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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): February 19, 1998
ANCOR COMMUNICATIONS, INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 1-2982 41-1569659
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
6130 Blue Circle Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 932-4000
Not Applicable
(Former name or former address, if changed since last report.)
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Item 5. Other Events
On February 19, 1998, Ancor Communications, Incorporated (the "Company")
completed the sale in a private placement of $11,000,000 of Series C Convertible
Preferred Stock. The Series C Preferred Stock is convertible into common stock
of the Company as of specified dates and automatically converts into common
stock in February 2001 at a conversion price based on a defined formula. The
foregoing information is a summary only and is qualified in its entirety by the
information contained in the documents filed as exhibits to this Form 8-K.
The Company intends to use the proceeds from its offering to continue
market and product development efforts, as well as general working capital.
Item 7. Financial Statements and Exhibits
(c) Exhibits
4.1 Form of Subscription Agreement, dated as of February 19,
1998 (the "Subscription Agreement"), between Ancor
Communications, Incorporated (the "Company") and each
purchaser
4.2 Registration Rights Agreement, dated as of February 19,
1998, by and between the Company, the placement agent and
each purchaser
4.3 Certificate of Designation of Series C Preferred Stock of
Ancor Communications, Incorporated
4.4 Specimen Certificate, Series C Preferred Stock
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
ANCOR COMMUNICATIONS, INCORPORATED
Date: February 23, 1998
By /s/ Steven E. Snyder
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Steven E. Snyder
Chief Financial Officer
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EXHIBIT INDEX
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Exhibit Description of Exhibit
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4.1 Form of Subscription Agreement, dated as of February 19, 1998
(the "Subscription Agreement"), between Ancor Communications,
Incorporated (the "Company") and each purchaser
4.2 Registration Rights Agreement, dated as of February 19, 1998, by
and between the Company, the placement agent and each purchaser
4.3 Certificate of Designation of Series C Preferred Stock of Ancor
Communications, Incorporated
4.4 Specimen Certificate, Series C Preferred Stock
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ANCOR COMMUNICATIONS, INCORPORATED
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 THE FEDERAL
AND STATE 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
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY 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 19th day of February, 1998, by and between Ancor Communications,
Incorporated, a corporation duly incorporated and existing under the laws of the
State of Minnesota (the "Company"), and the undersigned subscriber executing
this Agreement ("Subscriber").
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 C Preferred Stock, $.01
par value (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 ten (4) shares ($40,000), and
increments of one (1) share ($10,000) in excess thereof, with a minimum
aggregate offering amount of Eight Hundred (800) shares of Preferred Stock, or
Eight
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Million Dollars ($8,000,000) (the "Minimum Amount"), and up to a maximum
aggregate amount of Eleven Hundred (1,100) shares of Preferred Stock, or Eleven
Million Dollars ($11,000,000) (the "Maximum Amount") (collectively, the
"Offering"). The terms of the Preferred Stock, including the terms on which the
Preferred Stock may be converted into common stock, $.01 par value, of the
Company (the "Common Stock"), are set forth in the Certificate of Designation of
Series C Preferred Stock (the "Certificate of Designation"), in the form
attached hereto as Exhibit A. The solicitation of this subscription and, if
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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
"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
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Fees.
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Subject to satisfaction of the conditions to closing set forth in Section 1.2
below, Subscriber hereby agrees 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. 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, full payment for the Preferred Stock subscribed
for shall have been made by Subscriber, and the conditions to Subscriber's
obligations set forth in Section 1.2 have been satisfied.
The parties hereto acknowledge that Dunwoody Brokerage Services, Inc. is acting
as placement agent (the "Placement Agent") for this Offering and will be
compensated by the Company in cash and warrants to purchase Common Stock of the
Company pursuant to the terms of a Placement Agent Agreement between the Company
and the Placement Agent (the "Placement Agent Agreement"). 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.
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 received by the
Subscriber: (i) the Registration Rights Agreement, in the form
attached hereto as Exhibit B (the "Registration Rights
---------
Agreement") (executed by the Company), (ii)
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an opinion of counsel, substantially in the form attached hereto
as Exhibit C (the "Opinion of Counsel") (signed by the Company's
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counsel), (iii) [intentionally omitted], (iv) the Certificate of
Designation, in the form attached hereto as Exhibit A (together
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with evidence that it has been filed with the Secretary of State
of Minnesota); (v) certificates representing the Preferred Stock
for which the Subscriber has subscribed issued in the name of the
Subscriber; and (vi) a secretary's certificate, as to (A) the
resolutions of the Company's board of directors authorizing this
transaction, (B) the Company's Articles of Incorporation, and (C)
the Company's Bylaws;
(b) the Company's Common Stock shall be listed for and actively
trading on the Nasdaq Small Cap Market;
(c) other than as described in the Disclosure Documents (as
described in Section 2.2.4), as of the Closing 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 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 at the Closing as if made on such date and the
conditions to Subscriber's obligations set forth in this Section
1.2 are satisfied as of the Closing, and the Company shall
deliver a certificate, signed by an officer of the Company, to
such effect to the Subscriber;
(e) [intentionally omitted]
(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 Two Million Six Hundred Fifty Thousand (2,650,000) shares.
2. Representations, Warranties and Covenants of Subscriber. Subscriber
hereby represents and warrants to and agrees with the Company as follows:
2.1 Accredited Investor. Subscriber is an accredited investor, as
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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
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Investigation.
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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 and to obtain any
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additional information which Subscriber or Subscriber's professional advisor
deems necessary concerning the terms and conditions of this Offering, the
Company and its business and prospects.
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 of the foregoing,
within the meaning of Section 15 of the Acts for any tax or legal advice (other
than reliance on information in the Disclosure Documents as defined in Section
2.2.4 and on the Opinion of Counsel).
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 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 31, 1996 (ii) the
Company's quarterly reports on Form 10-Q for the quarters ended March 31, June
30 and September 30, 1997, (iii) the Risk Factors, attached as Exhibit E, (iv)
---------
the Capitalization Schedule, attached as Exhibit F, (the "Capitalization
---------
Schedule"), (v) the Use of Proceeds Schedule, attached as Exhibit G, (the "Use
---------
of Proceeds Schedule"), and (vi) the draft press release and related financial
information with respect to the Company's 1997 fiscal year end earnings attached
as Exhibit X (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 and is designated in writing by
the Company as a Disclosure Document (the documents described in 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 contained in the Disclosure Documents or incorporated herein or
therein. 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 or Swartz Investments, LLC, in making the decision to
invest.
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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.
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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 limits on Subscriber's ability to sell or dispose of
the Securities and, therefore, that Subscriber may be required to 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. 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 registration
statement or an exemption from registration under the Act, except as otherwise
limited or required by Section 5(a) of the Certificate of Designation and
Section 6 of the Registration Rights Agreement.
2.3.2 [Intentionally Omitted]
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 exempt
from the registration requirements of the federal securities laws 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 sell,
transfer, assign, pledge (except for any limited pledge in connection with a
margin account of Subscriber to the extent that such pledge does not require
registration under the Act or unless an exemption from such registration is
available) and provided further that if such pledge is realized upon, any
transfer to the pledgee shall comply
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with the requirements set forth herein), or otherwise dispose of all or any
portion of the Securities unless and until:
(a) There is then in effect a registration statement under the
Act and any applicable state securities laws 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 or state
securities laws. It is agreed that the Company will not require the
Subscriber to provide opinions of counsel for transactions made
pursuant to Rule 144 provided that Subscriber and Subscriber's broker,
if necessary, provide the Company with the necessary representations
for counsel to the Company to issue an opinion with respect to such
transaction.
2.4 Due Authorization.
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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 or she resides.
2.4.2 Due Authorization. If Subscriber is a corporation,
Subscriber is duly and validly organized, validly existing and in good 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 [Intentionally Omitted]
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 the
Disclosure Documents, this Agreement and the exhibits
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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 (except for any limited pledge in connection
with a margin account of Subscriber to the extent that such pledge does not
require registration under the Act or unless an exemption from such registration
is available and provided further that if such pledge is realized upon, any
transfer to the pledgee shall comply with the requirements set forth herein)
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 [Intentionally Omitted].
-----------------------
3.5 No Assurances of Registration. There can be no assurance that
-----------------------------
any registration statement will become effective at the scheduled time, or ever.
Subscriber acknowledges that it may be required to 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
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Preferred Stock, and the Conversion Shares, subject to legend removal under the
terms of Section 5.9 below, shall bear the following legend (the "Legend"):
"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 an exemption therefrom."
3.8 Missouri Representation. If a Missouri resident, I hereby
-----------------------
represent that (i) I understand that the Securities are not registered under the
Missouri Securities Act and may be disposed of only through a licensed broker-
dealer and (ii) I have been advised that it is a felony to sell securities in
violation of the Missouri Securities Act.
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4. Representations and Warranties of the Company . The Company hereby
makes the following representations and warranties to Subscriber (which shall be
true at the signing of this Agreement and as of Closing) and agrees with
Subscriber that:
4.1 Organization, Good Standing, and Qualification. The Company is a
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corporation duly incorporated, validly existing and in good standing under the
laws of the State of Minnesota, 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, the Securities and Exchange Commission ("SEC"), The
National Association of Securities Dealers, Inc., The Nasdaq Stock Market, Inc.
or any state securities commission, or any other governmental entity, which have
not been disclosed in the Disclosure Documents. The Company does not have any
subsidiaries.
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 in the Company's business, prospects or financial condition
since September 30, 1997, including but not limited to incurring material
liabilities, of which any officer of the Company is aware of or should be aware
of after due inquiry. 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 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 or its officers and directors in their capacity
as such, except as disclosed in the Disclosure Documents. 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 necessary to make the
statements contained therein 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, would require disclosure in a registration
statement for the primary issuance by the Company of its Common Stock but which
has not been so publicly announced or disclosed.
4.3 Authorization. Except for the filing of the Certificate of
-------------
Designation, 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
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of the Company hereunder and the authorization, issuance and delivery of the
Preferred Stock being sold hereunder and the issuance (and the reservation for
issuance) of the Conversion Shares have been taken, and this Agreement, the
Certificate of Designation, the Irrevocable Instructions to Transfer Agent, 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
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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 and of the Placement Agent in the Placement Agent Agreement,
will be issued in compliance with all applicable 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 in this Agreement and of the
Placement Agent in the Placement Agent Agreement, 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 Two Million Six Hundred Fifty Thousand (2,650,000)
Conversion Shares 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 Articles of Incorporation or
Bylaws each as amended, and in effect on and as of the date of this Agreement or
of any provision of any instrument or contract to which it is a party or by
which it is bound or 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 effect on the Company's business or
prospects, or on the performance of its obligations under this Agreement, the
Registration Rights Agreement, the Certificate of Designation and the
Irrevocable Instructions to Transfer Agent, 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 and thereby will not (a)
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, which would
have a material adverse effect on the Company's business or prospects, or on the
performance of its obligations under this Agreement, the Registration Rights
Agreement, the Certificate of Designation and the Irrevocable Instructions to
Transfer Agent, except as described in the Disclosure Documents, (b) violate the
Company's Articles of Incorporation or By-Laws or (c) violate any statute, rule
or governmental regulation applicable to the Company which violation would have
a material adverse effect on the Company's business or prospects.
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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 the date the Company first became subject to such reporting
obligations. The Company is not in violation of the listing requirements of the
Nasdaq Small Cap Market.
4.7 Capitalization. The capitalization of the Company as of
--------------
September 30 1997, is, and the pro forma capitalization as of such date, 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.
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There are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Securities.
As of February 17, 1998, the Company's authorized capital stock consisted
of 20,000,000 shares of Common Stock, of which 11,918,226 shares are issued and
outstanding and 5,409,851 shares were reserved for future issuance and 5,000,000
shares of preferred stock, of which 1,100 have been designated as Series A
Preferred Stock, none of which are outstanding, 900 of which have previously
been designated as Series B Preferred Stock, 440 of which are outstanding and,
upon filing of the Certificate of Designations with the Minnesota Secretary of
State on the date of the Closing, 1,100 of which will be designated as Series C
Preferred Stock and the remaining 4,996,900 shares are undesignated as to
series.
4.8 Intellectual Property. The Company has valid, unrestricted and
---------------------
exclusive ownership of or rights to use the patents, trademarks, trademark
registrations, trade names, copyrights, know-how, technology and other
intellectual property necessary to the conduct of its business. Section A of
Exhibit H lists all patents, trademarks, trademark registrations, trade names
- ---------
and copyrights of the Company. 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 Section B of Exhibit H.
---------
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
Section C Exhibit H. To the best of the Company's knowledge after due inquiry,
---------
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
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 net 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. The
Company will not use in excess of $1,000,000 of the proceeds of this Offering to
acquire any entity or the assets of any business prior to December 31, 1998.
10
<PAGE>
4.10 No Rights of Participation. No person or entity, including, but
--------------------------
not limited to, current or former shareholders 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 an indefinite period 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. There shall only be one Closing
----------------------------
of the purchase and sale of the Preferred Stock and the date of such Closing
shall be referred to as the ("Last Closing Date").
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 Availability of Form S-3. The Company is currently eligible and
------------------------
agrees to maintain its eligibility 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 or would require the issuance of any other securities
to be integrated with this Offering under the Rules of Nasdaq. The Company has
not engaged in any form of general solicitation or advertising in connection
with the offering of Series C 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 in which the trading price of
the Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the Securities being sold hereunder
and recognize 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 shareholders.
11
<PAGE>
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 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 unlawful 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, or is
now expected to be, 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,
any intention to terminate his employment with, or services to, the Company.
"Key Employee" means each of Ken Hendrickson, Chief Executive Officer, Calvin G.
Nelson, President, and Steven E. Snyder, Chief Financial Officer.
4.19 Tax Status. The Company has made or filed all federal and state
----------
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and as set aside on its books provision reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.
4.20 Transactions With Affiliates. Except as set forth in the
----------------------------
Disclosure Documents, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
4.21 Application of Takeover Protections. The Company and its board
-----------------------------------
of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under Minnesota law which is or could become
applicable to the Subscriber as a result of the transactions contemplated
12
<PAGE>
by this Agreement, including, without limitation, the issuance of the Preferred
Stock and any conversions of the Preferred Stock and ownership of the Conversion
Shares.
4.22 Other Agreements. The Company has not, directly or indirectly,
----------------
made any agreements with the Subscriber, or any other subscriber under a
subscription in the form of this Agreement for the purchase of Preferred Stock,
relating to the terms or conditions of the transactions contemplated hereby or
thereby except as expressly set forth herein or therein, respectively, or in
exhibits hereto or thereto.
5. Covenants of the Company
5.1 Independent Auditors. The Company shall, until at least three
--------------------
(3) years after the Last Closing Date, 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 Last Closing Date 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 Issuer" (defined as a Company which files periodic
reports under the Exchange Act) (provided, however, that the foregoing covenant
shall not prevent the Company from entering into any merger or corporate
reorganization as long as the surviving entity in such transaction, if not the
Company, assumes the Company's obligations with respect to the Preferred Stock
and has Common Stock listed for trading on a stock exchange or on Nasdaq and is
a Reporting Issuer) 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 in the form of the
Registration Rights Agreement attached as Exhibit B.
---------
5.4 Notification of Last Closing Date by Company. Within thirty-five
--------------------------------------------
(35) business days after the Last Closing Date, the Company shall notify
Subscriber in writing of the dates that Subscriber is entitled to convert
Subscriber's Preferred Stock, the value of the First Year Maximum 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 the
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 a cash or cash equivalent consideration and for a proper business
purpose, while any shares of the Preferred Stock are outstanding without the
consent of the holders of 75% of the outstanding Preferred Stock.
13
<PAGE>
5.6 Capital Raising Limitations; Rights of First Refusal.
----------------------------------------------------
5.6.1 Capital Raising Limitations. The Company shall not issue
or sell, or agree to issue or sell, any debt or equity securities (or any
security convertible into or exercisable or exchangeable, directly or
indirectly, for equity or debt securities of the Company) for a period beginning
on the date hereof and ending Two Hundred and Forty (240) days after the Last
Closing Date without obtaining the prior written approval of Subscribers holding
a majority of the purchase price of Preferred Stock then outstanding (the
"Future Offerings Lock Up").
5.6.2 Right of First Offer. The Company agrees that, during the
period beginning on the date hereof and terminating one year following the Last
Closing Date, the Company will not, without the prior written consent of each
Subscriber (which shall be deemed given for the warrants to purchase Common
Stock issued or to be issued to the Placement Agent in consideration of its
services in connection with this Agreement and the transactions contemplated
hereby) issue or sell, or agree to issue or sell any equity or debt securities
of the Company (or any security convertible into or exercisable or exchangeable,
directly or indirectly, for equity or debt securities of the Company) ("Future
Offerings") unless the Company shall have first delivered 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
for such ten (10) business day period following delivery of such notice to
purchase up to the amount of the securities, as designated in Section 5.6.3
below, being offered in the Future Offering 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 First Refusal. The amount
of securities which a Subscriber is entitled to purchase in such a Future
Offering shall be 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 Future
Offerings Lock Up and Capital Raising Limitations shall not apply to any
transaction involving issuances of securities as consideration for a merger,
consolidation, acquisition or purchase of assets, or, in connection with any of
the foregoing transactions with an industry partner (a "Strategic Alliance"), 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; provided, however, that no registration statement covering the resale
of Common Stock issued in connection with a Strategic Alliance, or upon
conversion, exercise or exchange of securities issued in connection with such
transactions, shall be declared effective prior to the date that is one year
after the Last Closing Date. The Capital Raising Limitations also shall not
apply to (a) the issuance of securities pursuant to a firm commitment
underwritten public offering, (b) the issuance of securities upon exercise or
conversion of the Company's options, warrants or other convertible
14
<PAGE>
securities outstanding as of the date hereof, (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, or (d) the issuance of debt securities,
with no equity feature, incurred solely for working capital purposes.
5.7 Financial 10-K Statements, Etc. and Current Reports on Form 8-K.
---------------------------------------------------------------
The Company shall make available, upon request, to the holders of the Preferred
Stock copies of its annual reports on Form 10-K, and quarterly reports on Form
10-Q and shall deliver to the Subscriber current reports on form 8-K within two
(2) days of filing for as long as the Preferred Stock may remain outstanding.
The Company shall file a current report on form 8-K disclosing the terms of this
Offering and the Securities within two (2) business days of the date of Closing.
5.8 Opinion of Counsel. Subscribers shall, concurrent with the
------------------
purchase of the Preferred Stock pursuant to this Agreement, receive an opinion
letter from Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth
Street, Minneapolis, MN 55402, Telephone (612) 340-2600 ("Counsel"), counsel to
the Company, in the form attached as Exhibit C.
---------
5.9 Removal of Legend Upon Conversion. Conversion Shares shall be
---------------------------------
issued to transferees thereof without restrictive legend upon the terms set
forth in the Irrevocable Instructions to Transfer Agent. The Company will, or
will instruct the Transfer Agent to, remove the restrictive legend from
Conversion Shares provided the Conversion Shares are eligible for resale
pursuant to Rule 144(k) and the Holder thereof makes the representations
necessary for counsel to the Company to issue a legal opinion to that effect.
5.10 Listing. The Company shall (i) continue the listing and trading
-------
of its Common Stock on the Nasdaq Small Cap Market ("Nasdaq"), or on the Nasdaq
National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or the
American Stock Exchange ("AMEX"); and (ii) comply in all material 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
--------------------------------------------
shall use its best efforts to, within ten (10) business days of the Last Closing
Date, enter into an agreement with the Company's transfer agent (the "Transfer
Agent") substantially in the form attached hereto as Exhibit D (the "Irrevocable
---------
Instructions to Transfer Agent"), with such modifications as are necessary to
reflect the terms of this Offering and the Certificate of Designations. The
Company will issue to its Transfer Agent the Irrevocable Instructions to
Transfer Agent 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 upon the terms
and conditions set forth in Section 5.9 above. The Company warrants that no
instruction, other than such instructions referred to in Section 5.9 hereof will
be given by the Company to its Transfer Agent with respect to the Preferred
Stock or the Conversion Shares. 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
15
<PAGE>
to deliver a prospectus in connection with such sale or in compliance with an
exemption from the registration requirements of applicable securities laws. The
Company hereby agrees that it will not unilaterally terminate its relationship
with the Transfer Agent for any reason prior to the date which is three (3)
years and one month after the Last Closing Date or one (1) month after the first
date that no Preferred Stock is outstanding, whichever is earlier (the "Ending
Date") without the consent of the holders of 75% in interest of the then
outstanding Preferred Stock. In the event the Company's agency relationship
with the Transfer Agent should be terminated for any other reason prior to the
date which is three (3) years after the Last Closing Date, 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; (ii) is approved by seventy-five
percent (75%) of the Subscribers of outstanding Preferred Stock; and (iii)
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.
----------------------------------------------------------------
The 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.
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 in a form acceptable to the Company and provides an original copy of
such acknowledgment to the Company.
6.3 Governing Law; Jurisdiction; Jury Trial. This Agreement shall be
---------------------------------------
governed by and construed under the laws of the State of New York without regard
to conflict of laws principles. Each party to this Agreement hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or
16
<PAGE>
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR
ANY TRANSACTION CONTEMPLATED HEREBY.
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 or upon receipt if by overnight or 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.
6.7 Expenses. Except as set forth in Section 8 hereof and Section 9
--------
of the Registration Rights Agreement, 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 [Intentionally Omitted]
6.10 [Intentionally Omitted]
17
<PAGE>
6.11 Limitations on Shorting. Subscribers hereby covenants and
-----------------------
agrees that (i) during the thirty (30) trading days following the Last Closing
Date, and (ii) during the five (5) consecutive Wednesdays immediately preceding
the date that is one (1) year after the date of the Last Closing Date,
Subscriber will not enter into a short sale within the meaning of Rule 3b-3 of
the Exchange Act with respect to the Common Stock of the Company; provided,
however, that nothing herein shall limit the rights of a holder of Series B
Preferred Stock to sell shares of Common Stock received or to be received upon
conversion of Series B Preferred Stock provided that the Notice of Conversion
(as defined in the Certificate of Designation) is delivered by the end of the
first business day following such sale.
7.1 [Intentionally omitted]
7.2 [Intentionally omitted]
7.3 [Intentionally omitted]
8. Indemnification.
In consideration of each Buyer's execution and delivery of the Subscription
Agreement, Registration Rights Agreement, Irrevocable Instructions to Transfer
Agent (the "Transaction Documents") and acquiring the Securities thereunder and
in addition to all of the Company's other obligations under the Transaction
Documents and the Certificate of Designations, the company shall defend,
protect, indemnify and hold harmless Subscriber and all of its stockholders,
officers, directors, employees and direct or indirect investors and any of the
foregoing person's agents, members, partners or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorney's fees and disbursements (the "Indemnified Liabilities"), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
documents contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
the Certificate of Designations or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim,
derivative or otherwise, by any shareholder of the Company based on a breach or
alleged breach by the Company or any of its officers or directors of their
fiduciary or other obligations to the shareholders of the Company.
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which it
would be required to make if such foregoing undertaking was enforceable which is
permissible under applicable law.
18
<PAGE>
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 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
19
<PAGE>
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.
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]
20
<PAGE>
10. Number of Shares and Purchase Price. 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, limited duration
company, limited liability company, 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]__________________________________________________
21
<PAGE>
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 Street Address
(if applicable)
_______________________________ ___________________________________________
Place of Execution of this City, State or Province, Country,
Agreement Offshore Postal Code
___________________________________________
Phone Number (For Federal Express)
and Fax Number (re: Notice)
WITH A COPY TO:
-
Please type or print address where copies are to be delivered
ATTN.:____________________________________________
__________________________________________________
Street Address
__________________________________________________
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.
Ancor Communications, Incorporated
By:________________________________
Name:______________________________
Title:_______________________________
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
February 19, 1998, by and among Ancor Communications, Incorporated, a
corporation duly incorporated and existing under the laws of the State of
Minnesota ("Company"), Dunwoody Brokerage Services, Inc. ("Dunwoody"), a Georgia
limited liability company, and the subscribers (hereinafter referred to as
"Subscribers") to the Company's Offering ("Offering") of up to Eleven Million
Dollars ($11,000,000) of Series C Preferred Stock (the "Preferred Stock")
pursuant to the Regulation D Subscription Agreements between the Company and
each of the Subscribers ("Subscription Agreements").
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"), issuable or issued upon (i) conversion of the Preferred
Stock, and (ii) exercise of the Warrants to purchase Common stock issued to
Dunwoody in connection with the Offering (the "Placement Agent Warrants", also
referred to as the "Warrants"), by Dunwoody or any subsequent Holder of the
Warrant or portion thereof.
Notwithstanding the above:
1. Common Stock which would otherwise be deemed to be Registrable
Securities shall not constitute Registrable Securities if and to the
extent that those shares of Common Stock may be resold in a public
transaction pursuant to Rule 144(k) 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 Preferred Stock 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;
1
<PAGE>
(e) The term "Filing Date" means the date which is twenty (20) days
after the Last Closing Date (as defined in the Certificate of Designation of the
Series C Preferred Stock) and the term "Due Date" means the date which is ninety
(90) days after such Last Closing Date.
2. REQUIRED REGISTRATION.
---------------------
(a) The Company shall use its best efforts to file, by the Filing
Date, 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 the Holders), covering no more than 120,000 shares for holders of
piggyback rights at the time of this Agreement, other than in connection with
the Series B Preferred Stock, plus covering the resale of all of the Registrable
Securities, which Registration Statement, to the extent allowable under the
Securities Act and the Rules promulgated thereunder (including Rule 416), shall
state that such Registration Statement also covers such indeterminate number of
additional shares of Common Stock as may become issuable upon conversion of the
Preferred Stock and the exercise of the Warrants (i) to prevent dilution
resulting from stock splits, stock dividends or similar transactions or (ii) by
reason of changes in the conversion price of the Preferred Stock or the exercise
price of the Warrants in accordance with the terms thereof, as the case may be.
Such Registration Statement shall initially cover the number of shares issuable
upon exercise of the Warrants plus at least Two Million Six Hundred Fifty
Thousand (2,650,000) shares of 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 is notified at any time by a Holder of
Registrable Securities relating to the Preferred Stock ("Registrable Conversion
Shares") 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 at least (i) one hundred fifty percent (150%) of the number of
shares of Common Stock issuable to such Holder upon conversion of all of such
Holder's outstanding Preferred Stock (without regard to any limitations on
conversions) for any five (5) business days out of any thirty (30) consecutive
business days or (ii) one hundred and twenty-five percent (125%) of the number
of shares of Common Stock issuable to such Holder upon conversion of all of such
Holder's outstanding Preferred Stock (without regard to any limitations on
conversions) for any two (2) consecutive business days (a "Registration
Shortfall"), the Company shall, within seven (7) 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 two hundred percent (200%) of the
number of shares of Common Stock issuable to each Holder upon conversion of all
outstanding Preferred Stock (without regard to any limitations on conversions).
If for any reason or for no reason (including by exercise of the Company's
rights pursuant to Section 6 hereof), the Registration Statement is not declared
effective under the Securities Act on or prior to the Due Date or is not
available for resales of all Registrable Securities at anytime thereafter
("Registration Failure Period"), the Company shall make payments to each Holder
("Registration Failure Payments") which shall accrue at the rate of 2% per
month, accruing daily, on each Holder's "Illiquid Amount", as defined below, for
the first 30 days of such Registration Failure Period and 3% per month, accruing
daily, on the Illiquid Amount, for the remainder of such Registration Failure
Period, payable (i) in shares of Common Stock ("Additional Shares"), valued at
the Closing Bid Price
2
<PAGE>
(as defined in the Certificate of Designation) of the Common Stock on the
business day immediately prior to the delivery of the Additional Shares to the
extent that such Registration Failure Period occurred during the first 90 days
after the Due Date or (ii) in cash, to the extent that such Registration Failure
Period occurred following the 90th day after the Due Date, in each case payable
within 5 business days of the last day of the calendar month in which they
accrue (provided, however, that a Holder may elect to receive any cash
Registration Failure Payments in Common Stock in such Holder's sole discretion.
For purposes hereof, the Holder's "Illiquid Amount" shall mean:
the difference of (a) the aggregate Total Value (as defined in the
Certificate of Designations) of all of Holder's outstanding Preferred Stock
minus (b) if such Registration Failure Payments accrued more than 1 year
after the Last Closing Date but less than 2 years after the Last Closing
Date, the 144 Dollar Amount (as defined below). For purposes of this
Section 2(a) "144 Dollar Amount" shall mean the product of (x) 1% of the
number of shares of Common Stock outstanding as shown by the most recent
report or statement publicly released by the Company and (y) the average of
the Conversion Prices (as defined in the Certificate of Designations) on
the trading days during the Registration Failure Period with respect to
which such payments have accrued.
Notwithstanding the above, no Registration Failure Payments shall accrue
prior to the Due Date.
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.
In the event the Company is informed by the SEC that the SEC will not declare
the Registration Statement effective, or the Company's board of directors
determines in its good faith judgment that the Registration Statement can not be
made effective, Registration Failure Payments shall cease to accrue and the
Holders shall be entitled to the remedies contained in Section 12 of the
Certificate of Designation for a Triggering Event (as defined therein).
(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.
(d) Notwithstanding anything contained herein to the contrary, the
Company shall not be required to register additional shares hereunder if such
shares are not available for issuance as a result of the unavailability of
authorized but unreserved shares of Common Stock.
3
<PAGE>
(e) The initial number of Registrable Conversion Shares included in
any Registration Statement and each increase in the number of Registrable
Conversion Shares included therein shall be allocated pro rata among the Holders
of Registrable Conversion Shares based on the number of Registrable Conversion
Shares held by each Holder at the time the Registration Statement covering such
initial number of Registrable Conversion Shares or increase thereof is declared
effective by the SEC. In the event that a Holder of Registrable Conversion
Shares sells or otherwise transfers any of such person's Registrable Conversion
Shares (other than pursuant to the Registration Statement), each transferee
shall be allocated a pro rata portion of the then remaining number of
Registrable Conversion Shares included in such Registration Statement for such
transferor. Any shares of Common Stock included in a Registration Statement and
which remain allocated to any person which ceases to hold any Registrable
Securities shall be allocated to the remaining of Holders of Preferred Stock,
pro rata based on the number of Registrable Conversion Shares then held by such
Holder.
3. PIGGYBACK REGISTRATION. If the Registration Statement described
----------------------
in Section 2 is not effective 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
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
security holder 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 involving 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
4
<PAGE>
Securities which each such Holder, including Dunwoody, seeks to register bears
to the total number of Registrable Securities sought to be included by all
Holders, including Dunwoody. If required by the managing underwriter of such an
underwritten public offering, the Holders shall enter into a reasonable
agreement limiting the 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
and to remain effective for the applicable period.
(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.
5
<PAGE>
(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 promptly prepare
and file 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 within one (1) business day
of the date that a registration statement and any amendment thereto 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.
(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.
(i) Provide Holders and their representatives the opportunity to
review the registration statement and all amendments thereto a reasonable period
of time prior to their filing with the SEC if so requested by Holder in writing.
(j) Provide each Holder with prompt notice of the issuance by the SEC
or any state securities commission or agency of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceeding
for such purpose. The Company shall use its best efforts to prevent the
issuance of any stop order, and, if any is issued, to obtain the removal thereof
at the earliest possible date.
(k) Use its best efforts to list the Registrable Securities covered
by the registration statement with all securities exchanges or markets on which
the Common Stock is then listed and prepare and file any required filing with
the NASD or any such exchange or market.
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 use of the Registration Statement (a "Registration Black
Out"), and no Holder shall be permitted to sell any Registrable Securities
pursuant thereto, until such time as such suspension is no longer required
hereunder; provided, however, that such time shall not exceed a period of sixty
(60) days. As soon as such suspension is no longer required hereunder, the
Company shall, if required, promptly, but in no event later than the date the
Company files any documents with the Securities
6
<PAGE>
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 that the use of the Registration Statement is suspended
by the Company, 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 use of the Registration Statement may be
resumed. Notwithstanding anything to the contrary, the Company shall cause the
Transfer Agent to deliver unlegended shares of Common Stock to a transferee of a
Holder in accordance with the terms of the Certificate of Designation in
connection with any sale of Registrable Securities with respect to which such
Holder has entered into a contract for sale prior to receipt of notice of such
Registration Black Out and for which such Holder has not yet settled. The
Company shall be entitled to effect no more than one Registration Black Out
during any twelve (12) month 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 timely 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, directors and agents 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 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,
7
<PAGE>
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 statement 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
8
<PAGE>
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 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 Preferred Stock, 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
9
<PAGE>
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: Ancor Communications, Incorporated, Attn:
Steve Snyder, 6130 Blue Circle Drive, Minnetonka, MN 55343, Telephone No. (612)
932-4000, Facsimile No. (612) 932-4037 and (ii) the Holders at their respective
last address and facsimile number of 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. 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 the Company hereby agrees to file a
new registration statement or an amended registration statement including such
transferee or a selling security holder thereunder.
15. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York 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.
17. SPECIFIC PERFORMANCE. The Holder shall be entitled to the remedy
--------------------
of specific performance in the event of the Company's breach of this Agreement,
the parties agreeing that a remedy at law would be inadequate.
18. ENTIRE AGREEMENT. This Agreement, including the Exhibits
----------------
attached hereto, the Subscription Agreements, the Certificate of Designation,
the Placement Agent Agreement, the Placement Agent's Warrant, the Irrevocable
Instructions to Transfer Agent, the Preferred Stock certificates, 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.
10
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of this
19th day of February, 1998.
ANCOR COMMUNICATIONS, INCORPORATED
By: ________________________________
Kenneth F. Hendrickson, Chairman/CEO
Address: Ancor Communications, Inc.
6130 Blue Circle Drive
Minnetonka, MN 55343
Telephone No. (612) 932-4000
Facsimile No. (612) 932-4037
DUNWOODY BROKERAGE SERVICES,
INC.
By: ________________________________
Robert L. Hopkins, President
Address: 8309 Dunwoody Avenue
Atlanta, GA 30350
Telephone: (770) 640-0011
Facsimile: (770) 993-1324
INVESTOR(S)
___________________________________
Investor's Name
By:_________________________________
(Signature)
Address: ____________________________________
____________________________________
____________________________________
11
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES C PREFERRED STOCK
OF
ANCOR COMMUNICATIONS, INCORPORATED
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is Ancor
Communications, Incorporated, a Minnesota corporation. For purposes hereof,
references to the Company shall include any successor.
2. The articles of incorporation of the Company (the "Articles of
Incorporation") authorizes the issuance of Five Million (5,000,000) shares of
preferred stock, $.01 par value per share, One Thousand One Hundred (1,100) of
which have been previously designated as Series A Preferred Stock and Nine
Hundred (900) of which have been previously designated as Series B Preferred
Stock, 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 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 of Preferred Stock to be designated as "Series C Preferred
Stock":
RESOLVED, that One Thousand One Hundred (1,100) of the Four Million Nine
Hundred Ninety-eight Thousand (4,998,000) authorized but undesignated shares of
preferred stock of the Company shall be designated Series C Preferred Stock,
$.01 par value per share, and shall possess the rights and preferences set forth
below:
Section 1. Designation and Amount. One thousand one hundred (1,100)
----------------------
shares of the Company's authorized but undesignated preferred stock shall be
designated as Series C Preferred Stock (the "Series C Preferred Stock"), par
value $.01 per share. The Series C Preferred Stock shall have a stated value of
Ten Thousand Dollars ($10,000) per share (the "Original Series C Issue Price" or
the "Stated Value"), with an eight percent (8%) per annum accretion rate as set
forth herein.
Section 2. Rank. The Series C Preferred Stock shall rank: (i) junior to
----
any other class or series of capital stock of the Company hereafter created
specifically ranking by its terms senior to the Series C Preferred Stock
(collectively, the "Senior Securities"); (ii) prior to all of the Company's
Common Stock, $.01 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 C
Preferred Stock (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 C
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"). The Series C Preferred Stock shall rank junior to the
Company's Series A Preferred Stock and Series B Preferred Stock and shall rank
senior to the Company's Common Stock.
<PAGE>
Section 3. Dividends. The Series C Preferred Stock will bear no
---------
dividends, and the holders of the Series C Preferred Stock ("Holders") shall not
be entitled to receive dividends on the Series C Preferred Stock.
Section 4. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
the Company ("Liquidation Event"), either voluntary or involuntary, then each
Holder of shares of Series C Preferred Stock shall be entitled to receive,
immediately after any distributions to Senior Securities required by the
Company's Articles of Incorporation or any certificate of designation, and prior
in preference to any distribution to Junior Securities, but on parity with any
distribution to Parity Securities, an amount per share (the "Total Value") equal
to the sum of (i) the Original Series C Issue Price for each share of Series C
Preferred Stock held by such Holder and (ii) an amount equal to eight percent
(8%) of the Original Series C Issue Price, per annum, accruing daily, for the
period that has passed since the Last Closing Date, as defined below (such
amount in this clause (ii) being referred to herein as the "Premium"). If upon
the occurrence of such 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 all of the Holders of the Series C 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 C 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 C 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 Articles of Incorporation and any certificate(s) of
designation relating thereto.
(b) Upon the completion of the distribution required by subsection
4(a), if assets remain in this Company, they shall be distributed to holders of
Junior Securities in accordance with the Company's Articles of Incorporation
including any duly adopted certificate(s) of designation.
(c) At the Holders's option, a sale, conveyance or disposition of
all or substantially all of the assets of the Company may be treated as a
Redemption Upon Major Transaction pursuant to Section 12(a) by such Holder's
delivery of a Notice of Redemption Upon Major Transaction as provided in Section
12(e) hereof, and if such notice is not so delivered shall be treated as a
liquidation, dissolution or winding up within the meaning of this Section 4;
provided further that, a Change of Control (as such term is defined in Section
12(c)) shall not be treated as a liquidation, dissolution or winding up within
the meaning of this Section 4, but instead shall be treated pursuant to Section
5(d)(iii) hereof or Section 12 hereof, as the case may be. Within 2 business
days following the public announcement of any Change of Control, the Company
shall deliver notice thereof via facsimile to each Holder of Series C Preferred
Stock. From and after the time for such notice or earlier public announcement,
each Holder shall be entitled to immediately convert any or all of its shares of
Series C 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).
2
<PAGE>
Section 5. Conversion. The Holders of the Series C Preferred Stock shall
----------
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. The record Holder of the Series C Preferred
Stock shall be entitled to convert, subject to the conversion restrictions set
forth herein, any or all of the shares of the Series C 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's transfer agent for the Common Stock (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 one (1) share of
Series C Preferred Stock =
(.08) (N/365) (10,000) + 10,000
-------------------------------
Conversion Price
where,
. N= the number of days (inclusive) between (i) the Last Closing Date (as
defined below) and (ii) the applicable Date of Conversion (as defined in
Section 5(b)(iv) below) for the shares of Series C Preferred Stock for
which conversion is being elected, and
. Conversion Price = the lesser of (x) the "Maximum Conversion Price" (as
defined below) or (y) 100% of the "Market Conversion Price" (as defined
below) on the Date of Conversion.
. "Maximum Conversion Price": During the one (1) year period following the
Last Closing Date, "Maximum Conversion Price" shall equal the greater of
$9.00 per share and the price as defined in the schedule below (the "First
Year Maximum Conversion Price"). Anytime after the date that is one (1)
year after the Last Closing Date, "Maximum Conversion Price" shall equal
the lesser of (i) the First Year Maximum Conversion Price or (ii) the
average Closing Bid Price for the five (5) consecutive Wednesdays
immediately preceding the date that is one (1) year after the Last Closing
Date.
<TABLE>
<CAPTION>
Average Closing Bid Price for the 30
Trading Days Following the
Last Closing Date Maximum Conversion Price
----------------- ------------------------
<S> <C>
below $5.50 $ 9
$5.50 - $6.49 $10
$6.50 - $7.49 $11
$7.50 - $8.49 $12
$8.50 or over $13
</TABLE>
3
<PAGE>
. "Market Conversion Price" shall equal the average of the three (3) lowest
Closing Bid Prices (as defined below) occurring during the applicable
Pricing Period (as defined below).
. "Pricing Period" shall mean twelve (12) consecutive trading days, plus
one (1) additional consecutive trading day for each full calendar month
which has passed since the Last Closing Date, ending on the trading day
immediately preceding the Date of Conversion.
provided, however, 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 a Holder to convert into Common Stock at a Conversion Price that is
less than the average Closing Bid Price for the five (5) trading days
immediately preceding the Last Closing Date (the "Quota Closing Price")
initially shall be limited to a maximum of fifteen percent (15%) of the
aggregate principal amount of the Series C 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 at a Conversion Price that
is less than the Quota Closing Price an additional fifteen percent (15%) of the
aggregate principal amount of the Series C Preferred Stock issued to such Holder
(the number of shares that may be converted at any given time using a Conversion
Price that is less than the Quota Closing Price, in the aggregate, is referred
to hereinafter as the "Conversion Quota"); and provided, further, in the event
that the Holder elects not to convert its full Conversion Quota during any one
(1) month period, the unconverted amount shall be carried forward and continue
to constitute a portion of the Conversion Quota, and thereafter the Holder may,
from time to time, convert any portion of the Conversion Quota; and provided,
further, that unless otherwise indicated herein, beginning on the date that is
four (4) months following the Last Closing Date, the right of the Holder to
convert into Common Stock at a Conversion Price that is equal to or greater than
the Quota Closing Price, but less than the Maximum Conversion Price then in
effect initially shall be limited to a maximum of thirty percent (30%) of the
aggregate principal amount of the Series C 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 at a Conversion Price that
is equal to or greater than the Quota Closing Price but less than the Maximum
Conversion Price an additional thirty percent (30%) of the aggregate principal
amount of Series C Preferred Stock issued to such Holder (the number of shares
that may be converted at any given time using a Conversion Price that is less
than Maximum Conversion Price but greater than or equal to the Quota Closing
Price, in the aggregate, is referred to hereinafter as the "Medium Range
Conversion Quota"); and provided further, in the event that Holder elects not to
convert its full Medium Range Conversion Quota during any one month period, the
unconverted amount shall be carried forward and continue to constitute a portion
of the Medium Range Conversion Quota and thereafter the Holder may, from time to
time, convert any portion of the Medium Range Conversion Quota; and provided,
further, that 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 C Preferred Stock that may be converted into Common Stock using a
Conversion Price that is less than the Quota Closing Price; and provided,
further, that subsequent to the date that is eight (8) months following the Last
Closing Date, there shall be no restrictions on the number of shares of Series C
Preferred Stock that may be converted into Common Stock using a Conversion Price
that is less than the Maximum Conversion Price and greater than or equal to the
Quota Closing Price; and provided, further, that if the Conversion Price then in
effect is equal to or greater than the Maximum Conversion Price, a Holder can
convert one hundred percent (100%) of the Series C Preferred Stock, or any
portion thereof, into Common Stock any time on or after the date that is four
(4) months after the Last Closing Date. Notwithstanding the above, conversions
at a Conversion Price that is less than the Quota Closing Price shall count
against both the Conversion Quota and the Medium Range
4
<PAGE>
Conversion Quota, and any such conversion shall not be permissible to the extent
either such quota is exceeded thereby. A new month will be deemed to occur on
the same numeric day of the next calendar month. For example, if the Last
Closing Date were to occur on February 19, 1998, the fourth month thereafter
would being on June 19, 1998, and the fifth month thereafter would begin on July
19, 1998.
As used herein, "Last Closing Date" shall have the meaning as set forth in
the Subscription Agreements between the Company and the initial purchasers of
the Series C Preferred Stock, dated as of February 18, 1998 (each, a
"Subscription Agreement" or "Securities Purchase Agreement"). From and after
the occurrence of a Triggering Event there shall be no restrictions under this
Section 5(a) on conversions.
For purposes hereof, any Holder which acquires shares of Series C 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
C Preferred Stock acquired by such Holder from its Transferor bears to the total
number of shares of Series C Preferred Stock immediately theretofore owned by
such Transferor, or (subject to the aggregate limitation applicable to a
Transferor) as may otherwise be agreed between a Transferor and its transferee
with notice to the Company.
As used herein, "Closing Bid Price" means, for any security as of any date,
the last closing bid price for such security on The Nasdaq SmallCap Market as
reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Nasdaq
SmallCap Market is not the principal securities exchange or trading market for
such security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of a majority of the shares of Series C Preferred
Stock. If the Company and the holders of Preferred Shares are unable to agree
upon the fair market value of the Common Stock, then such dispute shall be
resolved by an investment banking firm mutually acceptable to the Company and
the holders of a majority of the shares of Series C Preferred Stock.
As used herein, "Closing Sale Price" means, for any security as of any
date, the last closing trade price for such security on The Nasdaq SmallCap
Market as reported by Bloomberg, or, if The Nasdaq SmallCap Market is not the
principal securities exchange or trading market for such security, the last
closing trade price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing trade price of such security
in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the last closing bid price of such
security as reported by Bloomberg, or,
5
<PAGE>
if no last closing bid price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Sale
Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Sale Price of such security on such date shall be
the fair market value as mutually determined by the Company and the holders of a
majority of the shares of Series C Preferred Stock. If the Company and the
holders of Preferred Shares are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved by an investment banking
firm mutually acceptable to the Company and the holders of a majority of the
shares of Series C Preferred Stock.
(b) Mechanics of Conversion. In order to convert Series C 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
attached hereto ("Notice of Conversion") to the Company at the office of the
Company and the Transfer Agent stating that the Holder elects to convert
(provided that if Holder timely sends a copy of the Notice of Conversion to one
of the Company or the Transfer Agent, failure to send a copy of the Notice of
Conversion to the other shall not void the conversion), which notice shall
specify the Date of Conversion, the number of shares of Series C 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 of each certificate to be converted) and (ii) within two business days
surrender to a common courier for delivery to the office of the Transfer Agent,
the original certificates representing the Series C 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 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). 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 its Transfer Agent, and upon
surrender and cancellation of the Preferred Stock Certificate(s), if mutilated,
the Company shall, or shall cause the Transfer Agent to 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 C Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The Company shall
cause to be delivered to Holder or at its direction to transferees of the
Holder, as soon as practicable but in any event no later than the later of (the
"Deadline") (x) the close of business on the third (3rd)
6
<PAGE>
business day following the delivery of the facsimile Notice of Conversion and
(y) the day that is the first business day after receipt by the Transfer Agent
of the original Preferred Stock Certificates to be converted (or provision for
security or indemnification in accordance with the requirements of subparagraph
(i) in the case of lost or destroyed certificates, if required) and a copy of
the Notice of Conversion, the number of shares of Common Stock to which the
Holder shall be entitled as aforesaid and a certificate for that number of
shares of Series C Preferred Stock not being converted, if any, which were
previously represented by the Preferred Stock Certificate submitted for
conversion. If electronic delivery is requested, shares of Common Stock shall
be transmitted electronically pursuant to such electronic delivery system as the
Holder shall request (to the extent such shares may be delivered without a
legend pursuant to the Securities Purchase Agreement); otherwise delivery shall
be by physical certificates. All Series C Preferred Stock shall be physically
delivered. All physical deliveries shall be by reputable overnight courier and
the Deadline shall be extended by one additional business day for physical
delivery of certificates to a location outside of the United States.
(iii) No Fractional Shares. If any conversion of the Series C
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 Transfer Agent before 11:59 p.m., New York City time,
on the Date of Conversion, and (ii) that the original Preferred Stock
Certificates representing the shares of Series C Preferred Stock to be converted
are surrendered by depositing such certificates with a common courier, for
delivery to the Transfer Agent as provided above. 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. In the event that the original
Notice of Conversion and stock certificates are inadvertently forwarded to the
Company instead of the Transfer Agent within the required time frame, the
conversion shall not be voided thereby, provided that the Deadline is based
solely on the date of receipt by the Transfer Agent of the required
documentation. In the event that the Company receives an original Notice of
Conversion or original Series C Stock Certificates from a Holder, it shall
promptly forward such certificates to the Transfer Agent.
(c) Mandatory Conversion. Each share of Series C 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 ("Termination Date")
automatically shall be converted ("Mandatory 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 Termination Date shall be deemed the
Date of Conversion with respect to such conversion for purposes of this
Certificate of Designation. If a Mandatory 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).
7
<PAGE>
(d) Adjustment to Conversion Rate.
(i) Adjustment to Maximum Conversion Price Due to Stock Split, Stock
Dividend, Etc. If, prior to the conversion of all of the Series C Preferred
Stock, the number of outstanding shares of Common Stock is increased by a stock
split, stock dividend, or other similar event, the Maximum Conversion Price
shall be proportionately reduced, or if the number of outstanding shares of
Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Maximum Conversion Price shall be proportionately
increased.
(ii) Further Adjustment to Conversion Price. If, at any time when any
shares of the Series C Preferred Stock are 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 C Preferred Stock (including, without limitation, a
reference period for determining the Maximum Conversion Price), then the Market
Conversion Price and the Maximum Conversion Price, as applicable, shall be
calculated giving appropriate effect to the stock split, stock dividend,
combination, reclassification or other similar event.
(iii) Adjustments.
(A) Adjustment Due to Merger, Consolidation, Etc. If, prior to
the conversion of all Series C 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, then the Holders of Series
C Preferred Stock shall thereafter have the right to receive upon conversion of
Series C 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 (without regard to any limitation on
conversion contained herein), such stock, securities and/or other assets which
the Holder would have been entitled to receive in such transaction had the
Series C 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 C 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 C 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 twenty (20) 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 shares of Series C 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. Subject to the restrictions
herein contained, 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)
or shares of its capital stock (other than
8
<PAGE>
Common Stock) 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), then the Holders of Series C
Preferred Stock shall be entitled, upon any conversion of shares of Series C
Preferred Stock after the date of record for determining shareholders entitled
to such Distribution, to receive the amount of such distribution (in kind) which
would have been payable to the Holder with respect to the shares of Common Stock
issuable upon such conversion (without regard to any limitation on conversion
contained herein) had such Holder been the holder of such shares of Common Stock
on the record date for determination of shareholders entitled to such
distribution.
(iv) [Intentionally Omitted].
(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,
in the aggregate, shall be the next higher number of shares.
Section 6. Redemption by Company.
---------------------
(a) [Intentionally Omitted].
(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 a Triggering Event or the Registration Statement is not, pursuant to
Section 6 of the Registration Rights Agreement entered into between the Company
and each of the initial purchasers of the Preferred Stock (the "Registration
Rights Agreement"), available for use by all Holders with respect to all
Registrable Securities (as defined therein) held by them, 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 Series C Preferred Stock;
provided (i) the Company shall first provide at least thirty (30) days, but not
more than sixty (60), irrevocable advance written notice as provided in
subparagraph 6(b)(ii) below (which can be given beginning sixty (60) 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 C
Preferred Stock having an aggregate Stated Value (as defined above in Section 1)
of at least One Million Dollars ($1,000,000). If the Company elects to redeem
some, but not all, of the Series C Preferred Stock, the Company shall redeem a
pro-rata amount from each Holder of the Series C Preferred Stock.
(i) Redemption Price At Company's Election. The "Redemption
Price At Company's Election" shall be the greater of (A) the product of (x) the
number of shares of Common Stock the Holder would have received upon a
conversion of the Series C Preferred Stock being redeemed at the Conversion
Price in effect on the date of such redemption (without regard to the
limitations contained herein), and (y) the Closing Sale Price in effect on the
date of such redemption, or (B) an amount calculated as a percentage of Total
Value, as that term is defined above, of the Series C Preferred Stock redeemed
pursuant to this Section 6(b), which percentage shall vary depending on the date
of Redemption at Company's Election, and shall be determined as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Date 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 36 months following Last Closing Date 125%
</TABLE>
(ii) Mechanics of Redemption at Company's Election. The Company shall
effect each such redemption by giving not more than sixty (60) but at least
thirty (30) days prior written notice ("Notice of Redemption At Company's
Election"or a "Redemption Notice") to (A) the Holders of the Series C Preferred
Stock selected for redemption, at the address and facsimile number of such
Holders appearing in the Company's Series C Preferred Stock register and (B) the
Transfer Agent, which Notice of Redemption At Company's Election shall be deemed
to have been delivered two (2) 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. The Company shall simultaneously publicly
announce that it has served a Redemption Notice. Such Notice of Redemption At
Company's Election shall indicate (i) the number of shares of Series C 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, at any time and from time to
time prior to the close of business on the day prior to the Date of Redemption
at Company's Election, any Series C Preferred Stock which it is otherwise
entitled to convert, which conversions shall not be subject to the conversion
restrictions set forth in Section 5(a), including Series C Preferred Stock that
has been selected for redemption at the Company's election pursuant to this
subsection 6(b).
(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 Section 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; 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.
Following delivery of a Redemption Notice, the Company shall maintain the
funding availability as contemplated by (i) through (iv) above. If the
foregoing conditions of this Section 6(c) are satisfied and the Company complies
with Section 6(d) hereof, then any shares of Series C Preferred Stock called for
by a Redemption at Company's Election shall cease to be outstanding for
10
<PAGE>
all purposes hereunder (including the right to convert or to accrete additional
Premium 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 Preferred Stock being redeemed under
this Section 6 shall send their Series C Preferred Stock Certificates so
redeemed to the Transfer Agent by overnight or, if outside the U.S., two-day
courier within two business days of the Date of Redemption at Company's
Election, and the Company shall pay the applicable redemption price to that
Holder within five (5) business days of the date the Transfer Agent receives the
original Series C Stock Certificates being redeemed. The Company shall not be
obligated to deliver the redemption price unless and until the Preferred Stock
Certificates so redeemed are delivered to the 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). Notwithstanding anything to
the contrary contained herein, the Company shall in no event be obligated to pay
the redemption proceeds before the second (2nd) business day following the Date
of Redemption at Company's Election.
(ii) [Intentionally omitted]
(e) Prohibition on Redemption. 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 period in 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 and provided further that in the event the
Registration Statement is not available for sale of all of the Registrable
Securities (as such term is defined in the Registration Rights Agreement) at any
time during the period from the Notice of Redemption at Company's Election and
the Redemption Date, such Notice of Redemption at Company's Election shall be
void.
Section 7. Voting Rights. The Holders of the Series C Preferred Stock
-------------
shall have no voting power whatsoever, and no Holder of Series C 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 except as otherwise provided by the
Minnesota Business Corporation Act ("Minnesota Law").
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 or any other major corporate event, the Company shall deliver a notice
to Holder, no later than 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,
11
<PAGE>
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 (but such notice shall not be given prior to the public
announcement with respect thereto).
To the extent that under Minnesota Law the vote of the Holders of the
Series C 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 the Series C Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent of a
majority of the shares of Series C Preferred Stock (except as otherwise may be
required under Minnesota Law) shall constitute the approval of such action by
the class. To the extent that under Minnesota Law the Holders of the Series C
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one (1) class, each share of Series C 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 (without regard to the limitations on
conversion contained herein) 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 C 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 shares of Series C Preferred
--------------------
Stock are outstanding, the Company shall not without first obtaining the written
consent of the Holders of at least seventy-five percent (75%) of the then
outstanding shares of Series C Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series C Preferred Stock or any securities so as to affect adversely the Series
C Preferred Stock;
(b) create any new class or series of stock having a preference
over or on parity with the Series C Preferred Stock with respect to
Distributions (as defined in Section 2 above) or increase the size of the
authorized number of Series C Preferred; 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 the
Series C 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).
Notwithstanding the foregoing, the Company shall not take any action
pursuant to paragraph (a), (b) or (c) above with respect to the Series C
Preferred Stock held by a Holder without the written consent of such Holder.
Section 9. Status of Converted or Redeemed Stock. In the event any shares
-------------------------------------
of Series C 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 C
Preferred Stock.
12
<PAGE>
Section 10. [INTENTIONALLY DELETED]
Section 11. 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 Two Million Six Hundred Fifty
Thousand 2,650,000 shares of Common Stock (the "Reserved Amount") solely for the
purpose of effecting the conversion of the Series C Preferred Stock, which
number shall not be reduced at any time any shares of Series C Preferred Stock
are outstanding. 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 C Preferred Stock, and issuance of the shares of Common Stock in
connection therewith. In no event shall the total number of shares of Common
Stock issued upon Conversion of the Series C Preferred Stock exceed the number
of authorized shares; provided, however that the Company shall use all
authorized but unreserved shares as necessary to honor conversions of Series C
Preferred Stock.
(b) Increases to Reserved Amount. Without limiting any other
provision of this Section 11, if at any time the Company is notified by a Holder
that the Holder's portion of the Reserved Amount, based upon the average of the
5 lowest Conversion Prices in effect during any 30 consecutive trading days
prior to the providing of such notice shall be less than One Hundred Fifty
percent (150%) of the number of shares of Common Stock issuable to such Holder
upon conversion of its Series C Preferred Stock (without regard to the
conversion limitations contained herein) (a "Share Reservation Failure"), or
that the Holder's portion of the Reserved Amount, based upon the Conversion
Prices in effect during two consecutive trading days prior to such notice, shall
be less than One Hundred Twenty Five percent (125%) of the number of shares of
Common Stock issuable to such Holder upon conversion of its Series C Preferred
Stock (without regard to the conversion limitations contained herein) (each, a
"Share Reservation Failure"), the Company shall within five (5) business days
notify all Holders of such occurrence and shall take action as soon as possible,
but in any event within five (5) days after such Holder's notice if such action
can be accomplished by the Board of Directors and within 120 days of such
Holder's notice if such action requires the approval of the Company's
shareholders, to increase the Reserved Amount for each Holder to Two Hundred
percent (200%) of the number of shares of Common Stock then issuable to such
Holder upon conversion of its Series C Preferred Stock (without regard to the
conversion limitations contained herein). Any notice with respect to a
particular Share Reservation Failure by a Holder shall be given within ten (10)
business days of such particular Share Reservation Failure.
(c) Reduction of Reserved Amount Under Certain Circumstances. Prior
to complete conversion of all Series C Preferred Stock the Company shall not
reduce the number of shares required to be reserved for issuance under this
Section 11 without the written consent of Holders of 75% of the Preferred Stock
except for a reduction proportionate to a combination, reverse stock split, or
other similar action effected for a valid business purpose other than affecting
the obligations of Company under this Section 11, which action affects all
shares of Common Stock equally; provided, however that in no event shall any
Holder's portion of the Reserved Amount be reduced below one hundred 150% of the
number of shares of Common Stock issuable upon conversion of that Holder's
outstanding Series C Preferred Stock (without regard to the conversion
limitations contained herein), without that Holder's written consent.
13
<PAGE>
(d) [Intentionally Omitted].
(e) Cap Amount. Until the 20% Approval (as defined herein) has been
obtained, in no event shall the total number of shares of Common Stock issued
upon conversion of the Series C Preferred Stock exceed the maximum number of
shares of Common Stock (the "Cap Amount") that the Company can, without
shareholder approval, so issue pursuant to Nasdaq Rule 4460(i)(1)(d)(ii) (the
"Nasdaq 20% Rule"), if applicable, or any applicable rule of the Pacific Stock
Exchange requiring shareholder approval of an issuance of Common Stock in excess
of 20% of the outstanding capital stock of the Company, (in each case unless
otherwise agreed by Nasdaq or the Pacific Stock Exchange to the extent their
rules apply); provided however that the Company may elect to issue stock in
excess of the limit created by such Pacific Stock Exchange rule if the Company
elects to delist its Common Stock from the Pacific Stock Exchange. The Cap
Amount shall be allocated pro rata to the holders of Series C Preferred Stock as
provided in subsection (f) below. To the extent applicable, the Cap Amount
shall be 2,383,725 Shares of Common Stock.
(f) Allocations of Cap Amount and Reserved Amount. The initial Cap
Amount and Reserved Amount shall be allocated pro rata among the Holders of
Series C Preferred Stock based on the number of the shares of Series C Preferred
Stock initially issued to each Holder. Each increase to the Reserved Amount
shall be allocated pro rata among the Holders of Series C Preferred Stock based
on the number of the shares of Series C Preferred Stock held by each Holder at
the time of the increase in the Reserved Amount in the event the Company is
unable to increase each Holder's allocable portion of the Reserved Amount to a
full 200%. In the event a holder shall sell or otherwise transfer any of such
Holder's shares of Series C Preferred Stock, each transferee shall be allocated
a pro rata portion of such transferor's Cap amount and Reserved Amount. Any
portion of the Cap Amount or Reserved Amount which remains allocated to any
person or entity which does not hold any Series C Preferred Stock shall be
allocated to the remaining holders of shares of Series C Preferred Stock, pro
rata based on the number of shares of Series C Preferred Stock then held by such
Holders.
(g) Inability to Convert.
(i) Obligation to Cure; Shareholder Approval. The Company shall,
at its next annual shareholder meeting, to be held no later than June 30, 1998,
use its best efforts to obtain approval of its shareholders to authorize (i) the
issuance of the full number of shares of Common Stock which would be issuable
upon the conversion of Series C Preferred Stock but for the Cap Amount and
without regard to any other conversion limitations contained herein and
eliminate any prohibitions under applicable law or the rules or regulations of
any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or any of its securities with
respect to the Company's ability to issue shares of Common Stock in excess of
the Cap Amount (such approvals being the "20% Approval") and (ii) the increase
in the number of authorized shares of Common Stock of the Company from
20,000,000 to 40,000,000 shares. In connection with such shareholder vote, the
Company shall use its best efforts to cause all officers and directors of the
Company to promptly enter into irrevocable agreements to vote all of their
shares in favor of eliminating such prohibitions. If the shareholders fail to
approve the 20% Approval or fail to authorize such increase in the number of
authorized shares of Common Stock by June 30, 1998, then each Holder of Series C
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time, until all such prohibitions have been
eliminated (as to
14
<PAGE>
the Cap Amount) and that such increase has been approved (as the Reserved
Amount), by delivery of written notice to the Company that a Cap Amount Failure
has occurred (a "Cap Amount Failure Notice") or that a Share Reservation
Redemption Failure has occurred (a "Share Reservation Failure Notice"), to
require the Company to purchase for cash within five (5) business days of such
Failure Notice, for a redemption price per share of Series C Preferred Stock
equal to the Redemption Price at Company's Election in effect on the date of the
Cap Amount Failure Notice or Share Reservation Failure Notice, a portion of the
Holder's Series C Preferred Stock such that, after giving effect to such
purchase, the Holder's allocated portion of the Cap Amount or Reserve Amount, as
applicable, equals, or exceeds 150% of the total number of shares of Common
Stock issuable to such Holder upon conversion of its Series C Preferred Stock
upon consummation of such purchase (without regard to any limitations on
conversion herein). For purposes hereof, a Cap Amount Failure shall occur if at
any time a Holder's portion of the Cap Amount, based upon the average of the
five (5) lowest Conversion Prices in effect during any 30 consecutive trading
days, shall be less than One Hundred Fifty percent (150%) of the number of
shares of Common Stock issuable upon conversion of such Holder's Series C
Preferred Stock (without regard to the conversion limitations contained herein),
or a Holder's portion of the Cap Amount, based upon the Conversion Prices in
effect during any two consecutive trading days, shall be less than One Hundred
Fifty percent (150%) of the number of shares of Common Stock issuable upon
conversion of such Holder's Series C Preferred Stock (without regard to the
conversion limitations contained herein). For purposes hereof, a Share
Reservation Redemption Failure shall occur if at any time a Holder's portion of
the Reserved Amount, based upon the average of the five (5) lowest Conversion
Prices in effect during any 30 consecutive trading days shall be less than One
Hundred Fifty percent (150%) of the number of shares of Common Stock issuable
upon conversion of such Holder's Series C Preferred Stock (without regard to the
conversion limitations contained herein), or a Holder's portion of the Reserved
Amount, based upon the Conversion Prices in effect during any two consecutive
trading days, shall be less than One Hundred Fifty percent (150%) of the number
of shares of Common Stock issuable upon conversion of such Holder's Series C
Preferred Stock (without regard to the conversion limitations contained herein).
Any notice with respect to a particular Cap Amount Failure or Share Reservation
Redemption Failure shall be given by a Holder with ten (10) business days of
such particular Cap Amount Failure or Share Reservation Redemption Failure, as
the case may be. In addition, if the shareholder approval to increase the
authorized shares to 40,000,000 is obtained, each Holder's portion of the
Reserved Amount shall, within five (5) business days thereafter, be increased to
the extent necessary so that such Holder's portion of the Reserved Amount is
equal to Two Hundred Percent (200%) of the number of shares of Common Stock
issuable to such Holder upon conversion of its Series C Preferred Stock (without
regard to the conversion limitations contained herein).
(h) Company's Failure to Timely Convert.
(i) Cash Damages. Except as provided in Subsection (iii) below,
------------
if the Transfer Agent shall fail to issue and deliver (physically or
electronically as required hereby) the number of shares of Common Stock to which
such holder is entitled upon such holder's conversion of Preferred Shares or to
issue a new Preferred Stock Certificate representing the number of Preferred
Shares to which such holder is entitled pursuant to Section 5(b)(ii) within two
(2) business days of the Deadline and provided that Holder has notified the
Company by facsimile of its failure to receive such shares (a "Conversion
Failure") (it being understood that such notice received by 4:30 p.m. central
time on a business day shall cause such day to be treated as a day on which a
Conversion Failure existed), in addition to all other available remedies which
such holder may pursue hereunder
15
<PAGE>
and under the Subscription Agreement (including indemnification pursuant to
Section 8 thereof, except to the extent of any Redemption Premium Excess (as
defined below)), the Company shall pay damages in cash to such holder on each
date after such second business day such conversion is not timely effected
and/or such Preferred Stock Certificate is not delivered in an amount equal to
0.5% of the product of (I) the sum of the number of shares of Common Stock not
issued to the holder on a timely basis pursuant to Section 5(b)(ii) and to which
such holder is entitled and, in the event the Company has failed to deliver a
Preferred Stock Certificate to the holder on a timely basis pursuant to Section
5(b)(ii), the number of shares of Common Stock issuable upon conversion of the
Series C Preferred Stock represented by such Preferred Stock Certificate based
upon the conversion price in effect on the last possible date which the Company
could have issued such Preferred Stock Certificate to such holder without
violating Section 5(b)(ii) and (II) the Closing Sale Price of the Common Stock
on the last possible date which the Company could have issued such Common Stock
and such Preferred Stock Certificate, as the case may be, to such holder without
violating Section 5(b)(ii). If the Company fails to pay the additional damages
set forth in this Section 11(h) within five business days of the date incurred,
then the holder entitled to such payments shall have the right at any time, so
long as the Company continues to fail to make such payments, to require the
Company, upon written notice, to immediately issue, in lieu of such cash
damages, the number of shares of Common Stock equal to the quotient of (X) the
aggregate amount of the damages payments described herein divided by (Y) the
Conversion Price in effect on such Conversion Date as specified by the holder in
the Conversion Notice.
(ii) Void Conversion Notice; Adjustment to Conversion Price. If for
------------------------------------------------------
any reason a holder has not received all of the shares of Common Stock prior to
the tenth (10th) business day after the Deadline with respect to a conversion of
Preferred Shares, then the holder, upon written notice to the Transfer Agent,
with a copy to the Company, may void its Conversion Notice with respect to, and
retain or have returned, as the case may be, any Preferred Shares that have not
been converted pursuant to such holder's Conversion Notice; provided that the
voiding of a holder's Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of such
notice pursuant to Section 11(h)(i) above or otherwise.
(iii) Notwithstanding the above, a Holder shall not be entitled to
receive the payments set forth in Subsection (i) with respect to shares of
Common Stock not so issued on a timely basis in the event the Company's failure
to convert is a result of the unavailability of authorized but unreserved shares
or the Cap Amount contained in Section 11(e) to the extent such payments would
but for this limitation exceed (such excess being the "Redemption Premium
Excess") the amount by which the Triggering Event Redemption Price (as defined
in Section 12(b)) exceeds the Total Value with respect to the shares of Series C
Preferred Stock as to which such Conversion Failure exists.
(iv) Buy-In Cure. In addition to the foregoing, 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 C Preferred Stock and (ii)
after the applicable Delivery Period with respect to such conversion, a Holder
or Holder's broker 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 this
Section 11(h)(iv) the amount by which (x) such Holder's
16
<PAGE>
total purchase price (including brokerage commission, if any) for the shares of
Common Stock so purchased exceeds (y) Conversion Price with respect to the Sold
Shares. For example, if Holder purchases shares of Common Stock having a total
price of $11,000 to cover a Buy-In with respect to shares of Common Stock with a
Conversion Price of $10,000, the Company will be required to pay such Holder
$1,000. A Holder shall provide the Company written notification indicating any
amount payable to Holder pursuant to this Section 11.
Section 12. Redemption at Option of Holders.
-------------------------------
(a) Redemption Option Upon Major Transaction. In addition to all
----------------------------------------
other rights of the holders of Series C Preferred Stock contained herein, upon
the announcement of a Major Transaction (as defined below), each holder of
Series C Preferred Stock shall have the right, at such holder's option, upon
written notice to the Company to require the Company to redeem, at any time and
from time to time, all or a portion of such holder's Series C Preferred Stock at
a price per Preferred Share equal to the greater of (i) 125% of the Total Value
of such share and (ii) the product of (A) the Conversion Rate on the date of
such notice and (B) the Closing Sale Price of the Common Stock on the trading
date immediately preceding the date of consummation of the Major Transaction
("Major Transaction Redemption Price").
(b) Redemption Option Upon Triggering Event. In addition to all other
---------------------------------------
rights of the holders of Series C Preferred Stock contained herein, after a
Triggering Event (as defined below), each holder of Series C Preferred Stock
shall have the right, at such holder's option, to require the Company to redeem,
at any time and from time to time, all or a portion of such holder's Series C
Preferred Stock at a price per Preferred Share equal to the greater of (i) 125%
of the Total Value and (ii) the product of (A) the Conversion Rate in effect at
such time as such holder delivers a Notice of Redemption at Option of Buyer Upon
a Triggering Event (as defined below) and (B) the Closing Sale Price of the
Common Stock on the trading date immediately preceding such Triggering Event
("Triggering Event Redemption Price" and, collectively with "Major Transaction
Redemption Price," the "Redemption Price").
(c) "Major Transaction". A "Major Transaction" shall be deemed to
-------------------
have occurred at such time as any of the following events:
(i) a consolidation, merger or other business combination or
event following which the holders of Common Stock of the Company
immediately preceding such consolidation, merger, combination or event
either (i) no longer hold a majority of the shares of Common Stock of the
Company or (ii) no longer have the ability to elect the board of directors
of the Company (a "Change of Control"); provided, however, that if the
other entity involved in such consolidation, merger, combination or event
is a publicly traded company with "Substantially Similar Trading
Characteristics" (as defined below) as the Company and the holders of
Common Stock are to receive solely Common Stock or no consideration (if the
Company is the surviving entity) or solely common stock of such other
entity (if such other entity is the surviving entity), such transaction
shall not be deemed to be a Major Transaction (provided the surviving
entity, if other than the Company, shall have agreed to assume all
obligations of the Company under the Certificate of Designation, the
Securities Purchase Agreement and the Registration Rights Agreement). For
purposes hereof, an entity shall have Substantially Similar Trading
Characteristics as the Company if the average daily dollar trading volume
of the common stock of such entity is equal to or in excess of $1,120,000
for
17
<PAGE>
the 90th through the 31st day prior to the public announcement of such
transaction.
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to the holders
of outstanding shares of Common Stock, such that following such purchase,
tender or exchange offer a Change of Control shall have occurred.
(d) "Triggering Event". A "TRIGGERING EVENT" shall be deemed to
------------------
have occurred upon the happening of any of the following events:
(i) the failure of the Registration Statement to be declared
effective by the SEC on or prior to the date that is 150 days after the
Last Closing Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Series C Preferred Stock for sale of all
of the Registrable Securities (as defined in the Registration Rights
Agreement) other than as a result of the provisions of Section 6 thereof in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of five consecutive trading
days, provided that the cause of such lapse or unavailability is not due to
factors solely within the control of such holder of Series C Preferred
Stock;
(iii) 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 C Preferred Stock) is (i) suspended from trading on any of
Nasdaq Small Cap, the Nasdaq National Market, the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. or (ii) is not qualified for
trading on at least one of Nasdaq Small Cap, the Nasdaq National Market,
the New York Stock Exchange, Inc. or the American Stock Exchange, Inc.;
(iv) the Company's or the Transfer Agent's notice to any
holder of Series C Preferred Stock, including by way of public
announcement, at any time, of its intention not to comply with a request
for conversion of any Series C Preferred Stock into shares of Common Stock
that is tendered in accordance with the provisions of this Certificate of
Designations, or the failure of the Transfer Agent to comply with a
Conversion Notice tendered in accordance with the provisions of this
Certificate of Designations within 10 business days after the receipt by
the Transfer Agent of the Conversion Notice; or
(v) the Company breaches, and such breach continues uncured
for ten (10) business days after the Company has been notified thereof in
writing by a Holder, any significant covenant or other material term or
condition of this Certificate of Designation, the Subscription Agreement,
or the Registration Rights Agreement, or 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
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any material respect when made;
(vi) the Company and the Transfer Agent fail, and such failure
continues uncured for five (5) 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 transferee
from a Holder upon conversion of any Series C Preferred Stock, as and when
required by the Subscription Agreement;
(vii) the Company fails, and such failure continues uncured for
five (5) business days after the Company has been notified thereof in
writing by a Holder, to reserve a sufficient number of shares to satisfy a
conversion, where such shares are already authorized;
(viii) the Company's failure to redeem any shares of Preferred
Stock as required pursuant to Section 11(g) hereof within five (5) business
days of the Company's receipt of a Cap Amount Failure Notice or Share
Reservation Failure Notice.
(e) Mechanics of Redemption at Option of Buyer Upon Major
-----------------------------------------------------
Transaction. Within 2 business days following the public announcement of a
-----------
Major Transaction, the Company shall deliver written notice thereof via
facsimile ("Notice of Major Transaction") to each holder of Series C
Preferred Stock. At any time after the public announcement of a Major
Transaction, but prior to the consummation thereof any holder of Series C
Preferred Stock then outstanding may by delivering written notice thereof
via facsimile and overnight courier ("Notice of Redemption at Option of
Buyer Upon Major Transaction") to the Company, require the Company to
redeem up to all of the holder's Series C Preferred Stock outstanding at
the time such Major Transaction is consummated. The Notice of Redemption
at Option of Buyer Upon Major Transaction shall indicate the maximum number
of Series C Preferred Stock that such holder is electing to redeem provided
that such redemption shall be contingent upon the closing of such Major
Transaction. No such notice shall preclude a Holder from converting shares
of Series C Preferred Stock pursuant to Section 5 hereof.
(f) Mechanics of Redemption at Option of Buyer Upon Triggering Event.
-----------------------------------------------------------------
Within one (1) day after the occurrence of a Triggering Event, the Company
shall deliver written notice thereof via facsimile and overnight courier
("Notice of Triggering Event") to each holder of Series C Preferred Stock.
At any time and from time to time after the earlier of a holder's receipt
of a Notice of Triggering Event and such holder becoming aware of a
Triggering Event, any holder of Series C Preferred Stock then outstanding
may require the Company to redeem any or all of the Series C Preferred
Stock by delivering written notice thereof via facsimile and overnight
courier ("Notice of Redemption at Option of Buyer Upon Triggering Event")
to the Company, which Notice of Redemption at Option of Buyer Upon
Triggering Event shall indicate (i) the number of Series C Preferred Stock
that such holder is electing to redeem and (ii) the applicable Triggering
Event Redemption Price, as calculated pursuant to Section 3(b) above.
(g) Payment of Redemption Price. Upon the Company's receipt of a
---------------------------
Notice(s) of Redemption at Option of Buyer Upon Major Transaction or a
Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as the
case may be, from any holder of Series C Preferred Stock, the Company shall
immediately notify each holder of Series C
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Preferred Stock by facsimile of the Company's receipt of such notices. The
Company shall deliver the applicable Redemption Price to such holder within
five business days after the Company's receipt of a Notice of Redemption at
Option of Buyer Upon Triggering Event or Notice of Redemption at Option of
Buyer Upon Major Transaction; provided that a holder's Preferred Stock
Certificates shall have been so delivered to the Transfer Agent and, in the
case of a Major Transaction, provided that such Major Transaction has
closed. If the Company is unable to redeem all of the Series C Preferred
Stock submitted for redemption, the Company shall (i) redeem a pro rata
amount from each holder of Series C Preferred Stock based on the number of
Series C Preferred Stock submitted for redemption by such holder relative
to the total number of Series C Preferred Stock submitted for redemption by
all holders of Series C Preferred Stock as of the date payment is required
to be made and (ii) in addition to any remedy such holder of Series C
Preferred Stock may have under this Certificate of Designations and the
Securities Purchase Agreement, pay to each holder interest at the rate of
18% per annum in respect of each unredeemed Preferred Share until paid in
full.
(h) Void Redemption. In the event that the Company does not pay
---------------
the Redemption Price within the time period set forth in Section 12(g), at
any time thereafter and until the Company pays such unpaid applicable
Redemption Price in full, a holder of Series C Preferred Stock shall have
the option (the "Void Optional Redemption Option") to, in lieu of
redemption, require the Company to promptly return to such holder any or
all of the shares of Series C Preferred Stock that were submitted for
redemption by such holder under this Section 12 and for which the
applicable Redemption Price (together with any interest thereon) has not
been paid, by sending written notice thereof to the Company via facsimile
(the "Void Optional Redemption Notice"). Upon the Company's receipt of
such Void Optional Redemption Notice, (i) the Notice of Redemption at
Option of Buyer Upon Triggering Event or the Notice of Redemption at Option
of Buyer Upon Major Transaction, as the case may be, shall be null and void
with respect to those Series C Preferred Stock subject to the Void Optional
Redemption Notice, (ii) the Company shall immediately return any Series C
Preferred Stock subject to the Void Optional Redemption Notice, (iii) the
Maximum Conversion Price of such returned Series C Preferred Stock shall be
adjusted to the lesser of (A) the Maximum Conversion Price as in effect on
the date on which the Void Optional Redemption Notice is delivered to the
Company and (B) the lowest Closing Bid Price during the period beginning on
the date on which the Notice of Redemption at Option of Buyer Upon Major
Transaction or the Notice of Redemption at Option of Buyer Upon Triggering
event, as the case may be, is delivered to the Company and ending on the
date on which the Void Optional Redemption Notice is delivered to the
Company, and (iv) the Conversion Price in effect at such time shall be
reduced by a number of percentage points equal to the product of (A) .25
and (B) the number of days in the period beginning on the date which is
five business days after the date on which the Notice of Redemption at
Option of Buyer Upon Major Transaction or the Notice of Redemption at
Option of Buyer Upon Triggering Event, as the case may be, is delivered to
the Company and ending on the date on which the Void Optional Redemption
Notice is delivered to the Company.
(i) Miscellaneous. A holder's delivery of a Void Optional
-------------
Redemption Notice and exercise of its rights following such notice shall
not effect the Company's obligations to make any payments which have
accrued prior to the date of such notice. Payments provided for in this
Section 12 shall have priority to payments to holders of Junior Securities
in connection with a Major Transaction. In the event of a redemption
pursuant to
20
<PAGE>
this Section 12 of less than all of the Series C Preferred Stock
represented by a particular Preferred Stock Certificate, the Company shall
promptly cause to be issued and delivered to the holder of such Series C
Preferred Stock a preferred stock certificate representing the remaining
Series C Preferred Stock which have not been redeemed.
Section 13. [INTENTIONALLY DELETED]
Section 14. Remedies, Other Obligations, Breaches and Injunctive Relief.
-----------------------------------------------------------
Except as expressly otherwise provided herein in Sections 11(h)(i) and
11(h)(iii) with respect to a Redemption Premium Excess, the remedies provided in
this Certificate of Designation shall be cumulative and in addition to all other
remedies available 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 actual damages for any failure by
the Company to comply with the terms of this Certificate of Designation (after
taking into effect the damages and remedies available hereunder). 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).
Section 15. Restriction on Redemption and Cash Dividends. Until all
--------------------------------------------
of the Preferred Shares have been converted or redeemed as provided herein, the
Company shall not, directly or indirectly, redeem, or declare or pay any cash
dividend or distribution on, its Junior Securities without the prior express
written consent of the holders of not less than two-thirds (2/3) of the then
outstanding Preferred Shares.
Section 16. Vote to Change the Terms of Preferred Shares. Except as
--------------------------------------------
otherwise provided in Section 8, the affirmative vote at a meeting duly called
for such purpose or the written consent without a meeting, of the holders of not
less than two-thirds (2/3) of the then outstanding Preferred Shares, shall be
required for any change to this Certificate of Designations or the Company's
Certificate of Incorporation which would amend, alter, change or repeal any of
the powers, designations, preferences and rights of the Preferred Shares.
Section 17. Limitation on Beneficial Ownership. The Company shall
----------------------------------
not effect any conversion of Series C Preferred Stock and no holder of Series C
Preferred Stock shall have the right to convert any Series C Preferred Stock to
the extent that after giving effect to such conversion such person (together
with such person's affiliates) would beneficially own in excess of 5.00% of the
outstanding shares of the Common Stock following such conversion. For purposes
of the foregoing sentence, the number of shares of Common Stock beneficially
owned by a person and its affiliates shall include the number of shares of
Common Stock issuable upon conversion of the Series C Preferred Stock with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (i)
conversion of the remaining, nonconverted shares of Series C Preferred Stock
beneficially owned by such person and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by such person and its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 17, beneficial
ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. A holder of Series C Preferred Shares may
waive the restrictions of this
21
<PAGE>
paragraph only upon not less than 61 days prior written notice to the Company
(with such waiver taking effect only upon the expiration of such 61 day notice
period). Notwithstanding anything to the contrary contained herein, each
Conversion Notice shall constitute a representation by the holder submitting
such Conversion Notice that, after giving effect to such Conversion Notice, the
holder will not beneficially own (as determined in accordance with this Section
17) more than 5.00% of the outstanding shares of Common Stock of the Company as
reflected in the Company's most recent Form 10-Q or Form 10-K, as the case may
be, or more recent public press release or other public notice by the Company
setting forth the number of shares of Common Stock outstanding. For purposes of
satisfying its obligations under this paragraph, the Company shall be entitled
to rely solely upon the implied representation of the holder made by submitting
a Notice of Conversion enforcing this provision.
Section 18. Miscellaneous. No specific provision contained in this
-------------
Certificate of Designation shall limit or modify any more general provision
contained herein. This Certificate of Designation shall be deemed to be jointly
drafted by the Company and all Purchasers and shall not be construed against any
person as the drafter hereof. No failure or delay on the part of a Holder in
the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege. The Company covenants to each Holder that there
shall be no characterization concerning this instrument other than as expressly
provided herein. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of Preferred
Stock and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the Holders shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being required.
Notwithstanding anything to the contrary contained herein, or any limitations
contained herein, any cash amounts due hereunder which are not paid when due
shall bear interest at 18% per annum.
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<PAGE>
In witness whereof, this Certificate of Designation has been executed on
February ___, 1998.
___________________________________
Kenneth E. Hendrickson
Chairman and Chief Executive Officer
23
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Preferred Stock)
The undersigned hereby irrevocably elects to convert _____________ shares of
Series C Preferred Stock, represented by stock certificate No(s).
________________ (the "Preferred Stock Certificates") into shares of common
stock ("Common Stock") of Ancor Communications, Incorporated (the "Company")
according to the conditions contained in the Certificate of Designation of
Series C Preferred Stock, as of the date written below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates. No fee will be charged to the Holder for any conversion,
except for transfer taxes, if any. A copy of each of the Preferred Stock
Certificates being converted is attached hereto. The undersigned agrees to
deliver a Prospectus in connection with any sale made pursuant to the
Registration Statement, as provided in Section 5.10 of the Subscription
Agreement.
NOTE REGARDING LEGEND REMOVAL UPON RESALE: The Common Stock certificates, if
issued in Holder's name, shall bear a restrictive legend. The restrictive
legend may be removed when and to the extent allowed under Section 5.9 of the
Subscription Agreement or under the Irrevocable Instructions to Transfer Agent.
[_] Physical delivery
[_] Electronic delivery if eligible
Date of Conversion:_________________
Applicable Conversion Price:___________
Number of Shares of
Common Stock to be Issued:____________
Signature:__________________________
Name:_____________________________
Address: ___________________________
___________________________
DELIVER PREFERRED STOCK CERTIFICATES TO THE TRANSFER AGENT
24
<PAGE>
Exhibit 4.4
Specimen Certificate, Series C Preferred Stock
[front]
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
NUMBER SHARES
ANCOR COMMUNICATIONS, INCORPORATED
This Certifies that ___________________________ is the owner and registered
holder of __________________________ Shares of fully paid and nonassessable
Series C Preferred Stock, $.01 par value, of Ancor Communications, Incorporated
transferable only on the books of the corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed.
IN WITNESS WHEREOF, the said corporation has caused this certificate to be
signed by its duly authorized officers and to be sealed with the seal of the
corporation this _____ day of ___________, 19___.
- ---------------------------------- --------------------------------------
Secretary President
<PAGE>
[Back]
Ancor Communications, Incorporated will furnish without charge to each
shareholder who so requests a statement of the powers, designations, preferences
and relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
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.
For Value Received ___________________________________ hereby sell, assign, and
transfer unto _______________________________________ Shares represented by the
within Certificate, and do hereby irrevocably constitute and appoint
____________________________________________________ Attorney to transfer the
said shares on the Books of the within named Corporation with full power of
substitution in the premises.
Dated _________________, 19____
IN PRESENCE OF _________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
