price in respect of any shares of
Series A Preferred Stock not so converted shall thereafter be the lesser of (i)
the Conversion Price on the Conversion Date specified in the Notice of
Conversion and (ii) the Conversion Price on the Conversion Date subsequently
elected by the holder in respect thereof (which remedy shall be in addition to
all other remedies such holder may have under this Certificate of Designation or
otherwise for such Conversion Default).
The accrued Conversion Default Payment for each calendar month shall be
paid in cash or shall be convertible into Common Stock at the Conversion Price,
at the holder's option, as follows:
(a) In the event holder elects to take such payment in cash,
cash payment shall be made to holder by the fifth (5th) day of the month
following the month in which it has accrued; and
(b) In the event holder elects to take such payment in
Common Stock, the holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of conversion) at any time after
the fifth (5th) day of the month following the month in which it has accrued in
accordance with the terms of this Article VI.
Nothing herein shall limit the holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock or to otherwise effect a conversion of the Series A
Preferred Stock as required pursuant to the terms of this Article VI.E or to
cause a redemption pursuant to Article V.B, and each holder shall have the
right to pursue all remedies available at law or in equity (including a decree
of specific performance and/or other injunctive relief).
F. Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VI, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and
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<PAGE>
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of a share of Series A Preferred Stock.
G. "MARKET PRICE," as of any date, (i) means the average of the
closing bid prices for the shares of Common Stock as reported on the Nasdaq
National Stock Market for the ten (10) Trading Days immediately preceding such
date, or (ii) if the Nasdaq National Market is not the principal trading market
for the shares of Common Stock, the average of the last reported bid prices on
the principal trading market for the Common Stock during the same period, or, if
there is no bid price for such period, the last reported sales price for such
period, or (iii) if market value cannot be calculated as of such date on any of
the foregoing bases, the Market Price shall be the average fair market value as
reasonably determined by an investment banking firm selected by the Corporation
and reasonably acceptable to holders of a majority of the then outstanding
shares of Series A Preferred Stock, with the costs of the appraisal to be borne
by the Corporation. The manner of determining the Market Price of the Common
Stock set forth in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to market value must be
made hereunder.
VII. Mandatory Conversion
--------------------
Provided all shares of Common Stock issuable upon conversion of all
outstanding shares of Series A Preferred Stock are then registered under the
Securities Act for resale by the holders of such Series A Preferred Stock and
are then eligible to be traded on the Nasdaq National Market, each share of
Series A Preferred Stock issued and outstanding on January 10, 1999 (the
"MANDATORY CONVERSION DATE"), automatically shall be converted into shares of
Common Stock on such date at the then effective Conversion Price in accordance
with the provisions of Article VI hereof, subject to the limitations set forth
in Article VI.A.(ii)(c) (the "MANDATORY CONVERSION"). The Mandatory Conversion
Date shall be the Conversion Date for purposes of determining the Conversion
Price and the time within which certificates representing the Common Stock must
be delivered to the holder.
VIII. Voting Rights
-------------
The holders of the Series A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Texas Business Corporation Act
("TBCA"), and in this Article VIII, and in Article IX below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and
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<PAGE>
other information sent to shareholders). In the event of any taking by the
Corporation of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation or recapitalization) any share of any
class or any other securities or property, or to receive any other right, or for
the purpose of determining shareholders who are entitled to vote in connection
with any proposed sale, lease or conveyance of all or substantially all of the
assets of the Corporation, or any proposed liquidation, dissolution or winding
up of the Corporation, the Corporation shall mail a notice to each holder, at
least twenty (20) days prior to the record date specified therein (or 30 days
prior to the consummation of the transaction or event, whichever is earlier), of
the date on which any such record is to be taken for the purpose of such
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such dividend, distribution, right or other event to
the extent known at such time.
To the extent that under the TBCA the vote of the holders of the Series A
Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series A
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series A Preferred Stock
(except as otherwise may be required under the TBCA) shall constitute the
approval of such action by the class. To the extent that under the TBCA holders
of the Series A Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series A Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series A Preferred Stock shall be entitled to
notice of (and copies of proxy materials and other information sent to
shareholders) all shareholder meetings or written consents with respect to which
they would be entitled to vote, which notice would be provided pursuant to the
Corporation's by-laws and the TBCA.
IX. Protection Provisions
---------------------
So long as shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the TBCA) of the holders of at least a majority of the
then outstanding shares of Series A Preferred Stock and, provided such holder
then owns at least one thousand (1,000) shares of Series A Preferred Stock, any
holder which purchased from the Corporation shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series A Preferred Stock or any other capital stock of the Corporation so as
to affect adversely the Series A Preferred Stock;
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<PAGE>
(b) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "SENIOR SECURITIES");
(c) create any new class or series of capital stock ranking
pari passu with the Series A Preferred Stock as to distribution of assets upon
- ---- -----
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "PARI PASSU SECURITIES");
---- -----
(d) increase the authorized number of shares of Series A
Preferred Stock; or
(e) issue any shares of Series A Preferred Stock other than
pursuant to the Securities Purchase Agreement.
In the event holders of at least a majority of the then outstanding shares
of Series A Preferred Stock agree to allow the Corporation to alter or change
the rights, preferences or privileges of the shares of Series A Preferred Stock,
pursuant to subsection (a) above, so as to affect the Series A Preferred Stock,
then the Corporation will deliver notice of such approved change to the holders
of the Series A Preferred Stock that did not agree to such alteration or change
(the "DISSENTING HOLDERS") and Dissenting Holders shall have the right for a
period of thirty (30) days to convert pursuant to the terms of this Certificate
of Designation as they exist prior to such alteration or change or continue to
hold their shares of Series A Preferred Stock.
X. Cancellation of Series A Preferred Stock
----------------------------------------
In the event any shares of Series A Preferred Stock shall be converted
pursuant to Article VI, the shares so converted shall be canceled, shall return
to the status of unauthorized, but unissued preferred stock of no designated
series, and shall not be issuable by the Corporation as Series A Preferred
Stock.
XI. Limitations on Transfer
-----------------------
Prior to the delivery of an Optional Redemption Notice to the Corporation
pursuant to Article V.B., no "Subject Holder" (as defined below) may sell or
otherwise transfer shares of Series A Preferred Stock, except (i) to the
Corporation or to a shareholder or a group of shareholders who immediately prior
to the sale control a majority of the Corporation's voting shares (a
"CONTROLLING SHAREHOLDER" or "CONTROLLING GROUP", as applicable); (ii) to an
affiliate of such holder; (iii) in connection with any merger, consolidation,
reorganization, tender offer or sale of more than 50% of the outstanding Common
Stock of the Corporation (a "REORGANIZATION"); (iv) in a registered public
offering or a public sale pursuant to Rule 144 or other applicable exemption
from the registration requirements of the Securities Act (or any successor rule
or regulation); or (v) in a private sale (otherwise than to the Corporation, to
a Controlling Shareholder or a Controlling Group, to an
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<PAGE>
affiliate of such holder, or in a Reorganization), provided that the holder
shall not sell or otherwise transfer in a private sale not described in clause
(i) - (iii) of this Article XI, during any ninety (90) day period, a number of
shares of Series A Preferred Stock, a portion(s) of the Warrants or any other
securities of the Corporation subject to a limitation on sale or transfer
analogous to the limitation contained herein, which, if exercised for or
converted into Common Stock at the time of the transfer, would represent, in the
aggregate (together with any other shares of Common Stock transferred),
beneficial ownership by the transferee(s) of more than 4.9% of the Common Stock
then outstanding. "SUBJECT HOLDER" means any holder who, but for Article VI.A
hereof and this Article XI., may be deemed to beneficially own 5% or more of the
outstanding Common Stock of the Corporation. The restriction contained in the
proviso of this Article XI. shall not be altered, amended, deleted or changed in
any manner whatsoever unless the holders of a majority of the Common Stock
(voting as a separate class) and each holder of Series A Preferred Stock shall
approve such alteration, amendment, deletion or change.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 10th day of January, 1997.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
------------------------------
Vice President - Finance
and Chief Financial Officer
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<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert shares of Series A
Preferred Stock (the "CONVERSION"), represented by stock certificate Nos(s).
___________ (the "PREFERRED STOCK CERTIFICATES") into shares of common stock
("COMMON STOCK") of Data Race, Inc. (the "CORPORATION") according to the
conditions of the Statement of Designations, Preferences and Rights of 1997
Series A Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATION"), as of
the date written below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates. No fee will
be charged to the holder for any conversion, except for transfer taxes, if any.
A copy of each Preferred Stock Certificate is attached hereto (or evidence of
loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Series A Preferred Stock shall be made pursuant to
registration of the Common Stock under the Securities Act of 1933, as amended
(the "ACT"), or pursuant to an exemption from registration under the Act.
Date of Conversion:
---------------------------------
Applicable Conversion Price:
------------------------
Number of Shares of
Common Stock to be Issued:
--------------------------
Signature:
------------------------------------------
Name:
-----------------------------------------------
Address:
--------------------------------------------
* The Corporation is not required to issue shares of Common Stock until the
original Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Certificate of Designation for the number of business
days such issuance and delivery is late.
<PAGE>
Exhibit 3.8
-----------
On December 6, 1996, the Board of Directors of the Company amended Section 4.4
of the Bylaws of the Company to read in its entirety as follows:
"Section 4.4. Special Meetings. Special meetings of the Board of
----------------
Directors may be called by the President upon 24 hours notice to each
director, personally or by mail, telegram or facsimile. Special meetings
shall be called by the President in like manner and on like notice on the
written request of two (2) directors. Except as may be otherwise expressly
provided by statute, the Articles of Incorporation or these Bylaws, neither
the business to be transacted at, nor the purpose of, any special meeting
need be specified in the notice or waiver of notice of such meeting."
<PAGE>
Exhibit 10.24
-------------
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between DATA RACE INC.
,a Corporation
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank")
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate
unpaid principal balance, the following Borrowing Base:
80.000 % of Eligible Accounts
30.000 % of the Value of Inventory
and in no event more than $ 1,500,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be
debited to the loan ledger account of Borrower maintained by Bank
(herein called "Loan Account") and Bank shall credit the Loan Account
with all loan repayments made by Borrower. Borrower promises to pay
Bank(s) the unpaid balance of Borrower's Loan Account at maturity of
November 12, 1997 and (b) on or before the tenth day of each month,
interest on the average daily unpaid balance on the Loan Account during
the immediately preceding month at the rate of One percent (1.00%) per
annum in excess of the rate of interest which Bank has announced as its
prime lending rate ("Prime Rate") which shall vary concurrently with any
change in such Prime Rate. Interest shall be computed at the above rate
on the basis of the actual number of days during which the principal
balance of the loan account is outstanding divided by 360, which shall
for interest computation purposes be considered one year. The amount of
interest payable each month by Borrower shall not be less than a minimum
monthly charge of $250.00. Bank is hereby authorized to charge
Borrower's deposit account(s) with Bank for all sums due Bank under this
Agreement.
3. Requests for loan hereunder shall be in writing duly executed by
Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in Section 1, which
shall disclose that Borrower is entitled to the amount of loan being
requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or
leased, or to be sold or to be leased, or for services
rendered or to be rendered no matter how evidenced,
including accounts receivable, contract rights, chattel
paper, instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of
obligations and receivables.
B. "Inventory" means all of the Borrower's goods, merchandise
and other personal property which are held for sale or
lease, including those held for display or demonstration or
out on lease or consignment or to be furnished under a
contract of service or are raw materials, work in process or
materials used or consumed, or to be used or consumed in
Borrower's business, and shall include all property rights,
patents, plans, drawings, diagrams, schematics, assembly and
display materials relating thereto.
C. "Collateral" means any and all personal property of Borrower
which is assigned or hereafter is assigned to Bank as
security or in which Bank now has or hereafter acquires a
security interest.
D. "Eligible Accounts" means all of Borrower's Accounts
excluding, however, (1) all Accounts under which payment is
not received within 90 days from any invoice date, (2) all
Accounts against which the account debtor or any other
person obligated to make payment thereon asserts any
defense, offset, counterclaim or other right to avoid or
reduce the liability represented by the Account and (3) any
Accounts if the account debtor or any other person liable in
connection therewith is insolvent, subject to bankruptcy or
receivership proceedings or has made an assignment for the
benefit of creditors or whose credit standing is
unacceptable to Bank and Bank has so notified Borrower.
Eligible Accounts shall only include such accounts as Bank
in its sole discretion shall determine are eligible from
time to time.
E. "Value of Inventory" means the value of Borrower's Inventory
determined in accordance with generally accepted accounting
principles consistently applied including inventory which is
purchased to fulfill non-cancelable and contractually
guaranteed orders from IBM, TI, and NEC, and excluding,
however, the amount of progress payments, pre-delivery
payments, deposits and any other sums received by Borrower
in anticipation of the sale and delivery of inventory, all
inventory on consignment or lease to others, and all
property on consignment or lease from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future
Accounts, including all proceeds due thereunder, all guaranties and
security therefore and all merchandise giving rise thereto, and hereby
grants to Bank a continuing security interest in all Borrower's
Inventory and in all proceeds and products thereof, whether now owned or
hereafter existing or acquired, including all moneys in the Collateral
Account referred to in Section 6 hereof, as security for any and all
obligations of Borrower to Bank, whether now owing or hereafter incurred
and whether direct, indirect, absolute or contingent. So long as
Borrower is indebted to Bank or Bank is committed to extend credit to
Borrower, Borrower will execute and deliver to Bank such assignments,
including Bank's standard forms of Specific or General Assignment
covering individual Accounts, notices, financing statements, and other
documents and papers as Bank may reasonably require in order to affirm,
effectuate or further assure the assignment to Bank of the Collateral or
to give any third party, including the account debtors obligated on the
Accounts, notice of Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts and inventory
proceeds pursuant to paragraph 10, Borrower will collect with diligence
all Borrowers Accounts and Inventory proceeds, provided that no legal
action shall be maintained thereon or in connection therewith without
Bank's prior written consent which consent shall not be unreasonable
withheld. Any collection of Accounts or inventory proceeds by Borrower,
whether in the form of cash, checks, notes, or other instruments for the
payment of money (properly endorsed or assigned where required to enable
Bank to collect same), shall be in trust for Bank, and Borrower shall
keep all such collections separate and apart from all other funds and
property so as to be capable of identification as the property of Bank
and deliver said collections, together with the proceeds of all cash
sales, daily to Bank in the identical form received. The proceeds of
such collections when received by Bank may be applied by Bank directly
to the payment of Borrower's Loan Account or any other obligation
secured hereby. Any credit given by Bank upon receipt of said proceeds
shall be conditional credit subject to collection. Returned items at
Bank's option may be charged to Borrower's general account. All
collections of the Accounts and inventory proceeds shall be set forth on
an itemized schedule, showing the name of the account debtor, the amount
of each payment and such other information as Bank may request.
7. Until Bank exercises its right to collect the Accounts or Inventory
proceeds pursuant to paragraph 10, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However,
Borrower shall immediately notify Bank of all cases which represent
material amounts in excess of $50,000 involving returns, repossessions,
and loss or damage of or to merchandise represented by the Accounts or
constituting Inventory and of any credits, adjustments or disputes
arising in connection with the goods or services represented by the
Accounts or constituting Inventory and, in any of such events, Borrower
will immediately pay to Bank from its own funds, (and not from the
proceeds of Accounts or Inventory) for application to Borrower's Loan
Account or any other obligation secured hereby the amount of any credit
for such returned or reposessed merchandise and adjustments made to any
of the Accounts. Until payment is made as provided herein or until
release by Bank from its security interest, all merchandise returned to
or
<PAGE>
repossessed by Borrower shall be set aside and identified as the
property of Bank and Bank shall be entitled to enter upon any premises
where such merchandise is located and take immediate possession thereof
and remove same.
8. Borrower represents and warrants to Bank: (i) If Borrower is a
corporation that borrower is duly organized and existing in the State
of its incorporation and the execution, delivery and performance hereof
are within Borrower's corporate powers, have been duly authorized and
are not in conflict with law or the terms of any charter, by-law or
other incorporation papers, or of any indenture, agreement or
undertaking to which Borrower is a party or by which Borrower is found
or affected; (ii) Borrower is, or at the time the collateral becomes
subject to Bank's security interest will be, the true and lawful owner
of and has, or at the time the Collateral becomes subject to Bank's
security interest will have, good and, clear title to the Collateral,
subject only to Bank's rights therein; (iii) Each Account is, or at the
time the Account comes into existence will be, a true and correct
statement of a bona fide indebtedness incurred by the debtor named
therein in the amount of the Account for either merchandise sold or
delivered (or being held subject to Borrower's delivery instructions)
to, or services rendered, performed and accepted by, the account
debtor; (iv) That to the best of Borrower's knowledge there are or will
be no defenses, counterclaims, or setoffs which may be asserted against
the Accounts, and (v) any and all financial information, including
information relating to the Collateral, submitted by Borrower to Bank,
whether previously or in the future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial
statements and information as Bank may reasonably request and inform
Bank immediately upon the occurrence of a material adverse change
therein; (ii) Furnish Bank periodically, in such form and detail and at
such times as is required by the Letter of Inducement executed in
connection herewith, statements showing aging and reconciliation of the
Accounts and collections thereon, and reports as to the inventory and
sales thereof; (iii) Permit representatives of Bank to inspect the
inventory and Borrower's books and records relating to the Collateral
and make extracts therefrom at any reasonable time and to arrange for
verification of the Accounts, under reasonable procedures, acceptable
to Bank, directly with the account debtors or otherwise at Borrower's
expense; (iv) Promptly notify Bank of any attachment or other legal
process levied against any of the Collateral and any information
received by Borrower relative to the Collateral, including the
Accounts, the account debtors or other persons obligated in connection
therewith, which may in any way affect the value of the Collateral or
the rights and remedies of Bank in respect thereto; (v) Reimburse Bank
upon demand for any and all legal costs, including reasonable
attorneys' fees, and other expense incurred in collecting any sums
payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this
Security Agreement or otherwise or in the checking, handling and
collection of the Collateral and the preparation and enforcement of any
agreement relating thereto; (vi) Notify Bank of each location at which
the inventory is or will be kept, other than the temporary processing,
storage or similar purposes, and of any removal thereof to a new
location and of each office of Borrower at which records of Borrower
relating to the Accounts are kept; (vii) Provide, maintain and deliver
to Bank policies insuring the Collateral against loss or damage by such
risks and in such amounts, forms and companies as Bank may require and
with loss payable solely to Bank, and, in the event Bank takes
possession of the Collateral, the insurance policy or policies and any
unearned or returned premium thereon shall at the option of Bank become
the sole property of Bank, such policies and the proceeds of any other
insurance covering or in any way relating to the collateral, whether
now in existence or hereafter obtained, being hereby assigned to Bank;
(viii) Do all acts necessary to maintain, preserve and protect all
inventory, keep all inventory in good condition and repair and not to
cause any waste or unusual or unreasonable depreciation thereof, and
(ix) in the event the unpaid balance of Borrower's Loan Account shall
exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to
Bank, from its own funds and not from the proceeds of Collateral, for
credit to Borrower's Loan Account the amount of such excess.
10. Bank may after the occurrence of any event of default set forth in part
12 and 13 below, without prior notice to Borrower, collect the Accounts
and inventory proceeds and may give notice of assignment to any and all
account debtors, and Borrower does hereby make, constitute and appoint
Bank its irrevocable, true and lawful attorney with power to receive,
open and dispose of all mail addressed to Borrower, to endorse the name
of Borrower upon any checks or other evidence of payment that may come
into the possession of Bank upon the Accounts or as proceeds of
Inventory; to endorse the name of the undersigned upon any document or
instrument relating to the Collateral; in its name or otherwise, to
demand, sue for, collect and give acquaintances for any and all moneys
due or to become due upon the Accounts: to compromise, prosecute or
defend any action, claim or proceeding with respect thereto; and to do
any and all things necessary and proper to carry out the purpose herein
contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of Collateral other than to Bank or
execute any financing statements covering the Collateral in favor of
any secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach
be made in any warranty, statement, promise, terms or condition,
contained herein or hereby secured; (ii) Any statement or
representation made for the purpose of obtaining credit hereunder prove
materially false; (iii) Bank deem the Collateral inadequate or unsafe
or in danger of misuse; (iv) Borrower become insolvent or make an
assignment for the benefit of creditors; or (v) Any proceeding be
commended by or against Borrower under any bankruptcy, reorganization,
arrangement, readjustment of debt or moratorium law or statute; then in
any such event, Bank may, at its option and without demand first made
and without notice to Borrower, do any one or more of the following:
Borrower will have a cure period of 10 days on interest default and no
cure period on principal default. (a) Terminate its obligation to make
loans to Borrower as provided in Section 1 hereof; (b) Declare all sums
secured hereby immediately due and payable; (c) immediately take
possession of the Collateral wherever it may be found, using all
necessary force so to do, or require Borrower to assemble the
Collateral and make it available to Bank at a place designated by Bank
which is reasonably convenient to Borrower and Bank, and Borrower
waives all claims for damages due to or arising from or connected with
any such taking; (d) Proceed in the foreclosure of Bank's security
interest and sale of the Collateral in any manner permitted by law, or
provided for herein: (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the
Collateral at the place of sale, and upon terms and in such manner as
Bank may determine, and Bank may purchase same at any such sale; (f)
Retain the Collateral in full satisfaction of the obligations secured
thereby; (g) Exercise any remedies of a secured party under the Uniform
Commercial Code. Prior to any such disposition, Bank may, at its
option, cause any of the Collateral to be repaired or reconditioned in
such manner and to such extent as Bank may deem advisable, and any
reasonable sums expended therefor by Bank shall be repaid by Borrower
and secured hereby. Bank shall have the right to enforce one or more
remedies hereunder successively or concurrently, and any such action
shall not stop or prevent Bank from pursuing any further remedy which
it may have hereunder or by law. If a sufficient sum is not realized
from any such disposition of collateral to pay all obligations secured
by this Security Agreement, Borrower hereby promises and agrees to pay
Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal
process be issued against any property of Borrower, or if any
assessment for taxes against Borrower, other than real property, is
made by Federal or State government or any department thereof, the
obligation of Bank to make loans to Borrower as provided in Section 1
hereof shall immediately terminate and the unpaid balance of the Loan
Account, all other obligations secured hereby and all other sums due
hereunder shall immediately become due and payable without demand,
presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time
subsequent to four months from the time such items are delivered to
Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower,
but each and every condition hereof shall be in addition thereto.
*16. Additional Provisions: Subject to Conditions and limitations contained
in the Credit Terms and Conditions dated
November 12, 1996
See Addendum attached
SEE ATTACHED AMENDMENT
Executed this 12th day of November, 1996
DATA RACE INC.
-----------------------------------
(Name of Borrower)
IMPERIAL BANK BY: /s/ GREGORY T. SKALLA, CFO
-----------------------------------
(Authorized Signature and Title)
BY: /s/ MANSOOR A. GHORi BY:
--------------------------------- -----------------------------------
Title (Authorized Signature and Title)
*If none, insert "None"
<PAGE>
Exhibit 10.25
-------------
GENERAL SECURITY AGREEMENT
(TANGIBLE AND INTANGIBLE PERSONAL PROPERTY)
This Agreement is executed on November 12, 1996 , by
DATA RACE INC.
(hereinafter called "Obligor").
In consideration of financial accommodations given, to be given or continued,
the Obligor grants to IMPERIAL BANK (hereinafter called "Bank") a security
interest in (a) all property (i) delivered to Bank by Obligor, (ii) which shall
be in Bank's possession or control in any matter or for any purpose, (iii)
described below, (iv) now owned or hereafter acquired by Obligor of the type or
class described below and/or in any supplementary schedule hereto, or in any
financing statement filed by Bank and executed by or on behalf of Obligor; (b)
the proceeds, increase and products of such property, all accessions thereto,
and all property which Obligor may receive on account of such collateral which
Obligor will immediately deliver to Bank (collectively referred to as
"Collateral") to secure payment and performance of all of Obligor's present or
future debts or obligations to Bank, whether absolute or contingent (hereafter
referred to as "Debt"). Unless otherwise defined, words used herein have the
meanings given them in the California Uniform Commercial Code.
Collateral:
<TABLE>
<CAPTION>
A. VEHICLE, VESSEL, AIRCRAFT:
- -----------------------------------------------------------------------------------------------------------
Identification License or
Year Make/Manufacturer Model and Serial No. Registration No. New or Used
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Engine or other equipment:
------------------------------------------------------
(For aircraft - original ink signature on copy to FAA)
B. DEPOSIT ACCOUNTS:
Type Account Number Amount $
-------------------- ------------------ ----------------
In name of Depository
------------------------------ ------------------------------
AND ALL EXTENSIONS OR RENEWALS THEREOF.
C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe)
All personal property, whether presently existing or hereafter created
or acquired, including but not limited to: All accounts, chattel paper,
documents, instruments, money, deposit accounts and general intangibles
including returns, repossessions, books and records relating thereto,
and equipment containing said books and records, All goods including
equipment and inventory. All proceeds including, without limitation,
insurance proceeds. All guarantees and other security therefor.
The collateral not in Bank's possession will be located at: 12400 Network Blvd.,
San Antonio, TX 78249
[_] If checked, the Obligor is executing this Agreement as an Accommodation
Debtor only and the Obligor's liability is limited to the security interest
granted in the Collateral described herein. The party being accommodated is:
("Borrower").
All the terms and provisions on the reverse side hereof are incorporated herein
as though set forth in full, and constitute a part of this Agreement.
Name Signature Address
(indicate title, if applicable)
DATA RACE INC. BY /s/ GREGORY T. SKALLA, CFO 12400 Network Blvd.
- --------------------- ------------------------------ ------------------------
San Antonio, TX 78249
- --------------------- ------------------------------ ------------------------
- --------------------- ------------------------------ ------------------------
Page 1 of 2
<PAGE>
SECURITY AGREEMENT (CONTINUED)
Obligor represents, warrants and agrees:
1. Obligor will immediately pay (a) any Debt when due, (b) Banks reasonable
costs of collecting the Debt, of protecting, insuring or realizing on
Collateral, and any expenditure of Bank pursuant hereto, including attorneys'
fees and expenses, with interest at the rate of 24% per year, or the rate
applicable to the Debt, whichever is less, from the date of expenditure, and
(c) any deficiency after realization of Collateral.
2. Obligor will use the proceeds of any loan that becomes Debt hereunder for
the purpose indicated on the application therefore, and will promptly contract
to purchase and pay the purchase price of any property which becomes Collateral
hereunder from the proceeds of any loan made for that purpose.
3. As to all Collateral in Obligor's possession (unless specifically otherwise
agreed to by Bank in writing), Obligor will:
(a) Have, or has, possession of the Collateral at the location disclosed
to Bank and will not remove the Collateral from the location.
(b) Keep the Collateral separate and identifiable.
(c) Maintain the Collateral in good and saleable condition, repair it if
necessary, clean, feed, shelter, water, medicate, fertilize, cultivate,
irrigate, prune and otherwise deal with the Collateral in all such ways as
are considered good practice by owners of like property, use it lawfully
and only as permitted by insurance policies, and permit Bank to inspect the
Collateral at any reasonable time .
(d) Not sell, contract to sell, lease, encumber or transfer the Collateral
(other than inventory Collateral) until the Debt has been paid, even
though Bank has a security interest in proceed of such Collateral.
4. As to Collateral which is inventory and accounts, Obligor:
(a) May, until notice from Bank, sell, lease or otherwise dispose of
inventory Collateral in the ordinary course of business only, and
collect the cash proceeds thereof.
(b) Will, upon notice from Bank, deposit all cash proceeds as received in
a demand deposit account with Bank, containing only such proceeds and
deliver statements identifying units of inventory disposed of, accounts
which gave rise to proceeds, and all acquisitions and returns of inventory
as required by Bank.
(c) Will receive in trust, schedule on forms satisfactory to the Bank and
deliver to Bank all non-cash proceeds other than inventory received in
trade.
(d) If not in default, may obtain release of Bank's interest in individual
units of inventory upon request, therefore, payment to Bank of the release
price of such units shown on any Collateral schedule supplementary hereto,
and compliance herewith as to proceeds thereof.
5. As to Collateral which are accounts, chattel paper, general intangibles and
proceeds described in 4(c) above, Obligor warrants, represents and agrees:
(a) All such Collateral is genuine, enforceable in accordance with its
terms, free from default, prepayment, defense and conditions precedent
(except as disclosed to and accepted by Bank in writing), and is supported
by consecutively numbered invoices to, or rights against, the debtors
thereon. Obligor will supply Bank with duplicate invoices or other evidence
of Obligor's rights on Bank's request;
(b) To the best of Obligor's knowledge all persons appearing to be
obligated on such Collateral have authority and capacity to contract;
(c) All chattel paper is in compliance with law as to form, content and
manner of preparation and execution and has been properly registered,
recorded,and/or filed to protect Obligor's interest thereunder.
(d) If an account debtor shall also be indebted to Obligor on another
obligation, any payment made by him not specifically designated to be
applied on any particular obligation shall be considered to be a payment on
the account in which Bank has a security interest. Should any remittance
include a payment not on an account, it shall be delivered to Bank and, if
no event of default has occurred, Bank shall pay Obligor the amount of such
payment;
(e) Obligor agrees not to compromise, settle or adjust any material
account or renew or extend the time of payment thereof without Bank's
prior written consent.
6. Obligor owns all Collateral absolutely, and no other person has or claims
any interest in any Collateral, except as disclosed to and accepted by Bank in
writing. Obligor will defend any proceeding which may affect title to or Bank's
security interest in any Collateral, and will indemnify and hold Bank free and
harmless from all costs and expenses of Bank's defense.
7. Obligor will pay when due all existing or future charges, liens or
encumbrances on and all taxes and assessments now or hereafter imposed on or
affecting the Collateral and, if the Collateral is in Obligor's possession, the
realty on which the Collateral is located if such realty is owned by
Obligor.
8. Obligor will insure the Collateral with Bank as loss payee in form and
amounts with companies, and against risks and liability satisfactory to Bank,
and hereby assigns such policies to Bank, agrees to deliver them to Bank at
Bank's request, and authorizes Bank to make any claim thereunder, to cancel the
insurance on Obligor's default, and to receive payment of and endorse any
instrument in payment of any loss or return premium. If Obligor should fail to
deliver the required policy or policies to Bank, Bank may, at Obligor's cost and
expense, without any duty to do so, get and pay for insurance naming as the
Insured, at Bank's option, either both Obligor and Bank, or only Bank, and the
cost thereof shall be secured by this Security Agreement, and shall be repayable
as provided in Paragraph 1 above.
9. Obligor will give Bank any information it reasonably requires. All
information at any time supplied to Bank by Obligor (including, but not limited
to, the value and condition of Collateral, financial statements, financing
statements, and statements made in documentary Collateral) is correct and
complete, and Obligor will notify Bank of any material adverse change in such
information. Obligor will promptly notify Bank of any change of Obligor's
residence, chief executive office or mailing address.
10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act
which Obligor is obligated hereby to do, to exercise such rights as Obligor may
exercise, to use such equipment as Obligor might use, to enter Obligor's
premises to give notice of Bank's security interest, and to collect Collateral
and proceeds and to execute and file in Obligor's name any financing statements
and amendments thereto required to perfect Bank's security interest hereunder,
all to protect and preserve the Collateral and Bank's rights hereunder. Bank
may:
(a) Endorse, collect and receive delivery or payment of instruments and
documents constituting Collateral;
(b) Make extension agreements with respect to affecting Collateral,
exchange it for other Collateral, release persons liable thereon or take
security for the payment thereof, and compromise disputes in connection
therewith;
(c) Use or operate Collateral for the purpose of preserving Collateral or
its value and for preserving or liquidating Collateral.
11. If more than one Obligor signs this Agreement, their liability is joint and
several. Any obligor who is married agrees that recourse may be had against
separate property for the Debt. Discharge of any Obligor except for full
payment, or any extension, forbearance, change of rate of interest, or
acceptance, release or substitution of Collateral or any impairment or
suspension of Bank's rights against an Obligor, or any transfer of an Obligor's
interest to another shall not affect the liability of any other obligor. Until
the Debt shall have been paid or performed in full, Bank's rights shall continue
even if the Debt is outlawed. All Obligors waive: (a) any right to require
Bank to proceed against any Obligor before any other, or to pursue any other
remedy; (b) presentment, protest and notice of protest, demand and notice of
nonpayment, demand or performance, notice of sale, and advertisement of sale;
(c) any right to the benefit of or to direct the application of any Collateral
until the Debt shall have been paid; (d) and any right of subrogation to Bank
until Debt shall have been paid or performed in full.
12. Upon default, at Bank's option, without demand or notice, all or any part
of the Debt, except as provided in Security and Loan Agreement, shall
immediately become due. Bank shall have all rights given by law, and may sell,
in one or more sales, Collateral in any county where Bank has an office. Bank
may purchase at such sale. Sales for cash or on credit to a wholesaler,
retailer or user of the Collateral, or at public or private auction,are all to
be considered commercially reasonable. Bank may require Obligor to assemble the
Collateral and make it available to Bank at the entrance to the location of the
Collateral, or a place designated by Bank.
Defaults shall include:
(a) Obligor's failure to pay or perform this or any agreement with Bank or
breach of any warranty herein, or Borrower's failure to pay or perform any
agreement with Bank.
(b) Any change in Obligor's or Borrower's financial condition which in
Bank's judgment impairs the prospect of Borrower's payment or performance.
(c) Any actual or reasonably anticipated deterioration of the Collateral
or in the market price thereof which causes it, in Bank's judgment, to
become unsatisfactory as security.
(d) Any levy or seizure against Borrower or any of the Collateral.
(e) Death, termination of business, assignment for creditors, insolvency,
appointment of receiver, or the filing of any petition under bankruptcy or
debtor's relief laws of, by or against Obligor or Borrower or any guarantor
of the Debt.
(f) Any warranty or representation which is false or is believed in good
faith by Bank to be false.
13. Bank's acceptance of partial or delinquent payments or the failure of Bank
to exercise any right or remedy shall not waive any obligation of obligor or
Borrower or right of Bank to modify this Agreement, waive any other similar
default.
14. On transfer of all or any part of the Debt, Bank may transfer all of any
part of the Collateral. Bank may deliver all or any part of the Collateral to
any Obligor at any time. Any such transfer or delivery shall discharge Bank from
all liability and responsibility with respect to such Collateral transferred or
delivered. This Agreement benefits Bank's successors and assigns and binds
Obligor's heirs, legatees, personal representatives, successors, and assigns.
Obligor agrees not to assert against any assignee of Bank any claim or defense
that may exist against Bank. Time is of the essence. This Agreement and
supplementary schedules hereto contain the entire security agreement between
Bank and Obligor. Obligor will execute any additional agreements, assignments
or documents reasonably required by Bank to carry this Agreement into effect.
15. This Agreement shall be governed by and construed in accordance with the
laws of the State of California, to the jurisdiction of whose courts the
Obligor hereby agrees to submit. Obligor agrees that service of process may be
accomplished by any means authorized by California law. All words used herein
in the singular shall be considered to have been used in the plural where the
context and construction so require.
**SEE ATTACHED AMENDMENTS TO THIS AGREEMENT**
<PAGE>
Exhibit 10.26
-------------
IMPERIAL BANK
Member FDIC
226 Airport Parkway
San Jose,CA 95110
November 12, 1996
Subject: Credit Terms and Conditions ("Agreement") Borrower: DataRace, Inc.
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower"),
and in consideration of any loan or loans you, in your sole discretion may make
to Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. EXISTENCE AND RIGHTS.
Borrower is a Texas corporation
Borrower is duly organized and existing and in good standing under the laws of
the State of Texas and is authorized to do business in the State of Texas.
Borrower has powers and adequate authority, rights and franchises to own its
property and to carry on its business as now conducted, and is duly qualified
and in good standing in each State in which the character of the properties
owned by it therein or the conduct of its business makes such qualification
necessary, and Borrower has the power and adequate authority to make and carry
out this Agreement. Borrower has no investment in any other business entity.
2. AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
3. NO CONFLICT. The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound or affected and do not cause any lien, charge or other
encumbrance to be created or imposed upon any such property by reason thereof.
4. LITIGATION. There is no litigation or other proceeding pending or to
Borrower's knowledge threatened against or affecting Borrower, and Borrower is
not in default with respect to any order, writ, injunction, decree or demand of
any court or other governmental or regulatory authority.
5. FINANCIAL CONDITION. The balance sheet of Borrower as of June 96, and
the related profit and loss statement for the 1 month ended on that date, a copy
of which has heretofore been delivered to you by Borrower, and all other
statements and data submitted in writing by Borrower to you in connection with
this request for credit are true and correct, and said balance sheet and profit
and loss statement truly present the financial condition of Borrower as of the
date thereof and the results of the operations of Borrower for the period
covered thereby, and have been prepared in accordance with generally accepted
accounting principles on a basis consistently maintained. Since such date there
have been no materially adverse changes in the financial condition or business
of Borrower. Borrower has no knowledge of any liabilities, contingent or
otherwise, at such date not reflected in said balance sheet, and Borrower has
not entered into any special commitments or substantial contracts which are not
reflected in said balance sheet, other than in the ordinary and normal course of
its business, which may have a materially adverse effect upon its financial
condition, operations or business as now conducted.
6. TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section C.3 hereof.
7. TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, and if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
9. REGULATION U. The proceeds of this loan shall not be used to purchase
or carry margin stock (as defined with Regulation U of the Board of Governors of
the Federal Reserve system).
B. Borrower agrees that so long as it is indebted to you, it will, unless you
shall otherwise consent in writing:
1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair, conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses.
3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as: (a)
The same are being contested in good faith and by appropriate proceedings in
such manners as not to cause any materially adverse effect upon its financial
condition or the loss of any right of redemption from any sale thereunder, and
(b) it shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting practice) deemed by it adequate with
respect thereto.
4. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit your representatives to have access to,
and to examine its properties, books and records in all reasonable times; and
furnish you:
(a) As soon as available, and in any event within 25 days after the close of
each month of each fiscal year of Borrower, commencing with the month next
ending, a balance sheet, profit and loss statement and reconciliation of
Borrower's capital accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on the last day of
such period, all in reasonable detail and stating in comparative form the
figures for the corresponding date and period in the previous fiscal year,
prepared in accordance with generally accepted accounting principles on a basis
consistently maintained by Borrower and certified by an appropriate officer of
Borrower, subject, however, to year-end audit adjustments;
(b) As soon as available, and in any event within 90 days after the close of
each fiscal year of Borrower, a report of audit of Company as of the close of
end for such fiscal year, all in reasonable detail and stating in
comparative form the figures as of the close of and for the previous fiscal
year, with the unqualified opinion of accountants satisfactory to you.
<PAGE>
(c) Within 45 days after the close of each quarter of each fiscal year of
Borrower, a certificate by chief financial officer or partner of Borrower,
stating that Borrower has performed and observed each and every covenant
contained in this Letter of Inducement to be performed by it and that no event
has occurred and no condition then exists which constitutes an event of default
hereunder or would constitute such an event of default upon the lapse of time or
upon the giving of notice and the lapse of time specified herein, or, if any
such event has occurred or any such conditions exists, specifying the nature
thereof;
(d) Promptly after the receipt thereof by Borrower, copies of any detailed
audit reports submitted to Borrower by independent accountants in connection
with each annual or interim audit of the accounts of Borrower made by such
accountants;
(e) Promptly after the same are available, copies of all such proxy statements,
financial statements and reports as Borrower shall send to its stockholders, if
any, and copies of all reports which Borrower may file with the Securities and
Exchange Commission or any governmental authority at any time substituted
therefor; and
(f) Such other information relating to the affairs of Borrower as you reasonably
may request from time to time.
(g) Notice of Default. Promptly notify the Bank in writing of the occurrence of
any event of default hereunder or any event which upon notice and lapse of time
would be an event of default.
C. Borrower agrees that so long as it is indebted to you, it will not, without
your written consent:
1. TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the
character of its business: or make any change in its executive management.
2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from you except obligations
now existing as shown in financial statement dated June 96, excluding those
being refinanced by your bank; or sell or transfer, either with or without
recourse, any accounts or notes receivable or any moneys due to become due.
3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
liens for taxes not delinquent and liens in your favor.
4. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
to any person or other entity other than in the ordinary and normal course of
its business as now conducted or make any investment in securities other than
United States Government Treasuries or Agencies, Imperial Bank sponsored paper,
or the Monarch Money Market Funds; or guarantee or otherwise become liable upon
the obligations of any person or other entity, except by endorsement of
negotiable instruments for deposit or collection in the ordinary and normal
course of its business.
5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings
therefor: or sell any assets except in the ordinary and normal course of
business as now conducted: or sell, lease, assign, or transfer any substantial
part of its business or fixed assets, or any property or other assets necessary
for the continuance of its business as now conducted including without
limitation the selling of any property or other asset accompanied by the leasing
back of the same.
6. DIVIDENDS, STOCK PAYMENTS. If a corporation, declare or pay any
dividend (other than dividends payable in common stock of Borrower) or make any
other distribution on any of its capital stock now outstanding or hereafter
issued or purchase, redeem or retire any of such stock.
D. The occurrence of any one of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you due and
payable, within 10 days, all without demand, presentment or notice, all of which
are hereby expressly waived:
1. FAILURE TO PAY NOTE. Failure to pay any installment of principal or of
interest on any indebtedness of Borrower to you.
2. BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower.
3. BREACH OF WARRANTY. Any of Borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
material respect.
4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. JUDGEMENTS, ATTACHMENTS. Any money judgement, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated unbonded or unstayed for a period of 10
days or in any event later than five days prior to the date of any proposed sale
thereunder.
6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
E. MISCELLANEOUS PROVISIONS.
1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
your Bank or any holder of Notes issued hereunder, 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. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that your Bank may make hereunder, are cumulative to, and
not exclusive of, any rights or remedies, otherwise available.
The Commitment Letter dated October 3, 1996, is attached hereto and incorporated
herein by this reference for additional terms. In the event of a conflict
between this Agreement and the Letter, the terms in the Letter shall take
precedence.
DataRace, Inc.
BY /s/ GREGORY T. SKALLA
----------------------------
(Authorized Signature)
BY Gregory T. Skalla
----------------------------
(Print Name)
BY CFO
----------------------------
(Title)
<PAGE>
EXHIBIT 10.27
-------------
SECURITIES PURCHASE AGREEMENT
-----------------------------
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of January 10,
1997, by and among DATA RACE, INC., a Texas corporation, with headquarters
located at 12400 Network Blvd., San Antonio, TX 78249 (the "COMPANY"), and each
of the purchasers (individually, a "PURCHASER" and collectively, the
"PURCHASERS") set forth on the execution pages hereof (the "EXECUTION PAGES").
WHEREAS:
A. The Company and the Purchasers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions 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 "SECURITIES ACT");
B. Each of the Purchasers desires to purchase, upon the terms and
conditions stated in this Agreement, (i) at the First Closing (as hereinafter
defined), the number of units (the "UNITS") set forth immediately below such
Purchaser's name on the Execution Pages, each Unit consisting of (a) one (1)
share of the Company's 1997 Series A Convertible Preferred Stock, no par value
(the "PREFERRED STOCK"), and (b) warrant(s) (the "WARRANT"), in the form
attached hereto as Exhibit B, to purchase 9.16 shares of Common Stock (as
---------
defined below) at a purchase price per share of $16.375, and (ii) at the Second
Closing (as hereinafter defined), a pro rata portion of the Units to be issued
thereat as set forth in Section 1(a) below. The rights, preferences and
privileges of the Preferred Stock, including the terms upon which such Preferred
Stock is convertible into shares of the Company's common stock, no par value
(the "COMMON STOCK"), are set forth in the form of Statement of Designations,
Preferences and Rights attached hereto as Exhibit A (the "CERTIFICATE OF
---------
DESIGNATION"). The shares of Preferred Stock to be issued and sold hereunder
are hereinafter referred to as the "PREFERRED SHARES."
C. Contemporaneous with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement, in
the form attached hereto as Exhibit C (the "REGISTRATION RIGHTS AGREEMENT"),
---------
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
NOW, THEREFORE, the Company and the Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF THE UNITS.
------------------------------
a. Purchase of the Units. The issuance, sale and purchase of the Units
-----------------------
and Preferred Shares shall take place in two (2) separate closings, the first of
which is hereinafter referred to as the "FIRST CLOSING" and the second of which
is hereinafter referred to as the "SECOND CLOSING." Subject to the satisfaction
(or waiver) of the conditions thereto set forth in Section 6 and Section 7 below
(i)
<PAGE>
at the First Closing, the Company shall issue and sell to each Purchaser and
each Purchaser shall purchase from the Company that number of Units set forth
immediately below such Purchaser's name on the Execution Pages and (ii) at the
Second Closing, the Company shall issue and sell to each Purchaser and each
Purchaser shall purchase from the Company that Purchaser's pro rata portion
(based on the number of Preferred Shares issued to such Purchaser at the First
Closing) of that number of Units which equal, in the aggregate, the lesser of
(y) 2,500 Units or (z) that number of Units which consist of Preferred Shares
and Warrants which, when added to the Preferred Shares and Warrants issued at
the First Closing, are convertible (based on the Conversion Price (as defined in
the Certificate of Designation) then in effect) or exercisable into that number
of shares of Common Stock equal to 724,219. The purchase price for each Unit
shall be One Thousand Dollars ($1,000) (the "PURCHASE PRICE").
b. Form of Payment. At each of the First Closing and Second Closing, (i)
---------------
each Purchaser shall pay the Purchase Price for the Units purchased by such
Purchaser thereat by wire transfer to the Company, in accordance with the
Company's written wiring instructions, against delivery of duly executed
certificates representing the Preferred Shares and the Warrants comprising the
Units, and (ii) the Company shall deliver such certificates against delivery of
such Purchase Price.
c. Closing Dates. Subject to the satisfaction (or waiver) of the
-------------
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Units and the Preferred Shares pursuant to this
Agreement shall be (i) in the case of the First Closing, 12:00 noon Eastern
Standard Time on January 10, 1997 and (ii) in the case of the Second Closing,
12:00 noon Eastern Standard Time, five (5) business days following notification
by the Company to each of the Purchasers of satisfaction (or waiver) of the
applicable conditions thereto set forth in Section 7(b) below (subject, in each
case, to a two (2) business day grace period at either party's option) but, in
any event, not later than October 31, 1997, or, in each case, such other time as
may be mutually agreed upon by the Company and each of the Purchasers. The
closings shall occur at the offices of Klehr, Harrison, Harvey, Branzburg &
Ellers, 1401 Walnut Street, Philadelphia, Pennsylvania 19102.
2. PURCHASERS' REPRESENTATIONS AND WARRANTIES
------------------------------------------
Each Purchaser, solely with respect to such Purchaser, represents and
warrants to the Company that:
a. Investment Purpose. Purchaser is purchasing the Preferred Shares, the
------------------
shares of Common Stock issuable upon conversion of the Preferred Shares or
otherwise pursuant to the Certificate of Designation (the "CONVERSION SHARES"),
the Warrants, and the shares of Common Stock issuable upon exercise of the
Warrants (including the shares issuable in satisfaction of Exercise Default
Payments (as defined in the Warrant) or otherwise) (the "WARRANT SHARES" and,
collectively with the Preferred Shares, the Conversion Shares, and the Warrants,
the "SECURITIES")) for Purchaser's own account for investment only and not with
a present view towards the public sale or distribution thereof, except pursuant
to sales that are exempt from the registration requirements of the Securities
Act and/or sales registered under the Securities Act. Purchaser understands that
-2-
<PAGE>
Purchaser must bear the economic risk of this investment indefinitely, unless
the Securities are registered pursuant to the Securities Act and any applicable
state securities or blue sky laws or an exemption from such registration is
available, and that the Company has no present intention of registering any such
Securities other than as contemplated by the Registration Rights Agreement.
Purchaser covenants that neither Purchaser nor its affiliates, nor any person
acting on Purchaser's or their behalf, has entered, has the intention of
entering, or will enter into any put option, short position or other similar
instrument or position (through the use of options, swaps or other derivative
securities) with respect to the Securities (collectively, "SELL SHORT" or
"SELLING SHORT") at any time after the date of the First Closing until the
earlier of the first anniversary of the First Closing and such time as such
Purchaser no longer owns any Preferred Shares (the "LIMITATION PERIOD") or shall
take any action for the sole purpose of lowering the price at which the
Preferred Shares are convertible into Conversion Shares; provided, however, that
-----------------
no person shall be deemed to Sell Short within the restrictions of this Section
2(a) if such person sells shares of Common Stock at least ninety (90) days after
the First Closing and delivers a Notice of Conversion to the Company with
respect to an equal number of Conversion Shares within forty-eight (48) hours of
such sale and nothing herein shall prevent any Purchaser from Selling Short in
order to accomodate bona fide orders placed by a customer of the Purchaser and,
provided further, that nothing herein shall prevent any affiliate of Credit
Suisse First Boston Corporation ("FIRST BOSTON") domiciled outside the United
States (a "FOREIGN AFFILIATE") from Selling Short. First Boston agrees that
neither it nor any its affiliates domiciled in the United States shall induce or
cause any Foreign Affiliate to Sell Short. Upon the conclusion of the
Limitation Period and until the second anniversary of the First Closing,
Purchaser may Sell Short only at a price greater than the Maximum Conversion
Price (as defined in the Certificate of Designation). Further, as a condition
to any transfer of any or all of the Preferred Shares, any transferee shall
agree to be bound by the restrictions contained in this Section 2(a), which
agreement shall be for the benefit of the Company and all holders of Preferred
Shares.
b. Accredited Investor Status. Purchaser is an "ACCREDITED INVESTOR" as
--------------------------
that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. Purchaser understands that the Units are being
----------------------
offered and sold to Purchaser in reliance upon specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and Purchaser's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of Purchaser to acquire the
Units, the Preferred Shares and the Warrants.
d. Information. Purchaser and its counsel, if any, have been furnished
-----------
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 Purchaser or its counsel. Purchaser and its counsel, if any, have
been afforded the opportunity to ask questions of the Company and have received
what Purchaser believes to be satisfactory answers to any such inquiries.
Neither such inquiries nor any other due diligence investigation conducted by
Purchaser or its counsel or any of
-3-
<PAGE>
its representatives shall modify, amend or affect Purchaser's right to rely on
the Company's representations and warranties contained in Section 3 below.
Purchaser understands that Purchaser's investment in the Securities involves a
high degree of risk.
e. Governmental Review. Purchaser understands that no United States
-------------------
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Resale. Purchaser understands that (i) except as provided
------------------
in the Registration Rights Agreement, the Securities have not been and are not
being registered under the Securities Act or any state securities laws, and may
not be transferred unless (a) subsequently registered thereunder, or (b)
Purchaser shall have delivered to the Company an opinion of counsel (which
opinion and counsel shall be reasonably acceptable to the Company, and, in the
case of a tranfer to an affiliate of such Purchaser, the cost of which shall be
borne by the Company) to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration or (c) sold pursuant to Rule 144 promulgated under the Securities
Act (or a successor rule) ("RULE 144"); (ii) any sale of such Securities made in
reliance on Rule 144 may be made only in accordance with the terms of said Rule
and further, if said Rule is not applicable, any resale of such Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities 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 Securities Act or any state securities laws or to comply with the
terms and conditions of any exemption thereunder (in each case, other than
pursuant to the Registration Rights Agreement).
g. Legends. Purchaser understands that the Preferred Shares, Warrants
-------
and, until such time as the Conversion Shares and Warrant Shares have been
registered under the Securities Act as contemplated by the Registration Rights
Agreement or otherwise may be sold by Purchaser pursuant to Rule 144 without any
restriction as to the public resale thereof, the certificates for the Conversion
Shares and Warrant Shares, may bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of the
certificates for such Securities):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be sold, transferred or assigned in the
absence of an effective registration statement for the securities under
said Act, or an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, that registration is not required under said Act
or unless sold pursuant to Rule 144(k) under said Act.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by state securities laws, (a) the sale of
such Security is registered under the Securities Act, or (b) such
-4-
<PAGE>
holder provides the Company with an opinion of counsel, in form, substance and
scope reasonably acceptable to the Company, to the effect that a public sale or
transfer of such Security may be made without registration under the Securities
Act or (c) such holder provides the Company with reasonable assurances that such
Security can be sold pursuant to Rule 144 without any restriction as to the
number of Securities acquired as of a particular date that can then be
immediately sold. Purchaser agrees to sell all Securities, including those
represented by a certificate(s) from which the legend has been removed, pursuant
to an effective registration statement and in accordance with the prospectus
delivery requirements set forth in the rules promulgated by the SEC or in
compliance with an exemption from the registration requirements of applicable
securities law. In the event the above legend is removed from any Security and
thereafter the effectiveness of a registration statement covering such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
Purchaser the Company may require that the above legend be placed on any such
Security that cannot then be sold pursuant to an effective registration
statement or Rule 144 without any restriction as to the number of Securities
acquired as of a particular date that can then be immediately sold, which legend
shall be removed when such Security may be sold pursuant to an effective
registration statement or Rule 144 without any restriction as to the number of
Securities acquired as of a particular date that can then be immediately sold.
h. Authorization; Enforcement. This Agreement and the Registration
--------------------------
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of Purchaser and are valid and binding agreements of Purchaser
enforceable in accordance with their terms.
i. Residency. Purchaser is a resident of the state and jurisdiction set
---------
forth immediately below Purchaser's name on the Execution Pages.
j. Acknowledgments Regarding Placement Agent. Purchaser acknowledges
-----------------------------------------
that The Zanett Securities Corporation is acting as placement agent (the
"PLACEMENT AGENT") for the Securities being offered hereby and will be
compensated by the Company for acting in such capacity. Purchaser further
acknowledges that the Placement Agent has acted solely as placement agent in
connection with the offering of the Securities by the Company, that the
information and data provided to Purchaser and referred to in subsection (d)
above have not been subjected to independent verification by the Placement
Agent, and that the Placement Agent makes no representation or warranty with
respect to the accuracy or completeness of such information, data or other
related disclosure material. Purchaser further acknowledges that in making its
decision to enter into this Agreement and purchase the Securities it has relied
on its own examination of the Company and the terms of, and consequences, of
holding, the Securities.
-5-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each Purchaser that:
a. Organization and Qualification. The Company and each of its
------------------------------
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated, and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material Adverse
Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on the
operations, properties, financial condition or prospects of the Company and its
subsidiaries on a consolidated basis or on the transactions contemplated hereby.
b. Authorization; Enforcement. (i) The Company has the requisite
--------------------------
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement and the Warrants, to issue and sell the Units in
accordance with the terms hereof and to issue the Conversion Shares and Warrant
Shares upon conversion of the Preferred Shares and exercise of the Warrants,
respectively, in accordance with the terms thereof; (ii) the execution and
delivery of this Agreement, the Registration Rights Agreement and the Warrants
by the Company and the consummation by it of the transactions contemplated
hereby and thereby (including without limitation the issuance of the Preferred
Shares and the Warrants and the issuance and reservation for issuance of the
Conversion Shares and Warrant Shares issuable upon conversion and exercise
thereof) have been duly authorized by the Company's Board of Directors and,
except as set forth on Schedule 3(b) hereof, no further consent or authorization
-------------
of the Company, its Board or Directors, or its stockholders is required (under
Rule 4460(i) promulgated by the National Association of Securities Dealers or
otherwise); (iii) this Agreement has been duly executed and delivered by the
Company; and (iv) this Agreement constitutes, and, upon execution and delivery
by the Company of the Registration Rights Agreement and the Warrants, such
agreements will constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their terms.
c. Capitalization. The capitalization of the Company as of the date
--------------
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares reserved for issuance pursuant to the
Company's stock option plans, the number of shares reserved for issuance
pursuant to securities (other than the Preferred Shares and the Warrants)
exercisable for, or convertible into or exchangeable for any shares of Common
Stock and the number of shares to be reserved for issuance upon conversion of
the Preferred Shares and exercise of the Warrants is set forth on Schedule 3(c).
-------------
All of such outstanding shares of capital stock have been, or upon issuance will
be, validly issued, fully paid and nonassessable. No shares of capital stock of
the Company (including the Preferred Shares, the Conversion Shares and the
Warrant Shares) are subject to preemptive rights or any other similar rights of
the stockholders of the Company or any liens or encumbrances. Except as
disclosed in Schedule 3(c) or as contemplated herein, as of the date of this
-------------
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or
-6-
<PAGE>
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the Company
or any of its subsidiaries, or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its subsidiaries, and (ii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of its or their securities under the Securities Act
(except the Registration Rights Agreement). The Company has furnished to the
Purchasers true and correct copies of the Company's Articles of Incorporation as
in effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-
laws as in effect on the date hereof (the "BY-LAWS"), and all other instruments
and agreements governing securities convertible into or exercisable for Common
Stock of the Company. The Certificate of Designation, in the form attached
hereto, has been duly filed with the Secretary of State for the State of Texas
and the Purchasers are entitled to the rights set forth therein. The Company
shall provide Purchasers with a written update of this representation signed by
the Company's Chief Executive Officer or Chief Financial Officer on behalf of
the Company as of the Closing Date.
d. Issuance of Shares. The Preferred Shares are duly authorized and,
------------------
upon issuance in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances and will not be subject to preemptive rights or other similar
rights of stockholders of the Company. The Conversion Shares and Warrant Shares
are duly authorized and reserved for issuance, and, upon conversion of the
Preferred Shares and exercise of the Warrants in accordance with the terms
thereof, will be validly issued, fully paid and non-assessable, and free from
all taxes, liens, claims and encumbrances and will not be subject to preemptive
rights or other similar rights of stockholders of the Company.
e. No Conflicts. The execution, delivery and performance of this
------------
Agreement, the Registration Rights Agreement and the Warrants by the Company,
the performance by the Company of its obligations under the Certificate of
Designation, and the consummation by the Company of the transactions
contemplated hereby and thereby (including without limitation the issuance and
reservation for issuance of the Preferred Shares, Conversion Shares and Warrant
Shares) will not (i) result in a violation of the Certificate of Incorporation
or 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 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) applicable to the Company or any of its subsidiaries or by which
any property or asset of the Company or any of its subsidiaries is bound or
affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Neither the Company nor any of its
subsidiaries is in violation of its Certificate of Incorporation, By-laws or
other organizational documents and neither the Company nor any of its
subsidiaries is in default (and no event has occurred which, with notice or
lapse of time or both, would put the Company or any of its subsidiaries in
default) under, nor has there occurred any event giving others (with notice or
lapse of
-7-
<PAGE>
time or both) any rights of termination, amendment, acceleration or cancellation
of, any agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, except for possible defaults or rights as would not,
individually or in the aggregate, have a Material Adverse Effect. The businesses
of the Company and its subsidiaries are not being conducted, and shall not be
conducted so long as a Purchaser owns any of the Securities, in violation of any
law, ordinance or regulation of any governmental entity, except for possible
violations the sanctions for which either singly or in the aggregate would not
have a Material Adverse Effect. Except as specifically contemplated by this
Agreement and as required under the Securities Act and any applicable state
securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency or any regulatory or self regulatory agency in order for it
to execute, deliver or perform any of its obligations under this Agreement, the
Registration Rights Agreement or the Warrants or to perform its obligations
under the Certificate of Designation, in each case in accordance with the terms
hereof or thereof. The Company is not in violation of the listing requirements
of the Nasdaq National Market ("NASDAQ") and does not reasonably anticipate that
the Common Stock will be delisted by NASDAQ for the foreseeable future.
f. SEC Documents, Financial Statements. Except as disclosed in Schedule
----------------------------------- --------
3(f), since December 31, 1993 , the Company has timely filed all reports,
- ----
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT") (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and
schedules thereto and documents (other than exhibits) incorporated by reference
therein, being hereinafter referred to herein as the "SEC DOCUMENTS"). The
Company has delivered to the Purchasers true and complete copies of the SEC
Documents, except for such exhibits, schedules and incorporated documents. As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Exchange 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 include footnotes or may be condensed or
summary statements) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Except as set forth in the financial
statements of the Company included in the SEC Documents, the Company has no
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to the date of such financial statements
and (ii) obligations under contracts and commitments incurred in the ordinary
course of business and not
-8-
<PAGE>
required under generally accepted accounting principles to be reflected in such
financial statements, which, individually or in the aggregate, are not material
to the financial condition or operating results of the Company. The Company has
not provided to any Purchaser any information which, according to applicable
law, rule or regulation, should have been disclosed publicly by the Company but
which has not been so disclosed. Unless and only to the extent permitted by
Section 4(k) hereof, the Company has not incurred any indebtedness under its
line of credit with Imperial Bank.
g. Absence of Certain Changes. Since September 30, 1996 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, except as disclosed in Schedule 3(g) or in the SEC Documents.
-------------
h. Absence of Litigation. Except as disclosed in the SEC Documents,
---------------------
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company, any of its subsidiaries, or any of
their respective directors or officers in their capacities as such.
i. Disclosure. All information relating to or concerning the Company set
----------
forth in this Agreement or provided to the Purchasers pursuant to Section 2(d)
hereof and otherwise in connection with the transactions contemplated hereby is
true and correct in all material respects and the Company has not omitted to
state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading. No event or circumstance has occurred or exists with respect to
Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial conditions, which, under applicable law, rule
or regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed.
j. Acknowledgment Regarding the Purchasers' Purchase of the Securities.
-------------------------------------------------------------------
The Company acknowledges and agrees that the Purchasers are not acting as
financial advisors or fiduciaries of the Company (or in any similar capacity)
with respect to this Agreement and the transactions contemplated hereby, and any
advice given by Purchasers, or any of their respective representatives or
agents, in connection with this Agreement and the transactions contemplated
hereby is merely incidental to the Purchasers' purchase of the Units, the
Preferred Shares and the Warrants. The Company further represents to the
Purchasers that the Company's decision to enter into this Agreement has been
based solely on the independent evaluation of the Company and its
representatives.
k. Current Public Information. The Company is currently eligible to
--------------------------
register the resale of its Common Stock on a registration statement on Form S-3
under the Securities Act.
l. No General Solicitation. Neither the Company nor any distributor
-----------------------
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the
-9-
<PAGE>
Company, or any such distributor, has conducted any "GENERAL SOLICITATION," as
such term is defined in Regulation D, with respect to any of the Securities
being offered hereby.
m. 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 offerers to
buy any security under circumstances that would require registration of the
Securities being offered hereby under the Securities Act.
n. No Brokers. The Company has taken no action which would give rise to
----------
any claim by any person for brokerage commissions, finder's fees or similar
payments by any Purchaser relating to this Agreement or the transactions
contemplated hereby, except for dealings with the Placement Agent, whose
commissions and fees will be paid for by the Company.
4. COVENANTS.
---------
a. Best Efforts. The parties shall use their best efforts timely to
------------
satisfy each of the conditions described in Section 6 and 7 of this Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with
---------------------
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Purchaser promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Purchasers
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United States or obtain exemption therefrom, and shall provide
evidence of any such action so taken to each Purchaser on or prior to such
Closing Date.
c. Reporting Status. So long as the Purchasers beneficially own any of
----------------
the Securities, the Company shall timely file all reports required to be filed
with the SEC pursuant to the Exchange Act, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would permit such
termination.
d. Use of Proceeds. The Company shall use the proceeds from the sale of
---------------
the Units for general corporate purposes, including the development and
introduction of new products; provided, however, that the Company shall not,
directly or indirectly, use such proceeds for any loan to or investment in any
other corporation, partnership, enterprise or other person (except in connection
with its direct subsidiaries).
e. Financial Information. The Company agrees to send the following
---------------------
reports to each Purchaser until such Purchaser transfers, assigns, or sells all
of the Securities: (i) within ten (10) days after the filing with the SEC, a
copy of its Annual Report on Form 10-K, its proxy statements, its Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K; and (ii) within one
(1) day after release, copies of all press releases issued by the Company or any
of its subsidiaries.
-10-
<PAGE>
f. Reservation of Shares. The Company shall at all times have authorized
---------------------
and reserved for the purpose of issuance a sufficient number of shares of Common
Stock to provide for the full conversion of the outstanding Preferred Shares and
issuance of the Conversion Shares in connection therewith and the full exercise
of the Warrants and the issuance of the Warrant Shares in connection therewith.
In that regard, a "sufficient number of shares" with respect to the Preferred
Shares shall be deemed to be equal to such number of Conversion Shares issuable
upon conversion of the Preferred Shares if the Discounted Conversion Price (as
defined in the Certificate of Designation) were fifty percent (50%) of the
Discounted Conversion Price then in effect. The Company shall not reduce the
number of shares reserved for issuance upon conversion of the Preferred Shares
and the full exercise of the Warrants without the consent of each of the
Purchasers, which consent will not be unreasonably withheld.
g. Listing. The Company shall promptly secure the listing of the
-------
Conversion Shares and Warrant Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares from time to time issuable upon conversion of the Preferred
Shares and Warrant Shares from time to time issuable upon exercise of the
Warrants.
h. Corporate Existence. So long as any Purchaser beneficially owns any
-------------------
Preferred Shares or Warrants, the Company shall maintain its corporate
existence, except in the event of a merger, consolidation or sale of all or
substantially all of the Company's assets, as long as the surviving or successor
entity in such transaction (i) assumes the Company's obligations hereunder and
under the agreements and instruments entered into in connection herewith
regardless of whether or not the Company would have had a sufficient number of
shares of Common Stock authorized and available for issuance in order to affect
the conversion of all Preferred Shares and exercise in full of all Warrants
outstanding as of the date of such transaction and (ii) is a publicly traded
corporation whose common stock is listed for trading on the American Stock
Exchange, the New York Stock Exchange or NASDAQ.
i. Expenses. Except as otherwise provided herein or in Section 5 of the
--------
Registration Rights Agreement, each party hereto shall be responsible for the
payment of its own expenses incurred in connection with the negotiation,
execution, delivery and performance of this Agreement.
j. Lock-Up Letters. The Company shall cause its Chairman, Chief
---------------
Executive Officer, and Chief Financial Officer (collectively, the "SENIOR
MANAGERS") to execute and deliver to the Purchasers at the First Closing a Lock-
Up Letter, in the form attached hereto as Exhibit E (the "LOCK-UP LETTERS").
---------
k. Corporate Indebtedness. Unless all of the Purchasers otherwise agree
----------------------
in writing, so long as any Purchaser 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 Purchasers, (the "WAIVER") of the covenant
-11-
<PAGE>
contained in the documentation executed by the Company in connection with that
certain Security and Loan Agreement dated November 12, 1996 by and 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 by the Company, provided that the aggregate amount of such
indebtedness under all such lines of credit at any time outstanding shall not
exceed $1,500,000. The Company shall use its best efforts to obtain the Waiver
as soon as practicable after the First Closing.
5. TRANSFER AGENT INSTRUCTIONS.
---------------------------
The Company shall instruct its transfer agent to issue certificates,
registered in the name of the appropriate Purchaser or its nominee, for the
Conversion Shares and Warrant Shares in such amounts as specified from time to
time by such Purchaser to the Company upon conversion of the Preferred Shares or
exercise of the Warrants. Prior to registration of the Conversion Shares and
Warrant Shares under the Securities Act or resale of such Securities under Rule
144, all such certificates shall bear the restrictive legend specified in
Section 2(g) of this Agreement. The Company warrants that no instruction other
than such instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof, in the case of the
Conversion Shares and Warrant Shares, prior to registration of the Conversion
Shares and Warrant Shares under the Securities Act, will be given by the Company
to its transfer agent and that the Securities shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section shall affect in any way the Purchasers' obligations and agreement
set forth in Section 2(g) hereof to resell the Securities pursuant to an
effective registration statement and in accordance with the prospectus delivery
requirements set forth in the rules promulgated by the SEC or in compliance with
an exemption from the registration requirements of applicable securities law.
If a Purchaser provides the Company with an opinion of counsel, which opinion of
counsel shall be reasonably acceptable to the Company (and, in the case of a
transfer to an affiliate of such Purchaser, the cost of which shall be borne by
the Company), to the effect that the Securities to be sold or transferred may be
sold or transferred pursuant to an exemption from registration, the Company
shall permit the transfer, and, in the case of the Conversion Shares and Warrant
Shares promptly instruct its transfer agent to issue one or more certificates in
such name and in such denominations as specified by such Purchaser.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
The obligation of the Company hereunder to issue and sell the Units to each
of the Purchasers at the closings is subject to the satisfaction, at or before
the appropriate closing date, of each of the following conditions thereto,
provided that these conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.
-12-
<PAGE>
a. With respect to the First Closing:
(i) Purchaser shall have executed the signature page to this
Agreement and the Registration Rights Agreement, and delivered the same to the
Company.
(ii) Purchaser shall have delivered the Purchase Price for the Units
purchased in accordance with Section 1(b) above.
(iii) The representations and warranties of Purchaser shall be true
and correct in all material respects as of the date when made and as of the date
and time of the First Closing as though made at that time (except for
representations and warranties that speak as of a specific date), and Purchaser
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by Purchaser at or prior to such First Closing.
(iv) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
b. With respect to the Second Closing:
(i) Purchaser shall have executed the signature page to this
Agreement and the Registration Rights Agreement, and delivered the same to the
Company.
(ii) Purchaser shall have delivered the Purchase Price for the Units
purchased in accordance with Section 1(b) above.
(iii) The representations and warranties of Purchaser shall be true
and correct in all material respects as of the date when made and as of the date
and time of the Second Closing as though made at that time (except for
representations and warranties that speak as of a specific date), and Purchaser
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by Purchaser at or prior to such Second Closing.
(iv) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
-13-
<PAGE>
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
-----------------------------------------------------
The obligation of each of the Purchasers hereunder to purchase the Units at
the closings is subject to the satisfaction, at or before the appropriate
closing date, of each of the following conditions, provided that these
conditions are for each Purchaser's sole benefit and may be waived by such
Purchaser at any time in such Purchaser's sole discretion:
a. With respect to the First Closing:
(i) The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Purchasers.
(ii) The Certificate of Designation shall have been accepted for
filing with the Secretary of State of the State of Texas, and a copy thereof
certified by the Secretary of State shall have been delivered to the Purchasers.
(iii) The Company shall have delivered duly executed certificates
representing the Preferred Shares and Warrants being so purchased to each
Purchaser in accordance with Section 1(b) above.
(iv) The Common Stock shall be authorized for quotation on NASDAQ
and trading in the Common Stock (or NASDAQ generally) shall not have been
suspended by the SEC or NASDAQ.
(v) The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the date
of the First Closing 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 in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the First Closing. The Purchasers
shall have received a certificate, executed by the chief executive officer of
the Company, dated as of the First Closing, to the foregoing effect and as to
such other matters as may be reasonably requested by the Purchasers.
(vi) No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(vii) The Purchasers shall have received the officer's certificate
described in Section 3(c) above, dated as of the First Closing.
-14-
<PAGE>
(viii) The Purchasers shall have received an opinion of the Company's
counsel, dated as of the First Closing, in form, scope and substance reasonably
satisfactory to the Purchasers and in substantially the form of Exhibit D-1
-----------
attached hereto.
(ix) The Senior Managers shall have executed and delivered the Lock-
Up Letters.
b. With respect to the Second Closing:
(i) The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Purchasers.
(ii) The Company shall have delivered duly executed certificates
representing the Preferred Shares and Warrants being so purchased to each
Purchaser in accordance with Section 1(b) above.
(iii) The Common Stock shall be authorized for quotation on NASDAQ
and trading in the Common Stock (or NASDAQ generally) shall not have been
suspended by the SEC or NASDAQ.
(iv) The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the date
of the Second Closing 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 in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Second Closing. The
Purchasers shall have received a certificate, executed by the chief executive
officer of the Company, dated as of the Second Closing, to the foregoing effect
and as to such other matters as may be reasonably requested by the Purchasers.
(v) No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(vi) The Purchasers shall have received the officer's certificate
described in Section 3(c) above, dated as of the Second Closing.
(vii) The Purchasers shall have received an opinion of the Company's
counsel, dated as of the Second Closing, in form, scope and substance reasonably
satisfactory to the Purchasers and in substantially the form of Exhibit D-2
-----------
attached hereto.
(viii) The Company shall have collected at least $2,000,000 on account
of revenues generated from the Hogan technology in the course of any ninety (90)
consecutive day period,
-15-
<PAGE>
beginning not earlier than the date of the First Closing and ending not later
than October 15, 1997. The Purchasers shall have received a certificate,
executed by the chief financial officer of the Company, dated as of the Second
Closing, to the foregoing effect.
(ix) The Registration Statement required to be filed by the Company
pursuant to Section 2(a) of the Registration Rights Agreement shall have been
declared effective by the SEC no later than August 31, 1997 and shall be
effective and available for use by the Purchasers as of the date of the Second
Closing.
(x) No material adverse change or development in the business,
operations, financial condition, results of operations or prospects of the
Company shall have occurred since the First Closing.
8. 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. The parties hereto hereby submit to the
exclusive jurisdiction of the United States federal courts located in New York
City with respect to any dispute arising under this Agreement, the agreements
entered into in connection herewith or the transactions contemplated hereby or
thereby.
b. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party.
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
----------------------------
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Purchasers make any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the party to be charged with enforcement and no provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and all of the Purchasers.
f. Notices. Any notices required or permitted to be given under the
-------
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered
-16-
<PAGE>
personally or by courier or by confirmed telecopy, and shall be effective five
days after being placed in the mail, if mailed, or upon receipt or refusal of
receipt, if delivered personally or by courier or confirmed telecopy, in each
case addressed to a party. The addresses for such communications shall be:
If to the Company:
Data Race, Inc.
12400 Network Blvd.
San Antonio, TX 78249
Attn: President
with copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, TX 78205
Attn: Matthew R. Bair, Esq.
If to a Purchaser, to the address set forth immediately below such
Purchaser's name on the Execution Pages.
Each party shall provide notice to the other parties of any change in
address.
g. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their successors and assigns. Neither
the Company nor the Purchasers shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, each of the Purchasers may assign its rights
hereunder to any of such Purchaser's "AFFILIATES," as that term is defined under
the Exchange Act, without the consent of the Company. This provision shall not
limit a Purchaser's right to transfer the Securities pursuant to the terms of
the Certificate of Designation, the Warrants and this Agreement or to assign
such Purchaser's rights hereunder to any such transferee.
h. Third Party Beneficiaries. This Agreement is intended for the benefit
-------------------------
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
i. Survival. The representations and warranties of the Company and the
--------
agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the
First Closing and Second Closing hereunder notwithstanding any due diligence
investigation conducted by or on behalf of the Purchasers. The Company agrees
to indemnify and hold harmless each of the Purchasers and each of such
Purchaser's officers, directors, employees, partners, agents and affiliates for
loss or damage
-17-
<PAGE>
arising as a result of or related to any breach or alleged breach by the Company
of any of its representations or covenants set forth herein, including
advancement of expenses as they are incurred.
j. Publicity. The Company and each of the Purchasers shall have the
---------
right to approve before issuance any press releases, SEC, NASDAQ or NASD
filings, 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 the Purchasers, to make any press release or SEC,
NASDAQ or NASD filings with respect to such transactions as is required by
applicable law and regulations (although the Purchasers shall be consulted by
the Company in connection with any such press release prior to its release and
shall be provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to be
------------------
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that a closing shall not have occurred on
-----------
or before thirty (30) days from the date hereof, unless the parties agree
otherwise, this Agreement shall terminate at the close of business on such date.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-18-
<PAGE>
IN WITNESS WHEREOF, the Purchasers and the Company have caused this
Agreement to be duly executed as of the date first above written.
DATA RACE, INC.
By: /S/ GREGORY T. SKALLA
-----------------------------------------
Name: Gregory T. Skalla
---------------------------------------
Title: Chief Financial Officer and Secretary
--------------------------------------
-19-
<PAGE>
PURCHASER:
NAME: Capital Ventures International
------------------------------
SIGNATURE:
By: Bala International, Inc., as agent
----------------------------------
By: /s/ Andrew Frost
-----------------------------
Name: Andrew Frost
---------------------------
Title: Director
--------------------------
ADDRESS:
Capital Place
----------------------------------
P. O. Box 1787GT
----------------------------------
Grand Cayman, Cayman Islands BWI
----------------------------------
ADDRESS TO WHICH SECURITIES SHOULD BE SENT (IF DIFFERENT FROM ABOVE
ADDRESS):
c/o Bala International, Inc.
----------------------------------
401 City Avenue, Suite 220
----------------------------------
Bala Cynwyd, PA 19004
----------------------------------
Number of Units to be purchased at the First Closing: 3,300
-------
PURCHASER:
NAME: Zanett Lombardier, Ltd.
------------------------------
SIGNATURE:
By: /s/ Tomaso Barbini
------------------------------
Name: Tomaso Barbini
----------------------------
Its: Director to Advisor
-----------------------------
ADDRESS:
Kirk House
----------------------------------
P. O. Box 1100
----------------------------------
Grand Cayman, Cayman Islands BWI
----------------------------------
ADDRESS TO WHICH SECURITIES SHOULD BE SENT (IF DIFFERENT FROM ABOVE
ADDRESS):
----------------------------------
----------------------------------
----------------------------------
NUMBER OF UNITS TO BE PURCHASED AT THE FIRST CLOSING: 500
-----
PURCHASER:
NAME: Credit Suisse First Boston
--------------------------------
SIGNATURE:
By: /s/ John McAvoy
--------------------------------
Name: John McAvoy
------------------------------
Its: Managing Director
------------------------------
ADDRESS:
Eleven Madison Avenue
-------------------------------------
New York, New York 10010-3629
-------------------------------------
ADDRESS TO WHICH SECURITIES SHOULD BE SENT (IF DIFFERENT FROM ABOVE
ADDRESS):
-------------------------------------
-------------------------------------
-------------------------------------
Number of Units to be purchased at the First Closing: 1200
------
-20-
<PAGE>
Exhibit 10.28
-------------
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of January 10,
1997 by and among DATA RACE, INC., a Texas corporation, with headquarters
located at 12400 Network Blvd., San Antonio, TX 78249 (the "COMPANY"), and the
undersigned (together with affiliates, the "INITIAL INVESTORS").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investors (the "SECURITIES
PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investors (i)
shares of its 1997 Series A Convertible Preferred Stock (the "PREFERRED STOCK")
that is convertible into shares (the "CONVERSION SHARES") of the Company's
common stock (the "COMMON STOCK"), upon the terms and subject to the
limitations and conditions set forth in the Statement of Designations, Rights
and Preferences with respect to such Preferred Stock (the "CERTIFICATE OF
DESIGNATION") and (ii) warrants (the "WARRANTS") to acquire shares of Common
Stock (the "WARRANT SHARES"); and
B. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"SECURITIES 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 Initial
Investors hereby agree as follows:
1. DEFINITIONS.
-----------
a. As used in this Agreement, the following terms shall have the
following meanings:
(i) "INVESTORS" means the Initial Investors and any transferees or
assignees who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("RULE 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
<PAGE>
(iii) "REGISTRABLE SECURITIES" means the Conversion Shares and the
Warrant Shares issued or issuable with respect to the Preferred Stock and
Warrants and any shares of capital stock issued or issuable, from time to time
(with any adjustments), on or in exchange for or otherwise with respect to any
of the foregoing.
(iv) "REGISTRATION STATEMENT" means a registration statement of the
Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
------------
a. Mandatory Registration. The Company shall prepare, and, on or
----------------------
prior to February 28, 1997, file with the SEC a Registration Statement on Form
S-3 (or, if Form S-3 is not then available, on such form of Registration
Statement as is then available to effect a registration of the Registrable
Securities, subject to the consent of the Initial Investors (as determined
pursuant to Section 11(j) hereof), which consent will not be unreasonably
withheld) covering the resale of the Registrable Securities, which Registration
Statement, to the extent allowable under the Securities Act and the Rules
promulgated thereunder (including Rule 416), shall state that such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Preferred Stock and exercise
of the Warrants (i) to prevent dilution resulting from stock splits, stock
dividends or similar transactions or (ii) by reason of changes in the Conversion
Price of the Preferred Stock or the Exercise Price of the Warrants in accordance
with the terms thereof. The Registration Statement (and each amendment or
supplement thereto, and each request for acceleration of effectiveness thereof)
shall be provided to (and subject to the approval of) the Initial Investors and
their counsel prior to its filing or other submission.
b. Payments by the Company. The Company shall use its best efforts to
-----------------------
obtain effectiveness of the registration statement as soon as practicable. If
the registration statement(s) covering the Registrable Securities required to be
filed by the Company pursuant to Section 2(a) hereof is not declared effective
by the SEC on or before April 30, 1997 (the "FIRST DEADLINE") or on or before
June 1, 1997 (the "SECOND DEADLINE") or if, after the registration statement has
been declared effective by the SEC, sales cannot be made pursuant to the
registration statement by reason of a stop order or the Company's failure to
update the registration statement or any other reason outside the control of the
Investors, then the Company will make payments to the Investors in such amounts
and at such times as shall be determined pursuant to this Section 2(b) as
liquidated damages to the Investors by reason of any such delay in or reduction
of their ability to sell the Registrable Securities (which remedy shall be
exclusive of any other remedies available at law or in equity except as
otherwise provided in the Certificate of Designation). The Company shall pay to
each Investor an amount equal to the sum of (i) the aggregate Purchase Price of
the Units held by such Investor (the "AGGREGATE SHARE PRICE") multiplied by two
hundredths (.02) times the number of months (prorated for partial months) after
the First Deadline and prior to the earlier of the Second Deadline and the
2
<PAGE>
date the Registration Statement filed pursuant to Section 2(a) is declared
effective by the SEC and (ii) the Aggregate Share Price multiplied by three
hundredths (.03) times the sum of: (y) the number of months (prorated for
partial months) after the Second Deadline and prior to the date the Registration
Statement filed pursuant to Section 2(a) is declared effective by the SEC and
(z) the number of months (prorated for partial months) that sales cannot be made
pursuant to the registration statement after the registration statement has been
declared effective; provided, however that there shall be excluded from each
such period any delays which are solely attributable to changes (other than
corrections of Company mistakes with respect to information previously provided
by the Investors) required by the Investors in the registration statement with
respect to information relating to the Investors, including, without limitation,
changes to the plan of distribution. (For example, if the Registration Statement
is not effective by April 30, 1997, the Company would pay $20,000 per month for
each $1,000,000 of Aggregate Share Price and would continue to pay $20,000 per
month for each $1,000,000 of Aggregate Share Price until the registration
statement becomes effective, and if the Registration Statement is not effective
on the Second Deadline, then from the Second Deadline the Company would pay
$30,000 per month for each $1,000,000 of Aggregate Purchase Price until the
Registration Statement becomes effective or the shares of Preferred Stock are
redeemed pursuant to the Certificate of Designation.) Such amounts shall be paid
in cash or, at each Investor's option, may be convertible into Common Stock at
the "CONVERSION PRICE" (as defined in the Certificate of Designation). Any
shares of Common Stock issued upon conversion of such amounts shall be
Registrable Securities. If the Investor desires to convert the amounts due
hereunder into Registrable Securities it shall so notify the Company in writing
within two (2) business days of the date on which such amounts are first payable
in cash and such amounts shall be so convertible (pursuant to the mechanics set
forth under Article VI of the Certificate of Designation), beginning on the last
day upon which the cash amount would otherwise be due in accordance with the
following sentence. Payments of cash pursuant hereto shall be made within ten
(10) days after the end of each period that gives rise to such obligation,
provided that, if any such period extends for more than thirty (30) days,
interim payments shall be made for each such thirty (30) day period.
d. Piggy-Back Registrations. If at any time prior to the expiration
------------------------
of the Registration Period (as hereinafter defined) the Company shall file with
the SEC a Registration Statement relating to (i) a firm underwritten offering
for its own account or the account of others under the Securities Act of any of
its equity securities or (ii) any other offering for its own account or the
account of others under the Securities Act of any of its equity securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans) the Company shall send to each Investor who is
entitled to registration rights under this Section 2(d) written notice of such
determination and, if within fifteen (15) days after the effective date of such
notice, such Investor shall so request in writing, the Company shall include in
such Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s)' judgment, marketing or other factors dictate such
limitation is
3
<PAGE>
necessary to facilitate public distribution, then the Company shall be obligated
to include in such Registration Statement only such limited portion of the
Registrable Securities with respect to which such Investor has requested
inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Investors; provided, however, that the
-------- -------
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and provided,
--------
further, however, that, after giving effect to the immediately preceding
- ------- -------
proviso, any exclusion of Registrable Securities shall be made pro rata with
holders of other securities having the right to include such securities in the
Registration Statement other than holders of securities entitled to inclusion of
their securities in such Registration Statement by reason of demand registration
rights. No right to registration of Registrable Securities under this Section
2(d) shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering.
e. Eligibility for Form S-3. The Company represents and warrants
------------------------
that it meets the requirements for the use of Form S-3 for registration of the
sale by the Initial Investors and any other Investor of the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form S-3 .
3. OBLIGATIONS OF THE COMPANY.
--------------------------
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly and file with the SEC the
Registration Statement required by Section 2(a), and thereafter use its best
efforts to cause such Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times until such
date as is the earlier of (i) the date on which all of the Registrable
Securities have been sold and (ii) the date on which the Registrable Securities
(in the reasonable opinion of counsel to the Initial Investors) may be
immediately sold to the public without registration (the "REGISTRATION PERIOD"),
which Registration Statement (including any amendments or supplements thereto
and prospectuses contained therein and all documents incorporated by reference
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein not misleading.
4
<PAGE>
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 the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement. In the event the number of
shares available under a Registration Statement filed pursuant to this Agreement
is insufficient to cover all of the Registrable Securities issued or issuable
upon conversion of the Preferred Stock and exercise of the Warrants, the Company
shall amend the Registration Statement, or file a new Registration Statement (on
the short form available therefore, if applicable), or both, so as to cover 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 its best efforts to cause
such amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC, and each item of correspondence from the SEC or the
staff of the SEC, in each case relating to such Registration Statement (other
than any portion of any thereof which contains information for which the Company
has sought confidential treatment), and (ii) such number of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
d. The Company shall use reasonable efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statement under such
other securities or "blue sky" laws of such jurisdictions in the United States
as each Investor who holds Registrable Securities being offered reasonably
requests, (ii) prepare and file in those jurisdictions such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
- -------- -------
therewith or as a condition thereto to (a) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (b) subject itself to general taxation in any such jurisdiction,
(c) file a general consent to service of
5
<PAGE>
process in any such jurisdiction, (d) provide any undertakings that cause the
Company undue expense or burden, or (e) make any change in its charter or
bylaws, which in each case the Board of Directors of the Company determines to
be contrary to the best interests of the Company and its stockholders.
e. In the event the Investors who hold a majority in interest of the
Registrable Securities being offered in an offering select underwriters for the
offering, the Company shall enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.
f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest possible moment and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof.
h. The Company shall permit a single firm of counsel designated by the
Initial Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to their filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects.
i. The Company shall make generally available to its security holders
as soon as practical, but not later than ninety (90) days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the Securities 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.
j. At the request of any Investor, the Company shall furnish, on the
date of effectiveness of the Registration Statement (i) an opinion, dated as of
such date, from counsel representing the Company addressed to the Investors and
in form, scope and substances as is customarily given in an underwritten public
offering and (ii) in the case of an underwriting, a letter, dated such date,
from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and the Investors.
6
<PAGE>
k. The Company shall make available for inspection by (i) any Investor,
(ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; provided, however, that each Inspector shall
-------- -------
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially in the form of this Section 3(k) (although failure to
require separate confidentiality agreements shall not affect the provisions
hereof). Each Investor agrees that it shall, upon learning that disclosure of
such Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, the Records deemed
confidential. Nothing herein shall be deemed to limit the Investor's ability to
sell Registrable Securities in a manner which is otherwise consistent with
applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction, (iv) such information has been
made generally available to the public other than by disclosure in violation of
this or any other agreement, or (v) such Investor consents to the form and
content of any such disclosure. The Company agrees that it shall, upon learning
that disclosure of such information concerning an Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to such Investor prior to making such disclosure, and allow
the Investor, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
m. The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by the Registration Statement to be listed on the
NYSE or the AMEX or another national securities exchange and on each additional
national securities exchange on which securities
7
<PAGE>
of the same class or series issued by the Company are then listed, if any, if
the listing of such Registrable Securities is then permitted under the rules of
such exchange, or (ii) secure the designation and quotation, of all the
Registrable Securities covered by the Registration Statement on the Nasdaq
National Market and, without limiting the generality of the foregoing, to
arrange for or maintain at least two market makers to register with the National
Association of Securities Dealers, Inc. ("NASD") as such with respect to such
Registrable Securities.
n. The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities to be offered
pursuant to the Registration Statement and enable such certificates to be in
such denominations or amounts, as the case may be, as the managing underwriter
or underwriters, if any, or the Investors may reasonably request and registered
in such names as the managing underwriter or underwriters, if any, or the
Investors may request, and, within three (3) business days after a Registration
Statement which includes Registrable Securities is ordered effective by the SEC,
the Company shall deliver, and shall cause legal counsel selected by the Company
to deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an instruction in the form attached hereto as EXHIBIT 1 and an
opinion of such counsel in the form attached hereto as EXHIBIT 2.
p. At the request of any Investor, 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 the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.
4. OBLIGATIONS OF THE INVESTORS.
----------------------------
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least three (3) business
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor.
8
<PAGE>
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
c. In the event Investors holding a majority in interest of the
Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
------------------------
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, the fees and disbursements of
counsel for the Company, the fees and disbursements contemplated by Section 3(j)
hereof, and the reasonable fees and disbursements of one counsel selected by the
Investors pursuant to Section 3(k) hereof shall be borne by the Company.
9
<PAGE>
6. INDEMNIFICATION.
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, members, employees, agents and each
person who control any Investor within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), if any, (each,
an "INDEMNIFIED PERSON"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "CLAIMS") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities (the matters in the foregoing clauses (i)
through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions
set forth in Section 6(c) with respect to the number of legal counsel, the
Company shall reimburse the Investors and each such underwriter or controlling
person, promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (i) shall not apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person
expressly for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld; and (iii) with
respect to any preliminary prospectus, shall not inure to the benefit of any
Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, if such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a Violation and such Indemnified
Person, notwithstanding such advice, used it. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.
10
<PAGE>
b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees severally and not jointly to
indemnify, hold harmless and defend, to the same extent and in the same manner
set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, each person, if any, who controls
the Company within the meaning of the Securities Act or the Exchange Act, and
any other stockholder selling securities pursuant to the Registration Statement
or any of its directors or officers or any person who controls such stockholder
or underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
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(c) such
Investor will reimburse any legal or other expenses (promptly as such expenses
are incurred and are due and payable) reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
-------- -------
indemnity agreement contained in this Section 6(b) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
-------- ------- -------
this Agreement (including this Section 6(b) and Section 7) for only that amount
as does not exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Indemnified Party if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
on a timely basis in the prospectus, as then amended or supplemented.
c. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to 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
11
<PAGE>
separate legal counsel for the Indemnified Persons or the Indemnified Parties,
as applicable, and such legal counsel shall be selected by Investors holding a
majority-in-interest of the Registrable Securities included in the Registration
Statement to which the Claim relates (with the approval of the Initial Investor
if it holds Registrable Securities included in such Registration Statement), if
the Investors are entitled to indemnification hereunder, or the Company, if the
Company is entitled to indemnification hereunder, as applicable. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is actually prejudiced in its
ability to defend such action. The indemnification required by this Section 6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that (i) no
-------- -------
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in Section
6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations under this Agreement) by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
------------------------------
With a view to making available to the Investors the benefits of Rule 144
promulgated under the Securities Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange 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
12
<PAGE>
c. furnish to each Investor so long as such Investor owns shares of
Preferred Stock, Warrants or Registrable Securities, promptly upon request, (i)
a written statement by the Company that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange 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 of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or any
portion of the shares of Preferred Stock, the Warrants, or the Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment, (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such transferee or assignee, and
(b) the securities with respect to which such registration rights are being
transferred or assigned, (iii) following such transfer or assignment, the
further disposition of such securities by the transferee or assignee is
restricted under the Securities 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 written consent of the Company, the Initial
Investors (to the extent the Initial Investors still own shares of Preferred
Stock, Warrants or Registrable Securities) and Investors who hold a majority
interest of the Registrable Securities. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Investor and the
Company.
11. MISCELLANEOUS.
-------------
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
13
<PAGE>
b. Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier or by confirmed telecopy, and
shall be effective five days after being placed in the mail, if mailed, or upon
receipt or refusal of receipt, if delivered personally or by courier or
confirmed telecopy, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
Data Race, Inc.
12400 Network Blvd.
San Antonio, TX 78249
Attn: President
Telecopy: (210) 263-2075
with copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, TX 78205
Attn: Matthew R. Bair, Esq.
Telecopy: (210) 224-2035
and if to any Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 11(b).
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof. The parties hereto hereby submit to the exclusive
jurisdiction of the United States federal courts located in New York City with
respect to any dispute arising under this Agreement or the transactions
contemplated hereby.
14
<PAGE>
e. This Agreement, the Securities Purchase Agreement and the Warrants
(including all schedules and exhibits thereto) constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement and the
Securities Purchase Agreement supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
g. The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the 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 or
Initial Investors pursuant to this Agreement shall be made by the Investors or
Initial Investors, as the case may be, holding a majority of the Registrable
Securities (determined as if all shares of Preferred Stock and Warrants then
outstanding had been converted into or exercised for Registrable Securities).
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
----------------------------------------
Name: Gregory T. Skalla
--------------------------------------
Its: Chief Financial Officer and Secretary
---------------------------------------
INITIAL INVESTOR:
Capital Ventures International
- -------------------------------------
Investor's Name
By: Bala International, Inc., as agent
By: /s/ Andrew Frost
----------------------------------
Name: Andrew Frost
--------------------------------
Its: Director
---------------------------------
Address: Capital Place
--------------------------------
P. O. Box 1787GT
--------------------------------
Grand Cayman, Cayman Island BWI
--------------------------------
INITIAL INVESTOR:
Credit Suisse First Boston
- -------------------------------------
Investor's Name
By: /s/ John McAvoy
----------------------------------
Name: John McAvoy
--------------------------------
Its: Managing Director
---------------------------------
Address: Eleven Madison Avenue
-----------------------------
New York, New York 10010-3629
-----------------------------
INITIAL INVESTOR:
Zanett Lombardier, Ltd.
- -------------------------------------
Investor's Name
By: /s/ Tomaso Barbini
----------------------------------
Name: Tomaso Barbini
--------------------------------
Its: Director to Advisor
---------------------------------
Address: Kirk House
--------------------------------
P.O. Box 1100
--------------------------------
Grand Cayman, Cayman Islands BWI
--------------------------------
16
<PAGE>
EXHIBIT 1
TO
REGISTRATION
RIGHTS
AGREEMENT
[Company Letterhead]
[Date]
[Name and address of Transfer Agent]
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction
to you (1) to transfer or re-register the certificates for the shares of Common
Stock, no par value (the "COMMON STOCK"), of DATA RACE, INC., a Texas
corporation (the "COMPANY"), represented by certificate numbers _____ for an
aggregate of _____ shares (the "OUTSTANDING SHARES") of Common Stock presently
registered in the name of [Name of Investor] (which shares were previously
issued upon conversion or exercise of the Company's 1997 Series A Convertible
Preferred Stock (the "PREFERRED STOCK") or Warrants (as hereinafter defined)
upon surrender of such certificates to you (or evidence of loss, theft or
destruction thereof), notwithstanding the legend appearing on such certificates,
and (2) to issue shares (the "CONVERSION SHARES") of Common Stock to or upon the
order of the registered holder from time to time of the Preferred Stock upon
surrender to you of a properly completed and duly executed Conversion Notice and
such Preferred Stock, notwithstanding the legend appearing on such Preferred
Stock, and (3) to issue shares (the "WARRANT SHARES") of Common Stock to or upon
the order of the registered holder from time to time of the Warrants of the
Company issued at the time of the original issuances of the Preferred Stock (the
"WARRANTS") upon surrender to you of a properly completed and duly executed
Exercise Agreement and such Warrants (or evidence of loss, theft or destruction
thereof) notwithstanding the legend appearing on such Warrants. The transfer or
re-registration of the certificates for the Outstanding Shares by you should be
made at such time as you are requested to do so by the record holder of the
Outstanding Shares. The certificate issued upon such transfer or re-
registration should be registered in such name as requested by the holder of
record of the certificate surrendered to you and should not bear any legend
which would restrict the transfer of the shares represented thereby. In
addition, you are hereby directed to remove any stop-transfer instruction
relating to the Outstanding Shares. Certificates for the Conversion Shares and
Warrant Shares should not bear any restrictive legend and should not be subject
to any stop-transfer restriction.
Contemporaneous with the delivery of this letter, the Company is
delivering to you an opinion of ___________________ as to registration of the
Outstanding Shares, the Conversion Shares and the Warrant Shares under the
Securities Act of 1933, as amended.
17
<PAGE>
Should you have any questions concerning this matter, please contact
me.
Very truly yours,
DATA RACE, INC.
By:
--------------------------
Name:
Title:
Enclosures:
cc: [Name of Investor]
18
<PAGE>
EXHIBIT 2
TO
REGISTRATION
RIGHTS
AGREEMENT
[Date]
[Name and address
of transfer agent]
RE: DATA RACE, INC.
Ladies and Gentlemen:
We are counsel to DATA RACE, INC., a Texas corporation (the "COMPANY") ,
and we understand that [Name of Investor] (the "HOLDER") has purchased from the
Company shares of the Company's 1997 Series A Convertible Preferred Stock (the
"PREFERRED STOCK") and warrants (the "WARRANTS") that are convertible or
exercisable, as the case may be, into the Company's Common Stock, no par value
(the "Common Stock"). The Preferred Stock and Warrants were purchased by the
Holder pursuant to a Securities Purchase Agreement, dated as of January 10,
1997, by and among the Company and the signatories thereto (the "AGREEMENT").
Pursuant to a Registration Rights Agreement, dated as of January 10, 1997, by
and among the Company and the signatories thereto (the "REGISTRATION RIGHTS
AGREEMENT"), the Company agreed with the Holder, among other things, to register
the Registrable Securities (as that term is defined in the Registration Rights
Agreement) under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
upon the terms provided in the Registration Rights Agreement. In connection
with the Company's obligations under the Registration Rights Agreement, on _____
__, 1997, the Company filed a Registration Statement on Form S-___ (File No.
333- _____________) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission (the "SEC") relating to the Registrable Securities, which
names the Holder as a selling stockholder thereunder.
[Other introductory and scope of examination language to be inserted]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
19
<PAGE>
[Other appropriate language to be included.]
Very truly yours,
cc: [Name of investor]
20
<PAGE>
EXHIBIT 10.29
-------------
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
BEEN ISSUED PURSUANT TO REGULATION D PROMULGATED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE. THE
SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS
ARE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
Right to
Purchase
30,228
Shares of
Common Stock,
no par value
Date: January 10, 1997
DATA RACE, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, CAPITAL VENTURES INTERNATIONAL or
its registered assigns, is entitled to purchase from DATA RACE, INC., a Texas
corporation (the "COMPANY"), at any time or from time to time during the period
specified in Section 2 hereof, Thirty Thousand Two Hundred Twenty Eight (30,228)
fully paid and nonassessable shares of the Company's Common Stock, no par value
(the "COMMON STOCK"), at an exercise price per share (the "EXERCISE PRICE") of
$16.375 per share. The number of shares of Common Stock purchasable hereunder
(the "WARRANT SHARES") and the Exercise Price are subject to adjustment as
provided in Section 4 hereof. The term "WARRANTS" means this Warrant and the
other warrants of the Company issued pursuant to the Securities Purchase
Agreement (as hereinafter defined). The term "WARRANT PERIOD" as used herein
means the period commencing on the date this Warrant is issued and delivered
pursuant to the terms of that certain Securities Purchase Agreement, dated as of
January 10, 1997, by and between the Company and the Purchasers listed on the
execution page thereof (the "SECURITIES PURCHASE AGREEMENT") and ending at 5:00
p.m. New York City time on the third (3rd) anniversary of the date of issuance.
<PAGE>
This Warrant is subject to the following terms, provisions, and conditions:
1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
----------------------------------------------------------------
Subject to the provisions hereof, including without limitation, the vesting
provisions contained in Section 2(a) and (b) hereof, and the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "EXERCISE
AGREEMENT"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant
Shares by the holder is not then registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), delivery to the Company of a written notice of an election to
effect a Cashless Exercise (as defined in Section 11(c) below) for the Warrant
Shares specified in the Exercise Agreement. The Warrant Shares so purchased
shall be deemed to be issued to the holder hereof or such holder's designee, as
the record owner of such shares, as of the close of business on the date on
which this Warrant shall have been surrendered, the completed Exercise Agreement
shall have been delivered, and payment shall have been made for such shares as
set forth above. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time, not exceeding five (5)
business days, after this Warrant shall have been so exercised. The
certificates so delivered shall be in such denominations as may be requested by
the holder hereof and shall be registered in the name of such holder or such
other name as shall be designated by such holder. If this Warrant shall have
been exercised only in part, then, unless this Warrant has expired, the Company
shall, at its expense, at the time of delivery of such certificates, deliver to
the holder a new Warrant representing the number of shares with respect to which
this Warrant shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an Exercise
Agreement and payment to the Company of the Exercise Price for each of the
Warrant Shares specified in the Exercise Agreement, and the Company does not
have sufficient authorized but unissued shares of Common Stock available to
effect such exercise in accordance with the provisions of this Section 1 (an
"EXERCISE DEFAULT"), the Company shall issue to the holder all of the shares of
Common Stock which are available to effect such exercise and, within five (5)
business days of the attempted exercise of this Warrant, refund to the holder
that portion of the holder's payment of the Exercise Price allocable to the
number of shares of Common Stock included in the Exercise Agreement which
exceeds the amount which is then issuable by the Company (the "EXCESS AMOUNT").
The Excess Amount shall, notwithstanding anything to the contrary contained
herein, not be exercisable for Common Stock in accordance with the terms hereof
until (and at the holder's option on or at any time after) the date additional
shares of Common Stock are authorized by the Company to permit such exercise.
The Company shall pay to the holder payments ("EXERCISE DEFAULT PAYMENTS") for
an Exercise Default in the amount of (a) (N/365), multiplied by (b) the
difference between the Market Price (as defined in Section 4(1) below) on the
Exercise Default Date (as defined below) less the
-2-
<PAGE>
Exercise Price, multiplied by (c) the Excess Amount on the date the Exercise
Agreement giving rise to the Exercise Default is transmitted in accordance with
this Section 1 (the "EXERCISE DEFAULT DATE"), multiplied by (d) .24, where N =
the number of days from the Exercise Default Date to the date (the
"AUTHORIZATION DATE") that the Company authorizes a sufficient number of shares
of Common Stock to effect exercise of this Warrant in full. The Company shall
send notice to the holder of the authorization of additional shares of Common
Stock, the Authorization Date and the amount of holder's accrued Exercise
Default Payments. The accrued Exercise Default Payment for each calendar month
shall be paid in cash or shall be convertible into Common Stock at the Exercise
Price, at the holder's option, as follows:
(a) In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common Stock,
the holder may convert such payment amount into Common Stock at the Exercise
Price (as in effect at the time of conversion) at any time after the fifth (5th)
day of the month following the month in which it has accrued as computed in
accordance with the terms contained in Article VI of the Certificate of
Designation governing the Company's Series A Convertible Preferred Stock (the
"PREFERRED STOCK").
Nothing herein shall limit the holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock as required pursuant to the terms of Section 4(f) of the
Securities Purchase Agreement, and each holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
2. PERIOD OF EXERCISE. This Warrant shall be exercisable as follows:
------------------
(a) On July 10, 1997, 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
(i) the total number of Warrant Shares then issuable hereunder by (ii) the
quotient obtained by dividing (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 July 10, 1997 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 called the
"INITIAL VESTED SHARES").
(b) On October 10, 1997, 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 the product
obtained by multiplying (i) the total number of Warrant Shares initially
issuable hereunder (after giving effect to any adjustments required by Section 4
hereof prior to October 10, 1997) by (ii) the quotient obtained by dividing (x)
the aggregate number of shares of Preferred Stock issued to the initial holder
of this Warrant pursuant to the Securities
-3-
<PAGE>
Purchase Agreement and which remain outstanding on October 10, 1997 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 called the
"SUBSEQUENT VESTED SHARES").
The right to exercise this Warrant with respect to that number of Warrant
Shares equal to the difference between (i) the aggregate total of Warrant Shares
initially issuable hereunder (after giving effect to any adjustment required by
Section 4 hereof prior to October 10, 1997) and (ii) the sum of Initial Vested
Shares and the Subsequent Vested Shares (collectively, the "VESTED SHARES")
shall be deemed to have been forfeited by the holder hereof.
This Warrant shall be exercisable with respect to the Vested Shares until
5:00 p.m. New York City Time on the third (3rd) anniversary of the date of
issuance .
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance
-----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, claims and encumbrances.
(b) RESERVATION OF SHARES. During the Warrant Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a suf ficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(c) LISTING. The Company shall promptly secure the listing of the
-------
shares of Common Stock issuable upon exercise of the Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of
--------------------------
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not
-4-
<PAGE>
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all the Company's assets.
4. ANTIDILUTION PROVISIONS. During the Warrant Period, the Exercise
-----------------------
Price and the number of Warrant Shares shall be subject to adjustment from time
to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required herein
results in a fraction of a cent, such Exercise Price shall be rounded up to the
nearest cent.
(a) ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON ISSUANCE OF
------------------------------------------------------------------
COMMON STOCK. Except as otherwise provided in Sections 4(c) and 4(e) hereof, if
- ------------
and whenever on or after the date of issuance of the Warrant, the Company issues
or sells, or in accordance with Section 4(b) hereof is deemed to have issued or
sold, any shares of Common Stock for no consideration or for a consideration per
share (before deduction of reasonable expenses or commissions or underwriting
discounts or allowances in connection therewith) less than the Market Price (as
hereinafter defined) on the date of issuance (a "DILUTIVE ISSUANCE"), then
effective immediately upon the Dilutive Issuance, the Exercise Price will be
reduced to a price determined by multiplying the Exercise Price in effect
immediately prior to the Dilutive Issuance by a fraction, (i) the numerator of
which is an amount equal to the sum of (x) the number of shares of Common Stock
actually outstanding immediately prior to the Dilutive Issuance, plus (y) the
aggregate consideration, calculated as set forth in Section 4(b) hereof,
received by the Company upon such Dilutive Issuance, divided by the Market Price
in effect immediately prior to the Dilutive Issuance, and (ii) the denominator
of which is the total number of shares of Common Stock Deemed Outstanding (as
hereinafter defined) immediately after the Dilutive Issuance.
(b) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any
-----------------------------
manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("CONVERTIBLE SECURITIES") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "OPTIONS") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price on the date of issuance ("BELOW MARKET
OPTIONS"), then the maximum total number of shares of Common Stock issuable upon
the exercise of all such Below Market Options (assuming full exercise,
-5-
<PAGE>
conversion or exchange of Convertible Securities, if applicable) will, as of the
date of the issuance or grant of such Below Market Options, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of the preceding sentence, the "price per share for which
Common Stock is issuable upon the exercise of such Below Market Options" is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or granting of all such Below
Market Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Below Market
Options, plus, in the case of Convertible Securities issuable upon the exercise
of such Below Market Options, the minimum aggregate amount of additional
consideration payable upon the exercise, conversion or exchange thereof at the
time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Below Market Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Exercise Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Below Market Options or upon the exercise, conversion
or exchange of Convertible Securities issuable upon exercise of such Below
Market Options.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No further adjustment to the
Exercise Price will be made upon the actual issuance of such Common Stock upon
exercise, conversion or exchange of such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a variable conversion or exercise price or exchange
ratio (a "VARIABLE RATE CONVERTIBLE SECURITY"), then the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange for
purposes of the calculation contemplated by Section 4(b)(ii)(A) shall be deemed
to be the lowest price per share which would be applicable (assuming all holding
period and other conditions to any discounts contained in such Convertible
Security have been
-6-
<PAGE>
satisfied) if the Market Price on the date of issuance of such Convertible
Security was 75% of the Market Price on such date (the "ASSUMED VARIABLE MARKET
PRICE"). Further, if the Market Price at any time or times thereafter is less
than or equal to the Assumed Variable Market Price last used for making any
adjustment under this Section 4 with respect to any Variable Rate Convertible
Security, the Exercise Price in effect at such time shall be readjusted to equal
the Exercise Price which would have resulted if the Assumed Variable Market
Price at the time of issuance of the Variable Rate Convertible Security had been
75% of the Market Price existing at the time of the adjustment required by this
sentence.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If there is
-----------------------------------------
a change at any time in (i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
--------------------------------------------------------
SECURITIES. If, in any case, the total number of shares of Common Stock
- ----------
issuable upon exercise of any Option or upon exercise, conversion or exchange
of any Convertible Securities 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 in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) CALCULATION OF CONSIDERATION RECEIVED. If any Common
-------------------------------------
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair
market value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to
-7-
<PAGE>
such Common Stock, Options or Convertible Securities, as the case may be. The
fair market value of any consideration other than cash or securities will be
determined in good faith by an investment banker or other appropriate expert of
national reputation selected by the Company and reasonably acceptable to the
holder hereof, with the costs of such appraisal to be borne by the Company.
(vi) EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No adjustment
------------------------------------------
to the Exercise Price will be made (i) upon the exercise of any warrants,
options or convertible securities issued and outstanding on the date of issuance
of this Warrant in accordance with the terms of such securities as of the date
of issuance of this Warrant; (ii) upon the grant or exercise of any stock or
options which may hereafter be granted or exercised under any employee benefit
plan of the Company now existing or to be implemented in the future, so long as
the issuance of such stock or options is approved by a majority of the non-
employee members of the Board of Directors of the Company or a majority of the
members of a committee of non-employee directors established for such purpose;
(iii) upon the exercise of the Warrants or conversion of the Preferred Stock; or
(iv) Common Stock issued in a bona fide public offering pursuant to a firm
commitment underwriting.
(c) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any
------------------------------------------
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) CONSOLIDATION, MERGER OR SALE. In case of any consolidation of
-----------------------------
the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company, then as a condition of such consolidation, merger or sale or
conveyance, adequate provision will be made whereby the holder of this Warrant
will have the right to acquire and receive upon exercise of this Warrant in lieu
of the shares of Common Stock immediately theretofore acquirable upon the
exercise of this Warrant, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore acquirable and receivable upon exercise of
this Warrant had such consolidation, merger or sale or conveyance not taken
place. In any such case, the Company will
-8-
<PAGE>
make appropriate provision to insure that the provisions of this Section 4
hereof will thereafter be applicable as nearly as may be in relation to any
shares of stock or securities thereafter deliverable upon the exercise of this
Warrant. The Company will not effect any consolidation, merger or sale or
conveyance unless prior to the consummation thereof, the successor corporation
(if other than the Company) assumes by written instrument the obligations under
this Section 4 and the obligations to deliver to the holder of this Warrant such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, the holder may be entitled to acquire.
(f) DISTRIBUTION OF ASSETS. In case the Company shall declare or make
----------------------
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's shareholders
of cash or shares (or rights to acquire shares) of capital stock of a
subsidiary) (a "DISTRIBUTION"), then, after the date of record for determining
shareholders entitled to such Distribution, but prior to the date of
Distribution, the holder of this Warrant shall be entitled upon exercise of this
Warrant for the purchase of any or all of the shares of Common Stock subject
hereto, to receive the amount of such assets (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 the determination of shareholders entitled to such
Distribution. If the holder of this Warrant does not exercise this Warrant
prior to the date of Distribution, the Exercise Price in effect immediately
prior to such Distribution will be reduced by an amount equal to (x) the fair
market value, as reasonably determined by the Company's Board of Directors, of
the assets so distributed, divided by (y) the aggregate number of shares of
Common Stock outstanding on the date of Distribution (calculated as if all
shares of Common Stock issuable upon exercise of all Warrants had been issued as
of the date of the Distribution).
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which
--------------------
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) NO FRACTIONAL SHARES. No fractional shares of Common Stock are to
--------------------
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
-9-
<PAGE>
(j) OTHER NOTICES. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all its assets to, another
corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the
date on which the holders of Common Stock shall be entitled to receive such
dividend, distribution, or subscription rights or to exchange their Common Stock
for stock or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least 30 days
prior to the record date or the date on which the Company's books are closed in
respect thereto. Failure to give any such notice or any defect therein shall
not affect the validity of the proceedings referred to in clauses (i), (ii),
(iii) and (iv) above.
(k) CERTAIN EVENTS. If any event occurs of the type contemplated by
--------------
the adjustment provisions of this Section 4 but not expressly provided for by
such provisions, the Company will give notice of such event as provided in
Section 4(g) hereof, and the Company's Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of shares of Common
Stock acquirable upon exercise of this Warrant so that the rights of the holder
shall be neither enhanced nor diminished by such event.
(l) CERTAIN DEFINITIONS.
-------------------
-10-
<PAGE>
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the number of
-------------------------------
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Options,
the maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required (including any Common Stock
issuable upon the conversion of Convertible Securities issuable upon the
exercise of such Options), and (y) in the case of any adjustment required by
Section 4(a) resulting from the issuance of any Convertible Securities, the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the adjustment is
required, as of the date of issuance of such Convertible Securities, if any.
(ii) "MARKET PRICE," as of any date, (i) means the average of
the closing bid prices for the shares of Common Stock as reported on the Nasdaq
National Market for the ten (10) Trading Days immediately preceding such date,
or (ii) if the Nasdaq National Market is not the principal trading market for
the shares of Common Stock, the average of the last reported bid prices on the
principal trading market for the Common Stock during the same period, or, if
there is no bid price for such period, the last reported sales price for such
period, or (iii) if market value cannot be calculated as of such date on any of
the foregoing bases, the Market Price shall be the average fair market value as
reasonably determined by an investment banking firm selected by the Corporation
and reasonably acceptable to the holder, with the costs of the appraisal to be
borne by the Company. The manner of determining the Market Price of the Common
Stock set forth in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to market value must be
made hereunder.
(iii) "COMMON STOCK," for purposes of this Section 4, includes
------------
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only shares of Common
Stock, no par value, in respect of which this Warrant is exercisable, or shares
resulting from any subdivision or combination of such Common Stock, or in the
case of any reorganization, reclassification, consolidation, merger, or sale of
the character referred to in Section 4(e) hereof, the stock or other securities
or property provided for in such Section.
5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
-11-
<PAGE>
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.
----------------------------------------------
(a) RESTRICTION ON TRANSFER. This Warrant and the rights granted to
-----------------------
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Section 7(f) and (g) hereof and to the applicable
provisions of the Securities Purchase Agreement. Until due presentment for
registration of transfer on the books of the Company, the Company may treat the
registered holder hereof as the owner and holder hereof for all purposes, and
the Company shall not be affected by any notice to the contrary.
Notwithstanding anything to the contrary contained herein, the registration
rights described in Section 8 are assignable only in accordance with the
provisions of that certain Registration Rights Agreement, dated as of January
10, 1997, by and among the Company and the other signatories thereto (the
"REGISTRATION RIGHTS AGREEMENT").
(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
------------------------------------------------
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Section 7(e) below, for new Warrants of
like tenor of different denominations representing in the aggregate the right to
purchase the number of shares of Common Stock which may be purchased hereunder,
each of such new Warrants to represent the right to purchase such number of
shares as shall be designated by the holder hereof at the time of such
surrender.
(c) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7.
(e) WARRANT REGISTER. The Company shall maintain, at its principal
----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the
-12-
<PAGE>
person in whose name this Warrant has been issued, as well as the name and
address of each transferee and each prior owner of this Warrant.
(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of the
-----------------------------------------
surrender of this Warrant in connection with any exercise, transfer, or exchange
of this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares issuable hereunder), shall not be registered under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as
a condition of allowing such exercise, transfer, or exchange, (i) that the
holder or transferee of this Warrant, as the case may be, furnish to the Company
a written opinion of counsel (which opinion and counsel shall be reasonably
acceptable to the Company, and, in the case of a transfer to an affilate of such
holder, the cost of which shall be borne by the Company) to the effect that such
exercise, transfer, or exchange may be made without registration under the
Securities Act and under applicable state securities or blue sky laws, (ii) that
the holder or transferee execute and deliver to the Company an investment letter
in form and substance acceptable to the Company and (iii) that the transferee
be an "ACCREDITED INVESTOR" as defined in Rule 501(a) promulgated under the
Securities Act; provided that no such opinion, letter, status as an "accredited
investor" or minimum Market Price shall be required in connection with a
transfer pursuant to Rule 144 under the Securities Act.
(g) ADDITIONAL RESTRICTIONS ON EXERCISE OR TRANSFER. Notwithstanding
-----------------------------------------------
anything contained herein to the contrary, in no event shall the holder hereof
exercise Warrants to the extent that (a) the number of shares of Common Stock
beneficially owned by such holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised portion of the Warrants or the unexercised or unconverted portion of
any other securities (including, without limitation, the Preferred Stock) of the
Company subject to a limitation on conversion or exercise analogous to the
limitation contained herein) and (b) the number of shares of Common Stock
issuable upon exercise of the Warrants (or portion thereof) with respect to
which the determination described herein is being made, would result in
beneficial ownership by such holder and its affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G
thereunder, except as otherwise provided in clause (a) hereof. In addition, no
Subject Holder (as defined below) may sell or otherwise transfer Warrants,
except (i) to the Company or to a shareholder or a group of shareholders who
immediately prior to the sale control a majority of the Company's voting shares
(a "CONTROLLING SHAREHOLDER" or "CONTROLLING GROUP", as applicable); (ii) to an
affiliate of such holder; (iii) in connection with any merger, consolidation,
reorganization or sale of more than 50% of the outstanding Common Stock of the
Company (a "REORGANIZATION"); (iv) in a registered public offering or a public
sale pursuant to Rule 144 or other applicable exemption from the registration
requirements of the Securities Act (or any successor rule or regulation); or (v)
in a private sale (otherwise than to the Company, to a Controlling Shareholder
or a Controlling Group, to an affiliate of such holder, or in a Reorganization),
provided that the holder shall not sell or otherwise transfer in a private sale
not described in clauses (i) - (iii) hereof during any ninety (90) day period a
portion(s) of the Warrants or any other securities of the Company subject to
limitations on sale or transfer analogous to the limitations contained herein,
which, if
-13-
<PAGE>
exercised for or converted into
Common Stock at the time of the transfer, would represent, in the aggregate
(together with any other shares of Common Stock transferred), beneficial
ownership by the transferee(s) of more than 4.9% percent of the Common Stock
then outstanding. "SUBJECT HOLDER" means any holder who, but for the provisions
of the immediately preceding Section and this Section, may be deemed to
beneficially own 5% or more of the outstanding Common Stock of the Company. The
first holder of this Warrant, by taking and holding the same, represents to the
Company that such holder is acquiring this Warrant for investment only and not
with a view to the distribution thereof, except pursuant to sales that are
exempt from the registration requirements of the Securities Act and/or sales
registered under the Securities Act.
(h) EXERCISE CAP. In no event shall the aggregate number of shares of
------------
Common Stock issued upon conversion or otherwise with respect to any share of
Preferred Stock together with the aggregate number of Warrant Shares issued upon
exercise of any Warrants, exceed 965,625, subject to equitable adjustments from
time to time for the events described in Section 4(c) (the "CAP AMOUNT"),
unless, prior to any issuance of shares of Common Stock which causes the Cap
Amount to be reached, (i) the Company shall have obtained the approval of its
shareholders for issuance in excess of such amount (the "ADDITIONAL SHARES") and
such approval is sufficient to satisfy any requirements imposed by Rule 4460(i)
promulgated by the National Association of Securities Dealers (or any successor
rule or regulation) and (ii) the resale of the Additional Shares by the holders
of the Warrants shall have been registered under the Securities Act pursuant to
an effective registration statement. Until such shareholder approval of the
Additional Shares and registration thereof shall have been effected, no Initial
Investor (as defined in the Registration Rights Agreement) shall be issued upon
conversion or exercise or otherwise with respect to shares of Preferred Stock or
the Warrants, in the aggregate, more than that number of shares of Common Stock
equal to the product of the Cap Amount multiplied by a fraction, the numerator
of which is the number of shares of Preferred Stock issued to such Initial
Investor at the First Closing (as defined in the Securities Purchase Agreement)
and the denominator of which is the aggregate number of shares of Preferred
Stock issued at the First Closing (the "ALLOCATION AMOUNT"). In the event any
Initial Investor shall sell or otherwise transfer any of such Initial Investor's
shares of Preferred Stock or Warrants, each such transferee shall be allocated a
pro rata portion of the transferor Initial Investor's Allocation Amount. In the
event any holder shall convert all of such holder's shares of Preferred Stock
and exercise all of such holder's Warrants into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Allocation Amount,
then the difference between such holder's Allocation Amount and the number of
shares of Common Stock actually issued to such holder shall be allocated to the
respective Allocation Amounts of the remaining holders of shares of Preferred
Stock and Warrants, pro rata based on the number of shares of Common Stock then
issuable upon conversion of all Preferred Stock and exercise of all Warrants
then held by each such holder. In the event the Company is prohibited from
issuing shares of Common Stock as a result of the operation of this Section
7(h), the Company shall redeem for cash those Warrant Shares which cannot 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.
-14-
<PAGE>
8. REGISTRATION RIGHTS. The initial holder of this Warrant (and certain
-------------------
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement.
9. NOTICES. Any notices required or permitted to be given under the
-------
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
Data Race, Inc.
12400 Network Blvd.
San Antonio, TX 78249
Attn: President
Telecopy: (210) 263-2075
with copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, TX 78205
Attn: Matt Bair, Esq.
Telecopy: (210) 224-2035
and if to the holder, at such address as such holder shall have provided in
writing to the Company, or at such other address as each such party furnishes by
notice given in accordance with this Section 9.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW. THE UNITED STATES
FEDERAL COURTS LOCATED IN NEW YORK CITY SHALL HAVE EXCLUSIVE JURISDICTION WITH
RESPECT TO ANY DISPUTE ARISING UNDER THIS WARRANT.
11. MISCELLANEOUS.
-------------
(a) AMENDMENTS. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and the holder hereof.
-15-
<PAGE>
(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several
--------------------
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
(c) CASHLESS EXERCISE. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the second
anniversary of the date of issuance of this Warrant by presentation and
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "CASHLESS EXERCISE").
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
cash, the holder shall surrender this Warrant for that number of shares of
Common Stock determined by multiplying the number of Warrant Shares to which it
would otherwise be entitled by a fraction, the numerator of which shall be the
difference between the then current Market Price per share of the Common Stock
and the Exercise Price, and the denominator of which shall be the then current
Market Price per share of Common Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-16-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
--------------------------------
Name: Gregory T. Skalla
---------------------------
Title: Chief Financial Officer
--------------------------
and Secretary
--------------------------
-17-
<PAGE>
FORM OF EXERCISE AGREEMENT
(TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT)
The undersigned hereby irrevocably exercises the right to purchase
_____________ of the shares of Common Stock of Data Race, Inc., a Texas
corporation (the "COMPANY"), evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
i. The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws, and agrees that the following legend
may be affixed to the stock certificate for the Common Stock hereby subscribed
for if resale of such Common Stock is not registered or if Rule 144(k) is
unavailable:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL,
IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE COMPANY,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD
PURSUANT TO RULE 144(K) UNDER SAID ACT.
ii. The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder and delivered to the
undersigned at the address set forth below:
Dated:----------------- -------------------------------------
Signature of Holder
-------------------------------------
Name of Holder (Print)
Address:
-------------------------------------
-------------------------------------
-------------------------------------
-18-
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints
-----------------
as agent and attorney-in-fact to transfer said Warrant
- -----------------------
on the books of the within-named corporation, with full
power of substitution in the premises.
Dated: ---------------------, ----,
In the presence of
- ------------------
Name: ------------------------------------------
Signature:
-------------------------------
Title of Signing Officer or Agent (if any):
------------------------------------------
Address:
---------------------------------
---------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within
Warrant.
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,727,216
<SECURITIES> 0
<RECEIVABLES> 2,009,441
<ALLOWANCES> 0
<INVENTORY> 1,487,762
<CURRENT-ASSETS> 6,247,308
<PP&E> 2,034,135
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,322,689
<CURRENT-LIABILITIES> 2,860,839
<BONDS> 0
0
0
<COMMON> 24,588,389
<OTHER-SE> (19,126,539)
<TOTAL-LIABILITY-AND-EQUITY> 8,322,689
<SALES> 4,425,040
<TOTAL-REVENUES> 4,425,040
<CGS> 3,173,650
<TOTAL-COSTS> 3,173,650
<OTHER-EXPENSES> 2,600,259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,321,143)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,321,143)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
