AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
TELEPAD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1680936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
-----------------
380 HERNDON PARKWAY
SUITE 1900
HERNDON, VIRGINIA 22070
(703) 834-9000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-----------------
DONALD W. BARRETT, CHIEF EXECUTIVE OFFICER
380 HERNDON PARKWAY
SUITE 1900
HERNDON, VIRGINIA 22070
(703) 834-9000 (Name, address, including zip code, and telephone
number, including area code, of agent for service)
-----------------
Copy to:
Henry I. Rothman, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000 (Telephone)
(212) 704-6288 (Facsimile)
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
possible after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
================================================================================
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered be Registered (1) Per Security Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock(2) 3,000,000 Shares $.7185(3) $ 2,155,500.00 $635.87
- --------------------------------------------------------------------------------------------------------------
Class A Common Stock(4) 1,000,000 Shares .7185(3) 718,500.00 211.96
- --------------------------------------------------------------------------------------------------------------
Class A Common Stock(6) 200,000 Shares .98 (7) 196,000.00 57.82
- --------------------------------------------------------------------------------------------------------------
Total $ 3,070,000.00 $905.65
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
(1) Pursuant to Rule 416, there also are being registered such additional
shares of Class A Common Stock as may become issuable pursuant to
anti-dilution and other adjustment provisions of the Convertible Notes,
Put Notes, and Warrants. The issuance of 2,700,000 of the Shares offered
hereby are subject to prior approval of the Company's shareholders in
compliance with applicable Nasdaq requirements.
(2) Represents shares that may be offered for resale from time to time by
certain Selling Securityholders subsequent to the conversion of certain
Convertible Notes issued by the Company in May 1998 including shares
issuable by the Company pursuant to a reset adjustment provision of the
Convertible Notes in connection with which the Company has agreed with
certain Selling Securityholders that the Company will issue additional
shares of Common Stock in certain circumstances. Also includes additional
reset shares that may be offered for resale from time to time by certain
Selling Securityholders subsequent to the conversion of certain Put Notes
(in the event Put Notes are issued by the Company).
(3) Based, pursuant to Rule 457(c), on $ .7185 per share which was the average
of the high and low prices of the Registrant's Common Stock on the
National Association of Securities Dealers Automated Quotation System on
June 22, 1998.
(4) Represents shares that may be offered for resale from time to time by
Selling Securityholders subsequent to the conversion of certain Put Notes.
In the event the Company does not issue any Put Notes, or, the Put Notes
or any portion thereof are issued but not converted, then to the extent
such Put Notes are not issued and converted, the Company intends to use up
to 1,000,000 shares registered pursuant to this Registration Statement as
additional reset shares.
(5) Represents shares that are issuable upon exercise of certain warrants
granted by the Company.
(6) Based, pursuant to Rule 457(g), on the exercise price of the Warrants.
- ----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
-2-
<PAGE>
================================================================================
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
================================================================================
SUBJECT TO COMPLETION DATED JUNE 26, 1998
PROSPECTUS
TELEPAD CORPORATION
4,200,000 SHARES OF CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
The Prospectus relates to the offer and sale from time to time for
the account of certain Securityholders (the "Selling Securityholders") of
TelePad Corporation, a Delaware corporation (the "Company") of up to 4,200,000
shares of Class A Common Stock, par value $.01 per share ("Common Stock"), of
which 1,500,000 shares were issued in May 1998. See "The Company - Recent
Developments" and "Selling Securityholders" and "Plan of Distribution."
The shares offered hereby may be sold by the Selling Securityholders
directly or through agents, underwriters or dealers as designated from time to
time or through a combination of such methods. The Company will not receive any
of the proceeds from any sale of shares by or for the account of the Selling
Securityholders. The Selling Securityholders and any broker-dealers that
participate with the Selling Securityholders in the distribution of the shares
offered hereby may be deemed to be underwriters and any commissions received or
profit realized by them in connection with the resale of the shares may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Securities Act"). The Company has agreed to bear all
expenses relating to this registration, other than underwriting discounts and
commissions. In addition, the Company has agreed to indemnify the Selling
Stockholders against certain liabilities. See "Selling Stockholders" and "Plan
of Distribution."
The Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "TPADA". On June 22, 1998, the closing sale price of the Common Stock as
reported by NASDAQ was $ .7185.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. AN INVESTMENT IN THESE SECURITIES SHOULD ONLY BE MADE BY INVESTORS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON
PAGE 7.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS _________________, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission ("Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices, Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company (at http://www.sec.gov).
INFORMATION INCORPORATED BY REFERENCE
The Company's (i) Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1997, heretofore filed by the Company with the Commission
(File No. 0-21934); (ii) Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998; (iii) Current Report of Form 8-K filed with the SEC on June 11,
1998, and (iv) the description of the Company's Common Stock contained in the
Registration Statement on Form 8-A filed with the Commission on June 14, 1993
under the 1934 Act, including any amendment or report filed by the Company for
the purpose of updating such description, Each document filed by the Company
subsequent to the date of the Prospectus pursuant to Sections 13(a), 13(c), 14
or 15(d) of the 1934 Act prior to the termination of this offering shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing such document. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
This Prospectus does not contain all the information set forth in
the Registration Statement of which this Prospectus is a part (the "Registration
Statement"), including exhibits relating thereto, which has been filed with the
Commission in Washington, D.C. Copies of the Registration Statement and the
exhibits thereto may be obtained, upon payment of the fee prescribed by the
Commission, or may be examined, without charge, at the office of the Commission.
THE COMPANY WILL PROVIDE, WITHOUT CHARGE, TO EACH PERSON (INCLUDING
ANY BENEFICIAL OWNER) TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE
WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY DOCUMENT INCORPORATED
BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS UNLESS SUCH EXHIBITS ARE
EXPRESSLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS SHOULD BE
DIRECTED TO TELEPAD CORPORATION, 380 HERNDON PARKWAY, SUITE 1900, HERNDON,
VIRGINIA 20170, (703) 834-9000, ATTENTION: ROBERT D. RUSSELL, CHIEF FINANCIAL
AND ACCOUNTING OFFICER.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere or incorporated by reference in this
Prospectus.
To inform investors of the Company's future plans and objectives, this
Prospectus (and other reports and statements issued by the Company and its
officers from time to time) contain certain statements concerning the Company's
future results, future performance, intentions, objectives, plans and
expectations that are or may be deemed to be "forward-looking statements." The
Company's ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), which provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company believes it
is in the best interest of investors to take advantage of the "safe harbor"
provisions of the Reform Act. Such forward-looking statements are subject to a
number of known and unknown risks and uncertainties that, in addition to general
economic and business conditions and those described in "Risk Factors" could
cause the Company's actual results, performance and achievements to differ
materially from those described or implied in the forward-looking statements.
THE COMPANY
TelePad Corporation (the "Company") designs, develops and markets
mobile computing and communication systems for customers whose work forces
include substantial numbers of mobile field workers in remote locations ("Field
Force Workers"). The Company's approach is to provide hardware and software
products that support an enterprise's field force workers, connect the Field
Force Workers to their home office, and direct information to the home office
staff and back to the workers in the field. Through this approach, the Company
believes that its customers can significantly enhance profitability and customer
service by providing more effective tools and communications to their Field
Force Workers.
FIELD FORCE SOLUTIONS STRATEGY
The Company's value proposition is that customers can gain
significant competitive advantages through automation of that portion of their
work forces which operate "in the field", outside a traditional office
environment. To that end, the Company endeavors to provide total field force
solutions comprised of purpose-built computer hardware and software linked to
the enterprise through wireless communications ("Field Force Solutions").
Recognizing the need to tailor such solutions to each individual customer, the
Company's Field Force Solutions strategy incorporates consulting and systems
integration services.
To implement its Field Force Solutions strategy, the Company
developed the TelePad line of computers and peripherals specifically designed
for the unique requirements of Field Force Workers. It also offers its customers
the services of its staff of professional management consultants, engineers, and
application programmers. Furthermore, it supports the integration of its
products with third-party hardware products, software products, and wireless
services. Accordingly, a Field Force Solution may be comprised of off-the-shelf
products combined with custom-built or tailored products and services.
3
<PAGE>
As the Field Force Solutions strategy necessarily requires expertise
in its customers' business, the Company focuses on a limited set of industries.
Currently, these are the utilities, cable television, public safety, and
military equipment maintenance industries.
From 1993 (the time of the Company's initial public offering)
through 1996, the Company devoted most of its resources to developing and
manufacturing its TelePad line of computer hardware. Since 1996 the Company has
enhanced the TelePad 3 to remain within the competitive range with respect to
technology, but more emphasis is being placed on applying the Company's
knowledge of field force automation by offering integrated solutions to
potential customers. Such solutions include reselling hardware from
manufacturers other than the Company where appropriate and offering software,
systems integration, and services.
The Company was incorporated in Delaware on April 11, 1990. Its
executive offices are located at 380 Herndon Parkway, Suite 1900, Herndon,
Virginia 22070. The Company's telephone number is (703) 834-9000.
RECENT DEVELOPMENTS
On May 27, 1998, the Company, pursuant to a Share Purchase Agreement
dated as of May 27, 1998 (the "Purchase Agreement"), acquired from Christine
LeMaire and Dean N. Eisenberger (collectively the "L&E Shareholders"), all of
the outstanding capital stock of L&E Mobile Computer Mounts, Inc. ("L&E"). L&E
is a distributor, installer and integrator of vehicle mounted mobile computers,
and a distributor and manufacturer of mobile mounting products. At closing,
among other things, the Company paid a total of $1,300,000 in cash to the L&E
Shareholders ("Cash Consideration") and issued to them a total of (a) 900,000
shares of Common Stock (the "Common Stock Consideration"), and (b) 950,000
shares, having a liquidation preference of $1.00 per share, of a new series of
preferred stock designated Series C 7% Cumulative Redeemable Convertible
Preferred Stock ("Preferred Shares"). The Company is obligated to pay an
additional sum as additional consideration (the "Additional Consideration") to
the L&E Shareholders within a specified number of days after the earlier of (i)
the third anniversary of the closing under the Purchase Agreement (the
"Closing"), (ii) the date on which any event included in the definition of
"Acceleration Event" occurs (including specified changes in control of the
Company and certain other extraordinary events regarding the Company or L&E) and
(iii) at the Company's option, on an earlier date (the "Additional Consideration
Payment Date"). The amount of the Additional Consideration will be based on
either (a) a formula using a multiple of L&E's average annual "stand-alone"
earnings before income taxes, depreciation and amortization (as defined in the
Purchase Agreement) from the Closing to the Additional Consideration Payment
Date, or (b) at the Company's option, the present value on the Additonal
Consideration Payment Date of $20,000,000 discounted from the third anniversary
of the Closing, assuming a discount rate of 8.5% per annum. As a condition to
the Closing, as a capital contribution, the Company concurrently issued a
non-recourse $333,000 note payable to L&E, which bears interest at a rate of 12%
per annum, and which matures 60 days following the Closing. The Company is
obligated to make additional capital contributions to L&E of $333,000 on May 27,
1999 and $334,000 on May 27, 2000.
The Company obtained $1,000,000 of the Cash Consideration through a
portion of the proceeds realized on May 27, 1998 from the Company's private sale
(the "Private Placement") of convertible notes in the aggregate principal amount
of $1,500,000 (the "Convertible Notes") to certain private investors
(collectively, the "Investors"). The Company, in connection with the Private
Placement, also issued to certain placement agents warrants to purchase 200,000
shares of Common Stock, at an exercise price of $0.98 per share subject to
certain anti-dilution and other adjustment provisions set forth therein (the
"Warrants"). Each Convertible Note bears interest at a rate of 8% per annum,
matures on the first anniversary of the Closing, and is convertible, in $25,000
increments, at the discretion of the holder into Common Stock from time to time
until the principal balance and
4
<PAGE>
all unpaid interest on such Convertible Note is paid in full (the "Conversion
Date") at a specified per share conversion price. The Company has issued into
escrow 1,500,000 shares of Common Stock reserved for issuance in connection with
the conversion of the Convertible Notes. The issuance of any additional shares
(in excess of such 1,500,000 shares) to be issued by the Company to the
Investors with respect to the conversion of the Convertible Notes, and issuance
of the Put Notes (if any), or to certain placement agents upon exercise of the
Warrants, are subject to prior approval by the Company's shareholders. The
conversion price of the Convertible Notes will be $0.98 per share if the
conversion occurs within the first 120 days following the Closing, and
thereafter if the average closing bid price for the Common Stock on the NASDAQ
SmallCap Market, or any other securities exchange or securities market on which
the Common Stock is then traded for any five consecutive days is less than
$1.31, then the conversion price per share will be the lesser of (i) 75% of the
average closing bid price of the Common Stock on the NASDAQ SmallCap Market, or
any other securities exchange or securities market on which the Common Stock is
then traded, for the five consecutive trading days immediately preceding the
Conversion Date, or (ii) $0.98. The Company has granted the Investors, a
security interest in all of the Company's assets, other than the L&E Stock, to
secure the Convertible Notes. The Investors have agreed to subordinate their
security interest in the Company's assets in favor of liens in connection with
non-convertible debt financing on reasonable commercial terms by the Company but
up to a maximum prior lien of $1,000,000 and provided the Investors have been
given seven business days prior notice of such financing. The Company is also
entitled, subject to certain conditions, to require the Investors to acquire an
additional aggregate amount of $1,000,000 of notes (with each Investor to
purchase an amount equal to two-thirds of the amount of Convertible Notes
purchased by such Investor in the Private Placement (the "Put Notes"). In the
event of the issuance and conversion of the Put Notes, the conversion price, per
share, of such Notes will be 85% of the average closing bid price for the Common
Stock on the Nasdaq SmallCap Market, or on any securities exchange or other
securities market on which the Common Stock is then being traded for the five
days immediately preceding the conversion date. The Put Notes are also subject
to certain antidilution and other adjustment provisions as agreed upon by the
Company and the Investors.
5
<PAGE>
THE OFFERING
Securities Registered............................. 4,200,000 shares of Common
Stock
Common Stock outstanding
prior to the offering hereby................... 13,021,874 shares of Common
Stock(1)
Common Stock outstanding
after the offering hereby...................... 14,852,486 shares of Common
Stock (2)
Common Stock trading symbol
on NASDAQ...................................... TPADA
- ---------------------
(1) Does not include 42,558,921 shares of Common Stock reserved for issuance
upon the exercise of outstanding options and warrants (issued prior to the
Private Placement) to purchase Common Stock.
(2) Assumes conversion of the Convertible Notes and the Put Notes based upon a
price of $.98 per share; also assumes exercise of all the Warrants. Does
not include additional shares that may be issued at a later date (the
"Reset Date") by the Company in the event of certain adjustments in the
number of shares issuable upon conversion of the Convertible Notes and the
Put Notes and changes in market price of the Company's shares (the "Reset
Shares"). See "The Company-Recent Developments". The actual number of
Reset Shares that may be issued pursuant to the Private Placement is
dependent upon the market price of the Common Stock during the five
trading days prior to a Reset Date and will therefore vary according to
actual market conditions prevailing during those time periods. The Company
and the Investors have agreed that Reset Shares shall be reserved, for the
purpose of this offering, by providing for the registration of 20,000
shares for each $10,000 of Convertible Notes issued by the Company in its
$1,500,000 Private Placement, which equals 3,000,000 shares (1,500,000
shares of which have been delivered into escrow by the Company for
delivery to the Investors upon conversion, if any, of the Convertible
Notes). Of such 3,000,000 shares, 1,530,612 shares would be issuable at
the initial conversion price of $.98 per share. Accordingly, up to
1,469,388 shares registered hereby would be available for use as Reset
Shares (to the extent such shares are issued by the Company at a future
date). In the event the Company does not issue any Put Notes, or, the Put
Notes or any portion thereof are issued but not converted, then to the
extent that such Put Notes are not issued and converted, the Company
intends to use up to 1,000,000 shares of Common Stock registered pursuant
to the Registration Statement as additional Reset Shares. The issuance of
2,700,000 of the shares that may be offered hereby are subject to prior
approval of the Company's shareholders in compliance with applicable
Nasdaq requirements.
6
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is highly speculative
in nature, involves a high degree of risk and should be made only by investors
who can afford the loss of their entire investment. In addition to the factors
set forth elsewhere in this Prospectus, prospective investors should give
careful consideration to the following risk factors in evaluating the Company
and its business before purchasing any securities offered hereby.
GOING CONCERN CONSIDERATIONS. The Report of the Company's
Independent Auditors accompanying the Company's audited Financial Statements for
the year ended December 31, 1997, contains an explanatory paragraph as to the
uncertainty of the Company's ability to continue as a going concern. Among the
factors cited in that report as raising substantial doubts as to the Company's
ability to continue as a going concern are the Company losses from operations
and negative operating cash flows. In the event the Company is unable to
generate revenues sufficient to cover operating expenses or obtain additional
financing, the Company may be unable to satisfy most of its current liabilities
and would be unable to sustain its operations at the current level thereafter.
The inability to do so may have a material adverse effect on the Company's
business and financial condition.
LIQUIDITY; WORKING CAPITAL NEEDS. To meet working capital cash
requirements, the Company intends to complete additional financings including
the issuance of the Put Notes. There can be no assurance that the Company can or
will be able to issue the Put Notes or obtain sufficient funds to meet, in whole
or in part, its working capital needs from collections of product sales. There
can be no assurance that the Company will be capable of raising additional
capital thereafter, or that the terms upon which such additional funding would
be available to the Company would be acceptable, in which case the Company could
be required to curtail materially, suspend or cease operations.
DILUTION; IMPACT OF SALE OF COMMON STOCK UPON CONVERSION OF THE
CONVERTIBLE NOTES AND THE PUT NOTES, AND EXERCISE OF THE WARRANTS WARRANTS. The
purchasers of the shares offered hereby may experience substantial dilution in
the net tangible value of their shares in the event of the conversion of any or
all of the Convertible Notes, the Put Notes and the exercise of the Warrants.
The Company may issue Put Notes possibly resulting in the issuance of Common
Stock at discounts from future market prices of the Common Stock, which could
result in substantial dilution to existing holders of Common Stock. The sale of
such Common Stock acquired at a discount could have a negative impact on the
trading price of the Common Stock and could increase the volatility in the
trading price of the Common Stock.
The Convertible Notes and the Put Notes, if any are issued, are
convertible into Common Stock at discounts from future market prices of the
Common Stock which could result in substantial dilution to existing holders of
Common Stock. In addition, the Company may issue additional Shares of Common
Stock in the future that are reserved for issuance upon the exercise of
outstanding options and warrants at various exercise prices which could result
in substantial dilution to existing holders of the Company's Common Stock. See
"The Offering". The sale of such Common Stock acquired at a discount could have
a negative impact on the trading price of the Common Stock and could increase
the volatility in the trading price of the Common Stock.
DELAYS IN PRODUCT COMMERCIALIZATION. The Company has experienced
substantial technical and financial difficulties that have led to significant
delays in the commencement of product commercialization. The Company anticipates
that the delays in commencing commercial production of the TelePad 3 it has
experienced, have and may continue to adversely affect the demand for TelePad 3s
as potential customers elect to purchase
7
<PAGE>
competing products. There can be no assurance that the Company ever will
successfully commercialize the TelePad 3 or any other product. See "Risk Factors
- -- Dependence on Manufacturer and Suppliers," and "-- Unproven Products;
Reliance on a Single Product; Need for Market Acceptance."
SUBSTANTIAL OPERATING LOSSES; NO ASSURANCE OF SUCCESS. The Company
has incurred substantial operating losses since its inception. At March 31,
1998, the Company had an accumulated deficit since inception of $36,465,089. The
Company's losses have continued since that date. Such deficits reflect the cost
of developmental and other start-up activities, including the industrial design,
development and marketing of TelePad computers and management's efforts to
obtain financing for the Company, without significant offsetting revenues. The
Company expects to continue to incur significant losses in the future. However,
management believes that it has developed a plan of operations which, if
successfully implemented, should permit the Company to achieve and sustain
profitable operations. The Company's proposed operations are subject to numerous
risks associated with establishing any new business, including unforeseeable
expenses, delays and complications, as well as specific risks of the computer
industry. There can be no assurance that the Company's plan of operations will
be successful, that it will be able to market any product on a commercial scale,
that it will achieve or sustain profitable operations or that it will be able to
remain in business.
DEPENDENCE ON MANUFACTURER AND SUPPLIERS. The Company has no
manufacturing capability and, therefore, contracts with third parties to perform
its manufacturing and out-sources production of components. The components of
the TelePads are supplied by various sources. Certain of the components are
highly technical in nature and, with respect to such components, there can be no
assurance that the Company would be able to locate, on a timely basis or at all,
alternative sources of supply. The inability to locate such alternative sources
of supply may have a material adverse effect on the Company's business and
financial condition.
RISK OF PRODUCT LIABILITY. The Company is subject to the inherent
business risk of product liability claims in the event that any of its products
are alleged to have resulted in adverse effects to a user of such products. The
Company does not presently carry product liability insurance, but the Company
expects that it will obtain such insurance. However, there can be no assurance
that adequate product liability insurance can be obtained at acceptable costs.
In the event of an uninsured or inadequately insured product liability claim,
the Company's business and financial condition could be materially adversely
affected.
RAPID TECHNOLOGICAL CHANGE; POSSIBLE OBSOLESCENCE. The Company's
products and marketing strategy are subject to rapid technological changes,
short product life cycles, product obsolescence, and rapid price erosion,
particularly with respect to the hardware components which represent the most
significant portion of the Company's business. The Company believes that its
future success will depend in significant part upon its ability to continue
full-scale production and sale of the TelePad 3 and to develop new products and
services incorporating technological changes and meeting changing customer
demands. To the extent products developed by the Company are based upon evolving
new technology, sales of such products may be adversely affected if such
technology ultimately is not widely accepted. If the Company does not
successfully develop and introduce new or enhanced products in a timely manner,
any competitive position the Company may develop could be lost and the Company's
sales, if any, would be reduced. There can be no assurance that the Company will
have sufficient funds to sustain its development activities, that any such
activities will be successful or that any such activities will enable the
Company to obtain or maintain any competitive advantage. See "-- Going Concern
Considerations."
UNPROVEN PRODUCTS; RELIANCE ON SINGLE PRODUCT; NEED FOR MARKET
ACCEPTANCE. The primary product currently being marketed by the Company is the
TelePad 3. There is no assurance that the TelePad 3 or any other
8
<PAGE>
product the Company may develop will achieve market acceptance. It is
anticipated that many potential purchasers of the TelePad 3 will require that it
pass elaborate tests performed both by the Company and, in many instances, by
the user itself, prior to completion of their purchases. No assurance can be
given that the TelePad 3 will satisfactorily pass such tests or, if it does,
that the product will function during actual operating use at levels acceptable
to users or will operate free of maintenance, product control or other
performance problems for sustained periods of time. In addition, users may be
reluctant to purchase any products from the Company unless they are satisfied as
to the Company's ability to provide an adequate supply of its products, as well
as its continued viability, as to neither of which assurance can be given. See
"-- Going Concern Considerations" and "-- Liquidity; Working Capital Needs."
LIMITED MARKETING CAPABILITIES. Because of the sophisticated nature
of its products and the early stage of development of the field force computing
industry, the Company must expend substantial resources to identify prospective
customers and educate them as to the merits of the Company's products and
strategy. There can be no assurance the Company will have sufficient funds or
resources to market its products effectively. In addition, the Company's
marketing efforts have been and will continue to be adversely affected to the
extent that its supply of products is disrupted and design defects occur. See
"-- Delays in Product Commercialization." Failure to market the Company's
products effectively would impair the Company's ability to generate revenues
from product sales.
COMPETITION. The Company currently is subject to substantial
competition and management expects competition in the field force computing
industry to intensify in the future. There can be no assurance that competing
products will not be introduced that achieve greater market acceptance than, or
are technologically superior to, the TelePad 3. Most of the Company's
competitors and future competitors are, or can be expected to be, larger than
the Company and to have more extensive experience and records of successful
operations than the Company. Such competitors also have, or can be expected to
have, greater financial, marketing and other resources, more employees and
larger facilities than the Company now has or can be expected to have in the
foreseeable future. In particular, certain of the Company's present and future
competitors are, or can be expected to be, the most prominent and well-respected
computer manufacturers in the world, including IBM (the Company's prior sole
source supplier of microprocessors), Fujitsu Limited, Toshiba Corp., NEC
Technologies, Panasonic, Zenith Data Systems Corp., Symbol, Telxon, Motorola,
Samsung and others. The Company believes that such companies have the resources
and technological capability to produce and market products competitive with, if
not superior to, the TelePads. In addition, the Company expects that other
competitors will emerge and competing products will be introduced in the near
future. No assurance can be given that the Company will be able to compete
successfully or that competitive pressures will not adversely affect its
financial performance.
LIMITED PATENT PROTECTION. Other than the four patents on the
multi-purpose handle and adjustable locking handle mechanism used on the
TelePads, the Company currently does not have patents relating to its products,
although its patent application for the industrial and mechanical design of the
portable electronic platform which is the basis of the TelePad 3 has been
allowed. There can be no assurance patents will be issued on the basis of the
Company's applications. Further, the Company otherwise does not intend to pursue
patents, because it does not believe that the technology it employs is
patentable. While the Company views the patents relating to the multi-purpose
handle used on the TelePads as important to the value of the TelePads as a
whole, there can be no assurance that any issued patent will provide the Company
with a meaningful competitive advantage, that competitors will not design
alternatives to reduce or eliminate the benefits of any issued patent or that
challenges will not be instituted against the validity or enforceability of
these patents. Other companies may obtain patents claiming products or processes
that are necessary for, or useful to, the development of the Company's products,
in which event the Company may be required to obtain licenses for patents or for
9
<PAGE>
proprietary technology in order to develop, manufacture or market its products.
There can be no assurance that the Company would be able to obtain such licenses
on commercially reasonable terms, if at all.
It is the Company's practice to protect its proprietary materials
and processes by relying on trade secret laws and non-disclosure and
confidentiality agreements. There can be no assurance that confidentiality or
trade secrets will be maintained or that others will not independently develop
or obtain access to such materials or processes.
DEPENDENCE ON KEY PERSONNEL; NEED TO RETAIN TECHNICAL PERSONNEL. The
Company's success will depend to a large extent upon the continued contributions
of Donald W. Barrett, currently Chief Executive Officer and Ronald C. Oklewicz,
currently President. The loss of the services of any or all of the executive
personnel could materially adversely affect the Company. The Company also has
entered into employment agreements with Messrs. Barrett and Oklewicz. The
Company has obtained term key-person life insurance coverage in the amount of
$2,000,000 on the life of Mr. Oklewicz.
The success of the Company also will depend, in part, upon its
ability to retain qualified engineering and other technical and marketing
personnel. There is significant competition for technologically qualified
personnel in the geographical area of the Company's business and there can be no
assurance that the Company will be successful in recruiting or retaining
qualified personnel.
GOVERNMENT REGULATION. The TelePad 3 and the TelePad SL are subject
to government regulation of electromagnetic emissions that are conducted from
the devices over power lines, when the devices are operated from AC wiring, and
radiated through the air. In particular, the regulations of the Federal
Communications Commission ("FCC") require products of this kind to have been
approved by the FCC as meeting the Class B digital device requirements under
Parts 2 and 15 of the FCC rules before the products may be marketed (i.e.
imported, sold or leased or advertised for sale or lease). These regulations are
designed to minimize interference with certain other electronic products and
communications services. The approvals (a form of equipment authorization known
as "certification") are granted only after the products have passed various
electromagnetic compatibility tests and an application submitted to the FCC has
been granted. The FCC approves equipment of the kind produced by the Company
only on the condition that operation of the equipment not cause interference to
licensed radio communications and that the equipment accept interference from
licensed radio facilities, even if the interference results in undesirable
operation of the equipment. Modems that the Company sells for the connection of
the TelePad SL and the TelePad 3 to the public switched telephone line are
subject to certification under the FCC Rules in the same manner and subject to
an additional approval requirement of "registration" under Part 68 of the FCC
Rules governing certain telephone equipment.
Although the TelePad 3 and TelePad SL have received FCC
certification, the devices must continue to comply with federal regulations.
Changes in the design of the products generally will require the Company to have
the products reexamined as to continued compliance. Depending on the nature of
the change, the products may be subject to the receipt of new or modified
approvals before the changed products may be marketed.
The Company also must ensure that the TelePad 3 and TelePad SL
comply with the Occupational Safety and Health Act ("OSHA") regulations
requiring electrical equipment to have been approved for safety by a nationally
recognized testing laboratory. Safety approvals for the TelePad SL and the
TelePad 3 have been obtained. Changes in either device may require retesting and
further approvals, which could result in delay that could have an adverse
material effect on the Company.
10
<PAGE>
To the extent that the Company desires to sell its products
internationally, it also will be required to comply with the regulations of
other nations as to electrical emissions and safety, some of which may be
expected to be more stringent than those imposed by the FCC or under regulations
adopted by OSHA. In particular, the TelePad 3 currently is certified for sale
within the European Union (the "EU"), whose standards are more stringent, in
order to permit export to members of the EU, including the United Kingdom.
To the extent that the Company sells products, directly or
indirectly, to the United States Government, the Company's contracts and
subcontracts will be subject to termination, reduction or modification at the
Government's convenience.
Failure to comply with FCC, OSHA and other governmental regulations
would have a material adverse effect on the Company. The delay associated with
obtaining any future approvals may also have a material adverse effect on the
Company.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK;
ANTI-TAKEOVER EFFECTS; STAGGERED BOARD. The Company's Second Restated
Certificate of Incorporation, as amended (the "Charter"), authorizes the
issuance of a maximum of 5,000,000 shares of Preferred Stock on terms which may
be fixed by the Company's Board of Directors without further stockholder action
(of which 950,000 Preferred Shares were issued in connection with the
acquisition of L&E). The terms of any series of Preferred Stock, which may
include priority claims to assets and dividends, and special voting rights,
could adversely affect the rights of holders of the Class A Common Stock. The
issuance of Preferred Stock could make the possible takeover of the Company or
the removal of management of the Company more difficult, discourage hostile bids
for control of the Company in which stockholders may receive premiums for their
shares of Class A Common Stock, or otherwise dilute the rights of holders of
Class A Common Stock and the market price of the Class A Common Stock. The
classification of the Company's Board of Directors would have the effect of
delaying a change in control of the Company. The rights of the holders of Class
A Common Stock would be subject to, and may be adversely affected by the rights
of the holders of Preferred Stock that may be issued in the future.
NO DIVIDENDS. The Company has not paid any cash dividends and does
not presently intend to pay cash dividends. It is not likely that any cash
dividends will be paid in the foreseeable future.
VOLATILITY OF STOCK PRICE. The trading price of the Common Stock has
been volatile, and it may continue to be so. Such trading price could be subject
to wide fluctuations in response to announcements of business and technical
developments by the Company or its competitors, quarterly variations in
operating results, and other events or factors, including expectations by
investors and securities analysts and the Company's prospects. In addition,
stock markets have experienced extreme price volatility in recent years. This
volatility has had a substantial effect on the market price of the Company's
shares of Class A Common Stock, at times for reasons unrelated to its operating
performance. Such broad market fluctuations may adversely affect the price of
the Common Stock in the future.
YEAR 2000 ISSUES. The Company is aware of the computing issues
associated with the coming of the millennium (year 2000), most notably whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. Based on preliminary
investigations, the Company currently believes that computers and software used
in its operations and sold by the Company require that the TelePad 3 computer
clock be reset in order to operate properly after 1999. The Company is working
with its suppliers and customers to either verify year 2000 compliance or
identify and execute appropriate changes to make such
11
<PAGE>
systems year 2000 compliant. The Company believes that the cost of completing
any modifications for year 2000 compliance to the systems used or sold by the
Company will not be material. However, there can be no assurance that the
Company's suppliers will be correct in their assertions that their products are
year 2000 compliant or that the Company's estimate of the cost of systems
modifications for year 2000 compliance will prove ultimately to be correct.
USE OF PROCEEDS
The shares of Common Stock offered hereby are being registered for
the account of the Selling Securityholders, and accordingly, the Company will
not receive any of the proceeds from the sale of such shares.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of an aggregate
of 95,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As
of the date hereof, there were outstanding 13,021,874 shares of Common Stock and
950,000 Preferred Shares.
CLASS A COMMON STOCK
Holders of Common Stock have one vote per share on each matter
submitted to a vote of the stockholders. Holders of the Class A Common Stock do
not have preemptive rights to purchase additional shares of Common Stock or
other subscription rights. The Common Stock carries no conversion rights and is
not subject to redemption or to any sinking fund provisions. All shares of
Common Stock are entitled to share equally in dividends from legally available
sources as determined by the Board of Directors, subject to any preferential
dividend rights of the Preferred Stock (described below). Upon dissolution or
liquidation of the Company, whether voluntary or involuntary, holders of the
Common Stock are entitled to receive assets of the Company available for
distribution to the stockholders, subject to the preferential rights of the
Preferred Stock.
TRANSFER AGENT AND WARRANT AGENT
The Company's transfer agent for Common Stock is American Stock
Transfer & Trust Company, New York, New York.
12
<PAGE>
SELLING SECURITYHOLDERS
The Shares being offered for resale by the Selling Securityholders
were acquired in connection with the May 1998 Private Placement under the terms
provided in certain Subscription Agreements. In connection with the Private
Placement, the Company granted the Selling Securityholders certain registration
rights pursuant to which the Company agreed not to take any action to terminate
the Registration Statement, of which this Prospectus is a part, until the
earliest of (i) three years after the effectiveness of the Registration
Statement of which this Prospectus forms a part (or such other Registration
Statement described in the Subscription Agreements), (ii) repayment of the
amounts due under the notes issued pursuant to the Subscription Agreements, or
(iii) the sale by the subscribers and placement agents of all the shares of
Common Stock issuable pursuant to the Subscription Agreement.
The following table sets forth certain information regarding the
ownership of shares of Common Stock by the Selling Securityholders as of June
22, 1998, assuming the conversion of the Preferred Shares, the Convertible
Notes, the Put Notes, and the exercise of the Warrants offered hereby and the
issuance of all the Reset Shares. The information in the table concerning the
Selling Securityholders who may offer shares hereunder from time to time is
based on information currently available to the Company, except for the assumed
conversions and exercise described above. Information concerning the Selling
Securityholders may change from time to time and any changes of which the
Company is advised will be set forth in a Prospectus Supplement to the extent
required. See "Plan of Distribution."
Shares of Maximum
Common Stock Shares of
Owned Prior to Common Stock
Offering(1) to be Sold
--------- ---------
Libra Finance S.A 100,000 100,000
Sun Capital LLC 7,333 7,333
Ellis Enterprises Ltd. 226,000 226,000
Beeston Investments Ltd. 293,333 293,333
The Hewlett Fund, Inc. 240,000 240,000
Investcor LLC 400,000 400,000
Austrot Anstalt Schaan 1,000,000 1,000,000
Balmore Funds S.A 1,000,000 1,000,000
The Gross Foundation, Inc. 933,333 933,333
--------- ---------
Total 4,199,999(2) 4,199,999(2)
========= =========
- -------------
(1) Includes (i) 1,530,612 shares of Common Stock, issuable upon conversion of
the Convertible Notes based upon an assumed average closing bid price of
$.98 per share for the five trading days prior to the date of conversion
which have been allocated between the Investors, (ii) an aggregate assumed
total of 1,000,000 shares issuable upon conversion, if any, of the Put
Notes, and (iii) 200,000 shares issuable to certain placement agents in
connection with the Private Placement. Also includes an
13
<PAGE>
estimated 1,469,388 Reset Shares that could be issuable at the Reset Date.
The actual number of Reset Shares that may be issued pursuant to the
Agreement is dependent upon the market price of the Common Stock during
the five trading day period prior to a Reset Date, and will therefore vary
according to actual market conditions prevailing during those time
periods. The actual number of Reset Shares that may be issued cannot be
determined at this date and it is possible that no Reset Shares will be
issued by the Company. In the event the Company does not issue any Put
Notes, or, the Put Notes or any portion thereof are issued but not
converted, then to the extent such Put Notes are not issued and converted,
the Company intends to use up to 1,000,000 shares of Common Stock
registered pursuant to the Registration Statement as additional Reset
Shares. See "The Offering".
(2) Total number of shares reflects rounding of fractions to the nearest
share.
The Selling Securityholders are not affiliated with the Company.
Except for Ellis Enterprises Ltd., Libra Finance S.A. and Sun Capital, LCC (who
were placement agents in connection with the Private Placement) the Selling
Securityholders have not had any material relationships with the Company within
the past three years.
PLAN OF DISTRIBUTION
The distribution of the shares offered hereby by the Selling
Securityholders may be effected from time to time in one or more transactions
(which may involve block transactions), in special offerings, exchange
distributions and/or secondary distributions, in negotiated transactions, in
settlement of short sales of Common Stock or a combination or such methods of
sale, at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Such transactions may be
effected on a stock exchange, on the over-the-counter market or privately. The
Selling Stockholders may effect such transactions by selling the Shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Stockholders for whom they may act as agent (which compensation may be in excess
of customary commissions). Without limiting the foregoing, such brokers may act
as dealers by purchasing any and all of the Shares covered by this Prospectus
either as agents for others or as principals for their own accounts and
reselling such securities pursuant to this Prospectus. The Selling Stockholders
and any broker-dealers or other persons acting on the behalf of parties that
participate with such Selling Stockholders in the distribution of the Shares may
be deemed to be underwriters and any commissions received or profit realized by
them on the resale of the Shares may be deemed to be underwriting discounts and
commissions under the Securities Act. As of the date of this Prospectus, the
Company is not aware of any agreement, arrangement or understanding between any
broker or dealer and the Selling Stockholders with respect to the offer or sale
of the Shares pursuant to this Prospectus.
At the time that any particular offering of Shares is made, to the
extent required by the Securities Act, a prospectus supplement will be
distributed, setting forth the terms of the offering, including the aggregate
number of Shares being offered, the names of any underwriters, dealers or
agents, any discounts, commissions and other items constituting compensation
from the Selling Stockholders and any discounts, commissions or concessions
allowed or reallowed or paid to dealers.
Each of the Selling Stockholders may from time to time pledge the
Shares owned by it to secure margin or other loans made to such Selling
Stockholder. Thus, the person or entity receiving the pledge of any of the
14
<PAGE>
Shares may sell them, in a foreclosure sale or otherwise, in the same manner as
described above for such Selling Stockholder.
The Company will not receive any of the proceeds from any sale of
the shares of Class A Common Stock by the Selling Stockholders offered hereby.
The Company and the Selling Stockholders have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act. The Company shall bear customary expenses incident to the
registration of the shares of Class A Common Stock for the benefit of the
Selling Stockholders in accordance with such agreements, other than underwriting
discounts commissions and attorneys' fees directly attributable to the sale of
such securities by or on behalf of the Selling Stockholders.
In connection with the Private Placement, the Company granted the
Selling Securityholders certain registration rights pursuant to which the
Company agreed not to take any action to terminate the Registration Statement,
of which this Prospectus is a part, until the earliest of (i) three years after
the effectiveness of the Registration Statement of which this Prospectus forms a
part (or such other Registration Statement described in the Subscription
Agreements), (ii) repayment of the amounts due under the notes issued pursuant
to the Subscription Agreements, or (iii) the sale by the subscribers and
placement agents of all the shares of Common Stock issuable pursuant to the
Subscription Agreement.
15
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon
by Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New York,
New York.
EXPERTS
The financial statements of TelePad Corporation appearing in TelePad
Corporation's Annual Report (Form 10-KSB) for the year ended December 31, 1997
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon (which contains an explanatory paragraph describing
conditions that raise substantial doubt about the Company's ability to continue
as a going concern as described in Note 8 to the financial statements) included
therein and are incorporated herein by reference. Such financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement under the 1933 Act with respect to the shares of Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected without charge at the Commission's
principal office, and copies of all or any part of the Registration Statement
may be obtained from such office upon the payment of the fees prescribed by the
Commission.
16
<PAGE>
======================================= =======================================
NO PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS OR A SUPPLEMENT TO
THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDER OR
ANY OTHER PERSON. NEITHER THIS
PROSPECTUS NOR ANY SUPPLEMENT TO THIS
PROSPECTUS CONSTITUTES AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO
BUY, ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN 4,200,000 SHARES OF
OFFER TO SELL OR THE SOLICITATION OF CLASS A COMMON STOCK
AN OFFER TO BUY SUCH SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY
SUPPLEMENT TO THIS PROSPECTUS NOR ANY TELEPAD CORPORATION
SALE MADE HEREUNDER OR THEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THEREOF OR
THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATES AS OF WHICH SUCH
INFORMATION IS FURNISHED.
----------------- PROSPECTUS
----------
TABLE OF CONTENTS
PAGE
Available Information............... 2
Information Incorporated by
Reference.......................... 2
Prospectus Summary.................. 3
The Company......................... 3
The Offering........................ 6
Risk Factors........................ 7
Use of Proceeds.....................12
Description of Securities ..........12
Selling Securityholders.............13
Plan of Distribution................14
Legal Matters.......................16
Experts.............................16
Additional Information..............16
_____________ , 1998
======================================= =======================================
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
It is estimated that the following expenses will be incurred in
connection with the proposed offering hereunder. All of such expenses will be
borne by the Company.
Registration fee - Securities and Exchange Commission $ 905.65
Legal fees and expenses 20,000.00
Blue Sky fees and expenses 1,000.00
Accounting fees and expenses 5,000.00
Miscellaneous 1,094.35
-------------
Total $ 28,000.00
-------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Second Restated Certificate of Incorporation, as amended, and
By-Laws of the Company, as amended, provide that the Company shall indemnify its
officers and directors to the full extent permitted by the Delaware General
Corporation Law.
Reference is hereby made to Section 145 of the Delaware General
Corporation Law relating to the indemnification of officers and directors, which
Section is hereby incorporated herein by reference.
ITEM 16. EXHIBITS.
Exhibit
No. Document
- ------- --------
4.1* Form of Warrant issued in 1998 Private Placement.
5.1* Opinion and consent of Parker Chapin Flattau & Klimpl, LLP as to the
legality of the securities being offered.
10.1* Form of Subscription Agreement
10.2* Form of Convertible Note
10.3* Form of Put Note
10.4* Form of Security Agreement
21.1* List of Subsidiaries
23.1* Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit
5.1) 24.1* Powers of Attorney of certain Officers and Directors of the
Registrant (included on signature page).
- ---------------
* Filed herewith.
II-1
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or
sales are being made, a post-effective amendment
to this registration statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8, and the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or l5(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(b) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a
new registration statement relating to the
securities offered therein, and the offering of
such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) To remove from registration by means of a
post-effective amendment any of the securities
being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 15
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of
II-2
<PAGE>
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Herndon, State of Virginia, on the 22nd day of June,
1998.
TELEPAD CORPORATION
By /S/ DONALD W. BARRETT
---------------------------
Donald W. Barrett, Chief
Executive Officer
POWER OF ATTORNEY
The undersigned directors and officers of TelePad Corporation hereby
constitute and appoint Donald W. Barrett and Ronald C. Oklewicz, and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this registration statement and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm that such attorneys-in-fact, or either
of them, or their substitutes shall lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 22nd day of June, 1998.
SIGNATURE TITLE
/S/ DONALD W. BARRETT Chairman of the Board and Chief Executive
- --------------------------- Officer
Donald W. Barrett
/S/ RONALD C. OKLEWICZ President
- ---------------------------
Ronald C. Oklewicz
/S/ ROBERT D. RUSSELL Vice President (Chief Financial and Accounting
- --------------------------- Officer), Secretary and Treasurer
Robert D. Russell
/s/ JOHN P. DIESEL Director
- ---------------------------
John P. Diesel
/s/ SYDNEY J. DANKMAN Director
- ---------------------------
Sydney J. Dankman
/S/ JOHN M. TOUPS Director
- ---------------------------
John M. Toups
/S/ ALAN B. SALISBURY Director
- ---------------------------
Alan B. Salisbury
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Document
- ------- --------
4.1* Form of Warrant from 1998 Private Placement.
5.1* Opinion and consent of Parker Chapin Flattau & Klimpl, LLP as to the
legality of the securities being offered.
10.1* Form of Subscription Agreement
10.2* Form of Convertible Note
10.3* Form of Put Note
10.4* Form of Security Agreement
21.1* List of Subsidiaries
23.1* Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit
5.1) 24.1* Powers of Attorney of certain Officers and Directors of
the Registrant (included on signature page).
- -------------------
* Filed herewith.
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO TELEPAD CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase _______ Shares of Common
Stock of TelePad Corporation (subject to
adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. ___ May ____, 1998
TelePad Corporation, a corporation organized under the laws of the State
of Delaware (the "Company"), hereby certifies that, for value received,
__________________, or assigns, is entitled, subject to the terms set forth
below, to purchase from the Company after May ____, 1998 at any time or from
time to time before 5:00 p.m., New York time, on May ____, 2000 (the "Expiration
Date"), up to ______ fully paid and nonassessable shares of Common Stock (as
hereinafter defined), $.01 par value per share, of the Company, at a purchase
price of $0.98 per share (such purchase price per share as adjusted from time to
time as herein provided is referred to herein as the "Purchase Price"). The
number and character of such shares of Common Stock and the Purchase Price are
subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term Company shall include TelePad Corporation and any
corporation which shall succeed or assume the obligations of TelePad Corporation
hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized on the date of the Agreement, (b) any
other capital stock of any class or classes (however designated) of the Company,
authorized on or after such date, the holders of which shall have the right,
without limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even if the right so to vote
has been suspended by the happening of such a contingency) and (c) any other
securities into which or for which any of the securities described in (a) or (b)
may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
1
<PAGE>
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5 or otherwise.
1. EXERCISE OF WARRANT.
1.1. NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after the
date hereof through and including the Expiration Date, the holder hereof shall
be entitled to receive, upon exercise of this Warrant in whole in accordance
with the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, the number of shares of Common Stock of the
Company identified on Page 1 hereof, subject to adjustment pursuant to Section
4. The Warrant may not be exercised unless the Company has obtained approval of
its shareholders of the issuance of the Common Stock upon exercise of this
Warrant or an exemption from NASDAQ's corporate governance rules as they may
apply.
1.2. FULL EXERCISE. This Warrant may be exercised in full by the
holder hereof by surrender of this Warrant, with the form of subscription
attached as Exhibit A hereto (the Subscription Form") duly executed by such
holder, to the Company at its principal office or at the office of its Warrant
agent (as provided in Section 11), accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common Stock for which
this Warrant is then exercisable by the Purchase Price (as hereinafter defined)
then in effect.
1.3. PARTIAL EXERCISE. This Warrant may be exercised in part (but
not for a fractional share) by surrender of this Warrant in the manner and at
the place provided in subsection 1.2 except that the amount payable by the
holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of shares of Common Stock designated by the holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the holder hereof a new Warrant of like tenor, in the name of
the holder hereof or as such holder (upon payment by such holder of any
applicable transfer taxes), may request, the number of shares of Common Stock
for which such Warrant may still be exercised.
1.4. FAIR MARKET VALUE. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean the Fair
Market Value of a share of the Company's Common Stock. Fair Market Value of a
share of Common Stock as of a Determination Date shall mean:
(a) If the Company's Common Stock is traded on an exchange
or is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market, then
the closing or last sale price, respectively, reported for the last business day
immediately preceding the Determination Date.
2
<PAGE>
(b) If the Company's Common Stock is not traded on an
exchange or on the NASDAQ National Market System or the NASDAQ SmallCap Market
but is traded in the over-the-counter market, then the mean of the closing bid
and asked prices reported for the last business day immediately preceding the
Determination Date.
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree or
in the absence of agreement by arbitration in accordance with the rules then
standing of the American Arbitration Association, before a single arbitrator to
be chosen from a panel of persons qualified by education and training to pass on
the matter to be decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event of
such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
1.5. COMPANY ACKNOWLEDGMENT. The Company will, at the time of the
exercise of the Warrant, upon the request of the holder hereof acknowledge in
writing its continuing obligation to afford to such holder any rights to which
such holder shall continue to be entitled after such exercise in accordance with
the provisions of this Warrant. If the holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
1.6. TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or trust
company shall have been appointed as trustee for the holders of the Warrants
pursuant to Subsection 3.1, such bank or trust company shall have all the powers
and duties of a warrant agent appointed pursuant to Section 10 and shall accept,
in its own name for the account of the Company or such successor person as may
be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
2. DELIVERY OF STOCK CERTIFICATES, ETC. ON EXERCISE. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall be
deemed to be issued to the holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of Common Stock (or Other Securities) to which such holder
shall be entitled on such exercise, plus, in lieu of any fractional share to
which such holder would otherwise be entitled, cash equal to such fraction
multiplied by the then Fair Market Value of one full share, together with any
other stock
3
<PAGE>
or other securities and property (including cash, where applicable) to which
such holder is entitled upon such exercise pursuant to Section 1 or otherwise.
3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
3.1. REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 5.
3.2. DISSOLUTION. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause to
be delivered the stock and other securities and property (including cash, where
applicable) receivable by the holders of the Warrants, if exercised, after the
effective date of such dissolution pursuant to this Section 3 to a bank or trust
company having its principal office in New York, NY, as trustee for the holder
or holders of the Warrants.
3.3. CONTINUATION OF TERMS. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially all of the
properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 5.
4. EXTRAORDINARY EVENTS REGARDING COMMON STOCK. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock
4
<PAGE>
outstanding immediately after such event, and the product so obtained shall
thereafter be the Purchase Price then in effect. The Purchase Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein in this Section 4. The number of
shares of Common Stock that the holder of this Warrant shall thereafter, on the
exercise hereof as provided in Section 1, be entitled to receive shall be
increased to a number determined by multiplying the number of shares of Common
Stock that would otherwise (but for the provisions of this Section 4) be
issuable on such exercise by a fraction of which (a) the numerator is the
Purchase Price that would otherwise (but for the provisions of this Section 4)
be in effect, and (b) the denominator is the Purchase Price in effect on the
date of such exercise.
5. CHIEF FINANCIAL OFFICER'S CERTIFICATE AS TO ADJUSTMENTS. In each
case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrants, the Company at its expense
will promptly cause its Chief Financial Officer to compute such adjustment or
readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 10 hereof).
6. RESERVATION OF STOCK, ETC. ISSUABLE ON EXERCISE OF WARRANT;
FINANCIAL STATEMENTS. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant. This Warrant entitles the holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with
applicable Securities laws, and delivery of such representations and warranties
as shall reasonably be requested by the Company, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor") with respect to any or all of the Shares. On the surrender for
exchange of this Warrant, with the Transferor's endorsement in the form of
Exhibit B attached hereto (the Transferor Endorsement Form"), to the Company,
the Company at its expense but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant or Warrants of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor.
5
<PAGE>
8. REPLACEMENT OF WARRANT. On 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 of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. REGISTRATION RIGHTS. The holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in a Subscription Agreement entered into by the Company and Subscribers of
one or more of the Company's Convertible Notes, at or about the issue date of
this Warrant. The terms of the Subscription Agreement are incorporated herein by
this reference.
10. WARRANT AGENT. The Company may, by written notice to the each holder
of the Warrant, appoint an agent having an office in New York, NY for the
purpose of issuing Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7,
and replacing this Warrant pursuant to Section 8, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
11. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred
on the books of the Company, the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
12. NOTICES, ETC. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder or, until any such holder furnishes to the
Company an address, then to, and at the address of, the last holder of this
Warrant who has so furnished an address to the Company.
13. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York State. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms hereof.
The invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provision.
6
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Warrant under seal
as of the date first written above.
TELEPAD CORPORATION
By: _______________________________
Title: ____________________________
Witness:
_______________________________
7
<PAGE>
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: TELEPAD CORPORATION
The undersigned, the holder of the within Warrant, hereby irrevocably elects to
exercise this Warrant for, and to purchase thereunder, __________ shares of
Common Stock of TelePad Corporation and herewith makes payment of $________
therefor, and requests that the certificates for such shares be issued in the
name of, and delivered to _____________________ whose address is
____________________________________ .
Dated:___________________
_______________________________
(Signature must conform to name of
holder as specified on the face of
the Warrant)
_______________________________
(Address)
8
<PAGE>
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of TelePad Corporation to which the within Warrant
relates specified under the headings "Percentage Transferred" and "Number
Transferred," respectively, opposite the name(s) of such person(s) and appoints
each such person Attorney to transfer its respective right on the books of
TelePad Corporation with full power of substitution in the premises.
================================================================================
TRANSFEREES PERCENTAGE NUMBER
TRANSFERRED TRANSFERRED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Dated: ____________, 19___
__________________________ (Signature must conform to name of holder
as specified on the face of the warrant)
Signed in the presence of:
_______________________________ _________________________________________
(Name) (address)
_________________________________________
ACCEPTED AND AGREED: (address)
[TRANSFEREE]
_______________________________
(Name)
9
PARKER CHAPIN FLATTAU & KLIMPL, LLP
[Letterhead]
June 26, 1998
TelePad Corporation
380 Herndon Parkway
Suite 1900
Herndon, Virginia 20170
Gentlemen:
We have acted as counsel to TelePad Corporation, a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 (the "Registration Statement") being filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the offering of 4,200,000 shares (the "Shares") of Common Stock, par value $.01
per share (the "Common Stock").
Capitalized terms used herein and not defined shall have the meaning
given to them in the Registration Statement.
In connection with the foregoing, we have examined originals or
copies, satisfactory to us, of the Company's (i) Certificate of Incorporation as
amended and restated to date, (ii) By-laws as amended to date and (iii)
resolutions of the Company's board of directors. We have also reviewed such
other matters of law and examined and relied upon all such corporate records,
agreements, certificates and other documents as we have deemed relevant and
necessary as a basis for the opinion hereinafter expressed. In such examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity with the original
documents of all documents submitted to us as copies or facsimiles. As to any
facts material to such opinion, we have, to the extent that relevant facts were
not independently established by us, relied on certificates of public officials
and certificates of officers or other representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion that
the Shares, when issued and delivered upon conversion pursuant to the terms of
the applicable Subscription Agreements, Convertible Notes and Put Notes and when
issued and delivered upon exercise pursuant to the terms of the Warrants, will
be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Parker Chapin Flattau & Klimpl, LLP
PARKER CHAPIN FLATTAU & KLIMPL, LLP
SUBSCRIPTION AGREEMENT
You (the "Subscriber") hereby agree to purchase, and TelePad Corporation,
a Delaware corporation (the "Company") hereby agrees to issue and to sell to the
Subscriber, a convertible note of the Company in the principal amount as set
forth on the signature page hereof and in the form annexed as Exhibit A (the
"Note"), convertible in accordance with the terms thereof into shares of the
Company's Class A common stock ("Common Stock") and issue only to the placement
agents (identified on Schedule D hereto, "Placement Agents") 13,333 Common Stock
Purchase Warrants for each $100,000 of Note principal (the "Warrants"). (The
common shares issuable upon conversion of the Note and exercise of the Warrants
are sometimes referred to herein as the "Company Shares", "Shares" or "Common
Shares"). (The Note, the Company Shares, the Warrants and the shares of Common
Stock issuable upon conversion of the Note and exercise of the Warrants are
collectively referred to herein as, the "Securities"). Upon acceptance of this
Agreement by the Subscriber, the Company shall issue and deliver to the
Subscriber the Note and issue and deliver the Warrants to the Placement Agents
against payment, by federal funds (U.S.) wire transfer by the Subscriber of the
amount designated on the signature page hereof pursuant to the terms of a Funds
Escrow Agreement annexed hereto as Exhibit B.
The following terms and conditions shall apply to this subscription.
1. SUBSCRIBER'S REPRESENTATIONS AND WARRANTIES. The Subscriber
hereby represents and warrants to and agrees with the Company that:
(a) INFORMATION ON COMPANY. The Subscriber has been
furnished with and has read the Company's most recent Form 10-K for the year
ended December 31, 1997 and subsequent Forms 10-Q and 8-K as filed with the U.S.
Securities and Exchange Commission (the "Commission") (collectively, with
exhibits thereto, hereinafter referred to as the "Reports"). In addition, the
Subscriber has received from the Company such other information concerning its
operations, financial condition and other matters as the Subscriber has
requested, and considered all factors the Subscriber deems material in deciding
on the advisability of investing in the Securities (such information in writing
is collectively, the "Other Written Information").
(b) INFORMATION ON SUBSCRIBER. The Subscriber is an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the Securities Act of 1933, as amended, is experienced in
investments and business matters, has made investments of a speculative nature
and has purchased securities of United States publicly-owned companies in the
past and, with its representatives, has such knowledge and experience in
financial, tax and other business matters as to enable the Subscriber to utilize
the information made available by the Company to evaluate the merits and risks
of and to make an informed investment decision with respect to the proposed
purchase, which represents a speculative investment. The Subscriber has the
authority and is duly and legally qualified to purchase and own the Securities.
The Subscriber is able to bear the risk of such investment for an indefinite
period and to afford a complete loss thereof.
<PAGE>
(c) PURCHASE OF NOTES. On the Closing Date, the Subscriber
will purchase its Notes for its own account and not with a view to any
distribution thereof.
(d) COMPLIANCE WITH SECURITIES ACT. The Subscriber
understands and agrees that the Securities have not been registered under the
Securities Act of 1933, as amended (the "1933 Act") by reason of their issuance
in a transaction that does not require registration under the 1933 Act, and that
such Securities must be held unless a subsequent disposition is registered under
the 1933 Act or is exempt from such registration. The Subscriber agrees that if,
in the future, the Subscriber should decide to dispose of any of the Securities
acquired by it pursuant to this Agreement, the Subscriber will do so only
pursuant to a registration statement or by disposition exempt from registration
requirements under the 1933 Act.
(e) LEGEND. (i) The Notes which the Subscriber is acquiring
pursuant to this Agreement shall bear the following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND
THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO TELEPAD CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
(ii) The Shares of Common Stock issuable upon the
conversion of the Notes which the Subscriber is acquiring pursuant to this
Agreement shall bear the following legends:
"THESE SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES OF COMMON STOCK MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO TELEPAD CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED."
2
<PAGE>
"THESE SHARES OF COMMON STOCK ARE SUBJECT TO THE TERMS
AND PROVISIONS OF THE SHARES ESCROW AGREEMENT EXECUTED
BY AND AMONG TELEPAD CORPORATION, GRUSHKO & MITTMAN, AS
ESCROW AGENT, AND THE PARTIES IDENTIFIED ON SCHEDULE A
THERETO. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT IN
CONFORMITY WITH THE TERMS AND PROVISIONS OF SUCH SHARES
ESCROW AGREEMENT."
(f) CORRECTNESS OF REPRESENTATIONS. The Subscriber
represents that the foregoing representations and warranties are true and
correct as of the date hereof and, unless the Subscriber otherwise notifies the
Company prior to the Closing Date (as hereinafter defined), shall be true and
correct as of the Closing Date. The foregoing representations and warranties
shall survive the Closing Date.
2. COMPANY REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants to and agrees with the Subscriber that:
(a) DUE INCORPORATION. The Company and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation 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 each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or prospects or condition (financial or otherwise) of the Company.
(b) OUTSTANDING STOCK. All issued and outstanding shares of
capital stock of the Company and each of its subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable.
(c) AUTHORITY; ENFORCEABILITY. This Agreement has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights generally and
to general principles of equity; and the Company has full corporate power and
authority necessary to enter into this Agreement and to perform its obligations
hereunder.
(d) ADDITIONAL ISSUANCES. There are no outstanding
agreements or preemptive or similar rights affecting the Company's common stock
and no outstanding rights,
3
<PAGE>
warrants or options to acquire, or instruments convertible into or exchangeable
for, or agreements or understandings with respect to the sale or issuance of,
any shares of common stock or equity of the Company or other equity interest in
any of the subsidiaries of the Company, except as described in the Reports or
Other Written Information.
(e) CONSENTS. No consent, approval, authorization or order
of any court, governmental agency or body or arbitrator having jurisdiction over
the Company, or any of its affiliates is required for execution of this
Agreement, including, without limitation issuance and sale of the Securities, or
the performance of the Company's obligations hereunder.
(f) NO VIOLATION OR CONFLICT. Assuming the representations
and warranties of the Subscriber in Paragraph 1 are true and correct and the
Subscriber complies with its obligations under this Agreement, neither the
issuance and sale of the Securities nor the performance of its obligations under
this Agreement by the Company will:
(i) violate, conflict with, result in a breach of, or
constitute a default (or an event which with the giving of notice of the lapse
of time or both would be reasonably likely to constitute a default) under (A)
the articles of incorporation, charter or bylaws of the Company, or any of its
affiliates, (B) to the Company's knowledge any decree, judgment, order, law,
treaty, rule, regulation or determination applicable to the Company, or any of
its affiliates of any court, governmental agency or body, or arbitrator having
jurisdiction over the Company, or any of its affiliates or over the properties
or assets of the Company, or any of its affiliates, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any agreement, stock
option or other similar plan, indenture, lease, mortgage, deed of trust or other
instrument to which the Company, or any of its affiliates is a party, by which
the Company, or any of its affiliates is bound, or to which any of the
properties of the Company, or any of its affiliates is subject, or (D) the terms
of any "lock-up" or similar provision of any underwriting or similar agreement
to which the Company, or any of its affiliates is a party; or
(ii) result in the creation or imposition of any lien,
charge or encumbrance upon the Securities or any of the assets of the Company,
or any of its affiliates.
(g) THE SECURITIES. The Securities upon issuance:
(i) are, or will be, free and clear of any security
interests, liens, claims or other encumbrances except as otherwise provided
pursuant to this Agreement;
(ii) have been, or will be, duly and validly authorized
and on the date of issuance and on the Closing Date, as hereinafter defined, and
the date the Warrants are exercised according to their terms, as the case may
be, the Shares, and the Warrants and common stock issuable upon exercise of the
Warrants, will be duly and validly issued, fully paid and nonassessable, except
as otherwise provided in this Agreement, and if registered under the Securities
Act of 1933, as amended, or otherwise exempt, free trading and unrestricted;
4
<PAGE>
(iii) will not have been issued or sold in violation of
any preemptive or other similar rights of the holders of any securities of the
Company;
(iv) will not subject the holders thereof to personal
liability by reason of being such holders; and
(v) the Company Shares, are quoted on, and are listed
for trading on the NASDAQ SmallCap Market. Except as set forth on Schedule
2(g)(v), the Company has received no notice, either oral or written, with
respect to the continued eligibility of the Common Stock for such listing, and
the Company has maintained all requirements for the continuation of such
listing.
(h) LITIGATION. There is no pending or, to the best
knowledge of the Company, threatened action, suit, proceeding or investigation
before any court, governmental agency or body, or arbitrator having jurisdiction
over the Company, or any of its affiliates that would materially affect the
execution by the Company or the performance by the Company of its obligations
under this Agreement.
(i) REPORTING COMPANY. The Company is a publicly-held
company whose common stock is (and has been for the past twelve months)
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the
"1934 Act") and is duly listed for trading on the NASDAQ SmallCap Market.
Pursuant to the provisions of the 1934 Act, the Company has timely filed all
reports and other materials required to be filed thereunder with the Securities
and Exchange Commission during the preceding twelve months, and is eligible
presently and as of the Closing Date to file a Form S-3 to register the Company
Shares.
(j) NO MARKET MANIPULATION. The Company has not taken, and
will not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the common stock of the Company to facilitate the sale or resale of
the Company Shares or affect the price at which the Shares may be issued.
(k) INFORMATION CONCERNING COMPANY. The Reports and Other
Written Information contain all material information relating to the Company and
its operations and financial condition as of their respective dates which
information is required to be disclosed therein. Since the date of the financial
statements set forth in the Reports, and except as modified in the Other Written
Information, there has been no material adverse change in the Company's
business, financial condition or affairs not disclosed in the Reports. The
Reports and Other Written Information do 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.
(l) DILUTION. The number of Shares issuable upon conversion
of the Note may increase substantially in certain circumstances, including, but
not necessarily limited to, the circumstance wherein the trading price of the
Common Stock declines prior to conversion.
5
<PAGE>
The Company specifically acknowledges that its obligation to issue the
Securities is binding upon the Company and enforceable regardless of the
dilution such issuance may have on the ownership interests of other shareholders
of the Company.
(m) STOP TRANSFER. The Company has not issued, and will not
issue any stop transfer order or other order impeding the sale and delivery of
the Securities.
(n) DEFAULTS. Neither the Company nor any of its
subsidiaries is in violation of its Certificate of Incorporation or ByLaws.
Except as described in the Reports and Other Written Information, neither the
Company nor any of its subsidiaries is (i) in default under or in violation of
any other material agreement or instrument to which it is a party or by which it
or any of its properties are bound or affected, which default or violation would
have a material adverse effect on the Company, (ii) in default with respect to
any order of any court, arbitrator or governmental body or subject to or party
to any order of any court or governmental authority arising out of any action,
suit or proceeding under any statute or other law respecting antitrust,
monopoly, restraint of trade, unfair competition or similar matters, or (iii) to
its knowledge in violation of any statute, rule or regulation of any
governmental authority material to its business.
(o) NO INTEGRATED OFFERING. Neither the Comany, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
NASDAQ SmallCap, as applicable, nor will the Company or any of its subsidiaries
take any action or steps that would require or cause the offering of the
Securities to be integrated with other offerings. The Company has not conducted
and will not conduct any offering that will be integrated with the issuance of
the Securities solely for purposes of Rule 4460(i) of the NASDAQ Stock Market,
Inc.'s Marketplace Rules.
(p) NO GENERAL SOLICITATION. Neither the Company, nor any of
its affiliates, nor to its knowledge, any person acting on its or their behalf,
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the Act) in connection with the offer or sale
of the Securities.
(q) USE OF PROCEEDS. The Company will use not less than
$1,000,000 of the proceeds of this subscription and other subscriptions in this
offering aggregating $1,500,000 exclusively to pay the cash portion of the
acquisition by the Company of all the shares of L&E Mobile Computer Mounts,
Incorporated (a Pennsylvania corporation) pursuant to a form of Shares Purchase
Agreement provided to counsel to Subscriber. The Closing on this Subscription
Agreement is contingent on a concurrent closing of the acquisition of L&E
pursuant to the Shares Purchase Agreement.
6
<PAGE>
(r) CORRECTNESS OF REPRESENTATIONS. The Company represents
that the foregoing representations and warranties are true and correct as of the
date hereof and, unless the Company otherwise notifies the Subscriber prior to
the Closing Date, shall be true and correct as of the Closing Date. The
foregoing representations and warranties shall survive the Closing Date.
3. REGULATION D OFFERING. This Offering is being made pursuant to
the exemption from the registration provisions of the Securities Act of 1933, as
amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion acceptable to Subscriber from
the Company's legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities, and
conversion of the Note and exercise of the Warrants. A form of the legal opinion
is annexed hereto as Exhibit C.
4. CONVERSION OF NOTE. The Note will be immediately convertible
by Subscriber.
5. REVERSE SPLIT. The Company shall give the Subscriber not less
than twenty (20) days' prior written notice of any proposed combination of
shares or other reclassification or recapitalization of the common stock
resulting in a reduction of the number of Shares issuable upon conversion of the
Note, and the Subscriber shall have the right to consult with the Company with
respect to such proposed combination or recapitalization.
6. LEGAL FEES/COMMISSIONS. The Company shall pay to Grushko &
Mittman as counsel to the Subscribers its bill for $17,500 for services rendered
to the Subscriber in reviewing this Agreement and other subscription agreements
for the aggregate subscription amounts of up to $1,500,000. The Company will pay
at the time of Closing an aggregate cash commission of ten percent (10%) of the
principal amount of the Note subscribed for, to the Placement Agents identified
on Schedule D hereto. The Company will also issue the Warrants to the Placement
Agents at the time of Closing. The commissions and legal fees will be payable
out of funds held pursuant to a Funds Escrow Agreement to be entered into by the
Company and Subscriber. Additional aggregate cash commissions of 10% will be
payable to the Placement Agents in connection with any funds raised by the
Company by exercise of the Put described in Section 11 of this Subscription
Agreement.
7.1. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Subscriber as follows:
(a) The Company will advise the Subscriber, promptly after
it receives notice of issuance by the Securities and Exchange Commission (the
"Commission"), any state securities commission or any other regulatory authority
of any stop order or of any order preventing or suspending the use of any
offering of any securities of the Company, or of the suspension of the
qualification of the common stock of the Company for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
7
<PAGE>
(b) The Company shall promptly secure the listing of the
Company Shares and Common Stock issuable upon the exercise of the Warrants 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 Common Stock from time to time issuable upon
conversion of the Note and exercise of the Warrants. The Company will use its
reasonable efforts to maintain the listing and trading of its Common Stock on
NASDAQ SmallCap Market, and will comply in all respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the
National Association of Securities Dealers ("NASD") and such exchanges, as
applicable. The Company shall promptly provide to each Subscriber copies of any
notices it receives regarding the continued eligibility of the Common Stock for
listing on such exchanges or quotation systems, or any other exchange or
quotation system on which the Common Stock is then listed.
(c) The Company shall notify the SEC, NASD and applicable
state authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities and promptly
provide copies thereof to the Subscriber.
(d) Until at least three (3) years after the effectiveness
of the Registration Statement on Form S-3 or such other Registration Statement
described in Section 10.1(iv) hereof, the Company will use its reasonable
efforts (i) to cause its Common Stock to continue to be registered under
Sections 12(b) or 12(g) of the Exchange Act, (ii) to comply in all respects with
its reporting and filing obligations under such Exchange Act, and (iii) to
comply with all requirements related to any registration statement filed
pursuant to this Agreement. The Company will not take any action or file any
document (whether or not permitted by the Act or the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Acts, except as permitted
herein, until the earlier of (i) three (3) years after the effectiveness of the
Registration Statement on Form S-3 or such other Registration Statement
described in Section 10.1(iv) hereof, (ii) repayment of the amounts due under
Notes, or (iii) the sale by the Subscribers and Placement Agents of all the
shares of common stock issuable by the Company pursuant to this Agreement. Until
at least three (3) years after the Warrants have been converted into Common
Stock, the Company will take all action within its power to continue the listing
or trading of its Common Stock on the NASDAQ SmallCap Market and will comply in
all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and NASDAQ.
7.2. COVENANTS OF SUBSCRIBER.
(a) The Subscriber covenants and agrees to provide for
itself and any beneficial holder of a Note or other securities issuable pursuant
to this Agreement all information and documents reasonably required by the
Company for the Company to comply with its
8
<PAGE>
governmental and regulatory obligations including but not limited to Securities
and Exchange Commission, blue sky and NASDAQ requirements.
(b) The Subscriber agrees and covenants to comply with all
regulations of the United States Securities and Exchange Commission applicable
to the Securities and Put Note.
(c) The Subscriber agrees and covenants that it will not
directly or indirectly engage in the short selling of the Company's securities
prior to the repayment or conversion of the Note, and if applicable, the Put
Note.
8. COVENANTS OF THE COMPANY AND SUBSCRIBER REGARDING
INDEMNIFICATIONS.
(a) The Company agrees to indemnify, hold harmless,
reimburse and defend Subscriber against any claim, costs, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon Subscriber which results, arises out of or is based
upon (i) any material misrepresentation by Company or material breach of any
warranty by Company in this Agreement or in any Exhibits or Schedules attached
hereto, or Reports or other Written Information; or (ii) any material breach or
default in performance by Company of any covenant or undertaking to be performed
by Company hereunder.
(b) Subscriber agrees to indemnify, hold harmless, reimburse
and defend the Company at all times against any claim, costs, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Company which results, arises out of or
is based upon (a) any material misrepresentation by Subscriber or material
breach of any warranty by Subscriber in this Agreement or in any Exhibits or
Schedules attached hereto; or (b) any material breach or default in performance
by Subscriber of any covenant or undertaking to be performed by Subscriber
hereunder.
9. DELIVERY OF SHARES ON CONVERSION.
a. Upon the conversion of the Note or part thereof, and
exercise of the Warrants, the Company shall, at its expense, take all necessary
and reasonable action, including the issuance of an opinion of counsel, to
assure that the Company's transfer agent shall issue stock certificates without
restrictive legend or stop orders (if such issuance is subsequent to the
effective date of a registration statement described in Section 10 hereof) in
the name of Subscriber (or its nominee) or such other persons as designated by
Subscriber) and in such denominations to be specified at conversion representing
the number of shares of common stock issuable upon such conversion, as
applicable. The Company warrants that no instructions other than these
instructions will be given to the transfer agent of the Company's Common Stock.
9
<PAGE>
b. Subscriber will give notice of its decision to exercise
its right to convert the Note or part thereof by telecopying an executed and
completed notice of Conversion to the Company or Escrow Agent (described in
Section 9(f) below) and delivering within five business days thereafter, the
original Note to the escrow agent or to the Company by express courier. Each
date on which a Notice of Conversion is telecopied to the Company or Escrow
Agent in accordance with the provisions hereof shall be deemed a Conversion
Date. The Company will or cause the transfer agent or escrow agent [as described
in Section 9(f) below], as the case may be, to transmit the Company's common
stock certificates representing the Shares issuable upon conversion of the Note
(and a Note representing the balance of the Note not so converted) to the
Subscriber via express courier for receipt by such Subscriber within ten
business days after receipt by the Company or escrow agent of the original Note
(the "Delivery Date").
c. The Company understands that a delay in the delivery of
the Shares in the form required pursuant to Section 9 hereof, and failure to
deliver a Note representing the unconverted balance of the Note tendered for
conversion beyond the Delivery Date could result in economic loss to the
Subscriber. As compensation to the Subscriber for such loss, the Company agrees
to pay late payments to the Subscriber for late issuance of Shares in the form
required pursuant to Section 9 hereof upon Conversion of the Note and late
delivery of a Note for the unconverted portion of a Note, in the amount of $100
per business day after the Delivery Date for each $10,000 of Note principal
amount being converted and per $10,000 of Note principal for which a Note is not
delivered. The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Furthermore, in addition to any other
remedies which may be available to the Subscriber, in the event that the Company
fails for any reason to effect delivery of the Shares within ten business days
after the Delivery Date, the Subscriber will be entitled to revoke the relevant
Notice of Conversion by delivery of a notice to such effect to the Company
whereupon the Company and the Subscriber shall each be restored to their
respective positions immediately prior to the delivery of such notice of
revocation, except that late payment charges described above shall be payable
through the date notice of revocation is given to the Company. A delay arising
out of a default by the Escrow Agent (identified in Section 9(e) hereof), or
action or omission of the Subscriber shall not be deemed a default by the
Company.
d. Nothing contained herein or in any document referred to
herein shall be deemed to establish or require the payment of a rate of interest
or other charges in excess of the maximum permitted by applicable law. In the
event that the rate of interest required to be paid or other charges hereunder
or pursuant to the Note exceed the maximum permitted by such law, any payments
in excess of such maximum shall be credited against amounts owed by the Company
to the Subscriber and thus refunded to the Company.
10
<PAGE>
e. The Company shall deliver to Grushko & Mittman (the
"Escrow Agent"), prior or on the Closing Date 10,000 shares of Common Stock of
the Company for each $10,000 of principal amount of Notes subscribed for, (the
"Escrowed Shares") to be held in escrow. While held in escrow, the Escrowed
Shares and any additional shares of Common Stock which may be later delivered by
the Company to be held in escrow as set forth below shall not be deemed issued
and outstanding for any purpose nor shall any holder of the Note have any voting
or dispositive rights thereto for so long as such Shares are held in escrow. The
terms and conditions of escrow shall be set forth in a shares escrow agreement
in the form annexed as Exhibit E hereto (the "Escrow Agreement"). The Company
shall deliver to the Escrow Agent, from time to time, at the request of the
Subscriber within seven (7) business days after notice to the Company of such
request, such additional Company Shares as would be necessary to allow
conversion of the entire principal and interest of the Note at the then
applicable Conversion Price, as defined in Section 2 of the Note, and deliver
without demand or notice such additional Shares pursuant to the terms of Section
2 of the Note (collectively, the "Additional Shares"), subject to the
limitations and requirements of Section 9(f) of this Agreement. All such Shares
delivered to the Escrow Agent shall include the legends set forth in Section
2.1(e)(ii) of this Agreement.
f. The Company and Subscriber agree that until the Company
either obtains shareholder approval of the issuance of the Shares, or an
exemption from NASDAQ's corporate governance rules as they may apply to the
Shares, the Subscriber may not and will not convert the Notes into more than the
number of Shares designated on the signature page hereof. The Company represents
that this number together with the aggregate of such amounts designated for all
investors in the $1,500,000 offering to which this Subscription Agreement
relates, and the Shares of Common Stock to be issued with respect to the
acquisition of L&E is not greater than 19.99% of the shares of Company's common
stock outstanding on the Closing Date. The Company undertakes to obtain the
approval of its shareholders required pursuant to the NASDAQ's corporate
governance rules to allow conversion of the entire Note and exercise of all the
Warrants and conversion of the Put Note. The Company covenants to obtain the
shareholder approval no later than 60 days from the Closing Date. Failure to
obtain shareholder approval on or before 60 days from the Closing Date shall be
deemed an Acceleration Event pursuant to Article III of the Note, but only to
the extent of the Note that may not be converted due to the Company's failure to
obtain such shareholder approval.
10. REGISTRATION RIGHTS; PROCEDURE; INDEMNIFICATION.
10.1. REGISTRATION RIGHTS. The Company hereby grants the
following registration rights to holders of the Company Shares and the Warrants
(hereinafter "Seller" or "Holder").
(i) On one occasion, for a period commencing 125 days
after the Closing Date, but not later than three years from the date hereof, the
Company, to the extent not otherwise included in a registration statement, upon
a written request therefor from any record holder or holders of more than 50% of
the aggregate of the Company's Shares and Common Stock
11
<PAGE>
issuable upon exercise of the Warrants (the Company Shares and Common Stock
issuable upon exercise of the Warrants and all common stock issuable by virtue
of ownership of any of the Securities being the "Registrable Securities"), shall
prepare and file with the SEC a registration statement under the Act covering
the Registrable Securities which are the subject of such request. In addition,
upon the receipt of such request, the Company shall promptly give written notice
to all other record holders of the Registrable Securities that such registration
statement is to be filed and shall include in such registration statement
Registrable Securities for which it has received written requests within 20 days
after the Company gives such written notice. Such other requesting record
holders shall be deemed to have exercised their demand registration right under
this Section 10.1. As a condition precedent to the inclusion of Registrable
Securities, the holder thereof shall provide the Company with such information,
and representations and warranties as the Company reasonably requests. The
obligation of the Company under this Section 10.1(i) shall be limited to one
registration statement.
(ii) If the Company at any time proposes to register
any of its securities under the Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscriber pursuant to an effective registration statement, each such time
it will give at least 15 days' prior written notice to the record holder of the
Registrable Securities of its intention so to do. Upon the written request of
the holder, received by the Company within 10 days after the giving of any such
notice by the Company, to register any of the Registrable Securities, the
Company will cause such Registrable Securities as to which registration shall
have been so requested to be included with the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
required to permit the sale or other disposition of the Registrable Securities
so registered by the holder of such Registrable Securities (the "Seller"). In
the event that any registration pursuant to this Section 10.1(ii) shall be, in
whole or in part, an underwritten public offering of common stock of the
Company, the number of shares of Registrable Securities to be included in such
an underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the Company shall notify the
Seller in writing of any such reduction. Notwithstanding the forgoing
provisions, the Company may withdraw any registration statement referred to in
this Section 10.1(ii) without thereby incurring any liability to the Seller.
(iii) If, at the time any written request for
registration is received by the Company pursuant to Section 10.1(i), the Company
has determined to proceed with the actual preparation and filing of a
registration statement under the Act in connection with the proposed offer and
sale for cash of any of its securities for the Company's own account, such
written request shall be deemed to have been given pursuant to Section 10.1(ii)
rather than Section 10.1(i), and the rights of the holders of Registrable
Securities covered by such written request
12
<PAGE>
shall be governed by Section 10.1(ii) except that the Company, if any, may not
withdraw such registration or limit the amount of Registrable Securities
included in such registration.
(iv) The Company shall file with the Commission, within
sixty (60) days of the Closing Date, and cause to be declared effective a Form
S-3 registration statement in order to register the Registrable Securities for
resale and distribution under the Act. The registration statement described in
this paragraph must be declared effective by the Commission within 120 days of
the Closing Date. The Company will register not less than 20,000 shares of
Common Stock in the S-3 registration statement for each $10,000 of Aggregate
Principal Amount of Note as set forth on the signature page hereto and one share
of Common Stock for each share of Common Stock issuable upon exercise of the
Warrants. These shares to be registered shall be reserved and set aside
exclusively for the benefit of the Subscriber and Placement Agents and not
issued, employed or reserved for anyone other than the Subscriber and Placement
Agents. It is the intention of the parties that these shares include the
Additional Shares described in Section 9 hereof. No Shares or other securities
of the Company, other than the Registrable Securities and the Put Shares may be
included in the registration statement required pursuant to this section. In the
event the Company may not employ an S-3 Registration Statement, then the Company
will file such other form of registration statement as is appropriate to
register the Registrable Securities including Form S-1. One-fifth (1/5) of the
principal amount of the Note and a Note representing one-fifth (1/5) of the
principal amount of the Aggregate Principal Amount of Note purchased by the
Subscriber as set forth on the signature page of this Subscription Agreement
("Registration Escrow") shall be held in escrow pursuant to the Funds Escrow
Agreement until the acceptance for filing by the Securities and Exchange
Commission of the registration statement described in this Section 10.1(iv). In
the event the registration statement relating to the Registrable Securities is
not filed within 60 days from the Closing Date, then the Registration Escrow
shall be employed as a non-exclusive remedy, to pay the damages described in
Section 10.2(j) of this Subscription Agreement. In the event the Registration
Statement is not filed within 60 days from the Closing Date, unless otherwise
agreed to in writing by the Subscriber, then one-fifth of the principal amount
of the Note shall be released to the Subscriber, and the Note representing
one-fifth of the Aggregate Principal Amount of Note purchased shall be
returnable to the Company. In such event the Company shall not be released from
any of its obligations under this Subscription Agreement or any agreement
delivered in connection herewith including the Company's obligations pursuant to
this Section 10 except that the Company shall no longer be required to file a
registration statement in connection with only those Common Shares issuable by
virtue of the Note returned to the Company. Damages shall not accrue to the
Subscriber in relation to the Note releasable to the Company from and after the
date the corresponding portion of the Aggregate Principal Amount of Note is
returned to the Subscriber except that interest shall accrue on the Note and be
payable by the Company to the Holder until the date the funds portion of the
Registration Escrow is returned to the holder of the Note returnable to the
Company. The accrued interest on the Note released to the Company shall be
payable in cash immediately upon demand. To the extent any part of the funds
portion of the Registration Escrow is released to the Subscriber, then that
portion of the Registration Escrow may, at the Subscriber's election, first be
applied in satisfaction of payment by the Company of damages accrued to such
Subscriber under Section 9(e) and Section
13
<PAGE>
10.2(j). Anything to the contrary herein or in the Funds Escrow Agreement
notwithstanding, the Note portion of the Registration Escrow will not be
released to the Company until all outstanding monetary obligations to the
Subscriber are satisfied. The Subscriber may elect to satisfy any such
outstanding Company obligations by converting such dollar amount at the
Conversion Price, as defined in the Note. In such event, common shares issued on
such conversion are granted all registration rights described herein, including
but not limited to the registration rights described in Section 10.1(iv) hereof.
10.2. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions hereof to effect the registration of any shares of
Registrable Securities under the Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as hereinafter provided):
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Act with respect to the disposition of all of the Registrable Securities
covered by such registration statement in accordance with the Seller's intended
method of disposition set forth in such registration statement for such period;
(c) furnish to the Seller, and to each underwriter if any,
such number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the
securities covered by such registration statement;
(d) use its best efforts to register or qualify the Seller's
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Seller and, in the
case of an underwritten public offering, the managing underwriter shall
reasonably request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify the Seller and each underwriter under
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Act, of the happening of any event of which
the Company has knowledge as a result of
14
<PAGE>
which the prospectus contained in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing;
(g) make available for inspection by the Seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by the Seller or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
(h) at the request of the Seller, provided a demand for
registration has been made pursuant to Section 10.1(i) or a request for
registration has been made pursuant to Section 10.1(ii), the Registrable
Securities will be included in a registration statement filed pursuant to this
Section 10. In the event of a firm commitment underwritten public offering in
which the Registrable Securities are so included, the lockup, if any, requested
by the managing underwriter may not exceed ninety (90) days after the effective
date thereof.
(i) In connection with each registration hereunder, the
Seller will furnish to the Company in writing such information with respect to
itself and the proposed distribution by it as reasonably shall be necessary in
order to assure compliance with federal and applicable state securities laws. In
connection with each registration pursuant to Section 10.1(i) or 10.1(ii)
covering an underwritten public offering, the Company and the Seller agree to
enter into a written agreement with the managing underwriter in such form and
containing such provisions as are customary in the securities business for such
an arrangement between such underwriter and companies of the Company's size and
investment stature.
(j) The Company and the Subscriber agree that the Seller
will suffer damages if any registration statement required under Section 10.1(i)
or 10.1(ii) above is not filed within 45 days after request by the Holder and
not declared effective by the Commission within 130 days after such request [or
60 days and 120 days, respectively, after the Closing Date in reference to the
Registration Statement on Form S-3 or such other form described in Section
10.1(iv)], and maintained in the manner and within the time periods contemplated
by Section 10 hereof, and it would not be feasible to ascertain the extent of
such damages with precision. Accordingly, if (i) the Registration Statement
described in Sections 10.1(i) or 10.1(ii) is not filed within 45 days of such
request, or is not declared effective by the Commission on or prior to the date
that is 130 days after such request, or (ii) the registration statement on Form
S-3 or such other form described in Section 10.1(iv) is not filed within 60 days
after the Closing Date or not declared effective within 120 days of the Closing
Date, or (iii) any registration statement described in Sections 10.1(i),
10.1(ii) or 10.1(iv) is filed and declared effective but shall thereafter cease
to be effective (without being succeeded immediately by an additional
registration statement filed and declared effective) for a period of time which
shall exceed 30 days in the aggregate per year but not more than 20 consecutive
calendar days (defined as a period of 365 days commencing on
15
<PAGE>
the date the Registration Statement is declared effective) (each such event
referred to in clauses (i), (ii) and (iii) of this Section 10.2(j) is referred
to herein as a "Non-Registration Event"), then, for so long as such
Non-Registration Event shall continue, the Company shall pay in cash as
Liquidated Damages to each holder of any Note an amount equal to two (2%)
percent per month for the initial thirty (30) days or part thereof and three
(3%) percent per month, or part thereof, thereafter, of the principal amount of
the Note then owned of record by such holder as of immediately following the
occurrence of such Non-Registration Event, unless such Non-Registration Event
arises from Subscriber's material default of Subscriber's obligations hereunder.
Payments to be made pursuant to this Section 10.2(j) shall be due and payable
immediately upon demand in immediately available funds. At the Company's
election, the Liquidated Damages payable in connection with the initial 60 day
period after the occurrence of a Non-Registration Event arising from a
Registration Statement required pursuant to Section 10.1(iv) hereof not being
declared effective by the Commission on or before 120 days after the Closing
Date, may be paid by the Company in common stock at a per share value equal to
the Conversion Price (as defined in the Note) that would then be in effect on
each day that such Non-Registration Event occurs or is continuing. A
Non-Registration Event arising from the Registration Statement described in
Section 10.1(iv) hereof not being declared effective by the Commission within
120 days from the date hereof, shall not be deemed an Acceleration Event under
the Note unless such Non-Registration default occurs or is continuing from and
after 180 days after the Closing Date. In the event the Company may not employ
an S-3 Registration Statement, then the Company will file such other form of
registration statement as is appropriate to register the Registrable Securities.
10.3. EXPENSES. All expenses incurred by the Company in complying
with Section 10, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, fee of one counsel, if any, to represent
all the Sellers, and costs of insurance are called "Registration Expenses". All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities, including any fees and disbursements of any special
counsel to the Seller, are called "Selling Expenses". The Seller shall pay the
fees of its own additional counsel, if any.
The Company will pay all Registration Expenses in connection
with the registration statement under Section 10. All Selling Expenses in
connection with each registration statement under Section 10 shall be borne by
the Seller in proportion to the number of shares sold by the Seller relative to
the number of shares sold under such registration statement or as all Sellers
thereunder may agree.
10.4. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will indemnify and
hold harmless the Seller, each officer
16
<PAGE>
of the Seller, each director of the Seller, each underwriter of such Registrable
Securities thereunder and each other person, if any, who controls such Seller or
underwriter within the meaning of the 1933 Act, against any losses, claims,
damages or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Registrable Securities was registered under the Act pursuant to
Section 10, any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Seller, each such underwriter and each such controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
if and to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission so made in conformity with information furnished by any such
Seller, the underwriter or any such controlling person in writing specifically
for use in such registration statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the Act pursuant to Section 10, the Seller will indemnify and
hold harmless the Company, and each person, if any, who controls the Company
within the meaning of the Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such officer, director, underwriter or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the Act pursuant to Section 10, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the Registrable
Securities sold by the Seller under such registration
17
<PAGE>
statement bears to the total public offering price of all securities sold
thereunder, but not in any event to exceed the gross proceeds received by the
Seller from the sale of Registrable Securities covered by such registration
statement.
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 10.4(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 10.4(c) if and to the extent the indemnifying party is prejudiced
by such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in and, to the
extent it shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 10.4(c) for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the indemnifying
party or if the interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the indemnified parties
shall have the right to select one separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable expenses and fees of such separate counsel and other expenses related
to such participation to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution
in the event of joint liability under the Act in any case in which either (i)
the Seller, or any controlling person of the Seller, makes a claim for
indemnification pursuant to this Section 10.4 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 10.4 provides for indemnification in such case, or (ii)
contribution under the Act may be required on the part of the Seller or
controlling person of the Seller in circumstances for which indemnification is
provided under this Section 10.4; then, and in each such case, the Company and
the Seller will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that the Seller is responsible only for the portion
represented by the percentage that the public offering price of its securities
offered by the registration statement bears to the public offering price of all
securities offered by such registration statement, provided, however, that, in
any such case, (A) the Seller will not be required to contribute any amount in
excess of the public offering price of all such securities offered by it
18
<PAGE>
pursuant to such registration statement; and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of the Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
11.1. FUTURE OFFERINGS.
(a) OFFERING RESTRICTION. Until the later of (i) the
effective date of the S-3 Registration Statement or such other form of
registration statement described in Section 10.1(iv) hereof, or (ii) 180 days
after the Closing Date, and so long as Subscriber is not in default under
Section 11.2, the Company and its subsidiaries will not issue any equity, or
convertible debt or other securities or conduct any public or private offering
without the consent of the Subscribers holding a majority of the outstanding
principal amount of the Notes issued in the $1,500,000 offering to which this
Subscription Agreement relates, if such offering would or could result in the
issuance of Common Stock or any other security of the Company that would be
freely tradable on the books of the Company, with or without registration with
the Securities and Exchange Commission or in reliance on any exemption from
registration prior to the effective date of a Registration Statement described
in Sections 10.1(i) or 10.1(iv) relating to all the Registrable Securities. The
foregoing notwithstanding, the Company may raise no more than $1,000,000 in
non-convertible debt financing on reasonable commercial terms. In such event,
the security interest to be granted to the Subscriber in the Company's assets
will be subordinate to such $1,000,000 financing. Subscriber must be given not
less than seven (7) business days prior notice of such financing.
(b) RIGHT OF FIRST REFUSAL. Until the end of the period
described in Section 11.1(a) above, the Subscriber shall be given not less than
ten (10) business days prior written notice of any proposed sale by the Company
of its common stock or other securities. The Subscriber shall have the right
during the seven (7) business days following the notice to agree to purchase an
amount of securities in the same proportion as being purchased in the aggregate
offering to which this Subscription Agreement relates (i.e. $1,500,000 in the
aggregate), of those securities proposed to be issued and sold, in accordance
with the terms and conditions set forth in the notice of sale. In the event such
terms and conditions are modified during the notice period, the Subscriber shall
be given prompt notice of such modification and shall have the right during the
original notice period or for a period of ten (10) business days following the
notice of modification, whichever is longer, to exercise such right.
11.2. OBLIGATION TO PURCHASE.
(a) The Subscriber agrees to purchase from the Company a
Convertible Note of the Company (the "Put Note") in the principal amount and for
the aggregate consideration designated on the signature page hereof (the "Put").
The Put may be exercised by the Company only during the forty-five (45) day
period commencing thirty (30) days after the effective date of the S-3 or such
other form of Registration Statement described in Section 10.1(iv) hereof ("Put
Period").
19
<PAGE>
(b) The agreement to purchase the Put Note is contingent on
the Company filing a registration statement relating to the common shares
issuable upon conversion of the Put Note ("Put Shares") with the Securities and
Exchange Commission on Form S-3 or such other registration statement described
in Section 10.1(iv) of this Subscription Agreement or another form suitable for
such purpose and with such States reasonably designated by the Purchaser on or
before 60 days from the Closing Date, and such registration statement being
declared effective by the Securities and Exchange Commission on or before 180
days from the Closing Date.
(c) The agreement to purchase is further contingent on the
following:
(1) As of the effective date of the registration
statement described in Section 11.2(b), and the Put Date (as hereinafter
defined), the Company will be a full reporting company with the class of Shares
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934.
(2) The Company's Common Stock will have traded at an
average daily trading volume of 75,000 shares for the thirty trading days prior
to the Put Date with an average daily closing bid price of not less than $1.00
per share for the same period.
(3) The Company's financial condition will be at least
equivalent to the Company's financial condition as reported in the Company's
most recent financial statements included in the Reports and Other Information
and the Company will not have experienced the occurrence of an adverse material
event.
(4) None of the following events of default shall have
occurred or be continuing:
(i) The Company shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such
a receiver or trustee shall otherwise be appointed.
(ii) Any money judgment, writ or similar process shall
be entered or filed against Company or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a period
of forty-five (45) days.
(iii) Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Company.
20
<PAGE>
(iv) Delisting of any of the Company's securities from
the NASDAQ SmallCap Market or such other principal exchange on which such
security is listed for trading, except for the Boston Exchange.
(v) A concession by the Company of a default under any
one or more obligation in an aggregate monetary amount in excess of $50,000.
(vi) An SEC stop trade order or NASDAQ trading
suspension, if either applies for a period of ten days or longer.
(vii) Any representation or warranty of the Company made
in this Subscription Agreement or in connection herewith, or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith shall be materially false or misleading.
(viii)The occurrence of a Non-Registration Event as
described in Section 10.2(j) of this Subscription Agreement.
(ix) Any material default by the Company of any
covenant or undertaking described in this Subscription Agreement or any document
delivered in connection herewith.
(x) Any material default by the Company under the
Note, including the occurrence of an Acceleration Event as defined in the Note.
(5) A Closing shall have occurred on an aggregate of
$1,500,000 on the same terms and conditions described in this Subscription
Agreement.
(6) The Put Shares on the Put Date (as hereinafter
defined) will be free- trading, unrestricted, unlegended and not subject to
volume or other resale limitations.
(7) The timely obtainment of the exemption from NASDAQ's
corporate governance rules or the approval of its shareholders of the issuance
of the Shares upon conversion of the Notes, Put Notes, and exercise of the
Warrants as described in Section 9(f) of this Subscription Agreement.
(d) The Subscriber is required to purchase the Put Note
within ten (10) business days of notice by the Company that the Company is
exercising the Put ("Put Notice"). The Put may be exercised by the Company only
one time. The date notice is given is the "Put Date". Unless otherwise agreed to
by the Subscribers, Put Notices must be given to all Subscribers undertaking to
purchase Put Shares in the $1,500,000 offering to which this Subscription
Agreement relates in the same proportion to their investment in the $1,500,000
offering to which this Subscription Agreement relates. Payment for the Put Note
will be made upon receipt of the Put Note by the Subscriber or by Grushko &
Mittman as escrow agent.
21
<PAGE>
(e) The Put Note will be nearly identical to the Note
annexed hereto as Exhibit A and subject to the same terms as contained in this
Subscription Agreement except for Section 11 of this Subscription Agreement. A
form of Put Note is annexed as Exhibit F hereto.
(f) As a further condition of the exercise of the Put, the
Company is required to execute all documents reasonably necessary to memorialize
the rights and obligations of each of the parties.
(g) As a further condition of the exercise of the Put, the
Subscriber is required to execute all documents reasonably necessary to
memorialize the rights and obligations of each of the parties.
(h) The Company shall not be entitled to exercise the Put
without the consent of the Subscriber, in connection with an amount of Put Note
principal which corresponds to that number of Put Shares which would be issuable
upon conversion of the Put Note on the Put Date, in excess of the sum of (i) the
number of shares of Common Stock beneficially owned by the Subscriber and its
affiliates on the Closing Date, and (ii) the number of shares of Common Stock
issuable upon the exercise of the Put with respect to which the determination of
this proviso is being made on a Put Date, which would result in beneficial
ownership by the Subscriber and its affiliates of more than 9.99% of the
outstanding shares of Common Stock of the Company. For the purposes of the
proviso to 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-3 thereunder, except as otherwise provided
in clause (i) of such proviso.
(i) The Company may not exercise the Put at any time when
there is not then an effective registration statement relating to the Put
Shares, nor on or within five trading days of any trading suspension of any of
the Company's securities.
(j) The Company irrevocably agrees to exercise the Put in
connection with not less than 33% of the Aggregate Put Consideration subject to
the Put being exercisable hereunder. During the Put Period, the Subscriber may
exercise the Put on the Company's behalf for an amount up to 33% of the
Aggregate Put Consideration subject to the Put being exercisable hereunder but
only to the extent the Company has not previously exercised the Put in an amount
up to 33% of the Aggregate Put Consideration.
(k) In the event the Subscriber fails to comply with a valid
Put Notice, then the Company will be released from its obligations to the
Subscriber pursuant to Section 11(a) and Section 11(b) hereof.
22
<PAGE>
12. SECURITY INTEREST. The Company shall grant the Subscriber a
senior security interest in certain of its assets pursuant to a Security
Agreement. Except as described in Section 11(a) hereof, the security interest
shall be effective until the later of (i) the effective date of the S-3
Registration Statement described in Section 10.1(iv) hereof, and (ii) until the
Company has deposited or replaced the shares deposited in escrow pursuant to
Section 9(e) hereof, with unlegended, unrestricted, registered common shares of
the Company sufficient to allow complete conversion of the Note at the
Conversion Price that would be in effect on the day the S-3 Registration
Statement is declared effective. In the event an Acceleration Event, as defined
in the Note, shall have occurred, then the security interest shall remain in
effect until the Note has been satisfied or converted.
13. MISCELLANEOUS.
(a) NOTICES. All notices or other communications given or
made hereunder shall be in writing and shall be personally delivered or deemed
delivered the first business day after being telecopied (provided that a copy is
delivered by overnight courier) to the party to receive the same at its address
set forth below or to such other address as either party shall hereafter give to
the other by notice duly made under this Section: (i) if to the Company, to
TelePad Corporation, 380 Herndon Parkway, Suite 1900, Herndon, Virginia 22070,
telecopier number: (703) 834-1235, with a copy via telecopier to: Parker,
Chapin, Flattau & Klimpl, Attn: Henry Rothman, Esq., (212) 704-6288, and (ii) if
to the Subscriber, to the name, address and telecopy number set forth on the
signature page hereto.
(b) CLOSING. The consummation of the transactions
contemplated herein shall take place at the offices of Grushko & Mittman, 277
Broadway, Suite 801, New York, New York 10007, upon the satisfaction of all
conditions to Closing set forth in this Agreement. The closing date shall be the
date that subscriber funds representing the net amount due the Company from
aggregate subscriptions of $1,500,000 are transmitted by wire transfer to the
Company and the Registration Escrow is received by the Escrow Agent identified
in the Funds Escrow Agreement (the "Closing Date").
(c) ENTIRE AGREEMENT; ASSIGNMENT. This Agreement represents
the entire agreement between the parties hereto with respect to the subject
matter hereof and may be amended only by a writing executed by both parties. No
right or obligation of either party shall be assigned by that party without
prior notice to and the written consent of the other party.
(d) EXECUTION. This Agreement may be executed by facsimile
transmission, followed by delivery of an executed original copy.
(e) LAW GOVERNING THIS AGREEMENT. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without regard to principles of conflicts of laws. Any action brought by either
party against the other concerning
23
<PAGE>
the transactions contemplated by this Agreement shall be brought only in the
state courts of New York or in the federal courts located in the state of New
York. Both parties agree to submit to the jurisdiction of such courts and waive
trial by jury. The prevailing party shall be entitled to recover from the other
party its reasonable attorney's fees and costs. In the event that any provision
of this Agreement or any other agreement delivered in connection herewith 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 such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of any
agreement.
(f) CANCELLATION. Until a Closing actually takes place,
either or both the Company or Subscriber may withdraw without penalty from the
transactions described herein.
(g) AUTOMATIC TERMINATION. This Agreement shall
automatically terminate without any further action of either party hereto if the
Closing shall not have occurred by the seventh (7th) business day following the
date this Agreement is accepted by the Subscriber, or June 3, 1998, whichever is
sooner, provided, however, that any such termination shall not terminate the
liability of any party which is then in breach of the Agreement.
(h) ORIGINAL COUNTERPARTS. This Agreement may be executed in
counterparts, each of which will be deemed an original.
24
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
Very truly yours,
TELEPAD CORPORATION
By:________________________________
Dated: May ____, 1998
Accepted:
AUSTOST ANSTALT SCHAAN
(a Lichenstein corporation)
7440 Fuerstentum
Lichenstein, Landstrasse 163
Fax: 011-431-534532895
By:____________________________
Title:_________________________
Dated as of May ____, 1998
Aggregate Principal Amount of Notes: $375,000.00
Aggregate Put Consideration: $250,000.00
Section 9(f) Conversion Shares
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
Very truly yours,
TELEPAD CORPORATION
By:________________________________
Dated: May ____, 1998
Accepted:
BALMORE FUNDS S.A.
(a B.V.I. corporation)
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
By:____________________________
Title:_________________________
Dated as of May ____, 1998
Aggregate Principal Amount of Notes: $375,000.00
Aggregate Put Consideration: $250,000.00
Section 9(f) Conversion Shares
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
Very truly yours,
TELEPAD CORPORATION
By:________________________________
Dated: May ____, 1998
Accepted:
BEESTON INVESTMENTS LTD.
(an Israel corporation)
119 Rothschild Boulevard
Tel Aviv, Israel
Fax: 011-972-25600201
By:____________________________
Title:_________________________
Dated as of May ____, 1998
Aggregate Principal Amount of Notes: $100,000.00
Aggregate Put Consideration: $73,334.00
Section 9(f) Conversion Shares
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
Very truly yours,
TELEPAD CORPORATION
By:________________________________
Dated: May ____, 1998
Accepted:
ELLIS ENTERPRISES LTD.
(a U.K. corporation)
42A Waterloo Road
London, England
NW2 7UF
Fax: 011-441-814509004
By:____________________________
Title:_________________________
Dated as of May ____, 1998
Aggregate Principal Amount of Notes: $50,000.00
Aggregate Put Consideration: $33,333.00
Section 9(f) Conversion Shares
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
Very truly yours,
TELEPAD CORPORATION
By:________________________________
Dated: May ____, 1998
Accepted:
THE GROSS FOUNDATION INC.
(a New York corporation)
1660 49th Street
Brooklyn, New York
Fax: 718-851-3511
By:____________________________
Title:_________________________
Dated as of May ____, 1998
Aggregate Principal Amount of Notes: $350,000.00
Aggregate Put Consideration: $233,333.00
Section 9(f) Conversion Shares
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
Very truly yours,
TELEPAD CORPORATION
By:________________________________
Dated: May ____, 1998
Accepted:
THE HEWLETT FUND, INC.
(a New York corporation)
1615 Avenue I, Suite 201
Brooklyn, New York 11230
Fax: 201-363-0450
By:____________________________
Title:_________________________
Dated as of May ____, 1998
Aggregate Principal Amount of Notes: $90,000.00
Aggregate Put Consideration: $60,000.00
Section 9(f) Conversion Shares
<PAGE>
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
Very truly yours,
TELEPAD CORPORATION
By:________________________________
Dated: May ____, 1998
Accepted:
INVESTCOR LLC
(a Delaware LLC)
1550 54th Street
Brooklyn, New York 11219
Fax: 718-436-0736
By:____________________________
Title:_________________________
Dated as of May ____, 1998
Aggregate Principal Amount of Notes: $150,000.00
Aggregate Put Consideration: $100,000.00
Section 9(f) Conversion Shares
THIS NOTE AND THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON CONVERSION OF THIS NOTE MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO TELEPAD
CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONVERTIBLE NOTE
FOR VALUE RECEIVED, TELEPAD CORPORATION, a Delaware corporation
(hereinafter called "Borrower"), hereby promises to pay to
_________________________________________, Fax No.: ____________ (the "Holder")
or order, without demand, the sum of $____________, with interest accruing at
the annual rate of 8% on May ____, 1999 (the "Maturity Date"), as such date may
be extended by agreement of the parties hereto.
The following terms shall apply to this Note:
ARTICLE I
DEFAULT RELATED PROVISIONS
1.1 PAYMENT GRACE PERIOD. The Borrower shall have a ten (10) day
grace period to pay any monetary amounts due under this Note, after which grace
period a default interest rate of 16% per annum shall apply to the amounts owed
hereunder.
1.2 CONVERSION PRIVILEGES. The Conversion Privileges set forth in
Article II shall remain in full force and effect immediately from the date
hereof and until the Note principal and interest are paid in full.
1.3 INTEREST RATE. At the earlier of each Conversion Date (as
hereinafter defined) or the Maturity Date, accelerated or otherwise, the
Borrower shall pay interest at the annual rate of 8% per annum. From and after
the occurence of an Acceleration Event, as defined hereinafter, the interest
rate shall be 16% per annum.
<PAGE>
ARTICLE II
CONVERSION RIGHTS
The Holder shall have the right to convert the principal amount and
interest due under this Note into Shares of the Borrower's Common Stock as set
forth below.
2.1. CONVERSION INTO THE BORROWER'S COMMON STOCK.
(a) The Holder shall have the right from and after the issuance of
this Note and then at any time on or prior to the Maturity Date, as it may be
extended by agreement of the parties hereto, and until this Note is fully paid,
to convert any outstanding and unpaid principal portion of this Note of $25,000
or greater amount, or any lesser amount representing the full remaining
outstanding and unpaid principal portion and at the Holder's election, the
accrued interest on the Note (the date of telecopying such notice of conversion
being a "Conversion Date") into fully paid and nonassessable shares of Common
Stock of Borrower as such stock exists on the date of issuance of this Note, or
any shares of capital stock of Borrower into which such stock shall hereafter be
changed or reclassified (the "Common Stock") at the conversion price as defined
in Section 2.1(b) hereof (the "Conversion Price"), determined as provided
herein. Upon the delivery of this Note to the escrow agent ("Escrow Agent")
identified in Section 9 of the subscription agreement entered into between the
Company and Holder (the "Subscription Agreement") and in the escrow agreement
("Escrow Agreement") referred to therein, or to the Company, accompanied,
preceded or followed by notice from the Holder to the Company or Escrow Agent of
the Holder's written request for conversion, subject further to the terms of the
Escrow Agreement, Borrower shall issue and deliver to the Holder within ten
business days from the Conversion Date that number of shares of Common Stock for
the portion of the Note and/or interest converted in accordance with the
foregoing and a new Note in the form hereof for the balance of the principal
amount hereof, and/or interest if any. The number of shares of Common Stock to
be issued upon each conversion of this Note shall be determined by dividing that
portion of the principal and/or interest on the Note to be converted, by the
Conversion Price.
(b) The Conversion Price per share shall be $.98. From and after
120 days after the date of this Note and provided the average closing bid price
for the Common Stock on the NASDAQ SmallCap Market, or on any securities
exchange or other securities market on which the Common Stock is then being
traded for any five (5) consecutive trading days is less than $1.31, then the
Conversion Price shall be the lesser of (i) seventy-five (75%) of the average
closing bid price for the Common Stock on the NASDAQ SmallCap Market, or on any
securities
2
<PAGE>
exchange or other securities market on which the Common Stock is then being
traded, for the five (5) trading days immediately preceding the Conversion Date,
or (ii) $0.98.
(c) The Conversion Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 2.1(a)
and 2.1(b), shall be subject to adjustment from time to time upon the happening
of certain events while this conversion right remains outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time
shall consolidate with or merge into or sell or convey all or substantially all
its assets to any other corporation, this Note, as to the unpaid principal
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase such number and kind of shares or other
securities and property as would have been issuable or distributable on account
of such consolidation, merger, sale or conveyance, upon or with respect to the
securities subject to the conversion or purchase right immediately prior to such
consolidation, merger, sale or conveyance. The foregoing provision shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such securities of such
successor or purchaser after any such consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any time
shall, by reclassification or otherwise, change the Common Stock into the same
or a different number of securities of any class or classes, this Note, as to
the unpaid principal portion thereof and accrued interest thereon, shall
thereafter be deemed to evidence the right to purchase such number and kind of
securities as would have been issuable as the result of such change with respect
to the Common Stock immediately prior to such reclassification or other change.
C. Stock Splits, Combinations and Dividends. If the shares
of Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock in shares
of Common Stock, the Conversion Price shall be proportionately reduced in case
of subdivision of shares or stock dividend or proportionately increased in the
case of combination of shares, in each such case by the ratio which the total
number of shares of Common Stock outstanding immediately after such event bears
to the total number of shares of Common Stock outstanding immediately prior to
such event.
D. Share Issuance. Subject to the provisions of this
Section, if the Borrower at any time shall issue any shares of Common Stock
prior to the conversion of the entire principal amount of the Note (otherwise
than as: (i) provided in Sections 2.1(c)A, 2.1(c)B or 2.1(c)C or this
subparagraph D; (ii) pursuant to options, warrants, or other obligations to
issue shares, outstanding on the date hereof (including all securities being
issued in connection with the Subscription Agreement and the transactions
contemplated therein), or as described in the Reports and Other Written
Information, as such terms are defined in the Subscription Agreement (which
agreement is incorporated herein by this reference); [(i) and (ii) above, are
hereinafter referred
3
<PAGE>
to as the "Existing Option Obligations"] for a consideration less than the
Conversion Price that would be in effect at the time of such issue, then, and
thereafter successively upon each such issue, the Conversion Price shall be
reduced as follows: (i) the number of shares of Common Stock outstanding
immediately prior to such issue shall be multiplied by the Conversion Price in
effect at the time of such issue and the product shall be added to the aggregate
consideration, if any, received by the Borrower upon such issue of additional
shares of Common Stock; and (ii) the sum so obtained shall be divided by the
number of shares of Common Stock outstanding immediately after such issue. The
resulting quotient shall be the adjusted conversion price. Except for the
Existing Option Obligations for purposes of this adjustment, the issuance of any
security of the Borrower after the date of this Note, carrying the right to
convert such security into shares of Common Stock or of any warrant, right or
option to purchase Common Stock shall result in an adjustment to the Conversion
Price upon the issuance of shares of Common Stock upon exercise of such
conversion or purchase rights.
(d) During the period the conversion right exists, Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note. Borrower represents that upon issuance, such shares will be duly and
validly issued, fully paid and non-assessable. Borrower agrees that its issuance
of this Note shall constitute full authority to its officers, agents, and
transfer agents who are charged with the duty of executing and issuing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.
2.2 METHOD OF CONVERSION. This Note may be converted by the Holder
in whole or in part as described in Section 2.1(a) hereof and the Subscription
Agreement. Upon partial conversion of this Note, a new Note containing the same
date and provisions of this Note shall be issued by the Borrower to the Holder
for the principal balance of this Note and interest which shall not have been
converted.
ARTICLE III
ACCELERATION EVENT
The occurrence of any of the following acceleration events
("Acceleration Event") shall, at the option of the Holder hereof, make all sums
of principal and interest then remaining unpaid hereon and all other amounts
payable hereunder immediately due and payable, all without demand, presentment
or notice, or grace period, all of which hereby are expressly waived, except as
set forth below:
4
<PAGE>
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to
pay any installment of principal or interest hereon when due and such failure
continues for a period of ten (10) days after written notice to the Borrower
from the Holder.
3.2 BREACH OF COVENANT. The Borrower is in material breach of any
covenant or other term or condition of this Note, the Subscription Agreement, or
in any agreement delivered in connection herewith, and such breach continues for
a period of seven (7) days after written notice to the Borrower from the Holder.
3.3 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation
or warranty of the Borrower made herein, in the Subscription Agreement entered
into by the Holder and Borrower in connection with this Note, or in any
agreement, statement or certificate given in writing pursuant to the foregoing
or in connection herewith shall be materially false or misleading.
3.4 RECEIVER OR TRUSTEE. The Borrower shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed.
3.5 JUDGMENTS. Any money judgment, writ or similar process shall
be entered or filed against Borrower or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a period
of forty-five (45) days.
3.6 BANKRUPTCY. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower.
3.7 DELISTING. Delisting of the Common Stock from the NASDAQ
SmallCap Market or such other principal exchange on which the Common Stock is
listed for trading.
3.8 CONCESSION. A concession by the Company of a default under any
one or more obligations in an aggregate monetary amount in excess of $50,000.
3.9 STOP TRADE. An SEC stop trade order or NASDAQ trading
suspension, if either applies for a period of ten days or longer.
3.10 FAILURE TO DELIVER COMMON STOCK. Borrower's failure to timely
deliver Common Stock to the Holder pursuant to this Note or Section 9 of the
Subscription Agreement, or failure to timely deliver a replacement Note
representing any unconverted portion of this Note.
3.11 NON-REGISTRATION EVENT. The occurrence of a Non-Registration
Event as described in Section 10.2(j) of the Subscription Agreement.
5
<PAGE>
ARTICLE IV
MISCELLANEOUS
4.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the
part of Holder hereof 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
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
4.2 NOTICES. All notices or other communications given or made
hereunder shall be in writing and shall be personally delivered or deemed
delivered the first business day after being telecopied (provided that a copy is
delivered by overnight courier) to the party to receive the same at its address
set forth below or to such other address as either party shall hereafter give to
the other by notice duly made under this Section: (i)f if to the Company, (i)
TelePad Corporation, 380 Herndon Parkway, Suite 1900, Herndon, Virginia 22070,
telecopier number: (703) 834-1235, with a copy via telecopier to: Parker,
Chapin, Flattau & Klimpl, Attn: Henry Rothman, Esq., (212) 704-6288. Each date
on which a Notice of Conversion is telecopied to the Company or Escrow Agent in
accordance with the provisions hereof shall be deemed a Conversion Date.
4.3 AMENDMENT PROVISION. The term "Note" and all reference
thereto, as used throughout this instrument, shall mean this instrument as
originally executed, or if later amended or supplemented, then as so amended or
supplemented.
4.4 ASSIGNABILITY. This Note shall be binding upon the Borrower
and its successors and assigns, and shall inure to the benefit of the Holder and
its successors and assigns, and may be assigned by the Holder.
4.5 COST OF COLLECTION. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6 GOVERNING LAW. This Note shall be deemed to have been executed
in and shall be governed by the internal laws of the State of New York, without
regard to the principles of conflict of laws.
4.7 MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
6
<PAGE>
4.8 SECURITY INTEREST. This Note is secured by a security interest
granted to Holder pursuant to a Security Agreement delivered by Borrower to
Holder.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in
its name by its Chief Executive Officer on this _____ day of May, 1998.
TELEPAD CORPORATION
By:_________________________
7
THIS NOTE AND THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON CONVERSION OF THIS NOTE MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO TELEPAD
CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
FORM OF CONVERTIBLE PUT NOTE
----------------------------
FOR VALUE RECEIVED, TELEPAD CORPORATION, a Delaware corporation
(hereinafter called "Borrower"), hereby promises to pay to
_______________________________________, Fax No.: ____________ (the "Holder") or
order, without demand, the sum of $____________, with interest accruing at the
annual rate of 8% on May ____, ______ (the "Maturity Date"), as such date may be
extended by agreement of the parties hereto.
The following terms shall apply to this Note:
ARTICLE I
DEFAULT RELATED PROVISIONS
1.1 PAYMENT GRACE PERIOD. The Borrower shall have a ten (10) day
grace period to pay any monetary amounts due under this Note, after which grace
period a default interest rate of 16% per annum shall apply to the amounts owed
hereunder.
1.2 CONVERSION PRIVILEGES. The Conversion Privileges set forth in
Article II shall remain in full force and effect immediately from the date
hereof and until the Note principal and interest are paid in full.
1.3 INTEREST RATE. At the earlier of each Conversion Date (as
hereinafter defined) or the Maturity Date, accelerated or otherwise, the
Borrower shall pay interest at the annual rate of 8% per annum. From and after
the occurence of an Acceleration Event, as defined hereinafter, the interest
rate shall be 16% per annum.
1
<PAGE>
ARTICLE II
CONVERSION RIGHTS
The Holder shall have the right to convert the principal amount and
interest due under this Note into Shares of the Borrower's Common Stock as set
forth below.
2.1. CONVERSION INTO THE BORROWER'S COMMON STOCK.
(a) The Holder shall have the right from and after the issuance of
this Note and then at any time on or prior to the Maturity Date, as it may be
extended by agreement of the parties hereto, and until this Note is fully paid,
to convert any outstanding and unpaid principal portion of this Note of $25,000
or greater amount, or any lesser amount representing the full remaining
outstanding and unpaid principal portion and at the Holder's election, the
accrued interest on the Note (the date of telecopying such notice of conversion
being a "Conversion Date") into fully paid and nonassessable shares of Common
Stock of Borrower as such stock exists on the date of issuance of this Note, or
any shares of capital stock of Borrower into which such stock shall hereafter be
changed or reclassified (the "Common Stock") at the conversion price as defined
in Section 2.1(b) hereof (the "Conversion Price"), determined as provided
herein. Upon the delivery of this Note to the escrow agent ("Escrow Agent")
identified in Section 9 of the subscription agreement entered into between the
Company and Holder (the "Subscription Agreement") and in the escrow agreement
("Escrow Agreement") referred to therein, or to the Company, accompanied,
preceded or followed by notice from the Holder to the Company or Escrow Agent of
the Holder's written request for conversion, subject further to the terms of the
Escrow Agreement, Borrower shall issue and deliver to the Holder within ten
business days from the Conversion Date that number of shares of Common Stock for
the portion of the Note and/or interest converted in accordance with the
foregoing and a new Note in the form hereof for the balance of the principal
amount hereof, and/or interest if any. The number of shares of Common Stock to
be issued upon each conversion of this Note shall be determined by dividing that
portion of the principal and/or interest on the Note to be converted, by the
Conversion Price.
(b) The Conversion Price per share shall be eighty-five (85%)
percent of the average closing bid price for the Common Stock on the NASDAQ
SmallCap Market, or on any securities exchange or other securities market on
which the Common Stock is then being traded, for the five (5) trading days
immediately preceding the Conversion Date.
(c) The Conversion Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 2.1(a)
and 2.1(b), shall be subject to
2
<PAGE>
adjustment from time to time upon the happening of certain events while this
conversion right remains outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time
shall consolidate with or merge into or sell or convey all or substantially all
its assets to any other corporation, this Note, as to the unpaid principal
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase such number and kind of shares or other
securities and property as would have been issuable or distributable on account
of such consolidation, merger, sale or conveyance, upon or with respect to the
securities subject to the conversion or purchase right immediately prior to such
consolidation, merger, sale or conveyance. The foregoing provision shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such securities of such
successor or purchaser after any such consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any time
shall, by reclassification or otherwise, change the Common Stock into the same
or a different number of securities of any class or classes, this Note, as to
the unpaid principal portion thereof and accrued interest thereon, shall
thereafter be deemed to evidence the right to purchase such number and kind of
securities as would have been issuable as the result of such change with respect
to the Common Stock immediately prior to such reclassification or other change.
C. Stock Splits, Combinations and Dividends. If the shares
of Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock in shares
of Common Stock, the Conversion Price shall be proportionately reduced in case
of subdivision of shares or stock dividend or proportionately increased in the
case of combination of shares, in each such case by the ratio which the total
number of shares of Common Stock outstanding immediately after such event bears
to the total number of shares of Common Stock outstanding immediately prior to
such event.
D. Share Issuance. Subject to the provisions of this
Section, if the Borrower at any time shall issue any shares of Common Stock
prior to the conversion of the entire principal amount of the Note (otherwise
than as: (i) provided in Sections 2.1(c)A, 2.1(c)B or 2.1(c)C or this
subparagraph D; (ii) pursuant to options, warrants, or other obligations to
issue shares, outstanding on the date hereof (including all securities being
issued in connection with the Subscription Agreement and the transactions
contemplated therein), or as described in the Reports and Other Written
Information, as such terms are defined in the Subscription Agreement (which
agreement is incorporated herein by this reference); [(i) and (ii) above, are
hereinafter referred to as the "Existing Option Obligations"] for a
consideration less than the Conversion Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Conversion Price shall be reduced as follows: (i) the number of shares of Common
Stock outstanding immediately prior to such issue shall be multiplied by the
Conversion Price in effect at the time of such issue and the product shall be
added to the aggregate consideration, if
3
<PAGE>
any, received by the Borrower upon such issue of additional shares of Common
Stock; and (ii) the sum so obtained shall be divided by the number of shares of
Common Stock outstanding immediately after such issue. The resulting quotient
shall be the adjusted conversion price. Except for the Existing Option
Obligations for purposes of this adjustment, the issuance of any security of the
Borrower after the date of this Note, carrying the right to convert such
security into shares of Common Stock or of any warrant, right or option to
purchase Common Stock shall result in an adjustment to the Conversion Price upon
the issuance of shares of Common Stock upon exercise of such conversion or
purchase rights.
(d) During the period the conversion right exists, Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note. Borrower represents that upon issuance, such shares will be duly and
validly issued, fully paid and non-assessable. Borrower agrees that its issuance
of this Note shall constitute full authority to its officers, agents, and
transfer agents who are charged with the duty of executing and issuing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.
2.2 METHOD OF CONVERSION. This Note may be converted by the Holder
in whole or in part as described in Section 2.1(a) hereof and the Subscription
Agreement. Upon partial conversion of this Note, a new Note containing the same
date and provisions of this Note shall be issued by the Borrower to the Holder
for the principal balance of this Note and interest which shall not have been
converted.
ARTICLE III
ACCELERATION EVENT
The occurrence of any of the following acceleration events
("Acceleration Event") shall, at the option of the Holder hereof, make all sums
of principal and interest then remaining unpaid hereon and all other amounts
payable hereunder immediately due and payable, all without demand, presentment
or notice, or grace period, all of which hereby are expressly waived, except as
set forth below:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to
pay any installment of principal or interest hereon when due and such failure
continues for a period of ten (10) days after written notice to the Borrower
from the Holder.
3.2 BREACH OF COVENANT. The Borrower is in material breach of any
covenant or other term or condition of this Note, the Subscription Agreement, or
in any agreement delivered in connection herewith, and such breach continues for
a period of seven (7) days after written notice to the Borrower from the Holder.
4
<PAGE>
3.3 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation
or warranty of the Borrower made herein, in the Subscription Agreement entered
into by the Holder and Borrower in connection with this Note, or in any
agreement, statement or certificate given in writing pursuant to the foregoing
or in connection herewith shall be materially false or misleading.
3.4 RECEIVER OR TRUSTEE. The Borrower shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed.
3.5 JUDGMENTS. Any money judgment, writ or similar process shall
be entered or filed against Borrower or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a period
of forty-five (45) days.
3.6 BANKRUPTCY. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower.
3.7 DELISTING. Delisting of the Common Stock from the NASDAQ
SmallCap Market or such other principal exchange on which the Common Stock is
listed for trading.
3.8 CONCESSION. A concession by the Company of a default under any
one or more obligations in an aggregate monetary amount in excess of $50,000.
3.9 STOP TRADE. An SEC stop trade order or NASDAQ trading
suspension, if either applies for a period of ten days or longer.
3.10 FAILURE TO DELIVER COMMON STOCK. Borrower's failure to timely
deliver Common Stock to the Holder pursuant to this Note or Section 9 of the
Subscription Agreement, or failure to timely deliver a replacement Note
representing any unconverted portion of this Note.
ARTICLE IV
MISCELLANEOUS
4.1 FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the
part of Holder hereof 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
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5
<PAGE>
4.2 NOTICES. All notices or other communications given or made
hereunder shall be in writing and shall be personally delivered or deemed
delivered the first business day after being telecopied (provided that a copy is
delivered by overnight courier) to the party to receive the same at its address
set forth below or to such other address as either party shall hereafter give to
the other by notice duly made under this Section: (i)f if to the Company, (i)
TelePad Corporation, 380 Herndon Parkway, Suite 1900, Herndon, Virginia 22070,
telecopier number: (703) 834-1235, with a copy via telecopier to: Parker,
Chapin, Flattau & Klimpl, Attn: Henry Rothman, Esq., (212) 704-6288. Each date
on which a Notice of Conversion is telecopied to the Company or Escrow Agent in
accordance with the provisions hereof shall be deemed a Conversion Date.
4.3 AMENDMENT PROVISION. The term "Note" and all reference
thereto, as used throughout this instrument, shall mean this instrument as
originally executed, or if later amended or supplemented, then as so amended or
supplemented.
4.4 ASSIGNABILITY. This Note shall be binding upon the Borrower
and its successors and assigns, and shall inure to the benefit of the Holder and
its successors and assigns, and may be assigned by the Holder.
4.5 COST OF COLLECTION. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6 GOVERNING LAW. This Note shall be deemed to have been executed
in and shall be governed by the internal laws of the State of New York, without
regard to the principles of conflict of laws.
4.7 MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
4.8 SECURITY INTEREST. This Note is secured by a security interest
granted to Holder pursuant to a Security Agreement delivered by Borrower to
Holder.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in
its name by its Chief Executive Officer on this _____ day of ______, _____.
TELEPAD CORPORATION
By:________________________________
6
SECURITY AGREEMENT
May 27, 1998
A. PARTIES
1. Austost Anstalt Schaan
7440 Fuerstentum
Lichenstein, Landstrasse 163
Fax: 011-431-534532895
Balmore Funds S.A.
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
Beeston Investments Ltd.
119 Rothschild Blvd.
Tel Aviv, Israel
Fax: 011-972-25600201
Ellis Enterprises Ltd.
42A Waterloo Road
London, England, UW2 7UF
Fax: 011-441-814509004
The Gross Foundation Inc.
1660 49th Street
Brooklyn, New York
Fax: 718-851-3511
The Hewlett Fund, Inc.
1615 Avenue I, #201
Brooklyn, New York 11230
Fax: 201-363-0450
Investcor LLC
1550 54th Street
Brooklyn, New York 11219
Fax: 718-436-0736
("Lender" or "Lenders" hereinafter)
1
<PAGE>
2. TelePad Corporation
380 Herndon Parkway, Suite 1900
Herndon, Virginia 22070
Fax: (703) 834-1235
("Debtor" hereinafter)
B. AGREEMENT
Subject to the applicable terms of this Security Agreement, Debtor grants
to the Lenders, in the proportion in which their interests appear from time to
time, in the Obligation, hereinafter defined, a security interest in the
Collateral, as hereinafter defined, to secure the payment of the Obligation.
C. OBLIGATION
The following is the "Obligation" secured by this agreement:
1. Convertible promissory notes in the aggregate principal amount of
$1,000,000 issued by the Debtor to the Lenders on or about the date hereof.
2. In the event of Default, as hereinafter defined, all costs incurred
by Lender to obtain, preserve, and enforce this security interest, collect the
Obligation, and maintain and preserve the Collateral, and including (but not
limited to) taxes, assessments, reasonable attorneys' fees and legal expenses.
D. COLLATERAL
1. The security interest is granted in the following, hereinafter
called the "Collateral": All of the Debtor's tangible personal property,
including, without limitation, all present and future subsidiaries, stock,
securities, inventory, goods, merchandise, furniture, fixtures, office supplies,
motor vehicles, equipment, machinery, and associated equipment (as such terms
are defined for purposes of the Uniform Commercial Code of of the State of New
York), whether now owned or hereafter acquired; and all of the Debtor's other
personal property, including without limitation, all present and future accounts
receivable, instruments, contract rights, trademarks, trade names, copyrights,
licenses, notes, bills, drafts, acceptances, general intangibles, chooses in
action, and all debts, obligations and liabilities in whatever form, owing to
the Debtor from any person, firm or corporation or any other legal entity,
whether now existing or hereafter arising, now or hereafter received by or
belonging or owing to the Debtor, and all guaranties and securities therefor;
and any and all payments under, and proceeds of, any of the foregoing, provided
however that this Agreement shall not apply to and the term "Collateral" shall
not include any securities of L&E Computer Mounts, Incorporated (a Pennsylvania
corporation), that are the subject of Pledge and Security Agreements, or similar
agreements which Debtor is a party.
2
<PAGE>
E. AGREEMENT OF DEBTOR
1. Debtor will furnish Lender with any information on the Collateral
reasonably requested by Lender; allow Lender to inspect the Collateral, and
inspect and copy all records relating to the Collateral and the Obligation; sign
any papers furnished by Lender which are necessary to obtain and maintain this
security interest; notify Lender of any fact or circumtance warranted or
repreented by Debtor in this agreement or furnished to Lender, or if any event
of default occurs.
2. Debtor warrants, to the best of Debtor's knowledge, no financing
statement has been filed with respect to the Collateral. Debtor is absolute
owner of the Collateral, and it is not encumbered other than by this security
interest.
3. Debtor will not allow the issuance or payment of any liquidating
dividend without the prior consent of Lender.
F. RIGHTS OF LENDER
Lender may, in its discretion, after default, take any action Debtor is
required to take or is otherwise necessary to obtain, preserve, and enforce this
security interest, and maintain and preserve the Collateral, without notice to
Debtor, and add costs of same to the Obligation (but Lender is under no duty to
take any such action); release Collateral in its possession to Debtor,
temporarily or otherwise; take control of funds generated by the Collateral,
such as dividends, interest, receivables, proceeds or refunds from insurance,
and use same to reduce any part of the Obligation; waive any of its rights
hereunder without such waiver prohibiting the later exercise of the same or
similar rights; revoke any permission or waiver previously granted to Debtor.
G. MISCELLANEOUS
The rights and privileges of Lender shall inure to its successors and
assigns. All representations, warranties, and agreements to Debtor shall bind
Debtor's successors and assigns. Definitions in the Uniform Commercial Code
apply to words and phrases in this agreement. Debtor waives presentment, demand,
notice of dishonor, protest, and extension of time without notice as to any
instruments and chattel paper in the Collateral. Notice delivered via telecopier
transmission or mailed certified mail to Debtor's address in Section A, or to
Debtor's most recent changed address on file with Lender, at least three
business days prior to the related action shall be deemed reasonable. A
photographic or other reproduction of this agreement or any financing agreement
signed by Debtor, is sufficient as a financing statement.
H. DEFAULT
1. Any of the following is an event of default: failure of Debtor to
pay any part of the Obligation in accordance with its terms, or any other
liability in the Obligation, any default under
3
<PAGE>
the Obligation or failure to perform any act or duty required by this Agreement;
falsity of any warranty or representation in this agreement when made;
substantial change in any fact warranted or represented in this agreement;
involvement of Debtor in bankruptcy or insolvency proceedings; dissolution, or
other termination of Debtor's existence; merger or consolidation of Debtor with
another; substantial loss, theft, destruction, sale, reduction in value,
encumbrance of, damage to, or change in the Collateral; material modification of
any contract, the rights to which are part of the Collateral; levy on, seizure,
or attachment of the Collateral which is not contested.
2. When an event of default occurs, the entire Obligation becomes
immediately due and payable at Lender's Option without notice to Debtor, and
Lender may proceed to enforce payment of same and exercise any and all of the
rights and remedies available to a secured party under the Uniform Commercial
Code as well as all other rights and remedies.
I. FIRST AND PRIOR LIEN
This Security Agreement grants to Lender a first and prior lien to secure
the payment of the Obligation listed herein, and extensions and renewals
thereof. If Lender disposes of the Collateral following default, the proceeds of
such disposition available to satisfy the Obligation shall be applied first to
the Debentures included therein, and thereafter to all remaining indebtedness
secured hereby, in the order in which such remaining indebtedness was executed
or contracted. The lien granted herein to Lender may become subordinate to a
lien in connection with non-convertible debt financing on reasonable commercial
terms by Debtor but up to a maximum prior lien of $1,000,000 and provided Lender
has been given seven business days prior notice of such financing.
J. SUBSTANTIAL BENEFIT
Whenever possible, each provision of this Security Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Security Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remaining provisions
of this Security Agreement. Nothing in this Security Agreement or in any other
agreement between the parties shall require Debtor to pay or Lender to accept
interest in an amount which would subject Lender to penalty under applicable
law.
K. JURISDICTION
This Agreement shall, in all respects, be governed by the laws of the
State of New York without regard to New York's conflict of laws rules applicable
to agreements executed and to be wholly performed within the State of New York.
Nothing contained herein shall be construed so as to require the commission of
any act contrary to law, and wherever there is any conflict between any
provision contained herein and any present or future statute, law, ordinance or
regulation contrary to which the parties have no legal right of contract, the
latter shall prevail but the provision of this document which is affected shall
be curtailed and limited only to the extent necessary to bring it
4
<PAGE>
within the requirement of the law.
L. The Lender agrees to execute and deliver forms UCC-3 to Debtor upon full
satisfaction of the Obligation.
M. EXECUTION OF SECURITY AGREEMENT
This Agreement may be executed in any number of counterparts and by the
different signatories hereto on separate counterparts, each of which, when so
executed, shall be deemed an original, but all such counterparts shall
constitute but one and the same instrument. This Agreement may be executed by
facsimile transmission.
TELEPAD CORPORATION - Debtor
a Delaware corporation
By:________________________________
AUSTOST ANSTALT SCHAAN - Lender
By:________________________________
BEESTON INVESTMENTS LTD. - Lender
By:________________________________
THE HEWLETT FUND, INC. - Lender
By:________________________________
ELLIS ENTERPRISES LTD. - Lender
By:________________________________
THE GROSS FOUNDATION INC. - Lender
By:________________________________
BALMORE FUNDS S.A. - Lender
By:________________________________
INVESTCOR LLC - Lender
By:________________________________
EXHIBIT 21.1
LIST OF SUBSIDIARIES
1. L&E Mobile Computer Mounts, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of TelePad Corporation
for the registration of 4,200,000 shares of its common stock and to the
incorporation by reference therein of our report dated March 6, 1998, with
respect to the financial statements of TelePad Corporation included in its
Annual Report (Form 10-KSB) for the year ended December 31, 1997, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Vienna, Virginia
June 23, 1998
