SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERTLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number: 1-13760
THE NETWORK CONNECTION, INC.
1324 Union Hill Road
Alpharetta, Georgia 30201
(770-751-0889)
A Georgia Corporation IRS Employer ID No.
58-1712432
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value per share Registered on The Nasdaq
Stock Market
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(b) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 10, 1998, the registrant had outstanding 4,722,783
shares of its Common Stock.
Transitional Small Business Disclosure Format (Check One): Yes
[ ] No [ X ]
TABLE OF CONTENTS
ITEM PAGE(S)
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (Unaudited)
Balance Sheet September 30, 1998
3,4
Statements of Operations Three Months and Nine Months
Ended
September 30, 1998 and 1997
5
Statements of Cash Flows Three Months and Nine Months
Ended
September 30, 1998 and 1997
6
Notes to Financial Statements September 30, 1998
7
2. Management's Discussion and Analysis of Financial Condition
and Results
of Operations
8,9
PART II. OTHER INFORMATION
5. Other Information 10
6. Exhibits and Reports on Form 8-K
10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE NETWORK CONNECTION, INC.
BALANCE SHEET (Unaudited)
September
30,
1998
ASSETS
Current assets:
Cash $95,830
Restricted cash 1,000,000
Accounts receivable, less 5,631,962
allowance of $2,000,000
(Notes)
Inventory, less allowance of 1,815,145
$262,000 (Notes)
Prepaid expenses 303,887
---------
Total current assets 8,846,824
Property and equipment:
Land 150,000
Building and improvements 763,055
Furniture, fixtures and 2,164,153
equipment
Software 58,897
Vehicles 162,773
---------
3,298,878
Less accumulated depreciation (1,213,564)
---------
2,085,314
Other assets, net 641,117
---------
Total assets $11,573,255
=========
THE NETWORK
CONNECTION, INC.
BALANCE SHEET
(Unaudited)
September
30,
1998
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current
liabilities:
Accounts payable $1,539,432
and accrued
expenses
Payable to 70,929
shareholders
Borrowings under 2,875,000
line of credit
and notes (Notes)
Current portion 39,455
of long-term debt
and capital lease
obligations
----------
Total current 4,524,816
liabilities
Long-term debt, 704,218
less current
portion (Notes)
Obligations under 1,222
capital leases,
less current
portion
----------
Total liabilities 5,230,256
Mandatory Redeemable 4% 909,074
Convertible Preferred
Stock (Notes)
Shareholders'
equity:
Preferred stock,
$.01 par value:
Authorized,
2,500,000 shares;
Issued and
outstanding,
90,000
Common stock,
$.001 par value:
Authorized,
10,000,000
shares;
Issued and 4,617
outstanding,
4,617,096 shares
Additional paid- 15,526,715
in capital
Accumulated deficit (10,097,407)
----------
Total 5,433,925
shareholders'
equity
----------
Total liabilities $11,573,255
and shareholders'equity ==========
THE NETWORK CONNECTION,
INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three T Nine Months Ended Nine
Months h Months
Ended r Ended
e
e
M
o
n
t
h
s
E
n
d
e
d
September S September 30, September
30, e 30,
p
t
e
m
b
e
r
3
0
,
1998 1997 1998 1997
Revenues $1,381,847 $3,518,632 $5,140,834 $6,881,212
Cost of revenues 723,747 2,342,072 2,842,276 4,498,138
---------- ----------- ---------- ----------
---------- --------- ---------- ----------
Gross profit 658,100 1,176,560 2,298,558 2,383,074
Selling, general and 836,951 1,008,970 2,855,559 3,294,208
administrative
Provision for doubtful
accounts and inventory 2,142,128 2,842,128
Research and development 202,190 162,674
74,065 75,730
---------- ----------- ---------- ----------
Operating loss (2,395,044) 91,860 (3,601,319)(1,073,808)
Interest income (61,100) 16,932 (43,951) 1,685
(expense), net
---------- ----------- ---------- ----------
Net loss (2,456,144) 108,792 (3,645,270)(1,072,123)
Preferred stock 113,837 297,847
dividends
---------- ---------- ---------- ----------
Net loss to common ($2,569,981) $108,792($3,943,117)($1,072,123)
shareholders ========== =========== ========== ==========
Basic and Diluted per
share
net loss to common ($0.56) $0.03 ($0.92) ($0.28)
shareholders
========== =========== ========== ==========
Weighted average common
and equivalent shares
outstanding, basic and
diluted:
4,572,228 4,242,520 4,295,410 3,786,704
THE NETWORK
CONNECTION, INC.
STATEMENTS OF CASH
FLOWS (Unaudited)
Nine N
Months i
Ended n
e
M
o
n
t
h
s
E
n
d
e
d
September S
30, e
p
t
e
m
b
e
r
3
0
,
1998 1997
Operating
activities
Net loss ($3,645,270)($1,072,123)
Adjustments to
reconcile net loss
to net cash used
in operating
activities
Depreciation and 252,000 157,500
amortization
Provision for 2,842,128
doubtful accounts
and inventory
Changes in
operating assets
and liabilities:
Accounts (3,013,588) (3,122,309)
receivable
Inventory 1,105,850 (29,895)
Prepaid expenses 6,850 (409,796)
and other assets
Accounts payable (2,628,685) 1,327,263
and accrued
expenses
--------- ----------
Net cash used in (5,080,715) (3,149,360)
operating
activities
Investing
activities:
Purchase of (94,639) (301,387)
property and
equipment
Sale of short-term 638,559 (1,122,920)
investments
--------- ----------
Net cash (used in) 543,920 (1,424,307)
provided by
investing
activities
Financing
activities:
Proceeds from 470,000 48,000
issuance of long-
term debt
Net proceeds from 1,950,115 5,540,901
issuance of stock
Proceeds (payment) 2,212,750 (496,000)
of bank borrowings
and notes
Payment of long- (24,888) (33,670)
term debt and
capital lease
obligations
Payment of (1,429)
shareholder debt
--------- ----------
Net cash provided 4,607,977 5,057,802
by financing
activities
--------- ----------
Net change in cash 71,182 484,135
Cash at beginning 1,024,648 1,000,000
of period
--------- ----------
Cash at end of $1,095,830 $1,484,135
period
========= ==========
Supplemental
Information:
Conversion of $2,200,000
convertible debt to
convertible
preferred stock
Beneficial $297,847
conversion feature
on convertible
preferred stock
THE NETWORK CONNECTION, INC.
CONDENSED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine month period
ended September 30,1998 are not necessarily indicative of the
results that may be expected for the year ended December 31,
1998. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 1997,
included in the Company's Annual Report on Form 10-KSB.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10QSB that are not
descriptions of historical facts may be forward-looking
statements that are subject to risks and uncertainties, including
economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as
well as other specific factors discussed in the Company's filings
with the Securities and Exchange Commission. These and other
factors may cause actual results to differ materially from those
anticipated.
Management's Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Basic and Diluted Net Loss Per Common Share
Basic and Diluted net loss per common share have been computed by
dividing net loss by the weighted average number of common shares
outstanding during each period.
Accounts Receivable
The Company's products are often used with other products in
large complex projects. As a result, the Company may grant
extended payment terms for certain sales. Accounts receivable at
September 30, 1998 consisted of approximately $3.6 million from
sales to such customers with extended credit terms of up to 180
days based on the nature of the project.
Debt and Preferred Stock
On March 11, 1998, the Company raised gross proceeds of $2.2
million in a private placement to a single institutional
investor, KA Investments LDC (the "Investor"), of five-year
convertible debt securities (the "Debentures") pursuant to the
terms of a Convertible Debenture Purchase Agreement, dated March
11, 1998, by and between the Company and the Investor (the
"Debenture Purchase Agreement"). Each Debenture was sold for
$50,000.00, accrued interest at a rate of 4% per annum, and was
convertible at the option of the holder into shares of the
Company's Common Stock at a price per share equal to the lesser
of (i) $8.02 or (ii) 80% of the average closing market price of
the Company's Common Stock during the 21 trading days prior to
conversion, but in no event less than $3.00 per share (as
adjusted for stock splits). As of June 9, 1998, the Investor and
the Company entered into a Convertible Preferred Stock Purchase
Agreement (the "Purchase Agreement A"), pursuant to which the
Investor agreed to exchange all of its Debentures for 220,000
shares of the Company's 4% Series A Convertible Preferred Stock
(the "Series A Preferred Stock"). The financial terms of the
Series A Preferred Stock are identical to the financial terms of
the Debentures for which they were exchanged. The Company was
obligated to file and have declared effective by the Securities
and Exchange Commission (the "Commission"), on or prior to June
24, 1998, a registration statement with respect to the resale of
the Common Stock issuable upon conversion of the Series A
Preferred Stock. The Company originally filed such Registration
Statement on May 1, 1998, and such Registration Statement was
declared effective by the Commission on June 8, 1998. The Company
has agreed to use its best efforts to keep the Registration
Statement effective for a period of three (3) years following the
effective date of the Registration Statement, or through such
earlier date when the Common Stock to be acquired upon conversion
of the Series A Preferred Stock may be sold pursuant to Rule
144(k) under the Securities Act.
The Company registered the Shares underlying the Series A
Preferred Stock to provide the holder of such shares, upon
conversion of the Series A Preferred Stock, with freely tradable
shares of Common Stock. The related Registration Statement
covers up to 20% of the number of shares of Common Stock
outstanding on the issue date of the Series A Preferred Stock
under the Purchase Agreement. The terms of the Purchase
Agreement require that the Company maintain a reserve of up to
20% of the number of shares of Common Stock outstanding on the
issue date of the Series A Preferred Stock under the Purchase
Agreement for issuance upon conversion. The terms of the Series
A Preferred Stock permit the Company, at its option, to pay the
dividends on the Series A Preferred Stock in shares of Common
Stock in lieu of cash under certain circumstances. However, the
Company does not intend to issue such number of shares of Common
Stock in lieu of cash dividends which, when added to the number
of shares of Common Stock into which the Series A Preferred Stock
is convertible, would allow the aggregate number of such shares
of Common Stock to exceed 20% of the outstanding shares of Common
Stock on the issue date of the Series A Preferred Stock under the
Purchase Agreement A.
The outstanding Series A Preferred Stock is subject to mandatory
redemption by the Company, at the aggregate Stated Value ($100
per share) thereof plus accrued and unpaid dividends, on March
11, 2003, or earlier under certain circumstances. In addition,
during the period from March 11, 2001 through March 11, 2003, if
any five- day average of the closing bid price of the Common
Stock is $3.00 or greater, any outstanding shares of Series A
Preferred Stock shall be subject to automatic conversion by the
Company into shares of Common Stock at $3.00 per share. As of
September 30, 1998, holders of the Company's Series A Preferred
Stock exercised their right and converted 130,000 shares of the
Series A Preferred Stock into 442,153 shares of the Company's
Common Stock.
On May 19, 1998, the Company entered into a promissory note with
an institutional lender in the amount of $470,000. This note is
secured by the real estate of the Company. The note is due and
payable on April 19, 2001 and bears interest, payable monthly, at
an annual rate of 16%.
On June 29, 1998, the Company entered into a promissory note (the
"Investor Note") with an institutional investor in the amount of
$1,250,000. This note was unsecured and was due and payable with
accrued interest at an annual rate of 8% on August 28, 1998. The
Company, in its sole discretion, could elect to pay this note on
August 28, 1998, subject to a payment charge of $87,500, or
exchange this note for a series of convertible preferred stock or
convertible debentures of the Company. Repayment of the Investor
Note was orally extended and made payable on demand.
On August 12, 1998, the Company entered into promissory notes
(collectively "Series Notes") with five individual investors in
the aggregate amount of $650,000. The Series Notes were unsecured
and were due and payable with accrued interest at an annual rate
of 8% on October 14, 1998. The Company, in its sole discretion,
could elect to pay these Series Notes on October 12, 1998,
subject to a payment charge equal to 7% of the principal amount,
or exchange the Series Notes for a series of convertible
preferred stock or convertible debentures of the Company.
Subsequent Events
On October 12, 1998, the Company entered into new promissory
notes (collectively "Series A Notes") in the aggregate amount of
$704,082 with the holders of the Series Notes to replace and
rollover the Series Notes. The Series A Notes are unsecured and
are due and payable with accrued interest at an annual rate of 8%
on December 11, 1998. The Company, in its sole discretion, may
elect to pay these Series A Notes on December 11, 1998, subject
to a payment charge equal to 7% of the principal amount, or
exchange the Series A Notes for a series of convertible preferred
stock or convertible debentures of the Company.
On October 23, 1998, the Company elected to exchange the Investor
Note for 1,500 shares of the Company's Series B 8% Convertible
Preferred Stock (the " Series B Preferred Stock") and warrants to
acquire 100,000 shares of Common Stock issued to the holder of
the Series B Preferred Stock (the "Warrants"). The $1,000 stated
value per share of Series B Preferred Stock is convertible at the
option of the holder into shares of Common Stock, at a price per
share equal to (i) from November 22, 1998 through December 22,
1998, at the lesser of $ 3.66 per share of Common Stock (the
"Closing Price") or 80% of the average of the closing bid prices
as reported on the Nasdaq SmallCap Market ("Nasdaq") for the
lowest five of the 20 trading days immediately preceding the date
of Series B Preferred Stock conversion (the "Average Price"),
(ii) from December 23,1998 through January 21, 1999, at the
lesser of the Closing Price or 77.5% of the Average Price, and
(iii) from and after January 22, 1999, at the lesser of the
Closing Price or 75% of the Average Price. The Warrants are
exercisable to acquire shares of Common Stock at a price per
share equal to $4.125.
The shares of Series B Preferred Stock were issued pursuant to a
Securities Purchase Agreement, dated as of October 23, 1998 (the
"Purchase Agreement B"), entered into between the Company and a
single institutional investor upon the exchange of outstanding
loan principal and accrued interest pursuant to the Investor
Note, plus certain premiums, owed by the Company to that
investor. In connection with such exchange of indebtedness, the
Company also issued the Warrant to the same institutional
investor. The Company is obligated to file and have declared
effective by the Commission, on or prior to November 24, 1998, a
registration statement with respect to the resale of the Common
Stock issuable upon conversion of the Series B Preferred Stock
pursuant to the terms of a Registration Rights Agreement entered
into between the Company and the holder of the Series B Preferred
Stock and the Warrants on October 23, 1998 (the "Registration
Agreement"). Pursuant to the Registration Agreement, the Company
is required to use its best efforts to maintain a continuously
effective Registration Statement, with respect to the Common
Stock underlying the Series B Preferred Stock and the Warrants
until the earlier of three years after the Registration Statement
is declared effective or until such earlier date on which such
Common Stock may be sold pursuant to Rule 144(k) under the
Securities Act of 1933, as amended (the "Securities Act"). The
Company will not receive any proceeds from the resale by the
holders of any of the Common Stock issuable to the holders upon
conversion of the Series B Preferred Stock.
Pursuant to the terms of the Registration Agreement, the
Registration Statement will cover up to 20% of the number of
shares of Common Stock outstanding on the issue date of the
Series B Preferred Stock under the Purchase Agreement B. The
terms of the Purchase Agreement B require that the Company
maintain a reserve of up to 20% of the number of shares of Common
Stock outstanding on the issue date of the Series B Preferred
Stock under the Purchase Agreement B for issuance upon
conversion.
At any time through December 22, 1998, the Company may redeem the
Series B Preferred Stock at 103% of the aggregate stated value
($1,000 per share) thereof, plus all accrued and unpaid
dividends. Thereafter, through October 23, 2001, the Company may
redeem all outstanding shares of the Series B Preferred Stock at
135% of the aggregate stated value thereof, plus accrued and
unpaid dividends on such shares (the "Redemption Price"), as long
as the then Current Market Price (as defined) of the Common Stock
at the time of optional redemption is less than $3.66 per share.
Furthermore, all shares of Series B Preferred Stock that have not
been converted to Common Stock prior to October 23, 2001 shall be
converted to Common Stock on that date. Notwithstanding such
mandatory conversion, however, absent approval of the Purchase
Agreement B by Company Stockholders in satisfaction of applicable
Nasdaq rules, rather than conversion of all then outstanding
Series B Preferred Stock the Company shall be required to make
cash redemption payments equal to the Redemption Price of such
shares to the extent that any common shares issuable upon
conversion, when aggregated with (i) all common shares previously
issued on Series B Preferred Stock conversion, (ii) all common
shares issued as stock dividends on the Preferred Stock, and
(iii) all common shares issuable on exercise of the Warrants,
would equal 20% or more of the number of outstanding shares of
Common Stock on October 23, 1998.
Risks Associated With Year 2000
The commonly referred to Year 2000 ("Y2K") problem results from
the fact that many existing computer programs and systems use
only two digits to identify the year in the date field. These
programs were designed and developed without considering the
impact of a change in the century designation. If not corrected,
computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other
processing involving the Year 2000 or a later date. The Company
has identified two main areas of Y2K risk:
1. Internal computer systems or embedded chips could be
disrupted or fail, causing an interruption or decrease in
productivity in the Company's operations and
2. Computer systems or embedded chips of third parties
including (without limitation) financial institutions, suppliers,
vendors, landlords, customers and service providers and others
("Material Third Parties") could be disrupted or fail, causing an
interruption or decrease in the Company's ability to continue
operations.
The Company has developed, or is in the process of developing,
detailed plans for implementation and testing of any necessary
modifications to its key computer systems and equipment with
embedded chips to ensure that it is Y2K compliant. The Company
estimates that its internal systems will be Y2K ready by
September 30, 1999. The Company believes that with these detailed
plans and completed modifications, the Y2K issue will not pose
significant operational problems for it. However, if the
modifications and conversions are not made, or completed in a
timely fashion, the Year 2000 could have a material impact on its
operations.
The Company's cost of addressing Y2K has been insignificant to
date. The financial impact of making any required systems changes
or other remediation efforts cannot be known precisely at this
time, but it is not expected to be material to the Company's
financial position, results of operations, or cash flows.
In addition, the company has identified and prioritized and is
communicating with Material Third Parties to determine their Y2K
status and any probable impact on them. The Company will continue
to track and evaluate its long-term relationships with Material
third Parties based on the responses it receives from such
persons and on information learned from other sources. If any of
the Company's Material Third Parties are not Y2K ready and such
non-compliance causes a material disruption to any of their
respective businesses, the Company's business could be materially
adversely affected. Disruptions could include, among other
things: the failure of a Material Third Party's business; a
financial institution's inability to take and transfer funds; an
interruption in delivery of supplies from vendors; a loss of
voice and data connections; a loss of power to the Company's
facilities; and other interruptions in the normal course of the
Company's operations, the nature and extent of which the Company
cannot foresee. The Company will continue to evaluate the nature
of these risks, but at this time the Company is unable to
determine the probability that any such risk will occur, or if it
does occur, what the nature, length or other effects, if any,
that it may have on the Company. If a significant number of
Material Third Parties experience failures in their computer
systems or operations due to Y2K non-compliance, it could affect
the Company's ability to process transactions or otherwise engage
in similar normal business activities. For example, while the
Company expects its internal systems to be Y2K ready in September
1999, the Company and its customers will be dependant upon the
Y2K readiness of many providers of communications services and in
turn, those providers' vendors and suppliers. If, for example,
such providers and others are not Y2K ready, the Company and its
customers may not be able to send and receive data and electronic
transmissions, which would have a material adverse effect on the
business and revenues of the Company and its customers. While
many of these risks are outside the Company's control, the
Company has instituted a program to identify Material Third
Parties and to address any non-compliance issues.
While the Company believes that it is adequately addressing the
Y2K issue, there can be no assurance that its Y2K analysis will
be completed on a timely basis, or that the cost and liabilities
associated with the Y2K issue will not materially adversely
impact its business, prospects, revenues or financial position.
The Company is uncertain as to its most reasonably likely worst
case Y2K scenario, and it has not yet developed a contingency
plan to handle a worst case scenario. The Company expects to have
a contingency plan to handle this situation by September 30,
1999.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
Most sales efforts in 1998 have been focused on larger system
sales into niche markets of the Company's "turn-key" packaged
solutions, AirView, CruiseView and TrainView, which have longer
sales cycles. Sales of such products will contribute to sales
backlog for revenues derived from multiple roll-out deliveries
over 12 to 36 months. The Company has contracts for the following
programs: (i) Fairlines, a French commercial airline, for the
purchase, installation, maintenance and content management of
AirView on ten Fairlines MD81 aircraft, of which two complete
systems had been installed and commercially operational as of
September 30, 1998; (ii) Star Cruises, an Asian cruise line, for
the purchase, installation and maintenance of CruiseView on two
cruise ships of which one ship completed installation in October
of 1998 and the second ship is expected to be installed in mid-
1999 and (iii) Carnival Corporation ("Carnival"), a Panamanian
registered corporation that operates the Carnival Cruse Lines,
for the purchase, installation and maintenance of CruiseView on a
minimum of one cruise ship, and an unspecified maximum number of
cruise ships, with the first system expected to be installed in
early 1999. Carnival Cruise Lines currently operates 12 cruise
ships, and has 6 additional cruise ships in the process of being
constructed for delivery over the next four years. The Company
has not yet received any firm orders for TrainView systems. The
Company currently has responded to major requests for proposal
and is in various stages of negotiation for CruiseView, AirView
and TrainView systems with some of the world's largest travel and
transportation-related companies. There can be no assurance,
however, that the Company will successfully negotiate definitive
agreements for the purchase of these systems.
AirView
In an Agreement dated as of June 19, 1997, the Company entered
into an AirView Purchase Agreement (the "AirView Agreement") with
Fairlines, a French corporation engaged in the start-up operation
of a commercial airlines, for the purchase of up to ten AirView
systems for installation on ten Fairlines aircraft. It is
estimated by the Company that in the event that all ten AirView
systems were sold to Fairlines under the terms of the AirView
Agreement, the Company would generate over $10 million in gross
revenues. Delivery of all AirView systems under the terms of the
agreement was originally expected to be completed by December 31,
1998. However, to date only four AirView systems have been
delivered and two have been installed. Due to Fairlines repeated
delays in securing additional aircraft, it is unclear as to when,
if ever, any additional systems will be sold to and installed by
Fairlines. The costs of purchase from the Company include the
cost of training Fairlines employees for system use, and the cost
of system installation, which installation will be provided by
Hollingsead International and its subsidiaries ("Hollingsead") on
behalf of the Company under a separate agreement with the
Company. The Company has developed a manufacturing relationship
with Hollingsead for AirView in connection with the Fairlines
program in order to permit performance of higher level system
manufacturing, integration and test functions to meet the
regulatory requirements of the Federal Aviation Administration
("FAA"). Such arrangements enable the Company to manufacture its
other products in its existing facility, thereby avoiding the
need to provide for specialized manufacturing processes and
additional capacity to meet the needs of the Fairlines program.
The installation and use of AirView on any particular aircraft
requires prior certification and approvals from the FAA and
certification and approvals from aeronautical agencies of foreign
governments. Because the installation of AirView is considered a
major modification to an aircraft, the Company must apply for and
be granted an STC ("Supplemental Type Certificate") from the FAA.
This is a multi-step process involving required interim
approvals. A separate STC is required with respect to each
aircraft type on which AirView will be installed. Once an STC is
issued with respect to an aircraft type, the unit may be
installed on other aircraft of the same type with the same
configuration, provided that each installation is performed in a
manner as specified by the aircraft specific STC. To date, the
Company has obtained an STC for Fairlines MD-81 aircraft.
The process of obtaining an STC is highly technical. The Company
has also entered into agreements with Hollingsead to assist the
Company in the application and approval process. Hollingsead is
an FAA designated engineering representative experienced in in-
flight entertainment systems and has the authority to approve,
subject to final FAA review, certain aspects of the Company's STC
applications. Because of the manpower and experience required to
perform installations, and due to the inherent relationship
between installation and the STC application and compliance
process, the Company anticipates that future installations of all
AirView systems, if any, will be performed by an experienced
third-party subcontractor such as Hollingsead.
In addition, the Company or its subcontractor must obtain from
the FAA a Parts Manufacturer Approval ("PMA") with respect to the
components of AirView to be installed on each specific aircraft
type for which an STC is granted. There can be no assurance that
the Company will be issued the STC's and PMA's for which it
applies or that if such approvals are granted, that they will be
granted within a reasonable time frame or within the amount
budgeted by the Company for such approvals. Federal law grants to
the FAA the authority to reexamine at any time the basis upon
which certification and approval of AirView may be granted and,
if appropriate, to amend or revoke such certifications and
approvals, subject to certain appeal rights.
The Company may also be required to obtain certification and
approval of AirView from the aeronautical authorities of foreign
countries. In many cases, through technical working agreements
between the FAA and the foreign aeronautical authorities, such
authorities will accept the FAA issuance of the STC as approval,
although certain countries' authorities reserve the right to
independently review the data and the compliance criteria which
support the issuance of the STC and to reach an independent
determination on whether to approve the equipment for
installation and operation. There can be no assurance that
necessary foreign government approvals will be obtained, or if
obtained, within a reasonable time frame or within the amount
budgeted by the Company for this aspect of the project.
On June 23, 1998, the Company entered into a non-binding letter
of intent with a major aeronautical electronics company to
purchase a 10% equity interest in the Company and license the
Company's patent pending AirView In-Flight Information and
Entertainment System technology for use in commercial air
transport and business aircraft. The Company has been actively
involved in the development of a business plan and a definitive
agreement that it anticipates will be completed by the end of
1998. The scope of the agreement currently being negotiated
covers equity investment in the Company, technology licensing,
design, development, integration, installation, certification,
production, marketing, sales, product and customer support of in-
flight entertainment systems. There can be no assurance, however,
that the Company will successfully negotiate a definitive
agreement for this relationship.
On October 27, 1998 the Company announced an order from
Raytheon Systems Company, a unit of Raytheon Company, the
completion center in Waco, Texas contracted by Boeing
Company, to equip the Boeing Business Jet (BBJ)
B737-73Q "Demonstrator" aircraft with TNCi's AirView for
Integrated Business and Entertainment System (IBES).
Installation is expected to occur in late 1998. Raytheon was
awarded contracts of $125 million from Boeing for the
design, engineering and installation of executive VIP
interiors on 11 Boeing Business Jets, including the
Demonstrator.
CruiseView
The Company entered into a CruiseView Purchase Agreement, dated
as of February 13, 1998 (the "CruiseView Agreement"), with
Continuous Network Advisors ("CNA") on behalf of Star Cruises
Management Limited ("Star"), an Isle of Man corporation engaged
in the operation of a commercial cruise line, for the purchase of
two CruiseView systems for installation on two Star cruise
vessels. It is estimated by the Company that in the event that
both CruiseView systems are sold to Star under the terms of the
CruiseView Agreement, the Company will generate over $6 million
in gross revenues. Delivery and installation of both CruiseView
systems under the terms of the agreement is expected to be
completed by September 30, 1999. The costs of purchase from the
Company include the cost of training Star employees for system
use and the cost of system installation.
On September 2, 1998, the Company entered into a Turnkey
Agreement with Carnival for delivery of CruiseView systems (the
"Carnival Agreement"). The Carnival Agreement calls for an
initial delivery of the CruiseView system for use aboard one
ship, the Carnival Cruise Lines "M/S Triumph", which system is
expected to be installed in early 1999. During the four-year
period commencing on the date of the Carnival Agreement, Carnival
has the right to designate an unspecified number of additional
ships for the installation of CruiseView by the Company. The
cost per cabin per ship for CruiseView purchase and installation
is provided for in the Carnival Agreement, as is the minimum
software license and installation cost per ship, with additional
per ship costs charged based upon the number of actual cabins.
The cost of training up to ten Carnival personnel per ship for
system operation is included in the contract cost for licensing
and installation of CruiseView, with the cost of additional
training and maintenance billed separately by the Company. The
Company anticipates gross revenues of over $2.5 million from the
purchase, installation and maintenance of CruiseView on the
initial Carnival cruise ship.
RESULTS OF OPERATIONS
Revenues decreased 61% to $1.4 million for the quarter and
decreased 25% to $5.1 million for the nine months ended September
30, 1998 from $3.5 million for the quarter and $6.9 million for
the nine months ended September 30, 1997. This decrease in the
third quarter primarily resulted from initial deliveries in 1997
of the Company's larger AirView systems to Fairlines and
shipments on the South Korean Government High School Program,
with similar large contract deliveries not occurring in the
comparable 1998 quarter.
Gross profit as a percentage of revenues increased by 15% to 48%
during the quarter and 10% to 45% for the nine months ended
September 30, 1998 as compared to 33% and 35% for the same
periods in 1997. This increase was primarily due to revenues
generated during the 1998 period from larger system sales with
higher margins that were not realized in the same 1997 periods.
Gross margins for any particular period are not necessarily
indicative of the results that may occur in any future period due
to factors including, but not limited to, changes in product mix,
fluctuating component cost, critical component availability and
industry competition.
Selling, general and administrative expenses decreased $172,019
(17%) for the quarter and decreased $438,649 (13%) for the nine
months ended September 30, 1998, as compared to the same 1997
periods. This increase related primarily to expenses which were
incurred in the respective periods in 1997 and not in 1998,
primarily for additional (i) marketing expenses (including
advertising, trade show, public relations, bidding and proposal
and demonstration expenses) associated with the introduction of
new products for Courseware on Demand and increased sales and
marketing activity in the cruise line market, and; (ii)
employment of sales and marketing personnel and related payroll
and non-recurring legal and administrative expenses related to
establishing a sales office in Singapore. The Company anticipates
that it will continue to invest in its marketing and sales
generation strategy (increasing advertising, trade show,
demonstration and proposal expenses and sales and marketing
personnel, with related payroll costs) to increase revenues and
increase net income from operations in the future; such
investment may adversely affect short-term operating performance.
Provision for doubtful accounts and inventory for 1998 periods
reflect a change from 1997 periods of $2.1 million for the third
quarter and $2.8 million for the nine months ended September 30,
1998. $1.1 million for the third quarter and $1.8 million for the
nine months of 1998 resulted from a writedown of inventories and
a reserve for the uncertainty and possible uncollectibility of
outstanding receivables due to (i) repeated program schedule
delays by Fairlines related to shipsets three and four
and (ii) the length of time that
accounts receivable for extended programs with Fairlines and the
South Korean Government High School Program have been past due.
Additionally, a $1.0 million increase in the provision for
doubtful accounts for the third quarter and nine months ended
September 30, 1998 resulted from a reserve taken for a fixed fee
arrangement with a major aeronautical electronics company negotiated
in June 1998 with respect to the licensing
of the Company's technology, the value of which licensing cannot
now be considered fixed and determinable due to a change in facts
and circumstances. The current agreement under discussion
integrates the fixed fee arrangement which was originally viewed
as being a separate, distinct relationship, with a broader transaction
involving a planned equity investment.(See "General - AirView" above)
Changes in interest income and expense are attributable to
changes in average outstanding borrowings during the periods
presented, a conversion of debt interest to preferred stock
dividends and interest income on restricted cash and short-term
securities.
Liquidity and Capital Resources; Certain Transactions
During the nine months ended September 30, 1998, the Company's
cash increased $71,182 principally due to the net proceeds from
the issuance of convertible preferred stock of $2.0 million,
proceeds from the issuance of $2.7 million of debt and the sale
of short term investments of $638,559, offset by cash used in
operating activities of $5.1 million and the purchase of
property and equipment of $94,639. The negative change in cash
from operating activities primarily resulted from a net loss of
$3.6 million, a decrease in accounts payable and accrued expenses
of $2.6 million, and an increase of $3.0 million in accounts
receivable, offset by a decrease in inventory of $1.1 million.
The reduction in cash from operating activities was offset by
depreciation and amortization of $252,000 and an increase in
provision for doubtful accounts and inventory of $2.8 million.
The Company's primary source of funds at September 30, 1998
consisted of $1.1 million in cash and funds available under a
$1.0 million revolving line of credit. $1.0 million of cash
represents two certificates of deposit which are restricted from
use by the fact that they are pledged as collateral for the
availability of the line of credit. The line of credit, which
expires in May 1999, bears interest at an annual rate of 7.05%.
At September 30, 1998, the Company had $975,000 borrowings
outstanding under the line of credit.
Capital expenditures for the purchase of property and equipment
for the nine months ended September 30, 1998 were $94,639,
primarily for the purchase of additional equipment and software
in order to expand product demonstration and development
capabilities. During the rest of 1998, capital expenditures, if
any, are anticipated to be funded through existing working
capital or other financing.
The Company is indebted to an institutional lender, as of
September 30, 1998, in the aggregate amount of $230,189, for the
purchase of its primary operating facility. This loan is secured
by the purchased real estate and the personal guarantees of
Wilbur and Barbara Riner, and bears annual interest at the rate
of such lender's prime rate plus 2%. A default by the Company in
payment of this mortgage loan could result in foreclosure against
the property.
On March 11, 1998, the Company raised gross proceeds of $2.2
million in a private placement to a single institutional
investor, KA Investments LDC (the "Investor"), of five-year
convertible debt securities (the "Debentures") pursuant to the
terms of a Convertible Debenture Purchase Agreement, dated March
11, 1998, by and between the Company and the Investor (the
"Debenture Purchase Agreement"). Each Debenture was sold for
$50,000.00, accrued interest at a rate of 4% per annum, and was
convertible at the option of the holder into shares of the
Company's Common Stock at a price per share equal to the lesser
of (i) $8.02 or (ii) 80% of the average closing market price of
the Company's Common Stock during the 21 trading days prior to
conversion, but in no event less than $3.00 per share (as
adjusted for stock splits). As of June 9, 1998, the Investor and
the Company entered into a Convertible Preferred Stock Purchase
Agreement (the "Purchase Agreement A"), pursuant to which the
Investor agreed to exchange all of its Debentures for 220,000
shares of the Company's 4% Series A Convertible Preferred Stock
(the "Series A Preferred Stock"). The financial terms of the
Series A Preferred Stock are identical to the financial terms of
the Debentures for which they were exchanged. The Company was
obligated to file and have declared effective by the Securities
and Exchange Commission (the "Commission"), on or prior to June
24, 1998, a registration statement with respect to the resale of
the Common Stock issuable upon conversion of the Series A
Preferred Stock. The Company originally filed such Registration
Statement on May 1, 1998, and such Registration Statement was
declared effective by the Commission on June 8, 1998. The Company
has agreed to use its best efforts to keep the Registration
Statement effective for a period of three (3) years following the
effective date of the Registration Statement, or through such
earlier date when the Common Stock to be acquired upon conversion
of the Series A Preferred Stock may be sold pursuant to Rule
144(k) under the Securities Act.
The Company registered the Shares underlying the Series A
Preferred Stock to provide the holder of such shares, upon
conversion of the Series A Preferred Stock, with freely tradable
shares of Common Stock. The related Registration Statement
covers up to 20% of the number of shares of Common Stock
outstanding on the issue date of the Series A Preferred Stock
under the Purchase Agreement. The terms of the Purchase
Agreement require that the Company maintain a reserve of up to
20% of the number of shares of Common Stock outstanding on the
issue date of the Series A Preferred Stock under the Purchase
Agreement for issuance upon conversion. The terms of the Series
A Preferred Stock permit the Company, at its option, to pay the
dividends on the Series A Preferred Stock in shares of Common
Stock in lieu of cash under certain circumstances. However, the
Company does not intend to issue such number of shares of Common
Stock in lieu of cash dividends which, when added to the number
of shares of Common Stock into which the Series A Preferred Stock
is convertible, would allow the aggregate number of such shares
of Common Stock to exceed 20% of the outstanding shares of Common
Stock on the issue date of the Series A Preferred Stock under the
Purchase Agreement A.
The outstanding Series A Preferred Stock is subject to mandatory
redemption by the Company, at the aggregate Stated Value ($100
per share) thereof plus accrued and unpaid dividends, on March
11, 2003, or earlier under certain circumstances. In addition,
during the period from March 11, 2001 through March 11, 2003, if
any five- day average of the closing bid price of the Common
Stock is $3.00 or greater, any outstanding shares of Series A
Preferred Stock shall be subject to automatic conversion by the
Company into shares of Common Stock at $3.00 per share. As of
September 30, 1998, holders of the Company's Series A Preferred
Stock exercised their right and converted 130,000 shares of the
Series A Preferred Stock into 442,153 shares of the Company's
Common Stock.
On May 19, 1998, the Company entered into a promissory note with
an institutional lender in the amount of $470,000. This note is
secured by the real estate of the Company. The note is due and
payable on April 19, 2001 and bears interest, payable monthly, at
an annual rate of 16%.
On June 29, 1998, the Company entered into a promissory note (the
"Investor Note") with an institutional investor in the amount of
$1,250,000. This note was unsecured and was due and payable with
accrued interest at an annual rate of 8% on August 28, 1998. The
Company, in its sole discretion, could elect to pay this note on
August 28, 1998, subject to a payment charge of $87,500, or
exchange this note for a series of convertible preferred stock or
convertible debentures of the Company. Repayment of the Investor
Note was orally extended and made payable on demand.
On October 23, 1998, the Company elected to exchange the Investor
Note for 1,500 shares of the Company's Series B 8% Convertible
Preferred Stock (the " Series B Preferred Stock") and warrants to
acquire 100,000 shares of Common Stock issued to the holder of
the Series B Preferred Stock (the "Warrants"). The $1,000 stated
value per share of Series B Preferred Stock is convertible at the
option of the holder into shares of Common Stock, at a price per
share equal to (i) from November 22, 1998 through December 22,
1998, at the lesser of $ 3.66 per share of Common Stock (the
"Closing Price") or 80% of the average of the closing bid prices
as reported on the Nasdaq SmallCap Market ("Nasdaq") for the
lowest five of the 20 trading days immediately preceding the date
of Series B Preferred Stock conversion (the "Average Price"),
(ii) from December 23,1998 through January 21, 1999, at the
lesser of the Closing Price or 77.5% of the Average Price, and
(iii) from and after January 22, 1999, at the lesser of the
Closing Price or 75% of the Average Price. The Warrants are
exercisable to acquire shares of Common Stock at a price per
share equal to $4.125.
The shares of Series B Preferred Stock were issued pursuant to a
Securities Purchase Agreement, dated as of October 23, 1998 (the
"Purchase Agreement B"), entered into between the Company and a
single institutional investor upon the exchange of outstanding
loan principal and accrued interest pursuant to the Investor
Note, plus certain premiums, owed by the Company to that
investor. In connection with such exchange of indebtedness, the
Company also issued the Warrant to the same institutional
investor. The Company is obligated to file and have declared
effective by the Commission, a registration statement with
respect to the resale of the Common Stock issuable upon
conversion of the Series B Preferred Stock pursuant to the terms
of a Registration Rights Agreement entered into between the
Company and the holder of the Series B Preferred Stock and the
Warrants on October 23, 1998 (the "Registration Agreement").
Pursuant to the Registration Agreement, the Company is required
to use its best efforts to maintain a continuously effective
Registration Statement, with respect to the Common Stock
underlying the Series B Preferred Stock and the Warrants until
the earlier of three years after the Registration Statement is
declared effective or until such earlier date on which such
Common Stock may be sold pursuant to Rule 144(k) under the
Securities Act of 1933, as amended (the "Securities Act"). The
Company will not receive any proceeds from the resale by the
holders of any of the Common Stock issuable to the holders upon
conversion of the Series B Preferred Stock.
Pursuant to the terms of the Registration Agreement, the
Registration Statement will cover up to 20% of the number of
shares of Common Stock outstanding on the issue date of the
Series B Preferred Stock under the Purchase Agreement B. The
terms of the Purchase Agreement B require that the Company
maintain a reserve of up to 20% of the number of shares of Common
Stock outstanding on the issue date of the Series B Preferred
Stock under the Purchase Agreement B for issuance upon
conversion.
At any time through December 22, 1998, the Company may redeem the
Series B Preferred Stock at 103% of the aggregate stated value
($1,000 per share) thereof, plus all accrued and unpaid
dividends. Thereafter, through October 23, 2001, the Company may
redeem all outstanding shares of the Series B Preferred Stock at
135% of the aggregate stated value thereof, plus accrued and
unpaid dividends on such shares (the "Redemption Price"), as long
as the then Current Market Price (as defined) of the Common Stock
at the time of optional redemption is less than $3.66 per share.
Furthermore, all shares of Series B Preferred Stock that have not
been converted to Common Stock prior to October 23, 2001 shall be
converted to Common Stock on that date. Notwithstanding such
mandatory conversion, however, absent approval of the Purchase
Agreement B by Company Stockholders in satisfaction of applicable
Nasdaq rules, rather than conversion of all then outstanding
Series B Preferred Stock the Company shall be required to make
cash redemption payments equal to the Redemption Price of such
shares to the extent that any common shares issuable upon
conversion, when aggregated with (i) all common shares previously
issued on Series B Preferred Stock conversion, (ii) all common
shares issued as stock dividends on the Preferred Stock, and
(iii) all common shares issuable on exercise of the Warrants,
would equal 20% or more of the number of outstanding shares of
Common Stock on October 23, 1998.
On August 12, 1998, the Company entered into promissory notes
(collectively "Series Notes") with five individual investors in
the aggregate amount of $650,000. The Series Notes were unsecured
and were due and payable with accrued interest at an annual rate
of 8% on October 14, 1998. The Company, in its sole discretion,
could elect to pay these Series Notes on October 12, 1998,
subject to a payment charge equal to 7% of the principal amount,
or exchange the Series Notes for a series of convertible
preferred stock or convertible debentures of the Company.
On October 12, 1998, the Company entered into new promissory
notes (collectively "Series A Notes") in the aggregate amount of
$704,082 with the holders of the Series Notes to replace and
rollover the Series Notes. The Series A Notes are unsecured and
are due and payable with accrued interest at an annual rate of 8%
on December 11, 1998. The Company, in its sole discretion, may
elect to pay these Series A Notes on December 11, 1998, subject
to a payment charge equal to 7% of the principal amount, or
exchange the Series A Notes for a series of convertible preferred
stock or convertible debentures of the Company.
The Company believes that its working capital requirements will
increase throughout 1998 and beyond, particularly as its focus
continues on large, long-term projects. The Company is in
discussions with commercial and private lenders to increase the
availability of borrowings secured by assets of the Company. The
Company believes that currently available cash, the proceeds
received from the issuance of additional debt and preferred stock
and funds generated from operations, if any, further expansion of
terms with trade creditors and increasing the availability of
borrowings secured by assets of the Company will be sufficient to
satisfy its cash needs for the foreseeable future. However,
maintaining an adequate level of working capital through the end
of 1998, and thereafter, will depend in part on collection of
accounts receivable on a timely basis, the success of the
Company's products in the marketplace, the relative profitability
of those products, continued availability of memory and storage
components at favorable pricing and the Company's ability to
control operating expenses. The Company may seek or require
additional financing for growth opportunities, including any
expansion that the Company may undertake internally, for
strategic acquisitions or partnerships, or for expansion of
additional sites or major long-term projects. There can be no
assurance that any such financing will be available on terms
acceptable to the Company, if at all.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Amendment to the Certificate of
Incorporation of the Registrant
10.1 Securities Purchase Agreement, dated as of
October 23, 1998, between the Shaar Fund Ltd. (the
"Investor") and the Registrant.
10.2 Registration Rights Agreement, dated as of
October 23, 1998, between the Investor and the
Registrant.
10.3 Warrant Agreement dated October 23, 1998, between
the Investor and the Registrant.
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE NETWORK CONNECTION, INC.
(Registrant)
Date: November 16, 1998 By:__/s/ Wilbur
Riner________________________________
Wilbur Riner
Chairman and Chief Executive
Officer
By:__/s/ Bryan R.
Carr________________________________
Bryan R. Carr
Chief Financial and Principal
Accounting Officer
Exhibit 3.1
ARTICLES OF AMENDMENT TO THE ARTICLES
OF INCORPORATION OF
THE NETWORK CONNECTION, INC.
_______________
These Amended Articles of Incorporation (the
"Amendment") are being executed as of October 23, 1998, for the
purpose of amending the Articles of Incorporation of The Network
Connection, Inc. (the "Company"), pursuant to Section 14-2-602 of
the Georgia Business Corporation Code.
NOW, THEREFORE, the undersigned hereby certifies as
follows:
FIRST: The name of the Corporation is The Network
Connection, Inc.
SECOND: That, pursuant to authority conferred upon
the Board of Directors by the Article of Incorporation, said
Board of Directors, at a meeting of the Board of Directors,
adopted a resolution providing for the creation of one thousand
and five-hundred (1,500) shares of 8% Series B Convertible
Preferred Stock, which resolution is as follows:
RESOLVED, that pursuant to Article V of the Articles of
Incorporation of the Company, there be and hereby is authorized
and created one series of Preferred Stock, hereby designated as
Series B 8% Convertible Preferred Stock to consist of one
thousand and five-hundred (1,500) shares with a par value of $.01
per share and a stated value of $1,000.00 per share (the "Stated
Value"), and that the designations, preferences and relative,
participating, optional or other rights of the Series B 8%
Convertible Preferred Stock (the "Series B Preferred Stock") and
qualifications, limitations or restrictions thereof, shall be as
follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article
whenever used in this Amendment have the following respective
meanings:
(a) "Additional Capital Shares" has the meaning set forth in
Section 6.1(c).
(b) "Affiliate" has the meaning ascribed to such term in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
(c) "Average Price" per share of Common Stock means the average
of the closing bid prices as reported on the Nasdaq SmallCap
Market ("NASDAQ") for the lowest five of the twenty Trading Days
immediately preceding the Conversion Date.
(d) "Business Day" means a day other than Saturday, Sunday or
any day on which banks located in the State of New York are
authorized or obligated to close.
(e) "Capital Shares" means the Common Shares and any other
shares of any other class or series of common stock, whether now
or hereafter authorized and however designated, which have the
right to participate in the distribution of earnings and assets
(upon dissolution, liquidation or winding-up) of the Corporation.
(f) "Closing Date" means October 23, 1998.
(g) "Closing Price" per share of Common Stock means the closing
bid price as reported on the NASDAQ for the Trading Day
immediately preceding the Closing Date.
(h) "Common Shares" or "Common Stock" means shares of common
stock, $.001 par value, of the Corporation.
(i) "Common Stock Issued at Conversion" when used with reference
to the securities issuable upon conversion of the Series B
Preferred Stock, means all Common Shares now or hereafter
Outstanding and securities of any other class or series into
which the Series B Preferred Stock hereafter shall have been
changed or substituted, whether now or hereafter created and
however designated.
(j) "Conversion Date" means any day on which all or any portion
of shares of the Series B Preferred Stock is converted in
accordance with the provisions hereof.
(k) "Conversion Notice" has the meaning set forth in
Section 6.2.
(l) "Conversion Price" means on any date of determination the
applicable price for the conversion of shares of Series B
Preferred Stock into Common Shares on such day as set forth in
Section 6.1.
(m) "Conversion Ratio" on any date means determination of the
applicable percentage of the Market Price for conversion of
shares of Series B Preferred Stock into Common Shares on such day
as set forth in Section 6.1.
(n) "Corporation" means The Network Connection, Inc., a Georgia
corporation, and any successor or resulting corporation by way of
merger, consolidation, sale or exchange of all or substantially
all of the Corporation's assets, or otherwise.
(o) "Current Market Price" on any date of determination means
the closing price of a Common Share on such day as reported on
the NASDAQ.
(p) "Default Dividend Rate" shall be equal to the Preferred
Stock Dividend Rate plus an additional 4% per annum.
(q) "Holder" means The Shaar Fund Ltd., any successor thereto,
or any Person to whom the Series B Preferred Stock is
subsequently transferred in accordance with the provisions
hereof.
(r) "Market Disruption Event" means any event that results in a
material suspension or limitation of trading of Common Shares on
the NASDAQ.
(s) "Market Price" per Common Share means the average of the
closing prices of the Common Shares as reported on the NASDAQ for
the five Trading Days in any Valuation Period.
(t) "Maximum Rate" has the meaning set forth in Section 7.3(b).
(u) "Outstanding" when used with reference to Common Shares or
Capital Shares (collectively, "Shares"), means, on any date of
determination, all issued and outstanding Shares, and includes
all such Shares issuable in respect of outstanding scrip or any
certificates representing fractional interests in such Shares;
provided, however, that any such Shares directly or indirectly
owned or held by or for the account of the Corporation or any
Subsidiary of the Corporation shall not be deemed "Outstanding"
for purposes hereof.
(v) "Person" means an individual, a corporation, a partnership,
an association, a limited liability company, a unincorporated
business organization, a trust or other entity or organization,
and any government or political subdivision or any agency or
instrumentality thereof.
(w) "Registration Rights Agreement" means that certain
Registration Rights Agreement of even date herewith between the
Corporation and The Shaar Fund Ltd.
(x) "SEC" means the United States Securities and Exchange
Commission.
(y) "Securities Act" means the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all
as in effect at the time.
(z) "Securities Purchase Agreement" means that certain
Securities Purchase Agreement of even date herewith between the
Corporation and The Shaar Fund Ltd.
(aa) "Series B Preferred Stock" means the Series B 8% Convertible
Preferred Stock of the Corporation or such other convertible
Preferred Stock exchanged therefor as provided in Section 2.1.
(bb) "Subsidiary" means any entity of which securities or other
ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing
similar functions are owned directly or indirectly by the
Corporation.
(cc) "Trading Day" means any day on which purchases and sales of
securities authorized for quotation on the NASDAQ are reported
thereon and on which no Market Disruption Event has occurred.
(dd) "Valuation Event" has the meaning set forth in Section 6.1.
(ee) "Valuation Period" means the five Trading Day period
immediately preceding the Conversion Date.
All references to "cash" or "$" herein means currency
of the United States of America.
ARTICLE 2
RESERVED
ARTICLE 3
RANK
SECTION 3.1
The Series B Preferred Stock shall rank (i) prior to
the Common Stock; (ii) prior to any class or series of capital
stock of the Corporation hereafter created other than "Pari Passu
Securities" (collectively, with the Common Stock, "Junior
Securities"); and (iii) pari passu with any class or series of
capital stock of the Corporation hereafter created specifically
ranking on parity with the Series B Preferred Stock ("Pari Passu
Securities").
ARTICLE 4
DIVIDENDS
SECTION 4.1
(a) (i) The Holder shall be entitled to receive, the Board of
Directors shall be obligated to declare and the Corporation shall
be obligated to pay, out of funds legally available for the
payment of dividends, dividends (subject to Sections 4(a)(ii)) at
the rate of 8% per annum (computed on the basis of a 360-day
year) (the "Dividend Rate") on the Liquidation Value (as defined
below) of each share of Series B Preferred Stock on and as of the
most recent Dividend Payment Due Date (as defined below) with
respect to each Dividend Period (as defined below). Dividends on
the Series B Preferred Stock shall be cumulative from the date
hereof, whether or not declared for any reason, including if such
declaration is prohibited under any outstanding indebtedness or
borrowings of the Corporation or any of its Subsidiaries, or any
other contractual provision binding on the Corporation or any of
its Subsidiaries, and whether or not there shall be funds legally
available for the payment thereof.
(ii) Each dividend shall be payable in equal quarterly amounts
on each March 31, June 30, September 30 and December 31 of each
year (each, a "Dividend Payment Due Date"), commencing December
31, 1998, to the holders of record of shares of the Series B
Preferred Stock, as they appear on the stock records of the
Corporation at the close of business on any record date, not more
than 60 days or less than 10 days preceding the payment dates
thereof, as shall be fixed by the Board of Directors. For the
purposes hereof, "Dividend Period" means the quarterly period
commencing on and including the day after the immediately
preceding Dividend Payment Date and ending on and including the
immediately subsequent Dividend Payment Date. Accrued and unpaid
dividends for any past Dividend Period may be declared and paid
at any time, without reference to any Dividend Payment Due Date,
to holders of record on such date, not more than 15 days
preceding the payment date thereof, as may be fixed by the Board
of Directors.
(iii) At the option of the Corporation, the dividend shall
be paid in cash or through the issuance of duly and validly
authorized and issued, fully paid and non-assessable, freely
tradeable shares of the Common Stock valued at the Market Price.
The Common Stock to be issued in lieu of cash payments shall be
registered for resale in the Registration Statement to be filed
by the Corporation to register the Common Stock issuable upon
conversion of the shares of Series B Preferred Stock and exercise
of the Warrants as set forth in the Registration Rights
Agreement. Notwithstanding the foregoing, until such
Registration Statement has been declared effective under the
Securities Act by the SEC, payment of dividends on the Series B
Preferred Stock shall be in cash.
(b) The Holder shall not be entitled to any dividends in excess
of the cumulative dividends, as herein provided, on the Series B
Preferred Stock. Except as provided in this Article 4, no
interest, or sum of money in lieu of interest, shall be payable
in respect of any dividend payment or payments on the Series B
Preferred Stock that may be in arrears.
(c) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends, except as described in the next
succeeding sentence, shall be declared or paid or set apart for
payment on Pari Passu Securities for any period unless full
cumulative dividends required to be paid in cash have been or
contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on
the Series B Preferred Stock for all Dividend Periods terminating
on or prior to the date of payment of the dividend on such class
or series of Pari Passu Securities. When dividends are not paid
in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series B
Preferred Stock and all dividends declared upon any other class
or series of Pari Passu Securities shall be declared ratably in
proportion to the respective amounts of dividends accumulated and
unpaid on the Series B Preferred Stock and accumulated and unpaid
on such Pari Passu Securities.
(d) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart
for payment or other distribution declared or made upon Junior
Securities, nor shall any Junior Securities be redeemed,
purchased or otherwise acquired (other than a redemption,
purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a
stock option plan) of the Corporation or any subsidiary, (all
such dividends, distributions, redemptions or purchases being
hereinafter referred to as a "Junior Securities Distribution")
for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any shares of any such
stock) by the Corporation, directly or indirectly, unless in each
case (i) the full cumulative dividends required to be paid in
cash on all outstanding shares of the Series B Preferred Stock
and any other Pari Passu Securities shall have been paid or set
apart for payment for all past Dividend Periods with respect to
the Series B Preferred Stock and all past dividend periods with
respect to such Pari Passu Securities, and (ii) sufficient funds
shall have been paid or set apart for the payment of the dividend
for the current Dividend Period with respect to the Series B
Preferred Stock and the current dividend period with respect to
such Pari Passu Securities.
ARTICLE 5
LIQUIDATION PREFERENCE
SECTION 5.1
(a) If the Corporation shall commence a voluntary case under the
Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of
an order for relief in an involuntary case under any law or to
the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make
an assignment for the benefit of its creditors, or admit in
writing its inability to pay its debts generally as they become
due, or if a decree or order for relief in respect of the
Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or state bankruptcy,
insolvency or similar law resulting in the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator
(or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or
liquidation of its affairs, and any such decree or order shall be
unstayed and in effect for a period of thirty (30) consecutive
days and, on account of any such event, the Corporation shall
liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being
considered a "Liquidation Event"), no distribution shall be made
to the holders of any shares of capital stock of the Corporation
upon liquidation, dissolution or winding up unless prior thereto,
the holders of shares of Series B Preferred Stock, subject to
Article 5, shall have received the Liquidation Preference (as
defined in Section 5.1(c)) with respect to each share. If upon
the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series B
Preferred Stock and holders of Pari Passu Securities shall be
insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and
funds of the Corporation legally available for distribution to
the Series B Preferred Stock and the Pari Passu Securities shall
be distributed ratably among such shares in proportion to the
ratio that the Liquidation Preference payable on each such share
bears to the aggregate liquidation preference payable on all such
shares.
(b) At the option of each Holder, the sale, conveyance of
disposition of all or substantially all of the assets of the
Corporation, the effectuation by the Corporation of a transaction
or series of related transactions in which more than 50% of the
voting power of the Corporation is disposed of, or the
consolidation, merger or other business combination of the
Corporation with or into any other Person (as defined below) or
Persons when the Corporation is not the survivor shall be deemed
to be a liquidation, dissolution or winding up of the Corporation
pursuant to which the Corporation shall be required to
distribute, upon consummation of and as a condition to, such
transaction an amount equal to 120% of the Liquidation Preference
with respect to each outstanding share of Series B Preferred
Stock in accordance with and subject to the terms of this Article
5; provided, that all holders of Series B Preferred Stock shall
be deemed to elect the option set forth above if at least a
majority in interest of such holders elect such option. "Person"
shall mean any individual, corporation, limited liability
company, partnership, association, trust or other entity or
organization.
(c) For purposes hereof, the "Liquidation Preference" with
respect to a share of the Series B Preferred Stock shall mean an
amount equal to the sum of (i) the Stated Value thereof, plus
(ii) the aggregate of all accrued and unpaid dividends on such
share of Series B Preferred Stock until the most recent Dividend
Payment Date; provided that, in the event of an actual
liquidation, dissolution or winding up of the Corporation, the
amount referred to in clause (ii) above shall be calculated by
including accrued and unpaid dividends to the actual date of such
liquidation, dissolution or winding up, rather than the Dividend
Payment Due Date referred to above.
ARTICLE 6
CONVERSION OF PREFERRED STOCK
SECTION 6.1 Conversion; Conversion Price. At the option of
the Holder, the shares of Preferred Stock may be converted,
either in whole or in part, into Common Shares (calculated as to
each such conversion to the nearest 1/100th of a share), at any
time, and from time to time, (i) from and after a date 30 days
from the date hereof until a date 60 days from the date hereof at
a Conversion Price equal to the lower of the (a) the Closing
Price or (b) 80.0% of the Average Price, (ii) from and after a
date 61 days from the date hereof until a date 90 days from the
date hereof at a Conversion Price equal to the lower of the (a)
the Closing Price or (b) 77.5% of the Average Price and
(iii) from and after a date 61 days from the date hereof at a
Conversion Price equal to the lower of the (a) the Closing Price
or (b) 75% of the Average Price. At the Corporation's option,
the amount of accrued and unpaid dividends as of the Conversion
Date shall not be subject to conversion but instead may be paid
in cash as of the Conversion Date; if the Corporation elects to
convert the amount of accrued and unpaid dividends at the
Conversion Date into Common Stock, the Common Stock issued to the
Holder shall be valued at the Conversion Price.
The number of shares of Common Stock due upon
conversion of Series B Preferred Stock shall be (i) the number of
shares of Series B Preferred Stock to be converted, multiplied by
(ii) the Stated Value and divided by (iii) the applicable
Conversion Price.
Within two (2) Business Days of the occurrence of a
Valuation Event, the Corporation shall send notice (the
"Valuation Event Notice") of such occurrence to the Holder.
Notwithstanding anything to the contrary contained herein, if a
Valuation Event occurs during any Valuation Period, a new
Valuation Period shall begin on the Trading Day immediately
following the occurrence of such Valuation Event and end on the
Conversion Date; provided that, if a Valuation Event occurs on
the fifth day of any Valuation Period, then the Conversion Price
shall be the Current Market Price of the Common Shares on such
day; and provided, further, that the Holder may, in its
discretion, postpone such Conversion Date to a Trading Day which
is no more than five (5) Trading Days after the occurrence of the
latest Valuation Event by delivering a notification to the
Corporation within two (2) Business Days of the receipt of the
Valuation Event Notice. In the event that the Holder deems the
Valuation Period to be other than the five (5) Trading Days
immediately prior to the Conversion Date, the Holder shall give
written notice of such fact to the Corporation in the related
Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "Valuation Event" shall mean
an event in which the Corporation at any time during a Valuation
Period takes any of the following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution of its Capital Shares;
(c) issues any additional Capital Shares (the "Additional
Capital Shares"), otherwise than as provided in the foregoing
Sections 6.1(a) and 6.1(b) above, at a price per share less, or
for other consideration lower, than the Current Market Price in
effect immediately prior to such issuances, or without
consideration, except for issuances under employee benefit plans
consistent with those presently in effect and issuances under
presently outstanding warrants, options or convertible
securities, to officers, directors or employees of the Company,
or otherwise under the Company's 1994 Employee Stock Option Plan
or non-employee Director Stock Option Plan;
(d) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price per
share for which Additional Capital Shares may at any time
thereafter be issuable pursuant to such warrants, options or
other rights shall be less than the Current Market Price in
effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for Capital Shares and the consideration per share
for which Additional Capital Shares may at any time thereafter be
issuable pursuant to the terms of such convertible, exchangeable
or exercisable securities shall be less than the Current Market
Price in effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend
in liquidation or by way of return of capital or other than as a
dividend payable out of earnings or surplus legally available for
the payment of dividends under applicable law or any distribution
to such holders made in respect of the sale of all or
substantially all of the Corporation's assets (other than under
the circumstances provided for in the foregoing Sections 6.1(a)
through 6.1(e)); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing
Sections 6.1(a) through 6.1(f), inclusive, which in the opinion
of the Corporation's Board of Directors, determined in good
faith, would have a material adverse effect upon the rights of
the Holder at the time of a conversion of the Preferred Stock.
SECTION 6.2 Exercise of Conversion Privilege. (a) Conversion
of the Series B Preferred Stock may be exercised, in whole or in
part, by the Holder by telecopying an executed and completed
notice of conversion in the form annexed hereto as Annex I (the
"Conversion Notice") to the Corporation. Each date on which a
Conversion Notice is telecopied to and received by the
Corporation in accordance with the provisions of this Section 6.2
shall constitute a Conversion Date. The Corporation shall
convert the Preferred Stock and issue the Common Stock Issued at
Conversion effective as of the Conversion Date. The Conversion
Notice also shall state the name or names (with addresses) of the
persons who are to become the holders of the Common Stock Issued
at Conversion in connection with such conversion. The Holder
shall deliver the shares of Series B Preferred Stock to the
Corporation by express courier within 30 days following the date
on which the telecopied Conversion Notice has been transmitted to
the Corporation. Upon surrender for conversion, the Preferred
Stock shall be accompanied by a proper assignment hereof to the
Corporation or be endorsed in blank. As promptly as practicable
after the receipt of the Conversion Notice as aforesaid, but in
any event not more than five Business Days after the
Corporation's receipt of such Conversion Notice, the Corporation
shall (i) issue the Common Stock issued at Conversion in
accordance with the provisions of this Article 6, and (ii) cause
to be mailed for delivery by overnight courier to the Holder (X)
a certificate or certificate(s) representing the number of Common
Shares to which the Holder is entitled by virtue of such
conversion, (Y) cash, as provided in Section 6.3, in respect of
any fraction of a Share issuable upon such conversion and (Z)
cash in the amount of accrued and unpaid dividends as of the
Conversion Date. Holder shall indemnify the Corporation for any
damages to third parties as a result of a claim by such third
party to ownership of the Preferred Stock converted prior to the
receipt of the Preferred Srock by the Corporation. Such
conversion shall be deemed to have been effected at the time at
which the Conversion Notice indicates so long as the Preferred
Stock shall have been surrendered as aforesaid at such time, and
at such time the rights of the Holder of the Preferred Stock, as
such, shall cease and the Person and Persons in whose name or
names the Common Stock Issued at Conversion shall be issuable
shall be deemed to have become the holder or holders of record of
the Common Shares represented thereby. The Conversion Notice
shall constitute a contract between the Holder and the
Corporation, whereby the Holder shall be deemed to subscribe for
the number of Common Shares which it will be entitled to receive
upon such conversion and, in payment and satisfaction of such
subscription (and for any cash adjustment to which it is entitled
pursuant to Section 6.4), to surrender the Preferred Stock and to
release the Corporation from all liability thereon. No cash
payment aggregating less than $1.50 shall be required to be given
unless specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes or
denies the right of the Holder hereof to effect the conversion of
the Preferred Stock into Common Shares or otherwise dishonors or
rejects any Conversion Notice delivered in accordance with this
Section 6.2 or (ii) any third party who is not and has never been
an Affiliate of the Holder commences any lawsuit or proceeding or
otherwise asserts any claim before any court or public or
governmental authority which seeks to challenge, deny, enjoin,
limit, modify, delay or dispute the right of the Holder hereof to
effect the conversion of the Preferred Stock into Common Shares,
then the Holder shall have the right, by written notice to the
Corporation, to require the Corporation to promptly redeem the
Series B Preferred Stock for cash at a redemption price equal to,
in the case of (i), one hundred and twenty-five percent (125%) of
the Stated Value thereof together with all accrued and unpaid
dividends thereon and, in the case of (ii), one hundred and
fifteen percent (115%) of the Stated Value thereof together with
all accrued and unpaid dividends thereon (each, the "Mandatory
Purchase Amount"). Under any of the circumstances set forth
above, the Corporation shall be responsible for the payment of
all costs and expenses of the Holder, including reasonable legal
fees and expenses, as and when incurred in disputing any such
action or pursuing its rights hereunder (in addition to any other
rights of the Holder).
SECTION 6.3 Fractional Shares. No fractional Common Shares or
scrip representing fractional Common Shares shall be issued upon
conversion of the Series B Preferred Stock. Instead of any
fractional Common Shares which otherwise would be issuable upon
conversion of the Series B Preferred Stock, the Corporation shall
pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction. No cash payment of less than $1.50
shall be required to be given unless specifically requested by
the Holder.
SECTION 6.4 Reclassification, Consolidation, Merger or
Mandatory Share Exchange. At any time while the Series B
Preferred Stock remains outstanding and any shares thereof have
not been converted, in case of any reclassification or change of
Outstanding Common Shares issuable upon conversion of the Series
B Preferred Stock (other than a change in par value, or from par
value to no par value per share, or from no par value per share
to par value or as a result of a subdivision or combination of
outstanding securities issuable upon conversion of the Series B
Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another
corporation (other than a merger or mandatory share exchange with
another corporation in which the Corporation is a continuing
corporation and which does not result in any reclassification or
change, other than a change in par value, or from par value to no
par value per share, or from no par value per share to par value,
or as a result of a subdivision or combination of Outstanding
Common Shares upon conversion of the Series B Preferred Stock),
or in the case of any sale or transfer to another corporation of
the property of the Corporation as an entirety or substantially
as an entirety, the Corporation, or such successor, resulting or
purchasing corporation, as the case may be, shall, without
payment of any additional consideration therefor, execute a new
Series B Preferred Stock providing that the Holder shall have the
right to convert such new Series B Preferred Stock (upon terms
and conditions not less favorable to the Holder than those in
effect pursuant to the Series B Preferred Stock) and to receive
upon such exercise, in lieu of each Common Share theretofore
issuable upon conversion of the Series B Preferred Stock, the
kind and amount of shares of stock, other securities, money or
property receivable upon such reclassification, change,
consolidation, merger, mandatory share exchange, sale or transfer
by the holder of one Common Share issuable upon conversion of the
Series B Preferred Stock had the Series B Preferred Stock been
converted immediately prior to such reclassification, change,
consolidation, merger, mandatory share exchange or sale or
transfer. The provisions of this Section 6.4 shall similarly
apply to successive reclassifications, changes, consolidations,
mergers, mandatory share exchanges and sales and transfers.
SECTION 6.5 Adjustments to Conversion Ratio. For so long as
any shares of the Series B Preferred Stock are outstanding, if
the Corporation (i) issues and sells pursuant to an exemption
from registration under the Securities Act (A) Common Shares at a
purchase price on the date of issuance thereof that is lower than
the Conversion Price, (B) warrants or options with an exercise
price representing a percentage of the Current Market Price with
an exercise price on the date of issuance of the warrants or
options that is lower than the Current Warrant Price (as defined
in the Warrants (as defined in the Securities Purchase
Agreement)) for the Holder, except for employee stock option
agreements or stock incentive agreements of the Corporation, or
(C) convertible, exchangeable or exercisable securities with a
right to exchange at lower than the Current Market Price on the
date of issuance or conversion, as applicable, of such
convertible, exchangeable or exercisable securities, except for
stock option agreements or stock incentive agreements, and (ii)
grants the right to the purchaser(s) thereof to demand that the
Corporation register under the Securities Act such Common Shares
issued or the Common Shares for which such warrants or options
may be exercised or such convertible, exchangeable or exercisable
securities may be converted, exercised or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such
lower rates.
SECTION 6.6 Optional Redemptions Under Certain Circumstances.
(i) At anytime after the date of issuance of the Series B
Preferred Stock until a date 60 days after the Closing Date, the
Corporation, upon notice delivered to the Holder as provided in
Section 6.7, may redeem the Series B Preferred Stock (but only
with respect to such shares as to which the Holder has not
theretofore furnished a Conversion Notice in compliance with
Section 6.2), at one hundred and three percent (103%) of the
Stated Value thereof (the "Optional Redemption Price"), together
with all accrued and unpaid dividends thereon to the date of
redemption (the "Redemption Date"). (ii) At anytime after the
date of issuance of the Series B Preferred Stock until the
Mandatory Conversion Date (as defined below), the Corporation,
upon notice delivered to the Holder as provided in Section 6.7,
may redeem the Series B Preferred Stock (but only with respect to
such shares as to which the Holder has not theretofore furnished
a Conversion Notice in compliance with Section 6.2), at one
hundred and thirty-five percent (135%) of the Stated Value
thereof (the "Optional Redemption Price"), together with all
accrued and unpaid dividends thereon to the Redemption Date;
provided, however, that the Corporation may only redeem the
Series B Preferred Stock under this Section 6.6(ii) if the
Current Market Price is less than the Current Market Price on the
Closing Date. Except as provided in Article 6 hereof, the
Corporation shall not have the right to prepay or redeem the
Series B Preferred Stock.
SECTION 6.7 Notice of Redemption. Notice of redemption
pursuant to Section 6.6 shall be provided by the Corporation to
the Holder in writing (by registered mail or overnight courier at
the Holder's last address appearing in the Corporation's security
registry) not less than ten (10) nor more than thirty (30) days
prior to the Redemption Date, which notice shall specify the
Redemption Date and refer to Section 6.6 (including, a statement
of the Market Price per Common Share) and this Section 6.7.
SECTION 6.8 Surrender of Preferred Stock. Upon any redemption
of the Series B Preferred Stock pursuant to Sections 6.6 or 6.7,
the Holder shall either deliver the Series B Preferred Stock by
hand to the Corporation at its principal executive offices or
surrender the same to the Corporation at such address by express
courier. Payment of the Optional Redemption Price specified in
Section 6.6 shall be made by the Corporation to the Holder
against receipt of the Series B Preferred Stock (as provided in
this Section 6.8) by wire transfer of immediately available funds
to such account(s) as the Holder shall specify to the
Corporation. If payment of such redemption price is not made in
full by the Mandatory Redemption Date or the Redemption Date, as
the case may be, the Holder shall again have the right to convert
the Series B Preferred Stock as provided in Article 6 hereof.
SECTION 6.9 Mandatory Conversion. On the third anniversary of
the date of this Agreement (the "Mandatory Conversion Date"), the
Corporation shall convert all Series B Preferred Stock
outstanding at the Conversion Price. Notwithstanding the
previous sentence, unless the Corporation shall have obtained the
approval of its voting stockholders to such issuance in
accordance with the rules of the NASDAQ or such other stock
market as the Corporation shall be required to comply with, the
Corporation shall not issue shares of Common Stock upon such
conversion, if such issuance of Common Stock, when added to the
number of shares of Common Stock previously issued by the
Corporation (i) upon conversion of shares of the Series B
Convertible Preferred Stock, (ii) upon exercise of the Warrants
issued pursuant to the terms of the Securities Purchase Agreement
and (iii) in payment of dividends on the Series B Convertible
Preferred Stock, would equal or exceed twenty percent (20%) of
the number of shares of the Corporation's Common Stock which were
issued and outstanding on the Closing Date (the "Maximum Issuance
Amount"). In the event that a Mandatory Conversion would require
the Corporation to issue shares of Common Stock equal to or in
excess of the Maximum Issuance Amount, the Corporation shall
complete such Mandatory Conversion by (i) converting shares of
Series B Convertible Preferred Stock which would result in the
Corporation issuing shares of Common Stock equal to one less than
an amount which would result in the Corporation issuing shares
equal to the Maximum Issuance Amount and (ii) redeeming the
remaining shares of Series B Convertible Preferred Stock in cash
at a price equal to one hundred and thirty-five percent (135%) of
the Stated Value of the shares of Series B Convertible Preferred
Stock to be so redeemed, together with all accrued and unpaid
dividends thereon to the date of such redemption.
SECTION 6.10 Compliance with Section 13(d). Notwithstanding
anything herein to the contrary, the Holder shall not have the
right, and the Company shall not have the obligation, to convert
all or any portion of the Series B Convertible Preferred Stock
(and the Company shall not have the right to pay dividends on the
Series B Convertible Preferred Stock in shares of common stock)
if and to the extent that the issuance to the Holder of shares of
common stock upon such conversion (or payment of dividends) would
result in the Holder being deemed the "beneficial owner" of more
than 5% of the then outstanding shares of Common Stock within the
meaning of Section 13(d) of the Securities Exchange Act of 1934,
as amended, and the rules promulgated thereunder. If any court
of competent jurisdiction shall determine that the foregoing
limitation is ineffective to prevent a Holder from being deemed
the beneficial owner of more than 5% of the then outstanding
shares of Common Stock, then the Corporation shall redeem so many
of such Holder's shares (the "Redemption Shares") of Series B
Convertible Preferred Stock as are necessary to cause such Holder
to be deemed the beneficial owner of not more than 5% of the then
outstanding shares of Common Stock. Upon such determination by a
court of competent jurisdiction, the Redemption Shares shall
immediately and without further action be deemed returned to the
status of authorized but unissued shares of Series B Convertible
Preferred Stock and the Holder shall have no interest in or
rights under such Redemption Shares. Any and all dividends paid
on or prior to the date of such determination shall be deemed
dividends paid on the remaining shares of Series B Convertible
Preferred Stock held by the Holder. Such redemption shall be for
cash at a redemption price equal to the sum of (i) the Stated
Value of the Redemption Shares and (ii) any accrued and unpaid
dividends to the date of such redemption; provided, however, if
the redemption is a result of the Mandatory Redemption pursuant
to Section 6.9, the Corporation may either (i) (a) make such
redemption in cash at a redemption price equal to the sum of (x)
one hundred and thirty-five percent (135%) of the Stated Value of
such shares and (y) any accrued and unpaid dividends to the date
of such redemption or (ii) extend the Mandatory Conversion Date
for a period of one year.
SECTION 6.11 Shareholder Approval. Unless the Corporation
shall have obtained the approval of its voting stockholders to
such issuance in accordance with the rules of the NASDAQ or such
other stock market as the Corporation shall be required to comply
with, the Corporation shall not issue shares of Common Stock (i)
upon conversion of any shares of Series B Convertible Preferred
Stock or (ii) as a dividend on the Series B Convertible Preferred
Stock, if such issuance of Common Stock, when added to the number
of shares of Common Stock previously issued by the Corporation
(i) upon conversion of shares of the Series B Convertible
Preferred Stock, (ii) upon exercise of the Warrants issued
pursuant to the terms of the Securities Purchase Agreement and
(iii) in payment of dividends on the Series B Convertible
Preferred Stock, would equal or exceed twenty percent (20%) of
the number of shares of the Corporation's Common Stock which were
issued and outstanding on the Closing Date (the "Maximum Issuance
Amount"). In the event that a properly executed Conversion
Notice is received by the Corporation which would require the
Corporation to issue shares of Common Stock equal to or in excess
of the Maximum Issuance Amount, the Corporation shall honor such
conversion request by (i) converting the number of shares of
Series B Convertible Preferred Stock stated in the Conversion
Notice not in excess of the Maximum Issuance Amount and (ii)
redeeming the number of shares of Series B Convertible Preferred
Stock stated in the Conversion Notice equal to or in excess of
the Maximum Issuance Amount in cash at a price equal to one
hundred and twenty-five percent (125%) of the Stated Value of the
shares of Series B Convertible Preferred Stock to be so redeemed,
together with all accrued and unpaid dividends thereon. In the
event that the Corporation shall elect to pay a dividend in
shares of Common Stock which would require the Corporation to
issue shares of Common Stock equal to or in excess of the Maximum
Issuance Amount, the Corporation shall pay (i) a dividend in
shares of Common Stock equal to one less than an amount which
would result in the Corporation issuing shares equal to the
Maximum Issuance Amount and (ii) the balance of the dividend in
cash.
ARTICLE 7
VOTING RIGHTS
The Holders of the Series B Preferred Stock have no
voting power, except as otherwise provided by the Georgia
Business Corporation Code ("GCL"), in this Article 7, and in
Article 8 below.
Notwithstanding the above, the Corporation shall
provide each Holder of Series B Preferred Stock with prior
notification of any meeting of the shareholders (and copies of
proxy materials and other information sent to shareholders). In
the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise
acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities
or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection
with any proposed liquidation, dissolution or winding up of the
Corporation, the Corporation shall mail a notice to each Holder,
at least thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which
any such action is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement
regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such
time.
To the extent that under the GCL the vote of the
holders of the Series B Preferred Stock, voting separately as a
class or series as applicable, is required to authorize a given
action of the Corporation, the affirmative vote or consent of the
holders of at least a majority of the shares of the Series B
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 B Preferred Stock (except as otherwise may be
required under the GCL) shall constitute the approval of such
action by the class. To the extent that under the GCL holders of
the Series B Preferred Stock are entitled to vote on a matter
with holders of Common Stock, voting together as one class, each
share of Series B Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which
it is then convertible using the record date for the taking of
such vote of shareholders as the date as of which the Conversion
Price is calculated. Holders of the Series B Preferred Stock
shall be entitled to notice of all shareholder meetings or
written consents (and copies of proxy materials and other
infirmation sent to shareholders) with respect to which they
would be entitled to vote, which notice would be provided
pursuant to the Corporation's bylaws and the GCL.
ARTICLE 8
PROTECTIVE PROVISIONS
So long as shares of Series B Preferred Stock are
outstanding, the Corporation shall not, without first obtaining
the approval (by vote or written consent, as provided by the GCL)
of the holders of at least a majority of the then outstanding
shares of Series B Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series B Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to distribution
of assets upon liquidation, dissolution or winding up of the
Corporation ("Senior Securities") or alter or change the rights,
preferences or privileges of any Senior Securities so as to
affect adversely the Series B Preferred Stock;
(c) increase the authorized number of shares of Series B
Preferred Stock; or
(d) do any act or thing not authorized or contemplated by this
Amendment which would result in taxation of the holders of shares
of the Series B 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).
In the event holders of at least a majority of the then
outstanding shares of Series B Preferred Stock agree to allow the
Corporation to alter or change the rights, preferences or
privileges of the shares of Series B Preferred Stock, pursuant to
subsection (a) above, so as to affect the Series B Preferred
Stock, then the Corporation will deliver notice of such approved
change to the holders of the Series B Preferred Stock that did
not agree to such alteration or change (the "Dissenting Holders")
and Dissenting Holders shall have the right for a period of
thirty (30) days to convert pursuant to the terms of this
Amendment as they exist prior to such alteration or change or
continue to hold their shares of Series B Preferred Stock.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 Loss, Theft, Destruction of Preferred Stock. Upon
receipt of evidence satisfactory to the Corporation of the loss,
theft, destruction or mutilation of shares of Series B Preferred
Stock and, in the case of any such loss, theft or destruction,
upon receipt of indemnity or security reasonably satisfactory to
the Corporation, or, in the case of any such mutilation, upon
surrender and cancellation of the Series B Preferred Stock, the
Corporation shall make, issue and deliver, in lieu of such lost,
stolen, destroyed or mutilated shares of Series B Preferred
Stock, new shares of Series B Preferred Stock of like tenor. The
Series B Preferred Stock shall be held and owned upon the express
condition that the provisions of this Section 10.1 are exclusive
with respect to the replacement of mutilated, destroyed, lost or
stolen shares of Series B Preferred Stock and shall preclude any
and all other rights and remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with
respect to the replacement of negotiable instruments or other
securities without the surrender thereof.
SECTION 9.2 Who Deemed Absolute Owner. The Corporation may
deem the Person in whose name the Series B Preferred Stock shall
be registered upon the registry books of the Corporation to be,
and may treat it as, the absolute owner of the Series B Preferred
Stock for the purpose of receiving payment of dividends on the
Series B Preferred Stock, for the conversion of the Series B
Preferred Stock and for all other purposes, and the Corporation
shall not be affected by any notice to the contrary. All such
payments and such conversion shall be valid and effectual to
satisfy and discharge the liability upon the Series B Preferred
Stock to the extent of the sum or sums so paid or the conversion
so made.
SECTION 9.3 Notice of Certain Events. In the case of the
occurrence of any event described in Sections 6.1, 6.6 or 6.7 of
this Amendment, the Corporation shall cause to be mailed to the
Holder of the Series B Preferred Stock at its last address as it
appears in the Corporation's security registry, at least twenty
(20) days prior to the applicable record, effective or expiration
date hereinafter specified (or, if such twenty (20) days notice
is not practicable, at the earliest practicable date prior to any
such record, effective or expiration date), a notice stating (x)
the date on which a record is to be taken for the purpose of such
dividend, distribution, issuance or granting of rights, options
or warrants, or if a record is not to be taken, the date as of
which the holders of record of Series B Preferred Stock to be
entitled to such dividend, distribution, issuance or granting of
rights, options or warrants are to be determined or (y) the date
on which such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that
holders of record of Series B Preferred Stock will be entitled to
exchange their shares for securities, cash or other property
deliverable upon such reclassification, consolidation, merger,
sale transfer, dissolution, liquidation or winding-up.
SECTION 9.4 Register. The Corporation shall keep at its
principal office a register in which the Corporation shall
provide for the registration of the Series B Preferred Stock.
Upon any transfer of the Series B Preferred Stock in accordance
with the provisions hereof, the Corporation shall register such
transfer on the Series B Preferred Stock register.
The Corporation may deem the person in whose name the
Series B Preferred Stock shall be registered upon the registry
books of the Corporation to be, and may treat it as, the absolute
owner of the Series B Preferred Stock for the purpose of
receiving payment of dividends on the Series B Preferred Stock,
for the conversion of the Series B Preferred Stock and for all
other purposes, and the Corporation shall not be affected by any
notice to the contrary. All such payments and such conversions
shall be valid and effective to satisfy and discharge the
liability upon the Series B Preferred Stock to the extent of the
sum or sums so paid or the conversion or conversions so made.
SECTION 9.5 Withholding. To the extent required by applicable
law, the Corporation may withhold amounts for or on account of
any taxes imposed or levied by or on behalf of any taxing
authority in the United States having jurisdiction over the
Corporation from any payments made pursuant to the Series B
Preferred Stock.
SECTION 9.6 Headings. The headings of the Articles and
Sections of this Amendment are inserted for convenience only and
do not constitute a part of this Amendment.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the Corporation has caused this
Amendment to the Certificate of Incorporation to be signed by its
duly authorized officers on this 23 day of October, 1998.
THE NETWORK CONNECTION, INC.
By:
Name:
Title:
By:
Name:
Title:
INITIAL
HOLDER
THE SHAAR FUND LTD.
By:
Name:
Title:
[FORM OF CONVERSION NOTICE]
TO:
The undersigned owner of this Series B 8% Convertible
Preferred Stock (the "Series B Preferred Stock") issued by The
Network Connection, Inc. (the "Corporation") hereby irrevocably
exercises its option to convert __________ shares of the Series B
Preferred Stock into shares of the common stock, $.001 par value,
of the Corporation ("Common Stock"), in accordance with the terms
of the Amendment. The undersigned hereby instructs the
Corporation to convert the number of shares of the Series B
Preferred Stock specified above into Shares of Common Stock
Issued at Conversion in accordance with the provisions of Article
6 of the Amendment. The undersigned directs that the Common
Stock issuable and certificates therefor deliverable upon
conversion, the Series B Preferred Stock recertificated, if any,
not being surrendered for conversion hereby, together with any
check in payment for fractional Common Stock, be issued in the
name of and delivered to the undersigned unless a different name
has been indicated below. All capitalized terms used and not
defined herein have the respective meanings assigned to them in
the Amendment.
Dated:
Signature
Fill in for registration of Series B Preferred Stock:
Please print name and address
(including zip code number) :
Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of October 23,
1998, between The Network Connection, Inc., a Georgia corporation
with principal executive offices located at 1324 Union Hill Road,
Alpharetta, Georgia 30004, (the "Company"), and the undersigned
("Buyer").
W I T N E S S E T H:
WHEREAS, the Company borrowed $1,250,000 from Buyer
pursuant to a Promissory Note in such amount dated June 30, 1998
(the "Note");
WHEREAS, Section 2(c) of the Note permitted the Company
to deliver to Buyer on the Maturity Date (as defined in the
Note), an 8% convertible debenture (the "Debenture") and warrants
(the "Previous Warrants") in accordance with the terms of the
Escrow Documents (as defined in the Note);
WHEREAS, the Note is now past due;
WHEREAS, Buyer has not declared a default nor has the
Company delivered the Debenture and the Previous Warrants;
WHEREAS, in lieu of delivery of the Debenture and the
Previous Warrants by the Company, the Company and Buyer now wish
to permit the Company to deliver this Agreement, the Preferred
Stock (as defined) and the Warrants (as defined);
WHEREAS, Buyer desires to purchase from Company, and
the Company desires to issue and sell to the Buyer, upon the
terms and subject to the conditions of this Agreement, (i) 1,500
shares of Series B 8% Convertible Preferred Stock, $.01 par value
(the "Preferred Stock"), having the rights, preferences and
privileges set forth in the Articles of Amendment to the Articles
of Incorporation of the Company attached hereto as Annex I (the
"Amendment") and (ii) 100,000 warrants (the "Warrants") in the
form attached hereto as Annex II;
WHEREAS, upon the terms and subject to the conditions
set forth in the Amendment, the Preferred Stock is convertible
into shares of the Company's common stock, $.001 par value
("Common Stock");
WHEREAS, the Warrants upon the terms and subject to the
conditions in the Warrants, will for a period of five (5) years
be exercisable to purchase 100,000 shares of Common Stock;
NOW THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
I. PURCHASE AND SALE OF PREFERRED STOCK AND WARRANTS
A. Transaction. Buyer hereby agrees to purchase from the
Company, and the Company has offered and hereby agrees to issue
and sell to the Buyer in a transaction exempt from the
registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "Securities Act"), the
Preferred Stock and the Warrants.
B. Purchase Price; Form of Payment. The purchase price for the
Preferred Stock and Warrants to be purchased by Buyer hereunder
shall be equal to $1,500,000, determined by aggregating principal
and accrued interest under the Note, along with a premium (the
"Premium") to the Company in consideration for the Buyer's
forbearance from earlier conversion of the Note in accordance
with the Escrow Documents (the "Purchase Price"). Buyer shall
pay the Purchase Price from the proceeds of the repayment of the
Note by the Company (including the Premium).
II. BUYER'S REPRESENTATIONS, WARRANTIES; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
Buyer represents and warrants to and covenants and
agrees with the Company as follows:
A. Buyer is purchasing the Preferred Stock, the Warrants, the
Common Stock issuable upon exercise of the Warrants (the "Warrant
Shares") and the shares of Common Stock issuable upon conversion
of the Preferred Stock (the "Conversion Shares" and, collectively
with the Preferred Stock, the Warrants and the Warrant Shares,
the "Securities") for its own account, for investment purposes
only and not with a view towards or in connection with the public
sale or distribution thereof in violation of the Securities Act.
B. Buyer is (i) an "accredited investor" within the meaning of
Rule 501 of Regulation D under the Securities Act, (ii)
experienced in making investments of the kind contemplated by
this Agreement, (iii) capable, by reason of its business and
financial experience, of evaluating the relative merits and risks
of an investment in the Securities, and (iv) able to afford the
loss of its investment in the Securities.
C. Buyer understands that the Securities are being offered and
sold by the Company in reliance on an exemption from the
registration requirements of the Securities Act and equivalent
state securities and "blue sky" laws, and that the Company is
relying upon the accuracy of, and Buyer's compliance with,
Buyer's representations, warranties and covenants set forth in
this Agreement to determine the availability of such exemption
and the eligibility of Buyer to purchase the Securities;
D. Buyer has been furnished with or provided access to all
materials relating to the business, financial position and
results of operations of the Company, and all other materials
requested by Buyer to enable it to make an informed investment
decision with respect to the Securities.
E. Buyer acknowledges that it has been furnished with copies of
the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997 and all other reports and documents
heretofore filed by the Company with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act and
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), since December 31, 1997 (collectively the "Commission
Filings").
F. Buyer acknowledges that in making its decision to purchase
the Securities it has been given an opportunity to ask questions
of and to receive answers from the Company's executive officers,
directors and management personnel concerning the terms and
conditions of the private placement of the Securities by the
Company.
G. Buyer understands that the Securities have not been approved
or disapproved by the Commission or any state securities
commission and that the foregoing authorities have not reviewed
any documents or instruments in connection with the offer and
sale to it of the Securities and have not confirmed or determined
the adequacy or accuracy of any such documents or instruments.
H. This Agreement has been duly and validly authorized,
executed and delivered by Buyer and is a valid and binding
agreement of Buyer enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally.
I. Neither Buyer nor its affiliates nor any person acting on
its or their behalf has the intention of entering, or will enter
into, prior to the closing, any put option, short position or
other similar instrument or position with respect to the Common
Stock and neither Buyer nor any of its affiliates nor any person
acting on its or their behalf will use at any time shares of
Common Stock acquired pursuant to this Agreement to settle any
put option, short position or other similar instrument or
position that may have been entered into prior to the execution
of this Agreement.
III. COMPANY'S REPRESENTATIONS
The Company represents and warrants to Buyer that:
A. Capitalization. 1. The authorized capital stock of the
Company consists of 10,000,000 shares of Common Stock, of which
4,617,140 shares are outstanding on the date hereof and 2,500,000
shares of preferred stock, of which 90,000 shares are outstanding
on the date hereof which can be converted into a maximum of
300,001 shares of Common Stock (not including the payment of
dividends thereon in additional shares of Common Stock), subject
to anti-dilution and similar provisions. All of the issued and
outstanding shares of Common Stock and preferred stock have been
duly authorized and validly issued and are fully paid and non-
assessable. As of the date hereof, the Company has outstanding
stock options and warrants to purchase 1,118,828 shares of Common
Stock. The Conversion Shares and Warrant Shares have been duly
and validly authorized and reserved for issuance by the Company,
and when issued by the Company upon conversion of, or in lieu of
accrued dividends on, the Preferred Shares, on exercise of the
Warrants will be duly and validly issued, fully paid and non-
assessable and will not subject the holder thereof to personal
liability by reason of being such holder. There are no
preemptive, subscription, "call" or other similar rights to
acquire the Common Stock (including the Conversion Shares and
Warrant Shares) that have been issued or granted to any person,
except as disclosed on Schedule III.A.1. hereto or otherwise
previously disclosed in writing to Buyer.
2. The Company does not own or control, directly or indirectly,
any interest in any other corporation, partnership, limited
liability company, unincorporated business organization,
association, trust or other business entity.
B. Organization; Reporting Company Status. 1. The Company is
a corporation duly organized, validly existing and in good
standing under the laws of the State of Georgia and is duly
qualified as a foreign corporation in all jurisdictions in which
the failure to so qualify would have a material adverse effect on
the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Company or on the
consummation of any of the transactions contemplated by this
Agreement (a "Material Adverse Effect").
2. The Company has registered the Common Stock pursuant to
Section 12 of the Exchange Act and has timely filed with the
Commission all reports and information required to be filed by it
pursuant to all reporting obligations under Section 13(a) or
15(d), as applicable, of the Exchange Act for the 12-month period
immediately preceding the date hereof. The Common Stock is
listed and traded on the NASDAQ SmallCap Stock Market ("NASDAQ")
and the Company has not received any notice regarding, and to its
knowledge there is no threat, of the termination or
discontinuance of the eligibility of the Common Stock for such
listing.
C. Authorized Shares. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock
sufficient in number for the conversion, of the Preferred Stock
(assuming for purposes of this Section III.C. a Conversion Price
(as defined in the Amendment) of not greater than $1.83 and the
exercise of 100,000 Warrants. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock
of the issuance of the Preferred Stock and Warrant Shares upon
conversion of the Preferred Stock and exercise of the Warrants.
The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Preferred Stock and
Warrant Shares upon exercise of the Warrants in accordance with
this Agreement, the Preferred Stock and the Warrants is absolute
and unconditional regardless of the dilutive effect that such
issuance may have on the ownership interests of other
stockholders of the Company.
D. Authority; Validity and Enforceability. The Company has the
requisite corporate power and authority to enter into this
Agreement, the Amendment, the Registration Rights Agreement of
even date herewith between the Company and Buyer, a copy of which
is annexed hereto as Annex IV (the "Registration Rights
Agreement") and the Warrants and to perform all of its
obligations hereunder and thereunder (including the issuance,
sale and delivery to Buyer of the Securities). The execution,
delivery and performance by the Company of this Agreement, the
Amendment, the Warrants and the Registration Rights Agreement,
and the consummation by the Company of the transactions
contemplated hereby and thereby (the issuance of the Preferred
Stock, the Warrants and the issuance and reservation for issuance
of the Conversion Shares and Warrant Shares), has been duly
authorized by all necessary corporate action on the part of the
Company. Each of this Agreement, the Amendment, the Warrants and
the Registration Rights Agreement has been duly validly executed
and delivered by the Company and each instrument constitutes a
valid and binding obligation of the Company enforceable against
it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and
remedies generally. The Securities have been duly and validly
authorized for issuance by the Company and, when executed and
delivered by the Company, will be valid and binding obligations
of the Company enforceable against it in accordance with their
terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally.
E. Non-contravention. The execution and delivery by the
Company of this Agreement, the Amendment, the Warrants and the
Registration Rights Agreement, the issuance of the Securities,
and the consummation by the Company of the other transactions
contemplated hereby and thereby, do not and will not conflict
with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default (or an event which, with
notice, lapse of time or both, would constitute a default) under
(i) the articles of incorporation or by-laws of the Company or
(ii) ,except for such conflict, breach or default which would not
have a Material Adverse Effect, any indenture, mortgage, deed of
trust or other material agreement or instrument to which the
Company is a party or by which its properties or assets are
bound, or any law, rule, regulation, decree, judgment or order of
any court or public or governmental authority having jurisdiction
over the Company or any of the Company's properties or assets.
F. Approvals. No authorization, approval or consent of any
court or public or governmental authority is required to be
obtained by the Company for the issuance and sale of the
Preferred Stock and the Warrants (and the Conversion Shares and
Warrant Shares) to Buyer as contemplated by this Agreement,
except such authorizations, approvals and consents that have been
obtained by the Company prior to the date hereof.
G. Commission Filings. None of the Commission Filings
contained at the time they were filed any untrue statement of a
material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were
made, not misleading.
H. Absence of Certain Changes. Except as disclosed on Schedule
III.A.1., Schedule III.H. or in the Financial Statements (as
defined in Section III.L. hereto, since the Balance Sheet Date
(as defined in Section III.L.), there has not occurred any
change, event or development in the business, financial
condition, prospects or results of operations of the Company, and
there has not existed any condition having or reasonably likely
to have, a Material Adverse Effect.
I. Full Disclosure. There is no fact known to the Company
(other than general economic or industry conditions known to the
public generally) that has not been fully disclosed in writing to
the Buyer that (i) reasonably would be expected to have a
Material Adverse Effect or (ii) reasonably would be expected to
materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement, the
Amendment, the Warrants or the Registration Rights Agreement.
J. Absence of Litigation. There is no action, suit, claim,
proceeding, inquiry or investigation pending or, to the Company's
knowledge, threatened, by or before any court or public or
governmental authority which, if determined adversely to the
Company, would have a Material Adverse Effect.
K. Absence of Events of Default. No "Event of Default" (as
defined in any agreement or instrument to which the Company is a
party) and no event which, with notice, lapse of time or both,
would constitute an Event of Default (as so defined), has
occurred and is continuing, which could have a Material Adverse
Effect.
L. Financial Statements; No Undisclosed Liabilities. The
Company has delivered to Buyer true and complete copies of its
audited balance sheet as at December 31, 1997 and the related
audited statements of operations and cash flows for the fiscal
years ended December 31, 1997 including the related notes and
schedules thereto as well as the same financial statements as of
and for the three and six month periods ended March 31, 1998 and
June 30, 1998, respectively (collectively, the "Financial
Statements"), and all management letters, if any, from the
Company's independent auditors relating to the dates and periods
covered by the Financial Statements. Each of the Financial
Statements is complete and correct in all material respects, has
been prepared in accordance with United States General Accepted
Accounting Principles ("GAAP") (subject, in the case of the
interim Financial Statements, to normal year end adjustments and
the absence of footnotes) and in conformity with the practices
consistently applied by the Company without modification of the
accounting principles used in the preparation thereof, and fairly
presents the financial position, results of operations and cash
flows of the Company as at the dates and for the periods
indicated. For purposes hereof, the audited balance sheet of the
Company as at December 31, 1997 is hereinafter referred to as the
"Balance Sheet" and December 31, 1997 is hereinafter referred to
as the "Balance Sheet Date". The Company has no indebtedness,
obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become
due) that would have been required to be reflected in, reserved
against or otherwise described in the Balance Sheet or in the
notes thereto in accordance with GAAP, which was not fully
reflected in, reserved against or otherwise described in the
Balance Sheet or the notes thereto or was not incurred in the
ordinary course of business consistent with the Company's past
practices since the Balance Sheet Date.
M. Compliance with Laws; Permits. The Company is in compliance
with all laws, rules, regulations, codes, ordinances and statutes
(collectively "Laws") applicable to it or to the conduct of its
business, except for such non-compliance which would not have a
Material Adverse Effect. The Company possesses all permits,
approvals, authorizations, licenses, certificates and consents
from all public and governmental authorities which are necessary
to conduct its business, except for those the absence of which
would not have a Material Adverse Effect.
N. Related Party Transactions. Neither the Company nor any of
its officers, directors or "Affiliates" (as such term is defined
in Rule 12b-2 under the Exchange Act) has borrowed any moneys
from or has outstanding any indebtedness or other similar
obligations to the Company. Neither the Company nor any of its
officers, directors or Affiliates (i) owns any direct or indirect
interest constituting more than a one percent equity (or similar
profit participation) interest in, or controls or is a director,
officer, partner, member or employee of, or consultant to or
lender to or borrower from, or has the right to participate in
the profits of, any person or entity which is (x) a competitor,
supplier, customer, landlord, tenant, creditor or debtor of the
Company, (y) engaged in a business related to the business of the
Company , or (z) a participant in any transaction to which the
Company is a party (other than in the ordinary course of the
Company's business) or (ii) is a party to any contract,
agreement, commitment or other arrangement with the Company.
O. Insurance. The Company maintains property and casualty,
general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance with
financially sound and reputable insurers that is adequate,
consistent with industry standards and the Company's historical
claims experience. The Company has not received notice from, and
has no knowledge of any threat by, any insurer (that has issued
any insurance policy to the Company) that such insurer intends to
deny coverage under or cancel, discontinue or not renew any
insurance policy presently in force.
P. Securities Law Matters. Based, in part, upon the
representations and warranties of Buyer set forth in Section II
hereof, the offer and sale by the Company of the Securities is
exempt from (i) the registration and prospectus delivery
requirements of the Securities Act and the rules and regulations
of the Commission thereunder and (ii) the registration and/or
qualification provisions of all applicable state securities and
"blue sky" laws. Other than pursuant to an effective
registration statement under the Securities Act, the Company has
not issued, offered or sold Preferred Stock or any shares of
Common Stock (including for this purpose any securities of the
same or a similar class as the Preferred Stock or Common Stock,
or any securities convertible into or exchangeable or exercisable
for Preferred Stock or Common Stock or any such other securities)
within the six-month period next preceding the date hereof,
except as previously disclosed in writing to Buyer, and the
Company shall not directly or indirectly take, and shall not
permit any of its directors, officers or Affiliates directly or
indirectly to take, any action (including, without limitation,
any offering or sale to any person or entity of Preferred Stock
or shares of Common Stock), so as to make unavailable the
exemption from Securities Act registration being relied upon by
the Company for the offer and sale to Buyer of the Preferred
Stock (and the Conversion Shares) as contemplated by this
Agreement. No form of general solicitation or advertising has
been used or authorized by the Company or any of its officers,
directors or Affiliates in connection with the offer or sale of
the Preferred Stock (and the Conversion Shares) as contemplated
by this Agreement or any other agreement to which the Company is
a party.
Q. Environmental Matters.
1. The operations of the Company are in material compliance
with all applicable Environmental Laws and all permits issued
pursuant to Environmental Laws or otherwise;
2. to its knowledge, the Company has obtained or applied for
all material permits required under all applicable Environmental
Laws necessary to operate its business;
3. the Company is not the subject of any outstanding written
order of or agreement with any governmental authority or person
respecting (i) Environmental Laws, (ii) Remedial Action or (iii)
any Release or threatened Release of Hazardous Materials;
4. the Company has not received, since the Balance Sheet Date,
any written communication alleging that it may be in violation of
any Environmental Law or any permit issued pursuant to any
Environmental Law, or may have any liability under any
Environmental Law;
5. the Company does not have any current contingent liability
in connection with any Release of any Hazardous Materials into
the indoor or outdoor environment (whether on-site or off-site);
6. To the Company's knowledge, there are no investigations of
the business, operations, or currently or previously owned,
operated or leased property of the Company pending or threatened
which could lead to the imposition of any liability pursuant to
any Environmental Law;
7. there is not located at any of the properties of the Company
any (A) underground storage tanks, (B) asbestos-containing
material or (C) equipment containing polychlorinated biphenyls;
and,
8. the Company has provided to Buyer all environmentally
related audits, studies, reports, analyses, and results of
investigations that have been performed with respect to the
currently or previously owned, leased or operated properties of
the Company.
For purposes of this Section III.Q.:
"Environmental Law" means any foreign, federal, state
or local statute, regulation, ordinance, or rule of common law as
now or hereafter in effect in any way relating to the protection
of human health and safety or the environment including, without
limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. 9601 et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. App. 1801 et
seq.), the Resource Conservation and Recovery Act (42 U.S.C.
6901 et seq.), the Clean Water Act (33 U.S.C. 1251 et seq.),
the Clean Air Act (42 U.S.C. 7401 et seq.), the Toxic
Substances Control Act (15 U.S.C. 2601 et seq.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 136 et
seq.), and the Occupational Safety and Health Act (29 U.S.C.
651 et seq.), and the regulations promulgated pursuant thereto.
"Hazardous Material" means any substance, material or
waste which is regulated by the United States, Canada or any of
its provinces, or any state or local governmental authority
including, without limitation, petroleum and its by-products,
asbestos, and any material or substance which is defined as a
"hazardous waste," "hazardous substance," "hazardous material,"
"restricted hazardous waste," "industrial waste," "solid waste,"
"contaminant," "pollutant," "toxic waste" or toxic substance"
under any provision of any Environmental Law;
"Release" means any release, spill, filtration,
emission, leaking, pumping, injection, deposit, disposal,
discharge, dispersal, or leaching into the indoor or outdoor
environment, or into or out of any property;
"Remedial Action" means all actions to (x) clean up,
remove, treat or in any other way address any Hazardous Material;
(y) prevent the Release of any Hazardous Material so it does not
endanger or threaten to endanger public health or welfare or the
indoor or outdoor environment; or (z) perform pre-remedial
studies and investigations or post-remedial monitoring and care.
R. Labor Matters. The Company is not party to any labor or
collective bargaining agreement and there are no labor or
collective bargaining agreements which pertain to employees of
the Company. No employees of the Company are represented by any
labor organization and none of such employees has made a pending
demand for recognition, and there are no representation
proceedings or petitions seeking a representation proceeding
presently pending or, to the Company's knowledge, threatened to
be brought or filed, with the National Labor Relations Board or
other labor relations tribunal. There is no organizing activity
involving the Company pending or to the Company's knowledge,
threatened by any labor organization or group of employees of the
Company. There are no (i) strikes, work stoppages, slowdowns,
lockouts or arbitrations or (ii) material grievances or other
labor disputes pending or, to the knowledge of the Company,
threatened against or involving the Company. There are no unfair
labor practice charges, grievances or complaints pending or, to
the knowledge of the Company, threatened by or on behalf of any
employee or group of employees of the Company.
S. ERISA Matters. The Company and its ERISA Affiliates are in
compliance in all material respects with all provisions of ERISA
applicable to it. Neither the Company nor any ERISA Affiliate
maintains, contributes, maintained or contributed to a plan
subject to the provisions of Title IV of ERISA or Section 412 of
the Internal Revenue Code.
For purposes of this Section III.S.:
"ERISA" means the Employee Retirement Income Security
Act of 1974, or any successor statute, together with the final
regulations promulgated thereunder, as the same may be amended
from time to time.
"ERISA Affiliate" means any trade or business (whether
or not incorporated) that is a member of a group of which the
Company is a member and which is treated as a single employer
under 414 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code").
T. Tax Matters. 1. The Company has filed all Tax Returns
which it is required to file under applicable Laws, except for
such Tax Returns in respect of which the failure to so file does
not and could not have a Material Adverse Effect; all such Tax
Returns are true and accurate in all material respects and have
been prepared in compliance with all applicable Laws; the Company
has paid all Taxes due and owing by it (whether or not such Taxes
are required to be shown on a Tax Return) and have withheld and
paid over to the appropriate taxing authorities all Taxes which
it is required to withhold from amounts paid or owing to any
employee, stockholder, creditor or other third parties; and since
the Balance Sheet Date, the charges, accruals and reserves for
Taxes with respect to the Company (including any provisions for
deferred income taxes) reflected on the books of the Company are
adequate to cover any Tax liabilities of the Company if its
current tax year were treated as ending on the date hereof.
2. No claim has been made by a taxing authority in a
jurisdiction where the Company does not file tax returns that
such corporation is or may be subject to taxation by that
jurisdiction. There are no foreign, federal, state or local tax
audits or administrative or judicial proceedings pending or being
conducted with respect to the Company; no information related to
Tax matters has been requested by any foreign, federal, state or
local taxing authority; and, except as disclosed above, no
written notice indicating an intent to open an audit or other
review has been received by the Company from any foreign,
federal, state or local taxing authority. There are no material
unresolved questions or claims concerning the Company's Tax
liability. The Company (A) has not executed or entered into a
closing agreement pursuant to 7121 of the Internal Revenue Code
or any predecessor provision thereof or any similar provision of
state, local or foreign law; or (B) has not agreed to or is
required to make any adjustments pursuant to 481 (a) of the
Internal Revenue Code or any similar provision of state, local or
foreign law by reason of a change in accounting method initiated
by the Company or has any knowledge that the IRS has proposed any
such adjustment or change in accounting method, or has any
application pending with any taxing authority requesting
permission for any changes in accounting methods that relate to
the business or operations of the Company. The Company has not
been a United States real property holding corporation within the
meaning of 897(c)(2) of the Internal Revenue Code during the
applicable period specified in 897(c)(1)(A)(ii) of the Internal
Revenue Code.
3. The Company has not made an election under 341(f) of the
Internal Revenue Code. The Company is not liable for the Taxes
of another person that is not a subsidiary of the Company under
(A) Treas. Reg. 1.1502-6 (or comparable provisions of state,
local or foreign law), (B) as a transferee or successor, (C) by
contract or indemnity or (D) otherwise. The Company is not a
party to any tax sharing agreement. The Company has not made any
payments, is obligated to make payments or is a party to an
agreement that could obligate it to make any payments that would
not be deductible under 280G of the Internal Revenue Code.
For purposes of this Section III.T.:
"IRS" means the United States Internal Revenue Service.
"Tax" or "Taxes" means federal, state, county, local,
foreign, or other income, gross receipts, ad valorem, franchise,
profits, sales or use, transfer, registration, excise, utility,
environmental, communications, real or personal property, capital
stock, license, payroll, wage or other withholding, employment,
social security, severance, stamp, occupation, alternative or add-
on minimum, estimated and other taxes of any kind whatsoever
(including, without limitation, deficiencies, penalties,
additions to tax, and interest attributable thereto) whether
disputed or not.
"Tax Return" means any return, information report or
filing with respect to Taxes, including any schedules attached
thereto and including any amendment thereof.
U. Property. The Company has good and marketable title to all
real and personal property owned by it, free and clear of all
liens, encumbrances and defects except such as do not materially
affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the
Company; and any real property and buildings held under lease by
the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of
such property and buildings by the Company.
V. Intellectual Property. The Company owns or possesses
adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names,
service marks, copyrights, copyright applications, licenses, know-
how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures) and other similar rights and proprietary knowledge
(collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the best of the Company's
knowledge, the Company is not infringing upon or in conflict with
any right of any other person with respect to any Intangibles.
No claims have been asserted by any person to the ownership or
use of any Intangibles and the Company has no knowledge of any
basis for such claim.
W. Internal Controls and Procedures. The Company maintains
accurate books and records and internal accounting controls which
provide reasonable assurance that (i) all transactions to which
the Company is a party or by which its properties are bound are
executed with management's authorization; (ii) the reported
accountability of the Company's assets is compared with existing
assets at regular intervals; (iii) access to the Company's assets
is permitted only in accordance with management's authorization;
and (iv) all transactions to which the Company is a party or by
which its properties are bound are recorded as necessary to
permit preparation of the financial statements of the Company in
accordance with U.S. generally accepted accounting principles.
X. Payments and Contributions. Neither the Company nor any of
its directors, officers or, to its knowledge, other employees has
(i) used any Company funds for any unlawful contribution,
endorsement, gift, entertainment or other unlawful expense
relating to political activity; (ii) made any direct or indirect
unlawful payment of Company funds to any foreign or domestic
government official or employee; (iii) violated or is in
violation of any provision of the Foreign Corrupt Practices Act
of 1977, as amended; or (iv) made any bribe, rebate, payoff,
influence payment, kickback or other similar payment to any
person with respect to Company matters.
Y. No Misrepresentation. No representation or warranty of the
Company contained in this Agreement, any schedule, annex or
exhibit hereto or any agreement, instrument or certificate
furnished by the Company to Buyer pursuant to this Agreement,
contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary
to make the statements therein, not misleading.
Z. Right of First Refusal. Other than a right of first refusal
which expired on September 11, 1998, granted to KA Investments
LDC under the terms of the Convertible Preferred Stock Purchase
Agreement, dated as of June 9,1998, the Company has not granted
any right of first refusal to any person with respect to the
issuance of Common Stock or securities convertible into Common
Stock.
IV. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
A. Restrictive Legend. Buyer acknowledges and agrees that,
upon issuance pursuant to this Agreement, the Securities (and any
shares of Common Stock issued in conversion of the Preferred
Stock or exercise of the Warrants) shall have endorsed thereon a
legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the Preferred Stock and
the Conversion Shares:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND ARE
BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH
OTHER LAWS."
B. Filings. The Company shall make all necessary SEC and "blue
sky" filings required to be made by the Company in connection
with the sale of the Securities to the Buyer as required by all
applicable Laws, and shall provide a copy thereof to the Buyer
promptly after such filing.
C. Reporting Status. So long as the Buyer beneficially owns
any of the Securities, the Company shall use its best efforts to
file all reports required to be filed by it with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act.
D. Reserved.
E. Listing. Except to the extent the Company lists its Common
Stock on The New York Stock Exchange or the Nasdaq National
Market System, the Company shall use its best efforts to maintain
its listing of the Common Stock on the NASDAQ.
F. Reserved Conversion Shares. Subject to Section 6.11 of the
Amendment, the Company at all times from and after the date
hereof shall have a sufficient number of shares of Common Stock
duly and validly authorized and reserved for issuance to satisfy
the conversion, in full, of the Preferred Stock (assuming for
purposes of this Section IV.F., a Conversion Price of not greater
than $1.83) and upon the exercise of the Warrants. In the event
the Current Market Price (as defined in the Amendment) declines
to $1.75, the Company shall, within 10 days of the occurrence of
such event, authorize and reserve for issuance such additional
shares of Common Stock sufficient in number for the conversion,
in full, of the Preferred Stock, assuming for purposes of this
Section IV.F. a Conversion Price of not greater than $1.00 per
share, subject to Section 6.11 of the Amendment.
G. Right of First Refusal. If the Company should propose (the
"Proposal") to issue Common Stock or securities convertible into
Common Stock at a price less than the Current Market Price, or
debt at less than par value or having an effective annual
interest rate in excess of 9.9% (each a "Right of First Refusal
Security" and collectively, the "Right of First Refusal
Securities"), in each case on the date of issuance, during the
period ending nine months after the Closing Date (the "Right of
First Refusal Period"), the Company shall be obligated to offer
the Buyer on the terms set forth in the Proposal (the "Offer")
and the Buyer shall have the right, but not the obligation, to
accept such Offer on such terms. If during the Right of First
Refusal Period, the Company provides written notice to the Buyer
that it proposes to issue any Right of First Refusal Securities
on the terms set forth in the Proposal, then the Buyer shall have
ten (10) business days to accept or reject such Offer in writing.
If the Company fails to: (i) provide such written notice to the
Buyer of a Proposal during the Right of First Refusal Period,
(ii) offer the Buyer the opportunity to complete the transaction
as set forth in the Proposal, or (iii) enter into an agreement
with the Buyer, at such terms after the Buyer has accepted the
Offer, then the Company shall pay to the Buyer, as liquidated
damages, an amount in total equal to ten percent (10%) of the
amount paid to the Company for the Right of First Refusal
Securities. The foregoing Right of First Refusal is and shall be
senior in right to any other right of first refusal issued by the
Company to any other person. Notwithstanding the foregoing, the
Buyer shall have no rights under this paragraph 4.H. in respect
of Common Stock or any other securities of the Company issuable
(i) upon the exercise or conversion of options, warrants or other
rights to purchase securities of the Company outstanding as of
the date hereof, (ii) to officers, directors or employees of the
Company, (iii) as compensation to consultants and other
representatives of the Company, (iv) in connection with the
issuance of promissory notes in the aggregate amount of up to
$1,550,000 convertible into shares of Series C Convertible
Preferred Stock, so long as such promissory note and Series C
Convertible Preferred Stock are on terms no more favorable to the
payee of such note or the purchaser of such Series C Convertible
Preferred Stock than the terms of the Note or the Preferred Stock
to the Payee or the Buyer, respectively or (v) otherwise under
the Company's 1994 Stock Option Plan and Non-employee Director
Stock Option Plan.
V. TRANSFER AGENT INSTRUCTIONS.
A. The Company undertakes and agrees that no instruction other
than the instructions referred to in this Section V and customary
stop transfer instructions prior to the registration and sale of
the Common Stock pursuant to an effective Securities Act
registration statement will be given to its transfer agent for
the Common Stock and that the Common Stock issuable upon
conversion of the Preferred Stock and exercise of the Warrants
otherwise shall be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement,
the Registration Rights Agreement and applicable law. Nothing
contained in this Section V.A. shall affect in any way Buyer's
obligations and agreement to comply with all applicable
securities laws upon resale of such Common Stock. If, at any
time, Buyer provides the Company with an opinion of counsel
reasonably satisfactory to the Company that registration of the
resale by Buyer of such Common Stock is not required under the
Securities Act and that the removal of restrictive legends is
permitted under applicable law, the Company shall permit the
transfer of such Common Stock and, promptly instruct the
Company's transfer agent to issue one or more certificates for
Common Stock without any restrictive legends endorsed thereon.
B. The Company shall permit Buyer to exercise its right to
convert the Preferred Stock by telecopying an executed and
completed Notice of Conversion to the Company. Each date on
which a Notice of Conversion is telecopied to and received by the
Company in accordance with the provisions hereof shall be deemed
a Conversion Date. The Company shall transmit the certificates
evidencing the shares of Common Stock issuable upon conversion of
any Preferred Stock (together with certificates evidencing any
Preferred Stock not being so converted) to Buyer via express
courier, by electronic transfer or otherwise, within five
business days after receipt by the Company of the Notice of
Conversion (the "Delivery Date"). Within 30 days after Buyer
delivers the Notice of Conversion to the Company, Buyer shall
deliver to the Company the Preferred Stock being converted.
Buyer shall indemnify the Company for any damages to third
parties as a result of a claim by such third party to ownership
of the Preferred Stock converted prior to receipt of the
Preferred Stock by the Company.
C. The Company shall permit Buyer to exercise its right to
purchase shares of Common Stock pursuant to exercise of the
Warrants in accordance with its applicable terms of the Warrants.
The last date that the Company may deliver shares of Common Stock
issuable upon any exercise of Warrants is referred to herein as
the "Warrant Delivery Date."
D. The Company understands that a delay in the issuance of the
shares of Common Stock issuable in lieu of cash dividends on the
Preferred Stock, upon the conversion of the Preferred Stock or
exercise of the Warrants beyond the applicable Interest Payment
Due Date (as defined in the Preferred Stock), Delivery Date or
Warrant Delivery Date could result in economic loss to Buyer. As
compensation to Buyer for such loss (and not as a penalty), the
Company agrees to pay to Buyer for late issuance of Common Stock
issuable in lieu of cash dividends on the Preferred Stock, upon
conversion of the Preferred Stock or exercise of the Warrants in
accordance with the following schedule (where "No. Business Days"
is defined as the number of business days beyond five (5) days
from the Interest Payment Due Date, the Delivery Date or the
Warrant Delivery Date, as applicable):
Compensation For Each 500
Shares of
Preferred Stock Not
Converted Timely or
500 Shares of Common Stock
Issuable In
Lieu of Cash Dividends or
Compensation
For Each 500 Shares of
No. Business Days Preferred Stock
Not Converted Timely or 500
Shares of
Common Stock Issuable In
Lieu of Cash
Dividends or Shares of
Common Stock
Issuable Upon Exercise of
Each 1,500
Warrants Not Issued
Timely
1 $25
2 $50
3 $75
4 $100
5 $125
6 $150
7 $175
8 $200
9 $225
10 $250
more than 10 $250 + 100 for each
Business Day Late beyond
10 days
The Company shall pay to Buyer the compensation described above
by the transfer of immediately available funds upon Buyer's
demand. Nothing herein shall limit Buyer's right to pursue
actual damages for the Company's failure to issue and deliver
Common Stock to Buyer (which actual damages shall be reduced by
the amount of any compensation paid by the Company as described
above in this Section V.D.), and in addition to any other
remedies which may be available to Buyer, in the event the
Company fails for any reason to effect delivery of such shares of
Common Stock within five business days after the relevant
Interest Payment Due Date, the Delivery Date or the Warrant
Delivery Date, as applicable, Buyer shall be entitled to rescind
the relevant Notice of Conversion or exercise of Warrants by
delivering a notice to such effect to the Company whereupon the
Company and Buyer shall each be restored to their respective
original positions immediately prior to delivery of such Notice
of Conversion on delivery.
VI. DELIVERY INSTRUCTIONS.
The Securities shall be delivered by the Company on a
"delivery-against-payment basis" at the Closing.
VII. CLOSING DATE.
The date and time of the issuance and sale of the
Preferred Shares (the "Closing Date") shall be the date hereof or
such other as shall be mutually agreed upon in writing. The
issuance and sale of the Securities shall occur on the Closing
Date at the offices of Weil, Gotshal & Manages LLP.
VIII. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Buyer understands that the Company's obligation to
sell the Securities on the Closing Date to Buyer pursuant to this
Agreement is conditioned upon:
A. Delivery by Buyer of the Note;
B. The accuracy in all material respects on the Closing Date of
the representations and warranties of Buyer contained in this
Agreement as if made on the Closing Date (except for
representations and warranties which, by their express terms,
speak as of and relate to a specified date, in which case such
accuracy shall be measured as of such specified date) and the
performance by Buyer in all material respects on or before the
Closing Date of all covenants and agreements of Buyer required to
be performed by it pursuant to this Agreement on or before the
Closing Date;
C. There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority
restraining, enjoining or otherwise prohibiting any of the
transactions contemplated by this Agreement.
IX. CONDITIONS TO BUYER'S OBLIGATIONS.
The Company understands that Buyer's obligation to
purchase the Securities on the Closing Date pursuant to this
Agreement is conditioned upon:
A. Delivery by the Company of one or more certificates (I/N/O
Buyer) evidencing the Securities to be purchased by Buyer
pursuant to this Agreement;
B. The accuracy in all material respects on the Closing Date of
the representations and warranties of the Company contained in
this Agreement as if made on the Closing Date (except for
representations and warranties which, by their express terms,
speak as of and relate to a specified date, in which case such
accuracy shall be measured as of such specified date) and the
performance by the Company in all material respects on or before
the Closing Date of all covenants and agreements of the Company
required to be performed by it pursuant to this Agreement on or
before the Closing Date;
C. Buyer having received an opinion of counsel for the Company,
dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer.
D. There not having occurred (i) any general suspension of
trading in, or limitation on prices listed for, the Common Stock
on the NASDAQ, (ii) the declaration of a banking moratorium or
any suspension of payments in respect of banks in the United
States, (iii) the commencement of a war, armed hostilities or
other international or national calamity directly or indirectly
involving the United States or any of its territories,
protectorates or possessions, or (iv) in the case of the
foregoing existing at the date of this Agreement, a material
acceleration or worsening thereof.
E. There not having occurred any event or development, and
there being in existence no condition, having or which reasonably
and forseeably would have a Material Adverse Effect.
F. The Company shall have delivered to Buyer reimbursement of
Buyer's out-of-pocket costs and expenses incurred in connection
with the transactions contemplated by the Note and this Agreement
(including the fees and disbursements of Buyer's legal counsel of
$50,000, of which $25,000 is being held in escrow by Weil,
Gotshal & Manges LLP).
G. There shall not be in effect any Law or order, ruling,
judgment or writ of any court or public or governmental authority
restraining, enjoining or otherwise prohibiting any of the
transactions contemplated by this Agreement.
X. Reserved.
XI. SURVIVAL; INDEMNIFICATION.
A. The representations, warranties and covenants made by each
of the Company and Buyer in this Agreement, the annexes,
schedules and exhibits hereto and in each instrument, agreement
and certificate entered into and delivered by them pursuant to
this Agreement, shall survive the Closing and the consummation of
the transactions contemplated hereby. In the event of a breach
or violation of any of such representations, warranties or
covenants, the party to whom such representations, warranties or
covenants have been made shall have all rights and remedies for
such breach or violation available to it under the provisions of
this Agreement or otherwise, whether at law or in equity,
irrespective of any investigation made by or on behalf of such
party on or prior to the Closing Date.
B. The Company hereby agrees to indemnify and hold harmless the
Buyer, its Affiliates and their respective officers, directors,
partners and members (collectively, the "Buyer Indemnitees"),
from and against any and all losses, claims, damages, judgments,
penalties, liabilities and deficiencies (collectively, "Losses"),
and agrees to reimburse the Buyer Indemnitees for all out-of-
pocket expenses (including the reasonable fees and expenses of
legal counsel), in each case promptly as incurred by the Buyer
Indemnitees and to the extent arising out of or in connection
with:
1. any misrepresentation, omission of fact or breach of any of
the Company's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by
the Company pursuant to this Agreement; or
2. any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or
obligations set forth in this Agreement, the annexes, schedules
or exhibits hereto or any instrument, agreement or certificate
entered into or delivered by the Company pursuant to this
Agreement.
C. Buyer hereby agrees to indemnify and hold harmless the
Company, its Affiliates and their respective officers, directors,
partners and members (collectively, the "Company Indemnitees"),
from and against any and all Losses, and agrees to reimburse the
Company Indemnitees for all out-of-pocket expenses (including the
reasonable fees and expenses of legal counsel), in each case
promptly as incurred by the Company Indemnitees and to the extent
arising out of or in connection with:
1. any misrepresentation, omission of fact, or breach of any of
Buyer's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by
Buyer pursuant to this Agreement; or
2. any failure by Buyer to perform in any material respect any
of its covenants, agreements, undertakings or obligations set
forth in this Agreement or any instrument, certificate or
agreement entered into or delivered by Buyer pursuant to this
Agreement.
D. Promptly after receipt by either party hereto seeking
indemnification pursuant to this Section XI (an "Indemnified
Party") of written notice of any investigation, claim, proceeding
or other action in respect of which indemnification is being
sought (each, a "Claim"), the Indemnified Party promptly shall
notify the party against whom indemnification pursuant to this
Section XI is being sought (the "Indemnifying Party") of the
commencement thereof; but the omission to so notify the
Indemnifying Party shall not relieve it from any liability that
it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such
failure. In connection with any Claim as to which both the
Indemnifying Party and the Indemnified Party are parties, the
Indemnifying Party shall be entitled to assume the defense
thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have
the right to employ separate legal counsel (together with
appropriate local counsel) and to participate in the defense of
such Claim, and the Indemnifying Party shall bear the reasonable
fees, out-of-pocket costs and expenses of such separate legal
counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-
pocket costs and expenses, (y) the Indemnified Party and the
Indemnifying Party reasonably shall have concluded that
representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the
Indemnified Party, (i) potentially differing interests between
such parties in the conduct of the defense of such Claim, or (ii)
if there may be legal defenses available to the Indemnified Party
that are in addition to or disparate from those available to the
Indemnifying Party and which can not be presented by counsel to
the Indemnifying Party, or (z) the Indemnifying Party shall have
failed to employ legal counsel reasonably satisfactory to the
Indemnified Party within a reasonable period of time after notice
of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and
expenses of such legal counsel shall be borne exclusively by the
Indemnified Party. Except as provided above, the Indemnifying
Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than
one firm of legal counsel for the Indemnified Party (together
with appropriate local counsel). The Indemnifying Party shall
not, without the prior written consent of the Indemnified Party
(which consent shall not unreasonably be withheld), settle or
compromise any Claim or consent to the entry of any judgment that
does not include an unconditional release of the Indemnified
Party from all liabilities with respect to such Claim or
judgment.
E. In the event one party hereunder should have a claim for
indemnification that does not involve a claim or demand being
asserted by a third party, the Indemnified Party promptly shall
deliver notice of such claim to the Indemnifying Party. If the
Indemnified Party disputes the claim, such dispute shall be
resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in
accordance with the procedures and rules of the American
Arbitration Association. Judgment upon any award rendered by any
arbitrators may be entered in any court having competent
jurisdiction thereof.
XII. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York, without regard
to the conflicts of law principles of such state. Each of the
parties consents to the jurisdiction of the federal courts whose
districts encompass any part of the City of New York or the state
courts of the State of New York sitting in the City of New York
in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens,
to the bringing of any such proceeding in such jurisdictions. A
facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto. This Agreement may be signed
in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the
interpretation of, this Agreement. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other
jurisdiction. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement.
This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter
hereof.
XIII. NOTICES. Except as may be otherwise provided herein,
any notice or other communication or delivery required or
permitted hereunder shall be in writing and shall be delivered
personally or sent by certified mail, postage prepaid, or by a
nationally recognized overnight courier service, and shall be
deemed given when so delivered personally or by overnight courier
service, or, if mailed, three (3) days after the date of deposit
in the United States mails, as follows:
(1) if to the Company, to:
The Network Connection, Inc.
1324 Union Hill Road
Alpharetta, Georgia 30004
Attention: Wilbur Riner
With a copy to:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, New York 10022-7001
Attention: Peter W. Rothberg, Esq.
(2) if to Buyer, to
THE SHAAR FUND LTD.,
c/o SHAAR ADVISORY SERVICES LTD.
62 King George Street, Apartment 4F
Jerusalem, Israel
Attention: Samuel Levinson
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Gerald S. Backman, Esq.
The Company or Buyer may change the foregoing address by notice
given pursuant to this Section XVIII.
XIV. CONFIDENTIALITY. Each of the Company and Buyer agrees to
keep confidential and not to disclose to or use for the benefit
of any third party the terms of this Agreement or any other
information which at any time is communicated by the other party
as being confidential without the prior written approval of the
other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already
part of the public domain (except by breach of this Agreement)
and information which is required to be disclosed by law
(including, without limitation, pursuant to Item 10 of Rule 601
of Regulation S-K under the Securities Act and the Exchange Act).
XV. ASSIGNMENT. This Agreement shall not be assignable by
either of the parties hereto prior to the Closing without the
prior written consent of the other party, and any attempted
assignment contrary to the provisions hereby shall be null and
void; provided, however, that Buyer may assign its rights and
obligations hereunder, in whole or in part, to any affiliate of
Buyer who furnishes to the Company the representations and
warranties set forth in Section II hereof and otherwise agrees to
be bound by the terms of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have duly
executed and delivered this Agreement on the date first above
written.
THE NETWORK CONNECTION, INC.
By:______________________________
Name:
Title:
THE SHAAR FUND LTD.
By: ______________________________
Name:
Title:
Exhibit 10.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated this 23rd day of
October, 1998 (this "Agreement"), between The Network Connection,
Inc., a Georgia Corporation, with principal executive offices
located at 1324 Union Hill Road, Alpharetta, Georgia 30004 (the
"Company"), and the undersigned (the "Initial Investor").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions
of the Securities Purchase Agreement dated as of a date even
herewith, between the Initial Investor and the Company (the
"Securities Purchase Agreement"), the Company has agreed to issue
and sell to the Initial Investor (i) 1,500 shares of Series B
Convertible Preferred Stock, $.01 par value ("Preferred Stock")
which, upon the terms and subject to the conditions of the
Articles of Amendment to the Articles of Incorporation of the
Company dated a date even herewith (the "Amendment"), are
convertible into shares of common stock, $.001 par value, of the
Company ("Common Stock") and (ii) warrants ("Warrants") to
purchase 100,000 shares of Common Stock; and
WHEREAS, to induce the Initial Investor to execute and
deliver the Securities Purchase Agreement, the Company has agreed
to provide with respect to the Common Stock issued or issuable in
lieu of cash dividend payments on the Preferred Stock, upon
conversion of the Preferred Stock and exercise of the Warrants
certain registration rights under the Securities Act;
NOW, THEREFORE, in consideration of the premises and
the mutual covenants contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms
shall have the meanings:
(i) "Affiliate" of any specified Person means any
other Person who directly, or indirectly through one or more
intermediaries, is in control of, is controlled by, or is
under common control with, such specified Person. For
purposes of this definition, control of a Person means the
power, directly or indirectly, to direct or cause the
direction of the management and policies of such Person
whether by contract, securities, ownership or otherwise; and
the terms "controlling" and "controlled" have the respective
meanings correlative to the foregoing.
(ii) "Commission" means the Securities and Exchange
Commission.
(iii) "Current Market Price" on any date of
determination means the closing price of a share of Common
Stock on such day as reported on the Nasdaq SmallCap Stock
Market ("Nasdaq"), or, if such security is not listed or
admitted to trading on the Nasdaq, on the principal national
security exchange or quotation system on which such security
is quoted or listed or admitted to trading, or, if not
quoted or listed or admitted to trading on any national
securities exchange or quotation system, the closing price
of such security on the over-the-counter market on the day
in question as reported by the National Quotation Bureau
Incorporated, or a similar generally accepted reporting
service, or if not so available, in such manner as furnished
by any Nasdaq member firm of the National Association of
Securities Dealers, Inc. selected from time to time by the
Board of Directors of the Company for that purpose, or a
price determined in good faith by the Board of Directors of
the Company as being equal to the fair market value thereof,
as the case may be.
(iv) "Exchange Act" means the Securities Exchange Act
of 1934, as amended, and the rules and regulations of the
Commission thereunder, or any similar successor statute.
(v) "Investors" means the Initial Investor and any
transferee or assignee of Registrable Securities who agrees
to become bound by all of the terms and provisions of this
Agreement in accordance with Section 8 hereof.
(vi) "Person" means any individual, partnership,
corporation, limited liability company, joint stock company,
association, trust, unincorporated organization, or a
government or agency or political subdivision thereof.
(vii) "Prospectus" means the prospectus (including,
without limitation, any preliminary prospectus and any final
prospectus filed pursuant to Rule 424(b) under the
Securities Act, including any prospectus that discloses
information previously omitted from a prospectus filed as
part of an effective registration statement in reliance on
Rule 430A under the Securities Act) included in the
Registration Statement, as amended or supplemented by any
prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Securities
covered by the Registration Statement and by all other
amendments and supplements to such prospectus, including all
material incorporated by reference in such prospectus and
all documents filed after the date of such prospectus by the
Company under the Exchange Act and incorporated by reference
therein.
(viii) "Registrable Securities" means the Common
Stock issued or issuable (i) in lieu of cash dividend
payments on the Preferred Stock, (ii) upon conversion of the
Preferred Stock or (iii) upon exercise of the Warrants;
provided, however, a share of Common Stock shall cease to be
a Registrable Security for purposes of this Agreement when
it no longer is a Restricted Security.
(ix) "Registration Statement" means a registration
statement of the Company filed on an appropriate form under
the Securities Act providing for the registration of, and
the sale on a continuous or delayed basis by the holders of,
all of the Registrable Securities pursuant to Rule 415 under
the Securities Act, including the Prospectus contained
therein and forming a part thereof, any amendments to such
registration statement and supplements to such Prospectus,
and all exhibits and other material incorporated by
reference in such registration statement and Prospectus.
(x) "Restricted Security" means any share of Common
Stock issued or issuable in lieu of cash dividend payments
on the Preferred Stock, upon conversion of the Preferred
Stock or exercise of the Warrants except any such share that
(i) has been registered pursuant to an effective
registration statement under the Securities Act and sold in
a manner contemplated by the Prospectus included in the
Registration Statement, (ii) has been transferred in
compliance with the resale provisions of Rule 144 under the
Securities Act (or any successor provision thereto) or is
transferable pursuant to paragraph (k) of Rule 144 under the
Securities Act (or any successor provision thereto), or
(iii) otherwise has been transferred and a new share of
Common Stock not subject to transfer restrictions under the
Securities Act has been delivered by or on behalf of the
Company.
(xi) "Securities Act" means the Securities Act of 1933,
as amended, and the rules and regulations of the Commission
thereunder, or any similar successor statute.
(b) All capitalized terms used and not defined herein
have the respective meaning assigned to them in the Securities
Purchase Agreement.
2. Registration.
(a) Filing and Effectiveness of Registration
Statement. The Company shall prepare and file with the
Commission by not later than 21 days after the Closing Date (as
defined in the Securities Purchase Agreement), a Registration
Statement relating to the offer and sale of the Registrable
Securities and shall use its best efforts to cause the Commission
to declare such Registration Statement effective under the
Securities Act as promptly as practicable but not later than 105
days after the Closing Date, assuming for purposes hereof a
Conversion Price (as defined in the Amendment) of not greater
than $1.83 per share. The Company shall not include any other
securities in the Registration Statement relating to the offer
and sale of the Registrable Securities. The Company shall notify
the Initial Investor by written notice that such Registration
Statement has been declared effective by the Commission within 48
hours of such declaration by the Commission.
(b) Registration Default. If the Registration
Statement covering the Registrable Securities or the Additional
Registrable Securities (as defined in Section 2(d) hereof)
required to be filed by the Company pursuant to Section 2(a) or
(2d) hereof, as the case may be, is not (i) filed with the
Commission within 21 days after the Closing Date or (ii) declared
effective by the Commission within 105 days after the Closing
Date (either of which, without duplication, an "Initial Date"),
then the Company shall make the payments to the Initial Investor
as provided in the next sentence as liquidated damages and not as
a penalty. The amount to be paid by the Company to the Initial
Investor shall be determined as of each Computation Date, and
such amount shall be equal to 2% (the "Liquidated Damage Rate")
of the Purchase Price per share of Preferred Stock (as defined in
the Securities Purchase Agreement) from the Initial Date to the
first Computation Date and for each Computation Date thereafter,
calculated on a pro rata basis to the date on which the
Registration Statement is filed with (in the event of an Initial
Date pursuant to (c)(i) above) or declared effective by (in the
event of an Initial Date pursuant to (c)(ii) above) the
Commission (the "Periodic Amount"); provided, however, that in no
event shall the Liquidated Damages be less than $20,000. The
full Periodic Amount shall be paid by the Company to the Initial
Investor by wire transfer of immediately available funds within
three days after each Computation Date.
As used in this Section 2(b), "Computation Date" means
the date which is 30 days after the Initial Date and, if the
Registration Statement required to be filed by the Company
pursuant to Section 2(a) has not theretofore been declared
effective by the Commission, each date which is 30 days after the
previous Computation Date until such Registration Statement is so
declared effective.
Notwithstanding the above, if the Registration
Statement covering the Registrable Securities or the Additional
Registrable Securities (as defined in Section 2(d) hereof)
required to be filed by the Company pursuant to Section 2(a) or
(2d) hereof, as the case may be, is not filed with the Commission
within 21 days after the Closing Date, the Company shall be in
default of this Registration Rights Agreement.
(c) Eligibility for Use of Form S-3. The Company
agrees that at such time as it meets all the requirements for the
use of Securities Act Registration Statement on Form S-3 it shall
file all reports and information required to be filed by it with
the Commission in a timely manner and take all such other action
so as to maintain such eligibility for the use of such form.
(d) In the event the Current Market Price declines to
$1.75, the Company shall, to the extent required by the
Securities Act (because the additional shares were not covered by
the Registration Statement filed pursuant to Section 2(a)), as
reasonably determined by the Initial Investor, file an additional
Registration Statement with the Commission for such additional
number of Registrable Securities as would be issuable upon
conversion of the Preferred Stock (the "Additional Registrable
Securities"), in addition to those previously registered,
assuming a Conversion Price of $1.00 per share. The Company
shall, to the extent required by the Securities Act, as
reasonably determined by the Initial Investor, prepare and file
with the Commission not later than the 45th day thereafter, a
Registration Statement relating to the offer and sale of such
Additional Registrable Securities and shall use its best efforts
to cause the Commission to declare such Registration Statement
effective under the Securities Act as promptly as practicable but
not later than 60 days thereafter. The Company shall not include
any other securities in the Registration Statement relating to
the offer and sale of such additional Registrable Securities.
Upon declaration by the Commission of an effective Registration
Statement for the offer and sale of Registrable Securities in an
amount equal to 19.99% of the Common Stock outstanding on the
Closing Date, the Company shall have no further obligation to
file an additional Registration Statement for the Additional
Registrable Securities.
(e) (i) If the Company proposes to register any of
its warrants, Common Stock or any other shares of common stock of
the Company under the Securities Act (other than a registration
(A) on Form S-8 or S-4 or any successor or similar forms,
(B) relating to Common Stock or any other shares of common stock
of the Company issuable upon exercise of employee share options
or in connection with any employee benefit or similar plan of the
Company or (C) in connection with a direct or indirect
acquisition by the Company of another Person or any transaction
with respect to which Rule 145 (or any successor provision) under
the Securities Act applies), whether or not for sale for its own
account, it will each such time, give prompt written notice at
least 20 days prior to the anticipated filing date of the
registration statement relating to such registration to the
Initial Investor, which notice shall set forth such Initial
Investor' rights under this Section 3(e) and shall offer the
Initial Investor the opportunity to include in such registration
statement such number of Registrable Shares as the Initial
Investor may request. Upon the written request of an Initial
Investor made within ten (10) days after the receipt of notice
from the Company (which request shall specify the number of
Registrable Shares intended to be disposed of by such Initial
Investor), the Company will use its best efforts to effect the
registration under the Securities Laws of all Registrable Shares
that the Company has been so requested to register by the Initial
Investor, to the extent requisite to permit the disposition of
the Registrable Shares so to be registered; provided, however,
that (A) if such registration involves a Public Offering, the
Initial Investor must sell their Registrable Shares to the
underwriters selected as provided in Section 3(b) hereof on the
same terms and conditions as apply to the Company and (B) if, at
any time after giving written notice of its intention to register
any Registrable Shares pursuant to this Section 3 and prior to
the effective date of the registration statement filed in
connection with such registration, the Company shall determine
for any reason not to register such Registrable Shares, the
Company shall give written notice to the Initial Investor and,
thereupon, shall be relieved of its obligation to register any
Registrable Shares in connection with such registration. The
Company's obligations under this Section 2(c) shall terminate on
the date that the registration statement to be filed in
accordance with Section 2(a) is declared effective by the
Commission.
(ii) If a registration pursuant to this Section 2(e)
involves a Public Offering and the managing underwriter thereof
advises the Company that, in its view, the number of shares of
Common Stock, Warrants or other shares of Common Stock that the
Company and the Initial Investor intend to include in such
registration exceeds the largest number of shares of Common Stock
or Warrants (including any other shares of Common Stock or
Warrants of the Company) that can be sold without having an
adverse effect on such Public Offering (the "Maximum Offering
Size"), the Company will include in such registration, only that
number of shares of Common Stock or Warrants, as applicable, such
that the number of Registrable Shares registered does not exceed
the Maximum Offering Size, with the difference between the number
of shares in the Maximum Offering Size and the number of shares
to be issued by the Company to be allocated (after including all
shares to be issued and sold by the Company) among the Company
and the Initial Investor pro rata on the basis of the relative
number of Registrable Shares offered for sale under such
registration by each of the Company and the Initial Investor.
If as a result of the proration provisions of this
Section 2(e)(ii), any Initial Investor is not entitled to include
all such Registrable Shares in such registration, such Initial
Investor may elect to withdraw its request to include any
Registrable Shares in such registration. With respect to
registrations pursuant to this Section 2(e), the number of
securities required to satisfy any underwriters' over-allotment
option shall be allocated pro rata among the Company and the
Initial Investor on the basis of the relative number of
securities otherwise to be included by each of them in the
registration with respect to which such over-allotment option
relates.
3. Obligations of the Company. In connection with
the registration of the Registrable Securities, the Company
shall:
(a) Promptly (i) prepare and file with the Commission
such amendments (including post-effective amendments) to the
Registration Statement and supplements to the Prospectus as may
be necessary to keep the Registration Statement continuously
effective and in compliance with the provisions of the Securities
Act applicable thereto so as to permit the Prospectus forming
part thereof to be current and useable by Investors for resales
of the Registrable Securities for a period of three years (such
period to be extended by a period equal to any change in the
Mandatory Conversion Date (as defined in the Amendment) pursuant
to the Amendment) from the date on which the Registration
Statement is first declared effective by the Commission (the
"Effective Time") or such shorter period that will terminate when
all the Registrable Securities covered by the Registration
Statement have been sold pursuant thereto in accordance with the
plan of distribution provided in the Prospectus, transferred
pursuant to Rule 144 under the Securities Act or otherwise
transferred in a manner that results in the delivery of new
securities not subject to transfer restrictions under the
Securities Act (the "Registration Period") and (ii) take all
lawful action such that each of (A) the Registration Statement
and any amendment thereto does not, when it becomes effective,
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein, not misleading and (B) the Prospectus
forming part of the Registration Statement, and any amendment or
supplement thereto, does not at any time during the Registration
Period include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the
foregoing provisions of this Section 3(a), the Company may,
during the Registration Period, suspend the use of the Prospectus
for a period not to exceed 60 days (whether or not consecutive)
in any 12-month period if the Board of Directors of the Company
determines in good faith that because of valid business reasons,
including pending mergers or other business combination
transactions, the planned acquisition or divestiture of assets,
pending material corporate developments and similar events, it is
in the best interests of the Company to suspend such use, and
prior to or contemporaneously with suspending such use, the
Company provides the Investors with written notice of such
suspension, which notice need not specify the nature of the event
giving rise to such suspension. At the end of any such
suspension period, the Company shall provide the Investors with
written notice of the termination of such suspension.
(b) During the Registration Period, comply with the
provisions of the Securities Act with respect to the Registrable
Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of
disposition by the Investors as set forth in the Prospectus
forming part of the Registration Statement;
(c)(i) Prior to the filing with the Commission of any
Registration Statement (including any amendments thereto) and the
distribution or delivery of any Prospectus (including any
supplements thereto), provide draft copies thereof to the
Investors and reflect in such documents all such comments as the
Investors (and their counsel) reasonably may propose with regard
to Holder ownership and the Plan of Distribution included therein
and (ii) furnish to each Investor whose Registrable Securities
are included in the Registration Statement and its legal counsel
identified to the Company, (A) promptly after the same is
prepared and publicly distributed, filed with the Commission, or
received by the Company, one copy of the Registration Statement,
each Prospectus, and each amendment or supplement thereto, and
(B) such number of copies of the Prospectus and all amendments
and supplements thereto and such other documents, as such
Investor may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such Investor;
(d)(i) Register or qualify the Registrable Securities
covered by the Registration Statement under such securities or
"blue sky" laws of such jurisdictions as the Investors who hold a
majority-in-interest of the Registrable Securities being offered
reasonably request, (ii) prepare and file in such jurisdictions
such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times
during the Registration Period, (iii) take all such other lawful
actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration
Period, and (iv) take all such other lawful actions reasonably
necessary or advisable to qualify the Registrable Securities for
sale in such jurisdictions; provided, however, that the Company
shall not be required in connection therewith or as a condition
thereto to (A) qualify to do business in any jurisdiction where
it would not otherwise be required to qualify but for this
Section 3(d), (B) subject itself to general taxation in any such
jurisdiction or (C) file a general consent to service of process
in any such jurisdiction;
(e) As promptly as practicable after becoming aware of
such event, notify each Investor of the occurrence of any event,
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 promptly prepare an amendment to the Registration
Statement and supplement to the Prospectus to correct such untrue
statement or omission, and deliver a number of copies of such
supplement and amendment to each Investor as such Investor may
reasonably request;
(f) As promptly as practicable after becoming aware of
such event, notify each Investor who holds Registrable Securities
being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance by the Commission of any
stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time and take all
lawful action to effect the withdrawal, recession or removal of
such stop order or other suspension;
(g)(i) Cause all the Registrable Securities covered by
the Registration Statement to be listed on the principal national
securities exchange, and included in an inter-dealer quotation
system of a registered national securities association, on or in
which securities of the same class or series issued by the
Company are then listed or included;
(h) Maintain a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than
the effective date of the Registration Statement;
(i) Cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and
delivery of certificates for the Registrable Securities to be
offered pursuant to the Registration Statement and enable such
certificates for the Registrable Securities to be in such
denominations or amounts, as the case may be, as the Investors
reasonably may request and registered in such names as the
Investor may request; and, within three business days after a
Registration Statement which includes Registrable Securities is
declared effective by the Commission, deliver and cause legal
counsel selected by the Company to deliver to the transfer agent
for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and, to the extent
necessary, an opinion of such counsel;
(j) Take all such other lawful actions reasonably
necessary to expedite and facilitate the disposition by the
Investors of their Registrable Securities in accordance with the
intended methods therefor provided in the Prospectus which are
customary under the circumstances;
(k) Make generally available to its security holders
as soon as practicable, but in any event not later than 18 months
after (i) the effective date (as defined in Rule 158(c) under the
Securities Act) of the Registration Statement, and (ii) the
effective date of each post-effective amendment to the
Registration Statement, as the case may be, an earnings statement
of the Company and its subsidiaries complying with Section 11(a)
of the Securities Act and the rules and regulations of the
Commission thereunder (including, at the option of the Company,
Rule 158);
(l) In the event of an underwritten offering, promptly
include or incorporate in a Prospectus supplement or post-
effective amendment to the Registration Statement such
information as the managers reasonably agree should be included
therein and to which the Company does not reasonably object and
make all required filings of such Prospectus supplement or post-
effective amendment as soon as practicable after it is notified
of the matters to be included or incorporated in such Prospectus
supplement or post-effective amendment;
(m)(i) Make reasonably available for inspection by
Investors, any underwriter participating in any disposition
pursuant to the Registration Statement, and any attorney,
accountant or other agent retained by such Investors or any such
underwriter all relevant financial and other records, pertinent
corporate documents and properties of the Company and its
subsidiaries, and (ii) cause the Company's officers, directors
and employees to supply all information reasonably requested by
such Investors or any such underwriter, attorney, accountant or
agent in connection with the Registration Statement, in each
case, as is customary for similar due diligence examinations;
provided, however, that all records, information and documents
that are designated in writing by the Company, in good faith, as
confidential, proprietary or containing any material non-public
information shall be kept confidential by such Investors and any
such underwriter, attorney, accountant or agent (pursuant to an
appropriate confidentiality agreement in the case of any such
holder or agent), unless such disclosure is made pursuant to
judicial process in a court proceeding (after first giving the
Company an opportunity promptly to seek a protective order or
otherwise limit the scope of the information sought to be
disclosed) or is required by law, or such records, information or
documents become available to the public generally or through a
third party not in violation of an accompanying obligation of
confidentiality; and provided further that, if the foregoing
inspection and information gathering would otherwise disrupt the
Company's conduct of its business, such inspection and
information gathering shall, to the maximum extent possible, be
coordinated on behalf of the Investors and the other parties
entitled thereto by one firm of counsel designed by and on behalf
of the majority in interest of Investors and other parties;
(n) In connection with any underwritten offering, make
such representations and warranties to the Investors
participating in such underwritten offering and to the managers,
in form, substance and scope as are customarily made by the
Company to underwriters in secondary underwritten offerings;
(o) In connection with any underwritten offering,
obtain opinions of counsel to the Company (which counsel and
opinions (in form, scope and substance) shall be reasonably
satisfactory to the managers) addressed to the underwriters,
covering such matters as are customarily covered in opinions
requested in secondary underwritten offerings (it being agreed
that the matters to be covered by such opinions shall include,
without limitation, as of the date of the opinion and as of the
Effective Time of the Registration Statement or most recent post-
effective amendment thereto, as the case may be, the absence from
the Registration Statement and the Prospectus, including any
documents incorporated by reference therein, of an untrue
statement of a material fact or the omission of a material fact
required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, subject
to customary limitations);
(p) In connection with any underwritten offering,
obtain "cold comfort" letters and updates thereof from the
independent public accountants of the Company (and, if necessary,
from the independent public accountants of any subsidiary of the
Company or of any business acquired by the Company, in each case
for which financial statements and financial data are, or are
required to be, included in the Registration Statement),
addressed to each underwriter participating in such underwritten
offering (if such underwriter has provided such letter,
representations or documentation, if any, required for such cold
comfort letter to be so addressed), in customary form and
covering matters of the type customarily covered in "cold
comfort" letters in connection with secondary underwritten
offerings;
(q) In connection with any underwritten offering,
deliver such documents and certificates as may be reasonably
required by the managers, if any; and
(r) In the event that any broker-dealer registered
under the Exchange Act shall be an "Affiliate" (as defined in
Rule 2729(b)(1) of the rules and regulations of the National
Association of Securities Dealers, Inc. (the "NASD Rules") (or
any successor provision thereto)) of the Company or has a
"conflict of interest" (as defined in Rule 2720(b)(7) of the NASD
Rules (or any successor provision thereto)) and such broker-
dealer shall underwrite, participate as a member of an
underwriting syndicate or selling group or assist in the
distribution of any Registrable Securities covered by the
Registration Statement, whether as a holder of such Registrable
Securities or as an underwriter, a placement or sales agent or a
broker or dealer in respect thereof, or otherwise, the Company
shall assist such broker-dealer in complying with the
requirements of the NASD Rules, including, without limitation, by
(A) engaging a "qualified independent underwriter" (as defined in
Rule 2720(b)(15) of the NASD Rules (or any successor provision
thereto)) to participate in the preparation of the Registration
Statement relating to such Registrable Securities, to exercise
usual standards of due diligence in respect thereof and to
recommend the public offering price of such Registrable
Securities, (B) indemnifying such qualified independent
underwriter to the extent of the indemnification of underwriters
provided in Section 5 hereof, and (C) providing such information
to such broker-dealer as may be required in order for such broker-
dealer to comply with the requirements of the NASD Rules.
4. Obligations of the Investors. In connection with
the registration of the Registrable Securities, the Investors
shall have the following obligations:
(a) It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant
to this Agreement with respect to the Registrable Securities of a
particular Investor that such Investor shall furnish to the
Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of
the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable
Securities and shall execute such documents in connection with
such registration as the Company may reasonably request. As
least seven days prior to the first anticipated filing date of
the Registration Statement, the Company shall notify each
Investor of the information the Company requires from each such
Investor (the "Requested Information") if such Investor elects to
have any of its Registrable Securities included in the
Registration Statement. If at least two business days prior to
the anticipated filing date the Company has not received the
Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive
Investor and have no further obligations to the Non-Responsive
Investor;
(b) Each Investor by its acceptance of the Registrable
Securities agrees to cooperate with the Company in connection
with the preparation and filing of the Registration Statement
hereunder, unless such Investor has notified the Company in
writing of its election to exclude all of its Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any
notice from the Company of the occurrence of any event of the
kind described in Section 3(e) or 3(f), it shall immediately
discontinue its disposition of Registrable Securities pursuant to
the Registration Statement covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented
or amended Prospectus contemplated by Section 3(e) and, if so
directed by the Company, such Investor shall deliver to the
Company (at the expense of the Company) or destroy (and deliver
to the Company a certificate of destruction) all copies in such
Investor's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such
notice.
5. Expenses of Registration. All expenses, other
than underwriting discounts and commissions, incurred in
connection with registrations, filings or qualifications pursuant
to Section 3, but including, without limitation, all
registration, listing, and qualifications fees, printing and
engraving fees, accounting fees, and the fees and disbursements
of counsel for the Company shall be borne by the Company.
6. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Investor and each underwriter, if any, which facilitates the
disposition of Registrable Securities, and each of their
respective officers and directors and each person who controls
such Investor or underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act (each such
person being sometimes hereinafter referred to as an "Indemnified
Person") from and against any losses, claims, damages or
liabilities, joint or several, to which such Indemnified Person
may become subject under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact
contained in any Registration Statement or an omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, not
misleading, or arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any
Prospectus or an omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading; and the Company hereby
agrees to reimburse such Indemnified Person for all reasonable
legal and other expenses incurred by them in connection with
investigating or defending any such action or claim as and when
such expenses are incurred; provided, however, that the Company
shall not be liable to any such Indemnified Person in any such
case to the extent that any such loss, claim, damage or liability
arises out of or is based upon (i) an untrue statement or alleged
untrue statement made in, or an omission or alleged omission
from, such Registration Statement or Prospectus in reliance upon
and in conformity with written information furnished to the
Company by such Indemnified Person expressly for use therein or
(ii) in the case of the occurrence of an event of the type
specified in Section 3(e), the use by the Indemnified Person of
an outdated or defective Prospectus after the Company has
provided to such Indemnified Person an updated Prospectus
correcting the untrue statement or alleged untrue statement or
omission or alleged omission giving rise to such loss, claim,
damage or liability.
(b) Indemnification by the Investors and Underwriters.
Each Investor agrees, as a consequence of the inclusion of any of
its Registrable Securities in a Registration Statement, and each
underwriter, if any, which facilitates the disposition of
Registrable Securities shall agree, as a consequence of
facilitating such disposition of Registrable Securities,
severally and not jointly, to (i) indemnify and hold harmless the
Company, its directors (including any person who, with his or her
consent, is named in the Registration Statement as a director
nominee of the Company), its officers who sign any Registration
Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities to which the Company or such other persons
may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact
contained in such Registration Statement or Prospectus or arise
out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein (in light of the
circumstances under which they were made, in the case of the
Prospectus), not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the
Company by such holder or underwriter expressly for use therein,
and (ii) reimburse the Company for any legal or other expenses
incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Notice of Claims, etc. Promptly after receipt by
a party seeking indemnification pursuant to this Section 6 (an
"Indemnified Party") of written notice of any investigation,
claim, proceeding or other action in respect of which
indemnification is being sought (each, a "Claim"), the
Indemnified Party promptly shall notify the party against whom
indemnification pursuant to this Section 6 is being sought (the
"Indemnifying Party") of the commencement thereof; but the
omission to so notify the Indemnifying Party shall not relieve it
from any liability that it otherwise may have to the Indemnified
Party, except to the extent that the Indemnifying Party is
materially prejudiced and forfeits substantive rights and
defenses by reason of such failure. In connection with any Claim
as to which both the Indemnifying Party and the Indemnified Party
are parties, the Indemnifying Party shall be entitled to assume
the defense thereof. Notwithstanding the assumption of the
defense of any Claim by the Indemnifying Party, the Indemnified
Party shall have the right to employ separate legal counsel and
to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and
expenses of such separate legal counsel to the Indemnified Party
if (and only if): (x) the Indemnifying Party shall have agreed to
pay such fees, costs and expenses, (y) the Indemnified Party and
the Indemnifying Party shall reasonably have concluded that
representation of the Indemnified Party by the Indemnifying Party
by the same legal counsel would not be appropriate due to actual
or, as reasonably determined by legal counsel to the Indemnified
Party, (i) potentially differing interests between such parties
in the conduct of the defense of such Claim, or (ii) if there may
be legal defenses available to the Indemnified Party that are in
addition to or disparate from those available to the Indemnifying
Party and which can not be presented by counsel to the
Indemnifying Party, or (z) the Indemnifying Party shall have
failed to employ legal counsel reasonably satisfactory to the
Indemnified Party within a reasonable period of time after notice
of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and
expenses of such legal counsel shall be borne exclusively by the
Indemnified Party. Except as provided above, the Indemnifying
Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than
one firm of counsel for the Indemnified Party (together with
appropriate local counsel). The Indemnifying Party shall not,
without the prior written consent of the Indemnifying Party
(which consent shall not unreasonably be withheld), settle or
compromise any Claim or consent to the entry of any judgment that
does not include an unconditional release of the Indemnifying
Party from all liabilities with respect to such Claim or
judgment.
(d) Contribution. If the indemnification provided for
in this Section 6 is unavailable to or insufficient to hold
harmless an Indemnified Person under subsection (a) or (b) above
in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each
Indemnifying Party shall contribute to the amount paid or payable
by such Indemnified Party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and the Indemnified Party in connection with
the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations. The
relative fault of such Indemnifying Party and Indemnified Party
shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to
information supplied by such Indemnified Party or by such
Indemnified Party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The parties hereto agree that it would
not be just and equitable if contribution pursuant to this
Section 6(d) were determined by pro rata allocation (even if the
Investors or any underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in this
Section 6(d). The amount paid or payable by an Indemnified Party
as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred
by such indemnified party in connection with investigating or
defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
The obligations of the Investors and any underwriters in this
Section 6(d) to contribute shall be several in proportion to the
percentage of Registrable Securities registered or underwritten,
as the case may be, by them and not joint.
(e) Notwithstanding any other provision of this
Section 6, in no event shall any (i) Investor be required to
undertake liability to any person under this Section 6 for any
amounts in excess of the dollar amount of the proceeds to be
received by such Investor from the sale of such Investor's
Registrable Securities (after deducting any fees, discounts and
commissions applicable thereto) pursuant to any Registration
Statement under which such Registrable Securities are to be
registered under the Securities Act and (ii) underwriter be
required to undertake liability to any Person hereunder for any
amounts in excess of the aggregate discount, commission or other
compensation payable to such underwriter with respect to the
Registrable Securities underwritten by it and distributed
pursuant to the Registration Statement; provided, however, in the
event of fraud by the Investor (in the case of (i) above) or
underwriter (in the case of (ii) above), there shall be no such
dollar amount limitation.
(f) The obligations of the Company under this Section
6 shall be in addition to any liability which the Company may
otherwise have to any Indemnified Person and the obligations of
any Indemnified Person under this Section 6 shall be in addition
to any liability which such Indemnified Person may otherwise have
to the Company. The remedies provided in this Section 6 are not
exclusive and shall not limit any rights or remedies which may
otherwise be available to an indemnified party at law or in
equity.
7. Rule 144. With a view to making available to the
Investors the benefits of Rule 144 under the Securities Act or
any other similar rule or regulation of the Commission that may
at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the
Company agrees to use its best efforts to:
(a) comply with the provisions of paragraph (c)(1) of
Rule 144; and
(b) file with the Commission in a timely manner all
reports and other documents required to be filed by the Company
pursuant to Section 13 or 15(d) under the Exchange Act; and, if
at any time it is not required to file such reports but in the
past had been required to or did file such reports, it will, upon
the request of any Holder, make available other information as
required by, and so long as necessary to permit sales of, its
Registrable Securities pursuant to Rule 144.
8. Assignment. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall
be automatically assigned by the Investors to any permitted
transferee of all or any portion of such securities (or all or
any portion of any Preferred Stock or Warrant of the Company
which is convertible into such securities) of Registrable
Securities only if: (a) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time
after such assignment, (b) the Company is, within a reasonable
time after such transfer or assignment, furnished with written
notice of (i) the name and address of such transferee or assignee
and (ii) the securities with respect to which such registration
rights are being transferred or assigned, (c) immediately
following such transfer or assignment, the securities so
transferred or assigned to the transferee or assignee constitute
Restricted Securities, and (d) at or before the time the Company
received the written notice contemplated by clause (b) of this
sentence the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein.
9. Amendment and Waiver. 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 Investors who hold a majority-in-interest of the
Registrable Securities. Any amendment or waiver effected in
accordance with this Section 9 shall be binding upon each
Investor and the Company.
10. Miscellaneous.
(a) A person or entity shall be deemed to be a holder
of Registrable Securities whenever such person or entity owns of
record such Registrable Securities. If the Company receives
conflicting instructions, notices or elections from two or more
persons or entities with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such
Registrable Securities.
(b) If, after the date hereof and prior to the
Commission declaring the Registration Statement to be filed
pursuant to Section 2(a) effective under the Securities Act, the
Company grants to any Person any registration rights with respect
to any Company securities which are more favorable to such other
Person than those provided in this Agreement, then the Company
forthwith shall grant (by means of an amendment to this Agreement
or otherwise) identical registration rights to all Investors
hereunder.
(c) Except as may be otherwise provided herein, any
notice or other communication or delivery required or permitted
hereunder shall be in writing and shall be delivered personally
or sent by certified mail, postage prepaid, or by a nationally
recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or,
if mailed, three (3) days after the date of deposit in the United
States mails, as follows:
(1) if to the Company, to:
The Network Connection, Inc.
1324 Union Hill Road
Alpharetta, Georgia 30004
Attention: Wilbur Riner
With a copy to:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, New York 10022-7001
Attention: Peter W. Rothberg, Esq.
(2) if to the Initial Investor, to:
THE SHAAR FUND LTD.,
c/o SHAAR ADVISORY SERVICES LTD.
62 King George Street, Apartment 4F
Jerusalem, Israel
Attention: Samuel Levinson
(3) if to any other Investor, at such address as such
Investor shall have provided in writing to the
Company.
The Company, the Initial Investor or any Investor may change the
foregoing address by notice given pursuant to this Section 10(c).
(d) Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party in
exercising such right or remedy, shall not operate as a waiver
thereof.
(e) This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York.
Each of the parties consents to the jurisdiction of the federal
courts whose districts encompass any part of the City of New York
or the state courts of the State of New York sitting in the City
of New York in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by
law, any objection including any objection based on forum non
conveniens, to the bringing of any such proceeding in such
jurisdictions.
(f) The remedies provided in this Agreement are
cumulative and not exclusive of any remedies provided by law. If
any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provision,
covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or
invalidated, and the parties hereto shall use their best efforts
to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter
declared invalid, illegal, void or unenforceable.
(g) The Company shall not enter into any agreement
with respect to its securities that is inconsistent with the
rights granted to the holders of Registrable Securities in this
Agreement or otherwise conflicts with the provisions hereof. The
Company is not currently a party to any agreement granting any
registration rights with respect to any of its securities to any
person which conflicts with the Company's obligations hereunder
or gives any other party the right to include any securities in
any Registration Statement filed pursuant hereto, except for (i)
such rights and conflicts as have been irrevocably waived and
(ii) registration rights granted to KA Investments LDC pursuant
to the terms of the Convertible Preferred Stock Purchase
Agreement, dated as of June 9, 1998. Without limiting the
generality of the foregoing, without the written consent of the
Holders of a majority in interest of the Registrable Securities,
the Company shall not hereafter grant to any person the right to
request it to register any of its securities under the Securities
Act unless the rights so granted are subject in all respect to
the prior rights of the holders of Registrable Securities set
forth herein, and are not otherwise in conflict or inconsistent
with the provisions of this Agreement. The restrictions on the
Company's rights to grant registration rights under this
paragraph shall terminate on the date the Registration Statement
to be filed pursuant to Section 2(a) is declared effective by the
Commission.
(h) This Agreement, the Securities Purchase Agreement,
the Amendment and the Warrants constitute the entire agreement
among the parties hereto with respect to the subject matter
hereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein.
This Agreement, the Securities Purchase Agreement, the Amendment
and the Warrants supersede all prior agreements and undertakings
among the parties hereto with respect to the subject matter
hereof.
(i) Subject to the requirements of Section 8 hereof,
this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of each of the parties hereto.
(j) All pronouns and any variations thereof refer to
the masculine, feminine or neuter, singular or plural, as the
context may require.
(k) The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the
meaning thereof.
(l) The Company acknowledges that any failure by the
Company to perform its obligations under Section 3, or any delay
in such performance could result in direct damages to the
Investors and the Company agrees that, in addition to any other
liability the Company may have by reason of any such failure or
delay, the Company shall be liable for all direct damages caused
by such failure or delay.
(m) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all
of which shall constitute one and the same agreement. A
facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
[Remainder of this page intentionally left blank]
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed and delivered as of the date first above written.
THE NETWORK CONNECTION, INC.
By:____________________________
Name:
Title:
THE SHAAR FUND LTD.
By:____________________________
Name:
Title:
Exhibit 10.3
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND
REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT.
No. of Shares of Common Stock: 100,000
Warrant No. __
WARRANT
To Purchase Common Stock of
The Network Connection, Inc.
THIS IS TO CERTIFY THAT The Shaar Fund Ltd., or
registered assigns, is entitled, at any time from the Closing
Date (as hereinafter defined) to the Expiration Date (as
hereinafter defined), to purchase from The Network Connection,
Inc., a Georgia corporation (the "Company"), 100,000 shares of
Common Stock (as hereinafter defined and subject to adjustment as
provided herein), in whole or in part, including fractional
parts, at a purchase price equal to [110% of Closing Bid Price on
10/23/98] per share, all on the terms and conditions and pursuant
to the provisions hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the
respective meanings set forth below:
"Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Company after the Closing
Date, other than Warrant Stock.
"Book Value" shall mean, in respect of any share of
Common Stock on any date herein specified, the consolidated book
value of the Company as of the last day of any month immediately
preceding such date, divided by the number of Fully Diluted
Outstanding shares of Common Stock as determined in accordance
with GAAP (assuming the payment of the exercise prices for such
shares) by [Company accountants] or any other firm of independent
certified public accountants of recognized national standing
selected by the Company and reasonably acceptable to the Holder.
"Business Day" shall mean any day that is not a
Saturday or Sunday or a day on which banks are required or
permitted to be closed in the State of New York.
"Closing Date" shall have the meaning set forth in the
Securities Purchase Agreement.
"Commission" shall mean the Securities and Exchange
Commission or any other federal agency then administering the
Securities Act and other federal securities laws.
"Common Stock" shall mean (except where the context
otherwise indicates) the Common Stock, $.001 par value, of the
Company as constituted on the Closing Date, and any capital stock
into which such Common Stock may thereafter be changed, and shall
also include (i) capital stock of the Company of any other class
(regardless of how denominated) issued to the holders of shares
of Common Stock upon any reclassification thereof which is also
not preferred as to dividends or assets over any other class of
stock of the Company and which is not subject to redemption and
(ii) shares of common stock of any successor or acquiring
corporation received by or distributed to the holders of Common
Stock of the Company in the circumstances contemplated by Section
4.4.
"Convertible Securities" shall mean evidences of
indebtedness, shares of stock or other securities which are
convertible into or exchangeable, with or without payment of
additional consideration in cash or property, for shares of
Common Stock, either immediately or upon the occurrence of a
specified date or a specified event.
"Current Warrant Price" shall mean, in respect of a
share of Common Stock at any date herein specified, the price at
which a share of Common Stock may be purchased pursuant to this
Warrant on such date.
"Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, or any successor federal statute, and the
rules and regulations of the Commission thereunder, all as the
same shall be in effect from time to time.
"Exercise Period" shall mean the period during which
this Warrant is exercisable pursuant to Section 2.1.
"Expiration Date" shall mean a date five (5) years from
the date hereof.
"Fully Diluted Outstanding" shall mean, when used with
reference to Common Stock, at any date as of which the number of
shares thereof is to be determined, all shares of Common Stock
Outstanding at such date and all shares of Common Stock issuable
in respect of this Warrant, outstanding on such date, and other
options or warrants to purchase, or securities convertible into,
shares of Common Stock outstanding on such date which would be
deemed outstanding in accordance with GAAP for purposes of
determining book value or net income per share.
"GAAP" shall mean generally accepted accounting
principles in the United States of America as from time to time
in effect.
"Holder" shall mean the Person in whose name the
Warrant or Warrant Stock set forth herein is registered on the
books of the Company maintained for such purpose.
"Market Price" per Common Share means the average of
the closing prices of the Common Shares as reported on the Nasdaq
SmallCap Stock Market ("Nasdaq"), or, if such security is not
listed or admitted to trading on the Nasdaq, on the principal
national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not
quoted or listed or admitted to trading on any national
securities exchange or quotation system, the closing bid price of
such security on the over-the-counter market on the day in
question as reported by the National Quotation Bureau
Incorporated, or a similar generally accepted reporting service,
or if not so available, in such manner as furnished by any Nasdaq
member firm of the National Association of Securities Dealers,
Inc. selected from time to time by the Board of Directors of the
Company for that purpose, or a price determined in good faith by
the Board of Directors of the Company as being equal to the fair
market value thereof, as the case may be, for the five (5)
Trading Days immediately preceding the Closing Date.
"Other Property" shall have the meaning set forth in
Section 4.4.
"Outstanding" shall mean, when used with reference to
Common Stock, at any date as of which the number of shares
thereof is to be determined, all issued shares of Common Stock,
except shares then owned or held by or for the account of the
Company or any subsidiary thereof, and shall include all shares
issuable in respect of outstanding scrip or any certificates
representing fractional interests in shares of Common Stock.
"Person" shall mean any individual, sole
proprietorship, partnership, joint venture, trust, incorporated
organization, association, corporation, institution, public
benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or
department thereof).
"Registration Rights Agreement" shall mean the
Registration Rights Agreement dated a date even herewith by and
between the Company and The Shaar Fund Ltd., as it may be amended
from time to time.
"Restricted Common Stock" shall mean shares of Common
Stock which are, or which upon their issuance on the exercise of
this Warrant would be, evidenced by a certificate bearing the
restrictive legend set forth in Section 9.1(a).
"Securities Act" shall mean the Securities Act of 1933,
as amended, or any successor federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall
be in effect at the time.
"Securities Purchase Agreement" shall mean the
Securities Purchase Agreement dated as of a date even herewith by
and between the Company and The Shaar Fund, Ltd. as it may be
amended from time to time.
"Transfer" shall mean any disposition of any Warrant or
Warrant Stock or of any interest in either thereof, which would
constitute a sale thereof within the meaning of the Securities
Act.
"Transfer Notice" shall have the meaning set forth in
Section 9.2.
"Warrants" shall mean this Warrant and all warrants
issued upon transfer, division or combination of, or in
substitution for, any thereof. All Warrants shall at all times
be identical as to terms and conditions and date, except as to
the number of shares of Common Stock for which they may be
exercised.
"Warrant Price" shall mean an amount equal to (i) the
number of shares of Common Stock being purchased upon exercise of
this Warrant pursuant to Section 2.1, multiplied by (ii) the
Current Warrant Price as of the date of such exercise.
"Warrant Stock" shall mean the shares of Common Stock
purchased by the holders of the Warrants upon the exercise
thereof.
2. EXERCISE OF WARRANT
2.1. Manner of Exercise. From and after the Closing Date and
until 5:00 P.M., New York time, on the Expiration Date, Holder
may exercise this Warrant, on any Business Day, for all or any
part of the number of shares of Common Stock purchasable
hereunder.
In order to exercise this Warrant, in whole or in part,
Holder shall deliver to the Company at its principal office at
1324 Union Hill Road, Alpharetta, Georgia 30004 or at the office
or agency designated by the Company pursuant to Section 12, (i) a
written notice of Holder's election to exercise this Warrant,
which notice shall specify the number of shares of Common Stock
to be purchased, (ii) payment of the Warrant Price in cash or by
wire transfer or cashier's check drawn on a United States bank
and (iii) this Warrant. Such notice shall be substantially in
the form of the subscription form appearing at the end of this
Warrant as Exhibit A, duly executed by Holder or its agent or
attorney. Upon receipt of the items referred to in clauses (i),
(ii) and (iii) above, the Company shall, as promptly as
practicable, and in any event within five (5) Business Days
thereafter, execute or cause to be executed and deliver or cause
to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Common Stock
issuable upon such exercise, together with cash in lieu of any
fraction of a share, as hereinafter provided. The stock
certificate or certificates so delivered shall be, to the extent
possible, in such denomination or denominations as Holder shall
request in the notice and shall be registered in the name of
Holder or, subject to Section 9, such other name as shall be
designated in the notice. This Warrant shall be deemed to have
been exercised and such certificate or certificates shall be
deemed to have been issued, and Holder or any other Person so
designated to be named therein shall be deemed to have become a
holder of record of such shares for all purposes, as of the date
the notice, together with the cash or check or checks and this
Warrant, is received by the Company as described above and all
taxes required to be paid by Holder, if any, pursuant to Section
2.2 prior to the issuance of such shares have been paid. If this
Warrant shall have been exercised in part, the Company shall, at
the time of delivery of the certificate or certificates
representing Warrant Stock, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased
shares of Common Stock called for by this Warrant, which new
Warrant shall in all other respects be identical with this
Warrant, or, at the request of Holder, appropriate notation may
be made on this Warrant and the same returned to Holder.
Notwithstanding any provision herein to the contrary, the Company
shall not be required to register shares in the name of any
Person who acquired this Warrant (or part hereof) or any Warrant
Stock otherwise than in accordance with this Warrant.
2.2. Payment of Taxes and Charges. All shares of Common Stock
issuable upon the exercise of this Warrant pursuant to the terms
hereof shall be validly issued, fully paid and nonassessable,
freely tradeable and without any preemptive rights. The Company
shall pay all expenses in connection with, and all taxes and
other governmental charges that may be imposed with respect to,
the issue or delivery thereof, unless such tax or charge is
imposed by law upon Holder, in which case such taxes or charges
shall be paid by Holder. The Company shall not be required,
however, to pay any tax or other charge imposed in connection
with any transfer involved in the issue of any certificate for
shares of Common Stock issuable upon exercise of this Warrant in
any name other than that of Holder, and in such case the Company
shall not be required to issue or deliver any stock certificate
until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax
or other charge is due.
2.3. Fractional Shares. The Company shall not be required to
issue a fractional share of Common Stock upon exercise of any
Warrant. As to any fraction of a share which Holder would
otherwise be entitled to purchase upon such exercise, the Company
shall pay a cash adjustment in respect of such final fraction in
an amount equal to the same fraction of the Market Price per
share of Common Stock as of the Closing Date.
2.4. Continued Validity. A holder of shares of Common Stock
issued upon the exercise of this Warrant, in whole or in part
(other than a holder who acquires such shares after the same have
been publicly sold pursuant to a Registration Statement under the
Securities Act or sold pursuant to Rule 144 thereunder), shall
continue to be entitled with respect to such shares to all rights
to which it would have been entitled as Holder under Sections 9,
10 and 14 of this Warrant. The Company will, at the time of
exercise of this Warrant, in whole or in part, upon the request
of Holder, acknowledge in writing, in form reasonably
satisfactory to Holder, its continuing obligation to afford
Holder all such rights; provided, however, that if Holder shall
fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to Holder all such
rights.
3. TRANSFER, DIVISION AND COMBINATION
3.1. Transfer. Subject to compliance with Sections 9, transfer
of this Warrant and all rights hereunder, in whole or in part,
shall be registered on the books of the Company to be maintained
for such purpose, upon surrender of this Warrant at the principal
office of the Company referred to in Section 2.1 or the office or
agency designated by the Company pursuant to Section 12, together
with a written assignment of this Warrant substantially in the
form of Exhibit B hereto duly executed by Holder or its agent or
attorney and funds sufficient to pay any transfer taxes payable
upon the making of such transfer. Upon such surrender and, if
required, such payment, the Company shall, subject to Section 9,
execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denomination specified in such
instrument of assignment, and shall issue to the assignor a new
Warrant evidencing the portion of this Warrant not so assigned,
and this Warrant shall promptly be cancelled. A Warrant, if
properly assigned in compliance with Section 9, may be exercised
by a new Holder for the purchase of shares of Common Stock
without having a new Warrant issued.
3.2. Division and Combination
3.3. Subject to Section 9, this Warrant may be divided or
combined with other Warrants upon presentation hereof at the
aforesaid office or agency of the Company, together with a
written notice specifying the names and denominations in which
new Warrants are to be issued, signed by Holder or its agent or
attorney. Subject to compliance with Section 3.1 and with
Section 9, as to any transfer which may be involved in such
division or combination, the Company shall execute and deliver a
new Warrant or Warrants in exchange for the Warrant or Warrants
to be divided or combined in accordance with such notice.
3.4. Expenses. The Company shall prepare, issue and deliver at
its own expense (other than transfer taxes) the new Warrant or
Warrants under this Section 3.
3.5. Maintenance of Books. The Company agrees to maintain, at
its aforesaid office or agency, books for the registration and
the registration of transfer of the Warrants.
4. ADJUSTMENTS
The number of shares of Common Stock for which this
Warrant is exercisable, or the price at which such shares may be
purchased upon exercise of this Warrant, shall be subject to
adjustment from time to time as set forth in this Section 4. The
Company shall give Holder notice of any event described below
which requires an adjustment pursuant to this Section 4 at the
time of such event.
4.1. Stock Dividends, Subdivisions and Combinations. If at any
time the Company shall:
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or
other distribution of, Additional Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then (i) the number of shares of Common Stock for which this
Warrant is exercisable immediately after the occurrence of any
such event shall be adjusted to equal the number of shares of
Common Stock which a record holder of the same number of shares
of Common Stock for which this Warrant is exercisable immediately
prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Current
Warrant Price shall be adjusted to equal (A) the Current Warrant
Price multiplied by the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to the
adjustment divided by (B) the number of shares for which this
Warrant is exercisable immediately after such adjustment.
4.2. Certain Other Distributions. If at any time the Company
shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive any dividend or other
distribution of:
(a) cash,
(b) any evidences of its indebtedness, any shares of its stock
or any other securities or property of any nature whatsoever
(other than cash, Convertible Securities or Additional Shares of
Common Stock), or
(c) any warrants or other rights to subscribe for or purchase
any evidences of its indebtedness, any shares of its stock or any
other securities or property of any nature whatsoever (other than
cash, Convertible Securities or Additional Shares of Common
Stock),
then Holder shall be entitled to receive such dividend or
distribution as if Holder had exercised the Warrant. A
reclassification of the Common Stock (other than a change in par
value, or from par value to no par value or from no par value to
par value) into shares of Common Stock and shares of any other
class of stock shall be deemed a distribution by the Company to
the holders of its Common Stock of such shares of such other
class of stock within the meaning of this Section 4.2 and, if the
outstanding shares of Common Stock shall be changed into a larger
or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of
Common Stock within the meaning of Section 4.1.
4.3. Other Provisions Applicable to Adjustments under this
Section. The following provisions shall be applicable to the
making of adjustments of the number of shares of Common Stock for
which this Warrant is exercisable and the Current Warrant Price
provided for in this Section 4:
(a) When Adjustments to Be Made. The adjustments required by
this Section 4 shall be made whenever and as often as any
specified event requiring an adjustment shall occur. For the
purpose of any adjustment, any specified event shall be deemed to
have occurred at the close of business on the date of its
occurrence.
(b) Fractional Interests. In computing adjustments under this
Section 4, fractional interests in Common Stock shall be taken
into account to the nearest 1/10th of a share.
(c) When Adjustment Not Required. If the Company shall take a
record of the holders of its Common Stock for the purpose of
entitling them to receive a dividend or distribution or
subscription or purchase rights and shall, thereafter and before
the distribution to stockholders thereof, legally abandon its
plan to pay or deliver such dividend, distribution, subscription
or purchase rights, then thereafter no adjustment shall be
required by reason of the taking of such record and any such
adjustment previously made in respect thereof shall be rescinded
and annulled.
(d) Challenge to Good Faith Determination. Whenever the Board
of Directors of the Company shall be required to make a
determination in good faith of the fair value of any item under
this Section 4, such determination may be challenged in good
faith by the Holder, and any dispute shall be resolved by an
investment banking firm of recognized national standing selected
by the Company and acceptable to the Holder.
4.4. Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its
capital, reclassify its capital stock, consolidate or merge with
or into another corporation (where the Company is not the
surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or
sell, transfer or otherwise dispose of all or substantially all
its property, assets or business to another corporation and,
pursuant to the terms of such reorganization, reclassification,
merger, consolidation or disposition of assets, shares of common
stock of the successor or acquiring corporation, or any cash,
shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase
rights) in addition to or in lieu of common stock of the
successor or acquiring corporation ("Other Property"), are to be
received by or distributed to the holders of Common Stock of the
Company, then Holder shall have the right thereafter to receive,
upon exercise of the Warrant, the number of shares of common
stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Other Property
receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to such event. In
case of any such reorganization, reclassification, merger,
consolidation or disposition of assets, the successor or
acquiring corporation (if other than the Company) shall expressly
assume the due and punctual observance and performance of each
and every covenant and condition of this Warrant to be performed
and observed by the Company and all the obligations and
liabilities hereunder, subject to such modifications as may be
deemed appropriate (as determined by resolution of the Board of
Directors of the Company) in order to provide for adjustments of
shares of Common Stock for which this Warrant is exercisable
which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section 4. For purposes of this
Section 4.4, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class
which is not preferred as to dividends or assets over any other
class of stock of such corporation and which is not subject to
redemption and shall also include any evidences of indebtedness,
shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the
arrival of a specified date or the happening of a specified event
and any warrants or other rights to subscribe for or purchase any
such stock. The foregoing provisions of this Section 4.4 shall
similarly apply to successive reorganizations, reclassifications,
mergers, consolidations or dispositions of assets.
4.5. Other Action Affecting Common Stock. In case at any time or
from time to time the Company shall take any action in respect of
its Common Stock, other than any action described in this Section
4, which would have a materially adverse effect upon the rights
of the Holder, the number of shares of Common Stock and/or the
purchase price thereof shall be adjusted in such manner as may be
equitable in the circumstances, as determined in good faith by
the Board of Directors of the Company.
4.6. Certain Limitations. Notwithstanding anything herein to the
contrary, the Company agrees not to enter into any transaction
which, by reason of any adjustment hereunder, would cause the
Current Warrant Price to be less than the par value per share of
Common Stock.
5. NOTICES TO HOLDER
5.1. Notice of Adjustments. Whenever the number of shares of
Common Stock for which this Warrant is exercisable, or whenever
the price at which a share of such Common Stock may be purchased
upon exercise of the Warrants, shall be adjusted pursuant to
Section 4, the Company shall forthwith prepare a certificate to
be executed by the chief financial officer of the Company setting
forth, in reasonable detail, the event requiring the adjustment
and the method by which such adjustment was calculated (including
a description of the basis on which the Board of Directors of the
Company determined the fair value of any evidences of
indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in
Section 4.2), specifying the number of shares of Common Stock for
which this Warrant is exercisable and (if such adjustment was
made pursuant to Section 4.4 or 4.5) describing the number and
kind of any other shares of stock or Other Property for which
this Warrant is exercisable, and any change in the purchase price
or prices thereof, after giving effect to such adjustment or
change. The Company shall promptly cause a signed copy of such
certificate to be delivered to the Holder in accordance with
Section 15.2. The Company shall keep at its office or agency
designated pursuant to Section 12 copies of all such certificates
and cause the same to be available for inspection at said office
during normal business hours by the Holder or any prospective
purchaser of a Warrant designated by the Holder.
5.2. Notice of Corporate Action. If at any time
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or
other distribution, or any right to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class
or any other securities or property, or to receive any other
right, or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of
the Company or any consolidation or merger of the Company with,
or any sale, transfer or other disposition of all or
substantially all the property, assets or business of the Company
to, another corporation, or
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to
Holder (i) at least 30 days' prior written notice of the date on
which a record date shall be selected for such dividend,
distribution or right or for determining rights to vote in
respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution,
liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, dissolution, liquidation or winding up, at
least 30 days' prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing
clause also shall specify (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or
right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the
amount and character thereof, and (ii) the date on which any such
reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, dissolution, liquidation or winding up is
to take place and the time, if any such time is to be fixed, as
of which the holders of Common Stock shall be entitled to
exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
merger, consolidation, sale, transfer, disposition, dissolution,
liquidation or winding up. Each such written notice shall be
sufficiently given if addressed to Holder at the last address of
Holder appearing on the books of the Company and delivered in
accordance with Section 15.2.
6. NO IMPAIRMENT
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through
any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to
protect the rights of Holder against impairment. Without
limiting the generality of the foregoing, the Company will
(a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise immediately prior to such
increase in par value, (b) take all such action as may be
necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of Common
Stock upon the exercise of this Warrant, and (c) use its best
efforts to obtain all such authorizations, exemptions or consents
from any public regulatory body having jurisdiction thereof as
may be necessary to enable the Company to perform its obligations
under this Warrant.
Upon the request of Holder, the Company will at any
time during the period this Warrant is outstanding acknowledge in
writing, in form satisfactory to Holder, the continuing validity
of this Warrant and the obligations of the Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK
From and after the Closing Date, the Company shall at
all times reserve and keep available for issue upon the exercise
of Warrants such number of its authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full
of all outstanding Warrants. All shares of Common Stock which
shall be so issuable, when issued upon exercise of any Warrant
and payment therefor in accordance with the terms of such
Warrant, shall be duly and validly issued and fully paid and
nonassessable, and not subject to preemptive rights.
Before taking any action which would cause an
adjustment reducing the Current Warrant Price below the then par
value, if any, of the shares of Common Stock issuable upon
exercise of the Warrants, the Company shall take any corporate
action which may be necessary in order that the Company may
validly and legally issue fully paid and non-assessable shares of
such Common Stock at such adjusted Current Warrant Price.
Before taking any action which would result in an
adjustment in the number of shares of Common Stock for which this
Warrant is exercisable or in the Current Warrant Price, the
Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by
the Company to the holders of its Common Stock with respect to
which any provision of Section 4 refers to the taking of a record
of such holders, the Company will in each such case take such a
record and will take such record as of the close of business on a
Business Day. The Company will not at any time, except upon
dissolution, liquidation or winding up of the Company, close its
stock transfer books or Warrant transfer books so as to result in
preventing or delaying the exercise or transfer of any Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Stock shall not be
transferred, hypothecated or assigned before satisfaction of the
conditions specified in this Section 9, which conditions are
intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant or any
Warrant Stock. Holder, by acceptance of this Warrant, agrees to
be bound by the provisions of this Section 9.
9.1. Restrictive Legend. (a) The Holder by accepting this
Warrant and any Warrant Stock agrees that this Warrant and the
Warrant Stock issuable upon exercise hereof may not be assigned
or otherwise transferred unless and until (i) the Company has
received an opinion of counsel for the Holder that such
securities may be sold pursuant to an exemption from registration
under the Securities Act of 1933, as amended (the "Securities
Act") or (ii) a registration statement relating to such
securities has been filed by the Company and declared effective
by the Commission.
Each certificate for Warrant Stock issuable hereunder
shall bear a legend as follows unless such securities have been
sold pursuant to an effective registration statement under the
Securities Act:
"The securities represented by this certificate
have not been registered under the Securities Act of
1933, as amended (the "Act"). The securities may not
be offered for sale, sold or otherwise transferred
except (i) pursuant to an effective registration
statement under the Act or (ii) pursuant to an
exemption from registration under the Act in respect of
which the Company has received an opinion of counsel
satisfactory to the Company to such effect. Copies of
the agreement covering both the purchase of the
securities and restricting their transfer may be
obtained at no cost by written request made by the
holder of record of this certificate to the Secretary
of the Company at the principal executive offices of
the Company."
(a) Except as otherwise provided in this Section 9, the Warrant
shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"This Warrant and the securities represented
hereby have not been registered under the Securities
Act of 1933, as amended, and may not be transferred in
violation of such Act, the rules and regulations
thereunder or the provisions of this Warrant."
9.2. Notice of Proposed Transfers. Prior to any Transfer or
attempted Transfer of any Warrants or any shares of Restricted
Common Stock, the Holder shall give ten days' prior written
notice (a "Transfer Notice") to the Company of Holder's intention
to effect such Transfer, describing the manner and circumstances
of the proposed Transfer, and obtain from counsel to Holder who
shall be reasonably satisfactory to the Company, an opinion that
the proposed Transfer of such Warrants or such Restricted Common
Stock may be effected without registration under the Securities
Act. After receipt of the Transfer Notice and opinion, the
Company shall, within five days thereof, notify the Holder as to
whether such opinion is reasonably satisfactory and, if so, such
holder shall thereupon be entitled to Transfer such Warrants or
such Restricted Common Stock, in accordance with the terms of the
Transfer Notice. Each certificate, if any, evidencing such
shares of Restricted Common Stock issued upon such Transfer shall
bear the restrictive legend set forth in Section 9.1(a), and the
Warrant issued upon such Transfer shall bear the restrictive
legend set forth in Section 9.1(b), unless in the opinion of such
counsel such legend is not required in order to ensure compliance
with the Securities Act. The Holder shall not be entitled to
Transfer such Warrants or such Restricted Common Stock until
receipt of notice from the Company under this Section 9.2(a) that
such opinion is reasonably satisfactory.
9.3. Required Registration. Pursuant to the terms and conditions
set forth in the Registration Rights Agreement, the Company shall
prepare and file with the Commission not later than the [45th]
day after the Closing Date, a Registration Statement relating to
the offer and sale of the Common Stock issuable upon exercise of
the Warrants and shall use its best efforts to cause the
Commission to declare such Registration Statement effective under
the Securities Act as promptly as practicable but no later than
[105] days after the Closing Date.
9.4. Termination of Restrictions. Notwithstanding the foregoing
provisions of Section 9, the restrictions imposed by this Section
upon the transferability of the Warrants, the Warrant Stock and
the Restricted Common Stock (or Common Stock issuable upon the
exercise of the Warrants) and the legend requirements of Section
9.1 shall terminate as to any particular Warrant or share of
Warrant Stock or Restricted Common Stock (or Common Stock
issuable upon the exercise of the Warrants) (i) when and so long
as such security shall have been effectively registered under the
Securities Act and disposed of pursuant thereto or (ii) when the
Company shall have received an opinion of counsel reasonably
satisfactory to it that such shares may be transferred without
registration thereof under the Securities Act. Whenever the
restrictions imposed by Section 9 shall terminate as to this
Warrant, as hereinabove provided, the Holder hereof shall be
entitled to receive from the Company upon written request of the
Holder, at the expense of the Company, a new Warrant bearing the
following legend in place of the restrictive legend set forth
hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE WITHIN
WARRANT CONTAINED IN SECTION 9 HEREOF TERMINATED ON
________, 19__, AND ARE OF NO FURTHER FORCE AND
EFFECT."
All Warrants issued upon registration of transfer, division or
combination of, or in substitution for, any Warrant or Warrants
entitled to bear such legend shall have a similar legend endorsed
thereon. Whenever the restrictions imposed by this Section shall
terminate as to any share of Restricted Common Stock, as
hereinabove provided, the holder thereof shall be entitled to
receive from the Company, at the Company's expense, a new
certificate representing such Common Stock not bearing the
restrictive legend set forth in Section 9.1(a).
9.5. Listing on Securities Exchange. If the Company shall list
any shares of Common Stock on any securities exchange, it will,
at its expense, list thereon, maintain and, when necessary,
increase such listing of, all shares of Common Stock issued or,
to the extent permissible under the applicable securities
exchange rules, issuable upon the exercise of this Warrant so
long as any shares of Common Stock shall be so listed during any
such Exercise Period.
10. SUPPLYING INFORMATION
The Company shall cooperate with Holder in supplying
such information as may be reasonably necessary for Holder to
complete and file any information reporting forms presently or
hereafter required by the Commission as a condition to the
availability of an exemption from the Securities Act for the sale
of any Warrant or Restricted Common Stock.
11. LOSS OR MUTILATION
Upon receipt by the Company from Holder of evidence
reasonably satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of this Warrant and indemnity
reasonably satisfactory to it (it being understood that the
written agreement of the Holder shall be sufficient indemnity),
and in case of mutilation upon surrender and cancellation hereof,
the Company will execute and deliver in lieu hereof a new Warrant
of like tenor to Holder; provided, in the case of mutilation, no
indemnity shall be required if this Warrant in identifiable form
is surrendered to the Company for cancellation.
12. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the
Company shall maintain an office or agency (which may be the
principal executive offices of the Company) where the Warrants
may be presented for exercise, registration of transfer, division
or combination as provided in this Warrant.
13. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative
action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof,
shall give rise to any liability of Holder for the purchase price
of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the
Company.
14. MISCELLANEOUS
14.1. Nonwaiver and Expenses. No course of dealing or any
delay or failure to exercise any right hereunder on the part of
Holder shall operate as a waiver of such right or otherwise
prejudice Holder's rights, powers or remedies. If the Company
fails to make, when due, any payments provided for hereunder, or
fails to comply with any other provision of this Warrant, the
Company shall pay to Holder such amounts as shall be sufficient
to cover any costs and expenses including, but not limited to,
reasonable attorneys' fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights,
powers or remedies hereunder.
14.2. Notice Generally. Except as may be otherwise provided
herein, any notice or other communication or delivery required or
permitted hereunder shall be in writing and shall be delivered
personally or sent by certified mail, postage prepaid, or by a
nationally recognized overnight courier service, and shall be
deemed given when so delivered personally or by overnight courier
service, or, if mailed, three (3) days after the date of deposit
in the United States mails, as follows:
(1) if to the Company, to:
The Network Connection, Inc.
1324 Union Hill Road
Alpharetta, Georgia 30004
Attention: Wilbur Riner
With a copy to:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, New York 10022-7001
Attention: Peter W. Rothberg, Esq.
(2) if to the Holder, to:
THE SHAAR FUND LTD.,
c/o SHAAR ADVISORY SERVICES LTD.
62 King George Street, Apartment 4F
Jerusalem, Israel
Attention: Samuel Levinson
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Gerald S. Backman, Esq.
The Company or the Holder may change the foregoing address by
notice given pursuant to this Section 14.2.
14.3. Indemnification. The Company agrees to indemnify and
hold harmless Holder from and against any liabilities,
obligations, losses, damages, penalties, actions, judgments,
suits, claims, costs, attorneys' fees, expenses and disbursements
of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any
failure by the Company to perform or observe in any material
respect any of its covenants, agreements, undertakings or
obligations set forth in this Warrant; provided, however, that
the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, attorneys' fees, expenses or
disbursements are found in a final non-appealable judgment by a
court to have resulted from Holder's gross negligence, bad faith
or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
14.4. Remedies. Holder in addition to being entitled to
exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights
under Section 9 of this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of Section
9 of this Warrant and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be
adequate.
14.5. Successors and Assigns. Subject to the provisions of
Sections 3.1 and 9, this Warrant and the rights evidenced hereby
shall inure to the benefit of and be binding upon the successors
of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of
all Holders from time to time of this Warrant and, with respect
to Section 9 hereof, holders of Warrant Stock, and shall be
enforceable by any such Holder or holder of Warrant Stock.
14.6. Amendment. This Warrant and all other Warrants may be
modified or amended or the provisions hereof waived with the
written consent of the Company and the Holder.
14.7. Severability. Wherever possible, each provision of
this Warrant shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of
this Warrant shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Warrant.
14.8. Headings. The headings used in this Warrant are for
the convenience of reference only and shall not, for any purpose,
be deemed a part of this Warrant.
14.9. Governing Law. This Warrant shall be governed by the
laws of the State of New York, without regard to the provisions
thereof relating to conflict of laws.
IN WITNESS WHEREOF, the Company has caused this Warrant
to be duly executed and its corporate seal to be impressed hereon
and attested by its Secretary or an Assistant Secretary.
Dated: October 23, 1998
THE NETWORK CONNECTION, INC.
By:___________________________
Name:
Title:
Attest:
By:______________________
Name:
Title:
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant
irrevocably exercises this Warrant for the purchase of ______
Shares of Common Stock of The Network Connection, Inc. and
herewith makes payment therefor, all at the price and on the
terms and conditions specified in this Warrant and requests that
certificates for the shares of Common Stock hereby purchased (and
any securities or other property issuable upon such exercise) be
issued in the name of and delivered to _____________ whose
address is _________________ and, if such shares of Common Stock
shall not include all of the shares of Common Stock issuable as
provided in this Warrant, that a new Warrant of like tenor and
date for the balance of the shares of Common Stock issuable
hereunder be delivered to the undersigned.
_______________________________
(Name of Registered Owner)
_______________________________
(Signature of Registered Owner)
_______________________________
(Street Address)
_______________________________
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with
the name as written upon the face of the within Warrant
in every particular, without alteration or enlargement
or any change whatsoever.
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of
this Warrant hereby sells, assigns and transfers unto the
Assignee named below all of the rights of the undersigned under
this Warrant, with respect to the number of shares of Common
Stock set forth below:
Name and Address of Assignee No. of Shares of
Common Stock
and does hereby irrevocably constitute and appoint ______________
attorney-in-fact to register such transfer on the books of
____________ maintained for the purpose, with full power of
substitution in the premises.
Dated:__________________ Print Name:___________________
Signature:_____________________
Witness:______________________
NOTICE: The signature on this assignment must correspond with
the name as written upon the face of the within Warrant
in every particular, without alteration or enlargement
or any change whatsoever.
<TABLE> <S> <C>
<S> <C> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE NETWORK
CONNECTION, INC. FOR THE QUARTER ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-1-1998 JUL-1-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 1,095,830 1,095,830
<SECURITIES> 0 0
<RECEIVABLES> 7,631,962 7,631,962
<ALLOWANCES> 2,000,000 2,000,000
<INVENTORY> 1,815,145 1,815,145
<CURRENT-ASSETS> 8,846,824 8,846,824
<PP&E> 3,298,878 3,298,878
<DEPRECIATION> 1,213,564 1,213,564
<TOTAL-ASSETS> 11,573,255 11,573,255
<CURRENT-LIABILITIES> 4,524,816 4,524,816
<BONDS> 705,440 705,440
909,074 909,074
0 0
<COMMON> 4,617 4,617
<OTHER-SE> 5,433,925 5,433,925
<TOTAL-LIABILITY-AND-EQUITY> 11,573,255 11,573,255
<SALES> 5,140,834 1,381,847
<TOTAL-REVENUES> 5,140,834 1,381,847
<CGS> 2,842,276 723,747
<TOTAL-COSTS> 2,855,559 836,951
<OTHER-EXPENSES> 202,190 74,065
<LOSS-PROVISION> 2,842,128 2,142,128
<INTEREST-EXPENSE> (43,951) (61,100)
<INCOME-PRETAX> (3,645,270) (2,456,144)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,645,270) (2,456,144)
<EPS-PRIMARY> (0.92) (0.56)
<EPS-DILUTED> (0.92) (0.56)
</TABLE>
