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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 11, 1998
AUREAL SEMICONDUCTOR INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 0-20684 94-3117385
<S> <C> <C>
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
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4245 TECHNOLOGY DRIVE
FREMONT, CA 94538
(510) 252-4245
(Address and phone number
of Registrant's principal executive offices)
This report, including exhibits consists of 55 pages. The exhibit index is
located on page 3.
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ITEM 5. OTHER EVENTS
On March 11, 1998, Aureal Semiconductor Inc. (the "Company") completed
a private placement transaction for the sale of $5 million of the Company's
three year 8% Series A Convertible Preferred Stock, par value $0.001 per share,
(the "Preferred Stock").
The Preferred Stock is convertible at the lesser of the fixed
conversion price ("Fixed Conversion Price") of $2.50 face value of the
Preferred Stock per share of the Company's Common Stock, (the "Common Stock")
or at varying discounts from the then-current market price of the Common Stock
if the Common Stock is trading at prices below $2.50 per share over certain
periods of time ("Variable Conversion Price"). Conversion of the Preferred
Stock can commence at a date four months after the final closing date (March
11, 1998). Variable Conversion Price conversions can be completed at the rate
of 15% of the originally issued Preferred Stock per month. 100% of the
Preferred Stock is thus available for Variable Conversion Price conversion as
of January 1999. No such limitations apply to Fixed Conversion Price
conversions.
Accretion at the 8% rate on the outstanding Preferred Stock is
terminated if at any time the Common Stock trades at a price in excess of 150%
of the fixed conversion price for twenty consecutive trading days. At such
time as accretion is terminated, if ever, all restrictions as to conversion are
eliminated. If not converted earlier, all outstanding Preferred Stock will be
converted on the three-year anniversary of the final closing.
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ITEM 7. EXHIBITS
Exhibit No. Description
----------- -----------
5.1 Aureal Semiconductor Inc. Regulation D
Subscription Agreement
5.2 Certificate of Designation of Series A Preferred
Stock of Aureal Semiconductor Inc.
5.3 Registration Rights Agreement
5.4 Form of Warrant
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 16, 1998
AUREAL SEMICONDUCTOR INC.
/s/ David J. Domeier
----------------------------------
David J. Domeier
Vice President, Finance and
Chief Financial Officer
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EXHIBIT 5.1
AUREAL SEMICONDUCTOR INC.
REGULATION D SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES
AUTHORITIES. THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE SECURITIES LAWS.
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN
RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE
SUCH AUTHORITIES REVIEWED OR DETERMINED THE ACCURACY OF THIS DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND
ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN
THE ATTACHED DISCLOSURE DOCUMENTS AS EXHIBIT E.
SEE ADDITIONAL LEGENDS AT SECTIONS 3.7 and 9.
THIS REGULATION D SUBSCRIPTION AGREEMENT (this "Agreement") is
made as of the _____ day of _________, 1998, by and between Aureal
Semiconductor Inc., a corporation duly organized and existing under the laws of
the State of Delaware (the "Company"), and the undersigned subscriber executing
this Agreement ("Subscriber" or "Holder").
THE PARTIES HEREBY AGREE AS FOLLOWS:
This Agreement is executed by Subscriber in connection with the offer
by the Company and the purchase by Subscriber of Series A Preferred Stock (the
"Preferred Stock"), of the Company. The Preferred Stock is being offered at a
purchase price of Ten Thousand Dollars ($10,000), U.S., per share, in minimum
subscription amounts of at least Two Hundred Thousand Dollars ($200,000), and
increments of Fifty Thousand Dollars ($50,000) in excess thereof, with a
minimum aggregate offering amount of Three Million Dollars ($3,000,000) (the
"Minimum Offering Amount"), and up to a maximum aggregate amount of Five
Million Dollars ($5,000,000) (the "Maximum Offering Amount") (collectively, the
"Offering"). The terms of the Preferred Stock, including the terms on which
the Preferred Stock may be converted into common stock, $.001 par value, of the
Company (the "Common Stock"), are set forth in the Certificate of Designation
of the Series A Preferred Stock (the "Certificate of Designation"),
substantially in the form attached hereto as Exhibit A. The solicitation of
this subscription and, if accepted by the Company, the offer and sale of the
Preferred Stock are being made in reliance upon the provisions of Regulation D
("Regulation D") promulgated under the Securities Act of 1933, as amended ("the
Act"). The Preferred Stock, and the Common Stock issuable upon conversion
thereof (the
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"Conversion Shares"), are sometimes referred to herein singularly as "Security"
and collectively as the "Securities."
It is agreed as follows:
1. Offering
1.1 Offer to Subscribe; Purchase Price and Closing; and
Placement Fees.
Subject to satisfaction of the conditions to closing set forth in Section 1.2
below, Subscriber hereby offers to subscribe for and purchase Preferred Stock
for the aggregate purchase price in the amount set forth in Section 10 of this
Agreement, in accordance with the terms and conditions of this Agreement.
Assuming that the Minimum Offering Amount and corresponding subscription
agreements accepted by the Company are received into the Company's designated
escrow account for this Offering established pursuant to the Escrow Agreement
and Instructions (the "Escrow Agreement") by and among the Company, First Union
National Bank of Georgia (the "Escrow Agent") and the Placement Agent (as
defined below) (the "Escrow Account"), the closing of a sale and purchase of
Preferred Stock as to each Subscriber (the "Closing") shall be deemed to occur
when this Agreement has been executed by both Subscriber and the Company, the
conditions herein have been satisfied and full payment shall have been made to
the Company, by wire transfer from the Escrow Account as set forth in Section
7.1(a) for payment in consideration for the Company's delivery of certificates
representing the Preferred Stock subscribed for.
The parties hereto acknowledge that Swartz Investments, LLC is acting as
placement agent (the "Placement Agent") for this Offering and will be
compensated by the Company in cash, common stock and warrants to purchase
Common Stock. The Placement Agent has acted solely as placement agent in
connection with the Offering by the Company of the Preferred Stock pursuant to
this Agreement. The information and data contained in the Disclosure Documents
(as defined in Section 2.2.4) have not been subjected to independent
verification by the Placement Agent, and no representation or warranty is made
by the Placement Agent as to the accuracy or completeness of the information
contained in the Disclosure Documents.
The Company and Subscriber acknowledge that the Matthew Fund, N.V. (the
"Fund"), which is managed by affiliates of the Placement Agent, may subscribe
for securities in the Offering. The parties acknowledge that neither the
Placement Agent nor any of its affiliates shall be under any obligation to
advise the Company or Subscriber of the activities of the Fund with respect to
such securities following the consummation of the Offering. Such
acknowledgment shall not act as a waiver of any obligation required by law or
written agreement of which the Fund is a party. It is understood that the Fund
will act independently of the Placement Agent and may take action with respect
to such investment which may be inconsistent or contrary to any action or
interest of the Placement Agent, the Company or any of the other Subscribers.
1.2 Conditions to Subscriber's Obligations. Subscriber's
obligations hereunder are conditioned upon all of the following:
(a) the following documents shall have been deposited
with the Escrow Agent: the Registration Rights
Agreement, substantially in the form attached
hereto as Exhibit B (the "Registration Rights
Agreement") (executed by the Company), an opinion
of counsel, substantially in the form attached
hereto as Exhibit C (the "Opinion of Counsel")
(signed by the Company's counsel), the Irrevocable
Instructions to Transfer Agent, substantially in
the form attached hereto as Exhibit D (the
"Irrevocable Instructions to Transfer
Agent")(executed by the Company and the Company's
transfer agent, the "Transfer Agent"),
certificates representing the Preferred Stock
issued in the
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name of the Subscriber, and the Certificate of
Designation, in the form of Exhibit A (together
with written evidence showing that it has been
filed with and accepted by the Secretary of State
of Delaware);
(b) the Company's Common Stock shall be listed for and
trading on the Over-the Counter Bulletin Board;
(c) other than losses described in the Risk Factors as
set forth in Section 2.2.4 below there have been
no material adverse changes in the Company's
business prospects or financial condition since
the date of the last balance sheet included in the
Disclosure Documents (defined below in Section
2.2.4), including but not limited to incurring
material liabilities;
(d) the representations and warranties of the Company
are true and correct in all material respects at
the Closing as if made on such date, and the
Company shall deliver a certificate, signed by an
officer of the Company, to such effect to the
Escrow Agent;
(e) the Minimum Offering Amount and corresponding
subscription agreements accepted by the Company
shall have been received by the Escrow Agent; and
(f) the Company shall have reserved for issuance a
sufficient number of shares of Common Stock to
effect conversions of the Preferred Stock, which
number of shares shall initially be equal to at
least Three Million Seven Hundred Fifty Thousand
(3,750,000) shares.
2. Representations and Warranties of Subscriber. Subscriber
hereby represents and warrants to the Company as follows:
2.1 Accredited Investor. Subscriber is an accredited
investor, as defined in Rule 501 of Regulation D, and has checked the
applicable box set forth in Section 10 of this Agreement.
2.2 Investment Experience; Access to Information; Independent
Investigation.
2.2.1 Access to Information. Subscriber or
Subscriber's professional advisor has been granted the opportunity to ask
questions of and receive answers from representatives of the Company, its
officers, directors, employees and agents concerning the terms and conditions
of this Offering, the Company and its business and prospects, and to obtain any
additional information which Subscriber or Subscriber's professional advisor
deems necessary to verify the accuracy and completeness of the information
received.
2.2.2 Reliance on Own Advisors. Subscriber has
relied completely on the advice of, or has consulted with, Subscriber's own
personal tax, investment, legal or other advisors and has not relied on the
Company or any of its affiliates, officers, directors, attorneys, accountants
or any affiliates of any thereof and each other person, if any, who controls
any thereof, within the meaning of Section 15 of the Act for any tax or legal
advice (other than reliance on information in the Disclosure Documents as
defined in Section 2.2.4 below and on the Opinion of Counsel). The foregoing,
however, does not limit or modify Subscriber's right to rely upon
representations and warranties of the Company in Section 4 of this Agreement.
2.2.3 Capability to Evaluate. Subscriber has such
knowledge and experience in financial and business matters so as to enable such
Subscriber to utilize the information made available to it in connection with
the Offering in order to evaluate the merits and
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risks of the prospective investment, which are substantial, including without
limitation those set forth in the Disclosure Documents (as defined in Section
2.2.4 below).
2.2.4 Disclosure Documents. Subscriber, in making
Subscriber's investment decision to subscribe for the Securities hereunder,
represents that (a) Subscriber has received and had an opportunity to review
(i) the Company's Annual Report on Form 10-K for the year ended December 29,
1996, (ii) the Company's quarterly report on Form 10-Q for the quarter ended
September 28, 1997, (iii) the Risk Factors, attached as Exhibit E, (iv) the
Capitalization Schedule, attached as Exhibit F, (the "Capitalization Schedule")
and (v) the Use of Proceeds Schedule, attached as Exhibit G, (the "Use of
Proceeds Schedule") (b) Subscriber has read, reviewed, and relied solely on the
documents described in (a) above, the Company's representations and warranties
and other information in this Agreement, including the exhibits, any other
written information prepared by the Company which has been specifically
provided to Subscriber in connection with this Offering (the documents
described in this Section 2.2.4 (a) and (b) are collectively referred to as the
"Disclosure Documents"), and an independent investigation made by Subscriber
and Subscriber's representatives, if any; (c) Subscriber has, prior to the date
of this Agreement, been given an opportunity to review material contracts and
documents of the Company which have been filed as exhibits to the Company's
filings under the Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and has had an opportunity to ask questions of and receive
answers from the Company's officers and directors; and (d) is not relying on
any oral representation of the Company or any other person, nor any written
representation or assurance from the Company other than those referred to in
Section 4 or otherwise contained in the Disclosure Documents or incorporated
herein or therein. The foregoing, however, does not limit or modify
Subscriber's right to rely upon representations and warranties of the Company
in Section 4 of this Agreement. Subscriber acknowledges and agrees that the
Company has no responsibility for, does not ratify, and is under no
responsibility whatsoever to comment upon or correct any reports, analyses or
other comments made about the Company by any third parties, including, but not
limited to, analysts' research reports or comments (collectively, "Third Party
Reports"), and Subscriber has not relied upon any Third Party Reports,
including any provided by the Placement Agent, in making the decision to
invest.
2.2.5 Investment Experience; Fend for Self.
Subscriber has substantial experience in investing in securities and he, she or
it has made investments in securities other than those of the Company.
Subscriber acknowledges that Subscriber is able to fend for Subscriber's self
in the transaction contemplated by this Agreement, that Subscriber has the
ability to bear the economic risk of Subscriber's investment pursuant to this
Agreement and that Subscriber is an "Accredited Investor" by virtue of the fact
that Subscriber meets the investor qualification standards set forth in Section
2.1 above. Subscriber has not been organized for the purpose of investing in
securities of the Company, although such investment is consistent with
Subscriber's purposes.
2.3 Exempt Offering Under Regulation D.
2.3.1 Investment; No Distribution. Subscriber is
acquiring the Securities to be issued and sold hereunder for his, her or its
own account (or a trust account if such Subscriber is a trustee) for investment
and not as a nominee and not with a present view to the distribution thereof.
Subscriber is aware that there are legal and practical limits on Subscriber's
ability to sell or dispose of the Securities and, therefore, that Subscriber
must bear the economic risk of the investment for an indefinite period of time
and has adequate means of providing for Subscriber's current needs and possible
personal contingencies and has need for only limited liquidity of this
investment. Subscriber's commitment to illiquid investments is reasonable in
relation to Subscriber's net worth. By making the representations in this
Section 2.3.1, the Subscriber does not agree to hold the Securities for any
minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a
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registration statement or an exemption from registration under the Act, except
as otherwise required in this Agreement or in the Registration Rights
Agreement.
2.3.2 No General Solicitation. The Securities were
not offered to Subscriber through, and Subscriber is not aware of, any form of
general solicitation or general advertising, including, without limitation, (i)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
2.3.3 Restricted Securities. Subscriber understands
that the Preferred Stock issued at Closing is, and the Conversion Shares will
be, characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may not be transferred or resold without registration under the
Act or pursuant to an exemption therefrom. In this connection, Subscriber
represents that Subscriber is familiar with Rule 144 under the Act, as
presently in effect, and understands the resale limitations imposed thereby and
by the Act.
2.3.4 Disposition. Without in any way limiting the
representations set forth above, Subscriber further agrees not to make any
disposition of all or any portion of the Securities unless and until:
(a) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(b) (i) Subscriber shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Subscriber shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of the Securities under the Act. It
is agreed that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144 except in unusual circumstances.
2.4 Due Authorization.
2.4.1 Authority. The person executing this
Subscription Agreement, if executing this Agreement in a representative or
fiduciary capacity, has full power and authority to execute and deliver this
Agreement and each other document included herein for which a signature is
required in such capacity and on behalf of the subscribing individual,
partnership, trust, estate, corporation or other entity for whom or which
Subscriber is executing this Agreement. Subscriber has reached the age of
majority (if an individual) according to the laws of the state in which he
resides, has adequate means for providing for his current needs and personal
contingencies, is able to bear the economic risk of his investment in the
Securities for an indefinite period of time and could afford a complete loss of
such investment. Subscriber's commitment to illiquid investments is reasonable
in relation to Subscriber's net worth.
2.4.2 Due Authorization. If Subscriber is a
corporation, Subscriber is duly and validly organized, validly existing and in
good tax and corporate standing as a corporation under the laws of the
jurisdiction of its incorporation with full power and authority to purchase the
Securities to be purchased by Subscriber and to execute and deliver this
Agreement.
2.4.3 Partnerships. If Subscriber is a partnership,
the representations, warranties, agreements and understandings set forth above
are true with respect to all partners of
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Subscriber (and if any such partner is itself a partnership, all persons
holding an interest in such partnership, directly or indirectly, including
through one or more partnerships), and the person executing this Agreement has
made due inquiry to determine the truthfulness of the representations and
warranties made hereby.
2.4.4 Representatives. If Subscriber is purchasing
in a representative or fiduciary capacity, the representations and warranties
shall be deemed to have been made on behalf of the person or persons for whom
Subscriber is so purchasing.
3. Acknowledgments Subscriber is aware that:
3.1 Risks of Investment. Subscriber recognizes that an
investment in the Company involves substantial risks, including the potential
loss of Subscriber's entire investment herein. Subscriber recognizes that this
Agreement and the exhibits hereto do not purport to contain all the information
which would be contained in a registration statement under the Act;
3.2 No Government Approval. No federal or state agency has
passed upon the Securities, recommended or endorsed the Offering, or made any
finding or determination as to the fairness of this transaction;
3.3 No Registration. The Securities and any component
thereof have not been registered under the Act or any applicable state
securities laws by reason of exemptions from the registration requirements of
the Act and such laws, and may not be sold, pledged, assigned or otherwise
disposed of in the absence of an effective registration of the Securities and
any component thereof under the Act or unless an exemption from such
registration is available;
3.4 Restrictions on Transfer. Subscriber may not attempt to
sell, transfer, assign, pledge or otherwise dispose of all or any portion of
the Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of
the Act and applicable state securities laws;
3.5 No Assurances of Registration. There can be no assurance
that any registration statement will become effective at the scheduled time.
Therefore, Subscriber may bear the economic risk of Subscriber's investment for
an indefinite period of time;
3.6 Exempt Transaction. Subscriber understands that the
Securities are being offered and sold in reliance on specific exemptions from
the registration requirements of federal and state law and that the
representations, warranties, agreements, acknowledgments and understandings set
forth herein are being relied upon by the Company in determining the
applicability of such exemptions and the suitability of Subscriber to acquire
such Securities;
3.7 Legends. It is understood that the certificates
evidencing the Preferred Stock and the Conversion Shares shall bear the
following legend (the "Legend") (prior to registration as provided in Section
5.3):
"The securities represented hereby have not been registered
under the Securities Act of 1933, as amended, or applicable
state securities laws, nor the securities laws of any other
jurisdiction. They may not be sold or transferred in the
absence of an effective registration statement under those
securities laws or pursuant to an exemption therefrom."
4. Representations and Warranties of the Company . Subject to
the exceptions set forth in the disclosure schedule attached hereto as Schedule
A, the Company hereby makes the following representations and warranties to
Subscriber (which shall be true at the signing of this
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Agreement, as of Closing, and as of any such later date as contemplated
hereunder) and agrees with Subscriber that:
4.1 Organization, Good Standing, and Qualification. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, USA and has all requisite corporate
power and authority to carry on its business as now conducted and as proposed
to be conducted. The Company is duly qualified to transact business and is in
good standing in each jurisdiction in which the failure to so qualify would
have a material adverse effect on the business or properties of the Company and
its subsidiaries taken as a whole. The Company is not the subject of any
pending, threatened or, to its knowledge, contemplated investigation or
administrative or legal proceeding by the Internal Revenue Service, the taxing
authorities of any state or local jurisdiction, or the Securities and Exchange
Commission ("SEC"), or any state securities commission, or any other
governmental entity, which have not been disclosed in the Disclosure Documents.
4.2 Corporate Condition. The Company's condition is, in all
material respects, as described in the Disclosure Documents, except for changes
in the ordinary course of business and normal year-end adjustments that are
not, in the aggregate, materially adverse to the Company. There have been no
material adverse changes to the Company's business, financial condition, or
prospects since the date of such Disclosure Documents. The financial
statements contained in the Disclosure Documents have been prepared in
accordance with generally accepted accounting principles, consistently applied
(except as otherwise permitted by Regulation S-X of the Exchange Act), and
fairly present the consolidated financial condition of the Company as of the
dates of the balance sheets included therein and the consolidated results of
its operations and cash flows for the periods then ended. Without limiting the
foregoing, there are no material liabilities, contingent or actual, that are
not disclosed in the Disclosure Documents (other than liabilities incurred by
the Company in the ordinary course of its business, consistent with its past
practice, after the period covered by the Disclosure Documents). The Company
has paid all material taxes which are due, except for taxes which it reasonably
disputes. There is no material claim, litigation, or administrative proceeding
pending, or, to the best of the Company's knowledge, threatened against the
Company, except as disclosed in the Disclosure Documents. This Agreement and
the Disclosure Documents do not contain any untrue statement of a material fact
and do not omit to state any material fact required to be stated therein or
herein necessary to make the statements contained therein or herein not
misleading in the light of the circumstances under which they were made. No
event or circumstance exists relating to the Company which under applicable
law, requires public disclosure but which has not been so publicly announced or
disclosed.
4.3 Authorization. All corporate action on the part of the
Company by its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance and
delivery of the certificates representing the Preferred Stock being sold
hereunder and the issuance (and/or the reservation for issuance) of the
Conversion Shares have been taken, and this Agreement, the Certificate of
Designation, the Irrevocable Instructions to Transfer Agent, the Escrow
Agreement and the Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance with their terms,
except insofar as the enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or other similar laws affecting creditors' rights
generally or by principles governing the availability of equitable remedies.
The Company has obtained all consents and approvals required for it to execute,
deliver and perform each agreement referenced in the previous sentence.
4.4 Valid Issuance of Preferred Stock and Common Stock. The
Preferred Stock when issued, sold and delivered in accordance with the terms
hereof, for the consideration expressed herein, will be validly issued, fully
paid and nonassessable and, based in part upon the representations of
Subscriber in this Agreement, will be issued in compliance with all applicable
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U.S. federal and state securities laws. The Conversion Shares, when issued in
accordance with the terms of the Certificate of Designation, shall be duly and
validly issued and outstanding, fully paid and nonassessable, and based in part
on the representations and warranties of Subscriber of the Preferred Stock,
will be issued in compliance with all applicable U.S. federal and state
securities laws. The Preferred Stock and the Conversion Shares will be issued
free of any preemptive rights. The Company currently has at least Three
Million Seven Hundred Fifty Thousand (3,750,000) Conversion Shares authorized
and reserved for issuance upon conversion of the Preferred Stock.
4.5 Compliance with Other Instruments. The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
ByLaws each as amended, and in effect on and as of the date of the Agreement or
of any material provision of any material instrument or material contract to
which it is a party or by which it is bound or, to its knowledge, of any
provision of any federal or state judgment, writ, decree, order, statute, rule
or governmental regulation applicable to the Company, which would have a
material adverse affect on the Company's business or prospects, except as
described in the Disclosure Documents. The execution, delivery and performance
of this Agreement and the other agreements entered into in conjunction with the
Offering and the consummation of the transactions contemplated hereby will not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument or contract or an event which results in the
creation of any lien, charge or encumbrance upon any assets of the Company.
4.6 Reporting Company. The Company is subject to the
reporting requirements of the Exchange Act, has a class of securities
registered under Section 12 of the Exchange Act, and has filed all reports
required by the Exchange Act since November 18, 1992. The Company undertakes to
furnish Subscriber with copies of such reports as may be reasonably requested
by Subscriber prior to consummation of this Offering and thereafter, to make
such reports available, as long as Subscriber holds the Securities. The Company
has not furnished to the Subscriber any material nonpublic information
concerning the Company
4.7 Capitalization. The capitalization of the Company as of
September 28, 1997, is, and the capitalization as of the Closing, after taking
into account the offering of the Securities contemplated by this Agreement and
all other share issuances occurring prior to this Offering, will be, as set
forth in the Capitalization Schedule as set forth in Exhibit F. Except as
disclosed in the Capitalization Schedule, as of the date of this Agreement, (i)
there are no outstanding options, warrants, scrip, rights to subscribe for,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into or exercisable or exchangeable for, any shares of
capital stock of the Company or any of its subsidiaries, or arrangements by
which the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries,
and (ii) there are no agreements or arrangements under which the Company or any
of its subsidiaries is obligated to register the sale of any of its or their
securities under the Act (except the Registration Rights Agreement).
4.8 Intellectual Property. The Company has valid,
unrestricted and exclusive patents, trademarks, trademark registrations, trade
names, copyrights, know-how, technology and other intellectual property
necessary to the conduct of its business as set forth on Exhibit H-1. The
Company has granted such licenses or has assigned or otherwise transferred a
portion of (or all of) such valid, unrestricted and exclusive patents,
trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business as set forth on Exhibit H-2. The Company has been granted licenses,
know-how, technology and/or other intellectual property necessary to the
conduct of its business as set forth on Exhibit H-3. To the best of the
Company's knowledge, the Company is not infringing on the intellectual property
rights of any third party, nor is any third party infringing on the Company's
intellectual property rights. There are no restrictions in any agreements,
licenses, franchises, or
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other instruments which preclude the Company from engaging in its business as
presently conducted.
4.9 Use of Proceeds. As of the date hereof, the Company
expects to use the proceeds from this Offering (less fees and expenses) for the
purposes and in the approximate amounts set forth on the Use of Proceeds
Schedule set forth as Exhibit G hereto. These purposes and amounts are
estimates and are subject to change without notice to any Subscriber.
4.10 No Rights of Participation. No person or entity,
including, but not limited to, current or former stockholders of the Company,
underwriters, brokers, agents or other third parties, has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the financing contemplated by this Agreement which has not been
waived.
4.11 Company Acknowledgment. The Company hereby acknowledges
that Subscriber may elect to hold the Securities for various periods of time,
as permitted by the terms of this Agreement, the Certificate of Designation,
and other agreements contemplated hereby, and the Company further acknowledges
that Subscriber and the Placement Agent have made no representations or
warranties, either written or oral, as to how long the Securities will be held
by Subscriber or regarding Subscriber's trading history or investment
strategies.
4.12 Termination Date of Offering. In no event shall the
last Closing ("Last Closing") of a sale and purchase of the Preferred Stock
occur later than March 15, 1998, which date can be extended by up to ten (10)
days upon written approval by the Company and the Placement Agent.
4.13 Underwriter's Fees and Rights of First Refusal. The
Company is not obligated to pay any compensation or other fees, costs or
related expenditures in cash or securities to any underwriter, broker, agent or
other representative other than the Placement Agent in connection with this
Offering.
4.14 Current Public Information. The Company is currently
eligible to register the resale of its Common Stock on a registration statement
on Form S-3 under the Act.
4.15 No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under the Act pursuant to the
provisions of Regulation D. The Company has not engaged in any form of general
solicitation or advertising in connection with the offering of Preferred Stock.
4.16 Acknowledgment of Dilution. The number of Conversion
Shares issuable upon conversion of the Preferred Stock may increase
substantially in certain circumstances, including the circumstance wherein the
trading price of the Common Stock declines. The Company has studied and fully
understands the nature of the Securities being sold hereunder and recognizes
that they have a potential dilutive effect. The board of directors of the
Company has concluded in its good faith business judgment that such issuance is
in the best interests of the Company. The Company acknowledges that its
obligation to issue Conversion Shares upon conversion of the Preferred Stock is
binding upon it and enforceable regardless of the dilution that such issuance
may have on the ownership interests of the other stockholders.
4.17 Foreign Corrupt Practices. Neither the Company, nor any
of its subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any subsidiary has, in the course of its
actions for, or on behalf of, the Company, used any corporate
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funds for any unlawful contribution, gift, entertainment or other unlawful
expenses relating to political activity; made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.
4.18 Key Employees. Each Key Employee (as defined below) is
currently serving the Company in the capacity disclosed in Exhibit I. No Key
Employee, to the best knowledge of the Company and its subsidiaries, is in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each Key Employee does not subject the Company or any of its
subsidiaries to any liability with respect to any of the foregoing matters. No
Key Employee has, to the best knowledge of the Company and its subsidiaries,
any intention to terminate his employment with, or services to, the Company or
any of its subsidiaries. "Key Employee" means each of the employees listed on
Exhibit I.
4.19 Representations Correct. The foregoing representations,
warranties and agreements are true, correct and complete in all material
respects, and shall survive the Closing and the issuance of the Preferred
Stock.
5. Covenants of the Company
5.1 Independent Auditors. The Company shall, until at least
three (3) years after the date of the Last Closing, maintain as its independent
auditors an accounting firm authorized to practice before the SEC.
5.2 Corporate Existence and Taxes. The Company shall, until
at least the later of (i) the date that is three (3) years after the date of
the Last Closing or (ii) the conversion or redemption of all of the Preferred
Stock purchased pursuant to this Agreement, maintain its corporate existence in
good standing and remain a Reporting Company (provided, however, that the
foregoing covenant shall not prevent the Company from entering into any merger
or corporate reorganization as otherwise allowed pursuant to the terms of the
Certificate of Designation) and shall pay all its taxes when due except for
taxes which the Company disputes.
5.3 Registration Rights. The Company will enter into a
registration rights agreement covering the resale of the Conversion Shares
substantially in the form of the Registration Rights Agreement attached as
Exhibit B.
5.4 Notification of Final Closing Date by Company. Within
five (5) business days after the Last Closing, the Company shall notify
Subscriber in writing that the Last Closing has occurred, the date of the Last
Closing, the dates that Subscriber is entitled to convert Subscriber's
Preferred Stock, the value of the Fixed Conversion Price, as that term is
defined in the Certificate of Designation, and the name and telephone number of
an administrative contact person at the Company whom Subscriber may contact
regarding information related to conversion of the Preferred Stock as
contemplated by the Certificate of Designation.
5.5 Asset Transfers. The Company shall not transfer, sell,
convey or otherwise dispose of any of its material assets to any Subsidiary or
affiliate except for (i) a cash or cash equivalent consideration and for a
proper business purpose, while any of the Preferred Stock is outstanding, or
(ii) purposes of obtaining third party debt financing (e.g., a transfer of
assets equivalent in value to such securitized debt to a special purpose
corporation for purposes of a securitization financing).
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5.6 Capital Raising Limitations; Rights of Participation.
5.6.1 [Intentionally Omitted]
5.6.2 Right of First Offer. The Company agrees that,
during the period beginning on the date hereof and terminating on the first
anniversary of the date of the Last Closing, if the Company issues or sells, or
agrees to issue or sell any equity or debt securities of the Company or any of
its subsidiaries (or any security convertible into or exercisable or
exchangeable, directly or indirectly, for equity or debt securities of the
Company or any of its subsidiaries) ("Future Offerings"), the Company shall
deliver to each Subscriber at least ten (10) business days prior to the closing
of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof, and providing each
Subscriber and its affiliates an option (a "Right of Participation"), during
the ten (10) business day period following delivery of such notice, to purchase
an amount of the securities being offered in the Future Offering, equal to the
Right of Participation Amount (as defined below), on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence are collectively referred to as the "Capital Raising Limitations").
5.6.3 Amount of Subscriber's Right of Participation..
The amount of securities which a Subscriber is entitled to purchase in such a
Future Offering (the "Right of Participation Amount") shall be the lesser of
(i) the dollar amount invested by Subscriber in this Offering or (ii) a number
obtained by multiplying the aggregate amount of securities being offered in the
Future Offering by a fraction, the numerator of which is the purchase price of
the Preferred Stock purchased by the Subscriber pursuant to this Agreement and
the denominator of which is the aggregate dollar amount of Preferred Stock
placed in this Offering.
5.6.4 Exceptions to the Capital Raising Limitation.
The Capital Raising Limitations shall not apply to any transaction involving
issuances of securities in connection with a merger, consolidation, acquisition
or sale of assets, or in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or in
connection with the disposition or acquisition of a business, product or
license by the Company or exercise of options by employees, consultants or
directors. The Capital Raising Limitations also shall not apply to (a) the
issuance of securities pursuant to an underwritten public offering, (b) the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof or
(c) the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan for the
benefit of the Company's employees, directors or consultants.
5.7 Financial 10-K Statements, Etc. and Current Reports on
Form 8-K. The Company shall make available to the Subscriber copies of its
annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on form 8-K for as long as the Preferred Stock may remain outstanding.
5.8 Opinion of Counsel. Subscribers shall, upon purchase of
the Preferred Stock pursuant to this Agreement, receive an opinion letter from
Gary Cary Ware & Freidenrich, 400 Hamilton Avenue, Palo Alto, CA 94301-1825
Telephone: (650) 328-6561 ("Counsel"), counsel to the Company, in the form
attached as Exhibit C.
5.9 Removal of Legend Upon Conversion. As contemplated by
the Certificate of Designation, upon conversion of the Preferred Stock,
Subscriber shall submit a Notice of Conversion and Resale, substantially in the
form attached hereto as Exhibit J. The Legend shall be removed and the Company
shall issue a certificate without such Legend to the holder of any Security
upon which it is stamped, and a certificate for a security shall be originally
issued without the Legend, if, unless otherwise required by state securities
laws, (a) the sale of such Security is
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registered under the Act, or (b) such holder provides the Company with an
opinion of counsel (if so required by the Company or the Transfer Agent), in
form, substance and scope customary for opinions of counsel in comparable
transactions (the reasonable cost of which shall be borne by the Company), to
the effect that a public sale or transfer of such Security may be made without
registration under the Act, or (c) such holder provides the Company with
reasonable assurances that such Security can be sold pursuant to Rule 144.
Each Subscriber agrees to sell all Securities, including those represented by a
certificate(s) from which the Legend has been removed, or which were originally
issued without the Legend, pursuant to an effective registration statement and
to deliver a prospectus in connection with such sale or in compliance with an
exemption from the registration requirements of the Act. In the event the
Legend is removed from any Security or any Security is issued without the
Legend and thereafter the effectiveness of a registration statement covering
the resale of such Security is suspended or the Company determines that a
supplement or amendment thereto is required by applicable securities laws, then
upon reasonable advance notice to Subscriber holding such Security, the Company
may require that the Legend be placed on any such Security that cannot then be
sold pursuant to an effective registration statement or Rule 144 or with
respect to which the opinion referred to in clause (b) next above has not been
rendered, which Legend shall be removed when such Security may be sold pursuant
to an effective registration statement or Rule 144 or such holder provides the
opinion with respect thereto described in clause (b) next above.
5.10 Listing. The Company shall (i) use its best efforts to
continue the listing and trading of its Common Stock (including all Conversion
Shares) on either the OTC Bulletin Board, the Nasdaq Small Cap Market, the
Nasdaq National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or
the American Stock Exchange ("AMEX") or any other national exchange or
over-the- counter market system; (ii) take all action necessary to cause and
maintain the listing and trading of its Common Stock on the OTC Bulletin Board
or the Nasdaq Small Cap Market at any time the Common Stock is not listed and
traded on NMS, NYSE or AMEX; and (iii) comply in all respects with the
Company's reporting, filing and other obligations under the by-laws or rules of
the National Association of Securities Dealers ("NASD") and such exchanges, as
applicable.
5.11 The Company's Instructions to Transfer Agent. The Company
will issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent
substantially in the form of Exhibit D instructing the Transfer Agent to issue
certificates, registered in the name of each Subscriber or its nominee, for the
Conversion Shares in such amounts as specified from time to time by such
Subscriber to the Company upon conversion of the Preferred Stock. Such
certificates shall bear a Legend only to the extent permitted by Section 5.9
hereof. The Company warrants that no instruction, other than such instructions
referred to in Section 5.9 hereof or in this Section 5.11 and stop transfer
instructions to give effect to Section 3.7 hereof in the case of Conversion
Shares prior to registration of the Conversion Shares under the Act, will be
given by the Company to its Transfer Agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way each Subscriber's obligations
and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the
Securities pursuant to an effective registration statement and to deliver a
prospectus in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. If (a) a
Subscriber provides the Company with an opinion of counsel (if so required by
the Company or the Transfer Agent), which opinion of counsel shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions (the reasonable cost of which shall be borne by the Company), to
the effect that the Securities to be sold or transferred may be sold or
transferred pursuant to an exemption from registration or (b) a Subscriber
transfers Securities to an affiliate which is an accredited investor pursuant
to Rule 144, the Company shall permit the transfer, and, in the case of
Conversion Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denomination as specified by such
Subscriber. The
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Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to a Subscriber by vitiating the intent and purpose of
the transaction contemplated hereby. Accordingly, the Company acknowledges
that the remedy at law for a breach of its obligations under this Section 5.11
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 5.11, that a Subscriber shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required. The Company shall not terminate its agency relationship with
the Transfer Agent for any reason prior to the date which is three (3) years
after the Last Closing, unless the Company's Transfer Agent shall continue
acting as transfer agent pursuant to the terms of the Irrevocable Instructions
to Transfer Agent until such time that a successor transfer agent (i) is
appointed by the Company; and (ii) executes and agrees to be bound by the terms
of the Irrevocable Instructions to Transfer Agent.
6. Subscriber Covenant/Miscellaneous
6.1 Representations and Warranties Survive the Closing;
Severability. Subscriber's and the Company's representations and warranties
shall survive the Closing of the transactions contemplated by this Agreement
notwithstanding any due diligence investigation made by or on behalf of the
party seeking to rely thereon. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to
any party.
6.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Subscriber may assign Subscriber's rights hereunder, in
connection with any private sale of the Preferred Stock of such Subscriber, so
long as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement.
6.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California without respect to conflict
of laws principles.
6.4 Execution in Counterparts Permitted. This Agreement may
be executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
6.5 Titles and Subtitles; Gender. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement. The use in this
Agreement of a masculine, feminine or neither pronoun shall be deemed to
include a reference to the others.
6.6 Written Notices, Etc. Any notice, demand or request
required or permitted to be given by the Company or Subscriber pursuant to the
terms of this Agreement shall be in writing and shall be deemed given when
delivered personally, or by facsimile (with a hard copy to follow by two (2)
day courier), addressed to the parties at the addresses and/or facsimile
telephone number of the parties set forth at the end of this Agreement or such
other address as a party may request by notifying the other in writing.
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6.7 Expenses. Each of the Company and Subscriber shall pay
all costs and expenses that it respectively incurs, with respect to the
negotiation, execution, delivery and performance of this Agreement.
6.8 Entire Agreement; Written Amendments Required. This
Agreement, including the Exhibits attached hereto, the Certificate of
Designation, the Preferred Stock certificates, the Registration Rights
Agreement, the Escrow Agreement, the Irrevocable Instructions to Transfer Agent
and the other documents delivered pursuant hereto constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged
or terminated other than by a written instrument signed by the party against
whom enforcement of any such amendment, waiver, discharge or termination is
sought.
6.9 Arbitration. Any controversy or claim arising out of or
related to this Agreement or the breach thereof, shall be settled by binding
arbitration in Wilmington, Delaware (if the Subscriber is the Defendant in such
action) or in San Francisco, California (if the Company is the Defendant) in
accordance with the Expedited Procedures (Rules 53-57) of the Commercial
Arbitration Rules of the American Arbitration Association ("AAA"). A
proceeding shall be commenced upon written demand by Company or any Subscriber
to the other. The arbitrator(s) shall enter a judgment by default against any
party which fails or refuses to appear in any properly noticed arbitration
proceeding. The proceeding shall be conducted by one (1) arbitrator, unless
the amount alleged to be in dispute exceeds two hundred fifty thousand dollars
($250,000), in which case three (3) arbitrators shall preside. The
arbitrator(s) will be chosen by the parties from a list provided by the AAA,
and if they are unable to agree within ten (10) days, the AAA shall select the
arbitrator(s). The arbitrators must be experts in securities law and financial
transactions. The arbitrators shall assess costs and expenses of the
arbitration, including all attorneys' and experts' fees, as the arbitrators
believe is appropriate in light of the merits of the parties' respective
positions in the issues in dispute. Each party submits irrevocably to the
jurisdiction of any state court sitting in Wilmington, Delaware or to the
United States District Court sitting in Delaware (if the Subscriber is the
Defendant in such action) or in San Francisco, California (if the Company is
the Defendant) for purposes of enforcement of any discovery order, judgment or
award in connection with such arbitration. The award of the arbitrator(s)
shall be final and binding upon the parties and may be enforced in any court
having jurisdiction. The arbitration shall be held in such place as set by the
arbitrator(s) in accordance with Rule 55.
6.10 No Five Percent Holders. Notwithstanding anything to the
contrary contained herein, the Preferred Stock shall not be convertible by a
Holder to the extent (but only to the extent) that, if converted by such
Holder, the Holder would beneficially own in excess of 4.9% of the then
outstanding shares of Common Stock of the Company. To the extent this
limitation applies, the determination of whether Preferred Stock shall be
convertible (vis-a vis other securities owned by such Holder) and of which
Preferred Stock shall be converted shall be in the sole discretion of the
Holder and submission of the Preferred Stock for conversion shall be deemed to
be the Holder's determination of whether such Preferred Stock is convertible,
subject to such aggregate percentage limitations. No prior inability to
convert Preferred Stock pursuant to this subparagraph shall have any effect on
the applicability of its provisions with respect to any subsequent
determination of convertibility. For the purposes of this subparagraph,
beneficial ownership and all calculations, including without limitation, with
respect to calculations of percentage ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the Regulations thereunder. Notwithstanding the foregoing, each
Holder shall have the right to waive such restriction or increase such
percentage upon sixty one (61) days' prior notice to the Company and to
decrease any such percentage immediately upon written notice to the Company.
No transferee of Preferred Stock shall be bound by such restriction unless the
transferee expressly
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so agrees. The provisions of this subparagraph may be waived and/or
implemented in a manner otherwise than in strict conformity with the terms
hereof with the approval of the Board of Directors of the Company and the
Holders of a majority in interest in the then outstanding Preferred Stock: (i)
with respect to any matter to cure any ambiguity herein, to correct this
subparagraph (or any portion thereof) which may be defective or inconsistent
with the intended 4.9% beneficial ownership limitation herein contained or to
make changes or supplements necessary or desirable to properly give effect to
such 4.9% limitation; and (ii) with respect to any other matter, with the
further consent of the Holders of majority of the then outstanding shares of
Common Stock. The limitations contained in this subparagraph shall apply to a
successor Holder of Preferred Stock, and to the extent, elected by such
successor Holder concurrently with its acquisition of such Preferred Stock,
such election to be promptly confirmed in writing to the Company (provided no
transfer or series of transfers to a successor Holder or Holders shall be used
by a Holder to evade the limitations contained herein). The provisions of this
Section 6.10 shall not apply on or after the Maturity Date (as defined in the
Certificate of Designation).
7. Subscription and Wiring Instructions; Irrevocability.
7.1 Subscription
(a) Wire transfer of Subscription Funds. Subscriber shall
send this signed Agreement by facsimile to the
Placement Agent at (770) 640-7150, and send the
subscription funds by wire transfer, to the Escrow
Agent as follows:
First Union National Bank
ABA No. 053000219
Account No. 465946
Account Name: Trust Ledger
Attn: Doug Milner
Reference: Aureal Escrow #3072237467
Telephone No.: (404) 827-7349
SWIFT Code: FUNBUS33
(b) Irrevocable Subscription. Subscriber hereby
acknowledges and agrees, subject to the provisions of
any applicable laws providing for the refund of
subscription amounts submitted by Subscriber, that
this Agreement is irrevocable and that Subscriber is
not entitled to cancel, terminate or revoke this
Agreement or any other agreements executed by such
Subscriber and delivered pursuant hereto, and that
this Agreement and such other agreements shall survive
the death or disability of such Subscriber and shall
be binding upon and inure to the benefit of the
parties and their heirs, executors, administrators,
successors, legal representatives and assigns. If the
Securities subscribed for are to be owned by more than
one person, the obligations of all such owners under
this Agreement shall be joint and several, and the
agreements, representations, warranties and
acknowledgments herein contained shall be deemed to be
made by and be binding upon each such person and his
heirs, executors, administrators, successors, legal
representatives and assigns. Notwithstanding the
foregoing, (i) if the conditions to Closing are not
satisfied or (ii) if the Disclosure Documents are
discovered prior to Closing to contain statements
which are materially inaccurate, or omit statements of
material fact, Subscriber may revoke or cancel this
Agreement.
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(c) Company's Right to Reject Subscription. Subscriber
understands that this Agreement is not binding on the
Company until the Company accepts it. This Agreement
shall be accepted by the Company when the Company
countersigns this Agreement. Subscriber hereby
confirms that the Company has full right in its sole
discretion to accept or reject the subscription of
Subscriber, in whole or in part, provided that, if the
Company decides to reject such subscription, the
Company must do so promptly and in writing. In the
case of rejection, the Company will promptly return
any rejected payments and (if rejected in whole)
copies of all executed subscription documents
(including without limitation this Agreement) to
Subscriber. In the event of rejection, no interest
will be payable by the Company to Subscriber on any
return of payment, provided however, that any such
interest accrued on such funds in the Escrow Account
shall be returned to the Subscriber by the Escrow
Agent.
7.2 Acceptance of Subscription. In the case of acceptance
of Subscriber's subscription, ownership of the number of securities being
purchased hereby will pass to Subscriber upon the Closing.
7.3 Subscriber to Forward Original Signed Subscription
Agreement to Company. Subscriber agrees to courier to Company his, her or its
original inked signed Subscription Agreement within two (2) days after faxing
said signed agreement to Placement Agent.
8. Indemnification.
The Company agrees to indemnify and hold harmless Subscriber and the
Placement Agent and each of their respective officers, directors, employees and
agents, and each person who controls Subscriber or the Placement Agent within
the meaning of the Act or the Exchange Act (each, a "Subscriber Indemnified
Party") against any losses, claims, damages or liabilities, joint or several,
to which it, they or any of them, may become subject and not otherwise
reimbursed arising from or due to any untrue statement of a material fact or
the omission to state any material fact required to be stated in order to make
the statements not misleading in any representation or warranty made by the
Company contained in this Agreement or in any statements contained in the
Disclosure Documents.
Subscriber agrees to indemnify and hold harmless the Company and the
Placement Agent and each of their respective officers, directors, employees and
agents, and each person who controls Company or the Placement Agent within the
meaning of the Act or the Exchange Act (each, a "Company Indemnified Party") (a
Subscriber Indemnified Party or a Company Indemnified Party may be hereinafter
referred to singularly as "Indemnified Party") against any losses, claims,
damages or liabilities, joint or several, to which it, they or any of them, may
become subject and not otherwise reimbursed arising from or due to any untrue
statement of a material fact or the omission to state any material fact
required to be stated in order to make the statements not misleading in any
representation or warranty made by Subscriber contained in this Agreement.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought,
such Indemnified Party will, if a claim in respect thereof is to be made
against the other party (hereinafter "Indemnitor") under this Section 8,
deliver to the Indemnitor a written notice of the commencement thereof and the
Indemnitor shall have the right to participate in and to assume the defense
thereof with counsel reasonably selected by the Indemnitor, provided, however,
that an Indemnified Party shall have the right to retain its own counsel, with
the reasonably incurred fees and expenses of such counsel to be paid by the
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Indemnitor, if representation of such Indemnified Party by the counsel retained
by the Indemnitor would be inappropriate due to actual or potential conflicts
of interest between such Indemnified Party and any other party represented by
such counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve
the Indemnitor of any liability to the Indemnified Party under this Section 8,
but the omission to so deliver written notice to the Indemnitor will not
relieve it of any liability that it may have to any Indemnified Party other
than under this Section 8 to the extent it is prejudicial.
9. Certain Additional Legends and Information.
FOR FLORIDA RESIDENTS:
THE SECURITIES REFERRED TO HEREIN WILL BE SOLD TO, AND ACQUIRED
BY, THE HOLDER IN A TRANSACTION EXEMPT UNDER SECTION 517.061 OF THE FLORIDA
SECURITIES ACT. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SAID ACT IN THE
STATE OF FLORIDA. IN ADDITION, ALL FLORIDA RESIDENTS SHALL HAVE THE PRIVILEGE OF
VOIDING THE PURCHASE WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF
CONSIDERATION IS MADE BY SUCH SUBSCRIBER TO THE ISSUER, AN AGENT OF THE ISSUER,
OR AN ESCROW AGENT OR WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE
IS COMMUNICATED TO SUCH SUBSCRIBER, WHICHEVER OCCURS LATER.
FOR MAINE RESIDENTS:
THESE SECURITIES ARE BEING SOLD PURSUANT TO AN EXEMPTION FROM
REGISTRATION WITH THE BANK SUPERINTENDENT OF THE STATE OF MAINE UNDER SECTION
10502(2)(R) OF TITLE 32 OF THE MAINE REVISED STATUTES. THESE SECURITIES MAY BE
DEEMED RESTRICTED SECURITIES AND AS SUCH THE HOLDER MAY NOT BE ABLE TO RESELL
THE SECURITIES UNLESS PURSUANT TO REGISTRATION UNDER STATE OR FEDERAL SECURITIES
LAWS OR UNLESS AN EXEMPTION UNDER SUCH LAWS EXISTS.
FOR PENNSYLVANIA RESIDENTS:
EACH PENNSYLVANIA RESIDENT WHO SUBSCRIBES FOR THE SECURITIES BEING
OFFERED HEREBY AGREES NOT TO SELL THESE SECURITIES FOR A PERIOD OF TWELVE
MONTHS AFTER THE DATE OF PURCHASE UNLESS SUCH SECURITIES HAVE BEEN REGISTERED
FOR SALE. UNDER PROVISION OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (THE
"1972 ACT"), EACH PENNSYLVANIA RESIDENT SHALL HAVE THE RIGHT TO WITHDRAW HIS
ACCEPTANCE WITHOUT INCURRING ANY LIABILITY, TO THE SELLER, UNDERWRITER (IF ANY)
OR ANY PERSON, WITHIN TWO (2) BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE
ISSUER OF HIS WRITTEN BINDING CONTRACT OF PURCHASE OR IN THE CASE OF A
TRANSACTION IN WHICH THERE IS NO WRITTEN BINDING CONTRACT OF PURCHASE, WITHIN
TWO BUSINESS DAYS AFTER HE MAKES THE INITIAL PAYMENT FOR THE SECURITIES BEING
OFFERED. TO ACCOMPLISH THIS WITHDRAWAL, A SUBSCRIBER NEED ONLY SEND A LETTER
OR TELEGRAM TO THE SELLING AGENT AT THE ADDRESS SET FORTH IN THE TEXT OF THE
MEMORANDUM, INDICATING HIS OR HER INTENTION TO WITHDRAW. SUCH LETTER OR
TELEGRAM SHOULD BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED
SECOND BUSINESS DAY. IT IS PRUDENT TO SEND SUCH LETTER BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, TO ENSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE
THE TIME WHEN IT WAS MAILED. IF THE REQUEST IS MADE ORALLY (IN PERSON OR BY
TELEPHONE, TO THE SELLING AGENT AT THE NUMBER LISTED IN THE TEXT OF THE
MEMORANDUM) A WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED SHOULD BE
REQUESTED.
17
<PAGE> 18
FOR NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN
APPLICATION FOR A LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN
ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL
TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO
BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
[INTENTIONALLY LEFT BLANK]
18
<PAGE> 19
10. Purchase Price of Preferred Stock. Subscriber subscribes for
_________ shares of Preferred Stock (in the amount of $10,000 per share)
against payment by wire transfer in the amount of $___________________
("Purchase Price").
11. Accredited Investor. Subscriber is an "accredited investor"
because (check all applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3)
of the Internal Revenue Code, or a corporation,
business trust, or partnership not formed for the
specific purpose of acquiring the securities offered,
with total assets in excess of $5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a
sophisticated person who has such knowledge and
experience in financial and business matters that he
is capable of evaluating the merits and risks of the
prospective investment.
(c) [ ] a natural person, who
[ ] is a director, executive officer or general partner of
the issuer of the securities being offered or sold or
a director, executive officer or general partner of a
general partner of that issuer.
[ ] has an individual net worth, or joint net worth with
that person's spouse, at the time of his purchase
exceeding $1,000,000.
[ ] had an individual income in excess of $200,000 in each
of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching the
same income level in the current year.
(d) [ ] an entity each equity owner of which is an entity
described in a - b above or is an individual who could
check one (1) of the last three (3) boxes under
subparagraph (c) above.
(e) [ ] other [specify]_______________________________________
The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.
IN WITNESS WHEREOF, the undersigned Subscriber does represent and
certify under penalty of perjury that the foregoing statements are true and
correct and that Subscriber by the following signature(s) executed this
Agreement.
Dated this _____ day of February, 1998.
____________________________________ _______________________________
Your Signature PRINT EXACT NAME IN WHICH YOU
WANT THE SECURITIES TO BE
REGISTERED
____________________________________ DELIVERY INSTRUCTIONS:
Name: Please Print Please type or print address
where your security is to be
delivered
____________________________________ ATTN.:_________________________
Title/Representative Capacity (if applicable)
____________________________________ _______________________________
Name of Company You Represent (if applicable) Street Address
____________________________________ _______________________________
Place of Execution of this Agreement City, State or Province,
Country, Offshore Postal Code
_______________________________
Phone Number (For Federal
Express) and Fax Number
(re: Notice)
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $ _________________
ON THE ____ DAY OF February, 1998.
Aureal Semiconductor Inc.
By:________________________________
Name:______________________________
Title:_____________________________
19
<PAGE> 1
EXHIBIT 5.2
CERTIFICATE OF DESIGNATION OF
SERIES A PREFERRED STOCK
OF
AUREAL SEMICONDUCTOR INC.
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is
Aureal Semiconductor Inc., a corporation validly organized and existing under
the laws of the state of Delaware.
2. The Amended and Restated Certificate of Incorporation of the
Company authorizes the issuance of five million (5,000,000) shares of preferred
stock, $0.001 par value per share, and expressly vests in the Board of
Directors of the Company the authority provided therein to issue any or all of
said shares in one (1) or more series and by resolution or resolutions to
establish the designation and number and to fix the relative rights and
preferences of each series to be issued.
3. The Board of Directors of the Company, pursuant to the
authority expressly vested in it as aforesaid, has adopted the following
resolutions creating a Series A issue of Preferred Stock:
RESOLVED, that five hundred (500) of the five million (5,000,000)
authorized shares of Preferred Stock of the Company shall be designated Series
A Preferred Stock, $0.001 par value per share, and shall possess the rights and
preferences set forth below:
Section 1. Designation and Amount. The shares of such series
shall have a par value of $0.001 per share and shall be designated as Series A
Preferred Stock (the "Series A Preferred Stock") and the number of shares
constituting the Series A Preferred Stock shall be five hundred (500). The
Series A Preferred Stock shall be offered at a purchase price of Ten Thousand
Dollars ($10,000) per share (the "Original Series A Issue Price"), with an
eight percent (8%) per annum accretion rate as set forth herein.
Section 2. Rank. The Series A Preferred Stock shall rank: (i)
junior to any other class or series of capital stock of the Company hereafter
created (subject to Section 8 hereof) specifically ranking by its terms senior
to the Series A Preferred Stock (collectively, the "Senior Securities"); (ii)
prior to all of the Company's Common Stock, $0.001 par value per share ("Common
Stock"); (iii) prior to any class or series of capital stock of the Company
hereafter created not specifically ranking by its terms senior to or on parity
with any Series A Preferred Stock of whatever subdivision (collectively, with
the Common Stock, "Junior Securities"); and (iv) on parity with any class or
series of capital stock of the Company hereafter created specifically ranking
by its terms on parity with the Series A Preferred Stock ("Parity Securities")
in each case as to distributions of assets upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary (all such
distributions being referred to collectively as "Distributions").
Section 3. Dividends. The Series A Preferred Stock will bear no
dividends, and the holders of the Series A Preferred Stock ("Holders") shall
not be entitled to receive dividends on the Series A Preferred Stock.
Section 4. Liquidation.
(a) In the event of any liquidation, dissolution or
winding up of the Company ("Liquidation Event"), either voluntary or
involuntary, the then Holders of Series A Preferred Stock shall be entitled to
receive, immediately after any distributions to Senior Securities required by
the Company's Certificate of Incorporation or any certificate of designation,
and prior in preference to any distribution to Junior Securities but in parity
with any distribution to Parity Securities, a cash amount per share equal to
the sum of (i) 125% of the aggregate Principal Amount (as defined in Section 5
below) of Holder's outstanding shares of Series A Preferred Stock and (ii) 100%
of any accrued Accretion (as defined in Section 5 below) on such shares. If
upon the occurrence of such
<PAGE> 2
event, and after payment in full of the preferential amounts with respect to
the Senior Securities, the assets and funds available to be distributed among
the Holders of the Series A Preferred Stock and Parity Securities shall be
insufficient to permit the payment to such Holders of the full preferential
amounts due to the Holders of the Series A Preferred Stock and the Parity
Securities, respectively, then the entire assets and funds of the Company
legally available for distribution shall be distributed among the Holders of
the Series A Preferred Stock and the Parity Securities, pro rata, based on the
respective liquidation amounts to which each such series of stock is entitled
by the Company's Certificate of Incorporation and any certificate(s) of
designation relating thereto.
(b) At each Holder's option, a sale, conveyance or
disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related transactions
in which more than fifty percent (50%) of the voting power of the Company is
disposed of shall be deemed to be a Liquidation Event as defined in Section
4(a); provided further that (i) a consolidation, merger, acquisition, or other
business combination of the Company with or into any other publicly traded
company or companies shall not be treated as a Liquidation Event as defined in
Section 4(a) but instead shall be treated pursuant to Section 5(d) hereof, and
(ii) a consolidation, merger, acquisition, or other business combination of the
Company with or into any other non-publicly traded company or companies, where
the surviving entity is not a publicly traded entity, shall be treated as a
Liquidation Event as defined in Section 4(a). The Company shall not effect any
transaction described in subsection 4(b)(ii) unless it first gives ten (10)
business days prior notice of such transaction (during which time the Holder
shall be entitled to immediately convert any or all of its Series A Preferred
Stock into Common Stock at the Conversion Price, as defined below, then in
effect, which conversion shall not be subject to the conversion restrictions
set forth in Section 5(a); provided however, that, if such conversion takes
place prior to the end of the four (4) month holding period set forth in
Section 5(a), for purposes of calculating the Variable Conversion Price (as
defined in Section 5(a)), "X" shall equal ninety percent (90%)).
(c) In the event that, immediately prior to the closing of
a transaction described in Section 4(b) which would constitute a Liquidation
Event, the cash distributions required by Section 4(a) or Section 6 have not
been made, the Company shall either: (i) cause such closing to be postponed
until such cash distributions have been made, or (ii) cancel such transaction,
in which event the rights of the Holders of Series A Preferred Stock shall be
the same as existing immediately prior to such proposed transaction.
Section 5. Conversion. Subject to Section 4(b) herein, the
record Holder of Series A Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert. The record Holder of Series A
Preferred Stock shall be entitled to convert, subject to the Company's right of
Redemption upon Receipt of Notice of Conversion set forth in Section 6(a) and
the conversion restrictions herein below, any portion or all of its Series A
Preferred Stock on or after the date that is four (4) months after the Last
Closing Date, as defined below, at the office of the Company or its designated
transfer agent (the "Transfer Agent"), into that number of fully-paid and
non-assessable shares of Common Stock calculated in accordance with the
following formula (the "Conversion Rate"):
Number of shares of Common Stock issued upon conversion of each share
of Series A Preferred Stock =
Principal Amount + Accretion
----------------------------
Conversion Price
where,
- Principal Amount = $10,000 per share of Series A Preferred Stock,
- Accretion = (.08) X (N/365) X Principal Amount, where N = the number
of days between (i) the Closing Date for the Series A Preferred Stock
for which conversion is being elected, and
2
<PAGE> 3
(ii) the applicable Date of Conversion (as defined in Section 5(b)(iv)
below) for the Series A Preferred Stock for which conversion is being
elected or the Accretion Termination Date (as defined below), whichever
is earlier; and
- Accretion Termination Date = in the event that, anytime after the
date hereof, the Closing Bid Price of the Company's Common Stock is
equal to or greater than 150% of the Fixed Conversion Price (as defined
below) for twenty (20) consecutive trading days, the last such trading
day is referred to as the "Accretion Termination Date" and the accrual
of Accretion shall terminate (an "Accretion Termination") on such date;
and
- Conversion Price = the lesser of (x) $2.50 (the "Fixed Conversion
Price"), or (y) X% of the lowest average Closing Bid Price, as that
term is defined below, of the Company's Common Stock for any
consecutive five (5) trading days during the thirty (30) trading days
immediately preceding the Date of Conversion, as defined below (the
"Variable Conversion Price"), where
<TABLE>
<CAPTION>
Number of Months Between Last
Closing Date and Date of Conversion "X"
----------------------------------- ---
<S> <C>
4 months - 5 months 90%
5 months and 1 day - 6 months 88%
6 months and 1 day - 7 months 86%
7 months and 1 day - 8 months 84%
8 months and 1 day - 9 months 82%
More than 9 months 80%
</TABLE>
and provided that, unless otherwise indicated herein, beginning on the date
that is four (4) months following the Last Closing Date, as defined below, the
right of the Holder to convert into Common Stock using the Variable Conversion
Price initially shall be limited (such limitations shall not apply to
conversions at the Fixed Conversion Price) to a maximum of fifteen percent
(15%) of the aggregate number of shares of Series A Preferred Stock issued to
such Holder, and for each one (1) month period which expires thereafter, the
Holder shall accrue the right to convert into Common Stock an additional
fifteen percent (15%) of the number of shares of Series A Preferred Stock
issued to such Holder (the number of shares that may be converted at any given
time using the Variable Conversion Price, in the aggregate, is referred to
hereinafter as the "Variable Price Conversion Quota"); and provided, further,
in the event that the Holder elects not to convert its full Variable Price
Conversion Quota during any one (1) month period, the unconverted amount shall
be carried forward and added to the Variable Price Conversion Quota, and
thereafter the Holder may, from time to time, convert any portion of the
Variable Price Conversion Quota at the Variable Conversion Price; and provided,
further, that (i) subsequent to the date that is four (4) months after the Last
Closing Date, there shall be no restrictions on the number of shares of Series
A Preferred Stock that may be converted into Common Stock using the Fixed
Conversion Price, whether or not the Fixed Conversion Price is less than the
Variable Conversion Price; (ii) subsequent to the date that is eleven (11)
months following the Last Closing Date, there shall be no restrictions on the
number of shares of Series A Preferred Stock that may be converted into Common
Stock using the Conversion Price then in effect and (iii) if the Company
completes an offering of debt or equity securities ("Future Convertible
Securities") for cash in a private capital raising transaction that are
convertible into Common Stock of the Company prior to the date that is twelve
(12) months following the Last Closing Date, the aggregate Variable Price
Conversion Quota shall be increased (but not decreased), at any time that such
Future Convertible Securities become convertible into Common Stock, by an
amount equal to the dollar amount of the Future Convertible Securities that are
then convertible (or have been converted) into Common Stock, divided by the
total dollar amount of Series A Preferred Stock that were issued in this
offering (expressed as a percentage, but not greater than 100%).
As used herein, a "Closing Date" shall mean the date of the "Closing"
(as defined in the Subscription Agreement between the Company and the Holders)
of a purchase and sale of Series A Preferred Stock that occurs pursuant to the
offering of the Series A Preferred Stock by the Company, and the "Last Closing
Date" shall be the date of the last such closing.
3
<PAGE> 4
For purposes hereof, any Holder which acquires Series A Preferred Stock
from another Holder (the "Transferor") and not upon original issuance from the
Company shall be entitled to exercise its conversion right as to the
percentages of such shares specified under Section 5(a) in such amounts and at
such times such that the number of shares eligible for conversion by such
Holder at any time shall be in the same proportion that the number of shares of
Series A Preferred Stock acquired by such Holder from its Transferor bears to
the total number of shares of Series A Preferred Stock originally issued by the
Company to such Transferor (or its predecessor Transferor).
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price of the Company's Common Stock on the OTC Bulletin Board, or
if no longer traded on the OTC Bulletin Board, the closing bid price on the
principal national securities exchange or the over-the-counter on which the
Common Stock is so traded and if not available, the mean of the high and low
prices on the principal national securities exchange or the National Market
System or over-the counter market on which the Common Stock is so traded;
"Closing Ask Price" shall mean the closing ask price of the Company's Common
Stock determined in the same manner; and "Mean Closing Price" shall mean the
average of the day's Closing Bid Price and Closing Ask Price.
(b) Mechanics of Conversion. In order to convert Series A
Preferred Stock into full shares of Common Stock, the Holder shall (i) send via
facsimile, on or prior to 11:59 p.m., New York City time (the "Conversion
Notice Deadline") on the Date of Conversion, a copy of the fully executed
notice of conversion ("Notice of Conversion") to the Company at the office of
the Company and to its designated transfer agent (the "Transfer Agent") for the
Series A Preferred Stock stating that the Holder elects to convert, which
notice shall specify the Date of Conversion, the number of shares of Series A
Preferred Stock to be converted, the applicable Conversion Price and a
calculation of the number of shares of Common Stock issuable upon such
conversion (together with a copy of the front page of each certificate to be
converted) and (ii) surrender to a common courier for delivery to the office of
the Company or the Transfer Agent, the original certificates representing the
Series A Preferred Stock being converted (the "Preferred Stock Certificates"),
duly endorsed for transfer; provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such conversion unless either the Preferred Stock Certificates are
delivered to the Company or its Transfer Agent as provided above, or the Holder
notifies the Company or its Transfer Agent that such certificates have been
lost, stolen or destroyed (subject to the requirements of subparagraph (i)
below). Upon receipt by the Company of a facsimile copy of a Notice of
Conversion, the Company shall immediately send, via facsimile, a confirmation
of receipt of the Notice of Conversion to Holder which shall specify that the
Notice of Conversion has been received and the name and telephone number of a
contact person at the Company whom the Holder should contact regarding
information related to the Conversion. In the case of a dispute as to the
calculation of the Conversion Rate, the Company shall promptly issue to the
Holder the number of Shares that are not disputed and shall submit the disputed
calculations to its outside accountant via facsimile within three (3) days of
receipt of Holder's Notice of Conversion. The Company shall cause the
accountant to perform the calculations and notify the Company and Holder of the
results no later than two business days from the time it receives the disputed
calculations. Accountant's calculation shall be deemed conclusive absent
manifest error.
(i) Lost or Stolen Certificates. Upon receipt by
the Company of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates, and (in the case of loss, theft or destruction)
of indemnity or security reasonably satisfactory to the Company, and upon
surrender and cancellation of the Preferred Stock Certificate(s), if mutilated,
the Company shall execute and deliver new Preferred Stock Certificate(s) of
like tenor and date. However, the Company shall not be obligated to re-issue
such lost or stolen Preferred Stock Certificates if Holder contemporaneously
requests the Company to convert such Series A Preferred Stock into Common
Stock.
(ii) Delivery of Common Stock Upon Conversion.
The Company shall or shall cause the Transfer Agent to, no later than the close
of business on the second (2nd) business day (the "Deadline") after receipt by
the Company or the Transfer Agent of a facsimile copy of a Notice of Conversion
and receipt by Company or the Transfer Agent of all necessary documentation
duly executed and in proper form required for conversion, including the
original Preferred Stock Certificates to be converted (or after provision for
security or indemnification in the case of lost or
4
<PAGE> 5
destroyed certificates, if required), issue and surrender to a common courier
for either overnight or (if delivery is outside the United States) two (2) day
delivery to the Holder at the address of the Holder as shown on the stock
records of the Company a certificate for the number of shares of Common Stock
to which the Holder shall be entitled as aforesaid.
(iii) No Fractional Shares. If any conversion of
the Series A Preferred Stock would create a fractional share of Common Stock or
a right to acquire a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares of Common Stock issuable upon
conversion, in the aggregate, shall be the next higher number of shares.
(iv) Date of Conversion. The date on which
conversion occurs (the "Date of Conversion") shall be deemed to be the date set
forth in such Notice of Conversion, provided (i) that the advance copy of the
Notice of Conversion is sent via facsimile to the Company before 11:59 p.m.,
New York City time, on the Date of Conversion, and (ii) that the original
Preferred Stock Certificates representing the Series A Preferred Stock to be
converted are surrendered by depositing such certificates with a common
courier, for delivery to the Company or the Transfer Agent as provided above,
as soon as practicable after the Date of Conversion. The person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record Holder or Holders of such
shares of Common Stock on the Date of Conversion.
(c) Automatic Conversion or Redemption. Each share of
Series A Preferred Stock outstanding on the date which is three (3) years
after the Last Closing Date or, if not a business day, the first business day
thereafter ("Maturity Date") automatically shall, at the option of the Company,
either (i) be converted ("Automatic Conversion") into Common Stock on such date
at the Conversion Rate then in effect (calculated in accordance with the
formula in Section 5(a) above), and the Maturity Date shall be deemed the Date
of Conversion with respect to such conversion for purposes of this Certificate
of Designation of Series A Preferred Stock ("Certificate of Designation"), or
(ii) be redeemed ("Automatic Redemption") by the Company for cash in an amount
equal to the Total Value (as defined below) of the Series A Preferred Stock
being redeemed. If the Company elects to redeem, on the Maturity Date, the
Company shall send to the Holders of outstanding Series A Preferred Stock
notice (the "Automatic Redemption Notice") via facsimile of its intent to
effect an Automatic Redemption of the outstanding Series A Preferred Stock. If
the Company does not send such notice to Holder on such date, an Automatic
Conversion shall be deemed to have occurred. If an Automatic Conversion
occurs, the Company and the Holders shall follow the applicable conversion
procedures set forth in this Certificate of Designation; provided, however,
that the Holders are not required to send the Notice of Conversion contemplated
by Section 5(b). If the Company elects to redeem, each Holder of outstanding
Series A Preferred Stock shall send their certificates representing the Series
A Preferred Stock to the Company within five (5) days of the date of receipt of
the Automatic Redemption Notice from the Company, and the Company shall pay the
applicable redemption price to each respective Holder within five (5) days of
the receipt of such certificates. The Company shall not be obligated to
deliver the redemption price unless the certificates representing the Series A
Preferred Stock are delivered to the Company, or, in the event one or more
certificates have been lost, stolen, mutilated or destroyed, unless the Holder
has complied with Section 5(b)(i). If the Company elects to redeem under this
Section 5(c) and the Company fails to pay the Holders the redemption price
within five (5) business days of its receipt of the certificates representing
the Series A Preferred Stock to be redeemed as required by this Section 5(c),
then an Automatic Conversion shall be deemed to have occurred and, upon receipt
of the Preferred Stock Certificates, the Company shall immediately deliver to
the Holders the certificates representing the number of shares of Common Stock
to which the Holders would have been entitled upon Automatic Conversion using
the lowest Conversion Price (as defined in Section 5 hereof) in effect during
the period beginning on the Maturity Date and ending on the date the Transfer
Agent issues Common Stock pursuant to this Section 5(c). Nothing in this
Section 5(c) shall be construed to limit Holder's ability to pursue Holder's
rights under Section 13 hereof.
For purposes hereof, "Total Value" shall mean the Stated Value of the
Series A Preferred Stock being redeemed, plus liquidated damages, Conversion
Failure Payments (as defined below), Late Registration Payments (as defined in
the Registration Rights Agreement) and any other cash payments then due from
the Company and then unpaid, where "Stated Value" shall mean the
5
<PAGE> 6
Original Series A Issue Price (as defined in Section 1) of each share of Series
A Preferred Stock, together with the accrued but unpaid Accretion (as defined
in Section 5(a)).
(d) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to
Stock Split, Stock Dividend, Etc. If, prior to the conversion of all of the
Series A Preferred Stock, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, or other similar event, the Fixed
Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Fixed Conversion Price
shall be proportionately increased.
(ii) Adjustment to Variable Conversion Price. If,
at any time when any Series A Preferred Stock is issued and outstanding, the
number of outstanding shares of Common Stock is increased or decreased by a
stock split, stock dividend, or other similar event, which event shall have
taken place during the reference period for determination of the Conversion
Price for any conversion of the Series A Preferred Stock, then the Variable
Conversion Price shall be calculated giving appropriate effect to the stock
split, stock dividend, combination, reclassification or other similar event for
all five (5) trading days immediately preceding the Date of Conversion.
(iii) Adjustments.
(A) Adjustment Due to Merger, Consolidation,
Etc. If, prior to the conversion of all outstanding Series A Preferred Stock,
there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of the Company shall be changed into (or the shares of Common Stock
become entitled to receive) the same or a different number of shares of the
same or another class or classes of stock or securities of the Company or
another entity or there is a sale of all or substantially all the Company's
assets or there is a change of control transaction not deemed to be a
liquidation pursuant to Section 4(c), then the Holders of Series A Preferred
Stock shall thereafter have the right to receive upon conversion of Series A
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities and/or other assets which the
Holder would have been entitled to receive in such transaction had the Series A
Preferred Stock been converted immediately prior to such transaction, and in
any such case appropriate provisions shall be made with respect to the rights
and interests of the Holders of the Series A Preferred Stock to the end that
the provisions hereof (including, without limitation, provisions for the
adjustment of the Conversion Price and of the number of shares issuable upon
conversion of the Series A Preferred Stock) shall thereafter be applicable, as
nearly as may be practicable in relation to any securities thereafter
deliverable upon the exercise hereof. The Company shall not effect any
transaction described in this subsection 5(d)(iii) unless (a) it first gives at
least ten (10) business days prior notice of such merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event
(during which time the Holder shall be entitled to convert its Series A
Preferred Stock into Common Stock, which conversions shall not be subject to
the conversion restrictions set forth in Section 5(a)), and (b) the resulting
successor or acquiring entity (if not the Company) assumes by written
instrument the obligations of the Company under this Certificate of Designation
including this subsection 5(d)(iii).
(B) Adjustment Due to Distribution. If at
any time after the Last Closing Date, the Company shall declare or make any
distribution of its assets (or rights to acquire its assets) to Holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's shareholders
in cash or shares (or rights to acquire shares) of capital stock of any other
public or private company, including but not limited to a subsidiary or
spin-off of the Company (a "Distribution"), then the Holders of Series A
Preferred Stock shall be entitled, upon any conversion of Series A Preferred
Stock after the date of record for determining shareholders entitled to such
Distribution, to receive the amount of such assets which would have been
payable to the Holder with respect to the shares of Common Stock issuable upon
such conversion had such Holder been the holder of such shares of Common Stock
on the record date for determination of shareholders entitled to such
Distribution.
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<PAGE> 7
(iv) Issuance of Other Securities With Variable
Conversion Price. If, at any time after the Last Closing Date the Company
shall issue any securities which are convertible into or exchangeable for
Common Stock ("Convertible Securities") either (i) at a conversion or exchange
rate based on a discount from the market price of the Common Stock at the time
of conversion or exercise or (ii) with a fixed conversion or exercise price
less than the Fixed Conversion Price, then, at the Holder's option: (X) in the
case of clause (i), the Variable Conversion Price in respect of any conversion
of Series A Preferred Stock after such issuance shall be calculated utilizing
the greatest discount applicable to any such Convertible Securities, and (Y) in
the case of clause (ii), the Fixed Conversion Price shall be reduced to such
lesser conversion or exercise price. Notwithstanding the above, the following
securities shall not trigger the adjustments required by this subsection (iv):
(A) Company stock options, (B) warrants given in exchange for equipment
financing and (C) securities other than (A) or (B) above, which, in the
aggregate, total less than the aggregate Principal Amount of Series A Preferred
Stock placed in this offering.
(v) No Fractional Shares. If any adjustment
under this Section 5(d) would create a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares of Common Stock issuable upon
conversion shall be the next higher number of shares.
Section 6. Redemption by Company.
(a) Company's Right to Redeem Upon Receipt of Notice of
Conversion. If the Conversion Price of the Company's Common Stock is less than
the Fixed Conversion Price (as defined in Section 5(a)), at the time of receipt
of a Notice of Conversion pursuant to Section 5(b), the Company shall have the
right, in its sole discretion, to redeem in whole or in part any Series A
Preferred Stock submitted for conversion at the Redemption Rate (as defined
below), immediately prior to and in lieu of conversion ("Redemption Upon
Receipt of Notice of Conversion"). If the Company elects to redeem some, but
not all, of the Series A Preferred Stock submitted for conversion, the Company
shall redeem from among the shares of Series A Preferred Stock submitted by the
various shareholders for conversion on the applicable date, a pro-rata amount
from each such Holder so submitting Series A Preferred Stock for conversion.
(i) Redemption Price Upon Receipt of a Notice of
Conversion. The redemption price of Series A Preferred Stock under this
Section 6(a) shall be calculated as follows ("Redemption Rate"):
(The original Principal Amount of each share of Series A Preferred
Stock X 125%) + (accrued but unpaid Accretion) + (liquidated damages,
Conversion Failure Payments, Late Registration Payments and any other
cash payments then due from the Company and then unpaid).
(ii) Mechanics of Redemption Upon Receipt of
Notice of Conversion. The Company shall effect each such redemption by giving
notice of its election to redeem, by facsimile, by 5:00 p.m. New York City
time the next business day following receipt of a Notice of Conversion from a
Holder, and the Company shall provide a copy of such redemption notice by
overnight or two (2) day courier, to (A) the Holder of the Series A Preferred
Stock submitted for conversion at the address and facsimile number of such
Holder appearing in the Company's register for the Series A Preferred Stock and
(B) the Company's Transfer Agent. Such redemption notice shall indicate
whether the Company will redeem all or part of the Series A Preferred Stock
submitted for conversion and the applicable redemption price.
(iii) Redemption Buy-In. If (i) subsequent to
the tender of a Notice of Conversion, but prior to its receipt of a Notice of
Redemption Upon Notice of Conversion, the Holder sells shares of Common Stock
(the "Redemption Sold Shares") which such Holder anticipated receiving upon
such conversion, (ii) the Company effects a Redemption Upon Receipt of Notice
of Conversion with respect to such conversion, and (iii) the Holder purchases
(in an open market transaction), no later than the close of trading on the
trading day following its receipt of the Notice of Redemption Upon Notice of
Conversion, shares of Common Stock to make delivery upon the sale of
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<PAGE> 8
the Redemption Sold Shares (a "Redemption Buy-In"), the Company shall pay such
Holder (in addition to the applicable Redemption Rate) the amount by which (x)
such Holder's total purchase price (including brokerage commission, if any) for
the shares of Common Stock purchased in the Redemption Buy-In exceeds (y) the
net proceeds received by such Holder from the sale of the Redemption Sold
Shares. For example, if a Holder purchases shares of Common Stock having a
total purchase price of $11,000 to cover a Redemption Buy-In with respect to
shares of Common Stock sold for $10,000, the Company will be required to pay
such Holder $1,000. A Holder shall provide the Company written notification
(and trading records, if reasonably requested by the Company) indicating any
amounts payable to Holder pursuant to this Section. Notwithstanding the above,
the Holder shall not be entitled to the payments set forth in this section if
the Company shall have notified the Holder, in writing, at least one (1)
business day prior to the Date of Conversion, that the Company intends to
redeem any conversions effected over a certain period of time following such
notice (and such period of time includes the Date of Conversion), provided that
(A) if the Company gives such notice, it shall be obligated to redeem any
conversions effected during such period, unless it terminates such period in
writing upon at least one (1) business day's notice prior to the Date of
Conversion to the Holders and (B) in order to give such notice, the Company
Must Have Immediately Available Funds or Credit Facilities to effect such
redemptions as required in Section 6(c) below.
(b) Company's Right to Redeem at its Election. At any
time, commencing twelve (12) months and one (1) day after the Last Closing
Date, provided that such date shall be extended for each day during which there
is continuing an Event of Default, the Company shall have the right, in its
sole discretion, to redeem ("Redemption at Company's Election"), from time to
time, any or all of the shares of Series A Preferred Stock; provided (i) the
Company shall first provide thirty (30) business days advance written notice as
provided in subparagraph 6(b)(ii) below (which can be given beginning thirty
(30) business days prior to the date which is twelve (12) months and one (1)
day after the Last Closing Date), and (ii) that the Company shall only be
entitled to redeem Series A Preferred Stock having an aggregate Stated Value
(as defined below) of at least One Million Dollars ($1,000,000). If the
Company elects to redeem some, but not all, of the shares of Series A Preferred
Stock, the Company shall redeem a pro-rata amount from each Holder of the
Series A Preferred Stock.
(i) Redemption Price At Company's Election. The
"Redemption Price At Company's Election" shall be calculated as a percentage of
Total Value, as that term is defined above, of the Series A Preferred Stock
redeemed pursuant to this Section 6(b), which percentage shall vary depending
on the date of Redemption at Company's Election (as defined below), and shall
be determined as follows:
<TABLE>
<CAPTION>
Date of Notice of Redemption at Company's Election % of Total Value
-------------------------------------------------- ----------------
<S> <C>
12 months and 1 day to 18 months following Last Closing Date 130%
18 months and 1 day to 24 months following Last Closing Date 125%
24 months and 1 day to 30 months following Last Closing Date 120%
30 months and 1 day to 36 months following Last Closing Date 115%
</TABLE>
(ii) Mechanics of Redemption at Company's
Election. The Company shall effect each such redemption by giving at least
thirty (30) business days prior written notice ("Notice of Redemption At
Company's Election") to (A) the Holders of the Series A Preferred Stock
selected for redemption, at the address and facsimile number of such Holder
appearing in the Company's Series A Preferred Stock register and (B) the
Transfer Agent, which Notice of Redemption At Company's Election shall be
deemed to have been delivered three (3) business days after the Company's
mailing (by overnight or two (2) day courier, with a copy by facsimile) of such
Notice of Redemption At Company's Election. Such Notice of Redemption At
Company's Election shall indicate (i) the Principal Amount of the shares of
Series A Preferred Stock that have been selected for redemption, (ii) the date
which such redemption is to become effective (the "Date of Redemption At
Company's Election") and (iii) the applicable Redemption Price At Company's
Election, as defined in subsection (b)(i) above. Notwithstanding the above,
Holder may convert into Common Stock pursuant to Section 5, prior to the close
of business on the Date of Redemption at Company's Election, any Series A
Preferred Stock which it is otherwise entitled to convert, which
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<PAGE> 9
conversions shall not be subject to the conversion restrictions set forth in
Section 5(a), including Series A Preferred Stock that has been selected for
redemption at the Company's election pursuant to this subsection 6(b);
provided, however, that the Company shall still be entitled to exercise its
right to redeem upon receipt of a Notice of Conversion if otherwise allowed
pursuant to Section 6(a).
(c) Company Must Have Immediately Available Funds or
Credit Facilities. The Company shall not be entitled to send any Redemption
Notice and begin the redemption procedure under Sections 6(a) and 6(b) unless
it has:
(i) the full amount of the redemption price in
cash, available in a demand or other immediately available account in a bank or
similar financial institution; or
(ii) immediately available credit facilities, in
the full amount of the redemption price with a bank or similar financial
institution (including the Company's existing line of credit with TCW); or
(iii) an agreement with a standby underwriter
willing to purchase from the Company a sufficient number of shares of stock to
provide proceeds necessary to redeem any stock that is not converted prior to
redemption; or
(iv) a combination of the items set forth in (i),
(ii) and (iii) above, aggregating the full amount of the redemption price.
If the foregoing conditions of this Section 6(c) are satisfied and the
Company complies with Section 6(d) hereof, then any Series A Preferred Stock
called for by a Redemption at Company's Election shall cease to be outstanding
for all purposes hereunder (including the right to convert or to accrete
additional Accretion or to exercise any other right or privilege hereunder) on
the Date of Redemption at Company's Election and shall instead represent the
right to receive the Redemption Price at Company's Election without interest
from and after the Date of Redemption at Company's Election.
(d) Payment of Redemption Price.
(i) Each Holder submitting Series A Preferred
Stock being redeemed under this Section 6 shall send their Preferred Stock
Certificates so redeemed to the Company or its Transfer Agent, and the Company
shall pay the applicable redemption price to that Holder within five (5)
business days of the Date of Redemption at Company's Election. The Company
shall not be obligated to deliver the redemption price unless the Preferred
Stock Certificates so redeemed are delivered to the Company or its Transfer
Agent, or, in the event one (1) or more certificates have been lost, stolen,
mutilated or destroyed, unless the Holder has complied with Section 5(b)(i).
(ii) If the Company elects to redeem pursuant to
Section 6(a) hereof, and the Company fails to pay Holder the redemption price
within the time frame as required by this Section 6(d), then the Company shall
issue shares of Common Stock to any such Holder who has submitted a Notice of
Conversion in compliance with Section 5(b) hereof. The shares to be issued to
Holder pursuant to this provision shall be the number of shares determined
using the lowest Conversion Price (as defined in Section 5 hereof) in effect
during the period beginning on the date Holder sends its Notice of Conversion
to Company or Transfer Agent via facsimile and ending on the date the Transfer
Agent issues Common Stock pursuant to this Section 6(d)(ii). Nothing in this
Section 6(d) shall be construed to limit Holder's ability to pursue Holder's
rights under Section 13 hereof.
(e) Blackout Period. Notwithstanding the foregoing, the
Company may not either send out a redemption notice or effect a redemption
pursuant to Section 6(b) above during a Blackout Period (defined as a period
during which the Company's officers or directors would be prohibited from
buying or selling stock pursuant to the Securities Exchange Act of 1934, as
amended, because of their holding of material non-public information), unless
the Company shall first disclose the non-public information that resulted in
the Blackout Period; provided, however, that no redemption shall be effected
until at least ten (10) days after the Company shall have given the
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<PAGE> 10
Holder written notice that the Blackout Period has been lifted. The Blackout
period shall not be construed to apply to the Company's standard quarterly
period in which the officers and directors of the Company are prohibited from
buying or selling the Company's securities unless the Company possesses
material nonpublic information as to the Company's financial performance or
condition or a major transaction to be entered into by the Company.
Section 7. Voting Rights. The Holders of the Series A Preferred
Stock shall have no voting power whatsoever, except as otherwise provided by
the General Corporation Law of the State of Delaware ("Delaware Law"), and no
Holder of Series A Preferred Stock shall vote or otherwise participate in any
proceeding in which actions shall be taken by the Company or the shareholders
thereof or be entitled to notification as to any meeting of the shareholders.
Notwithstanding the above, the Company shall provide Holder with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any share of any class or any
other securities or property (including by way of merger, consolidation or
reorganization), or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Company, or any proposed liquidation, dissolution or winding up of the
Company, the Company shall mail a notice to Holder, at least ten (10) days
prior to the record date specified therein, of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under Delaware Law the vote of the Holders of the
Series A Preferred Stock, voting separately as a class, is required to
authorize a given action of the Company, the affirmative vote or consent of the
Holders of at least a majority of the shares of Series A Preferred Stock
represented at a duly held meeting at which a quorum is present or by written
consent of a majority of the number of shares of outstanding Series A Preferred
Stock (except as otherwise may be required under Delaware Law) shall constitute
the approval of such action by the class. To the extent that under Delaware
Law the Holders of the Series A Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one (1) class, each
share of Series A Preferred Stock shall be entitled to a number of votes equal
to the number of shares of Common Stock into which it is then convertible using
the record date for the taking of such vote of stockholders as the date as of
which the Conversion Price is calculated. Holders of the Series A Preferred
Stock also shall be entitled to notice of all shareholder meetings or written
consents with respect to which they would be entitled to vote, which notice
would be provided pursuant to the Company's by-laws and applicable statutes.
Section 8. Protective Provision. So long as Series A Preferred
Stock is outstanding, the Company shall not without first obtaining the
approval (by vote or written consent, as provided by Delaware Law) of the
Holders of at least sixty six and two thirds percent (66 2/3%) of the then
outstanding Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges
of the Series A Preferred Stock or any securities so as to affect adversely the
Series A Preferred Stock;
(b) create any new class or series of stock having a
preference over the Series A Preferred Stock with respect to Distributions (as
defined in Section 2 above), other than preferred stock issued solely to
existing debtholders of the Company in exchange for such debt, or increase the
authorized amount of Series A Preferred Stock; or
(c) do any act or thing not authorized or contemplated by
this Designation which would result in taxation of the holders of shares of
Series A Preferred Stock under Section 305 of the Internal Revenue Code of
1986, as amended (or any comparable provision of the Internal Revenue Code as
hereafter from time to time amended).
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<PAGE> 11
Section 9. Status of Converted or Redeemed Stock. In
the event any shares of Series A Preferred Stock shall be converted or redeemed
pursuant to Section 5 or Section 6 hereof, the shares so converted or redeemed
shall be canceled, shall return to the status of authorized but unissued
Preferred Stock of no designated series, and shall not be issuable by the
Company as Series A Preferred Stock.
Section 10. Authorization and Reservation of Shares of Common
Stock.
(a) Authorized and Reserved Amount. The Company shall
have authorized and reserved and keep available for issuance three million
seven hundred fifty thousand (3,750,000) shares of Common Stock (the
"Authorized and Reserved Amount") solely for the purpose of effecting the
conversion of the Series A Preferred Stock, which number shall not be reduced.
The Company shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock a sufficient number of shares of Common
Stock to provide for the full conversion of all outstanding Series A Preferred
Stock, and issuance of the shares of Common Stock in connection therewith.
(b) Increases to Authorized and Reserved Amount. Without
limiting any other provision of this Section 10, if the Authorized and Reserved
Amount for any three (3) consecutive trading days (the last of such three (3)
trading days being the "Reservation Trigger Date") shall be less than one
hundred twenty-five percent (125%) of the number of shares of Common Stock
issuable upon conversion of the Series A Preferred Stock on such trading days
(a "Share Authorization Failure"), the Company shall immediately notify all
Holders of such occurrence and shall take action as soon as possible, but in
any event within sixty (60) days after a Reservation Trigger Date (including,
if necessary, seeking shareholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Authorized and Reserved
Amount to one hundred fifty percent (150%) of the number of shares of Common
Stock then issuable upon conversion of the Series A Preferred Stock.
(c) Reduction of Authorized and Reserved Amount Under
Certain Circumstances. Prior to complete conversion of all Series A Preferred
Stock the Company shall not reduce the number of shares required to be reserved
for issuance under this Section 10 without the written consent of all Holders
except for a reduction proportionate to a reverse stock split effected for a
business purpose other than affecting the obligations of Company under this
Section 10, which reverse stock split affects all shares of Common Stock
equally.
(d) [Intentionally Omitted].
(e) [Intentionally Omitted].
(f) Allocations of Authorized and Reserved Amount. The
initial Authorized and Reserved Amount shall be allocated pro rata among the
Holders of Series A Preferred Stock based on the number of shares of Series A
Preferred Stock initially issued to each Holder. Each increase to the
Authorized and Reserved Amount shall be allocated pro rata among the Holders of
Series A Preferred Stock based on the number of shares of Series A Preferred
Stock held by each Holder at the time of the increase in the Authorized and
Reserved Amount, as the case may be. In the event a holder shall sell or
otherwise transfer any of such Holder's Series A Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's
Authorized and Reserved Amount. Any portion of the Authorized and Reserved
Amount which remains allocated to any person or entity which does not hold any
Series A Preferred Stock shall be allocated to the remaining holders of Series
A Preferred Stock, pro rata based on the number of shares of Series A Preferred
Stock then held by such Holders.
(g) [Intentionally Omitted].
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<PAGE> 12
Section 11. Failure to Satisfy Conversions.
(a) Conversion Failure Payments. If, at any time, (x) a
Holder submits a Notice of Conversion (or is deemed to submit such notice
pursuant to Section 5(c) hereof), and the Company fails for any reason to
deliver, on or prior to the expiration of the third (3rd) business day after
the Deadline ("Delivery Period") for such conversion, such number of shares of
Common Stock to which such Converting Holder is entitled upon such conversion
(which shares shall be listed, authorized, reserved, registered, and freely
tradeable to the extent required in this Certificate of Designation, the
Registration Rights Agreement between the Company and the Holder(s) and the
Subscription Agreement between the Company and the Holder(s), collectively
referred to as the "Governing Agreements"), or (y) the Company provides notice
to Holder at any time of its intention not to issue shares of Common Stock upon
exercise by Holder of its conversion rights in accordance with the terms of
this Certificate of Designation (each of (x) and (y) being a "Conversion
Failure"), then the Company shall pay to such Holder cash damages in an amount
equal to the lower of:
(i) the Conversion Failure Payment Amount (as defined
below), and
(ii) the highest interest rate permitted by applicable
law, where:
"D" means the number of days beginning on the date of the Conversion
Failure through and including the Cure Date with respect to such Conversion
Failure;
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of
the Series A Preferred Stock submitted for conversion and (ii) with respect to
a Conversion Failure described in clause (y) of its definition, the date the
Company undertakes in writing to timely issue Common Stock in satisfaction of
all conversions of Series A Preferred Stock in accordance with the terms of
this Certificate of Designation.
"Conversion Failure Payment Amount" means $1,000 per occurrence, unless
and until such conversion failure constitutes an "Event of Default" under
Section 12(c)(i), at which time "Default Payments" as defined in Section 12(a)
shall also begin to accrue.
The payments to which a Holder shall be entitled pursuant to this
Section are referred to herein as "Conversion Failure Payments." The parties
agree that the damages caused by a breach hereof would be difficult or
impossible to estimate accurately. A Holder may elect to receive accrued
Conversion Failure Payments in cash or to convert all or any portion of such
accrued Conversion Failure Payments, at any time, into Common Stock at the
lowest Conversion Price in effect during the period beginning on the date of
the Conversion Failure through the Cure Date for such Conversion Failure. In
the event a Holder elects to receive any Conversion Failure Payments in cash,
it shall so notify the Company in writing. In the event a Holder elects to
convert all or any portion of the Conversion Failure Payments, such Holder
shall indicate on a Notice of Conversion such portion of the Conversion Failure
Payments which such Holder elects to so convert and such conversion shall
otherwise be effected in accordance with provisions of Section 5.
(b) Buy-In Cure. Unless a Conversion Failure described in
clause (y) of Section 11(a) hereof has occurred with respect to such a Holder,
if (i) the Company fails for any reason to deliver during the Delivery Period
shares of Common Stock to a Holder upon a conversion of the Series A Preferred
Stock and (ii) after the applicable Delivery Period with respect to such
conversion, a Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to make delivery upon a sale by a Holder of the shares
of Common Stock (the "Sold Shares") which such Holder anticipated receiving
upon such conversion (a "Buy-In"), the Company shall pay such Holder within two
(2) business days following receipt of written notice of a claim pursuant to
Section 11(b) (in addition to any other remedies available to Holder) the
amount by which (x) such Holder's total purchase price (including brokerage
commission, if any) for the shares of Common Stock so purchased exceeds (y) the
net proceeds received by such Holder from the sale of the Sold Shares. For
example, if a Holder purchases shares of Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to shares of Common Stock sold
for $10,000, the Company will be
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<PAGE> 13
required to pay such Holder $1,000. A Holder shall provide the Company written
notification indicating any amounts payable to Holder pursuant to this Section
11.
(c) Adjustment to Conversion Price. If a Holder has not
received certificates for all shares of Common Stock within three (3) business
days following the expiration of the Delivery Period with respect to a
conversion of any portion of any of such Holder's Series A Preferred Stock for
any reason, then the Conversion Price applicable upon conversion of such
portion of the Series A Preferred Stock shall thereafter be the lowest
Conversion Price in effect during the period beginning on, and including, such
Conversion Date through and including the Cure Date. If there shall occur a
Conversion Failure of the type described in clause (y) of Section 11(a), then
the Fixed Conversion Price with respect to any conversion of Series A Preferred
Stock thereafter shall be the lowest Conversion Price in effect at any time
during the period beginning on, and including, the date of the occurrence of
such Conversion Failure through and including the Cure Date. The Conversion
Price shall thereafter be subject to further adjustment for any events
described in Section 5(d).
Section 12. Events of Default.
(a) Holder's Option to Demand Prepayment. Upon the
occurrence of an Event of Default (as herein defined), the Company shall,
unless a specific cash payment is already specified in the Governing Agreements
with respect to such default, pay the Holders (beginning after the specified
cure period) an amount equal to one percent (1%) per month of the aggregate
amount of outstanding Series A Preferred Stock held by Holder, accruing daily
until the Event of Default is cured or until the Series A Preferred Stock is
prepaid under this Section, payable in cash by a cashiers check, no later than
five (5) days after the end of any month(s) for which such amounts accrue
("Default Payments"). Notwithstanding the above and whether or not the above
Default Payments have been paid, each Holder shall have the right to elect at
any time and from time to time prior to the cure by Company of such Event of
Default to have all or any portion of such Holder's then outstanding Series A
Preferred Stock prepaid by the Company for an amount equal to the Holder Demand
Prepayment Amount (as herein defined).
(i) The right of a Holder to elect prepayment
shall be exercisable upon the occurrence of an Event of Default by such Holder
in its sole discretion by delivery of a Demand Prepayment Notice (as herein
defined) in accordance with the procedures set forth in this Section 12.
Notwithstanding the exercise of such right, the Holder shall be entitled to
exercise all other rights and remedies available under the provisions of this
Certificate of Designation and at law or in equity.
(ii) A Holder shall effect each demand for
prepayment under this Section 12 by giving at least two (2) business days prior
written notice (the "Demand Prepayment Notice") of the date which such
prepayment is to become effective (the "Effective Date of Demand of
Prepayment"), the Series A Preferred Stock selected for prepayment and the
Holder Demand Prepayment Amount to the Company at the address and facsimile
number provided in the stock records of the Company, which Demand Prepayment
Notice shall be deemed to have been delivered on the business day after the
date of transmission of Holder's facsimile (with a copy sent by overnight
courier to the Company) of such notice.
(iii) The Holder Demand Prepayment Amount shall be
paid to a Holder whose Series A Preferred Stock is being prepaid within one (1)
business day following the Effective Date of Demand of Prepayment; provided,
however, that the Company shall not be obligated to deliver any portion of the
Holder Demand Prepayment Amount until one (1) business day following either the
date on which the certificates representing the Series A Preferred Stock being
prepaid are delivered to the office of the Company or the Transfer Agent, or
the date on which the Holder notifies the Company or the Transfer Agent that
such Preferred Stock Certificates have been lost, stolen or destroyed and
delivers the documentation required in accordance with Section 5(b)(i) hereof.
(b) Holder Demand Prepayment Amount. The "Holder Demand
Prepayment Amount" means the greater of: (a) the sum of (1) the Total Value of
the Series A Preferred Stock for which demand is being made, through the date
of prepayment plus (2) 30% of the original Principal Amount of such Series A
Preferred Stock, and (b) the product of (1) the highest price at
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<PAGE> 14
which the Common Stock is traded on the date of the Event of Default (or on the
most recent trading date for the Common Stock if the Common Stock is not traded
on such date) divided by the Conversion Price in effect as of the date of the
Event of Default, and (2) the Total Value through the date of prepayment.
(c) Events of Default. An "Event of Default" means any
one of the following:
(i) either (a) a Conversion Failure described in
Section 11(a) hereof which is uncured thirty (30) days after the applicable
Date of Conversion or (b) a material failure by the Company to comply with the
Conversion Failure remedies described in Section 11(a)(2) hereof;
(ii) a Share Authorization Failure described in
Section 10(b) hereof, if such Share Authorization Failure continues uncured for
ninety (90) days after the Reservation Trigger Date (for purposes of this
subsection (ii), a prepayment demand may be made by a Holder only to the extent
that there is an insufficient number of shares of Common Stock authorized and
reserved to effect conversion of all of such Holder's outstanding Series A
Preferred Stock, provided, however, that Holder need not actually convert any
Series A Preferred Stock and exhaust its available authorized and reserved
shares of Common Stock in order to demand such prepayment);
(iii) the Company fails, and such failure continues
uncured for three (3) business days after the Company has been notified thereof
in writing by a Holder, to satisfy the share reservation requirements of
Section 10 hereof;
(iv) the Company fails to pay any cash payments
due to Holder under the terms of this Certificate of Designation within five
(5) days after Holder has notified the Company, in writing, that such payment
is past due and that the Holder intends to declare an "Event of Default" under
this Section 12;
(v) the Company fails to cause the registration
statement required by the Registration Rights Agreement to become effective
within six (6) months of the Last Closing Date, or fails to maintain an
effective registration statement as required by the Registration Rights
Agreement between the Company and the Holder(s) (the "Registration Rights
Agreement") except where (A) such failure lasts no longer than seven (7)
consecutive trading days or twenty one (21) days in any twelve (12) month
period, or (B) the Conversion Shares may be sold immediately, without volume
limitation, without registration under the Act, by virtue of Rule 144 or
similar provisions;
(vi) after the date that is four (4) months after
the Last Closing Date, for three (3) consecutive trading days or for an
aggregate of ten (10) trading days in any nine (9) month period, the Common
Stock (including any of the shares of Common Stock issuable upon conversion of
the Series A Preferred Stock) is (i) suspended from trading on any of the OTC
Bulletin Board, Nasdaq SmallCap, NMS, NYSE, or the AMEX or (ii) is not listed
and qualified for trading on at least one of the OTC Bulletin Board, Nasdaq
SmallCap, NMS, NYSE, or AMEX;
(vii) the Company fails, and such failure continues
uncured for three (3) business days after the Company has been notified thereof
in writing by a Holder, to remove any restrictive legend on any certificate for
any shares of Common Stock issued to a Holder upon conversion of any Series A
Preferred Stock as and when required by this Certificate of Designation, the
Subscription Agreement, between the Company and the Holder(s) (the
"Subscription Agreement") or the Registration Rights Agreement;
(viii) the Company breaches, and such breach
continues uncured (after any cure period specifically set forth in the
Governing Agreements, if applicable) for three (3) business days after the
Company has been notified thereof in writing by a Holder, any significant
covenant or other material term or condition of any of the Governing Agreements
which is not specifically addressed in subsections 12(c)(i) - (iv) above or
subsections 12(c)(ix) - (xi) below, and which directly or indirectly has or
could have a material effect on (x) the Holder's ability to convert its Series
A Preferred Stock, or to receive and resell on the Company's primary exchange
or market the Common Stock issuable upon conversion, or (y) the Company's
ability to make any cash payments provided for in the Governing Agreements
(including, without limitation, the failure to make any required
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<PAGE> 15
liquidated damage or other cash payment hereunder or under the Registration
Rights Agreement), provided that if such breach provides for money damages in
the applicable Governing Agreement, and such money damages are being timely
paid, then such breach shall not constitute a default under this subsection
unless such breach continues for sixty (60) days after which the Holder may
immediately demand the Holder Demand Prepayment Amount if such breach has not
been cured. Notwithstanding the above, the terms of this subsection (viii)
shall not apply to any Event of Default which is specifically addressed in
subsections 12(c)(i) - (vii) above or subsections 12(c)(ix) - (xi) below.
(ix) any representation or warranty of the Company
made herein or in any agreement, statement or certificate given in writing
pursuant hereto or in connection herewith (including, without limitation, the
Subscription Agreement and Registration Rights Agreement), shall be false or
misleading in any material respect when made, until, in the case of a warranty,
the Company has complied with the warranty; provided that, in the case of a
false representation, no Default Payments shall accrue absent proof of fraud;
(x) the Company or any subsidiary of the Company
shall make an assignment for the benefit of its 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 receiver or trustee shall otherwise
be appointed; or
(xi) bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or against the
Company or any subsidiary of the Company (and such proceedings shall continue
unstayed for thirty (30) days).
(d) Failure to Pay Demand Prepayment Amount. If the
Company fails to pay the Holder Demand Prepayment Amount within five (5)
business days of its receipt of a Demand Prepayment Notice, then such Holder
shall have the right, at any time and from time to time prior to the payment of
the Holder Demand Prepayment Amount, to require the Company, upon written
notice, to immediately convert (in accordance with the terms of Section 5) all
or any portion of the Holder Demand Prepayment Amount, into shares of Common
Stock at the then current Conversion Price, provided that if the Company has
not delivered the full number of shares of Common Stock issuable upon such
conversion, which shares shall be listed, registered, and freely tradable, each
to the extent required by the Governing Agreements, within three (3) business
days after the Company receives written notice of such conversion, the
Conversion Price with respect to such Holder Demand Prepayment Amount shall
thereafter be deemed to be the lowest Conversion Price in effect during the
period beginning on the date of the Event of Default through the date on which
the Company delivers to the Holder the full number of freely tradable shares of
Common Stock issuable upon such conversion, which shares shall be listed,
registered, and freely tradable, each to the extent required by the Governing
Agreements. In the event the Company is not able to pay all amounts due and
payable with respect to all Series A Preferred Stock subject to Holder Demand
Prepayment Notices, the Company shall pay the Holders such amounts pro rata,
based on the total amounts payable to such Holder relative to the total amounts
payable to all Holders.
Section 13. Remedies, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under the
Certificate of Designation at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall
be deemed a waiver of compliance with the provision giving rise to such remedy
and nothing herein shall limit a holder's right to pursue actual damages for
any failure by the Company to comply with the terms of this Certificate of
Designation. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder hereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of Series A
Preferred Stock and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees, in the event of any such breach or
threatened breach, the holders of Series A Preferred Stock shall be
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<PAGE> 16
entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
Section 14. Arbitration. Any controversy or claim arising out of
or related to this Certificate of Designation or the breach thereof, shall be
settled by binding arbitration in Wilmington, Delaware (if the Holder is the
Defendant in such action) or in San Francisco, California (if the Company is
the Defendant) in accordance with the Expedited Procedures (Rules 53-57) of the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
A proceeding shall be commenced upon written demand by Company or any
Subscriber to the other. The arbitrator(s) shall enter a judgment by default
against any party which fails or refuses to appear in any properly noticed
arbitration proceeding. The proceeding shall be conducted by one (1)
arbitrator, unless the amount alleged to be in dispute exceeds two hundred
fifty thousand dollars ($250,000), in which case three (3) arbitrators shall
preside. The arbitrator(s) will be chosen by the parties from a list provided
by the AAA, and if they are unable to agree within ten (10) days, the AAA shall
select the arbitrator(s). The arbitrators must be experts in securities law
and financial transactions. The arbitrators shall assess costs and expenses of
the arbitration, including all attorneys' and experts' fees, as the arbitrators
believe is appropriate in light of the merits of the parties' respective
positions in the issues in dispute. Each party submits irrevocably to the
jurisdiction of the Chancery Court sitting in Wilmington, Delaware or to the
United States District Court sitting in Delaware (if the Holder is the
Defendant in such action) or in San Francisco, California (if the Company is
the Defendant), in each case for purposes of enforcement of any discovery
order, judgment or award in connection with such arbitration. The award of the
arbitrator(s) shall be final and binding upon the parties and may be enforced
in any court having jurisdiction. The arbitration shall be held in such place
as set by the arbitrator(s) in accordance with Rule 55.
Section 15. Assignability. The Series A Preferred Stock shall be
freely assignable by a Holder subject to applicable securities laws and any
agreement to the contrary signed by such Holder.
Signed on ____________________, 1998
___________________________________
______________, President
Attest:
____________________________
_________________, Secretary
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<PAGE> 1
EXHIBIT 5.3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
February __, 1998, by and among Aureal Semiconductor Inc., a corporation duly
incorporated and existing under the laws of the State of Delaware ("Company"),
Swartz Investments, LLC ("Swartz"), a Georgia limited liability company, and
the subscribers (hereinafter referred to as "Subscribers") to the Company's
offering ("Offering") of up to Five Million Dollars ($5,000,000) of Series A
Preferred Stock (the "Preferred Stock", or the "Convertible Securities")
pursuant to the Regulation D Subscription Agreement between the Company and
each of the Subscribers ("Subscription Agreement").
1. DEFINITIONS. For purposes of this Agreement:
(a) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933
(the "Act"), and pursuant to Rule 415 under the Act or any successor rule, and
the declaration or ordering of effectiveness of such registration statement or
document;
(b) For purposes hereof, the term "Registrable Securities"
means the shares of the Company's Common Stock together with any capital stock
issued in replacement of, in exchange for or otherwise in respect of such
Common Stock (the "Common Stock") (i) issued or issuable upon conversion of the
Convertible Securities, (ii) issued or issuable upon exercise of the Warrant to
purchase Common stock issued to Swartz or its designees in connection with the
Offering (the "Warrants"), by Swartz, its designees or any subsequent Holder of
the Warrant or portion thereof and (iii) issued to Swartz in connection with
the Offering.
Notwithstanding the above:
1. Common Stock which would otherwise be deemed to be
Registrable Securities shall not constitute Registrable
Securities if those shares of Common Stock may be resold in a
public transaction without volume limitations or other
material restrictions without registration under the Act,
including without limitation, pursuant to Rule 144 under the
Act; and
2. any Registrable Securities resold in a public transaction
shall cease to constitute Registrable Securities.
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock which
have been issued or are issuable upon conversion of the Convertible Securities
and exercise of the then outstanding Warrants at the time of such
determination;
(d) The term "Holder" means any person owning or having
the right to acquire Registrable Securities or any permitted assignee thereof;
(e) The term "Initiating Holders" means (i) one or more
holders of Registrable Securities obtained or obtainable upon conversion of at
least Fifty (50) shares of Preferred Stock; and
(f) The term "Due Date" means the date which is four (4)
months after the Last Closing (as defined in the Subscription Agreement) of the
Offering.
EXHIBIT B
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2. REQUIRED REGISTRATION.
(a) The Company shall, within two (2) calendar months
after the Last Closing of the Offering, file a registration statement
("Registration Statement") on Form S-3 (or other suitable form, at the
Company's discretion, but subject to the reasonable approval of Subscribers),
covering the resale of all shares of Registrable Securities then outstanding or
issuable upon conversion of all then outstanding Convertible Securities or upon
exercise of the Warrants. Such Registration Statement shall initially cover the
number of shares issuable upon exercise of the Warrants plus at least Three
Million Seven Hundred Fifty Thousand (3,750,000) shares of Common Stock and
shall cover, to the extent allowed by applicable law in the reasonable opinion
of Company's counsel, such additional indeterminate number of shares of Common
Stock as are required to effect conversion of the Convertible Securities due to
fluctuations in the price of the Company's Common Stock. The Company shall use
its best efforts to have the Registration Statement declared effective as soon
as possible. In the event that the Company determines, which determination
shall be made by the Company within five (5) business days after the last
business day of each month after the Due Date or is notified at any time by a
Holder, that the Registration Statement does not cover a sufficient number of
shares of Common Stock to effect the resales of a number of shares of Common
Stock equal to one hundred twenty five percent (125%) of the number of shares
of Common Stock issuable to each Subscriber upon conversion of all outstanding
Convertible Securities then eligible for conversion, at the Conversion Price
(as defined in the Certificate of Designation of the Series A Preferred Stock,
referred to herein as the "Certificate of Designation") in effect on the last
business day of such month (the "Assumed Conversion Price"), and upon exercise
of all the outstanding Warrants (a "Registration Shortfall"), the Company
shall, within five (5) business days, amend the Registration Statement or file
a new Registration Statement (an "Amended" or "New" Registration Statement,
respectively), as appropriate, to add such number of additional shares as would
be necessary to effect the resales of a number of shares of Common Stock equal
to at least one hundred fifty percent (150%) of the number of shares of Common
Stock issuable to each Subscriber upon conversion of all outstanding
Convertible Securities then eligible for conversion, at the Assumed Conversion
Price then in effect and upon exercise of all of the outstanding Warrants. If
the Registration Statement is not filed within two (2) calendar months after
the Last Closing of the Offering, Company shall pay the Subscribers an amount
equal to one percent (1%) per month of the aggregate amount of outstanding
Convertible Securities held by Subscriber, accruing daily until the
Registration Statement is filed, payable in cash or Common Stock at the
Subscriber's option, as set forth below ("Late Filing Payment"). If the
Registration Statement is not declared effective by the Due Date, or if any
other Amended or New Registration Statement required to be filed hereunder is
not declared effective within two (2) calendar months of the date it is
required to be filed, the Company shall pay the Subscribers an amount equal to
one percent (1%) per month of the aggregate amount of outstanding Convertible
Securities held by Subscriber, accruing daily until the Registration Statement
or a registration statement filed pursuant to Section 3 of this Agreement is
declared effective (the "Late Registration Payment"). Notwithstanding the
above, any Late Registration Payments otherwise due to a Subscriber shall be
reduced by the amount of any Late Filing Payments that have previously been
paid in full to such Subscriber. Any Late Filing Payment or Late Registration
Payment shall be payable in cash or Common Stock, at the Subscriber's option,
as follows: If Subscriber elects to be paid in cash, such Late Filing Payment
or Late Registration Payment shall be paid to such Subscriber by a cashiers
check, no later than ten (10) days after the end of (i) the month in which the
Company receives the Holder's cash payment request and (ii) any subsequent
month(s) for which such amounts accrue. If Subscriber elects to be paid in
Common Stock, such number of shares shall be determined as follows:
Upon conversion of each Convertible Security or any portion thereof,
the Company shall issue to the Subscriber the number of shares of
Common Stock determined as set forth in Section 5(a) of the Certificate
of Designation, plus an additional number of shares of Common Stock
attributable to such Convertible Securities (the "Additional Shares")
determined as set forth below:
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Additional Shares = Late Registration Payment + Late Filing Payment
-----------------------------------------------
Conversion Price
With respect to the Preferred Stock, "Conversion Price" has the definition
ascribed to it in the Certificate of Designation.
Such Additional Shares shall also be deemed "Registrable Securities" as defined
herein. The Company covenants to use its best efforts to use Form S-3 for the
registration required by this Section during all applicable times contemplated
by this Agreement.
(b) The Registration Statement shall be prepared as a
"shelf" registration statement under Rule 415, and shall be maintained
effective until all Registrable Securities cease to exist.
(c) The Company represents that it is presently eligible
to effect the registration contemplated hereby on Form S-3 and will use its
best efforts to continue to take such actions as are necessary to maintain such
eligibility.
3. PIGGYBACK REGISTRATION. If the Registration Statement
described in Section 2 is not effective by the Due Date, and if (but without
any obligation to do so) the Company proposes to register (including for this
purpose a registration effected by the Company for shareholders other than the
Holders) any of its Common Stock under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely for the sale of securities to participants in a Company stock plan or a
registration on Form S-4 or from S-8 promulgated under the Act or any successor
or similar form registering stock issuable upon a reclassification, upon a
business combination involving an exchange of securities or upon an exchange
offer for securities of the issuer or another entity), the Company shall, at
such time, promptly give each Holder written notice of such registration (a
"Piggyback Registration Statement"). Upon the written request of each Holder
given by fax within ten (10) days after mailing of such notice by the Company,
the Company shall cause to be included in such registration statement under the
Act all of the Registrable Securities that each such Holder has requested to be
registered ("Piggyback Registration") to the extent such inclusion does not
violate the registration rights of any other securityholder of the company
granted prior to the date hereof; nothing herein shall prevent the Company from
withdrawing or abandoning the registration statement prior to its
effectiveness. The election of initiating Holders to participate in a Piggyback
Registration Statement shall not impact the amount payable to investors
pursuant to Section 2(a) herein except that the Late Registration Payment shall
cease to accrue as of the date of effectiveness of the Piggyback Registration
Statement.
4. LIMITATION ON OBLIGATIONS TO REGISTER.
(a) In the case of a Piggyback Registration on an
underwritten public offering by the Company, if the managing underwriter
determines and advises in writing that the inclusion in the registration
statement of all Registrable Securities proposed to be included would interfere
with the successful marketing of the securities proposed to be registered by
the Company, then the number of such Registrable Securities to be included in
the registration statement, to the extent such Registrable Securities may be
included in such Piggyback Registration Statement shall be allocated among all
Holders who had requested Piggyback Registration pursuant to the terms hereof,
in the proportion that the number of Registrable Securities which each such
Holder, including Swartz, seeks to register bears to the total number of
Registrable Securities sought to be included by all Holders, including Swartz.
If required by the managing underwriter of such an underwritten public
offering, the Holders shall enter into a reasonable agreement limiting the
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<PAGE> 4
number of Registrable Securities to be included in such Piggyback Registration
Statement and the terms, if any, regarding the future sale of such Registrable
Securities.
(b) In the event the Company believes that shares sought
to be registered under Section 2 or Section 3 by Holders do not constitute
"Registrable Securities" by virtue of Section 1(b) of this Agreement, and the
status of those shares as Registrable Securities is disputed, the Company shall
provide, at its expense, an Opinion of Counsel, reasonably acceptable to the
Holders of the Securities at issue (and satisfactory to the Company's transfer
agent to permit the sale and transfer) that those securities may be sold
immediately, without volume limitation, without registration under the Act, by
virtue of Rule 144 or similar provisions.
5. OBLIGATIONS OF THE COMPANY. Whenever required under
this Agreement to effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Securities and Exchange
Commission ("SEC") a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Act with respect to the disposition of all securities
covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders of the Registrable Securities covered by such registration statement,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in
usual and customary form, with the managing underwriter of such offering. Each
Holder participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) As promptly as practicable after becoming aware of such
event, notify each Holder of Registrable Securities of the happening of any
event of which the Company has knowledge, as a result of which the prospectus
included in the registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and subject to
Section 6 use its best efforts promptly to prepare a supplement or amendment to
the registration statement to correct such untrue statement or omission, and
deliver a number of copies of such supplement or amendment to each Holder as
such Holder may reasonably request.
(g) Provide Holders with written notice of the date that a
registration statement registering the resale of the Registrable Securities is
declared effective by the SEC, and the date or dates when the Registration
Statement is no longer effective.
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(h) Provide Holders and their representatives the opportunity
to conduct a reasonable due diligence inquiry of Company's pertinent financial
and other records and make available its officers, directors and employees for
questions regarding such information as it relates to information contained in
the registration statement.
6. BLACK OUT. In the event that, during the time that
the Registration Statement is effective, the Company reasonably determines,
based upon advice of counsel, that due to the existence of material non-public
information, disclosure of such material non-public information would be
required to make the statements contained in the Registration Statement not
misleading, and the Company has a bona fide business purpose for preserving as
confidential such material non-public information, the Company shall have the
right to suspend the effectiveness of the Registration Statement, and no Holder
shall be permitted to sell any Registrable Securities pursuant thereto, until
such time as such suspension is no longer advisable; provided, however, that
such time shall not exceed a period of sixty (60) days. As soon as such
suspension is no longer advisable, the Company shall, if required, promptly,
but in no event later than the date the Company files any documents with the
Securities and Exchange Commission ("SEC") referencing such material
information, file with the SEC an amendment to the Registration Statement
disclosing such information and use its best efforts to have such amendment
declared effective as soon as possible.
In the event the effectiveness of the Registration
Statement is suspended by the Company pursuant hereto, the Company shall
promptly notify all Holders whose securities are covered by the Registration
Statement of such suspension, and shall promptly notify each such Holder as
soon as the effectiveness of the Registration Statement has been resumed. The
Company shall be entitled to effect no more than three (3) such suspensions
during the one (1) year period following the Last Closing, no more than two (2)
of which shall occur during the last six (6) months of such one year period.
7. FURNISH INFORMATION. It shall be a condition
precedent to the obligations of the Company to take any action pursuant to this
Agreement with regard to each selling Holder that such selling Holder shall
furnish to the Company such information regarding Holder, the Registrable
Securities held by it, and the intended method of disposition of such
securities as shall be required to effect the registration of its Registrable
Securities or to determine that registration is not required pursuant to Rule
144 or other applicable provision of the Act.
8. EXPENSES. All expenses other than underwriting
discounts and commissions and fees and expenses of counsel to the selling
Holders incurred in connection with registrations, filings or qualifications
pursuant hereto, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company, shall be borne by the Company.
9. INDEMNIFICATION. In the event any Registrable
Securities are included in a Registration Statement or a Piggyback Registration
Statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the officers and directors of each
Holder, any underwriter (as defined in the Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"),
against any losses, claims, damages, or liabilities (joint or several) to which
they may become subject under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements
or omissions: (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
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<PAGE> 6
statements therein not misleading, and the Company will reimburse each such
Holder, officer or director, underwriter or 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 indemnity agreement contained in this subsection 9(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any such
Holder, officer, director, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder,
severally and not jointly, will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed the registration
statement, each person, if any, who controls the Company within the meaning of
the Act, any underwriter and any other Holder selling securities in such
registration statement or any of its directors or officers or any person who
controls such Holder, against any losses, claims, damages, or liabilities
(joint or several) to which the Company or any such director, officer,
controlling person, or underwriter or controlling person, or other such Holder
or director, officer or controlling person may become subject, under the Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any statement or omission in each case to the extent (and only to
the extent) that such statement or omission is made in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in connection with such registration statement; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company and
any such director, officer, controlling person, underwriter or controlling
person, other Holder, officer, director, or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
subsection 9(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 9,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses of one such counsel to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
conflicting interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement
of any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 9.
(d) In the event that the indemnity provided in paragraph
(a) or (b) of this Section 9 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company and each Holder agree to
contribute to the aggregate claims, losses, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and one or more of
the Holder may
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be subject in such proportion as is appropriate to reflect the relative fault
of the Company and the Holders in connection with the statements or omissions
which resulted in such Losses. Relative fault shall be determined by reference
to whether any alleged untrue statement or omission relates to information
provided by the Company or by the Holders. The Company and the Holders agree
that it would not be just and equitable if contribution were determined by pro
rata allocation or any other method of allocation which does not take account
of the equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 10(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9, each person who
controls a Holder of Registrable Securities within the meaning of either the
Securities Act or the Exchange Act and each director, officer, partner,
employee and agent of a Holder shall have the same rights to contribution as
such holder, and each person who controls the Company within the meaning of
either the Act or the Exchange Act and each director of the Company, and each
officer of the Company who has signed the registration statement, shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
(e) The obligations of the Company and Holders under this
Section 9 shall survive the redemption and conversion, if any, of the
Convertible Securities, the completion of any offering of Registrable
Securities in a Registration Statement under this Agreement, and otherwise.
10. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a
view to making available to the Holders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144;
(b) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the Act
and the 1934 Act; and
11. AMENDMENT OF REGISTRATION RIGHTS. Any provision of
this Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Registrable Securities provided that the amendment treats all
Holders equally. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each Holder, each future Holder, and the
Company.
12. NOTICES. All notices required or permitted under this
Agreement shall be made in writing signed by the party making the same, shall
specify the section under this Agreement pursuant to which it is given, and
shall be addressed if to (i) the Company at: Aureal Semiconductor Inc., 4245
Technology Drive, Fremont, CA 94538 Telephone No. (510) 252-4245, Facsimile
No.(510) 252-4491 and (ii) the Holders at their respective last address as the
party as shown on the records of the Company. Any notice, except as otherwise
provided in this Agreement, shall be made by fax and shall be deemed given at
the time of transmission of the fax.
13. TERMINATION. This Agreement shall terminate on the
date all Registrable Securities cease to exist; but without prejudice to (i)
the parties' rights and obligations arising from breaches of this Agreement
occurring prior to such termination (ii) other indemnification obligations
under this Agreement.
14. ASSIGNMENT. No assignment, transfer or delegation,
whether by operation of law or otherwise, of any rights or obligations under
this Agreement by the Company or any Holder, respectively, shall be made
without the prior written consent of the majority in
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<PAGE> 8
interest of the Holders or the Company, respectively; provided that the rights
of a Holder may be transferred to a subsequent holder of the Holder's
Registrable Securities (provided such transferee shall provide to the Company,
together with or prior to such transferee's request to have such Registrable
Securities included in a Piggyback Registration, a writing executed by such
transferee agreeing to be bound as a Holder by the terms of this Agreement);
and provided further that the Company may transfer its rights and obligations
under this Agreement to a purchaser of all or a substantial portion of its
business if the obligations of the Company under this Agreement are assumed in
connection with such transfer, either by merger or other operation of law
(which may include without limitation a transaction whereby the Registrable
Securities are converted into securities of the successor in interest) or by
specific assumption executed by the transferee.
15. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California applicable
to agreements made in and wholly to be performed in that jurisdiction, except
for matters arising under the Act or the Securities Exchange Act of 1934, which
matters shall be construed and interpreted in accordance with such laws.
16. EXECUTION IN COUNTERPARTS PERMITTED. This Agreement
may be executed in any number of counterparts, each of which shall be
enforceable against the parties actually executing such counterparts, and all
of which together shall constitute one (1) instrument.
[INTENTIONALLY LEFT BLANK]
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<PAGE> 9
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this ____ day of February, 1998.
AUREAL SEMICONDUCTOR INC.
By: _______________________________________
Kenneth E. Kokinakis, President - CEO
Address: Aureal Semiconductor Inc.
4245 Technology Drive
Fremont, California 94538
Telephone No. (510) 252-4245
Facsimile No. (510) 252-4491
SWARTZ INVESTMENTS, LLC
By: _______________________________________
Eric S. Swartz, President
Address: 1080 Holcomb Bridge Road
Bldg. 200, Suite 285
Roswell, GA 30076
Telephone: (770) 640-8130
Facsimile: (770) 640-7150
INVESTOR(S)
___________________________________________
Investor's Name
By:________________________________________
(Signature)
Address: ___________________________________________
___________________________________________
___________________________________________
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<PAGE> 1
EXHIBIT 5.4
THIS WARRANT AND THE SECURITIES RECEIVABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION
WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE
HEREOF INVOLVES A HIGH DEGREE OF RISK. HOLDER MUST RELY ON HIS OWN ANALYSIS OF
THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET
FORTH IN THE DISCLOSURE DOCUMENTS UNDER THAT CERTAIN SUBSCRIPTION AGREEMENT FOR
SERIES H PREFERRED STOCK BY AND BETWEEN THE COMPANY AND HOLDER REFERENCED
THEREIN AS EXHIBIT E.
Warrant to Purchase
_______________ shares
WARRANT TO PURCHASE COMMON STOCK
OF
AUREAL SEMICONDUCTOR INC.
THIS CERTIFIES that Swartz Investments, LLC or any subsequent
("Holder") hereof, has the right to purchase from AUREAL SEMICONDUCTOR INC., a
Delaware corporation (the "Company"), not more than _____________ fully paid
and nonassessable shares of the Company's Common Stock, $.001 par value
("Common Stock"), at a price equal to the Exercise Price as defined in Section
3 below, subject to adjustment as provided herein, at any time on or before
5:00 p.m., Atlanta, Georgia time, on February 26, 2003.
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. Date of Issuance.
This Warrant shall be deemed to be issued on February 26, 1998 ("Date
of Issuance").
2. Exercise.
(a) Manner of Exercise. This Warrant may be exercised as to all or any
lesser number of full shares of Common Stock covered hereby upon surrender of
this Warrant, with the Exercise Form attached hereto duly completed and
executed, together with the full Exercise Price (as defined in Section 3) for
each share of Common Stock as to which this Warrant is exercised, at the office
of the Company, Aureal Semiconductor Inc., 4245 Technology Dr., Fremont, CA
94538, Attention: David J. Domeier, Vice President Finance/CFO, Telephone No.
(510) 252-4245, Telecopy No. (510) 252-4491, or at such other office or agency
as the Company may designate in writing, by overnight mail, with
<PAGE> 2
an advance copy of the Exercise Form attached as Exhibit A ("Exercise Form")
sent by facsimile to the Company and its Transfer Agent (such surrender and
payment of the Exercise Price hereinafter called the "Exercise of this
Warrant").
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed
Exercise Form is sent by facsimile to the Company and its Transfer Agent,
provided that the original Warrant and Exercise Form are received by the
Company within five (5) business days thereafter. The original Warrant and
Exercise Form must be received within five (5) business days of the Date of
Exercise, or the exercise may, at the Company's option, be considered void.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile.
(c) Cancellation of Warrant. This Warrant shall be canceled upon the
earlier of its Exercise and the expiration date, and, as soon as practical
after the Date of Exercise, the Holder hereof shall be entitled to receive
Common Stock for the number of shares purchased upon such Exercise, and if this
Warrant is not exercised in full, the Holder shall be entitled to receive a new
Warrant or Warrants (containing terms identical to this Warrant) representing
any unexercised portion of this Warrant in addition to such Common Stock.
(d) Holder of Record. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to have become the
Holder of record of such shares on the Date of Exercise of this Warrant,
irrespective of the date of delivery of such shares of Common Stock. Nothing
in this Warrant shall be construed as conferring upon the Holder hereof any
rights as a shareholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price ("Exercise Price") shall equal $2.50.
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price on the OTC Bulletin Board, the National Association of
Securities Dealers Automated Quotation System ("Nasdaq"), National Market
System ("NMS") or the Nasdaq Small Cap Market, or if no longer traded on the
OTC Bulletin Board, the NMS or the Nasdaq Small Cap Market, the closing price
on the principal national securities exchange or the over-the-counter system on
which the Common Stock is so traded and, if not available, the mean of the high
and low prices on the principal national securities exchange or the National
Securities Exchange on which the Common Stock is so traded.
Payment of the Exercise Price may be made by either of the following,
or a combination thereof, at the election of Holder:
(a) Cash Exercise: cash, bank or cashiers check or wire transfer; or
(b) Cashless Exercise: surrender of this Warrant at the principal
office of the Company together with notice of cashless election, in which event
the Company shall issue Holder a number of shares of Common Stock computed
using the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is
being exercised.
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<PAGE> 3
A = the Market Price of one (1) share of Common Stock (for
purposes of this Section 3(b), the "Market Price" shall be
defined as the average closing price of the Common Stock for
the five (5) trading days prior to the Date of Exercise of
this Warrant (the "Average Closing Price"), as reported by
Nasdaq or if the Common Stock is not traded on Nasdaq, the
Average Closing Price in the over-the-counter market;
provided, however, that if the Common Stock is listed on a
stock exchange, the Market Price shall be the Average Closing
Price on such exchange. If the Common Stock is/was not traded
during the five (5) trading days prior to the Date of
Exercise, then the closing price for the last publicly traded
day shall be deemed to be the closing price for any and all
(if applicable) days during such five (5) trading day period.
B = the Exercise Price.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon exercise of
this Warrant in a cashless exercise transaction shall be deemed to have been
acquired at the time this Warrant was issued. Moreover, it is intended,
understood and acknowledged that the holding period for the Common Stock
issuable upon exercise of this Warrant in a cashless exercise transaction shall
be deemed to have commenced on the date this Warrant was issued.
4. Transfer and Registration.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender
and, as soon as practicable thereafter, the person to whom such transfer is
made shall be entitled to receive a new Warrant or Warrants as to the portion
of this Warrant transferred, and the Holder of this Warrant shall be entitled
to receive a new Warrant or Warrants as to the portion hereof retained.
(b) Registrable Securities. The Common Stock issuable upon the
exercise of this Warrant constitute "Registrable Securities" under that certain
Registration Rights Agreement dated on or about February 25, 1998 by and
between the Company and Swartz Investments, LLC and, accordingly, has the
benefit of the registration rights pursuant to that agreement.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a
dividend payable in shares of Common Stock, then the Holder hereof, upon
Exercise of this Warrant after the record date for the determination of Holders
of Common Stock entitled to receive such dividend, shall be entitled to receive
upon Exercise of this Warrant, in addition to the number of shares of Common
Stock as to which this Warrant is Exercised, such additional shares of Common
Stock as such Holder would have received had this Warrant been Exercised
immediately prior to such record date and the Exercise Price will be
proportionately adjusted.
(b) Recapitalization or Reclassification. If the Company shall at
any time effect a recapitalization, reclassification or other similar
transaction of such character that the shares of Common Stock shall be changed
into or become exchangeable for a larger or smaller number of shares, then upon
the effective date thereof, the number of shares of
3
<PAGE> 4
Common Stock which the Holder hereof shall be entitled to purchase upon
Exercise of this Warrant shall be increased or decreased, as the case may be,
in direct proportion to the increase or decrease in the number of shares of
Common Stock by reason of such recapitalization, reclassification or similar
transaction, and the Exercise Price shall be, in the case of an increase in the
number of shares, proportionally decreased and, in the case of decrease in the
number of shares, proportionally increased. The Company shall give the Warrant
Holder the same notice it provides to holders of Common Stock of any
transaction described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute to
Holders of Common Stock cash, evidences of indebtedness or other securities or
assets (other than cash dividends or distributions payable out of earned
surplus or net profits for the current or preceding year) then, in any such
case, the Holder of this Warrant shall be entitled to receive, upon exercise of
this Warrant, with respect to each share of Common Stock issuable upon such
Exercise, the amount of cash or evidences of indebtedness or other securities
or assets which such Holder would have been entitled to receive with respect to
each such share of Common Stock as a result of the happening of such event had
this Warrant been Exercised immediately prior to the record date or other date
fixing shareholders to be affected by such event (the "Determination Date") or,
in lieu thereof, if the Board of Directors of the Company should so determine
at the time of such distribution, a reduced Exercise Price determined by
multiplying the Exercise Price on the Determination Date by a fraction, the
numerator of which is the result of such Exercise Price reduced by the value of
such distribution applicable to one share of Common Stock (such value to be
determined by the Board in its discretion) and the denominator of which is such
Exercise Price.
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities or other assets of the Company or
another entity or there is a sale of all or substantially all the Company's
assets (a "Corporate Change"), then this Warrant shall be assumed by the
acquiring entity or any affiliate thereof and thereafter this Warrant shall be
exerciseable into such class and type of securities or other assets as the
Holder would have received had the Holder exercised this Warrant immediately
prior to such Corporate Change; provided, however, that Company may not affect
any Corporate Change unless it first shall have given twenty (20) business days
notice to the Holder hereof of any Corporate Change.
(e) Exercise Price Adjusted. As used in this Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in Section 3
of this Warrant, until the occurrence of an event stated in subsection (a), (b)
or (c) of this Section 5 and thereafter shall mean said price as adjusted from
time to time in accordance with the provisions of said subsection. No such
adjustment under this Section 5 shall be made unless such adjustment would
change the Exercise Price at the time by $.01 or more; provided, however, that
all adjustments not so made shall be deferred and made when the aggregate
thereof would change the Exercise Price at the time by $.001 or more. No
adjustment made pursuant to any provision of this Section 5 shall have the
effect of increasing the total consideration payable upon Exercise of this
Warrant in respect of all the Common Stock as to which this Warrant may be
exercised. Notwithstanding anything to the contrary contained herein, the
Exercise Price shall not be reduced to an amount below the par value of the
Common Stock.
(f) Adjustments: Additional Shares, Securities or Assets. In the
event that at any time, as a result of an adjustment made pursuant to this
Section 5, the Holder of this
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<PAGE> 5
Warrant shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. Fractional Interests.
No fractional shares or scrip representing fractional shares
shall be issuable upon the Exercise of this Warrant, but on Exercise of this
Warrant, the Holder hereof may purchase only a whole number of shares of Common
Stock. If, on Exercise of this Warrant, the Holder hereof would be entitled to
a fractional share of Common Stock or a right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion shall be the next higher number
of shares.
7. Reservation of Shares.
The Company shall at all times reserve for issuance such
number of authorized and unissued shares of Common Stock (or other securities
substituted therefor as herein above provided) as shall be sufficient for
Exercise and payment of the Exercise Price of this Warrant. The Company
covenants and agrees that upon Exercise of this Warrant, all shares of Common
Stock issuable upon such Exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to preemptive rights, rights of first refusal or
similar rights of any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant and the
Common Stock issuable on Exercise hereof have not been registered under the
Securities Act of 1933, as amended, and may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of in the absence of registration
or the availability of an exemption from registration under said Act. All
shares of Common Stock issued upon Exercise of this Warrant shall bear an
appropriate legend to such effect, if applicable.
(b) Assignment. Assuming the conditions of (a) above
regarding registration or exemption have been satisfied, the Holder may sell,
transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in
part. Holder shall deliver a written notice to Company, substantially in the
form of the Assignment attached hereto as Exhibit B, indicating the person or
persons to whom the Warrant shall be assigned and the respective number of
warrants to be assigned to each assignee. The Company shall effect the
assignment within ten days, and shall deliver to the assignee(s) designated by
Holder a Warrant or Warrants of like tenor and terms for the appropriate number
of shares.
(c) Investment Intent. The Warrant and Common Stock issuable
upon conversion are intended to be held for investment purposes and not with an
intent to distribution, as defined in the Act.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any
person other than the Company and the Holder of this Warrant any legal or
equitable right, remedy or
5
<PAGE> 6
claim under this Warrant and this Warrant shall be for the sole and exclusive
benefit of the Company and the Holder of this Warrant.
10. Applicable Law.
This Warrant is issued under and shall for all purposes be
governed by and construed in accordance with the laws of the state of Delaware,
without giving effect to conflict of law provisions thereof.
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by the Holder
of this Warrant to or on the Company shall be sufficiently given or made if
sent by certified or registered mail, return receipt requested, postage
prepaid, and addressed, until another address is designated in writing by the
Company, Aureal Semiconductor Inc., 4245 Technology Dr., Fremont, CA 94538,
Attention: David J. Domeier, Vice President Finance/CFO , Telephone No. (510)
252-4245, Telecopy No. (510) 252-4491. Notices or demands pursuant to this
Warrant to be given or made by the Company to or on the Holder of this Warrant
shall be sufficiently given or made if sent by certified or registered mail,
return receipt requested, postage prepaid, and addressed, Attn: Holder,
address: c/o Swartz Investments, LLC, 200 Roswell Summit, Suite 285, 1080
Holcomb Bridge Road, Roswell, Georgia 30076, until another address is
designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
26 day of February, 1998.
AUREAL SEMICONDUCTOR INC.
By: [SIG]
----------------------------------------
Print Name: KENNETH A. KOKINAKIS
-------------------------------
Title: PRESIDENT & CEO
-------------------------------------
6
