As filed with the Securities. and Exchange Commission on October 13, 1998
Registration No. _________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
11-1817252
(I.R.S. Employer Identification No.)
520 Logue Avenue
Mountain View, CA 94043
(650) 962-7470
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Dr. Lawrence B. Brilliant
Chief Executive Officer and President
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
(650) 962-7470
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Thomas W. Kellerman, Esq.
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
(650) 424-0160
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this Registration Statement.
-----------------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. /__/
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering./__/
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering./__/
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box./__/
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------ ---------------------- --------------------- --------------------- ---------------------
Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Per Aggregate Offering Registration Fee
Unit(1) Price
- ------------------------------------------ ---------------------- --------------------- --------------------- ---------------------
- ------------------------------------------ ---------------------- --------------------- --------------------- =====================
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value (2)........ 4,240,000(2) (3) $7.375 $31,270,000 $8,693.06
- ------------------------------------------ ---------------------- --------------------- --------------------- =====================
</TABLE>
(1) Estimated solely for purposes of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933,
based on the average of the high and low sales price of a share of Common
Stock of the Registrant on the American Stock Exchange as reported in the
consolidated reporting system on October 8, 1998.
(2) Consists of Common Stock issuable upon exercise of certain stock purchase
warrants (the "Warrants"), conversion of Series C Convertible Preferred
Stock (the "Series C Preferred Stock"), and conversion of Series D
convertible Preferred Stock (the "Series D Preferred Stock").
(3) The shares of Common Stock set forth in the Calculation of Registration
Fee Table, and which may be offered pursuant to this Registration
Statement, includes the maximum number of shares of Common Stock
underlying the Series C Preferred Stock, the Series D Preferred Stock and
the Warrants, and, pursuant to Rule 416 of the Securities Act of 1933, as
amended (the "Securities Act"), such additional number of shares of the
Registrant's Common Stock that may become issuable as a result of any
stock splits, stock dividends or anti-dilution provisions (including by
reason of the floating rate conversion price mechanism and certain other
adjustments, as set forth in the Amended and Restated Certificate of
Incorporation designating the terms of the Series C Preferred Stock and
the Series D Preferred Stock).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 13, 1998
SOFTNET SYSTEMS, INC.
4,240,000 Shares of Common Stock
($0.01 par value)
This Prospectus covers the sale from time to time of up to 4,240,000
shares (the "Shares") of Common Stock, par value $0.01 per share ("Common
Stock"), of SoftNet Systems, Inc., a New York corporation (the "Company"), by
certain shareholders of the Company (the "Selling Shareholders"). The Selling
Shareholders or their respective pledgees, donees, transferees or other
successors in interest may from time to time sell the Shares directly or through
one or more broker-dealers, in one or more transactions on the American Stock
Exchange, in privately negotiated transactions, through the writing of options
on the Shares, short sales or otherwise, at prices related to the prevailing
market prices or at negotiated prices. See "Plan of Distribution."
The Shares of Common Stock includes the maximum number of shares of
Common Stock underlying certain stock purchase warrants (the "Warrants"), the
Company's Series C Convertible Preferred Stock (the "Series C Preferred Stock")
and the Company's Series D Convertible Preferred Stock (the "Series D Preferred
Stock"), and, pursuant to Rule 416 of the Securities Act of 1933, as amended
(the "Securities Act"), such additional number of shares of the Registrant's
Common Stock that may become issuable as a result of any stock splits, stock
dividends or anti-dilution provisions (including by reason of the floating rate
conversion price mechanism and certain other adjustments, as set forth in the
Amended and Restated Certificate of Incorporation designating the terms of the
Series C Preferred Stock and the Series D Preferred Stock).
The Company will not receive any of the proceeds from the sale of the
Shares. The Company has agreed with the Selling Shareholders to register the
Shares offered hereby and to pay the expenses incident to the registration and
offering of the Shares, except that the Selling Shareholders will pay any
applicable underwriting commissions and expenses, brokerage fees and transfer
taxes, as well as the fees and disbursements of counsel to and experts for the
Selling Shareholders.
The Company's Common Stock is listed on the American Stock Exchange
under the symbol "SOF." On October 8, 1998, the last reported sales price of the
Common Stock on the American Stock Exchange was $7.375 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is to be used solely in connection with sales of the
Shares from time to time by the Selling Shareholders.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
The date of this Prospectus is October 13, 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, the registration statement related to this offering and other
information filed by the Company may be inspected and copied at the public
reference facilities of the Commission located at 450 Fifth Street N.W.,
Washington D.C. 20549 and at the Commission's regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates or accessed
electronically on the Commission's home page on the World Wide Web at
http://www.sec.gov. In addition, reports, proxy statements and other information
filed by the Company may be inspected at the offices of the American Stock
Exchange, 86 Trinity Place, New York, New York 10006, upon which the Common
Stock of the Company is traded.
The Company has filed with the Commission, a Registration Statement on
Form S-3 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act, covering the sale of the
Shares by the Selling Shareholders from time to time. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement. Statements made in the
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement for a more
complete description. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File
No. 1-5270) pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997.
2. The Company's Current Report on Form 8-K filed with the Commission on
January 12, 1998.
3. The Company's Proxy Statement on Schedule 14A filed with the
Commission on January 28, 1998.
4. The Company's Current Report on Form 8-K filed with the Commission on
February 12, 1998.
5. The Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997.
6. The Company's Current Report on Form 8-K filed with the Commission on
April 24, 1998.
7. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
8. The Company's Current Report on Form 8-K filed with the Commission on
June 1, 1998.
9. The Company's Current Report on Form 8-K filed with the Commission on
July 28, 1998.
10. The Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, as amended.
11. The Company's Current Report on Form 8-K filed with the Commission on
September 14, 1998.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date such documents were filed. Any statement contained herein
or in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated by reference herein (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Mark A. Phillips, Treasurer,
SoftNet Systems, Inc., 520 Logue Avenue, Mountain View, California 94043.
RISK FACTORS
These risk factors include "forward-looking" statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Although the Company believes that its plans, intentions, and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. Actual
results will differ from such plans, intentions and expectations, and such
differences may be material. Important factors that could cause actual results
to differ materially from the Company's forward-looking statements are set forth
below. All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements set forth herein. The Company disclaims any obligation to update
information contained in any forward-looking statement.
Limited Operating History of the Internet Services Division; Unproven Business;
Historical Losses; No Assurance of Profitability
The Company currently operates two continuing businesses: Micrographic
Technology Corporation ("MTC") and the Internet Services Division. The Company
is seeking a buyer for the Telecommunications Division, which is accounted for
as a discontinued operation. The Company's current strategy for growth is to
focus on substantially expanding the business of its Internet Services Division,
which was acquired in June 1996. The Company has very limited operating history
and experience in the Internet services business, and the successful expansion
of the Company's Internet Services Division will require strategies and
operations that are different from those historically employed by the Company in
connection with its two other businesses. There can be no assurance that the
Company will be able to develop or maintain strategies and business operations
that are necessary to increase the revenues of the Company's Internet Services
Division sufficiently to enable it to achieve positive cash flow and
profitability.
To be successful, the Company must, among other things, develop and
market products and services that are widely accepted by consumers and
businesses at prices that will yield cash flow sufficient to meet the Company's
debt service, capital expenditure and working capital requirements. the
provision of Internet services over cable infrastructure has only recently
become feasible on a broad scale. There are only a very limited number of
companies offering such services, none of which is currently profitable. The
Company's ISP Channel service has only recently been launched in 12 cable
franchise areas (all of which have revenue-paying subscribers) in the United
States, and there can be no assurance that it will achieve broad consumer or
commercial acceptance. The success of the Company's ISP Channel service will
depend upon the willingness of subscribers to pay the monthly fees and
installation costs as well as to purchase or lease the equipment necessary to
access the Internet. Currently, the Company has only approximately 500
subscribers to its ISP Channel service in these areas. Accordingly, it is
difficult to predict whether the Company's pricing model will prove to be
viable, whether demand for the Company's services will materialize at the prices
it expects to charge or whether current or future pricing levels will be
sustainable. If such pricing levels are not achieved or sustained or if the
Company's services do not achieve or sustain broad market acceptance, the
Company's business, financial condition, prospects and ability to repay its
indebtedness will be materially adversely affected.
The Company has sustained substantial losses over the last five fiscal
years. For the nine months ended June 30, 1998 and the fiscal year ended
September 31, 1997, the Company had net losses of $6.8 million and $2.6 million,
respectively, and as of June 30, 1998, the Company had an accumulated
stockholders' deficit of approximately $39 million. The Company expects to incur
substantial losses and experience substantial negative cash flows as it expands
its Internet Services Division. The costs of expansion will include expenses in
connection with: (i) the deployment of infrastructure necessary to enable its
cable affiliates to offer its services; (ii) research and development of new
product and service offerings; (iii) the continued development of its direct and
indirect selling and marketing efforts; and (iv) any charges related to
acquisitions, divestitures, business alliances or changing technologies. The
Company's prospects should also be considered in light of the risks, expenses
and difficulties encountered by companies competing in new and rapidly evolving
markets. There can be no assurance that the Company will ever achieve favorable
operating results or profitability.
Fluctuations in Quarterly Results
The Company's results of operations have fluctuated and will likely
continue to fluctuate significantly from quarter to quarter, especially as the
Company implements a new strategic focus that will emphasize its Internet
Services Division. In addition, the Company is seeking a buyer for its
Telecommunications Division. As a result, the Company believes that
period-to-period comparisons of its revenues and results of operations are not
necessarily meaningful and should not be relied upon as indicators of future
performance. The Company's quarterly operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which
are beyond the Company's control. Factors that may affect the Company's
quarterly operating results attributable to its Internet Services Division
include, among others, the rate at which the Company can enter into agreements
with cable operators, the exclusivity and term of such agreements, the rate of
subscription to the Company's Internet services, the prices subscribers pay for
such services, subscriber churn rates, changes in the revenue sharing
arrangements between the Company and its affiliated cable operators, the ability
of the Company and its cable affiliates to coordinate timely and effective
marketing, the success of the Company and its cable affiliates in marketing the
ISP Channel service to subscribers in such affiliates' local cable areas, the
quality of cable affiliates' cable infrastructure, the quality of customer and
technical support, and the rate at which the cable affiliates can complete the
installations required to initiate service for new subscribers. Additional
factors that may affect the Company's quarterly operating results generally
include the amount and timing of capital expenditures and other costs relating
to the expansion of the Company's Internet Services Division, the introduction
of new Internet services by the Company or its competitors, customer acceptance
of such services, price competition or pricing changes in the Internet or cable
industries, general economic conditions and economic conditions specific to the
Internet and cable industries, and changes in law and regulation.
Factors that may affect the Company's quarterly operating results
attributable to MTC include, among other things, the size and timing of customer
orders and subsequent shipments, customer order deferrals in anticipation of new
products and services, timing of product introductions or enhancements by the
Company or its competitors, market acceptance of new products and services,
technological changes in the industry, competitive pricing pressures, accuracy
of customer forecasts of end-user demand, changes in the Company's operating
expenses, personnel changes, changes in the mix of products sold, quality
control of products sold, disruption in sources of supply, capital spending,
delays of payments by customers and general economic conditions.
The Company expects to continue to engage in extensive research and
development activities and to evaluate new product and service opportunities.
This will require the Company to continue to invest in research and development
and sales and marketing, which could adversely affect short-term results of
operations. The Company believes that its future revenue growth and
profitability will depend in part on its success in developing new products and
services. Failure to increase revenues from new products and services, whether
due to lack of market acceptance, competition, technological change or
otherwise, would have a material adverse effect on the Company's business,
financial condition, prospects and ability to repay its indebtedness.
Dependence on Local Cable Operators and their Cable Infrastructure
Certain ISP Channel services are dependent on the quality of the cable
infrastructure. Cable system operators have announced and begun to implement
major infrastructure investments in order to increase the capacity of their
networks and deploy two-way capability. However, cable system operators have
limited experience with implementing such upgrades, and these investments have
placed a significant strain on the financial, managerial, operating and other
resources of cable system operators, most of which are already significantly
leveraged. Further, cable operators must periodically renew their franchises
with city, county, or state governments and, as a condition of obtaining such
renewal, may have to meet certain conditions imposed by the issuing
jurisdiction, which may have the effect of causing the cable operator to delay
such upgrades. The Company's contracts with its cable affiliates typically have
terms ranging from three to five years, and there can be no assurance that the
Company will be able to renew any such contracts. Moreover, even if cable
affiliates renew such contracts, there can be no assurance that such renewal
will be on terms satisfactory to the Company. In addition, cable operators are
primarily concerned with increasing television programming capacity to compete
with other modes of multichannel entertainment delivery systems such as direct
broadcast satellite ("DBS") and may consequently choose to roll-out incompatible
set-top boxes that do not support high-speed Internet access services, rather
than to upgrade their network infrastructures as described above. Such upgrades
thus have been, and the Company expects will continue to be, subject to change,
delay or cancellation. The failure of cable operators to complete these upgrades
in a timely and satisfactory manner, or at all, would adversely affect the
market for the Company's products in any such operator's franchise area and, if
repeated on a broad scale, could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
The Company provides Internet services to cable systems irrespective of
their two-way capabilities. To the extent the Company provides Internet services
over cable systems to the home with a telephone line return path for data from
the home (under a "one-way" cable system), the Company's services may not
provide the high speed, quality of experience and availability of certain
applications, such as video conferencing, necessary to attract and retain
subscribers to the ISP Channel service. Subscribers using a telephone line
return path will experience the upstream data transmission speeds provided by
their analog modems (typically 28.8 Kbps). It is not clear what impact the lack
of two-way capability will have on penetration levels for the ISP Channel.
Because subscribers to the ISP Channel will subscribe through a cable
affiliate, the cable affiliate (and not the Company) will substantially control
the customer relationship with the subscriber. For example, under the Company's
existing contracts, cable affiliates are responsible for important functions,
such as billing for and collecting ISP Channel subscription fees and providing
the labor and costs associated with the distribution of local marketing
materials. Therefore, in addition to the Company's business being subject to
general economic and market conditions and factors relating to Internet service
providers and on-line services specifically, the success and future growth of
the Company's business will also be subject to economic and other factors
affecting its cable affiliates generally.
Dependence on Exclusive Access to Cable Subscribers; Need for Aggressive
Implementation and Deployment
The success of the Company's Internet Services Division is dependent,
in part, on its ability to gain exclusive access to cable consumers. This
exclusivity is a function of cable operators' dominance within their geographic
markets and the Company's exclusive relationship with such cable operators.
There can be no assurance that cable operators affiliated with the Company will
not face competition in the future or that the Company will be able to establish
and maintain exclusive relationships with cable operators. Currently, a number
of the Company's contracts with cable operators do not contain exclusivity
provisions. Even if the Company is able to establish and maintain exclusive
relationships with cable operators, there can be no assurance that the Company
will be able to do so on terms favorable to the Company or in quantities to be
profitable. In addition, the Company seeks to affiliate with a large number of
cable operators as quickly as possible because it will be excluded from
providing Internet over cable in those areas served by cable operators with
exclusive arrangements with other Internet service providers. If the exclusive
relationship between either the Company and its cable affiliates or its cable
affiliates and their cable subscribers is impaired, or if the Company does not
become affiliated with a sufficient number of cable operators, the Company's
business, financial condition, prospects and ability to repay its indebtedness
could be materially adversely affected.
Substantial Future Capital Requirements
The development of the Company's business will require substantial
capital infusions as a result of (i) the Company's need to enhance and expand
its product and service offerings in order to maintain its competitive position
and increase its market share and (ii) the substantial investment in equipment
and corporate infrastructure required by the continued national deployment of
the ISP Channel. In addition, the Company anticipates that the majority of cable
affiliates with one-way cable systems will eventually upgrade their cable
infrastructure to two-way cable systems, at which time the Company will have to
upgrade its equipment on any affected cable system to handle two-way
transmissions. Whether or when the Company ultimately can achieve cash flow
levels sufficient to support its operations, development of new products and
services, and expansion of its Internet Services Division, cannot be predicted
accurately. Unless such cash flow levels are achieved, the Company will require
additional borrowings, the sale of debt or equity securities, the sale of assets
or businesses, or some combination thereof, to provide funding for its
operations. In the event that the Company cannot generate sufficient cash flow
from its operations, or is unable to borrow or otherwise obtain additional funds
to finance its operations on desirable terms when needed, the Company's
business, financial condition, prospects and ability to repay its indebtedness
would be materially adversely affected.
Management of Growth
To fully exploit the market for its products and services, the Company
must rapidly execute its sales strategy while managing anticipated growth by
implementing effective planning and operating processes. To manage its
anticipated growth, the Company must, among other things, continue to implement
and improve its operational, financial and management information systems, hire
and train additional qualified personnel, continue to expand and upgrade core
technologies and effectively manage multiple relationships with various
customers, suppliers and other third parties. Consequently, such expansion could
place a significant strain on the Company's services and support operations,
sales and administrative personnel and other resources. The Company may in the
future also experience difficulties meeting the demand for its products and
services. Additionally, if the Company is unable to provide training and support
for its products, the implementation process will be longer and customer
satisfaction may be lower. There can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's operations or
that the Company's management will be capable of exploiting fully the market for
the Company's products and services. Any failure of the Company to manage its
growth effectively could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
Non-Exclusivity of Cable Franchises; Non-Renewal or Termination of Franchises
Cable television companies operate under non-exclusive franchises
granted by local or state authorities that are subject to renewal and
renegotiation from time to time. A franchise is generally granted for a fixed
term ranging from five to 15 years but in many cases is terminable if the
franchisee fails to comply with the material provisions thereof. The Cable
Television Consumer Protection and Competition Act of 1992 prohibits franchising
authorities from granting exclusive cable television franchises and from
unreasonably refusing to award additional competitive franchises; it also
permits municipal authorities to operate cable television systems in their
communities without franchises. No assurance can be given that the cable
television companies that have contracts with the Company will be able to retain
or renew their franchises. The non-renewal or termination of any such franchises
would result in the termination of the Company's contract with the applicable
cable operator. Were an affiliated cable operator to lose its franchise, the
Company would seek to affiliate with the successor to the franchisee. No
assurance can be given that the Company would be able to achieve such
replacement affiliation or that to do so would not result in additional costs to
the Company. If the Company cannot affiliate with replacement cable operators in
sufficient numbers, the Company's business, financial condition, prospects and
ability to repay its indebtedness could be materially adversely affected.
Risk of Acquisition of Cable Affiliate by Unaffiliated Cable Operator
The Company believes that it is highly unlikely that a cable operator
will find it desirable, economically or otherwise, to devote the channel
capacity to offer Internet services to its subscribers over its infrastructure
through more than one provider. However, under many of the Company's initial
contracts, in the event a cable affiliate is acquired by an unaffiliated cable
operator that already has a relationship with one of the Company's competitors
or that does not enter into a contract with the Company, the Company may lose
its ability to offer its Internet services in the area served by such former
cable affiliate, which could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
Dependence on Third Party Technology and Suppliers
Many of the Company's products and service offerings incorporate
technology developed and owned by third parties. The markets for all of the
products and services used by the Company are characterized by intense
competition, rapid technological advances, evolving industry standards, changes
in subscriber requirements, frequent new product introductions and enhancements,
and rapidly evolving, alternative service offerings. Consequently, the Company
must rely upon third parties to develop and introduce technologies that enhance
the Company's current product and service offerings and enable the Company, in
turn, to develop its own products and services on a timely and cost-effective
basis to meet changing customer needs and technological trends in its
industries. Any impairment or termination of the Company's relationship with any
licensers of third party technology would force the Company to find other
developers on a timely basis or develop its own technology. There can be no
assurance that the Company will be able to obtain the third party technology
necessary to continue to develop and introduce new and enhanced products and
services, that the Company will obtain third party technology on commercially
reasonable terms or that the Company will be able to replace third party
technology in the event such technology becomes unavailable, obsolete or
incompatible with future versions of the Company's products or services. The
absence of or any significant delay in the replacement of third party technology
would have a material adverse effect on the Company's business, financial
condition, prospects and ability to service its indebtedness.
In addition, the Internet Services Division and MTC currently depend on
a limited number of suppliers for certain key products and services. In
particular, the Internet Services Division depends on Excite, Inc. for national
content aggregation, 3Com Corporation and Com21, Inc. for headend and cable
modem equipment, Cisco Systems, Inc. for specific network routing and switching
equipment, and, among others, MCI Communications Corporation ("MCI") for
national Internet backbone services. Certain of the Company's cable modem and
headend equipment suppliers are in litigation over their patents. The Company
could experience disruptions in the delivery or increases in the prices of
products and services purchased from such vendors as a result of intellectual
property litigation involving such vendors. There can be no assurance that
delays in key components or product deliveries will not occur in the future due
to shortages resulting from the limited number of suppliers, the financial or
other difficulties of such suppliers or the possible limited availability in the
suppliers' underlying raw materials. In addition, the Company may not have
adequate remedies against such third parties as a result of breaches of their
agreement with the Company. The inability to obtain sufficient key components or
to develop alternative sources for such components, if and as required in the
future, could result in delays or reductions in product shipments, which in turn
could have a material adverse effect on the Company's customer relationships,
business, financial condition, prospects and ability to repay its indebtedness.
Certain key products resold by the Company are currently contracted
exclusively for distribution in certain of the Company's markets. For instance,
the Company's Telecommunications Division currently maintains an exclusive
contract with Executone Information Systems, Inc. ("Executone") for the resale
of Executone's products in certain specified markets. For the fiscal year ended
September 30, 1997, such products accounted for approximately 30% of the
Telecommunications Division's revenues and 13% of the Company's total revenues.
Any change in the exclusivity provisions of these types of contracts, or loss
thereof, could have a materially adverse effect on the Company's business,
financial condition, prospects and ability to repay its indebtedness.
Competition
The markets for the Company's products and services are intensely
competitive, and the Company expects competition to increase in the future. Many
of the Company's competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than the
Company. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to developing Internet services or on-line content than the Company.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect the Company's business, financial
condition, prospects or ability to repay its indebtedness. Any increase in
competition could reduce the Company's gross margins, require increased spending
by the Company on research and development and sales and marketing, and
otherwise materially adversely affect the Company's business, financial
condition, prospects and ability to repay its indebtedness.
Internet Services. The markets for the Company's Internet products and
services are extremely competitive, and the Company expects this competition to
intensify in the future. In the cable-based segment of the Internet access
industry, the Company also competes with other cable-based data services that
are seeking to contract with cable system operators to bring their services into
geographic areas that are not covered by an agreement between the Company and
its cable affiliates. These competitors include systems integrators such as
Convergence.com, Online System Services, HSAnet and Frontier Communications'
Global Center business, as well as ISPs such as Earthlink Network, Inc.
("Earthlink"), MindSpring Enterprises, Inc., and IDT Corporation. Several cable
system operators, including CableVision Systems Corporation, Comcast Corporation
("Comcast"), Cox Enterprise, Inc. ("Cox"), MediaOne Group, Inc.,
Tele-Communications, Inc. ("TCI") and Time Warner Inc. ("Time Warner") have
deployed high-speed Internet access services over their existing local hybrid
fiber and coaxial cable networks. TCI, Cox and Comcast market through At Home
Corporation ("@Home") while Time Warner plans to market the RoadRunner service
through Time Warner's own cable systems as well as to other cable system
operators nationwide.
Some of the Company's most direct competitors in the access markets are
telephony-based access providers, including incumbent local exchange carriers
("ILECs"), national interexchange or long distance carriers, fiber-based
competitive local exchange carriers ("CLECs"), Internet service providers
("ISPs"), online service providers ("OSPs"), wireless and satellite data service
providers, and DSL-focused CLECS. Competitors in the Internet services industry
include AT&T Corp., BBN Corporation, Earthlink, Netcom Online Communications
Services, Inc., Concentric Network, PSInet Inc., and WorldCom, Inc., which
provide basic Internet access to residential consumers and businesses, generally
using the existing telephone network infrastructure. This method is widely
available and inexpensive, and barriers to entry are low, resulting in a highly
competitive and fragmented market.
Some of the Company's competitors are offering diversified packages of
telecommunications services, including Internet access service, to residential
customers and could bundle such services, which could place the Company at a
competitive disadvantage. Many of these competitors are offering (or may soon
offer) technologies that will attempt to compete with some or all of the
Company's high-speed data service offerings. The bases of competition in these
markets include transmission speed, reliability of service, ease of access,
ratio of price to performance, ease of use, content quality, quality of
presentation, timeliness of content, customer support, brand recognition,
operating experience and revenue sharing.
In addition, the market for high-speed data transmission services is
characterized by several competing technologies that offer alternative
solutions. Competitive technologies include telecom-related wireline
technologies that utilize telephone copper twisted-pair wiring, such as ISDN and
DSL implementations, as well as wireless technologies such as local multipoint
distribution service ("LMDS"), multichannel multipoint distribution service
("MMDS") and DBS. The Company's prospects may be further compromised by Federal
Communications Commission ("FCC") rules and regulations, which are designed, at
least in part, to increase competition in video and related services, for
example, new multi-channel video technologies and services known as Open Video
Systems ("OVS") and LMDS. While both are in nascent stages of development, OVS
and LMDS offer the potential for providing competition to traditional cable
television and other multi-channel video services. One form of OVS involves
delivery of signals over existing telephone lines. LMDS is a broadband,
wireless, digital service, and offers the potential for providing Internet
access along with a variety of other services, including traditional
multi-channel video entertainment. The FCC has also created a General Wireless
Communications Service ("GWCS") in which licensees are afforded broad latitude
in defining the nature and service area of the communications services they
offer. The full impact of the GWCS remains to be seen. Nevertheless, all of
these new technologies pose potential competition to the Company and its
business. Significant market acceptance of alternative solutions for high-speed
data transmission could decrease the demand for the Company's services if such
alternatives are viewed as providing faster access, greater reliability,
increased cost-effectiveness or other advantages over cable solutions.
Competition from telecom-related solutions is expected to be intense.
There can be no assurance that technological developments will not have
a material adverse effect on the competitive position of the Company. The rapid
development of new competing technologies and standards increases the risk that
current or new competitors could develop products and services that would reduce
the competitiveness of the Company's products and services, which could have a
material adverse effect on the Company's business, financial condition,
prospects and ability to repay its indebtedness.
Document Management. In the document management industry, the Company
competes on the basis of breadth of offering, cost, flexibility and customer
service. The Company has two direct competitors to its hardware products: Agfa
AG in Europe and Anacomp, Inc. worldwide. Indirect competitors include
International Business Machines Corp., Fuji Photo Film Co., Ltd., Mobius
Management Systems, Inc., Storage Technology and others. In most cases, the
Company's competitors have longer operating histories, greater name recognition,
and significantly greater financial, technical and marketing resources. While
the Company is not aware of any direct competitors to its software product
offerings, the industry is rapidly evolving and the Company may face significant
competition in the future.
Unproven Network Scalability and Speed
Due to the limited deployment of the Company's ISP Channel service, the
ability of the Company to connect and manage a substantial number of on-line
subscribers at high transmission speeds is as yet unknown, and the Company faces
risks related to its ability to scale up to its expected subscriber levels while
maintaining superior performance. While peak downstream data transmission speeds
across cable infrastructure approaches 3 megabits per second ("Mbps") in each 6
MHz channel, the actual downstream data transmission speeds are likely to be
significantly slower and will depend on a variety of factors, including type and
location of content, Internet traffic, the number of active subscribers on a
given cable network node, the number of 6 MHz channels allocated by the cable
affiliate (in its discretion) to carry the Company's service, the capability of
cable modems used and the service quality of the cable affiliates' cable
infrastructures. As subscriber penetration increases, it may be necessary for
the cable affiliates to add additional 6 MHz channels in order to maintain
adequate downstream data transmission speeds, which would render such additional
channels unavailable to such cable affiliates for video or other programming.
There can be no assurance that cable affiliates will provide additional capacity
for this purpose. On two-way cable systems, the upstream transmission data
channel is located in a range not used for broadcast by traditional cable
infrastructures and is more susceptible to interference than the downstream
channel, resulting in a slower peak upstream transmission speed. In addition to
the factors affecting downstream data transmission speeds, the level of
interference in the cable affiliates' upstream data broadcast range can
materially affect actual upstream data transmission speeds. The actual data
delivery speeds that can be realized by subscribers will be significantly lower
than peak data transmission speeds and will vary depending on the subscriber's
hardware, operating system and software configurations. There can be no
assurance that the Company will be able to achieve or maintain a speed of data
transmission sufficiently high to enable the Company to attract and retain its
planned numbers of subscribers, especially as the number of the subscribers to
the Company's services grows, and a perceived or actual failure by the Company
to achieve or maintain sufficiently high speed data transmission could
significantly reduce consumer demand for its services and have a material
adverse effect on its business, financial condition, prospects and ability to
repay its indebtedness.
Dependence on Network
The Company's success will depend upon the capacity, reliability and
security of the infrastructure used to carry data between its subscribers and
the Internet. A significant portion of such infrastructure is owned by third
parties, and accordingly the Company has no control over its quality and
maintenance. The Company relies on cable operators to maintain their cable
infrastructure. In addition, the Company relies on other third parties to
provide a connection from the cable infrastructure to the Internet. Currently,
the Company has transit agreements with MCI, MFS, Sprint Communications Company,
and others to support the exchange of traffic between the Company's network
operations center ("NOC"), cable infrastructure and the Internet. The failure of
the Internet backbone, or the NOC, or any other link in the delivery chain
resulting in an interruption in the Company's operations would have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
Risk of System Failure
The Company's operations are dependent upon its ability to support its
highly complex infrastructure and avoid damages from fires, earthquakes, floods,
power losses, telecommunications failures, network software flaws, transmission
cable cuts and similar events. The occurrence of one of these events could cause
interruptions in the services provided by the Company. In addition, failure of
an ILEC or other service provider to provide communications capacity required by
the Company, as a result of a natural disaster, operational disruption or any
other reason, could cause interruptions in the services provided by the Company.
Any damage or failure that causes interruptions in the Company's operations
could have a material adverse effect on the Company's business, financial
condition, prospects and ability to repay its indebtedness.
Security Risks
Despite the implementation of security measures, the Company's or its
cable affiliates' networks may be vulnerable to unauthorized access, computer
viruses and other disruptive problems. ISPs and OSPs have in the past
experienced, and may in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users. Unauthorized
access by current and former employees or others could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company and its subscribers. Such events may result in liability
of the Company to its subscribers and also may deter potential subscribers.
Although the Company intends to continue to implement industry-standard security
measures, such measures have been circumvented in the past, and there can be no
assurance that measures implemented by the Company will not be circumvented in
the future. Moreover, the Company has no control over the security measures that
the Company's cable affiliates adopt. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to the Company's subscribers, which could have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness. In addition, the threat of these and other
security risks may deter potential ISP Channel subscribers from purchasing the
ISP Channel service, which could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
Dependence on High-Quality Content Provision and Acceptance; Developing Market
for High-Quality Content
A key component of the Company's strategy is to provide a more
compelling interactive experience to Internet users than the experience
currently available to customers of dial-up ISPs and OSPs. The Company believes
that, in addition to providing high-speed, high-performance Internet access, it
must also develop and aggregate high-quality multimedia content. The Company's
success in providing and aggregating such content will depend in part on the
Company's ability to develop a customer base sufficiently large to justify
investments in the development of such content as well as (i) the ability of
content providers to create and support high-quality multimedia content; and
(ii) the Company's ability to aggregate content offerings in a manner that
subscribers find attractive. There can be no assurance that the Company will be
successful in these endeavors. In addition, the market for high-quality
multimedia Internet content has only recently begun to develop and is rapidly
evolving, and there is significant competition among ISPs and OSPs for
aggregating such content. If the market were to fail to develop, or were to
develop more slowly than expected, or if competition were to increase, or if the
Company's content offerings did not achieve or sustain market acceptance, the
Company's business, financial condition, prospects and ability to repay its
indebtedness would be materially adversely affected.
Dependence on Advertising Revenues
The success of the Company's Internet Services Division depends in part
on the ability of the Company to entice advertisers to advertise through the ISP
Channel. The Company expects to derive significant revenues from advertisements
placed on co-branded and ISP Channel web pages and "click through" revenues from
products and services purchased through links from the ISP Channel to vendors.
While the Company believes that it can leverage the ISP Channel to provide
information to advertisers to help them better target prospective customers,
there can be no assurance that advertisers will find such information useful or
choose to advertise through the ISP Channel. There can be no assurance that the
Company will be able to attract advertising revenues in quantities and at rates
that are satisfactory to the Company. The failure to do so could have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
Uncertain Acceptance and Maintenance of the ISP Channel Brand
The Company believes that establishing and maintaining the ISP Channel
brand are critical to attracting and expanding its subscriber base. Promotion of
the ISP Channel brand will depend, among other things, on the Company's success
in providing high-speed, high-quality consumer and business Internet products,
services and content, the marketing efforts of the cable affiliates, and the
reliability of the cable affiliates' networks and services, none of which can be
assured. The Company has little control over the cable affiliates' marketing
efforts or the reliability of their networks and services. If consumers and
businesses do not perceive the Company's existing products and services to be of
high quality or if the Company introduces new products or services or enters
into new business ventures that are not favorably received by consumers and
businesses, the Company will be unsuccessful in promoting and maintaining its
brand. To the extent the Company expands the focus of its marketing efforts to
geographic areas where the ISP Channel service is not available, the Company
risks frustrating potential subscribers who are not able to access the Company's
products and services. Furthermore, in order to attract and retain subscribers,
and to promote and maintain the ISP Channel brand in response to competitive
pressures, the Company may find it necessary to increase substantially its
financial commitment to creating and maintaining a distinct brand loyalty among
customers. If the Company were unable to establish or maintain the ISP Channel
brand successfully or if the Company were to incur excessive expense in an
attempt to improve its offerings or promote and maintain its brand, the
Company's business, financial condition, prospects and ability to repay its
indebtedness would be materially adversely affected.
Billing and Collections Risks
The Company has recently commenced the process of designing and
implementing its billing and collections system for its Internet Services
Division. It is the Company's intention to bill for the services provided by
this business over the Internet and, in most cases, to collect these invoices
through payments received via the Internet. Such invoices and payments have
security risks. Given the complexities of such a system, there can be no
assurance that the Company will be successful in developing and implementing the
system in a timely manner or that it will be able to scale the system quickly
and efficiently if necessary to accommodate potential growth in the number of
subscribers requiring such a billing format. In some circumstances, the
Company's cable affiliates are responsible for billing and collection for the
Company's Internet access services. In any such instance, the Company has little
or no control over the accuracy and timeliness of its invoices or over
collection efforts. Given its relatively limited history with billing and
collection for Internet services, the Company cannot predict the extent to which
it may experience bad debts or the extent to which it will be able to minimize
such bad debts. If the Company encounters significant problems with its billing
and collections process, the Company's business, financial condition, prospects
and ability to repay its indebtedness could be materially adversely affected.
Dependence on the Growth and Evolution of the Internet
Market acceptance of the Company's Internet services is substantially
dependent upon the growth and evolution of the Internet in ways that are best
suited for the Company's products and services. High-speed cable-based Internet
access is of greatest value to consumers of multimedia and other
bandwidth-intensive content. The nature of the content available over the
Internet, and the technologies available to access that content, are evolving
rapidly, and there can be no assurance that those applications that most favor
the Company's services and technology will be widely accepted by the
marketplace. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use, there can
be no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by such potential growth or that the
performance or reliability of the Internet will not be adversely affected. The
Internet could lose its commercial viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity. There can be no assurance that the infrastructure or complementary
services necessary to make the Internet a viable commercial marketplace will be
developed. In particular, the Internet has only recently become a medium for
advertising and electronic commerce. If the necessary infrastructure or
complementary services or facilities are not developed, or if the Internet does
not become a viable commercial marketplace or platform for advertising and
electronic commerce, the Company's business, financial condition, prospects and
ability to repay its indebtedness could be materially adversely affected.
Potential Liability for Defamatory or Indecent Content
The law relating to liability of ISPs and OSPs for information carried
on or disseminated through their networks is currently unsettled. A number of
lawsuits have sought to impose such liability for defamatory speech and indecent
materials. A recent federal statute seeks to impose such liability, in some
circumstances, for transmission of obscene or indecent materials. In one case, a
court has held that an OSP could be found liable for defamatory matter provided
through its service, on the ground that the service provider exercised active
editorial control over postings to its service. The imposition upon ISPs or OSPs
of potential liability for materials carried on or disseminated through their
systems could require the Company to implement measures to reduce its exposure
to such liability, which may require the expenditure of substantial resources or
the discontinuation of certain products or service offerings. In addition, the
imposition of liability on the Company for information carried on the Internet
could have a material adverse effect on the Company's business, financial
condition, prospects and ability to repay its indebtedness.
Potential Liability for Information Retrieved and Replicated
Because materials will be downloaded and redistributed by subscribers
and cached or replicated by the Company in connection with the Company's
offering of its services, there is a possibility that claims may be made against
the Company or its cable affiliates under both U.S. and foreign law for
defamation, negligence, copyright or trademark infringement, or other theories
based on the nature and content of such materials. Such types of claims have
been successfully brought against OSPs. In particular, copyright and trademark
laws are evolving both domestically and internationally, and there is
uncertainty concerning how broadly the rights afforded under these laws will be
applied to on-line environments. It is impossible for the Company to determine
who the potential rights holders may be with respect to all materials available
through the Company's services. In addition, a number of third party owners of
patents have claimed to hold patents that cover various forms of on-line
transactions or on-line technology. As with other OSPs, patent claims could be
asserted against the Company based upon its services or technologies. The
Company's liability insurance may not cover potential claims of the foregoing
types or may not be adequate to indemnify the Company for all liability that may
be imposed. Any imposition of liability that is not covered by insurance or is
in excess of insurance coverage could have a material adverse effect on the
Company's business, financial condition, prospects and ability to repay its
indebtedness. Rapid Technological Change; Dependence on New Products and
Services
There can be no assurance that the Company's future development efforts
will result in commercially successful products or that the Company's products
and services will not be rendered obsolete by changing technology, new industry
standards or new product announcements by competitors. The markets for all of
the Company's products and services are characterized by intense competition,
rapid technological advances, evolving industry standards, changes in subscriber
requirements, frequent new product introductions and enhancements, and rapidly
evolving, alternative service offerings. For example, the Company expects
digital set-top boxes capable of supporting high-speed Internet access services
to be commercially available in the next 18 months. Although the widespread
availability of set-top boxes could increase the demand for the Company's
Internet Service, there is no assurance that the demand for set-top boxes will
ever reach the level estimated by the Company and industry experts or, if
set-top boxes reach this level of popularity, that the Company will be able to
capitalize on such demand. If this scenario occurs or if other technologies or
standards applicable to the Company's products or service offerings become
obsolete or fail to gain widespread commercial acceptance, then the Company's
business, financial condition, prospects and ability to repay its indebtedness
will be materially adversely affected.
The introduction of products or services embodying, or purporting to
embody, new technology or the emergence of new industry standards could also
render the Company's existing products and services, as well as products or
services under development, obsolete and unmarketable. Internet,
telecommunications and cable technologies are evolving rapidly. Many large
corporations, including large telecommunications providers, Regional Bell
Operating Companies ("RBOCs") and telecommunications equipment providers, as
well as large cable system operators, regularly announce new and planned
technologies and service offerings that could impact the market for the
Company's services. These announcements can have the effect of delaying
purchasing decisions by the Company's customers and confusing the marketplace
regarding available alternatives. Such announcements could in the future
adversely impact the Company's business, financial condition, prospects and
ability to repay its indebtedness.
The Company's ability to adapt to changes in technology and industry
standards, and to develop and introduce new and enhanced products and service
offerings will be significant factors in maintaining or improving its
competitive position and its prospects for growth. Due to rapid technological
changes in the Internet and telecommunications industries, the lengthy product
approval and purchase processes of the Company's customers and the Company's
reliance on third party technology for the development of new products and
service offerings, there can be no assurance that the Company will successfully
introduce new products and services on a timely basis or achieve sales of new
products and services in the future, or, if sales are achieved, that latent
defects will not exist in the Company's products or equipment purchased by the
Company from third parties. In addition, there can be no assurance that the
Company will have the financial and manufacturing resources necessary to
continue to successfully develop new products or services based on emerging
technologies or to otherwise successfully respond to changing technology and/or
industry standards. Moreover, due to intense competition, there may be a
time-limited market opportunity for the Company's cable-based consumer and
business Internet services. There can be no assurance that the Company will be
successful in achieving widespread acceptance of its services before competitors
offer products and services with speed and performance similar to the Company's
current offerings. In addition, the widespread adoption of new Internet or
telecommuting technologies or standards, cable-based or otherwise, could require
substantial expenditures by the Company to modify or adapt its equipment,
products and services and could fundamentally alter the character, viability and
frequency of Internet-based advertising, either of which could have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
The technology underlying capital equipment used by the Company such as
headends and cable modems is continuing to evolve and, accordingly, it is
possible that the equipment acquired by the Company could become out-of-date or
obsolete prior to the time the Company would otherwise intend to replace such
equipment. In any such circumstance, the Company may need to acquire substantial
amounts of new capital equipment, which could have a material adverse effect on
the Company's business, financial condition, prospects and ability to repay its
indebtedness.
Adverse Effect on MTC of Growth of Alternate Technologies
Revenues for MTC's products and services have been adversely affected
in recent years, and could in the future be substantially adversely affected by,
among other things, the increasing use of digital technology. MTC's revenues,
after giving effect to the discontinuation of the Telecommunications Division,
have represented substantially all of the Company's revenues for the past
several years.
The effect of digital and other technologies on the demand for MTC's
products and services depends, in part, on the extent of technological advances
and cost decreases in such technologies. The recent trend of technological
advances and attendant price declines in digital systems and products is
expected to continue. As a result, in certain instances, potential MTC customers
have deferred, and may continue to defer, investments in MTC systems while
evaluating the abilities of digital and other technologies.
The continuing development of local area computer networks and similar
systems based on digital technologies has resulted and will continue to result
in many MTC customers changing their use of MTC products from data storage and
retrieval to primarily archival use. The rapidly changing data storage and
management industry also has resulted in intense price competition in certain of
MTC's markets.
Therefore, the Company has been and expects to continue to be impacted adversely
by the decline in the market for Computer Output to Microfilm ("COM") services,
the high fixed costs and declining market for COM systems and the attendant
reduction in equipment and supplies. The Company's revenues for maintenance of
COM systems have declined in part because of efficiencies associated with the
Company's systems and could decline further in the event of lesser use and fewer
sales of COM systems. The growth of alternate technologies has created
consolidation in the micrographics industry. To the extent consolidation in the
micrographics industry has the effect of causing major providers of
micrographics services and products to cease providing such services and
products, the negative trends in the industry, such as competition from
alternate technologies described above, may accelerate.
MTC Proprietary Technology; Risk of Third Party Claims of Infringement
The industry in which MTC operates may be affected by an increasing
number of patents and frequent litigation based on allegations of patent and
other intellectual property infringement. To develop and maintain its
competitive position, MTC relies primarily upon the technical expertise and
creative skills of its personnel, confidentiality agreements and, to some
degree, patents and copyrights that it owns or, with respect to patents held by
third parties, has license rights to use. There can be no assurance that such
confidentiality or licensing agreements will not be breached, that others may
not infringe upon such patents or licenses, or that the Company would have
adequate remedies for any such breach for infringement. There can be no
assurance that patents issued to or licensed by the Company will not be
challenged or circumvented by competitors or be found to be sufficiently broad
to protect the Company's technology or to provide it with any competitive
advantage. Moreover, the Company may be materially adversely affected by
competitors who independently develop substantially equivalent technology.
Further, any litigation, either on behalf of or against the Company, relating to
such confidentiality or licensing agreements, patents or copyrights, regardless
of outcome, could result in substantial costs to the Company and diversion of
effort by management. Any infringement claim or other litigation against or by
the Company could have a material adverse effect on the Company's business,
financial condition, prospects and ability to repay its indebtedness.
Acquisition-Related Risks
The Company may from time to time acquire other businesses that the
Company believes will complement its existing business. The Company is unable to
predict whether or when any prospective acquisitions will occur or the
likelihood of a material transaction being completed on favorable terms and
conditions, if at all. Such transactions, if effected, are likely to involve
certain risks, including, among other things: the difficulty of assimilating the
acquired operations and personnel; the potential disruption of the Company's
ongoing business and diversion of resources and management time; the possible
inability of management to maintain uniform standards, controls, procedures and
policies; the risks of entering markets in which the Company has little or no
direct prior experience; and the potential impairment of relationships with
employees or customers as a result of changes in management. There can be no
assurance that any acquisition will be so made, that the Company will be able to
obtain additional financing needed to finance such acquisitions and, if any
acquisitions are so made, that the acquired business will be successfully
integrated into the Company's operations or that the acquired business will
perform as expected.
Dependence on Key Personnel
The success of the Company is dependent, in part, on its ability to
attract and retain qualified technical, marketing, sales and management
personnel. Competition for such personnel is intense and the Company's inability
to attract and retain additional key employees or the loss of one or more of its
current key employees could materially adversely affect the Company's business,
financial condition, prospects and ability to repay its indebtedness. The
Company has recently assembled a new management team to implement its strategy
for launching its ISP Channel concept on a large-scale basis, most of whom have
been with the Company for less than six months. The Company is currently seeking
new employees in connection with the expansion of its Internet Services
Division. The loss of any member of the new team, or failure to attract such
personnel, could also have a material adverse effect on the Company's business,
financial condition, prospects and ability to repay its indebtedness. There can
be no assurance that the Company will be successful in hiring or retaining key
personnel.
Government Regulation
Although the Company's services are not currently subject to direct
regulation by the FCC or any other federal or state communications regulatory
agency, changes in law or regulation relating to Internet connectivity and the
telecommunications markets, including changes that, directly or indirectly,
affect costs, limit usage of subscriber-related information or increase the
likelihood or scope of competition from the RBOCs or other telecommunications
companies, could affect the nature, scope and prices of the Company's services.
For example, proceedings are pending at the FCC to determine whether, and to
what extent, ISPs should be considered "telecommunications carriers" and, if so,
whether they should be required to contribute to the Universal Service Fund.
Although the FCC has decided for the moment that ISPs are not telecommunications
carriers, that decision is not yet final and is being challenged by various
parties, including the RBOCs. Some members of Congress have also challenged the
FCC's conclusion. Congressional dissatisfaction with the FCC's conclusions could
result in further changes to the FCC's governing law. The Company cannot predict
the impact, if any, that future legal or regulatory changes might have on its
business. In addition, regulation of cable television may affect the speed at
which the Company's cable affiliates upgrade their cable infrastructures to
two-way hybrid fiber coaxial cable. Currently, the Company's cable affiliates
have generally elected to classify the distribution of the Company's services as
"additional cable services" under their respective franchise agreements, and to
pay franchise fees in accordance therewith. However, the election by cable
operators to classify Internet access as an additional cable service may be
challenged before the FCC, the courts or Congress, and any alteration in the
classification of service could potentially have an adverse impact on the
Company and its business.
Another risk lies in the possibility that local franchise authorities
may attempt to subject the cable affiliates to higher or other franchise fees or
taxes or otherwise require them to obtain additional franchises in connection
with their distribution of the Company's services. There are thousands of
franchise authorities in the United States alone, and thus it will be difficult
or impossible for the Company or its cable affiliates to operate under a unified
set of franchise requirements. In the event that the FCC or another governmental
agency were to classify the cable system operators as "common carriers" or
"telecommunications carriers" because of their provision of Internet services,
or if cable system operators were to seek such classification as a means of
limiting their liability, the Company's rights as the exclusive ISP over the
systems of certain of the cable affiliates could be lost. In addition, if the
Company or its cable affiliates were classified as common carriers, they could
be subject to government-regulated tariff schedules for the amounts they charge
for their services. To the extent the Company increases the number of foreign
jurisdictions in which it offers its services, the Company will be subject to
additional governmental regulation. Any future implementation of any changes in
law or regulation including those discussed herein, could have a material
adverse effect on the Company's business, financial condition, prospects and
ability to repay its indebtedness.
In addition, the Company's business, financial condition, prospects and
ability to repay its indebtedness may also be adversely affected by the
imposition of certain tariffs, duties and other import restrictions on
components that the Company obtains from non-domestic suppliers. Changes in law
or regulation, in the United States or elsewhere, could materially adversely
affect the Company's business, financial condition, prospects and ability to
repay its indebtedness.
Product Liability
Some of the Company's products, such as those sold by MTC, are used to
provide information that relates to the customer's enterprise operations and
information that may be used in other critical applications. Any failure by the
Company's products to provide accurate and timely information could result in
claims against the Company. There can be no assurance that the Company's
insurance coverage would adequately cover any claim asserted against the
Company. A successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the Company's
business, financial condition, prospects and ability to repay its indebtedness.
Even unsuccessful claims could result in the Company's expenditure of funds in
litigation and management time and resources. There can be no assurance that the
Company will not be subject to product liability claims, that such claims will
not result in liability in excess of its insurance coverage or that the
Company's insurance will cover such claims or that appropriate insurance will
continue to be available to the Company in the future at commercially reasonable
rates.
Risks Relating to MTC's International Operations
After giving effect to discontinued operations, sales outside of the
United States accounted for approximately 22% and 27% of the Company's total
revenues for the fiscal years ended September 30, 1997 and 1996, respectively,
which are attributable solely to MTC. Further development of foreign
distribution channels for MTC's products and services could require a
significant investment, which could adversely affect short-term results of
operations. The Company believes that its future revenue growth and
profitability in the foreign markets will principally depend on its success in
developing these new distribution channels. Failure to increase revenues from
the introduction of new products and services to these markets could have a
material adverse effect on the Company's business, financial condition,
prospects and ability to repay its indebtedness. Because of its export sales,
MTC is subject to the risks of conducting business internationally, including
unexpected changes in regulatory requirements (including the regulation of
Internet access), uncertainty regarding liability for information retrieved and
replicated in foreign institutions, foreign currency fluctuations which could
result in reduced revenues or increased operating expenses, tariffs and trade
barriers, potentially longer payment cycles, difficulty in accounts receivable
collection, foreign taxes, and the burdens of complying with a variety of
foreign laws and trade standards. MTC is also subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic and
trade relationships, in connection with its international operations. In
addition, the laws of certain foreign countries may not protect MTC's
proprietary technology to the same extent as do the laws of the United States.
There can be no assurance that the risks associated with MTC's international
operations will not materially adversely affect the Company's business,
financial condition, prospects and ability to repay its indebtedness or require
MTC to modify significantly its current business practices.
Shares Eligible for Future Sale; Potential for Dilution
Future sales of shares of the Common Stock by its existing shareholders
under Rule 144 of the Securities Act, or through the exercise of registration
rights or the issuance of shares of the Common Stock upon the exercise of
options or warrants, or conversion of convertible securities, could materially
adversely affect the market price of shares of the Common Stock and could
materially impair the Company's future ability to raise capital through an
offering of equity securities. In addition, such exercise or conversion could
result in substantial dilution to the holders of Common Stock. No predictions
can be made as to the effect, if any, of market sales of such shares or the
availability of such shares for future sale will have on the market price of
shares of the Common Stock prevailing from time to time. At September 30, 1998,
the Company has reserved for issuance 2,960,344 shares of Common Stock for
issuance pursuant to outstanding Convertible Subordinated Debentures, options
and warrants. The Company also has reserved up to 19.9% of its outstanding
Common Stock as of May 29, 1998 for issuance under its cable affiliate incentive
program.
In addition, the Company has issued Convertible Preferred Stock that
has a conversion price that fluctuates in relation to the price of the Common
Stock. If converted on September 30, 1998, the Convertible Preferred Stock would
have converted into approximately 1,930,500 shares of Common Stock, but this
number of shares could prove to be significantly greater in the event of a
decrease in the trading price of the Common Stock. The shares of Convertible
Preferred Stock are not registered and may be sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The shares of Common Stock into which the
Convertible Preferred Stock may be converted are being registered pursuant to
the Registration Statement of which this Prospectus is a part or have been
registered previously.
Failure to Sell the Telecommunications Division
The Company has decided to discontinue its Telecommunications Division,
and is currently seeking a buyer for this division. However, there can be no
assurance these efforts will be successful. If the Company is unable to
consummate a sale of the Telecommunications Division on terms it believes are
satisfactory, it will not obtain the proceeds anticipated from such sale, which
will correspondingly diminish the capital available to the Company to implement
its Internet Service Division's strategy. In the absence of such a sale,
management's attention could be substantially diverted to operate or otherwise
dispose of the Telecommunications Division. If a sale of the Telecommunications
Division is delayed, its value could be diminished. Moreover, the
Telecommunications Division could incur losses and operate on a cash flow
negative basis in the future. Any such event could have a material adverse
effect on the Company's business, financial condition, prospects and ability to
repay its indebtedness.
Absence of Dividends
The Company has not historically paid any cash dividends on its Common
Stock and does not expect to declare any such dividends in the foreseeable
future. Payment of any future dividends will depend upon earnings and capital
requirements of the Company, the Company's debt facilities and other factors the
Board of Directors deems relevant. The Company currently intends to retain its
earnings, if any, to finance the development and expansion of its Internet
Services Division, and therefore does not anticipate paying any cash dividends
in the foreseeable future. The Company's Certificate of Incorporation prohibits
the payment of cash dividends on the Common Stock, without the consent of the
holders of the Convertible Preferred Stock, while shares of the Convertible
Preferred Stock are outstanding and, upon liquidation of the Company, requires
payment of the liquidation value of the Convertible Preferred Stock prior to any
payments with respect to the Common Stock. The Company's ability to pay
dividends on its Common Stock is also restricted by certain of the Company's
financing agreements.
Volatility of Stock Price
The market price for the Common Stock has been volatile and market
fluctuations may adversely affect the market price of the Common Stock without
regard to the operating performance of the Company. The Company believes that
factors such as announcements of developments related to the Company's business,
fluctuations in the Company's results of operations, sales of substantial
amounts of securities of the Company into the marketplace, general conditions in
the Company's industries or the worldwide economy, an outbreak of hostilities, a
shortfall in revenues or earnings compared to analysts' expectations, changes in
analysts' recommendations or projections, announcements of new products or
services by the Company or its competitors or developments in the Company's
relationships with its suppliers or customers could cause the price of the
Common Stock to fluctuate in the future, perhaps substantially. There can be no
assurance that the market price of the Common Stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance. General market price declines or market
volatility in the future could adversely affect the market price of the Common
Stock, and the current market price of the Common Stock may not be indicative of
future market prices.
Prospective Anti-Takeover Provisions
The Company is a New York corporation. It is the Company's intention to
solicit shareholder approval to reincorporate in Delaware. Both the New York
Business Corporation Law and the Delaware General Corporation Law contain
certain provisions that may have the effect of discouraging, delaying or making
more difficult a change in control of the Company or preventing the removal of
incumbent directors. In addition, the Company is currently reviewing proposed
changes to its Certificate of Incorporation and Bylaws that would have the same
effect. The existence of these provisions may have a negative impact on the
price of the Common Stock and may discourage third party bidders from making a
bid for the Company or may reduce any premiums paid to shareholders for their
Common Stock.
Year 2000 Issues
Many existing computer systems, related software applications and other
control devices use only two digits to identify a year in a date field, without
considering the impact of the upcoming change in the century. Such systems,
applications and/or devices could fail or create erroneous results unless
corrected so that they can process data related to the Year 2000. The Company
relies on such computer systems, applications and devices in operating and
monitoring all major aspects of its business, including, but not limited to, its
financial systems (such as general ledger, accounts payable and payroll
modules), customer services, internal networks and telecommunications equipment,
and end products. The Company also relies, directly and indirectly, on the
external systems of various independent business enterprises, such as its
customers, suppliers, creditors, financial organizations, and of governments,
both domestically and internationally, for the accurate exchange of data and
related information.
The Company is currently in the process of evaluating the potential
impact of the Year 2000 issue on its business and the related expenses that
could likely be incurred in attempting to remedy such impact (including testing
and implementation of remedial action). Management's current estimate is that
the costs associated with the Year 2000 issue should not have a material adverse
affect on the results of operations or financial position of the Company in any
given year. However, despite the Company's efforts to address the Year 2000
impact on its internal systems, the Company is not sure that it has fully
identified such impact or that it can resolve it without disruption of its
business and without incurring significant expenses. In addition, even if the
internal systems of the Company are not materially affected by the Year 2000
issue, the Company could be affected as a result of any disruption in the
operation of the various third party enterprises with which the Company
interacts such as cable affiliates, vendors and suppliers.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
by the Selling Shareholders.
THE SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
Selling Shareholders, including (i) the name of each Selling Shareholder, (ii)
the number of Shares beneficially owned by each Selling Shareholder as of
October 7, 1998, and (iii) the maximum number of Shares that may be offered
hereby. The information presented is based on data furnished to the Company by
the Selling Shareholders. Percentage ownership is based upon 8,191,550 shares of
Common Stock outstanding on October 7, 1998.
The number of shares that may be actually sold by each Selling
Shareholder will be determined by such Selling Shareholder. Because each Selling
Shareholder may sell all, some or none of the shares of Common Stock which each
holds, and because the offering contemplated by this Prospectus is not currently
being underwritten, no estimate can be given as to the number of shares of
Common Stock that will be held by the Selling Shareholders upon termination of
the offering.
Pursuant to Rule 416 of the Securities Act, Selling Shareholders may
also offer and sell additional shares of Common Stock issued with respect to the
Warrants, the Series C Preferred Stock or the Series D Preferred Stock as a
result of stock splits, stock dividends and anti-dilution provisions.
Shares Beneficially Owned
Prior to Offering Shares Being
Number Percent Offered
--------- ------- --------------
RGC International Investors, LDC..... 2,556,196(1) 24.2% 4,187,500(2)
Shoreline Pacific Equity, Ltd........ 23,625(3) * 47,250(3)
Steve Lamar.......................... 10,025(3) * 5,250(3)
- ----------------------
* Less than 1%.
(1) Consists of (i) 201,946 shares of Common Stock, (ii) 423,750 shares of
Common Stock issuable upon exercise of the Warrants, (iii) 403,354
shares of Common Stock issuable upon conversion of the Series A
Convertible Preferred Stock (the "Series A Preferred Stock") at the
conversion price in effect as of the date of this Prospectus, which is
$7.6875 per share, (iv) 690,341 shares of Common Stock issuable upon
conversion of the Series B Convertible Preferred Stock (the "Series B
Preferred Stock") at the conversion price in effect as of the date of
this Prospectus, which is $13.20 per share, and (v) 836,805 shares of
Common Stock issuable upon conversion of the Series C Preferred Stock
at the conversion price in effect as of the date of this Prospectus,
which is $9.00 per share, held by such Selling Shareholder. The actual
number of shares of Common Stock issuable upon conversion of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock (collectively the "Preferred Stock") is indeterminable and is
subject to adjustment based on various factors, including the floating
rate conversion price mechanism contained in the terms of the Preferred
Stock. Pursuant to the terms of the Company's Certificate of
Incorporation, the actual number of shares of Common Stock issuable
upon conversion of each series of Preferred Stock will equal (i) the
aggregate stated value of the shares of Preferred Stock thus being
converted (i.e., $1,000 per share), plus a premium in the amount of 5%
per annum accruing cumulatively from the date of issuance through the
date of conversion (unless the Company chooses to pay such premium in
cash or additional shares of Preferred Stock), divided by (ii) the
applicable conversion price of the series of Preferred Stock being
converted. The conversion price of the Series A Preferred Stock is
equal to the lower of $8.28 per share and the consecutive two day
average closing price of the Common Stock (as determined in accordance
with the Certificate of Incorporation) during the 20 day trading period
immediately prior to such conversion (subject to adjustment in
accordance with the Certificate of Incorporation). Prior to February
28, 1999, the conversion price of the Series B Preferred Stock is equal
to $13.20 per share. Thereafter, the conversion price of the Series B
Preferred Stock is equal to the lower of $13.20 per share and the
lowest five day average closing price of the Common Stock (as
determined in accordance with the Certificate of Incorporation) during
the 20 day trading period immediately prior to such conversion (subject
to adjustment in accordance with the Certificate of Incorporation).
Prior to May 31, 1999, the conversion price of the Series C Preferred
Stock is equal to $9.00 per share. Thereafter, the conversion price of
the Series C Preferred Stock is equal to the lower of $9.00 per share
and the lowest five day average closing price of the Common Stock (as
determined in accordance with the Certificate of Incorporation) during
the 30-day trading period immediately prior to such conversion (subject
to adjustment in accordance with the Certificate of Incorporation).
The Company has reserved up to 1,093,466 shares of Common Stock for
issuance upon conversion of the Series A Preferred Stock held by this
Shareholder. The maximum number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and Series C Preferred Stock
held by this Shareholder is 1,800,000 and 2,000,000, respectively. If
this Selling Shareholder obtained these share amounts upon conversion
of the Preferred Stock that it owns, then its ownership position,
including shares of Common Stock owned and underlying warrants to
purchase Common Stock that it owns, would total 5,519,162 shares of
Common Stock, or 40.9% of the outstanding shares of Common Stock of the
Company. Pursuant to the agreements under which the Preferred Stock
were issued, the Selling Shareholder cannot convert into more than
19.99% of the Common Stock without shareholder approval. The Preferred
Stock, and the warrants to purchase Common Stock issued in connection
thereto, is convertible by any holder only to the extent that the
number of shares of Common Stock thereby issuable, together with the
number of shares of Common Stock owned by such holder and its
affiliates (but not including shares of Common Stock underlying
unconverted shares of Preferred Stock and the unexercised portion of
the warrants to purchase Common Stock) would not exceed 4.99% of the
then outstanding Common Stock as determined in accordance with Section
13(d) of the Exchange Act. However, under the terms of the Series A
Preferred Stock and Series B Preferred Stock such stockholder may waive
such prohibition by notifying the Company at least 61 days prior to the
date of such conversion of its intent to convert an amount of Series A
Preferred Stock or Series B Preferred Stock that causes such
stockholder to own more than 4.99% of the Common Stock. Accordingly,
the number of shares of Common Stock set forth in the table for this
Selling Shareholder exceeds the number of shares of Common Stock that
this Selling Shareholder beneficially owns as of the date of this
Prospectus. In that regard, beneficial ownership of this Selling
Shareholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Exchange Act.
(2) Consists of (i) 187,500 shares of Common Stock issuable upon exercise
of warrants, and (ii) 4,000,000 shares of Common Stock, which
represents the maximum number of shares potentially issuable upon
conversion of Series C Preferred Stock and Series D Preferred Stock
held by such Selling Shareholder. The actual number of shares of Common
Stock reserved for issuance upon conversion of the Series C Preferred
Stock and Series D Preferred Stock is indeterminable as of the date of
this Prospectus, and is subject to adjustment. The number of shares of
Common Stock actually issued upon conversion of the Selling
Shareholder's Series C Preferred Stock and Series D Preferred Stock
could be materially less than the 4,000,000 set forth above, depending
on various factors, including the floating rate conversion price
mechanism contained in the Series C Preferred Stock and Series D
Preferred Stock. In addition, the Company's obligation to issue the
Series D Preferred Stock is contingent upon a number of conditions
being satisfied, including shareholder approval, all of which are
outside the control of the Selling Shareholder and the Company. There
can be no assurance that the contingencies relating to the issuance of
the Series D Preferred Stock will be satisfied.
(3) Consists of shares of Common Stock issuable upon the exercise of stock
purchase warrants.
Relationships with the Company
On December 31, 1997, Registrant issued to RGC International Investors,
LDC ("RGC"), 5,000 shares of Series A Preferred Stock and warrants to purchase
150,000 shares of Common Stock ("RGC Series A Warrants") pursuant to a
Securities Purchase Agreement. The Series A Preferred Stock is convertible at a
price based upon the market price for the Common Stock during the trading period
preceding conversion but not more than $8.28 per share. The RGC Series A
Warrants are exercisable at $7.95 per share. Any Series A Preferred Stock
outstanding on December 31, 2000 will be automatically converted into Common
Stock and the RGC Series A Warrants expire on December 31, 2001. The RGC Series
A Warrants require adjustments of the exercise price and the number of shares of
Common Stock issuable if the Company issues additional shares of Common Stock
(other than pursuant to presently outstanding warrants and other convertible
securities, as well as under Board approved employee/director option plans) at
prices less than the then market price. The Series A Preferred Stock is subject
to redemption or automatic conversion, at the Company's option, at 118% of
stated value per share ($1,000), and the Company is subject to penalties, under
a variety of circumstances, including failure to list the underlying Common
Stock on the American Stock Exchange and failure to register the resale of the
underlying Common Stock under the Securities Act. At the Company's option, the
Series A Preferred Stock may be redeemed after December 31, 1998 at the greater
of Parity Value (as defined therein) or 130% of its stated value. The Series A
Preferred Stock is entitled to dividends, at the rate of 5% per annum, payable
in cash or, at the Company's election, in additional shares of Series A
Preferred Stock. The sale of the Preferred Stock and the RGC Series A Warrants
was arranged by Shoreline Pacific Institutional Finance, the Institutional
Division of Financial West Group ("SPIF"), which received a fee of $250,000 plus
warrants to purchase 20,000 shares of Common Stock, exercisable at $6.625 and
expiring on December 31, 2000. The warrants issued to SPIF were allocated to Mr.
Lamar, among others.
On May 29, 1998, Registrant issued to RGC and Shoreline Associates I,
LLC ("Shoreline"), an aggregate of 10,000 shares of Series B Preferred Stock and
warrants to purchase an aggregate 200,000 shares of Common Stock ("Series B
Warrants") pursuant to a Securities Purchase Agreement. The Series B Preferred
Stock is convertible at $13.20 per share until March 1, 1999, and thereafter at
a price potentially based upon the market price for the Common Stock during the
trading period preceding conversion, which may be higher or lower than $13.20
per share. The Series B Warrants are exercisable at $13.75 per share. Any Series
B Preferred Stock outstanding on May 28, 2001 will be automatically converted
into Common Stock and the Series B Warrants expire on May 28, 2002. The Series B
Warrants require adjustments of the exercise price and the number of shares of
Common Stock issuable if the Company issues additional shares of Common Stock
(other than pursuant to presently outstanding warrants and other convertible
securities, as well as under Board approved employee/director option plans) at
prices less than the then market price. In no event will the Series B Preferred
Stock be convertible into more than 2,000,000 shares of Common Stock. The Series
B Preferred Stock is subject to redemption or automatic conversion, at the
Company's option, at the greater of 120% of stated value per share ($1,000) or
the Parity Value (as defined), and the Company is subject to penalties, under a
variety of circumstances, including failure to list the underlying Common Stock
on the American Stock Exchange and failure to register the resale of the
underlying Common Stock under the Securities Act. At the Company's option, the
Series B Preferred Stock may be redeemed on or after the earlier of (i) an
underwritten public offering or 144A offering in an amount greater than
$10,000,000 or (ii) November 29, 1999 at the greater of Parity Value (as defined
therein) or 120% of its stated value. The Series B Preferred Stock is entitled
to dividends, at the rate of 5% per annum, payable in cash or, at the Company's
election, in additional shares of Series B Preferred Stock. The sale of the
Preferred Stock and the Series B Warrants was arranged by SPIF, which received a
fee of $500,000 plus warrants to purchase 50,000 shares of Common Stock,
exercisable at $11.00 and expiring on May 28, 2002. The warrants issued to SPIF
were allocated to Mr. Lamar, among others.
On August 31, 1998, Registrant issued to RGC, 7,500 shares of Series C
Preferred Stock and warrants to purchase 93,750 shares of Common Stock ("RGC
Series C Warrants") pursuant to a Securities Purchase Agreement. The Series C
Preferred Stock is convertible at a price based upon the market price for the
Common Stock during the trading period preceding conversion but not more than
$9.00 per share. The RGC Series C Warrants are exercisable at $9.375 per share.
Any Series C Preferred Stock outstanding on August 31, 2001 will be
automatically converted into Common Stock and the RGC Series C Warrants expire
on August 31, 2002. The RGC Series C Warrants require adjustments of the
exercise price and the number of shares of Common Stock issuable if the Company
issues additional shares of Common Stock (other than pursuant to presently
outstanding warrants and other convertible securities, as well as under Board
approved employee/director option plans) at prices less than the then market
price. The Series C Preferred Stock is subject to redemption or automatic
conversion, at the Company's option, at the greater of 120% of stated value per
share ($1,000) or the Parity Value (as defined therein), and the Company is
subject to penalties, under a variety of circumstances, including failure to
list the underlying Common Stock on the American Stock Exchange and failure to
register the resale of the underlying Common Stock under the Securities Act. At
the Company's option, the Series C Preferred Stock may be redeemed on or after
the earlier of (i) an underwritten public offering or 144A offering in an amount
greater than $10,000,000 or (ii) February 29, 2000, at a price equal to 110% of
its stated value if such redemption is made prior to September 1, 1999 and 120%
of the stated value thereafter. The Series C Preferred Stock is entitled to
dividends, at the rate of 5% per annum, payable in cash or, at the Company's
election, in additional shares of Series C Preferred Stock. The sale of the
Series C Preferred Stock and the Series C Warrants was arranged by SPIF, which
received a fee of $375,000 plus warrants to purchase 26,250 shares of Common
Stock, exercisable at $7.50 and expiring on August 31, 2002. The warrants issued
to SPIF were allocated among Mr. Lamar and Shoreline Pacific Equity, Ltd.
Also on August 31, 1998, the Company agreed to issue to RGC 7,500
shares of the Series D Preferred Stock and warrants to purchase an additional
93,750 shares of Common Stock (the "Series D Warrants") for an aggregate
purchase price of $7,500,000 on terms similar to the Series C and subject to
shareholder approval and other closing conditions. The conversion price of the
Series D Preferred Stock (the "Series D Conversion Price") will initially be a
price equal to 120% of the average closing bid price of the Common Stock on the
five days prior to the date the Series D Preferred Stock is issued (the "Initial
Series D Conversion Price"). On the ninth month anniversary of such issuance,
the Series D Conversion Price will be the lower of the Initial Series D
Conversion Price and a five day average market price within a 30 day trading
period prior to conversion, subject to adjustment upon certain conclusions.
Assuming the Series D Preferred Stock was issued on October 7, 1998, the
Conversion Price as of the date of this Prospectus would be $10.89 and the 7,500
shares of Series D Preferred Stock would convert into 688,705 shares of Common
Stock. The sale of the Series D Preferred Stock and the Series D Warrants was
arranged by SPIF, which will receive a fee of $375,000 plus warrants to purchase
26,250 shares of Common Stock, upon issuance of the Series D Preferred Stock and
Series D Warrants.
PLAN OF DISTRIBUTION
The Company will not receive any proceeds from the sale of the Shares
offered hereby. The Selling Shareholders have advised the Company that the
Shares may be sold by the Selling Shareholders or their respective pledgees,
donees, transferees or successors in interest, in one or more transactions
(which may involve one or more block transactions) on the American Stock
Exchange, in sales occurring in the public market of such Exchange, in privately
negotiated transactions, through the writing of options on shares, short sales
or in a combination of such transactions; that each sale may be made either at
market prices prevailing at the time of such sale or at negotiated prices or
such other price as the Selling Shareholders determine from time to time; that
some or all of the Shares may be sold directly to market makers acting as
principals or through brokers acting on behalf of the Selling Shareholders or as
agents for themselves or their customers or to dealers for resale by such
dealers; and that in connection with such sales such brokers and dealers may
receive compensation in the form of discounts and commissions from the Selling
Shareholders and may receive commissions from the purchasers of Shares for whom
they act as broker or agent (which discounts and commissions are not anticipated
to exceed those customary in the types of transactions involved). The Selling
Shareholders shall have sole discretion not to accept any purchase offer or make
any sale of Shares if they deem the purchase price to be unsatisfactory at any
time. Any broker or dealer participating in any such sale may be deemed to be an
"underwriter" within the meaning of the Securities Act and will be required to
deliver a copy of this Prospectus to any person who purchases any of the Shares
from or through such broker or dealer. The Company has been advised that, as of
the date hereof, none of the Selling Shareholders have made any arrangements
with any broker for the sale of their Shares. There can be no assurance that all
or any of the Shares being offered hereby will be issued to, or sold by the
Selling Shareholders.
In offering the Shares covered hereby, the Selling Shareholders and any
broker-dealers and any other participating broker-dealers who execute sales for
the Selling Shareholders may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales, and any profits realized by
the Selling Shareholders and the compensation of such broker-dealer may be
deemed to be underwriting discounts and commissions. In addition, any Shares
covered by this Prospectus which qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to this Prospectus.
In order to comply with certain states' securities laws, if applicable,
the Shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In certain states, the Shares may not be sold
unless the Shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
Under applicable rules and regulations under Regulation M, any person engaged in
the distribution of the shares may not simultaneously engage in market making
activities, subject to certain exceptions, with respect to the Common Stock of
the Company for a period of five business days prior to the commencement of such
distribution and until its completion. In addition and without limiting the
foregoing, each Selling Shareholder will be subject to the applicable
provisions of the Securities Act and Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of shares of the Company's Common Stock
by the Selling Shareholders.
The Company will bear all expenses of the offering of the Shares,
except that the Selling Shareholders will pay any applicable underwriting
commissions and expenses, brokerage fees and transfer taxes, as well as the fees
and disbursements of counsel to and experts for the Selling Shareholders.
Pursuant to the terms of registration rights agreements with certain of
the Selling Shareholders, the Company has agreed to indemnify and hold harmless
such Selling Shareholders from certain liabilities under the Securities Act.
EXPERT
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997 have
been audited by PricewaterhouseCoopers L.L.P., independent certified public
accountants, as set forth in their reports thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses (estimated except for the SEC
registration fee) for the issuance and distribution of the securities being
registered, all of which will be paid by the Registrant.
SEC registration fee...............................................$ 8,693
Fees and expenses of counsel..........................................20,000
Fees and expenses of accountants......................................10,000
Listing fees..........................................................17,500
Transfer agent fees....................................................5,000
Miscellaneous.........................................................17,500
Total...................................................$78,693
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The New York Business Corporation Law and the By-laws of the Registrant
provide for indemnification of directors and officers for expenses (including
reasonable amounts paid in settlement) incurred in defending actions brought
against them.
The Company's Certificate of Incorporation provides that no contract or
other transaction between the corporation and any other corporation shall be
affected or invalidated by the fact that any one or more of the directors of the
Company is or are interested in or is a director or officer, or are directors or
officers, of such other corporation, and any director or directors, individually
or jointly, may be a party or parties to or may be interested in any contractor
transaction of the Company, or in which the Company is interested, and no
contract, act or transaction of the Company with any person or persons, firms or
corporations shall be affected or invalidated by the fact that any director or
directors of the Company is a party or are parties to, or interested in, such
contract, act or transaction, or in any way connected with such person or
persons, firms or corporations, and each and every person who may become a
director of the Company is hereby relieved from any liability that might
otherwise exist from contracting with the Company for the benefit of himself or
any firm or corporation in which he may be in anyway interested.
The Company's Bylaws provide that the Company may indemnify any person
made, or threatened to be made, a party to a civil or criminal action or
proceeding (other than one by or in the right of the Company to procure a
judgment in its favor), by reason of the fact that he was a director or officer
of the Company, or serves another entity in any capacity at the request of the
Company, against judgments, fines, settlement amounts and reasonable expenses,
including actual and necessary attorneys' fees, if such director or officer
acted, in good faith, for a purpose which he reasonably believed to be in, or,
in the case of service for any other entity, not opposed to, the best interest
of the Company, and, in criminal actions or proceedings, had no reasonable cause
to believe that his conduct was unlawful ("Good Faith"). The termination of any
such action or proceeding by judgment, settlement, conviction or upon a plea of
nolo contendere, or its equivalent, shall not in itself create a presumption
that any such director or officer did not act in Good Faith.
Under the Company's Bylaws, a person who has been successful, on the
merits or otherwise, in the defense of an action or proceeding described above
shall be entitled to indemnification. Except as provided in immediately
preceding sentence, any indemnification under the above paragraph or otherwise
permitted by Section 721 of the New York Business Corporation Law, unless
ordered by a court of competent jurisdiction, shall be made by the Company, only
if authorized in the specific case: (i) by the Board of Directors acting by a
quorum consisting of disinterested directors, or (ii) if a quorum is not
obtainable or a quorum of disinterested directors so directs, by the Board, upon
the opinion of independent legal counsel that indemnification is proper in the
circumstances, or by the shareholders.
Under the Company's Bylaws, the Company may indemnify any person made,
threatened or threatened to be made, a party to an action by or in the right of
the Company to procure a judgment in its favor by reason of this fact that he is
or was a director or officer of the Company, or is or was serving at the request
of the Company as a director or officer of any other entity against amounts paid
in settlement and reasonable expenses, including actual and necessary attorneys,
fees, if such director or officer acted, in good faith, for a purpose which he
reasonably believed to be in, or, in the case of service for any other entity,
not opposed to, the best interest of the Company, except, that no
indemnification under this paragraph shall be made in respect of (i) a
threatened action, or a pending action if settled or otherwise disposed of, or
(ii) any claim, issue or matter as to which such person shall have been adjudged
to be liable to the Company, unless the court in which the action was brought,
or, if no action was brought, any court of competent jurisdiction, determines
that the person is fairly and reasonably entitled to indemnity for such portion
of the settlement amount and expenses as the court deems proper.
Under the Company's Bylaws, the Company shall have the power to
purchase and maintain insurance to satisfy its indemnification obligations
hereunder, or to indemnify directors and officers in instances in which they may
not otherwise be indemnified by the Company under certain circumstances. No
insurance may provide for any payment, other than the cost of defense, to or on
behalf of any director or officer: (i) if it is established that his acts were
committed in bad faith or with deliberate dishonesty, were material to the cause
of the adjudicated action, or that he personally and illegally gained a
financial profit or other advantage, or (ii) in relation to any risk, the
insurance of which is prohibited under New York state insurance law.
Under the Company's Bylaws, the indemnification and advancement of
expenses shall not be deemed the exclusive right of any other rights to which a
director or officer may be entitled, provided that no indemnification may be
made to or on behalf of any director or officer if a judgment or other final
adjudication adverse to the director or officer establishes that his acts were
committed in bad faith or were the result of deliberate dishonesty and were
material to the cause of action so adjudicated, or that he personally and
illegally gained a financial profit or other advantage. No indemnification,
advancement or allowance shall be made in any circumstances if (i) the
indemnification would be inconsistent with a provision of the Company's
Certificate of Incorporation, By- laws, Board or shareholders resolutions, an
agreement or other proper corporate action, that is in effect at the time of the
accrual of the alleged cause of action, which prohibits or limits
indemnification, or (ii) the court states that indemnification would be
inconsistent with any condition with respect to indemnification expressly
imposed by the court in a court-approved settlement. If any amounts are paid by
indemnification, otherwise than by court order or action by the shareholders,
the Company shall mail to its voting shareholders, a statement describing the
terms of the indemnification and any corporate action taken with respect to the
indemnification.
The Registrant maintains directors and officers liability insurance
covering all directors and officers of the Registrant against claims arising out
of the performance of their duties.
ITEM 16. EXHIBITS.
Exhibit
Number Description of Exhibit
4.1+ Amended and Restated Certificate of Incorporation.
4.2 By-Laws, as amended (incorporated herein by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
September 30, 1993).
5.1+ Opinion of Brobeck, Phleger & Harrison L.L.P.
23.1+ Consent of Brobeck, Phleger & Harrison L.L.P. (included as part of
Exhibit 5).
23.2+ Consent of PricewaterhouseCoopers, L.L.P.
24.1+ Powers of Attorney (included on signature page of the Registration
Statement).
99.1+ Form of Common Stock Purchase Warrant Certificate issued to
purchasers of the Series C Preferred Stock dated August 31, 1998.
99.2+ Form of Common Stock Purchase Warrant Certificate issued to Assignees
of Shoreline Pacific Institutional Finance dated August 31, 1998
(Series C).
99.3+ Form of Common Stock Purchase Warrant Certificate issued to Assignees
of Shoreline Pacific Institutional Finance dated August 31, 1998
(Series D).
99.4+ Securities Purchase Agreement by and among the Company and the Buyers
(as defined therein), dated as of August 31, 1998.
99.5+ Registration Rights Agreement by and among the Company and the
Initial investors (as defined therein) dated as of August 31, 1998.
99.6+ Escrow Agreement by and among the Company, the Buyers (as defined
therein), SPIF and the Escrow Holder (as defined therein), dated as
of August 31, 1998.
- ---------------
+ Filed herewith.
ITEM 17. UNDERTAKINGS.
1. (a) The undersigned Registrant hereby undertakes to file,
during any period in which offers or sales are being made, a post-effective
amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of' 1933 (the
"Securities Act");
(ii) To reflect, in the prospectus any facts or events
arising after the date of the Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in any information in the
Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement;
provided, however, that the undertakings set forth in paragraph (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Registrant pursuant to section 13 or section 15(d) of the Exchange
Act that are incorporated by reference in this Registration Statement.
(b) The undersigned Registrant hereby undertakes that,
for determining any liability under the Securities Act, each post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file
a post-effective amendment to remove from registration any of the securities
that remain unsold at the termination of the offering.
(d) The undersigned Registrant hereby undertakes that for
purposes of determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act that- is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the undersigned Registrant pursuant to the foregoing provisions, or
otherwise, the undersigned Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the undersigned Registrant of expenses incurred or paid by a
director, officer or controlling person of the undersigned Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the undersigned Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in Mountain View, California on October 8, 1998
SOFTNET SYSTEMS, INC.
By: /s/ Lawrence B. Brilliant
-------------------------------------
Dr. Lawrence B. Brilliant,
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint, jointly and severally, Dr.
Lawrence B. Brilliant and Mark A. Phillips, or either of them, as his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign the Registration Statement filed herewith and
any and all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 8, 1998.
Signature Title
/s/ Ronald I. Simon Chairman of the Board
- ------------------------------------
Ronald I. Simon
/s/ Lawrence B. Brilliant Vice Chairman of the Board,
- ------------------------------------ President and Chief Executive
Dr. Lawrence B. Brilliant Officer
/s/ Garrett J. Girvan
- ------------------------------------- Chief Operating Officer and
Garrett J. Girvan Chief Financial Officer
/s/ Mark A. Phillips Treasurer and
- ------------------------------------- Chief Accounting Officer
Mark A. Phillips
/s/ Ian B. Aaron Director
- -------------------------------------
Ian B. Aaron
/s/ John G. Hamm Director
- -------------------------------------
John G. Hamm
/s/ Edward A. Bennett Director
- -------------------------------------
Edward A. Bennett
/s/ Sean P. Doherty Director
- -------------------------------------
Sean P. Doherty
/s/ Robert C. Harris, Jr. Director
- -------------------------------------
Robert C. Harris, Jr.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit:
4.1+ Amended and Restated Certificate of Incorporation.
4.2 By-Laws, as amended (incorporated herein by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
September 30, 1993).
5.1+ Opinion of Brobeck, Phleger & Harrison L.L.P.
23.1+ Consent of Brobeck, Phleger & Harrison L.L.P. (included as part of
Exhibit 5).
23.2+ Consent of PricewaterhouseCoopers, L.L.P.
24.1+ Powers of Attorney (included on signature page of the Registration
Statement).
99.1+ Form of Common Stock Purchase Warrant Certificate issued to
purchasers of the Series C Preferred Stock dated August 31, 1998.
99.2+ Form of Common Stock Purchase Warrant Certificate issued to Assignees
of Shoreline Pacific Institutional Finance dated August 31, 1998
(Series C).
99.3+ Form of Common Stock Purchase Warrant Certificate issued to Assignees
of Shoreline Pacific Institutional Finance dated August 31, 1998
(Series D).
99.4+ Securities Purchase Agreement by and among the Company and the Buyers
(as defined therein), dated as of August 31, 1998.
99.5+ Registration Rights Agreement by and among the Company and the
Initial investors (as defined therein) dated as of August 31, 1998.
99.6+ Escrow Agreement by and among the Company, the Buyers (as defined
therein), SPIF and the Escrow Holder (as defined therein), dated as
of August 31, 1998.
- ---------------
+ Filed herewith
RESTATED
CERTIFICATE OF INCORPORATION
OF
SOFTNET SYSTEMS, INC.
Under Section 807 of the
Business Corporation Law
Pursuant to Section 807 of the Business Corporation Law, the
undersigned hereby certify:
FIRST: That the name of the corporation is SoftNet Systems, Inc.,
originally known as Tensor Electric Development Co., Inc.
SECOND: That the Certificate of Incorporation of the corporation was
filed by the Department of State, Albany, New York, on the 12th day of December,
1956.
THIRD: That the changes in the Certificate of Incorporation effected by
this Certificate are as follows:
(a) To redesignate the corporation's Series E Convertible Preferred
Stock as Series C Convertible Preferred Stock.
FOURTH: That the text of the Certificate of Incorporation of said
SoftNet Systems, Inc., is hereby restated and amended to read in full as
follows:
"FIRST: The name of the corporation is SoftNet Systems, Inc.
SECOND: The corporation is formed to engage in any lawful act
or activity for which corporations may be organized under the Business
Corporation Law of the State of New York; provided that it is not
formed to engage in any act or activity requiring the consent or
approval of any state, official, department, board, agency or other
body.
THIRD: The aggregate number of shares which the Corporation
shall have authority to issue is 29,000,000 shares, of which 25,000,000
shares shall be common stock, par value $.01 per share and 4,000,000
shares shall be Preferred Stock, par value $.10 per share. The Board of
Directors shall have authority to authorized the issuance, from time to
time without any vote or other action by the shareholders, of any or
all shares of stock of the corporation of any class at any time
authorized. The Preferred Stock may be issued from time to time in one
or more series. The number of shares included in any or all series of
any classes of preferred stock and the designations, relative rights,
preferences and limitations shall be determined by the Board of
Directors. The Board of Directors shall thereafter implement the
authority to issue shares of the Preferred Stock by amendment to the
Certificate of Incorporation pursuant to Section 502(d) of the Business
Corporation Law of the State of New York.
1. The rights and privileges of the Series A Convertible
Preferred Stock are as follows. All references to Articles and Sections
in this Article Third, Section 1 are solely to Articles and Sections
within this Articles Third, Section 1, unless otherwise noted.
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 5,000 shares
of Preferred Stock, is Series A Convertible Preferred Stock (the
"Series A Preferred Stock") and the stated value shall be One Thousand
Dollars ($1,000) per share (the "Stated Value").
II. RANK
The Series A Preferred Stock shall rank (i) prior to the
Corporation's common stock, par value $.01 per share (the "Common
Stock"); (ii) prior to any class or series of capital stock of the
Corporation hereafter created (unless, with the consent of the holders
of Series A Preferred Stock obtained in accordance with Article IX
hereof, such class or series of capital stock specifically, by its
terms, ranks senior to or pari passu with the Series A Preferred Stock)
(collectively, with the Common Stock, "Junior Securities"); (iii) pari
passu with any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series A
Preferred Stock obtained in accordance with Article IX hereof)
specifically ranking, by its terms, on parity with the Series A
Preferred Stock ("Pari Passu Securities"); and (iv) junior to any class
or series of capital stock of the Corporation hereafter created (with
the consent of the holders of Series A Preferred Stock obtained in
accordance with Article IX hereto specifically ranking, by its terms,
senior to the Series A Preferred Stock ("Senior Securities"), in each
case as to distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
III. DIVIDENDS
The Series A Preferred Stock shall bear dividends which will
accrue cumulatively at a rate of 5% per annum and shall be payable
quarterly, at the Corporation's option, in cash or in additional shares
of Series A Preferred Stock and may be entitled to additional
distributions, pursuant to the terms of Article VI(C)(4) and (5)
hereof. In no event, so long as any Series A Preferred Stock shall
remain outstanding, shall any dividend whatsoever be declared or paid
upon, nor shall any distribution be made upon, any Junior Securities,
nor shall any shares of Junior Securities be purchased or redeemed by
the Corporation nor shall any moneys be paid to or made available for a
sinking fund for the purchase or redemption of any Junior Securities,
without, in each such case, the written consent of the holders of a
majority of the outstanding shares of Series A Preferred Stock, voting
together as a class.
IV. LIQUIDATION PREFERENCE
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 (other than
Senior Securities) upon liquidation, dissolution or winding up unless
prior thereto, the holders of shares of Series A Preferred Stock, shall
have received the Liquidation Preference (as defined in Article IV.C)
with respect to each share. If upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the
holders of the Series A 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 A 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 any holder of Series A Preferred Stock,
the sale, conveyance or disposition of all or substantially all of the
assets of the Corporation in a single transaction or series of related
transactions, 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 either: (i) be deemed to be a liquidation, dissolution
or winding up of the Corporation pursuant to which the Corporation
shall be required to distribute an amount equal to 118% of the
Liquidation Preference with respect to each outstanding share of Series
A Preferred Stock owned by such holder in accordance with and subject
to the terms of this Article IV or (ii) be treated pursuant to Article
VI.C(3) hereof. "Person" shall mean any individual, corporation,
limited liability company, partnership, association, trust or other
entity or organization.
C. For purposes hereof, the "Liquidation Preference" with
respect to a share of the Series A Preferred Stock shall mean an amount
equal to the sum of (i) the Stated Value thereof, plus (ii) an amount
equal to five percent (5%) per annum of such Stated Value for the
period beginning on the date of issuance of such share and ending on
the date of final distribution to the holder thereof (pro rated for any
portion of such period) minus any dividends that have accrued and been
paid in cash or in stock in respect of such share of Series A Preferred
Stock. The liquidation preference with respect to any Pari Passu
Securities shall be as set forth in the Certificate of Amendment of the
Certificate of Incorporation filed in respect thereof.
V. REDEMPTION
A. If any of the following events (each, a "Mandatory Redemption
Event") shall occur:
(i) The Corporation fails to issue shares of Common
Stock to any holder of Series A Preferred Stock upon exercise by such
holder of its conversion rights in accordance with the terms of this
Certificate of Amendment (for a period of at least sixty (60) days if
such failure is solely as a result of the circumstances governed by the
second paragraph of Article VI.F below and the Corporation is using all
commercially reasonable efforts to authorize a sufficient number of
shares of Common Stock as soon as practicable), fails to transfer or to
cause its transfer agent to transfer any certificate for shares of
Common Stock issued to a holder upon conversion of the Series A
Preferred Stock as and when required by this Certificate of
Incorporation or the Registration Rights Agreement, dated as of
December 31, 1997, by and between the Corporation and any other
signatory thereto (the "Registration Rights Agreement"), fails to
remove any restrictive legend on any certificate or any shares of
Common Stock issued to the holders of Series A Preferred Stock upon
conversion of the Series A Preferred Stock as and when required by this
Certificate of Amendment, the Securities Purchase Agreement dated as of
December 31, 1997, by and between the Corporation and any other
signatory thereto (the "Purchase Agreement") or the Registration Rights
Agreement, or fails to fulfill its obligations pursuant to Section 4 of
the Purchase Agreement (or makes any statement that it does not intend
to honor the obligations described in this paragraph) and any such
failure set forth above in this paragraph shall continue uncured (or
any statement not to honor its obligations shall not be rescinded) for
ten (10) business days;
(ii) The Corporation fails to obtain effectiveness
with the Securities and Exchange Commission (the "SEC") of the
Registration Statement (as defined in the Registration Rights
Agreement) prior to June 30, 1998 or such Registration Statement lapses
in effect (or sales otherwise cannot be made thereunder, whether by
reason of the Company's failure to amend or supplement the prospectus
included therein in accordance with the Registration Rights Agreement
or otherwise) (a "Sale Restriction Day") for more than forty-five (45)
consecutive days or seventy-five (75) days in any twelve (12) month
period after such Registration Statement becomes effective;
(iii) The Corporation shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of
a receiver or trustee for it or for all or substantially all of its
property or business; or such a receiver or trustee shall otherwise be
appointed;
(iv) Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted
by or against the Corporation or any subsidiary of the Corporation; or
(v) The Common Stock is suspended from trading on any
of, or is not listed for trading on at least one of the American Stock
Exchange ("AMEX"), the New York Stock Exchange or the Nasdaq National
Market for an aggregate of at least ten (10) days in any twelve (12)
month period, then, upon the occurrence and during the continuation of
any Mandatory Redemption Event specified in subparagraphs (i), (ii) or
(v) at the option of one or more holders of then outstanding shares of
Series A Preferred Stock by written notice (the "Mandatory Redemption
Notice") to the Corporation of such Mandatory Redemption Event, or upon
the occurrence of any Mandatory Redemption Event specified in
subparagraphs (iii) or (iv), the Corporation shall purchase such
holder's or all holders' shares of Series A Preferred Stock for an
amount per share equal to the greater of (1) 118% multiplied by the sum
of (a) the Stated Value of the shares to be redeemed, plus (b) an
amount equal to five percent (5%) per annum of such Stated Value as
reduced by any cash or stock dividends paid through the date of payment
of the Mandatory Redemption Amount for the period beginning on the date
of issuance of such shares and ending on the date of payment of the
Mandatory Redemption Amount (as defined below) (the "Mandatory
Redemption Date") and (2) the "parity value" of the shares to be
redeemed, where parity value means the product of (a) the number of
shares of Common Stock issuable upon conversion of such shares in
accordance with Article VI below (treating the Trading Day (as defined
in Article VI.B below) immediately preceding the Mandatory Redemption
Date as the "Conversion Date" (as hereinafter defined) unless the
Mandatory Redemption Event arises as a result of a breach in respect of
a specific Conversion Date in which case such Conversion Date shall be
the Conversion Date, and deeming the two consecutive Trading Days in
the Pricing Period (as hereinafter defined) preceding the Mandatory
Redemption Date that maximize the number of shares of Common Stock
issuable for purposes of this proviso -as the Market Price Days (as
hereinafter defined), multiplied by (b) the Closing Price (as
hereinafter defined) for the Common Stock on such Conversion Date (the
greater of such amounts being referred to as the "Mandatory Redemption
Amount"). Notwithstanding the foregoing, any holder of Series A
Preferred who does not sign the Mandatory Redemption Notice shall
retain such holder's shares of Series A Preferred Stock, the rights of
which shall continue to be governed by the terms of this Certificate of
Incorporation. The Corporation shall notify all holders promptly of the
receipt by the Corporation of a Mandatory Redemption Notice from any
holder.
In the case of a Mandatory Redemption Event, if the
Corporation fails to pay the Mandatory Redemption Amount for each share
within five (5) business days of written notice that such amount is due
and payable, then (assuming there are sufficient authorized shares) in
addition to all other available remedies, each holder of Series A
Preferred Stock shall have the right at any time, so long as the
Mandatory Redemption Event continues, to require the Corporation, upon
written notice, to immediately issue (in accordance with and subject to
the terms of Article VI below), in lieu of the Mandatory Redemption
Amount, with respect to each outstanding share of Series A Preferred
Stock held by such holder, the number of shares of Common Stock of the
Corporation equal to the Mandatory Redemption Amount divided by the
Conversion Price then in effect.
B. If the Series A Preferred Stock ceases to be convertible as
a result of the limitations described in the second paragraph of
Article VI.A below (a "19.99% Event"), and the Corporation (i) has not
obtained approval of the issuance of the Conversion Shares by the
requisite vote of the holders of the then-outstanding Common Stock,
(ii) has not prior to, or within thirty (30) days after, the date that
such 19.99% Event arises received other permission pursuant to the
rules of AMEX allowing the Corporation to resume issuances of
Conversion Shares, or (iii) is no longer governed by a rule promulgated
by a stock exchange, Nasdaq or other applicable body prohibiting the
issuance of Common Stock upon conversion of the Series A Preferred
Stock in excess of 19.99% of the Outstanding Common Amount. then, with
respect to any Conversion Shares issuable after the occurrence of the
19.99% Event, the Corporation shall pay cash to the holder submitting
the Notice of Conversion that includes such Conversion Shares, in an
amount equal to the product of (a) the number of Conversion Shares
issuable in accordance with such Notice of Conversion, but which cannot
be issued as a result of the 19.99% Event, multiplied by (b) the
Closing Price for the Common Stock on the Conversion Date. Upon the
occurrence of a 19.99% Event, a Notice shall be delivered promptly to
the holders of Series A Preferred Stock at their registered address
appearing on the records of the Corporation and shall state that 19.99%
of the Outstanding Common Amount (as defined in Article VI.A below) has
been issued upon exercise of the Series A Preferred Stock. All cash
payments arising out of a 19.99% Event shall be paid within three (3)
business days of the Conversion Date.
C. Redemption at the Option of the Corporation
(i) The Corporation shall have the right to redeem
the Series A Preferred Stock on the following terms and conditions on
any day after the first anniversary of the date of original issuance of
the Series A Preferred Stock.
(ii) In the case of a redemption under this Article
V.C, the redemption price per share of Series A Preferred Stock shall
be the greater of (i) 130% of the Stated Value, or (ii) the "parity
value" of the shares to be redeemed, where parity value means the
product of (a) the number of shares of Common Stock issuable upon
conversion of such shares in accordance with Article VI below (treating
the Trading Day (as defined in Article VI.B below) immediately
preceding the Optional Redemption Date (as defined below) as the
"Conversion Date" (as hereinafter defined) and deeming the two
consecutive Trading Days in the Pricing Period (as hereinafter defined)
preceding the Optional Redemption Date that maximize the number of
shares of Common Stock issuable for purposes of this proviso as the
Market Price Days (as hereinafter defined)), multiplied by (b) the
Closing Price (as hereinafter defined) for the Common Stock on such
Conversion Date (the greater of such amounts being referred to as the
"Optional Redemption Amount").
(iii) The Corporation shall effect each such
redemption by giving notice (the "Optional Redemption Notice") of its
election to redeem, by facsimile with a copy by overnight or 2-day
courier, no less than 10 business days prior to the redemption date
(the "Optional Redemption Date"). The Corporation may elect to redeem
some, but not all, of the Series A Preferred Stock, but in no event
less than $1,500,000 per redemption. If the Corporation elects to
redeem some, but not all, of the Series A Preferred Stock, the
Corporation shall redeem a pro-rata amount from among all the Series A
Preferred Stock holders. The Optional Redemption Notice shall indicate
whether the Corporation will redeem all or part of the Series A
Preferred Stock and the Optional Redemption Date. The holders of the
Series A Preferred Stock shall have the right to convert their Series A
Preferred Stock until 12:00 midnight, New York time, on the Trading Day
preceding the Optional Redemption Date.
(iv) The Corporation shall not be entitled to send an
Optional Redemption Notice unless it has (x) the full amount of the
redemption price (assuming that the Optional Redemption Amount equals
130% of the Stated Value for all of the shares of Series A Preferred
Stock to be redeemed), in cash, available in a demand or other
immediately available account in a bank or similar financial
institution or (y) immediately available credit facilities, in the full
amount of the redemption price (as calculated above), with a bank or
similar financial institution on the date the Optional Redemption
Notice is sent. If the Corporation has met the requirements of the
preceding sentence, and a holder has not submitted his Series A
Preferred Stock for redemption as required by this Article V.C by the
Optional Redemption Date, the Corporation may pay the Optional
Redemption Price and cancel the Series A Preferred Stock subject to the
Optional Redemption Notice, and such redeemed Series A Preferred Stock
shall be of no further validity, force or effect. The Optional
Redemption Price shall be paid within three (3) business days after the
Optional Redemption Date.
VI. CONVERSION AT THE OPTION OF THE HOLDER
A. Each holder of shares of Series A Preferred Stock may, at
its option in accordance with the terms hereof, upon surrender of the
certificates therefor, convert any or all of its shares of Series A
Preferred Stock into Common Stock as follows (an "Optional Conversion")
on or after the first to occur of (a) the listing on (or on such other
national securities exchange or automated quotation system upon which
the Common Stock is listed) of the Common Stock into which the Series A
Preferred Stock is then convertible or (b) 10 business days after the
issuance of such Series A Preferred Stock. Each share of Series A
Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing (1)
the sum of (a) the Stated Value thereof, plus, (b) the Premium Amount
(as defined below), by (2) the then effective Conversion Price (as
defined below); provided, however, that, unless the holder delivers a
waiver in accordance with the immediately following sentence, in no
event shall a holder of shares of Series A Preferred Stock be entitled
to convert any such shares in excess of that number of shares upon
conversion of which the sum of (x) the number of shares of Common Stock
beneficially owned by the holder and its affiliates (other than shares
of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the shares of Series A
Preferred Stock or unexercised portion of warrants or any other
securities containing analogous limitations) and (y) the number of
shares of Common Stock issuable upon the conversion of the shares of
Series A Preferred Stock with respect to which the determination of
this proviso is being made, would result in beneficial ownership by a
holder and such holder's affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, (i) beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (x) of such proviso, and (ii) a holder may
waive the limitations set forth therein by written notice to the
Corporation upon not less than sixty-one (61) days prior written notice
(with such waiver taking effect only upon the expiration of such
sixty-one (61) day notice period). The "Premium Amount" for each share
of Series A Preferred Stock means the product of the Stated Value,
multiplied by .05, multiplied by (N/365), minus any dividends that have
accrued and been paid in cash or in stock in respect of such share of
Series A Preferred Stock, where "N" equals the number of days elapsed
from the date of issuance of the Series A Preferred Stock to and
including the Conversion Date (as defined in Article VI.B. below).
Notwithstanding anything to the contrary contained herein, if,
at any time, the aggregate number of shares of Common Stock then issued
upon conversion of the Series A Preferred Stock equals 19.99% of the
"Outstanding Common Amount" (as hereinafter defined), the Series A
Preferred Stock shall, from that time forward, cease to be convertible
into Common Stock in accordance with the terms of this Article VI and
Article VII below, unless the Corporation (i) has obtained approval of
the issuance of the Series A Preferred Stock by a majority of the total
votes eligible to be cast on such proposal, in person or by proxy, by
the holders of the then outstanding Common Stock, (ii) shall have
otherwise obtained permission to allow such issuances from AMEX; or
(iii) is no longer governed by a rule promulgated by a stock exchange,
Nasdaq or other applicable body prohibiting the issuance of Common
Stock upon conversion of the Series A Preferred Stock in excess of
19.99% of the Outstanding Common Amount without shareholder approval.
For purposes of this paragraph, "Outstanding Common Amount" shall be
determined in accordance with the rules of AMEX, as may be in effect
from time to time. The maximum number of shares of Common Stock
issuable as a result of the 19.99% limitation set forth herein is
hereinafter referred to as the "Maximum Share Amount." With respect to
each holder of Series A Preferred Stock, the Maximum Share Amount shall
refer to such holder's pro rata share thereof determined in accordance
with Article X below. In the event that the Corporation obtains
stockholder approval, the approval of AMEX or otherwise concludes that
it is able to increase the number of shares to be issued above the
Maximum Share Amount (such increased number being the "New Maximum
Share Amount"), the references to Maximum Share Amount, above, shall be
deemed to be instead, references to the greater New Maximum Share
Amount. In the event that stockholder approval is not obtained, there
are insufficient reserved or authorized shares or a registration
statement covering the additional shares of Common Stock which
constitute the New Maximum Share Amount is not effective prior to the
Maximum Share Amount being issued (if such registration statement is
necessary to allow for the public resale of such securities), the
Maximum Share Amount shall remain unchanged; provided, however, that
the holder may grant an extension to obtain a sufficient reserved or
authorized amount of shares or of the period for obtaining
effectiveness of such registration statement. In the event that (a) the
aggregate number of shares of Common Stock issued pursuant to the
outstanding Series A Preferred Stock represents at least twenty percent
(20%) of the Maximum Share Amount and (b) the sum of (x) the aggregate
number of shares of Common Stock issued upon conversion of Series A
Preferred Stock plus (y) the aggregate number of shares of Common Stock
that remains issuable upon conversion of Series A Preferred Stock,
together in each case with any shares- of Common Stock that are
integrated with the Conversion Shares for purposes of the rules of
AMEX, represents at least one hundred percent (100%) of the Maximum
Share Amount (the "Triggering Event"), the Corporation will use its
best efforts to seek and obtain Stockholder Approval (or obtain such
other relief as will allow conversions hereunder in excess of the
Maximum Share Amount) as soon as practicable following the Triggering
Event and before the Mandatory Redemption Date.
B. 1. Subject to subparagraph (b) and (c) and Article VI.C
below, the "Conversion Price" shall be the lesser of (i) the Market
Price (as defined herein) (the "Variable Conversion Price") and (ii)
the Fixed Conversion Price. "Market Price" shall mean the average of
the closing bid prices of the Common Stock on AMEX, or on the principal
securities exchange or other market on which the Common Stock is then
being traded (in each case, as reported by Bloomberg), for any two (2)
consecutive Trading Days (as defined herein) (the "Market Price Days")
in the 20 Trading Day period (the "Pricing Period") ending one (1)
Trading Day prior to the date (the "Conversion Date") the Notice of
Conversion (as defined in Section VI.E) is sent by a holder to the
Corporation via facsimile. "Trading Day" shall mean any day on which
the Common Stock is traded for any period on AMEX, or on the principal
securities exchange or other securities market on which the Common
Stock is then being traded. The converting holder shall designate the
"Market Price Days" on the Conversion Date, from the Trading Days
comprising the Pricing Period and such selection shall be indicated in
the Notice of Conversion. The "Fixed Conversion Price" shall equal
$8.28.
2. Notwithstanding anything contained in subparagraph
(1) of this Paragraph B to the contrary, in the event the Corporation
(i) makes a public announcement that it intends to consolidate or merge
with any other corporation (other than a merger in which the
Corporation is the surviving or continuing corporation and Its capital
stock is unchanged and the stockholders of the Corporation prior to the
date of such consolidation or merger continue to own at least 51% of
the surviving or continuing corporation) or sell or transfer all or
substantially all of the assets of the Corporation or (ii) any person,
group or entity (including the Corporation) publicly announces a tender
offer (as such term is used in the Exchange Act) to purchase 50% or
more of the Corporation's Common Stock (the date of the announcement
referred to in clause (i) or (ii) is hereinafter referred to as the
"Announcement Date"), then the Conversion Price shall, effective upon
the Announcement Date and continuing through the Adjusted Conversion
Price Termination Date (as defined below), be equal to the lower of (x)
the Conversion Price which would have been applicable for an Optional
Conversion occurring on the Announcement Date and (y) the Conversion
Price that would otherwise be in effect. From and after the Adjusted
Conversion Price Termination Date, the Conversion Price shall be
determined as set forth in subparagraph (1) of this Article VI.B. For
purposes hereof, "Adjusted Conversion Price Termination Date" shall
mean, with respect to any proposed transaction or tender offer for
which a public announcement as contemplated by this subparagraph (2)
has been made, six (6) Trading Days after the date upon which the
Corporation (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) publicly announces the
termination or abandonment of the proposed transaction or tender offer
which caused this subparagraph (2) to become operative, or the date on
which the proposed transaction or tender offer has been consummated.
3. In the event that (i) the Corporation fails to
obtain effectiveness with the SEC of the Registration Statement prior
to 90 days (or 120 days if the Company is advised by the SEC that it is
not eligible to use form S-3 and is thus required to use Form S-1)
following the issuance of the Series A Preferred Stock, or (ii) such
Registration Statement lapses in effect, or sales otherwise cannot be
made thereunder, whether by reason of the Corporation's failure or
inability to amend or supplement the prospectus (the "Prospectus")
included therein in accordance with the Registration Rights Agreement
or otherwise, after such Registration Statement becomes effective, then
the Pricing Period shall be comprised of, (a) in the case of an event
described in clause (i), the twenty (20) Trading Days preceding the
90th day (or the 120th day if the Company is advised by the SEC that it
is not eligible to use form S-3 and is thus required to use Form S-1)
following the issuance of the Series A Preferred Stock plus all Trading
Days through and including the third Trading Day following the date of
effectiveness of the Registration Statement; and (b) in the case of an
event described in clause (ii), the twenty (20) Trading Days preceding
the date on which the holders are first notified or otherwise first
reasonably determine based on the information available that sales may
not be made under the Prospectus, plus all Trading Days through and
including the third Trading Day following the date on which the holders
of Series A Preferred Stock are notified or otherwise first reasonably
determine based on the information available that such sales may again
be made under the Prospectus.
C. The Conversion Price shall be subject to adjustment from
time to time as follows:
1. Adjustment to Fixed Conversion Price Due to Stock
Split, Stock Dividend, Etc. If at any time when the Series A Preferred
Stock is issued and outstanding, the number of outstanding shares of
Common Stock is increased by a stock split, stock dividend,
combination, reclassification, below-Market Price rights offering to
all holders of Common Stock or other similar event, the Fixed
Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar
event, the Fixed Conversion Price shall be proportionately increased.
In such event, the Corporation shall notify the transfer agent and the
conversion agent for the Series A Preferred Stock (the "Transfer
Agent") of such change on or before the effective date thereof.
2. Adjustment to Variable Conversion Price. If at any
time when Series A Preferred Stock is issued and outstanding, the
number of outstanding shares of Common Stock is increased or decreased
by a stock split, stock dividend, combination, reclassification,
below-Market Price rights offering to all holders of Common Stock or
other similar event, which event shall have taken place during the
reference period for determination of the Conversion Price for any
Optional Conversion or Automatic Conversion of the Series A Preferred
Stock, then the Variable Conversion Price shall be calculated giving
appropriate effect to the stock split, stock dividend, combination,
reclassification or other similar event for the entire Pricing Period
immediately preceding the Conversion Date. In such event, the
Corporation shall notify the Transfer Agent of such change on or before
the effective date thereof.
3. Adjustment Due to Merger, Consolidation, Etc.
Subject to Article IV.B, if, at any time when Series A Preferred Stock
is issued and outstanding and prior to the conversion of all Series A
Preferred Stock, there shall be any `merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, "a
result of which shares of Common Stock of the Corporation shall be
changed into the same or a different number of shares of another class
or classes of stock or securities of the Corporation or another
entity, or in case of any sale or conveyance of all or substantially
all of the assets of the Corporation other than in connection with a
plan of complete liquidation of the Corporation, then the holders of
Series A Preferred Stock shall thereafter have the right to receive
upon conversion of the Series A Preferred Stock, upon the basis and
upon the terms and customs specified herein and in lieu of the shares
of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the holders of Series A Preferred
Stock would have been entitled to receive in such transaction had the
Series A Preferred Stock been converted in full (without regard to any
limitations on conversion contained herein) immediately prior to such
transaction, and in any such case appropriate provisions shall be made
with respect to the rights and interests of the holders of Series A
Preferred Stock to the end that the provisions hereof (including,
without limitation, provisions for adjustment of the Conversion Price
and of the number of shares of Common Stock issuable upon conversion of
the Series A Preferred Stock) shall thereafter be applicable, as nearly
as may be practicable in relation to any securities or assets
thereafter deliverable upon the conversion of Series A Preferred Stock.
The Corporation shall not effect any transaction described in this
subsection (3) unless (i) it first gives, to the extent practical,
thirty (30) days' prior written notice (but in any event at least
fifteen (15) business days prior written notice) of such merger,
consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the holders of
Series A Preferred Stock shall be entitled to convert the Series A
Preferred Stock) and (ii) the resulting successor or acquiring entity
(if not the Corporation) assumes by written instrument the obligations
of this subsection (3). The above provisions shall similarly apply to
successive consolidations, mergers, sales, transfers or share
exchanges.
4. Adjustment Due to Distribution. Subject to Article
III, if the Corporation shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as
a dividend, stock repurchase, by way of return of capital or otherwise
(including any dividend or distribution to the Corporation's
shareholders in cash or shares (or rights to acquire shares) of capital
stock of a subsidiary (i.e., a spin-off)) (a "Distribution"), then the
holders of Series A Preferred Stock shall be entitled, upon any
conversion of shares of Series A Preferred Stock after the date of
record for determining shareholders entitled to such Distribution, to
receive the amount of such assets which would have been payable to the
holder with respect to the shares of Common Stock issuable upon such
conversion had such holder been the holder of such shares of Common
Stock on the record date for the determination of shareholders entitled
to such Distribution.
5. Purchase Rights. Subject to Article III, if at any
time when any Series A Preferred Stock is issued and outstanding, the
Corporation issues any convertible securities or rights to purchase
stock, warrants, securities or other property (the "Purchase Rights")
pro rata to the record holders of any class of Common Stock, then the
holders of Series A Preferred Stock win be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate Purchase
Rights which such holder could have acquired if such holder had held
the number of shares of Common Stock acquirable upon complete
conversion of the Series A Preferred Stock (without regard to any
limitations on conversion contained herein) immediately before the date
on which a record is taken for the grant, issuance or sale of such
Purchase Rights, or, if no such record is taken, the date as of which
the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
6. Notice of Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this
Article VI.C. the Corporation, at its expense, shall make available to
the holders the information necessary to determine such adjustment or
readjustment. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish to such holder
a certificate setting forth (i) such adjustment or readjustment, (ii)
the Conversion Price at the time in effect and (iii) the number of
shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of a share
of Series A Preferred Stock.
D. For purposes of Article VI.C(l) and (2) above, "Market
Price," which shall be measured as of the record date in respect of the
rights offering means (i) the average of the last reported sale prices
for the shares of Common Stock as reported by AMEX, as applicable, for
the twenty (20) Trading Days immediately preceding such date, or (ii)
if AMEX is not the principal trading market for the shares of Common
Stock, the average of the last reported sale prices on the principal
trading market for the Common Stock during the same period, or (iii) if
market value cannot be calculated as of such date on any of the
foregoing bases, the Market Price shall be the fair market value as
reasonably determined in good faith by (a) the Board of Directors of
the Corporation, or (b) at the option of two-thirds (2/3) of the
holders, of the outstanding Series A Preferred Stock by an independent
investment bank of nationally recognized standing in the valuation of
businesses similar to the business of the Corporation.
E. In order to convert Series A Preferred Stock into full
shares of Common Stock, a holder of Series A Preferred Stock shall: (i)
submit a copy of the fully executed notice of conversion in the form
attached hereto as Exhibit A ("Notice of Conversion") to the
Corporation by facsimile dispatched on the Conversion Date (or by other
means resulting in notice to the Corporation on the Conversion Date) at
the office of the Corporation or the Transfer Agent that the holder
elects to convert the same, which notice shall specify the number of
shares of Series A Preferred Stock to be converted, the applicable
Conversion Price, the Market Price Days, and a calculation of the
number of shares of Common Stock issuable upon such conversion
(together with a copy of the first page of each certificate to be
converted) prior to 12:00 Midnight, New York City time (the "Conversion
Notice Deadline") on the date of conversion specified on the Notice of
Conversion; and (ii) surrender the original certificates representing
the Series A Preferred Stock being converted (the "Preferred Stock
Certificates"), duly endorsed, along with a copy of the Notice of
Conversion to the office of the Corporation or the Transfer Agent as
soon as practicable thereafter. The Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable
upon such conversion, until either the Preferred Stock Certificates are
delivered to the Corporation or its Transfer Agent as provided above,
or the holder notifies the Corporation or its Transfer Agent that such
certificates have been lost, stolen or destroyed (subject to the
requirements of subparagraph (1) below). In the case of a dispute as to
the calculation of the Conversion Price, the Corporation shall promptly
issue such number of shares of Common Stock that are not disputed in
accordance with subparagraph (2) below. The Corporation shall submit
the disputed calculations to its outside accountant via facsimile
within two (2) business days of receipt of the Notice of Conversion.
The accountant shall audit the calculations and notify the Corporation
and the holder of the results no later than 48 hours from the time it
receives the disputed calculations. The accountant's calculation shall
be deemed conclusive absent manifest error.
1. Lost or Stolen Certificates. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation
of any Preferred Stock Certificates representing shares of Series A
Preferred Stock, and (in the case of loss, theft or destruction) of
indemnity reasonably satisfactory to the Corporation, and upon
surrender and cancellation of the Preferred Stock Certificate(s), if
mutilated, the Corporation shall execute and deliver new Preferred
Stock Certificate(s) of like tenor and date.
2. Delivery of Common Stock Upon Conversion. Upon the
surrender of certificates as described above together With a Notice of
Conversion, the Corporation shall issue and, within three (3) business
days after such surrender (or, in the case of lost, stolen or destroyed
certificates, after provision of agreement and indemnification pursuant
to subparagraph (1) above) (the "Delivery Period"), deliver (or cause
its Transfer Agent to so issue and deliver) to or upon the order of the
holder (i) that number of shares of Common Stock for the portion of the
shares of Series A Preferred Stock converted as shall be determined in
accordance herewith and (ii) a certificate representing the balance of
the shares of Series A Preferred Stock not converted, if any. In
addition to any other remedies available to the holder, including
actual damages and/or equitable relief, the Corporation shall pay to a
holder $500 per day in cash for each day beyond the three (3) day grace
period following the Delivery Period that the Corporation fails to
deliver Common Stock issuable upon surrender of shares of Series A
Preferred Stock with a Notice of Conversion until such time as the
Corporation has delivered all such Common Stock. Such cash amount shall
be paid to such holder by the fifth day of the month following the
month in which it has accrued or, at the option of the holder (by
written notice to the Corporation by the first day of the month
following the month in which it has accrued), shall be payable in
Common Stock in accordance with the terms of this Article VI.
In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the holder and
subject to the limitations contained in Article VI.A. and to the
holder's compliance with the provisions in this Article VI.E., the
Corporation shall use its best efforts to cause the Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to
the holder by crediting the account of holder's Prime Broker with DTC
through its Deposit Withdrawal Agent Commission ("DWAC") system. The
time periods for delivery and penalties described in the immediately
preceding paragraph shall apply to the electronic transmittals
described herein.
3. No Fractional Shares. If any conversion of Series
A Preferred Stock would result in a fractional share of Common Stock or
the right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion, of the Series A Preferred Stock
shall be the next higher number of shares.
4. Conversion Date. The "Conversion Date" shall be
the date specified in the Notice of Conversion, provided that the
Notice of Conversion is submitted by facsimile (or by other means
resulting in notice) to the Corporation or the Transfer Agent before
12:00 Midnight, New York City time, on the Conversion Date. Subject to
Article VI.G, the person or persons entitled to receive the shares of
Common Stock issuable upon conversion shall be treated for all purposes
as the record holder or holders of such securities as of the Conversion
Date and all rights with respect to the shares of Series A Preferred
Stock surrendered shall forthwith terminate except the right to receive
the shares of Common Stock or other securities or property issuable on
such conversion and except that the holders preferential rights as a
holder of Series A Preferred Stock shall survive to the extent the
corporation fails to deliver such securities.
F. A number of shares of the authorized but unissued Common
Stock sufficient to provide for the conversion of the Series A
Preferred Stock outstanding at the then current Conversion Price shall
at all times be reserved by the Corporation, free from preemptive
rights, for such conversion or exercise (the "Reserved Amount"). The
Reserved Amount shall be increased from time to time in accordance with
the Corporation's obligations pursuant to Section 4(h) of the Purchase
Agreement. In addition, if the Corporation shall issue any securities
or make any change in its capital structure which would change the
number of shares of Common Stock into which each share of the Series A
Preferred Stock shall be convertible at the then current Conversion
Price, the Corporation shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of
shares of Common Stock authorized and reserved, free from preemptive
rights, for conversion of the outstanding Series A Preferred Stock.
If at any time a holder of shares of Series A Preferred Stock
submits a Notice of Conversion, and the Corporation does not have
sufficient authorized but unissued shares of Common Stock available to
effect such conversion, in accordance with the provisions of this
Article VI (a "Conversion Default'), the Corporation shall issue to the
holder (or holders, if more than one holder submits a Notice of
Conversion in respect of the same Conversion Date), the number of
shares of Common Stock which are available to effect such conversion up
to such holder's pro rata share of the Reserved Amount, as determined
in accordance with Article X. The number of shares of Series A
Preferred Stock included in the Notice of Conversion which exceeds the
amount which is then convertible into available shares of Common Stock
(the "Excess Amount") shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in accordance
with the terms hereof until (and at the holder's option at any time
after) the date additional shares of Common Stock are authorized by the
Corporation to permit such conversion, at which time the Conversion
Price in respect thereof shall be the lesser of (i) the Conversion
Price on the Conversion Default Date (as defined below) and (ii) the
Conversion Price on the Conversion Date elected by the holder in
respect thereof. The Corporation shall use its best efforts to effect
an increase in the authorized number of shares of Common Stock as soon
as possible following a Conversion Default. In addition, the
Corporation shall pay to the holder payments ("Conversion Default
Payments") for a Conversion Default in the amount of (a) (N/365),
multiplied by (b) the sum of the Stated Value plus the Premium Amount
per share of Series A Preferred Stock through the Authorization Date
(as defined below), multiplied by (c) the Excess Amount on the day the
holder submits a Notice of Conversion giving rise to a Conversion
Default (the "Conversion Default Date"), multiplied by (d) .24, where
(i) N = the number of days from the Conversion Default Date to the date
(the "Authorization Date") that the Corporation authorizes a sufficient
number of shares of Common Stock to effect conversion of the full
number of shares of Series A Preferred Stock. The Corporation shall
send notice to the holder of the authorization of additional shares of
Common Stock, the Authorization Date and the amount of holder's accrued
Conversion Default Payments. The accrued Conversion Default Payment for
each calendar month shall be paid in cash or shall be convertible into
Common Stock at the Conversion Price, at the holder's option, as
follows:
1. In the event the holder elects to receive such
payment in cash, cash payment shall be made to holder by the fifth day
of the month following the month in which it has accrued; and
2. In the event the holder elects to receive such
payment in Common Stock, the holder may convert such payment amount
into Common Stock at the Conversion Price (as in effect at the time of
Conversion) at any time after the fifth day of the month following the
month in which it has accrued in accordance with the terms of this
Article VI (so long as there is then a sufficient number of authorized
shares).
Nothing herein shall limit the holder's right to pursue actual
damages for the Corporation's failure to maintain a sufficient number
of authorized shares of Common Stock, and each holder shall have the
right to pursue all remedies available at law or in equity (including a
decree of specific performance and/or injunctive relief).
G. Upon submission of a Notice of Conversion by a holder of
Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their issuance would
exceed such holder's allocated portion of the Reserved Amount) shall be
deemed converted into shares of Common Stock and (ii) the holder's
rights as a holder of such converted shares of Series A Preferred Stock
shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies
provided herein or otherwise available at law or in equity to such
holder because of a failure by the Corporation to comply with the terms
of this Certificate of Incorporation. Notwithstanding the foregoing, if
a holder has not received certificates for all shares of Common Stock
prior to the tenth (10th) business day after the expiration of the
Delivery Period with respect to a conversion of shares of Series A
Preferred Stock for any reason, then (unless the holder otherwise
elects to retain its status as a holder of Common Stock by so notifying
the Corporation) the holder shall regain the rights of a holder of such
shares of Series A Preferred Stock with respect to such unconverted
shares of Series A Preferred Stock and the Corporation shall, as soon
as practicable, return such unconverted shares of Series A Preferred
Stock to the holder or, if such shares of Series A Preferred Stock have
not been surrendered, adjust its records to reflect that such shares of
Series A Preferred Stock have not been converted. In all cases, the
holder shall retain all of its rights and remedies (including, without
limitation, the right to receive Conversion Default Payments pursuant
to Article VI.F. to the extent required thereby for such Conversion
Default and any subsequent Conversion Default).
VII. AUTOMATIC CONVERSION
So long as the Registration Statement is then effective or
sales can otherwise be made without volume restrictions under the.
Securities Act by the holders of the Series A Preferred Stock and there
is not then a continuing Mandatory Redemption Event, each share of
Series A Preferred Stock issued and outstanding on December 31, 2000
(the "Automatic Conversion Date"), automatically shall be converted
into shares of Common Stock on such date at the then effective
Conversion Price in accordance with, and subject to, the provisions of
Article VI hereof (the "Automatic Conversion"); provided, however, that
the Automatic Conversion Date shall be extended by the number of Sale
Restriction Days which exceed a total of thirty (30) days. The
Automatic Conversion Date shall be the Conversion Date for purposes of
determining the Conversion Price and the time within which certificates
representing the Common Stock must be delivered to the holder.
VIII. VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting
power whatsoever, except as otherwise provided by the Business
Corporation Law of the State of New York ("BCL"), in this Article VIII,
and in Article IX below.
Notwithstanding the above, the Corporation shall provide each
holder of Series A Preferred Stock with prior notification of any
meeting of the shareholders (and copies of proxy materials and 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 correction with
any proposed sale, lease or conveyance of all or substantially all of
the assets of the Corporation or any proposed liquidation, dissolution
or winding up of the Corporation, the Corporation shall mail a notice
to each holder, at least ten (10) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction. or event, whichever is earlier), of the date on which any
such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the
amount and character of such dividend, distribution, right or other
event to the extent known at such time.
To the extent that under the BCL the vote of the holders of
the Series A Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the
Corporation, the affirmative vote or consent of the holders of at least
a majority of the shares of the Series A Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent
of a majority of the shares of Series A Preferred Stock (except as
otherwise may be required under the BCL) shall constitute the approval
of such action by the class. To the extent that under the BCL holders
of the Series A Preferred Stock are entitled to vote on a matter with
holders of Common Stock, voting together as one class, each share of
Series A Preferred Stock shall be entitled to a number of votes equal
to the number of shares of Common Stock into which it is then
convertible using the record date for the taking of such vote of
shareholders as the date as of which the Conversion Price is
calculated. Holders of the Series A Preferred Stock shall be entitled
to notice of all shareholder meetings or written consents (and copies
of proxy materials and other information 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 BCL.
IX. PROTECTIVE PROVISIONS
So long as shares of Series A Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by
vote or written consent, as provided by the BCL) of the holders of at
least a majority of the then outstanding shares of Series A Preferred
Stock:
(a) alter or change the rights, preferences or
privileges of the Series A Preferred Stock or any Senior Securities so
as to affect adversely the Series A Preferred Stock;
(b) create any new class or series of capital stock
having a preference over the Series A Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of
the Corporation (as previously defined in Article H hereof, "Senior
Securities");
(c) create any new class or series of capital stock
ranking pari passu with the Series A Preferred Stock as to distribution
of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined in Article II hereof, "Pari Passu
Securities");
(d) increase the authorized number of shares of
Series A Preferred Stock; or
(e) do any act or thing not authorized or
contemplated by this Certificate of Incorporation which would result in
taxation of the holders of shares of the Series A Preferred Stock under
Section 305 of the Internal Revenue Code of 1986, as amended (or any
comparable provision of the Internal Revenue Code as hereafter from
time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series A Preferred Stock agree to allow the
Corporation to alter or change the rights, preferences or privileges of
the shares of Series A Preferred Stock, pursuant to subsection (a)
above, so as to affect the Series A Preferred Stock, then the
Corporation will deliver notice of such approved change to the holders
of the Series A Preferred Stock that did not agree to such alteration
or change (the "Dissenting Holders") and Dissenting Holders shall have
the right for a period of thirty (30) days to convert pursuant to the
terms of this Certificate of Incorporation as they exist prior to such
alteration or change or continue to hold their shares of Series A
Preferred Stock.
X. PRO RATA ALLOCATIONS
The Maximum Share Amount and the Reserved Amount (including
any increases thereto) shall be allocated by the Corporation pro rata
among the holders of Series A Preferred Stock based on the number of
shares of Series A Preferred Stock then held by each holder relative to
the total aggregate number of shares of Series A Preferred Stock then
outstanding.
2. The rights and privileges of the Series B Convertible
Preferred Stock are as follows. All references to Articles and Sections
within this Article Third, Section 2 are solely to Articles and
Sections within this Article Third, Section 2.
I. DESIGNATION AND AMOUNT
The designation (this "Certificate of Designation") of this
series, which consists of 10,000 shares of Preferred Stock of SOFTNET
SYSTEMS, INC., a New York corporation (the "Company"), is the Series B
Convertible Preferred Stock (the "Preferred Stock" or "Preferred
Shares") and the face amount per share shall equal $1,000 (the "Face
Amount").
II. CERTAIN DEFINITIONS
For purposes of this Article Third, Section 2, the following
terms shall have the following meanings:
"Anniversary Date" means the date that is 9 months following
the Closing Date.
"Business Day" means any day other than a Saturday, Sunday or
a day on which banks in New York, New York are permitted or required by
law to be closed.
"Closing Bid Price" means, for any security as of any date,
the closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as
reported by Bloomberg Financial Markets or a comparable reporting
service of national reputation selected by the Company and reasonably
acceptable to the Holders then holding a majority of the outstanding
shares of Preferred Stock ("Majority Holders"), if Bloomberg Financial
Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the
last reported sale price of such security in the over-the-counter
market on the electronic bulletin board of such security as reported by
Bloomberg, or, if no sale price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid
Price of such security on such date shall be the fair market value as
mutually determined by the Company and the Majority Holders, or, if
they are unable to agree on such value, it shall be determined by an
investment banking firm selected by the Company and reasonably
acceptable to the Majority Holders.
"Closing Date" means the date on which the Preferred Shares
are initially issued.
"Closing Price" means $11.00.
"Common Stock" means the common stock, $0.01 par value, of the
Company.
"Conversion Price", subject to the adjustments provided for in
Article X hereof, means (1) on and prior to the Anniversary Date,
$13.20 and (2) beginning on the day following the Anniversary Date, the
lesser of (i) $13.20 and (ii) the Market Price at the time of
conversion.
"Effective Date" means the date the Registration Statement
registering the resale of the shares of Common Stock into which the
Preferred Shares are convertible is declared effective by the
Securities and Exchange Commission.
"Holders" means the initial Holders of the Preferred Stock and
their permitted transferees.
"majority of the outstanding shares of Preferred Stock" means
greater than 66.6% of the outstanding shares of Preferred Stock.
"Market Price" means the volume weighted average price of the
Common Stock over any 5 trading days, selected by the Holder, in the 20
trading days ending on the day prior to the Conversion Date.
"Registration Deadline" means the 90th day following the
Closing Date.
"Registration Statement" means a registration statement filed
with the Securities and Exchange Commission under the Securities Act of
1933, as amended.
"Securities Purchase Agreement" means the Securities Purchase
Agreement referencing this Article Third, Section 2, among the Company
and the purchasers named therein, as amended from time to time in
accordance with the terms thereof.
"Warrants" means certain stock purchase warrants to acquire
shares of Common Stock issued by the Company to the initial Holders in
connection with the transactions contemplated by the Securities
Purchase Agreement.
III. DIVIDENDS
A. General. Each Holder of the Preferred Stock shall be
entitled to receive cumulative dividends at the rate of five percent
(5%) of the Face Amount per annum (the "Dividend") of the Preferred
Stock held by such Holder commencing on the Closing Date and continuing
through the date that no shares of Preferred Stock are held by such
Holder; provided however, that commencing on and continuing through any
period that shares of Common Stock equal to such Holder's Maximum Share
Amount (as defined in Article V(B)) have been issued in conversion of
Preferred Stock with respect to such Holder of the Preferred Stock,
such Holder shall be entitled to receive cumulative dividends at the
rate of ten percent (10%) per annum. Such cumulative Dividends shall be
payable at the end of each fiscal quarter of the Company in arrears in
cash or additional Preferred Shares, at the Company's option; provided
however, that the Company's option to pay such Dividends in additional
Preferred Shares shall be subject to and contingent upon the
effectiveness of a Registration Statement for the Common Shares
underlying the Preferred Shares and Warrants, and provided further that
if the Maximum Share Amount is reached, the Company shall be required
to pay such Dividends in cash. Dividends on the Preferred Stock shall
accrue and be cumulative on a daily basis from the date payable (with
appropriate proration for any partial dividend period), whether or not
earned and whether or not in any dividend period there shall be surplus
or net profits of the Company legally available for the payment of such
dividends. In no event, so long as any Preferred Stock shall remain
outstanding, shall any dividend whatsoever be declared or paid upon,
nor shall any distribution be made upon, any Junior Securities (as
defined below), nor shall any shares of Junior Securities be purchased
or redeemed by the Company nor shall any moneys be paid to or made
available for a sinking fund for the purchase or redemption of any
Junior Securities, without, in each such case, the written consent of
the Holders of a majority of the outstanding shares of Preferred Stock,
voting together as a class.
B. Payment of Dividend in Preferred Shares. Should the Company
elect to pay accrued but unpaid Dividends in additional shares of
Preferred Stock, the number of Preferred Shares to which the Holder
shall be entitled will be equal to the aggregate cash value of such
unpaid Dividends, divided by the Face Amount.
IV. CONVERSION
A. Conversion at the Option of Holder. Subject to Article
V(B), beginning on the earlier to occur of the Effective Date and the
Registration Deadline, each Holder may, at any time and from time to
time, convert each of its shares of Preferred Stock into a number of
fully paid and nonassessable shares of Common Stock determined by
dividing the aggregate Face Amount of the Preferred Shares being
converted by the then applicable Conversion Price, subject to
adjustment as provided in Article X; provided, however, that, unless
the Holder delivers a waiver in accordance with the immediately
following sentence, in no event shall a Holder of shares of Preferred
Stock be entitled to convert any such shares to the extent that (x) the
number of shares of Common Stock beneficially owned by the Holder and
its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of
the shares of Preferred Stock or unexercised portion of warrants or any
other securities containing analogous limitations) plus (y) the number
of shares of Common Stock issuable upon the conversion of the shares of
Preferred Stock with respect to which the determination of this proviso
is being made, would result in beneficial ownership by a Holder and
such Holder's affiliates of more than 4.99% of the outstanding shares
of Common Stock. For purposes of the proviso to the immediately
preceding sentence, (i) beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934,
as amended, and Rules 13(d) through (g) thereunder, except as otherwise
provided in clause (x) of such proviso, and (ii) a Holder may waive the
limitations set forth therein by written notice to the Company upon not
less than sixty-one (61) days prior written notice (with such waiver
taking effect only upon the expiration of such sixty-one (61) day
notice period).
B. Mechanics of Conversion. To convert the Preferred Shares, a
Holder shall: (i) fax (or deliver by other means resulting in notice)
to the Company a copy of the fully executed Notice of Conversion in the
form of Exhibit H to the Securities Purchase Agreement, and (ii)
surrender or cause to be surrendered to the Company (or satisfy the
provisions of Article XIII(A), if applicable) the certificates
representing the Preferred Stock being converted (the "Preferred Stock
Certificates") and the original executed version of the Notice of
Conversion as soon as practicable thereafter. The date the Holder
delivers to the Company the Notice of Conversion described in clause
(i) or such later date specified in the Notice of Conversion shall be
the "Conversion Date". In the case of fax or messenger delivery,
delivery shall be deemed made on the date of such fax or messenger
delivery. In the case of Federal Express, or other overnight mail
service, delivery shall be deemed made the day after the Notice of
Conversion is sent. In the case of U.S. Mail, delivery shall be deemed
to be five (5) days after the Notice of Conversion is deposited in the
U.S. Mail.
C. Timing of Conversion. No later than the third Business Day
following the Conversion Date (the "Delivery Date"), provided that the
Company has received prior to such date the Preferred Stock
Certificates (or the Holder has satisfied the provisions of Article
XIII(A), if applicable), the Company shall issue and deliver to the
Holder (or otherwise at such Holder's direction) that number of shares
of Common Stock issuable upon conversion of the number of Preferred
Shares being converted and a new certificate representing the Preferred
Stock not converted by such Holder. The person or persons entitled to
receive shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares
at the close of business on the Conversion Date, unless the Notice of
Conversion is revoked as provided in Article IV(D). The Delivery Date
shall be extended until the Business Day following the date of
surrender to the Company of Preferred Stock Certificates to be
converted or satisfaction of the provisions of Article XIII(A), if
applicable.
D. Continuing Rights. In addition to any other remedies which
may be available to the Holder, in the event the Company fails for any
reason to effect delivery to the Holder of certificates representing
the shares of Common Stock receivable upon conversion of the Preferred
Shares by the Business Day following the Delivery Date (which
certificates shall be unlegended as and when required pursuant to the
Securities Purchase Agreement, Registration Rights Agreement
referencing this Article Third, Section 2, by and among the Company and
the other signatories thereto (the "Registration Rights Agreement") and
this Article Third, Section 2, the Holder shall, unless the Holder
otherwise elects to retain its status as a holder of Common Stock by so
notifying the Company regain the rights of a Holder with respect to
such unconverted shares of Preferred Stock and the Company shall
immediately return the subject Preferred Stock certificates and other
conversion documents, if any, delivered by Holder, to the Holder, or,
if shares of Preferred Stock have not been surrendered, adjust its
records to reflect that such shares of Preferred Stock have not been
converted; provided however, that the Company shall remain liable for
payment of the amounts determined pursuant to Article VI(A) hereof for
each day falling between the trading day following the Delivery Date
and the date of the revocation notice is received by the Company, and
shall also remain liable for any damages suffered by Holder.
E. Stamp, Documentary and Other Similar Taxes. The Company
shall pay all stamp, documentary, issuance and other similar taxes
which may be imposed with respect to the issuance and delivery of the
shares of Common Stock pursuant to conversion of the Preferred Stock;
provided that the Company will not be obligated to pay stamp, transfer
or other taxes resulting from the issuance of Common Stock to any
person other than the registered holder of the Preferred Stock.
F. No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the conversion of Preferred Stock, but the
Company shall make a cash payment equal to such fraction multiplied by
the per share face value in respect of any fractional share which would
otherwise be issuable; provided that in the event that sufficient funds
are not legally available for the payment of such cash adjustment any
fractional shares of Common Stock shall be rounded up to the next whole
number.
G. Electronic Transmission. In lieu of delivering physical
certificates representing the Common Stock issuable upon conversion,
provided the Company's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer
program, upon request of a Holder who shall have previously instructed
such Holder's prime broker to confirm such request to the Company's
transfer agent and upon the Holder's compliance with Article IV(B), the
Company shall use its commercially reasonable efforts to cause its
transfer agent to electronically transmit the Common Stock issuable
upon conversion to the Holder by crediting the account of Holder's
prime broker with DTC through its Deposit Withdrawal Agent Commission
("DWAC") system. In the case of electronic transmission of such Common
Stock, the Company shall within three (3) Business Days issue a new
certificate representing the Preferred Stock not converted pursuant to
any Notice of Conversion.
V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK;
LIMITATION ON NUMBER OF CONVERSION SHARES
A. Reservation of Common Stock. Subject to the provisions of
this Article V, the Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock a
sufficient number of shares of Common Stock to provide for the
conversion of all outstanding Preferred Shares upon issuance of shares
of Common Stock and the exercise of all Warrants in accordance with
Section 4(g) of the Securities Purchase Agreement (the "Reserved
Amount"). The Reserved Amount shall be increased from time to time in
accordance with the Company's obligations pursuant to Section 4(g) of
the Securities Purchase Agreement. In addition, if the Company shall
issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share
of the Preferred Stock shall be convertible at the then current
Conversion Price, the Company shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of
shares of Common Stock authorized and reserved, free from preemptive
rights, for conversion of the outstanding Preferred Stock.
B. Limitation on Number of Common Shares to be Issued.
Notwithstanding anything to the contrary contained herein, if, at any
time, the aggregate number of shares of Common Stock then issued upon
conversion of the Preferred Stock equals 19.99% of the outstanding
Common Stock on the Closing Date, subject to adjustments for stock
dividends, stock splits, combinations or similar events, the Preferred
Stock shall, from that time forward, cease to be convertible into
Common Stock in accordance with the terms of Article IV, unless the
Company (i) has obtained approval of the issuance of the Preferred
Stock by a majority of the total votes eligible to be cast on such
proposal, in person or by proxy, by the holders of the then-outstanding
Common Stock, (ii) shall have otherwise obtained permission to allow
such issuances from the American Stock Exchange or such other principal
exchange upon which the Common Stock is then trading (the "Common Stock
Exchange"); or (iii) is no longer governed by a rule promulgated by a
stock exchange, Nasdaq or other applicable body prohibiting the
issuance of Common Stock upon conversion of the Preferred Stock in
excess of 19.99% of the outstanding Common Stock without shareholder
approval. The maximum number of shares of Common Stock issuable as a
result of the limitation set forth in the first sentence of this
Article V(B) is hereinafter referred to as the "Maximum Share Amount."
With respect to each Holder of Preferred Stock, the Maximum Share
Amount shall refer to such Holder's pro rata share thereof determined
in accordance with Article X below. In the event that the Company
obtains stockholder approval, the approval of the Common Stock Exchange
or otherwise concludes that it is able to increase the number of shares
to be issued above the Maximum Share Amount (such increased number
being the "New Maximum Share Amount"), the references to Maximum Share
Amount, above, shall be deemed to be instead, references to the greater
New Maximum Share Amount. In the event that stockholder approval is not
obtained, there are insufficient reserved or authorized shares or a
registration statement covering the additional shares of Common Stock
which constitute the New Maximum Share Amount is not effective prior to
the Maximum Share Amount being issued (if such registration statement
is necessary to allow for the public resale of such securities), the
Maximum Share Amount shall remain unchanged; provided, however, that
the Holder may grant an extension to obtain a sufficient reserved or
authorized amount of shares or of the period for obtaining
effectiveness of such registration statement. If (a) the aggregate
number of shares of Common Stock actually issued upon conversion of the
Preferred Stock represents at least twenty percent (20%) of the Maximum
Share Amount and (b) the sum of (x) the aggregate number of shares of
Common Stock issued upon conversion of the outstanding Preferred Stock
plus (y) the aggregate number of shares of Common Stock that remain
issuable upon conversion of the Preferred Stock at the then-effective
Conversion Price, represents at least one hundred percent (100%) of the
Maximum Share Amount (the "Triggering Event"), the Company will use its
best efforts to seek and obtain Stockholder Approval (or obtain such
other relief as will allow conversions hereunder in excess of the
Maximum Share Amount) as soon as practicable following the Triggering
Event. Notwithstanding anything in this Article Third, Section 2 to the
contrary, for purposes of determining the aggregate number of shares of
Common Stock issuable upon conversion of the Preferred Stock, if the
issuance of Common Stock hereunder is aggregated with the issuance of
Common Stock in conversion of the Series A Preferred Stock of the
Company ("Series A Preferred Stock") pursuant to the regulations of the
American Stock Exchange, the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock shall be aggregated with the
shares of Common Stock issuable in conversion of the Preferred Stock in
determining the Maximum Share Amount. Notwithstanding anything in this
Article Third, Section 2 to the contrary, the Maximum Share Amount
shall not at any time exceed 2,000,000 shares of Common Stock
(exclusive of any shares of Common Stock issuable upon conversion of
the Series A Preferred Stock), subject to adjustments for stock
dividends, stock splits, combinations or similar events (the "Maximum
Share Amount Cap").
Notwithstanding anything in this Article Third, Section II to
the contrary, in the event the Maximum Share Amount is reached, the
Company shall honor any request for conversion with a payment in cash
equal to the number of shares of Common Stock that would have otherwise
been issued upon such conversion multiplied by the 5 day average
Closing Bid Price of the Common Stock on the date of delivery of the
Conversion Notice; provided that, no such payment shall be made in the
event the Maximum Share Amount Cap is reached. Any cash payment made
pursuant to this paragraph shall be counted toward the Maximum Share
Amount Cap as if such conversion was effected by the issuance of shares
of Common Stock.
C. Allocation of Reserved Amount, Maximum Share Amount. The
Reserved Amount and the Maximum Share Amount shall be allocated among
the initial Holders according to the number of Preferred Shares issued
to each such Holder on the Closing Date. Any Common Shares which were
initially allocated to any Holder remaining after such Holder no longer
owns any Preferred Shares shall be allocated among the remaining
Holders pro rata, based on the number of Preferred Shares then held by
such Holders.
VI. FAILURE TO CONVERT
A. If, at any time, (x) the Conversion Date has occurred and
the Company fails for any reason to deliver, on or prior to the third
Business Day following the expiration of the Delivery Date for such
conversion (said period of time being the "Extended Delivery Period"),
such number of shares of Common Stock to which such Holder is entitled
(taking into account the limitations on conversions imposed by such
Holder's allocated portion of the Reserved Amount and the Maximum Share
Amount) upon such conversion, or (y) the Company provides notice
(including by way of public announcement) (the "Refusal Notice") to any
Holder at any time of its intention not to issue shares of Common Stock
upon exercise by any Holder of its conversion rights in accordance with
the terms of this Article Third, Section 2 (other than because such
issuance would exceed such Holder's allocated portion of the Reserved
Amount) (each of (x) and (y) being a "Conversion Default"), then the
Company shall pay to the affected Holder, in the case of a Conversion
Default described in clause (x) above, and to all Holders, in the case
of a Conversion Default described in clause (y) above, an amount equal
to 1% of the Face Amount of the Preferred Stock held by such Holder
with respect to which the Conversion Default exists (which amount shall
be deemed to be the aggregate Face Amount of all outstanding Preferred
Stock in the case of a Conversion Default described in clause (y)
above) for each day thereafter until the Cure Date. "Cure Date" means
(i) with respect to a Conversion Default described in clause (x) of its
definition or if a Conversion Notice has been submitted and the Company
has issued a Refusal Notice, the date the Company effects the
conversion of the portion of the Preferred Stock submitted for
conversion and (ii) if no Conversion Notices have been submitted, with
respect to a Conversion Default described in clause (y) of its
definition, the date the Company undertakes in writing to issue Common
Stock in satisfaction of all conversions of Preferred Stock in
accordance with the terms of this Article Third, Section 2. The Company
shall promptly provide each Holder with notice of the occurrence of a
Conversion Default with respect to any of the other Holders.
The payments to which a Holder shall be entitled pursuant to
this Section VI(A) are referred to herein as "Conversion Default
Payments." Conversion Default Payments shall be paid in cash. Such
payment shall be made in accordance with and be subject to the
provisions of Article XIII(B).
VII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption Events. A "Redemption Event" means any one of
the following (after expiration of any applicable cure period):
(i) the Company fails, and any such failure continues
uncured for seven (7) Business Days after the Company has been notified
thereof in writing by the Holder, to (x) remove any restrictive legend
on any certificate for any shares of Common Stock issued after the
Effective Date to the Holders upon conversion of the Preferred Stock or
upon exercise of the Warrants, or (y) to cause its transfer agent to
transfer any certificate for shares of Common Stock issued to a Holder
upon conversion of the Preferred Stock, in each case as and when
required by this Article Third, Section 2, the Warrants, the Securities
Purchase Agreement or the Registration Rights Agreement; or
(ii) The Company fails to issue shares of Common
Stock to any Holder of Preferred Stock upon exercise by such Holder of
its conversion rights in accordance with the terms of this Article
Third, Section 2 for a period of five (5) Business Days following the
expiration of the Extended Delivery Period; or
(iii) The Company fails to fulfill any of its
obligations pursuant to the Registration Rights Agreement (or makes any
statement that it does not intend to honor such obligations) and any
such failure shall continue uncured (or any statement not to honor its
obligations shall not be rescinded) for ten (10) business days.
(iv) The Company (x) fails to cause the Registration
Statement to be declared effective on or before the date that is one
hundred eighty (180) days following the Closing Date, or (y) such
Registration Statement lapses in effect (or sales cannot be made by the
Holders thereunder, whether by reason of the Company's failure to amend
or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more then forty-five
(45) consecutive days or seventy-five (75) days in any twelve (12)
month period after such Registration Statement becomes effective, or
(z) the Common Stock is not listed or included for quotation on the
Nasdaq, NYSE, AMEX or that trading is halted after the Registration
Statement has been declared effective for more than an aggregate of
twenty (20) trading days or more in any twelve (12) month period.
B. Redemption of Holder's Shares. Upon the occurrence and
during the continuation of any Redemption Event, the Company shall, as
to each Holder of the then outstanding shares of Preferred Stock who
have given written notice (the "Optional Redemption Notice") to the
Company of such Redemption Event, purchase each such Holder's shares of
Preferred Stock for an amount per share equal to the greater of (1)
120% multiplied by the sum of (a) the Face Amount of the shares to be
redeemed, plus (b) accrued and unpaid dividends and any other amounts
payable thereon (including without limitation payments due under
Section 2 of the Registration Rights Agreement) through the date of
payment of the Optional Redemption Amount (as defined herein) (the
"Optional Redemption Date") and (2) the "Parity Value" of the shares to
be redeemed (the greater of such amounts being the "Optional Redemption
Amount"); provided that if such Redemption Event is pursuant to Article
VII(A)(iv), the Company may, at its sole option, in lieu of the
foregoing purchase, pay the Holder an amount equal to the Default
Amount (as defined below) multiplied by the number of shares of
Preferred Stock held by such holder on the date of the Optional
Redemption Notice. "Parity Value" means the product of (a) the number
of shares of Common Stock issuable upon conversion of such shares at
such time (treating the Trading Day immediately preceding the Optional
Redemption Date as the "Conversion Date" (as hereinafter defined),
unless the Redemption Event arises as a result of a breach in respect
of a specific Conversion Date in which case such Conversion Date shall
be the Conversion Date), multiplied by (b) the closing sale price for
the Common Stock on the principal trading market for such shares on
such "Conversion Date". "Default Amount" shall mean Fifty U.S. Dollars
($50).
In the case of a Redemption Event, if the Company fails to pay
the Default Amount or the Optional Redemption Amount, as applicable,
for each share within five (5) business days of written notice that
such amount is due and payable, then (assuming there are sufficient
authorized shares) in addition to all other available remedies, each
holder of Preferred Stock shall have the right at any time, so long as
the Redemption Event continues, to require the Company, upon written
notice, to immediately issue (in accordance with and subject to the
terms of Article V above), in lieu of the Default Amount or the
Optional Redemption Amount, as applicable, with respect to each
outstanding share of Preferred Stock held by such holder, the number of
shares of Common Stock of the Company equal to the Default Amount or
the Optional Redemption Amount, as applicable, divided by the
Conversion Price then in effect. Payment of the Default Amount shall
not affect the holders ongoing rights with respect to the then
outstanding shares of Preferred Stock or the rights of such holders to
pursue alternate damages in respect of the events giving rise to such
payments.
C. Optional Redemption by the Company. The Company may, at its
option, upon twenty (20) Business Days' notice, redeem the Preferred
Stock, as follows:
(i) If, notwithstanding the exercise by the Company
in good faith of best efforts, the registration statement required by
the Registration Rights Agreement is not effective by the Registration
Deadline, the Company may, on or prior to the date that is 120 days
following the Closing Date, at its option, either (x) redeem for cash
out of funds legally available therefor, all (but not less than all) of
the outstanding Preferred Shares at a price per share equal to the 110%
of the Face Amount of the Preferred Shares plus accrued and unpaid
dividends, if any, and any other amounts payable thereon, or (y) state
its intention to make cash payments to the Holders pursuant to Section
2(c) of the Registration Rights Agreement.
(ii) Beginning upon the earlier to occur of (a) the
date that the Company completes an underwritten public offering of its
Common Stock in an amount of at least $10,000,000, or (b) the date that
is eighteen months following the Closing Date, the Company may, at its
option, redeem for cash out of funds legally available therefor, all
(but not less than all) of the outstanding Preferred Shares at the
Optional Redemption Amount.
(iii) Beginning on the date any Holder reaches such
Holder's Maximum Share Amount, the Company may, at its option, redeem
for cash out of funds legally available therefor, all (but not less
than all) of the outstanding shares of Preferred Stock held by the
Holder who has reached its Maximum Share Amount at a price per share
equal to 100% of the Face Amount such shares of Preferred Stock plus
accrued and unpaid dividends, if any, and any other amounts payable
thereon.
Nothing in this Article VII(C) shall prohibit conversions of
Preferred Stock otherwise permitted pursuant to the terms of this
Article Third, Section 2 during the pendency of any notice of optional
redemption by the Company hereunder.
D. Maturity; Required Redemption. Subject to the limitations
contained in Article VII(F) hereof each share of Preferred Stock
outstanding on the third anniversary of the Closing Date (the "Maturity
Date") will be redeemed at the Company's sole option, (a) in cash equal
to the aggregate face value thereof plus accrued and unpaid dividends,
if any, and any other amounts payable thereon or, (b) by delivery of a
number of shares of Common Stock issuable upon conversion of all of the
Preferred Stock at the then-applicable Conversion Price, including any
adjustment under Article X; provided that (i) any necessary approval
for the issuance of additional shares has been obtained if the Maximum
Share Amount has been reached (or will be exceeded as a result of any
conversion at maturity), and (ii) all shares of Common Stock issuable
upon conversion of all outstanding shares of Preferred Stock are then
(x) authorized and reserved for issuance, (y) registered under the
Securities Act for resale by all Holders of such Preferred Shares and
(z) eligible to be traded on either the Nasdaq, Nasdaq Small Cap
Market, the New York Stock Exchange or the American Stock Exchange.
E. Redemption Defaults. If the Company fails to pay any Holder
the redemption consideration with respect to any share of Preferred
Stock, as provided in this Article VII, within five (5) Business Days
of its receipt or delivery, as applicable, of a notice requiring such
redemption (the "Redemption Notice"), then each Holder (i) shall be
entitled to interest on the redemption consideration not paid at a per
annum rate equal to the lower of (x) the sum of prime rate published
from time to time by the Wall Street Journal plus three percent (3%)
and (y) the highest interest rate permitted by applicable law from the
date of the Redemption Notice until the date of redemption hereunder.
In the event the Company is not able to redeem all of the shares of
Preferred Stock subject to Redemption Notices, the Company shall redeem
shares of Preferred Stock from each Holder, pro rata, based on the
total number of shares of Preferred Stock included in the Redemption
Notice relative to the total number of shares of Preferred Stock in all
of the Redemption Notices. In the case of a Redemption Event, if the
Company fails to pay the Optional Redemption Amount for each share for
any reason (including, without limitation, the circumstances specified
in paragraph VII(F)), within five (5) Business Days of the applicable
Redemption Notice then (assuming there are sufficient authorized
shares) in addition to all other available remedies, each Holder of
Preferred Stock shall have the right at any time, so long as the
Redemption Event continues, to convert, upon written notice, in lieu of
the Redemption Amount, each outstanding share of Preferred Stock held
by such Holder, into the number of shares of Common Stock of the
Company equal to the Redemption Amount, divided by the Conversion Price
then in effect, subject in all cases to each such Holder's Maximum
Share Amount.
F. Capital Impairment. In the event that any section of the
New York General Business Corporation Law ("BCL"), would be violated by
the redemption of any shares of Preferred Stock that are otherwise
subject to redemption pursuant to this Article VII, the Company: (i)
will redeem the greatest number of shares of Preferred Stock possible
without violation of said Article; (ii) the Company thereafter shall
use its best efforts to take all necessary steps permitted pursuant to
this Article Third, Section 2 and the agreements entered into in
connection with the issuance of Preferred Stock pursuant hereto in
order to remedy its capital structure in order to allow further
redemptions without violation of said Article; and (iii) from time to
time thereafter as promptly as possible the Company shall redeem shares
of Preferred Stock at the request of the Holders to the greatest extent
possible without causing a violation of the BCL.
VIII. RANK; PARTICIPATION
A. Rank. All shares of the Preferred Stock shall rank (i)
prior to the Common Stock; (ii) prior to any class or series of capital
stock of the Company hereafter created (unless, with the consent of the
Holders of a majority of the outstanding shares of Preferred Stock
obtained in accordance with Article XII hereof, such class or series of
capital stock specifically, by its terms, ranks senior to or pari passu
with the Preferred Stock) (collectively, with the Common Stock, "Junior
Securities"); (iii) pari passu with any class or series of capital
stock of the Company hereafter created (with the consent of the Holders
of a majority of the outstanding shares of Preferred Stock obtained in
accordance with Article XII hereof) specifically ranking, by its terms,
on parity with the Preferred Stock (the "Pari Passu Securities"); and
(iv) junior to any class or series of capital stock of the Company
hereafter created (with the consent of the Holders of a majority of the
outstanding shares of Preferred Stock obtained in accordance with
Article XII hereof) specifically ranking, by its terms, senior to the
Preferred Stock (the "Senior Securities"), in each case as to
distribution of assets upon liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary.
B. Participation. Subject to the rights of the Holders (if
any) of Pari Passu Securities and Senior Securities, the Holders shall,
as such Holders, be entitled to such dividends paid and distributions
made to the Holders of Common Stock to the same extent as if such
Holders had converted their shares of Preferred Stock into Common Stock
(without regard to any limitations on conversion herein or elsewhere
contained) and had been issued such Common Stock on the day before the
record date for said dividend or distribution. Payments under the
preceding sentence shall be made concurrently with the dividend or
distribution to the Holders of Common Stock.
IX. LIQUIDATION PREFERENCE
A. Liquidation of the Company. If the Company shall commence a
voluntary case under the U.S. Federal bankruptcy laws or any other
applicable 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 Company 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 Company shall be entered by a court having
jurisdiction in the premises in an involuntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency
or similar law resulting in the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official)
of the Company or of any substantial part of its property, or ordering
the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60)
consecutive days and, on account of any such event, the Company shall
liquidate, dissolve or wind up, or if the Company shall otherwise
liquidate, dissolve or wind up (a "Liquidation Event"), no distribution
shall be made to the Holders of any shares of capital stock of the
Company (other than Senior Securities and, together with the Holders of
Preferred Stock the Pari Passu Securities) upon liquidation,
dissolution or winding up unless prior thereto the Holders shall have
received the Liquidation Preference (as herein defined) with respect to
each Preferred Share. If, upon the occurrence of a Liquidation Event,
the assets and funds available for distribution among the Holders 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 Company legally available for
distribution to the 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. Certain Acts Not a Liquidation. The purchase or redemption
by the Company of stock of any class, in any manner permitted by law,
shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or
merger of the Company with or into any other entity nor the sale or
transfer by the Company of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation,
dissolution or winding up of the Company.
C. Definition of Liquidation Preference. The "Liquidation
Preference" with respect to a share of Preferred Stock means an amount
equal to the Face Amount thereof plus any other amounts that may be due
from the Company with respect thereto, including any accrued and unpaid
dividends, pursuant to this Article Third, Section 2 through the date
of final distribution. The Liquidation Preference with respect to any
Pari Passu Securities shall be as set forth in the Article Third,
Section 2 filed in respect thereof.
X. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS
The Conversion Price shall be subject to adjustment from time
to time as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or
after the Closing Date, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, reclassification
or other similar event, the number of shares of Common Stock issuable
upon conversion of the Preferred Shares shall be proportionately
increased, or if the number of outstanding shares of Common Stock is
decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the number of shares of Common Stock
issuable upon conversion of the Preferred Shares shall be
proportionately reduced. In such event, the Company shall notify the
Company's transfer agent of such change on or before the effective date
thereof.
B. Major Transactions. If the Company shall consolidate with
or merge into any corporation, sell all or substantially all of its
assets, effectuate a transaction or series of transactions in which 50%
or more of the voting power of the Company is disposed of or reclassify
its outstanding shares of Common Stock (other than by way of
subdivision or reduction of such shares) (each a "Major Transaction"),
then each Holder shall thereafter be entitled to receive consideration,
in exchange for each share of Preferred Stock held by it, equal to the
greater of, as determined in the sole discretion of the Holders of at
least 50.1% of the outstanding shares of Preferred Stock: (i) the
number of shares of stock or securities or property of the Company, or
of the entity resulting from such consolidation or merger (the "Major
Transaction Consideration"), to which a Holder of the number of shares
of Common Stock delivered upon conversion of such shares of Preferred
Stock would have been entitled upon such Major Transaction (without
regard to any limitations on conversion herein contained) and had such
Common Stock been issued and outstanding and had such Holder been the
holder of record of such Common Stock at the time of such Major
Transaction, and the Company shall make lawful provision therefore as a
part of such consolidation, merger or reclassification; and (ii) the
Redemption Amount, in cash. No sooner than ten (10) days nor later than
five (5) days prior to the consummation of the Major Transaction, but
not prior to the public announcement of such Major Transaction, the
Company shall deliver written notice ("Notice of Major Transaction") to
each Holder, which Notice of Major Transaction shall be deemed to have
been delivered one (1) Business Day after the Company's sending such
notice by telecopy (provided that the Company sends a confirming copy
of such notice on the same day by overnight courier). Such Notice of
Major Transaction shall indicate the amount and type of the Major
Transaction Consideration which such Holder would receive under clause
(i) of this Article X(B). If the Major Transaction Consideration does
not consist entirely of United States dollars, the value of such other
property shall be determined by a reputable accounting firm selected by
the Company that is reasonably acceptable the Holders of a majority of
the outstanding shares of Preferred Stock.
C. Adjustment Due to Distribution. If at any time after the
Closing Date, the Company shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as
a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's
stockholders in cash or shares (or rights to acquire shares) of capital
stock of a subsidiary (i.e. a spin-off)) (a "Distribution"), then the
minimum Conversion Price per share shall be reduced by the value of
such Distribution per share. If the Distribution does not consist
entirely of U.S. Dollars, the value of such other property shall be
determined by a reputable accounting firms selected by the Company that
is reasonably acceptable to the Holders of a majority of the
outstanding shares of Preferred Stock.
D. Purchase Rights. If at any time after the Closing Date, the
Company issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata
to the record holders of any class of Common Stock, then the Holders
will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Preferred Stock (without
regard to any limitations on conversion or exercise herein or elsewhere
contained) immediately before the date on which a record is taken for
the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such
Purchase Rights.
E. Adjustment to Conversion Price. If at any time when
Preferred Stock is issued and outstanding, the number of outstanding
shares of Common Stock is increased or decreased by a stock split,
stock dividend, combination, reclassification, below-market price
rights offering to all holders of Common Stock or other similar event,
which event shall have taken place during the reference period for
determination of the Conversion Price for the Preferred Stock, then the
Conversion Price shall be calculated giving appropriate effect to the
stock split, stock dividend, combination, reclassification or other
similar event during the calculation period preceding the Conversion
Date. In such event, the Company shall notify the Transfer Agent of
such change on or before the effective date thereof.
F. Adjustment for Restricted Periods. If (i) the Company fails
to obtain effectiveness of the Registration Statement prior to ninety
(90) days following the Closing Date, or (ii) the Registration
Statement, once effective, lapses in effect, or sales cannot otherwise
be made thereunder, whether by reason of the Company's failure or
inability to amend or supplement the prospectus included therein
("Prospectus") in accordance with the Registration Rights Agreement or
otherwise, then the 20 trading days period ("Lookback Period") used for
determining the "Market Price" shall be extended to include (x) in the
case of an event described in clause (i), the 20 trading days
immediately preceding the 90th day following the Closing Date plus all
Trading Days through and including the date of effectiveness of the
Registration Statement, and (y) in the case of an event described in
clause (ii), the number of trading days preceding the date on which the
Holder is first notified that sales may not be made under the
Prospectus, which would otherwise then be included in the Lookback
Period plus all trading days through and including the date on which
the Holder is notified that sales may again be made under the
Prospectus. If a Holder of the Preferred Stock reasonably determines
that sales may not be made pursuant to the Prospectus, it shall notify
the Company in writing and, unless the Company provides Holder with an
opinion of Company's counsel to the contrary, such determination shall
be binding for purposes of this paragraph.
G. Adjustment to Conversion Price Upon Anniversary Date. If
the average of the Closing Bid Prices of the Common Stock over the
twenty (20) consecutive trading days immediately preceding the
Anniversary Date is greater than 130% of the Closing Price, then
beginning on the Anniversary Date, the Conversion Price will be reset
to 130% of the Closing Price. Additionally, beginning on the trading
day following the Anniversary Date, any conversions requested at a
Conversion Price of $6.50 per share or less will be completed at a
price per share equal to 110% of the Market Price; provided that the
limitation specified in this second sentence of this Section X(G) will
not apply, and will be of no further force and effect, if the Company
does not close a debt offering in an aggregate amount of $100,000,000
within sixty (60) business days of the original issuance date of the
Preferred Stock.
H. Adjustment to Conversion Price for Major Announcements. In
the event the Company (i) makes a public announcement that it intends
to consolidate or merge with any other corporation (other than a merger
in which the Company is the surviving or continuing corporation and its
capital stock is unchanged) or sell or transfer all or substantially
all of the assets of the Company or (ii) any person, group or entity
(including the Company) publicly announces a tender offer to purchase
50% or more of the Company's Common Stock or otherwise publicly
announces an intention to replace a majority of the corporation's Board
of Directors by waging a proxy battle or otherwise (the date of the
announcement referred to in clause (i) or (ii) is hereinafter referred
to as the "Announcement Date"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the
Adjusted Conversion Price Termination Date (as defined below), be equal
to the lower of (x) the Conversion Price which would have been
applicable for an Optional Conversion occurring on the Announcement
Date and (y) the Conversion Price that would otherwise be in effect.
From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in Article II. For
purposes hereof, "Adjusted Conversion Price Termination Date" shall
mean, with respect to any proposed transaction, tender offer or removal
of the majority of the Board of Directors which a public announcement
as contemplated by this Article X.H. has been made, the date upon which
the Company (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) consummates or publicly
announces the termination or abandonment of the proposed transaction or
tender offer which caused this Article X.H. to become operative.
Adjustment to Conversion Price for Major Announcements.
I. Notice of Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this
Section X, the Company, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each Holder a
certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is
based. The Company shall, upon the written request at any time of any
Holder, furnish to such Holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time
in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would
be received upon conversion of a share of Preferred Stock.
XI. VOTING RIGHTS
No Holder of the Preferred Stock shall be entitled to vote on
any matter submitted to the shareholders of the Company for their vote,
waiver, release or other action, except as may be otherwise expressly
required by law.
XII. PROTECTION PROVISIONS
So long as any Preferred Shares are outstanding, the Company
shall not, without first obtaining the approval of the Holders of
majority of the outstanding shares of Preferred Stock: (a) alter or
change the rights, preferences or privileges of the Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
capital stock of the Company so as to affect adversely the Preferred
Stock; (c) create any Senior Securities; (d) create any Pari Passu
Securities; (e) increase the authorized number of shares of Preferred
Stock; or (e) do any act or thing not authorized or contemplated by
this Article Third, Section 2 which would result in any taxation with
respect to the 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, (or
otherwise suffer to exist any such taxation as a result thereof).
XIII. MISCELLANEOUS
A. Lost or Stolen Certificates. Upon receipt by the Company of
(i) evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft
or destruction, of indemnity reasonably satisfactory to the Company, or
(z) in the case of mutilation, upon surrender and cancellation of the
Preferred Stock Certificate(s), the Company shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Company shall not be obligated to reissue such lost, stolen, destroyed
or mutilated Preferred Stock Certificate(s) if the Holder
contemporaneously requests the Company to convert such Preferred Stock.
B. Payment of Cash; Defaults. Whenever the Company is required
to make any cash payment to a Holder under this Article Third, Section
2 (as a Conversion Default Payment, Redemption Amount or otherwise),
such cash payment shall be made to the Holder by the method (by
certified or cashier's check or wire transfer of immediately available
funds) elected by such Holder. If such payment is not delivered when
due such Holder shall thereafter be entitled to interest on the unpaid
amount until such amount is paid in full to the Holder at a per annum
rate equal to the lower of (x) the sum of prime rate published from
time to time by the Wall Street Journal plus three percent (3%) and (y)
the highest interest rate permitted by applicable law.
C. Remedies, Characterizations, Other Obligations, Breaches
and Injunctive Relief. The remedies provided in this Article Third,
Section 2 shall be cumulative and in addition to all other remedies
available under this Article Third, Section 2, at law or in equity
(including a decree of specific performance and/or other injunctive
relief), no remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing
herein shall limit a Holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Article Third,
Section 2. Company covenants to each Holder that there shall be no
characterization concerning this instrument other than as expressly
provided herein; provided, however, that the Company shall be entitled
to prepare summaries of this Article Third, Section 2 for purposes of
complying with its disclosure obligations and in connection with bona
fide disputes as to the operations of the provisions of this Article
Third, Section 2.
D. Failure or Indulgency Not Waiver. No failure or delay on
the part of a Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
E. Notices. Any notice from a Holder to the Company hereunder
shall be given to the Company in accordance with Section 8(f) of the
Securities Purchase Agreement. Any notices from the Company to a Holder
shall be given to such Holder at such Holder's address as shown in the
stock register of the Company and otherwise in accordance with Section
8(f) of the Securities Purchase Agreement.
3. The rights and privileges of the Series C Convertible
Preferred Stock are as follows. All references to Articles and Sections
within this Article Third, Section 3 are solely to Articles and
Sections within this Article Third, Section 3.
I. DESIGNATION AND AMOUNT
The designation (this "Certificate of Designation") of this
series, which consists of 7,500 shares of Preferred Stock of SOFTNET
SYSTEMS, INC., a New York corporation (the "Company"), is the Series C
Convertible Preferred Stock (the "Series C Preferred Stock" or "Series
C Preferred Shares") and the face amount per share shall equal $1,000
(the "Face Amount").
II. CERTAIN DEFINITIONS
For purposes of this Article Third, Section 3, the following
terms shall have the following meanings:
"Anniversary Date" means the date that is 9 months following
the Closing Date.
"Business Day" means any day other than a Saturday, Sunday or
a day on which banks in New York, New York are permitted or required by
law to be closed.
"Closing Bid Price" means, for any security as of any date,
the closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as
reported by Bloomberg Financial Markets or a comparable reporting
service of national reputation selected by the Company and reasonably
acceptable to the Holders then holding a majority of the outstanding
shares of Series C Preferred Stock ("Majority Holders"), if Bloomberg
Financial Markets is not then reporting closing bid prices of such
security (collectively, "Bloomberg"), or if the foregoing does not
apply, the last reported sale price of such security in the
over-the-counter market on the electronic bulletin board of such
security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market
makers for such security that are listed in the "pink sheets" by the
National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the
fair market value as mutually determined by the Company and the
Majority Holders, or, if they are unable to agree on such value, it
shall be determined by an investment banking firm selected by the
Company and reasonably acceptable to the Majority Holders.
"Closing Date" means August 31, 1998.
Closing Price" means the Closing Bid Price of the Common Stock
on the Closing Date.
"Common Stock" means the common stock, $0.01 par value, of the
Company.
"Conversion Price", subject to the adjustments provided for in
Article X hereof, means (1) on and prior to the Anniversary Date, 120%
of the Closing Price and (2) beginning on the day following the
Anniversary Date, the lesser of (I) 120% of the Closing Price and (ii)
the Market Price at the time of conversion.
"Effective Date" means the date the Registration Statement
registering the resale of the shares of Common Stock into which the
Series C Preferred Shares are convertible is declared effective by the
Securities and Exchange Commission.
"Holders" means the initial Holders of the Series C Preferred
Stock and their permitted transferees.
"majority of the outstanding shares of Series C Preferred
Stock" means greater than 66.6% of the outstanding shares of Series C
Preferred Stock.
"Market Price" means the volume weighted average price of the
Common Stock over any five trading days, selected by the Holder, in the
30 trading days ending on the day prior to the Conversion Date.
"Registration Deadline" means the 90th day following the
Closing Date.
"Registration Statement" means a registration statement filed
with the Securities and Exchange Commission under the Securities Act of
1933, as amended.
"Securities Purchase Agreement" means the Securities Purchase
Agreement referencing this Article Third, Section 3, among the Company
and the purchasers named therein, as amended from time to time in
accordance with the terms thereof.
"Warrants" means certain stock purchase warrants to acquire
shares of Common Stock issued by the Company to the initial Holders in
connection with the transactions contemplated by the Securities
Purchase Agreement.
III. DIVIDENDS
A. General. Each Holder of the Series C Preferred Stock shall
be entitled to receive cumulative dividends at the rate of five percent
(5%) of the Face Amount per annum (the "Dividend") of the Series C
Preferred Stock held by such Holder commencing on the Closing Date and
continuing through the date that no shares of Series C Preferred Stock
are held by such Holder. Such cumulative Dividends shall be payable at
the end of each fiscal quarter of the Company in arrears in cash or
additional Series C Preferred Shares, at the Company's option; provided
however, that the Company's option to pay such Dividends in additional
Series C Preferred Shares shall be subject to and contingent upon the
effectiveness of a Registration Statement for the Common Shares
underlying the Series C Preferred Shares and Warrants, and provided
further that if the Maximum Share Amount is reached, the Company shall
be required to pay such Dividends in cash. Dividends on the Series C
Preferred Stock shall accrue and be cumulative on a daily basis from
the date payable (with appropriate proration for any partial dividend
period), whether or not earned and whether or not in any dividend
period there shall be surplus or net profits of the Company legally
available for the payment of such dividends. In no event, so long as
any Series C Preferred Stock shall remain outstanding, shall any
dividend whatsoever be declared or paid upon, nor shall any
distribution be made upon, any Junior Securities (as defined below),
nor shall any shares of Junior Securities be purchased or redeemed by
the Company nor shall any moneys be paid to or made available for a
sinking fund for the purchase or redemption of any Junior Securities,
without, in each such case, the written consent of the Holders of a
majority of the outstanding shares of Series C Preferred Stock, voting
together as a class.
B. Payment of Dividend in Series C Preferred Shares. Should
the Company elect to pay accrued but unpaid Dividends in additional
shares of Series C Preferred Stock, the number of Series C Preferred
Shares to which the Holder shall be entitled will be equal to the
aggregate cash value of such unpaid Dividends, divided by the Face
Amount.
IV. CONVERSION
A. Conversion at the Option of Holder. Subject to Article
V(B), beginning on the date of issuance of the Series C Preferred
Shares, each Holder may, at any time and from time to time, convert
each of its shares of Series C Preferred Stock into a number of fully
paid and nonassessable shares of Common Stock determined by dividing
the aggregate Face Amount of the Series C Preferred Shares being
converted (plus any other amounts payable thereon including, without
limitation, payments due under Section 2(c) of the Registration Rights
Agreement and Conversion Default Payments) by the then applicable
Conversion Price, subject to adjustment as provided in Article X;
provided, however, that, in no event shall a Holder of shares of Series
C Preferred Stock be entitled to convert any such shares to the extent,
but only to the extent, that (x) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares
of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the shares of Series C
Preferred Stock or unexercised portion of Warrants or any other
securities containing analogous limitations) plus (y) the number of
shares of Common Stock issuable upon the conversion of the shares of
Series C Preferred Stock with respect to which the determination of
this proviso is being made, would result in beneficial ownership by a
Holder and such Holder's affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Rules 13(d) through (g) thereunder, except
as otherwise provided in clause (x) of such proviso.
B. Mechanics of Conversion. To convert the Series C Preferred
Shares, a Holder shall: (i) fax (or deliver by other means resulting in
notice) to the Company a copy of the fully executed Notice of
Conversion in the form of Exhibit H to the Securities Purchase
Agreement, and (ii) surrender or cause to be surrendered to the Company
(or satisfy the provisions of Article XIII(A), if applicable) the
certificates representing the Series C Preferred Stock being converted
(the "Series C Preferred Stock Certificates") and the original executed
version of the Notice of Conversion as soon as practicable thereafter.
The date the Holder delivers to the Company the Notice of Conversion
described in clause (i) or such later date specified in the Notice of
Conversion shall be the "Conversion Date". In the case of fax or
messenger delivery, delivery shall be deemed made on the date of such
fax or messenger delivery. In the case of Federal Express, or other
overnight mail service, delivery shall be deemed made the day after the
Notice of Conversion is sent. In the case of U.S. Mail, delivery shall
be deemed to be five (5) days after the Notice of Conversion is
deposited in the U.S. Mail.
C. Timing of Conversion. No later than the third Business Day
following the Conversion Date (the "Delivery Date"), provided that the
Company has received prior to such date the Series C Preferred Stock
Certificates (or the Holder has satisfied the provisions of Article
XIII(A), if applicable), the Company shall issue and deliver to the
Holder (or otherwise at such Holder's direction) that number of shares
of Common Stock issuable upon conversion of the number of Series C
Preferred Shares being converted and, if applicable, a new certificate
representing the Series C Preferred Stock not converted by such Holder.
The person or persons entitled to receive shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares at the close of business on the
Conversion Date, unless the Notice of Conversion is revoked as provided
in Article IV(D). If the Series C Preferred Stock Certificates are not
received (or the provisions of Article XIII(A) are not satisfied) prior
to the Delivery Date, The Delivery Date shall be extended until the
Business Day following the date of surrender to the Company of Series C
Preferred Stock Certificates to be converted or satisfaction of the
provisions of Article XIII(A), if applicable.
D. Continuing Rights. In addition to any other remedies which
may be available to the Holder, in the event the Company fails for any
reason to effect delivery to the Holder of certificates representing
the shares of Common Stock receivable upon conversion of the Series C
Preferred Shares by the Business Day following the Delivery Date (which
certificates shall be unlegended as and when required pursuant to the
Securities Purchase Agreement, Registration Rights Agreement
referencing this Article Third, Section 3, by and among the Company and
the other signatories thereto (the "Registration Rights Agreement") and
this Article Third, Section 3), the Holder shall, unless the Holder
otherwise elects to retain its status as a holder of Common Stock by so
notifying the Company, regain the rights of a Holder with respect to
such unconverted shares of Series C Preferred Stock and the Company
shall immediately return the subject Series C Preferred Stock
certificates and other conversion documents, if any, delivered by
Holder, to the Holder, or, if shares of Series C Preferred Stock have
not been surrendered, adjust its records to reflect that such shares of
Series C Preferred Stock have not been converted; provided, however,
that the Company shall remain liable for payment of the amounts
determined pursuant to Article VI(A) hereof for each day falling
between the trading day following the Delivery Date and the date of the
revocation notice is received by the Company, and shall also remain
liable for any damages suffered by Holder.
E. Stamp, Documentary and Other Similar Taxes. The Company
shall pay all stamp, documentary, issuance and other similar taxes
which may be imposed with respect to the issuance and delivery of the
shares of Common Stock pursuant to conversion of the Series C Preferred
Stock; provided that the Company will not be obligated to pay stamp,
transfer or other taxes resulting from the issuance of Common Stock to
any person other than the registered holder of the Series C Preferred
Stock.
F. No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the conversion of Series C Preferred Stock, but
the Company shall make a cash payment equal to such fraction multiplied
by the last sale price of the Common Stock in respect of any fractional
share which would otherwise be issuable; provided that in the event
that sufficient funds are not legally available for the payment of such
cash adjustment any fractional shares of Common Stock shall be rounded
up to the next whole number.
G. Electronic Transmission. In lieu of delivering physical
certificates representing the Common Stock issuable upon conversion,
provided the Company's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer
program, upon request of a Holder the Company shall use its best
efforts to cause its transfer agent to electronically transmit the
Common Stock issuable upon conversion to the Holder by crediting the
account of Holder's prime broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. In the case of electronic
transmission of such Common Stock, the Company shall, if applicable,
within three (3) Business Days issue a new certificate representing the
Series C Preferred Stock not converted pursuant to any Notice of
Conversion.
V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK;
LIMITATION ON NUMBER OF CONVERSION SHARES
A. Reservation of Common Stock. Subject to the provisions of
this Article V, the Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock a
sufficient number of shares of Common Stock to provide for the
conversion of all outstanding Series C Preferred Shares upon issuance
of shares of Common Stock and the exercise of all Warrants (at the then
current Conversion Price or Exercise Price) in accordance with Section
4(g) of the Securities Purchase Agreement (the "Reserved Amount"). The
Reserved Amount shall be increased from time to time in accordance with
the Company's obligations pursuant to Section 4(g) of the Securities
Purchase Agreement. In addition, if the Company shall issue any
securities or make any change in its capital structure which would
change the number of shares of Common Stock into which each share of
the Series C Preferred Stock shall be convertible at the then current
Conversion Price, the Company shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of
shares of Common Stock authorized and reserved, free from preemptive
rights, for conversion of the outstanding Series C Preferred Stock.
B. Limitation on Number of Common Shares to be Issued. (i)
Notwithstanding anything to the contrary contained herein, if, at any
time, the aggregate number of shares of Common Stock then issued upon
conversion of the Series C Preferred Stock equals 19.99% of the
outstanding Common Stock on the Closing Date, subject to adjustments
for stock dividends, stock splits, combinations or similar events, the
Series C Preferred Stock shall, from that time forward, cease to be
convertible into Common Stock in accordance with the terms of Article
IV, unless the Company (x) has obtained approval of the issuance of the
Series C Preferred Stock by a majority of the total votes eligible to
be cast on such proposal, in person or by proxy, by the holders of the
then-outstanding Common Stock (the "Stockholder Approval"), (y) shall
have otherwise obtained permission to allow such issuances from the
American Stock Exchange or such other principal exchange upon which the
Common Stock is then trading (the "Common Stock Exchange"); or (z) is
no longer governed by a rule promulgated by a stock exchange, Nasdaq or
other applicable body prohibiting the issuance of Common Stock upon
conversion of the Series C Preferred Stock in excess of 19.99% of the
outstanding Common Stock without shareholder approval. The maximum
number of shares of Common Stock issuable as a result of the limitation
set forth in the first sentence of this Article V(B) is hereinafter
referred to as the "Maximum Share Amount." With respect to each Holder
of Series C Preferred Stock, the Maximum Share Amount shall refer to
such Holder's pro rata share thereof determined in accordance with
Article X below. Notwithstanding anything in this Article Third,
Section 3 to the contrary, for purposes of determining the aggregate
number of shares of Common Stock issuable upon conversion of the Series
C Preferred Stock, if the issuance of Common Stock hereunder is
aggregated with the issuance of Common Stock in conversion of the
Series A Convertible Preferred Stock and/or the Series B Convertible
Preferred Stock (collectively, the "Other Series") pursuant to the
regulations of the American Stock Exchange, the shares of Common Stock
issuable upon conversion of the Other Series shall be aggregated with
the shares of Common Stock issuable in conversion of the Series C
Preferred Stock in determining the Maximum Share Amount. The Company
will use its best efforts to seek and obtain Stockholder Approval (or
obtain such other relief as will allow conversions hereunder in excess
of the Maximum Share Amount) no later than 120 days following the
Closing Date. In the event that the Company obtains Stockholder
Approval, the approval of the Common Stock Exchange or otherwise
concludes that it is able to increase the number of shares to be issued
above the Maximum Share Amount (such increased number being the "New
Maximum Share Amount"), the references to Maximum Share Amount, above,
shall be deemed to be instead, references to the greater New Maximum
Share Amount. In the event that Stockholder Approval is obtained, but
there are insufficient reserved or authorized shares or a registration
statement covering the additional shares of Common Stock which
constitute the New Maximum Share Amount is not effective prior to the
Maximum Share Amount being issued (if such registration statement is
necessary to allow for the public resale of such securities), the
Maximum Share Amount shall remain unchanged; provided, however, that
the Holder may grant an extension to obtain a sufficient reserved or
authorized amount of shares or of the period for obtaining
effectiveness of such registration statement. Notwithstanding anything
in this Article V(B)(i) to the contrary, and subject to Article
V(B)(ii) below, the Company shall only be required to issue a number of
shares of Common Stock upon conversion of the Series C Preferred Stock
equal to (p) the original aggregate Face Amount of all Series C
Preferred Stock issued on the Closing Date divided by (q) 50% of the
Closing Price (exclusive of any shares of Common Stock issuable upon
conversion of the Other Series), subject to adjustments for stock
dividends, stock splits, combinations or similar events (the "Maximum
Share Amount Cap").
(ii) Notwithstanding anything in this Article Third,
Section 3 to the contrary, in the event the Maximum Share Amount is
reached as a result of conversions of the Series C Preferred Stock or
any Other Series, the Company shall honor any request for conversion of
the Series C with a payment in cash equal to the number of shares of
Common Stock that would have otherwise been issued upon such conversion
multiplied by the five day average Closing Bid Price of the Common
Stock on the date of delivery of the Conversion Notice; provided that,
no such payment shall be made in the event the Maximum Share Amount Cap
is reached. Any cash payment made pursuant to this paragraph shall be
counted toward the Maximum Share Amount Cap as if such conversion was
effected by the issuance of shares of Common Stock. If the Maximum
Share Amount Cap is reached the Company must within ten (10) business
days either (x) provide irrevocable notice to the Company that it will
redeem all of the outstanding shares of Series C Preferred Stock at the
Face Amount thereof plus any accrued and unpaid dividends and other
payments thereon as provided by Article VII(C)(ii), and so redeem the
Series C Preferred Stock within one hundred eighty (180) days following
such notice, or (y) so long as the Stockholder Approval has been
obtained, provide irrevocable notice to the Holders that the Company
will honor Notices of Conversion that will result in the issuance of
shares of Common Stock in excess of the Maximum Share Amount Cap, and
thereafter honor such conversions without reference to the Maximum
Share Amount Cap or (z) if Shareholder Approval has not been obtained
within 120 days of the issuance of the Series C Preferred Stock,
provide irrevocable notice to the Holders that the Company will honor
Notice of Conversion in excess of the Maximum Share Amount Cap if such
conversions do not violate the rules and regulations of the applicable
stock exchange or quotation system on which the Common Stock is then
traded (but only to the extent such rules or regulations would not be
violated); provided, however, that for purposes of this clause (z), in
the event the Maximum Share Amount is reached, the Company will redeem
the Series C Preferred Stock in accordance with Article (V)(B)(ii)(x)
above.
C. Allocation of Reserved Amount, Maximum Share Amount. The
Reserved Amount and the Maximum Share Amount shall be allocated among
the initial Holders according to the number of Series C Preferred
Shares issued to each such Holder on the Closing Date. Any Common
Shares which were initially allocated to any Holder remaining after
such Holder no longer owns any Series C Preferred Shares shall be
allocated among the remaining Holders pro rata, based on the number of
Series C Preferred Shares then held by such Holders.
VI. FAILURE TO CONVERT
A. If, at any time, (x) a Notice of Conversion has been sent
to the Company and the Company fails for any reason to deliver, on or
prior to the third Business Day following the expiration of the
Delivery Date for such conversion (said period of time being the
"Extended Delivery Period"), such number of shares of Common Stock to
which such Holder is entitled (taking into account the limitations on
conversions imposed by such Holder's allocated portion of the Maximum
Share Amount) upon such conversion, or (y) the Company provides notice
(including by way of public announcement) (the "Refusal Notice") to any
Holder at any time of its intention not to issue shares of Common Stock
upon exercise by any Holder of its conversion rights in accordance with
the terms of this Article Third, Section 3 (each of (x) and (y) being a
"Conversion Default"), then the Company shall pay to the affected
Holder, in the case of a Conversion Default described in clause (x)
above, and to all Holders, in the case of a Conversion Default
described in clause (y) above, an amount equal to 1% of the Face Amount
of the Series C Preferred Stock held by such Holder with respect to
which the Conversion Default exists (which amount shall be deemed to be
the aggregate Face Amount of all outstanding Series C Preferred Stock
in the case of a Conversion Default described in clause (y) above) for
each day thereafter until the Cure Date. "Cure Date" means (i) with
respect to a Conversion Default described in clause (x) of its
definition or if a Conversion Notice has been submitted and the Company
has issued a Refusal Notice, the date the Company effects the
conversion of the portion of the Series C Preferred Stock submitted for
conversion and (ii) if no Conversion Notices have been submitted, with
respect to a Conversion Default described in clause (y) of its
definition, the date the Company undertakes in writing to issue Common
Stock in satisfaction of all conversions of Series C Preferred Stock in
accordance with the terms of this Article Third, Section 3. The Company
shall promptly provide each Holder with notice of the occurrence of a
Conversion Default with respect to any of the other Holders.
The payments to which a Holder shall be entitled pursuant to
this Section VI(A) are referred to herein as "Conversion Default
Payments." Conversion Default Payments shall be paid in cash. Such
payment shall be made in accordance with and be subject to the
provisions of Article XIII(B).
VII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption Events. A "Redemption Event" means any one of
the following (after expiration of any applicable cure period):
(i) the Company fails, and any such failure continues
uncured for seven (7) Business Days after the Company has been notified
thereof in writing by the Holder, to (x) remove any restrictive legend
on any certificate for any shares of Common Stock issued after the
Effective Date to the Holders upon conversion of the Series C Preferred
Stock or upon exercise of the Warrants, or (y) to transfer or cause its
transfer agent to transfer any certificate for shares of Common Stock
issued to a Holder upon conversion of the Series C Preferred Stock, in
each case as and when required by this Article Third, Section 3, the
Warrants, the Securities Purchase Agreement or the Registration Rights
Agreement; or
(ii) the Company fails to fulfill it obligations
pursuant to Sections 4(c), 4(g), 4(i) or 5 of the Purchase Agreement
(or makes any announcement, statement or threat that it does not intend
to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or
threat not to honor its obligations hall not be rescinded in writing)
for ten (10) days after the Corporation shall have been notified
thereof in writing by any holder of Series C Preferred Stock; or
(iii) the Company fails to make any payment
due pursuant to Article VII(C) when due; or
(iv) the Company fails to fulfill any of its
obligations pursuant to the Registration Rights Agreement (or makes any
statement that it does not intend to honor such obligations) and any
such failure shall continue uncured (or any statement not to honor its
obligations shall not be rescinded) for ten (10) business days; or
(v) the Company (x) fails to cause the Registration
Statement to be declared effective on or before the date that is one
hundred eighty (180) days following the Closing Date, or (y) such
Registration Statement lapses in effect (or sales cannot be made by the
Holders thereunder, whether by reason of the Company's failure to amend
or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more then forty-five
(45) consecutive days or seventy-five (75) days in any twelve (12)
month period after such Registration Statement becomes effective, or
(z) the Common Stock is not listed or included for quotation on the
Nasdaq, NYSE, AMEX or that trading is halted after the Registration
Statement has been declared effective for more than an aggregate of
twenty (20) trading days or more in any twelve (12) month period.
B. Redemption of Holder's Shares. Upon the occurrence and
during the continuation of any Redemption Event, the Company shall, as
to each Holder of the then outstanding shares of Series C Preferred
Stock who have given written notice (the "Optional Redemption Notice")
to the Company of such Redemption Event, purchase each such Holder's
shares of Series C Preferred Stock for an amount per share equal to the
greater of (1) 120% multiplied by the sum of (a) the Face Amount of the
shares to be redeemed, plus (b) accrued and unpaid dividends and any
other amounts payable thereon (including without limitation payments
due under Section 2 of the Registration Rights Agreement and Conversion
Default Payments) through the date of payment of the Optional
Redemption Amount (as defined herein) (the "Optional Redemption Date")
and (2) the "Parity Value" of the shares to be redeemed (the greater of
such amounts being the "Optional Redemption Amount"); provided that if
such Redemption Event is pursuant to Article VII(A)(iv), the Company
may, at its sole option, in lieu of the foregoing purchase, pay the
Holder an amount equal to the Default Amount (as defined below)
multiplied by the number of shares of Series C Preferred Stock held by
such holder on the date of the Optional Redemption Notice. "Parity
Value" means the product of (a) the highest number of shares of Common
Stock issuable upon conversion of such shares at such time (treating
the Trading Day immediately preceding the Optional Redemption Date as
the "Conversion Date" (as hereinafter defined), unless the Redemption
Event arises as a result of a breach in respect of a specific
Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest closing sale price for
the Common Stock on the principal trading market for such shares during
the period beginning on the date of first occurrence of the Redemption
Event and ending on such "Conversion Date." "Default Amount" shall mean
Fifty U.S. Dollars ($50).
In the case of a Redemption Event, if the Company fails to pay
the Default Amount or the Optional Redemption Amount, as applicable,
for each share within five (5) business days of written notice that
such amount is due and payable, then (assuming there are sufficient
authorized shares) in addition to all other available remedies, each
holder of Series C Preferred Stock shall have the right at any time, so
long as the Redemption Event continues, to require the Company, upon
written notice, to immediately issue (in accordance with and subject to
the terms of Article V above), in lieu of the Default Amount or the
Optional Redemption Amount, as applicable, with respect to each
outstanding share of Series C Preferred Stock held by such holder, the
number of shares of Common Stock of the Company equal to the Default
Amount or the Optional Redemption Amount, as applicable, divided by any
Conversion Price, as chosen in the sole discretion of the Holder, in
effect from the date of the Redemption Event until the date such Holder
elects to exercise its rights pursuant to this paragraph. Payment of
the Default Amount shall not affect the holders ongoing rights with
respect to the then outstanding shares of Series C Preferred Stock or
the rights of such holders to pursue alternate damages in respect of
the events giving rise to such payments.
C. Redemption of Holder's Shares. Upon the occurrence and
during the Optional Redemption by the Company. So long as (i) all of
the shares of Common Stock issuable upon conversion of all outstanding
shares of Series C Preferred Stock, for a period of twenty (20) days
prior to the date of delivery of any written notice of redemption
pursuant to the Article VII(C), are then (x) authorized and reserved
for issuance, (y) registered for re-sale under the 1933 Act by the
Holders (or may otherwise be resold publicly without restriction);
provided, however, that this clause (y) shall not apply to any
redemption made with the proceeds from a Qualified Offering (as
defined), and (z) eligible to be traded on Nasdaq, the NYSE, the AMEX
or Nasdaq SmallCap and (ii) there is not then a continuing Redemption
Event in effect the Company may, at its option, upon twenty (20)
Business Days' irrevocable written notice, redeem the Series C
Preferred Stock, as follows:
(i) Beginning upon the earlier to occur of (a) the
date that the Company completes an underwritten public offering of its
Common Stock or Rule 144A offering to "qualified institutional buyers"
and "accredited institutional investors" in an amount of at least
$10,000,000 (a "Qualified Offering"), or (b) the date that is eighteen
months following the Closing Date, the Company may, at its option,
redeem for cash out of funds legally available therefor, all (but not
less than all) of the outstanding Series C Preferred Shares at 110% of
the Face Amount of the Series C Preferred Shares during the first 12
months following issuance, and thereafter 120% of the Face Amount of
the Series C Preferred Shares, in each case plus accrued and unpaid
dividends, if any, and any other amounts payable thereon.
(ii) Beginning on the date any Holder reaches such
Holder's Maximum Share Amount, the Company may, at its option, redeem
for cash out of funds legally available therefor, all (but not less
than all) of the outstanding shares of Series C Preferred Stock held by
the Holder who has reached its Maximum Share Amount at a price per
share equal to 100% of the Face Amount such shares of Series C
Preferred Stock plus accrued and unpaid dividends, if any, and any
other amounts payable thereon.
Nothing in this Article VII(C) shall prohibit conversions of
Series C Preferred Stock otherwise permitted pursuant to the terms of
this Article Third, Section 3 during the pendency of any notice of
optional redemption by the Company hereunder.
D. Maturity; Required Redemption. Subject to the limitations
contained in Article VII(F) and so long as there is not then a
continuing Redemption Event, hereof each share of Series C Preferred
Stock outstanding on the third anniversary of the Closing Date (the
"Maturity Date") will be redeemed at the Company's sole option, (a) so
long as the Company has provided the Holders ten (10) business days
prior written notice of its election to pay cash on the Maturity Date,
in cash equal to the aggregate face value thereof plus accrued and
unpaid dividends, if any, and any other amounts payable thereon or, (b)
by delivery of a number of shares of Common Stock issuable upon
conversion of all of the Series C Preferred Stock at the lesser of the
then-applicable Conversion Price and the five trading day average
closing bid price on the Maturity Date, including any adjustment under
Article X; provided that (i) any necessary approval for the issuance of
additional shares has been obtained if the Maximum Share Amount has
been reached (or will be exceeded as a result of any conversion at
maturity), and (ii) all shares of Common Stock issuable upon conversion
of all outstanding shares of Series C Preferred Stock are then (x)
authorized and reserved for issuance, (y) registered under the
Securities Act for resale by all Holders of such Series C Preferred
Shares and (z) eligible to be traded on either the Nasdaq, Nasdaq Small
Cap Market, the New York Stock Exchange or the American Stock Exchange.
The Maturity Date shall be delayed by one (1) Trading Day each for each
Trading Day occurring prior thereto and prior to the full conversion of
the Series C Preferred Stock that (i) sales cannot be made pursuant to
the Registration Statement (whether by reason of the Company's failure
to properly supplement or amend the prospectus included therein in
accordance with the terms of the Registration Rights Agreement or
otherwise), (ii) any Redemption Event (as defined in Article V.A)
exists, without regard to whether any cure periods shall have run or
(iii) that the Company is in breach of any of its obligations pursuant
to Section 4(g) of the Purchase Agreement.
E. Redemption Defaults. If the Company fails to pay any Holder
the redemption consideration with respect to any share of Series C
Preferred Stock, as provided in this Article VII, within five (5)
Business Days of its receipt or delivery, as applicable, of a notice
requiring such redemption (the "Redemption Notice"), then each Holder
(i) shall be entitled to interest on the redemption consideration not
paid at a per annum rate equal to the lower of (x) the sum of prime
rate published from time to time by the Wall Street Journal plus three
percent (3%) and (y) the highest interest rate permitted by applicable
law from the date of the Redemption Notice until the date of redemption
hereunder. In the event the Company is not able to redeem all of the
shares of Series C Preferred Stock subject to Redemption Notices, the
Company shall redeem shares of Series C Preferred Stock from each
Holder, pro rata, based on the total number of shares of Series C
Preferred Stock included in the Redemption Notice relative to the total
number of shares of Series C Preferred Stock in all of the Redemption
Notices. In the case of a Redemption Event, if the Company fails to pay
the Optional Redemption Amount for each share for any reason
(including, without limitation, the circumstances specified in
paragraph VII(F)), within five (5) Business Days of the applicable
Redemption Notice then (assuming there are sufficient authorized
shares) in addition to all other available remedies, each Holder of
Series C Preferred Stock shall have the right at any time, so long as
the Redemption Event continues, to convert, upon written notice, in
lieu of the Redemption Amount, each outstanding share of Series C
Preferred Stock held by such Holder, into the number of shares of
Common Stock of the Company equal to the Redemption Amount, divided by
the Conversion Price then in effect, subject in all cases to each such
Holder's Maximum Share Amount.
F. Capital Impairment. In the event that any section of the
New York General Business Corporation Law ("BCL"), would be violated by
the redemption of any shares of Series C Preferred Stock that are
otherwise subject to redemption pursuant to this Article VII, the
Company: (i) will redeem the greatest number of shares of Series C
Preferred Stock possible without violation of said Article; (ii) the
Company thereafter shall use its best efforts to take all necessary
steps permitted pursuant to this Article Third, Section 3 and the
agreements entered into in connection with the issuance of Series C
Preferred Stock pursuant hereto in order to remedy its capital
structure in order to allow further redemptions without violation of
said Article; and (iii) from time to time thereafter as promptly as
possible the Company shall redeem shares of Series C Preferred Stock at
the request of the Holders to the greatest extent possible without
causing a violation of the BCL.
VIII. RANK; PARTICIPATION
A. Rank. All shares of the Series C Preferred Stock shall rank
(i) prior to the Common Stock; (ii) prior to any class or series of
capital stock of the Company hereafter created (unless, with the
consent of the Holders of a majority of the outstanding shares of
Series C Preferred Stock obtained in accordance with Article XII
hereof, such class or series of capital stock specifically, by its
terms, ranks senior to or pari passu with the Series C Preferred Stock)
(collectively, with the Common Stock, "Junior Securities"); (iii) pari
passu with the Other Series, and any class or series of capital stock
of the Company hereafter created (with the consent of the Holders of a
majority of the outstanding shares of Series C Preferred Stock obtained
in accordance with Article XII hereof, if required) specifically
ranking, by its terms, on parity with the Series C Preferred Stock (the
"Pari Passu Securities"); and (iv) junior to any class or series of
capital stock of the Company hereafter created (with the consent of the
Holders of a majority of the outstanding shares of Series C Preferred
Stock obtained in accordance with Article XII hereof) specifically
ranking, by its terms, senior to the Series C Preferred Stock (the
"Senior Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary.
B. Participation. Subject to the rights of the Holders (if
any) of Pari Passu Securities and Senior Securities, the Holders shall,
as such Holders, be entitled to such dividends paid and distributions
made to the Holders of Common Stock to the same extent as if such
Holders had converted their shares of Series C Preferred Stock into
Common Stock (without regard to any limitations on conversion herein or
elsewhere contained) and had been issued such Common Stock on the day
before the record date for said dividend or distribution. Payments
under the preceding sentence shall be made concurrently with the
dividend or distribution to the Holders of Common Stock.
IX. LIQUIDATION PREFERENCE
A. Liquidation of the Company. If the Company shall commence a
voluntary case under the U.S. Federal bankruptcy laws or any other
applicable 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 Company 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 Company shall be entered by a court having
jurisdiction in the premises in an involuntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency
or similar law resulting in the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official)
of the Company or of any substantial part of its property, or ordering
the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60)
consecutive days and, on account of any such event, the Company shall
liquidate, dissolve or wind up, or if the Company shall otherwise
liquidate, dissolve or wind up (a "Liquidation Event"), no distribution
shall be made to the Holders of any shares of capital stock of the
Company (other than Senior Securities and, together with the Holders of
Series C Preferred Stock the Pari Passu Securities) upon liquidation,
dissolution or winding up unless prior thereto the Holders shall have
received the Liquidation Preference (as herein defined) with respect to
each Series C Preferred Share. If, upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the
Holders 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 Company legally
available for distribution to the Series C 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. Certain Acts Not a Liquidation. The purchase or redemption
by the Company of stock of any class, in any manner permitted by law,
shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or
merger of the Company with or into any other entity nor the sale or
transfer by the Company of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation,
dissolution or winding up of the Company.
C. Definition of Liquidation Preference. The "Liquidation
Preference" with respect to a share of Series C Preferred Stock means
an amount equal to the Face Amount thereof plus any other amounts that
may be due from the Company with respect thereto, including any accrued
and unpaid dividends, pursuant to this Article Third, Section 3 or the
Registration Rights Agreement through the date of final distribution.
The Liquidation Preference with respect to any Pari Passu Securities
shall be as set forth in the Article Third, Section 3 filed in respect
thereof.
X. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS
The Conversion Price shall be subject to adjustment from time
to time as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or
after the Closing Date, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, reclassification
or other similar event, the number of shares of Common Stock issuable
upon conversion of the Series C Preferred Shares shall be
proportionately increased, or if the number of outstanding shares of
Common Stock is decreased by a reverse stock split, combination or
reclassification of shares, or other similar event, the number of
shares of Common Stock issuable upon conversion of the Series C
Preferred Shares shall be proportionately reduced. In such event, the
Company shall notify the Company's transfer agent of such change on or
before the effective date thereof.
B. Major Transactions. If the Company shall consolidate with
or merge into any corporation, sell all or substantially all of its
assets, effectuate a transaction or series of transactions in which 50%
or more of the voting power of the Company is disposed of or reclassify
its outstanding shares of Common Stock (other than by way of
subdivision or reduction of such shares) (each a "Major Transaction"),
then each Holder shall thereafter be entitled to receive consideration,
in exchange for each share of Series C Preferred Stock held by it,
equal to the greater of, as determined in the sole discretion of the
Holders of at least 50.1% of the outstanding shares of Series C
Preferred Stock: (i) the number of shares of stock or securities or
property of the Company, or of the entity resulting from such
consolidation or merger (the "Major Transaction Consideration"), to
which a Holder of the number of shares of Common Stock delivered upon
conversion of such shares of Series C Preferred Stock would have been
entitled upon such Major Transaction (without regard to any limitations
on conversion herein contained) and had such Common Stock been issued
and outstanding and had such Holder been the holder of record of such
Common Stock at the time of such Major Transaction, and the Company
shall make lawful provision therefore as a part of such consolidation,
merger or reclassification; and (ii) the Redemption Amount, in cash. No
sooner than ten (10) days nor later than five (5) days prior to the
consummation of the Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver
written notice ("Notice of Major Transaction") to each Holder, which
Notice of Major Transaction shall be deemed to have been delivered one
(1) Business Day after the Company's sending such notice by telecopy
(provided that the Company sends a confirming copy of such notice on
the same day by overnight courier). Such Notice of Major Transaction
shall indicate the amount and type of the Major Transaction
Consideration which such Holder would receive under clause (i) of this
Article X(B). If the Major Transaction Consideration does not consist
entirely of United States dollars, the value of such other property
shall be determined by a reputable accounting firm selected by the
Company that is reasonably acceptable the Holders of a majority of the
outstanding shares of Series C Preferred Stock.
C. Adjustment Due to Distribution. If at any time after the
Closing Date, the Company shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as
a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's
stockholders in cash or shares (or rights to acquire shares) of capital
stock of a subsidiary (i.e. a spin-off)) (a "Distribution"), then the
minimum Conversion Price per share shall be reduced by the value of
such Distribution per share. If the Distribution does not consist
entirely of U.S. Dollars, the value of such other property shall be
determined by a reputable accounting firms selected by the Company that
is reasonably acceptable to the Holders of a majority of the
outstanding shares of Series C Preferred Stock.
D. Purchase Rights. If at any time after the Closing Date, the
Company issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata
to the record holders of any class of Common Stock, then the Holders
will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Series C Preferred Stock
(without regard to any limitations on conversion or exercise herein or
elsewhere contained) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.
E. Adjustment to Conversion Price. If at any time when Series
C Preferred Stock is issued and outstanding, the number of outstanding
shares of Common Stock is increased or decreased by a stock split,
stock dividend, combination, reclassification, below-market price
rights offering to all holders of Common Stock or other similar event,
which event shall have taken place during the reference period for
determination of the Conversion Price for the Series C Preferred Stock,
then the Conversion Price shall be calculated giving appropriate effect
to the stock split, stock dividend, combination, reclassification or
other similar event during the calculation period preceding the
Conversion Date. In such event, the Company shall notify the Transfer
Agent of such change on or before the effective date thereof.
F. Adjustment for Restricted Periods. If (i) the Company fails
to obtain effectiveness of the Registration Statement prior to ninety
(90) days following the Closing Date, or (ii) the Registration
Statement, once effective, lapses in effect, or sales cannot otherwise
be made thereunder, whether by reason of the Company's failure or
inability to amend or supplement the prospectus included therein
("Prospectus") in accordance with the Registration Rights Agreement or
otherwise, then the 20 trading days period ("Lookback Period") used for
determining the "Market Price" shall be extended to include (x) in the
case of an event described in clause (i), the 20 trading days
immediately preceding the 90th day following the Closing Date plus all
Trading Days through and including the date of effectiveness of the
Registration Statement, and (y) in the case of an event described in
clause (ii), the number of trading days preceding the date on which the
Holder is first notified that sales may not be made under the
Prospectus, which would otherwise then be included in the Lookback
Period plus all trading days through and including the date on which
the Holder is notified that sales may again be made under the
Prospectus. If a Holder of the Series C Preferred Stock reasonably
determines that sales may not be made pursuant to the Prospectus, it
shall notify the Company in writing and, unless the Company provides
Holder with an opinion of Company's counsel to the contrary, such
determination shall be binding for purposes of this paragraph.
G. Adjustment to Conversion Price Upon Anniversary Date. If
the average of the Closing Bid Prices of the Common Stock over the
twenty (20) consecutive trading days immediately preceding the
Anniversary Date is greater than 130% of the Closing Price, then
beginning on the Anniversary Date, the Conversion Price will be reset
to 130% of the Closing Price.
H. Adjustment to Conversion Price for Major Announcements. In
the event the Company (i) makes a public announcement that it intends
to consolidate or merge with any other corporation (other than a merger
in which the Company is the surviving or continuing corporation and its
capital stock is unchanged) or sell or transfer all or substantially
all of the assets of the Company or (ii) any person, group or entity
(including the Company) publicly announces a tender offer to purchase
50% or more of the Company's Common Stock or otherwise publicly
announces an intention to replace a majority of the corporation's Board
of Directors by waging a proxy battle or otherwise (the date of the
announcement referred to in clause (i) or (ii) is hereinafter referred
to as the "Announcement Date"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the
Adjusted Conversion Price Termination Date (as defined below), be equal
to the lower of (x) the Conversion Price which would have been
applicable for an Optional Conversion occurring on the Announcement
Date and (y) the Conversion Price that would otherwise be in effect.
From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in Article II. For
purposes hereof, "Adjusted Conversion Price Termination Date" shall
mean, with respect to any proposed transaction, tender offer or removal
of the majority of the Board of Directors which a public announcement
as contemplated by this Article X.H. has been made, the date upon which
the Company (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) consummates or publicly
announces the termination or abandonment of the proposed transaction or
tender offer which caused this Article X.H. to become operative.
Adjustment to Conversion Price for Major Announcements.
I. Notice of Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this
Section X, the Company, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to each Holder a
certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is
based. The Company shall, upon the written request at any time of any
Holder, furnish to such Holder a like certificate setting forth (I)
such adjustment or readjustment, (ii) the Conversion Price at the time
in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would
be received upon conversion of a share of Series C Preferred Stock.
XI. VOTING RIGHTS
No Holder of the Series C Preferred Stock shall be entitled to
vote on any matter submitted to the shareholders of the Company for
their vote, waiver, release or other action, except as may be otherwise
expressly required by law.
XII. PROTECTION PROVISIONS
So long as any Series C Preferred Shares are outstanding, the
Company shall not, without first obtaining the approval of the Holders
of majority of the outstanding shares of Series C Preferred Stock: (a)
alter or change the rights, preferences or privileges of the Series C
Preferred Stock; (b) alter or change the rights, preferences or
privileges of any capital stock of the Company so as to affect
adversely the Series C Preferred Stock; (c) create or issue any Senior
Securities; (d) create or issue any Pari Passu Securities (except for
Pari Passu Securities that are convertible preferred securities with a
fixed conversion price at a premium to the market price of the Common
Stock at the date of issuance), (e) increase the authorized number of
shares of Series C Preferred Stock; (f) increase the par value of the
Common Stock; or (g) do any act or thing not authorized or contemplated
by this Article Third, Section 3 which would result in any taxation
with respect to the Series C Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended, or any comparable provision
of the Internal Revenue Code as hereafter from time to time amended,
(or otherwise suffer to exist any such taxation as a result thereof).
XIII. MISCELLANEOUS
A. Lost or Stolen Certificates. Upon receipt by the Company of
(i) evidence of the loss, theft, destruction or mutilation of any
Series C Preferred Stock Certificate(s) and (ii) (y) in the case of
loss, theft or destruction, of indemnity reasonably satisfactory to the
Company, or (z) in the case of mutilation, upon surrender and
cancellation of the Series C Preferred Stock Certificate(s), the
Company shall execute and deliver new Series C Preferred Stock
Certificate(s) of like tenor and date. However, the Company shall not
be obligated to reissue such lost, stolen, destroyed or mutilated
Series C Preferred Stock Certificate(s) if the Holder contemporaneously
requests the Company to convert such Series C Preferred Stock.
B. Payment of Cash; Defaults. Whenever the Company is required
to make any cash payment to a Holder under this Article Third, Section
3 (as a Conversion Default Payment, Redemption Amount or otherwise),
such cash payment shall be made to the Holder by the method (by
certified or cashier's check or wire transfer of immediately available
funds) elected by such Holder. If such payment is not delivered when
due such Holder shall thereafter be entitled to interest on the unpaid
amount until such amount is paid in full to the Holder at a per annum
rate equal to the lower of (x) the sum of prime rate published from
time to time by the Wall Street Journal plus three percent (3%) and (y)
the highest interest rate permitted by applicable law.
C. Remedies, Characterizations, Other Obligations, Breaches
and Injunctive Relief. The remedies provided in this Article Third,
Section 3 shall be cumulative and in addition to all other remedies
available under this Article Third, Section 3, at law or in equity
(including a decree of specific performance and/or other injunctive
relief), no remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing
herein shall limit a Holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Article Third,
Section 3. Company covenants to each Holder that there shall be no
characterization concerning this instrument other than as expressly
provided herein; provided, however, that the Company shall be entitled
to prepare summaries of this Article Third, Section 3 for purposes of
complying with its disclosure obligations and in connection with bona
fide disputes as to the operations of the provisions of this Article
Third, Section 3.
D. Failure or Indulgency Not Waiver. No failure or delay on
the part of a Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
E. Notices. Any notice from a Holder to the Company hereunder
shall be given to the Company in accordance with Section 8(f) of the
Securities Purchase Agreement. Any notices from the Company to a Holder
shall be given to such Holder at such Holder's address as shown in the
stock register of the Company and otherwise in accordance with Section
8(f) of the Securities Purchase Agreement.
4. The rights and privileges of the Series D Convertible
Preferred Stock are as follows. All references to Articles and Sections
within this Article Third, Section 4 are solely to Articles and
Sections within this Article Third, Section 4.
I. DESIGNATION AND AMOUNT
The designation (this "Certificate of Designation") of this
series, which consists of 7,500 shares of Preferred Stock of SOFTNET
SYSTEMS, INC., a New York corporation (the "Company"), is the Series D
Convertible Preferred Stock (the "Series D Preferred Stock" or "Series
D Preferred Shares") and the face amount per share shall equal $1,000
(the "Face Amount").
II. CERTAIN DEFINITIONS
For purposes of this Article Third, Section 4, the following
terms shall have the following meanings:
"Anniversary Date" means the date that is 9 months following
the Closing Date.
"Business Day" means any day other than a Saturday, Sunday or
a day on which banks in New York, New York are permitted or required by
law to be closed.
"Closing Bid Price" means, for any security as of any date,
the closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as
reported by Bloomberg Financial Markets or a comparable reporting
service of national reputation selected by the Company and reasonably
acceptable to the Holders then holding a majority of the outstanding
shares of Series D Preferred Stock ("Majority Holders"), if Bloomberg
Financial Markets is not then reporting closing bid prices of such
security (collectively, "Bloomberg"), or if the foregoing does not
apply, the last reported sale price of such security in the
over-the-counter market on the electronic bulletin board of such
security as reported by Bloomberg, or, if no sale price is reported for
such security by Bloomberg, the average of the bid prices of any market
makers for such security that are listed in the "pink sheets" by the
National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the
fair market value as mutually determined by the Company and the
Majority Holders, or, if they are unable to agree on such value, it
shall be determined by an investment banking firm selected by the
Company and reasonably acceptable to the Majority Holders.
"Closing Date" means the date on which the Series D Preferred
Shares are initially issued.
"Closing Price" means the average Closing Bid Price of the
Common Stock over the five trading days immediately preceding the
Closing Date.
"Common Stock" means the common stock, $0.01 par value, of the
Company.
"Conversion Price", subject to the adjustments provided for in
Article X hereof, means (1) on and prior to the Anniversary Date, 120%
of the Closing Price and (2) beginning on the day following the
Anniversary Date, the lesser of (i) 120% of the Closing Price and (ii)
the Market Price at the time of conversion.
"Effective Date" means the date the Registration Statement
registering the resale of the shares of Common Stock into which the
Series D Preferred Shares are convertible is declared effective by the
Securities and Exchange Commission.
"Holders" means the initial Holders of the Series D Preferred
Stock and their permitted transferees.
"majority of the outstanding shares of Series D Preferred
Stock" means greater than 66.6% of the outstanding shares of Series D
Preferred Stock.
"Market Price" means the volume weighted average price of the
Common Stock over any five trading days, selected by the Holder, in the
30 trading days ending on the day prior to the Conversion Date.
"Registration Deadline" means the 90th day following the
Closing Date.
"Registration Statement" means a registration statement filed
with the Securities and Exchange Commission under the Securities Act of
1933, as amended.
"Securities Purchase Agreement" means the Securities Purchase
Agreement referencing this Article Third, Section 4, among the Company
and the purchasers named therein, as amended from time to time in
accordance with the terms thereof.
"Warrants" means certain stock purchase warrants to acquire
shares of Common Stock issued by the Company to the initial Holders in
connection with the transactions contemplated by the Securities
Purchase Agreement.
III. DIVIDENDS
A. General. Each Holder of the Series D Preferred Stock shall
be entitled to receive cumulative dividends at the rate of five percent
(5%) of the Face Amount per annum (the "Dividend") of the Series D
Preferred Stock held by such Holder commencing on the Closing Date and
continuing through the date that no shares of Series D Preferred Stock
are held by such Holder. Such cumulative Dividends shall be payable at
the end of each fiscal quarter of the Company in arrears in cash or
additional Series D Preferred Shares, at the Company's option; provided
however, that the Company's option to pay such Dividends in additional
Series D Preferred Shares shall be subject to and contingent upon the
effectiveness of a Registration Statement for the Common Shares
underlying the Series D Preferred Shares and Warrants, and provided
further that if the Maximum Share Amount is reached, the Company shall
be required to pay such Dividends in cash. Dividends on the Series D
Preferred Stock shall accrue and be cumulative on a daily basis from
the date payable (with appropriate proration for any partial dividend
period), whether or not earned and whether or not in any dividend
period there shall be surplus or net profits of the Company legally
available for the payment of such dividends. In no event, so long as
any Series D Preferred Stock shall remain outstanding, shall any
dividend whatsoever be declared or paid upon, nor shall any
distribution be made upon, any Junior Securities (as defined below),
nor shall any shares of Junior Securities be purchased or redeemed by
the Company nor shall any moneys be paid to or made available for a
sinking fund for the purchase or redemption of any Junior Securities,
without, in each such case, the written consent of the Holders of a
majority of the outstanding shares of Series D Preferred Stock, voting
together as a class.
B. Payment of Dividend in Series D Preferred Shares. Should
the Company elect to pay accrued but unpaid Dividends in additional
shares of Series D Preferred Stock, the number of Series D Preferred
Shares to which the Holder shall be entitled will be equal to the
aggregate cash value of such unpaid Dividends, divided by the Face
Amount.
IV. CONVERSION
A. Conversion at the Option of Holder. Subject to Article
V(B), beginning on the date of issuance of the Series D Preferred
Shares, each Holder may, at any time and from time to time, convert
each of its shares of Series D Preferred Stock into a number of fully
paid and nonassessable shares of Common Stock determined by dividing
the aggregate Face Amount of the Series D Preferred Shares being
converted (plus any other amounts payable thereon including, without
limitation, payments due under Section 2(c) of the Registration Rights
Agreement and Conversion Default Payments) by the then applicable
Conversion Price, subject to adjustment as provided in Article X;
provided, however, that, in no event shall a Holder of shares of Series
D Preferred Stock be entitled to convert any such shares to the extent,
but only to the extent, that (x) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares
of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the shares of Series D
Preferred Stock or unexercised portion of Warrants or any other
securities containing analogous limitations) plus (y) the number of
shares of Common Stock issuable upon the conversion of the shares of
Series D Preferred Stock with respect to which the determination of
this proviso is being made, would result in beneficial ownership by a
Holder and such Holder's affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Rules 13(d) through (g) thereunder, except
as otherwise provided in clause (x) of such proviso.
B. Mechanics of Conversion. To convert the Series D Preferred
Shares, a Holder shall: (i) fax (or deliver by other means resulting in
notice) to the Company a copy of the fully executed Notice of
Conversion in the form of Exhibit H to the Securities Purchase
Agreement, and (ii) surrender or cause to be surrendered to the Company
(or satisfy the provisions of Article XIII(A), if applicable) the
certificates representing the Series D Preferred Stock being converted
(the "Series D Preferred Stock Certificates") and the original executed
version of the Notice of Conversion as soon as practicable thereafter.
The date the Holder delivers to the Company the Notice of Conversion
described in clause (i) or such later date specified in the Notice of
Conversion shall be the "Conversion Date". In the case of fax or
messenger delivery, delivery shall be deemed made on the date of such
fax or messenger delivery. In the case of Federal Express, or other
overnight mail service, delivery shall be deemed made the day after the
Notice of Conversion is sent. In the case of U.S. Mail, delivery shall
be deemed to be five (5) days after the Notice of Conversion is
deposited in the U.S. Mail.
C. Timing of Conversion. No later than the third Business Day
following the Conversion Date (the "Delivery Date"), provided that the
Company has received prior to such date the Series D Preferred Stock
Certificates (or the Holder has satisfied the provisions of Article
XIII(A), if applicable), the Company shall issue and deliver to the
Holder (or otherwise at such Holder's direction) that number of shares
of Common Stock issuable upon conversion of the number of Series D
Preferred Shares being converted and, if applicable, a new certificate
representing the Series D Preferred Stock not converted by such Holder.
The person or persons entitled to receive shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares at the close of business on the
Conversion Date, unless the Notice of Conversion is revoked as provided
in Article IV(D). If the Series D Preferred Stock Certificates are not
received (or the provisions of Article XIII(A) are not satisfied) prior
to the Delivery Date, The Delivery Date shall be extended until the
Business Day following the date of surrender to the Company of Series D
Preferred Stock Certificates to be converted or satisfaction of the
provisions of Article XIII(A), if applicable.
D. Continuing Rights. In addition to any other remedies which
may be available to the Holder, in the event the Company fails for any
reason to effect delivery to the Holder of certificates representing
the shares of Common Stock receivable upon conversion of the Series D
Preferred Shares by the Business Day following the Delivery Date (which
certificates shall be unlegended as and when required pursuant to the
Securities Purchase Agreement, Registration Rights Agreement
referencing this Article Third, Section 4, by and among the Company and
the other signatories thereto (the "Registration Rights Agreement") and
this Article Third, Section 4), the Holder shall, unless the Holder
otherwise elects to retain its status as a holder of Common Stock by so
notifying the Company, regain the rights of a Holder with respect to
such unconverted shares of Series D Preferred Stock and the Company
shall immediately return the subject Series D Preferred Stock
certificates and other conversion documents, if any, delivered by
Holder, to the Holder, or, if shares of Series D Preferred Stock have
not been surrendered, adjust its records to reflect that such shares of
Series D Preferred Stock have not been converted; provided, however,
that the Company shall remain liable for payment of the amounts
determined pursuant to Article VI(A) hereof for each day falling
between the trading day following the Delivery Date and the date of the
revocation notice is received by the Company, and shall also remain
liable for any damages suffered by Holder.
E. Stamp, Documentary and Other Similar Taxes. The Company
shall pay all stamp, documentary, issuance and other similar taxes
which may be imposed with respect to the issuance and delivery of the
shares of Common Stock pursuant to conversion of the Series D Preferred
Stock; provided that the Company will not be obligated to pay stamp,
transfer or other taxes resulting from the issuance of Common Stock to
any person other than the registered holder of the Series D Preferred
Stock.
F. No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the conversion of Series D Preferred Stock, but
the Company shall make a cash payment equal to such fraction multiplied
by the last sale price of the Common Stock in respect of any fractional
share which would otherwise be issuable; provided that in the event
that sufficient funds are not legally available for the payment of such
cash adjustment any fractional shares of Common Stock shall be rounded
up to the next whole number.
G. Electronic Transmission. In lieu of delivering physical
certificates representing the Common Stock issuable upon conversion,
provided the Company's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer
program, upon request of a Holder the Company shall use its best
efforts to cause its transfer agent to electronically transmit the
Common Stock issuable upon conversion to the Holder by crediting the
account of Holder's prime broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. In the case of electronic
transmission of such Common Stock, the Company shall, if applicable,
within three (3) Business Days issue a new certificate representing the
Series D Preferred Stock not converted pursuant to any Notice of
Conversion.
V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK;
LIMITATION ON NUMBER OF CONVERSION SHARES
A. Reservation of Common Stock. Subject to the provisions of
this Article V, the Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock a
sufficient number of shares of Common Stock to provide for the
conversion of all outstanding Series D Preferred Shares upon issuance
of shares of Common Stock and the exercise of all Warrants (at the then
current Conversion Price or Exercise Price) in accordance with Section
4(g) of the Securities Purchase Agreement (the "Reserved Amount"). The
Reserved Amount shall be increased from time to time in accordance with
the Company's obligations pursuant to Section 4(g) of the Securities
Purchase Agreement. In addition, if the Company shall issue any
securities or make any change in its capital structure which would
change the number of shares of Common Stock into which each share of
the Series D Preferred Stock shall be convertible at the then current
Conversion Price, the Company shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of
shares of Common Stock authorized and reserved, free from preemptive
rights, for conversion of the outstanding Series D Preferred Stock.
B. Limitation on Number of Common Shares to be Issued. (i)
Notwithstanding anything to the contrary contained herein, if, at any
time, the aggregate number of shares of Common Stock then issued upon
conversion of the Series D Preferred Stock equals 19.99% of the
outstanding Common Stock on the Closing Date, subject to adjustments
for stock dividends, stock splits, combinations or similar events, the
Series D Preferred Stock shall, from that time forward, cease to be
convertible into Common Stock in accordance with the terms of Article
IV, unless the Company (x) has obtained approval of the issuance of the
Series D Preferred Stock by a majority of the total votes eligible to
be cast on such proposal, in person or by proxy, by the holders of the
then-outstanding Common Stock (the "Stockholder Approval"), (y) shall
have otherwise obtained permission to allow such issuances from the
American Stock Exchange or such other principal exchange upon which the
Common Stock is then trading (the "Common Stock Exchange"); or (z) is
no longer governed by a rule promulgated by a stock exchange, Nasdaq or
other applicable body prohibiting the issuance of Common Stock upon
conversion of the Series D Preferred Stock in excess of 19.99% of the
outstanding Common Stock without shareholder approval. The maximum
number of shares of Common Stock issuable as a result of the limitation
set forth in the first sentence of this Article V(B) is hereinafter
referred to as the "Maximum Share Amount." With respect to each Holder
of Series D Preferred Stock, the Maximum Share Amount shall refer to
such Holder's pro rata share thereof determined in accordance with
Article X below. Notwithstanding anything in this Article Third,
Section 4 to the contrary, for purposes of determining the aggregate
number of shares of Common Stock issuable upon conversion of the Series
D Preferred Stock, if the issuance of Common Stock hereunder is
aggregated with the issuance of Common Stock in conversion of the
Series A Convertible Preferred Stock and/or the Series B Convertible
Preferred Stock and/or the Series C Convertible Preferred Stock
(collectively, the "Other Series") pursuant to the regulations of the
American Stock Exchange, the shares of Common Stock issuable upon
conversion of the Other Series shall be aggregated with the shares of
Common Stock issuable in conversion of the Series D Preferred Stock in
determining the Maximum Share Amount. The Company will use its best
efforts to seek and obtain Stockholder Approval (or obtain such other
relief as will allow conversions hereunder in excess of the Maximum
Share Amount) no later than 120 days following the Closing Date. In the
event that the Company obtains Stockholder Approval, the approval of
the Common Stock Exchange or otherwise concludes that it is able to
increase the number of shares to be issued above the Maximum Share
Amount (such increased number being the "New Maximum Share Amount"),
the references to Maximum Share Amount, above, shall be deemed to be
instead, references to the greater New Maximum Share Amount. In the
event that Stockholder Approval is obtained, but there are insufficient
reserved or authorized shares or a registration statement covering the
additional shares of Common Stock which constitute the New Maximum
Share Amount is not effective prior to the Maximum Share Amount being
issued (if such registration statement is necessary to allow for the
public resale of such securities), the Maximum Share Amount shall
remain unchanged; provided, however, that the Holder may grant an
extension to obtain a sufficient reserved or authorized amount of
shares or of the period for obtaining effectiveness of such
registration statement. Notwithstanding anything in this Article
V(B)(i) to the contrary, and subject to Article V(B)(ii) below, the
Company shall only be required to issue a number of shares of Common
Stock upon conversion of the Series D Preferred Stock equal to (p) the
original aggregate Face Amount of all Series D Preferred Stock issued
on the Closing Date divided by (q) 50% of the Closing Price (exclusive
of any shares of Common Stock issuable upon conversion of the Other
Series), subject to adjustments for stock dividends, stock splits,
combinations or similar events (the "Maximum Share Amount Cap").
(ii) Notwithstanding anything in this Article Third,
Section 4 to the contrary, in the event the Maximum Share Amount is
reached as a result of conversions of the Series D Preferred Stock or
any Other Series, the Company shall honor any request for conversion of
the Series D Preferred Stock with a payment in cash equal to the number
of shares of Common Stock that would have otherwise been issued upon
such conversion multiplied by the five day average Closing Bid Price of
the Common Stock on the date of delivery of the Conversion Notice;
provided that, no such payment shall be made in the event the Maximum
Share Amount Cap is reached. Any cash payment made pursuant to this
paragraph shall be counted toward the Maximum Share Amount Cap as if
such conversion was effected by the issuance of shares of Common Stock.
If the Maximum Share Amount Cap is reached the Company must within ten
(10) business days either (x) provide irrevocable notice to the Company
that it will redeem all of the outstanding shares of Series D Preferred
Stock at the Face Amount thereof plus any accrued and unpaid dividends
and other payments thereon as provided by Article VII(C)(ii), and so
redeem the Series D Preferred Stock within one hundred eighty (180)
days following such notice, or (y) so long as the Stockholder Approval
has been obtained, provide irrevocable notice to the Holders that the
Company will honor Notices of Conversion that will result in the
issuance of shares of Common Stock in excess of the Maximum Share
Amount Cap, and thereafter honor such conversions without reference to
the Maximum Share Amount Cap or (z) if Shareholder Approval has not
been obtained within 120 days of the issuance of the Series D Preferred
Stock, provide irrevocable notice to the Holders that the Company will
honor Notice of Conversion in excess of the Maximum Share Amount Cap if
such conversions do not violate the rules and regulations of the
applicable stock exchange or quotation system on which the Common Stock
is then traded (but only to the extent such rules or regulations would
not be violated); provided, however, that for purposes of this clause
(z), in the event the Maximum Share Amount is reached, the Company will
redeem the Series D Preferred Stock in accordance with Article
(V)(B)(ii)(x) above.
C. Allocation of Reserved Amount, Maximum Share Amount. The
Reserved Amount and the Maximum Share Amount shall be allocated among
the initial Holders according to the number of Series D Preferred
Shares issued to each such Holder on the Closing Date. Any Common
Shares which were initially allocated to any Holder remaining after
such Holder no longer owns any Series D Preferred Shares shall be
allocated among the remaining Holders pro rata, based on the number of
Series D Preferred Shares then held by such Holders.
VI. FAILURE TO CONVERT
A. If, at any time, (x) a Notice of Conversion has been sent
to the Company and the Company fails for any reason to deliver, on or
prior to the third Business Day following the expiration of the
Delivery Date for such conversion (said period of time being the
"Extended Delivery Period"), such number of shares of Common Stock to
which such Holder is entitled (taking into account the limitations on
conversions imposed by such Holder's allocated portion of the Maximum
Share Amount) upon such conversion, or (y) the Company provides notice
(including by way of public announcement) (the "Refusal Notice") to any
Holder at any time of its intention not to issue shares of Common Stock
upon exercise by any Holder of its conversion rights in accordance with
the terms of this Article Third, Section 4 (each of (x) and (y) being a
"Conversion Default"), then the Company shall pay to the affected
Holder, in the case of a Conversion Default described in clause (x)
above, and to all Holders, in the case of a Conversion Default
described in clause (y) above, an amount equal to 1% of the Face Amount
of the Series D Preferred Stock held by such Holder with respect to
which the Conversion Default exists (which amount shall be deemed to be
the aggregate Face Amount of all outstanding Series D Preferred Stock
in the case of a Conversion Default described in clause (y) above) for
each day thereafter until the Cure Date. "Cure Date" means (i) with
respect to a Conversion Default described in clause (x) of its
definition or if a Conversion Notice has been submitted and the Company
has issued a Refusal Notice, the date the Company effects the
conversion of the portion of the Series D Preferred Stock submitted for
conversion and (ii) if no Conversion Notices have been submitted, with
respect to a Conversion Default described in clause (y) of its
definition, the date the Company undertakes in writing to issue Common
Stock in satisfaction of all conversions of Series D Preferred Stock in
accordance with the terms of this Article Third, Section 4. The Company
shall promptly provide each Holder with notice of the occurrence of a
Conversion Default with respect to any of the other Holders.
The payments to which a Holder shall be entitled pursuant to
this Section VI(A) are referred to herein as "Conversion Default
Payments." Conversion Default Payments shall be paid in cash. Such
payment shall be made in accordance with and be subject to the
provisions of Article XIII(B).
VII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption Events. A "Redemption Event" means any one of
the following (after expiration of any applicable cure period):
(i) the Company fails, and any such failure continues
uncured for seven (7) Business Days after the Company has been notified
thereof in writing by the Holder, to (x) remove any restrictive legend
on any certificate for any shares of Common Stock issued after the
Effective Date to the Holders upon conversion of the Series D Preferred
Stock or upon exercise of the Warrants, or (y) to transfer or cause its
transfer agent to transfer any certificate for shares of Common Stock
issued to a Holder upon conversion of the Series D Preferred Stock, in
each case as and when required by this Article Third, Section 4, the
Warrants, the Securities Purchase Agreement or the Registration Rights
Agreement; or
(ii) the Company fails to fulfill it obligations
pursuant to Sections 4(c), 4(g), 4(i) or 5 of the Purchase Agreement
(or makes any announcement, statement or threat that it does not intend
to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or
threat not to honor its obligations hall not be rescinded in writing)
for ten (10) days after the Corporation shall have been notified
thereof in writing by any holder of Series D Preferred Stock; or
(iii) the Company fails to make any payment due
pursuant to Article VII(C) when due; or
(iv) the Company fails to fulfill any of its
obligations pursuant to the Registration Rights Agreement (or makes any
statement that it does not intend to honor such obligations) and any
such failure shall continue uncured (or any statement not to honor its
obligations shall not be rescinded) for ten (10) business days; or
(v) the Company (x) fails to cause the Registration
Statement to be declared effective on or before the date that is one
hundred eighty (180) days following the Closing Date, or (y) such
Registration Statement lapses in effect (or sales cannot be made by the
Holders thereunder, whether by reason of the Company's failure to amend
or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more then forty-five
(45) consecutive days or seventy-five (75) days in any twelve (12)
month period after such Registration Statement becomes effective, or
(z) the Common Stock is not listed or included for quotation on the
Nasdaq, NYSE, AMEX or that trading is halted after the Registration
Statement has been declared effective for more than an aggregate of
twenty (20) trading days or more in any twelve (12) month period.
B. Redemption of Holder's Shares. Upon the occurrence and
during the continuation of any Redemption Event, the Company shall, as
to each Holder of the then outstanding shares of Series D Preferred
Stock who have given written notice (the "Optional Redemption Notice")
to the Company of such Redemption Event, purchase each such Holder's
shares of Series D Preferred Stock for an amount per share equal to the
greater of (1) 120% multiplied by the sum of (a) the Face Amount of the
shares to be redeemed, plus (b) accrued and unpaid dividends and any
other amounts payable thereon (including without limitation payments
due under Section 2 of the Registration Rights Agreement and Conversion
Default Payments) through the date of payment of the Optional
Redemption Amount (as defined herein) (the "Optional Redemption Date")
and (2) the "Parity Value" of the shares to be redeemed (the greater of
such amounts being the "Optional Redemption Amount"); provided that if
such Redemption Event is pursuant to Article VII(A)( iv), the Company
may, at its sole option, in lieu of the foregoing purchase, pay the
Holder an amount equal to the Default Amount (as defined below)
multiplied by the number of shares of Series D Preferred Stock held by
such holder on the date of the Optional Redemption Notice. "Parity
Value" means the product of (a) the highest number of shares of Common
Stock issuable upon conversion of such shares at such time (treating
the Trading Day immediately preceding the Optional Redemption Date as
the "Conversion Date" (as hereinafter defined), unless the Redemption
Event arises as a result of a breach in respect of a specific
Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest closing sale price for
the Common Stock on the principal trading market for such shares during
the period beginning on the date of first occurrence of the Redemption
Event and ending on such "Conversion Date." "Default Amount" shall mean
Fifty U.S. Dollars ($50).
In the case of a Redemption Event, if the Company fails to pay
the Default Amount or the Optional Redemption Amount, as applicable,
for each share within five (5) business days of written notice that
such amount is due and payable, then (assuming there are sufficient
authorized shares) in addition to all other available remedies, each
holder of Series D Preferred Stock shall have the right at any time, so
long as the Redemption Event continues, to require the Company, upon
written notice, to immediately issue (in accordance with and subject to
the terms of Article V above), in lieu of the Default Amount or the
Optional Redemption Amount, as applicable, with respect to each
outstanding share of Series D Preferred Stock held by such holder, the
number of shares of Common Stock of the Company equal to the Default
Amount or the Optional Redemption Amount, as applicable, divided by any
Conversion Price, as chosen in the sole discretion of the Holder, in
effect from the date of the Redemption Event until the date such Holder
elects to exercise its rights pursuant to this paragraph. Payment of
the Default Amount shall not affect the holders ongoing rights with
respect to the then outstanding shares of Series D Preferred Stock or
the rights of such holders to pursue alternate damages in respect of
the events giving rise to such payments.
C. Optional Redemption by the Company. So long as (i) all of
the shares of Common Stock issuable upon conversion of all outstanding
shares of Series D Preferred Stock, for a period of twenty (20) days
prior to the date of delivery of any written notice of redemption
pursuant to the Article VII(C), are then (x) authorized and reserved
for issuance, (y) registered for re-sale under the 1933 Act by the
Holders (or may otherwise be resold publicly without restriction);
provided, however, that this clause (y) shall not apply to any
redemption made with the proceeds from a Qualified Offering (as
defined), and (z) eligible to be traded on Nasdaq, the NYSE, the AMEX
or Nasdaq SmallCap and (ii) there is not then a continuing Redemption
Event in effect the Company may, at its option, upon twenty (20)
Business Days' irrevocable written notice, redeem the Series D
Preferred Stock, as follows:
(i) Beginning upon the earlier to occur of (a) the
date that the Company completes an underwritten public offering of its
Common Stock or Rule 144A offering to "qualified institutional buyers"
and "accredited institutional investors" in an amount of at least
$10,000,000 (a "Qualified Offering"), or (b) the date that is eighteen
months following the Closing Date, the Company may, at its option,
redeem for cash out of funds legally available therefor, all (but not
less than all) of the outstanding Series D Preferred Shares at 110% of
the Face Amount of the Series D Preferred Shares during the first 12
months following issuance, and thereafter 120% of the Face Amount of
the Series D Preferred Shares, in each case plus accrued and unpaid
dividends, if any, and any other amounts payable thereon.
(ii) Beginning on the date any Holder reaches such
Holder's Maximum Share Amount, the Company may, at its option, redeem
for cash out of funds legally available therefor, all (but not less
than all) of the outstanding shares of Series D Preferred Stock held by
the Holder who has reached its Maximum Share Amount at a price per
share equal to 100% of the Face Amount such shares of Series D
Preferred Stock plus accrued and unpaid dividends, if any, and any
other amounts payable thereon.
Nothing in this Article VII(C) shall prohibit conversions of
Series D Preferred Stock otherwise permitted pursuant to the terms of
this Article Third, Section 4 during the pendency of any notice of
optional redemption by the Company hereunder.
D. Maturity; Required Redemption. Subject to the limitations
contained in Article VII(F) and so long as there is not then a
continuing Redemption Event, hereof each share of Series D Preferred
Stock outstanding on the third anniversary of the Closing Date (the
"Maturity Date") will be redeemed at the Company's sole option, (a) so
long as the Company has provided the Holders ten (10) business days
prior written notice of its election to pay cash on the Maturity Date,
in cash equal to the aggregate face value thereof plus accrued and
unpaid dividends, if any, and any other amounts payable thereon or, (b)
by delivery of a number of shares of Common Stock issuable upon
conversion of all of the Series D Preferred Stock at the lesser of the
then-applicable Conversion Price and the five trading day average
closing bid price on the Maturity Date, including any adjustment under
Article X; provided that (i) any necessary approval for the issuance of
additional shares has been obtained if the Maximum Share Amount has
been reached (or will be exceeded as a result of any conversion at
maturity), and (ii) all shares of Common Stock issuable upon conversion
of all outstanding shares of Series D Preferred Stock are then (x)
authorized and reserved for issuance, (y) registered under the
Securities Act for resale by all Holders of such Series D Preferred
Shares and (z) eligible to be traded on either the Nasdaq, Nasdaq Small
Cap Market, the New York Stock Exchange or the American Stock Exchange.
The Maturity Date shall be delayed by one (1) Trading Day each for each
Trading Day occurring prior thereto and prior to the full conversion of
the Series D Preferred Stock that (i) sales cannot be made pursuant to
the Registration Statement (whether by reason of the Company's failure
to properly supplement or amend the prospectus included therein in
accordance with the terms of the Registration Rights Agreement or
otherwise), (ii) any Redemption Event (as defined in Article V.A)
exists, without regard to whether any cure periods shall have run or
(iii) that the Company is in breach of any of its obligations pursuant
to Section 4(g) of the Purchase Agreement.
E. Redemption Defaults. If the Company fails to pay any Holder
the redemption consideration with respect to any share of Series D
Preferred Stock, as provided in this Article VII, within five (5)
Business Days of its receipt or delivery, as applicable, of a notice
requiring such redemption (the "Redemption Notice"), then each Holder
(i) shall be entitled to interest on the redemption consideration not
paid at a per annum rate equal to the lower of (x) the sum of prime
rate published from time to time by the Wall Street Journal plus three
percent (3%) and (y) the highest interest rate permitted by applicable
law from the date of the Redemption Notice until the date of redemption
hereunder. In the event the Company is not able to redeem all of the
shares of Series D Preferred Stock subject to Redemption Notices, the
Company shall redeem shares of Series D Preferred Stock from each
Holder, pro rata, based on the total number of shares of Series D
Preferred Stock included in the Redemption Notice relative to the total
number of shares of Series D Preferred Stock in all of the Redemption
Notices. In the case of a Redemption Event, if the Company fails to pay
the Optional Redemption Amount for each share for any reason
(including, without limitation, the circumstances specified in
paragraph VII(F)), within five (5) Business Days of the applicable
Redemption Notice then (assuming there are sufficient authorized
shares) in addition to all other available remedies, each Holder of
Series D Preferred Stock shall have the right at any time, so long as
the Redemption Event continues, to convert, upon written notice, in
lieu of the Redemption Amount, each outstanding share of Series D
Preferred Stock held by such Holder, into the number of shares of
Common Stock of the Company equal to the Redemption Amount, divided by
the Conversion Price then in effect, subject in all cases to each such
Holder's Maximum Share Amount.
F. Capital Impairment. In the event that any section of the
New York General Business Corporation Law ("BCL"), would be violated by
the redemption of any shares of Series D Preferred Stock that are
otherwise subject to redemption pursuant to this Article VII, the
Company: (i) will redeem the greatest number of shares of Series D
Preferred Stock possible without violation of said Article; (ii) the
Company thereafter shall use its best efforts to take all necessary
steps permitted pursuant to this Article Third, Section 4 and the
agreements entered into in connection with the issuance of Series D
Preferred Stock pursuant hereto in order to remedy its capital
structure in order to allow further redemptions without violation of
said Article; and (iii) from time to time thereafter as promptly as
possible the Company shall redeem shares of Series D Preferred Stock at
the request of the Holders to the greatest extent possible without
causing a violation of the BCL.
VIII. RANK; PARTICIPATION
A. Rank. All shares of the Series D Preferred Stock shall rank
(i) prior to the Common Stock; (ii) prior to any class or series of
capital stock of the Company hereafter created (unless, with the
consent of the Holders of a majority of the outstanding shares of
Series D Preferred Stock obtained in accordance with Article XII
hereof, such class or series of capital stock specifically, by its
terms, ranks senior to or pari passu with the Series D Preferred Stock)
(collectively, with the Common Stock, "Junior Securities"); (iii) pari
passu with the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, and
any class or series of capital stock of the Company hereafter created
(with the consent of the Holders of a majority of the outstanding
shares of Series D Preferred Stock obtained in accordance with Article
XII hereof, if required) specifically ranking, by its terms, on parity
with the Series D Preferred Stock (the "Pari Passu Securities"); and
(iv) junior to any class or series of capital stock of the Company
hereafter created (with the consent of the Holders of a majority of the
outstanding shares of Series D Preferred Stock obtained in accordance
with Article XII hereof) specifically ranking, by its terms, senior to
the Series D Preferred Stock (the "Senior Securities"), in each case as
to distribution of assets upon liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary.
B. Participation. Subject to the rights of the Holders (if
any) of Pari Passu Securities and Senior Securities, the Holders shall,
as such Holders, be entitled to such dividends paid and distributions
made to the Holders of Common Stock to the same extent as if such
Holders had converted their shares of Series D Preferred Stock into
Common Stock (without regard to any limitations on conversion herein or
elsewhere contained) and had been issued such Common Stock on the day
before the record date for said dividend or distribution. Payments
under the preceding sentence shall be made concurrently with the
dividend or distribution to the Holders of Common Stock.
IX. LIQUIDATION PREFERENCE
A. Liquidation of the Company. If the Company shall commence a
voluntary case under the U.S. Federal bankruptcy laws or any other
applicable 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 Company 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 Company shall be entered by a court having
jurisdiction in the premises in an involuntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency
or similar law resulting in the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official)
of the Company or of any substantial part of its property, or ordering
the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60)
consecutive days and, on account of any such event, the Company shall
liquidate, dissolve or wind up, or if the Company shall otherwise
liquidate, dissolve or wind up (a "Liquidation Event"), no distribution
shall be made to the Holders of any shares of capital stock of the
Company (other than Senior Securities and, together with the Holders of
Series D Preferred Stock the Pari Passu Securities) upon liquidation,
dissolution or winding up unless prior thereto the Holders shall have
received the Liquidation Preference (as herein defined) with respect to
each Series D Preferred Share. If, upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the
Holders 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 Company legally
available for distribution to the Series D 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. Certain Acts Not a Liquidation. The purchase or redemption
by the Company of stock of any class, in any manner permitted by law,
shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or
merger of the Company with or into any other entity nor the sale or
transfer by the Company of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation,
dissolution or winding up of the Company.
C. Definition of Liquidation Preference. The "Liquidation
Preference" with respect to a share of Series D Preferred Stock means
an amount equal to the Face Amount thereof plus any other amounts that
may be due from the Company with respect thereto, including any accrued
and unpaid dividends, pursuant to this Article Third, Section 4 or the
Registration Rights Agreement through the date of final distribution.
The Liquidation Preference with respect to any Pari Passu Securities
shall be as set forth in the Article Third, Section 4 filed in respect
thereof.
X. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS
The Conversion Price shall be subject to adjustment from time
to time as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or
after the Closing Date, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, reclassification
or other similar event, the number of shares of Common Stock issuable
upon conversion of the Series D Preferred Shares shall be
proportionately increased, or if the number of outstanding shares of
Common Stock is decreased by a reverse stock split, combination or
reclassification of shares, or other similar event, the number of
shares of Common Stock issuable upon conversion of the Series D
Preferred Shares shall be proportionately reduced. In such event, the
Company shall notify the Company's transfer agent of such change on or
before the effective date thereof.
B. Major Transactions. If the Company shall consolidate with
or merge into any corporation, sell all or substantially all of its
assets, effectuate a transaction or series of transactions in which 50%
or more of the voting power of the Company is disposed of or reclassify
its outstanding shares of Common Stock (other than by way of
subdivision or reduction of such shares) (each a "Major Transaction"),
then each Holder shall thereafter be entitled to receive consideration,
in exchange for each share of Series D Preferred Stock held by it,
equal to the greater of, as determined in the sole discretion of the
Holders of at least 50.1% of the outstanding shares of Series D
Preferred Stock: (i) the number of shares of stock or securities or
property of the Company, or of the entity resulting from such
consolidation or merger (the "Major Transaction Consideration"), to
which a Holder of the number of shares of Common Stock delivered upon
conversion of such shares of Series D Preferred Stock would have been
entitled upon such Major Transaction (without regard to any limitations
on conversion herein contained) and had such Common Stock been issued
and outstanding and had such Holder been the holder of record of such
Common Stock at the time of such Major Transaction, and the Company
shall make lawful provision therefore as a part of such consolidation,
merger or reclassification; and (ii) the Redemption Amount, in cash. No
sooner than ten (10) days nor later than five (5) days prior to the
consummation of the Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver
written notice ("Notice of Major Transaction") to each Holder, which
Notice of Major Transaction shall be deemed to have been delivered one
(1) Business Day after the Company's sending such notice by telecopy
(provided that the Company sends a confirming copy of such notice on
the same day by overnight courier). Such Notice of Major Transaction
shall indicate the amount and type of the Major Transaction
Consideration which such Holder would receive under clause (i) of this
Article X(B). If the Major Transaction Consideration does not consist
entirely of United States dollars, the value of such other property
shall be determined by a reputable accounting firm selected by the
Company that is reasonably acceptable the Holders of a majority of the
outstanding shares of Series D Preferred Stock.
C. Adjustment Due to Distribution. If at any time after the
Closing Date, the Company shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as
a partial liquidating dividend, by way of return of capital or
otherwise (including any dividend or distribution to the Company's
stockholders in cash or shares (or rights to acquire shares) of capital
stock of a subsidiary (i.e. a spin-off)) (a "Distribution"), then the
minimum Conversion Price per share shall be reduced by the value of
such Distribution per share. If the Distribution does not consist
entirely of U.S. Dollars, the value of such other property shall be
determined by a reputable accounting firms selected by the Company that
is reasonably acceptable to the Holders of a majority of the
outstanding shares of Series D Preferred Stock.
D. Purchase Rights. If at any time after the Closing Date, the
Company issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata
to the record holders of any class of Common Stock, then the Holders
will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Series D Preferred Stock
(without regard to any limitations on conversion or exercise herein or
elsewhere contained) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.
E. Adjustment to Conversion Price. If at any time when Series
D Preferred Stock is issued and outstanding, the number of outstanding
shares of Common Stock is increased or decreased by a stock split,
stock dividend, combination, reclassification, below-market price
rights offering to all holders of Common Stock or other similar event,
which event shall have taken place during the reference period for
determination of the Conversion Price for the Series D Preferred Stock,
then the Conversion Price shall be calculated giving appropriate effect
to the stock split, stock dividend, combination, reclassification or
other similar event during the calculation period preceding the
Conversion Date. In such event, the Company shall notify the Transfer
Agent of such change on or before the effective date thereof.
F. Adjustment for Restricted Periods. If (i) the Company fails
to obtain effectiveness of the Registration Statement prior to ninety
(90) days following the Closing Date, or (ii) the Registration
Statement, once effective, lapses in effect, or sales cannot otherwise
be made thereunder, whether by reason of the Company's failure or
inability to amend or supplement the prospectus included therein
("Prospectus") in accordance with the Registration Rights Agreement or
otherwise, then the 20 trading days period ("Lookback Period") used for
determining the "Market Price" shall be extended to include (x) in the
case of an event described in clause (i), the 20 trading days
immediately preceding the 90th day following the Closing Date plus all
Trading Days through and including the date of effectiveness of the
Registration Statement, and (y) in the case of an event described in
clause (ii), the number of trading days preceding the date on which the
Holder is first notified that sales may not be made under the
Prospectus, which would otherwise then be included in the Lookback
Period plus all trading days through and including the date on which
the Holder is notified that sales may again be made under the
Prospectus. If a Holder of the Series D Preferred Stock reasonably
determines that sales may not be made pursuant to the Prospectus, it
shall notify the Company in writing and, unless the Company provides
Holder with an opinion of Company's counsel to the contrary, such
determination shall be binding for purposes of this paragraph.
G. Adjustment to Conversion Price Upon Anniversary Date. If
the average of the Closing Bid Prices of the Common Stock over the
twenty (20) consecutive trading days immediately preceding the
Anniversary Date is greater than 130% of the Closing Price, then
beginning on the Anniversary Date, the Conversion Price will be reset
to 130% of the Closing Price.
H. Adjustment to Conversion Price for Major Announcements. In
the event the Company (i) makes a public announcement that it intends
to consolidate or merge with any other corporation (other than a merger
in which the Company is the surviving or continuing corporation and its
capital stock is unchanged) or sell or transfer all or substantially
all of the assets of the Company or (ii) any person, group or entity
(including the Company) publicly announces a tender offer to purchase
50% or more of the Company's Common Stock or otherwise publicly
announces an intention to replace a majority of the corporation's Board
of Directors by waging a proxy battle or otherwise (the date of the
announcement referred to in clause (i) or (ii) is hereinafter referred
to as the "Announcement Date"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the
Adjusted Conversion Price Termination Date (as defined below), be equal
to the lower of (x) the Conversion Price which would have been
applicable for an Optional Conversion occurring on the Announcement
Date and (y) the Conversion Price that would otherwise be in effect.
From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in Article II. For
purposes hereof, "Adjusted Conversion Price Termination Date" shall
mean, with respect to any proposed transaction, tender offer or removal
of the majority of the Board of Directors which a public announcement
as contemplated by this Article X.H. has been made, the date upon which
the Company (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) consummates or publicly
announces the termination or abandonment of the proposed transaction or
tender offer which caused this Article X.H. to become operative.
Adjustment to Conversion Price for Major Announcements.
Notice of Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Price pursuant to this Section X, the
Company, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each Holder a certificate
setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of any Holder, furnish to
such Holder a like certificate setting forth (i) such adjustment or
readjustment, (ii) the Conversion Price at the time in effect and (iii)
the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon
conversion of a share of Series D Preferred Stock.
XI. VOTING RIGHTS
No Holder of the Series D Preferred Stock shall be entitled to
vote on any matter submitted to the shareholders of the Company for
their vote, waiver, release or other action, except as may be otherwise
expressly required by law.
XII. PROTECTION PROVISIONS
So long as any Series D Preferred Shares are outstanding, the
Company shall not, without first obtaining the approval of the Holders
of majority of the outstanding shares of Series D Preferred Stock: (a)
alter or change the rights, preferences or privileges of the Series D
Preferred Stock; (b) alter or change the rights, preferences or
privileges of any capital stock of the Company so as to affect
adversely the Series D Preferred Stock; (c) create or issue any Senior
Securities; (d) create or issue any Pari Passu Securities (except for
Pari Passu Securities that are convertible preferred securities with a
fixed conversion price at a premium to the market price of the Common
Stock at the date of issuance), (e) increase the authorized number of
shares of Series D Preferred Stock; (f) increase the par value of the
Common Stock; or (g) do any act or thing not authorized or contemplated
by this Article Third, Section 4 which would result in any taxation
with respect to the Series D 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,
(or otherwise suffer to exist any such taxation as a result thereof).
XIII. MISCELLANEOUS
A. Lost or Stolen Certificates. Upon receipt by the Company of
(i) evidence of the loss, theft, destruction or mutilation of any
Series D Preferred Stock Certificate(s) and (ii) (y) in the case of
loss, theft or destruction, of indemnity reasonably satisfactory to the
Company, or (z) in the case of mutilation, upon surrender and
cancellation of the Series D Preferred Stock Certificate(s), the
Company shall execute and deliver new Series D Preferred Stock
Certificate(s) of like tenor and date. However, the Company shall not
be obligated to reissue such lost, stolen, destroyed or mutilated
Series D Preferred Stock Certificate(s) if the Holder contemporaneously
requests the Company to convert such Series D Preferred Stock.
B. Payment of Cash; Defaults. Whenever the Company is required
to make any cash payment to a Holder under this Article Third, Section
4 (as a Conversion Default Payment, Redemption Amount or otherwise),
such cash payment shall be made to the Holder by the method (by
certified or cashier's check or wire transfer of immediately available
funds) elected by such Holder. If such payment is not delivered when
due such Holder shall thereafter be entitled to interest on the unpaid
amount until such amount is paid in full to the Holder at a per annum
rate equal to the lower of (x) the sum of prime rate published from
time to time by the Wall Street Journal plus three percent (3%) and (y)
the highest interest rate permitted by applicable law.
C. Remedies, Characterizations, Other Obligations, Breaches
and Injunctive Relief. The remedies provided in this Article Third,
Section 4 shall be cumulative and in addition to all other remedies
available under this Article Third, Section 4, at law or in equity
(including a decree of specific performance and/or other injunctive
relief), no remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing
herein shall limit a Holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Article Third,
Section 4. Company covenants to each Holder that there shall be no
characterization concerning this instrument other than as expressly
provided herein; provided, however, that the Company shall be entitled
to prepare summaries of this Article Third, Section 4 for purposes of
complying with its disclosure obligations and in connection with bona
fide disputes as to the operations of the provisions of this Article
Third, Section 4.
D. Failure or Indulgency Not Waiver. No failure or delay on
the part of a Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
E. Notices. Any notice from a Holder to the Company hereunder
shall be given to the Company in accordance with Section 8(f) of the
Securities Purchase Agreement. Any notices from the Company to a Holder
shall be given to such Holder at such Holder's address as shown in the
stock register of the Company and otherwise in accordance with Section
8(f) of the Securities Purchase Agreement.
FOURTH: The capital of the corporation shall be at least equal
to the sum of the aggregate par value of all the issued shares having
par value, plus an aggregate amount of consideration received by the
corporation for the issuance of shares without par value, plus such
amounts, as from time to time, by resolution of the Board of Directors,
may be transferred thereto.
FIFTH: The office of the corporation is to be located in
County of Kings, State of New York. The Secretary of State is
designated as the Agent of the Corporation, upon whose process against
the Corporation may be serving and the address to which the Secretary
of State shall mail a copy of any process against the corporation which
may be served upon it pursuant to law is c/o CT Corporation System,
1633 Broadway, New York, NY 10019.
SIXTH: The duration of the corporation shall be perpetual.
SEVENTH: (a) The Board of Directors shall from time to time
determine the number of directors constituting the entire Board of
Directors of the Corporation; provided, however, that in no even shall
the number of directors constituting the entire Board of Directors be
less than five directors.
(b) In all elections of directors, each shareholder
shall be entitled to as many votes as shall equal the number of shares
held by him, multiplied by the number of directors to be elected, and
he may cast all of such votes for a single director or may distribute
them among the number to be voted for, or any two or more of them, as
he may see fit, which right, when exercised, shall be termed
`cumulative voting.'
(c) No director may be removed from office prior to
the expiration of his term except for cause by the vote of the
shareholders as required by Section 706 of the Business Corporation
Law.
EIGHTH: [omitted]
NINTH: [omitted]
TENTH: The United States Corporation Company, 15 Columbus
Circle, New York, NY 10023 is designated as the agent of the
corporation upon whom process in any action or proceeding against the
corporation may be served.
ELEVENTH: No contract or other transaction between the
corporation and any other corporation shall be affected or invalidated
by the fact that any one or more of the directors of this corporation
is or are interested in, or is a director or officer, or are directors
or officers, of such other corporation, and any director or directors,
individually or jointly may be a party or parties to, or may be
interested in any contractor transaction of this corporation, or in
which this corporation is interested, and no contract, act or
transaction of this corporation with any person or persons, firms or
corporations shall be affected or invalidated by the fact that any
director or directors of this corporation is a party or are parties to,
or interested in, such contract, act or transaction, or in any way
connected with such person or persons, firms or corporations and each
and every person who may become a director of this corporation is
hereby relieved from any liability that might otherwise exist from
contracting with the corporation for the benefit of himself or any firm
or corporation in which he may be in anywise interested.
TWELFTH: No stockholder of this Corporation shall, because of
the ownership of stock, have a pre-emptive or other right to purchase,
subscribe for, or take any part of any stock or any part of the notes,
debentures, bonds, or other securities convertible into or carrying
options or warrants to purchase stock of this Corporation issued,
optioned, or sold by it. Any part of the capital stock and any part of
the notes, debentures, or warrants to purchase stock of this
Corporation authorized by this amended certificate may at any time be
issued optioned for sale, and sold or disposed of by this Corporation
pursuant to resolution of its board of directors to such persons and
upon such terms as may to such board seem proper without first offering
such stock or securities or any part thereof to existing stockholders.
The affirmative vote of holders of not less than two-thirds of
the outstanding shares of stock of the Corporation shall be required in
order to amend, alter, change or repeal the provisions of Article
SEVENTH hereof or this Article TWELFTH."
FIFTH: That the changes in the Certificate of Incorporation and the
restatement were authorized by resolutions passed at the special meeting of the
Board of Directors held August 27, 1998 and by unanimous written consent, dated
as of September 30, 1998, by the holders of the Series E Convertible Preferred
Stock.
<PAGE>
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein are true under penalties of perjury this 30th day of
October, 1998.
SOFTNET SYSTEMS, INC.
By: /s/ Lawrence B. Brilliant
------------------------------
Lawrence B. Brilliant, M.D.
President and Chief Executive
By: /s/ Steven M. Harris
------------------------------
Steven M. Harris
Vice President and Secretary
BROBECK, PHLEGER, & HARRISON LLP
Attorneys at Law
Two Embarcadero Place
220 Gene Road
Palo Alto, CA 94303-0913
650-424-0160 telephone
650-496-2777 facsimile
October 8, 1998
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
Re: SoftNet Systems, Inc. Registration Statement on Form S-3 for 4,240,000
Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to SoftNet Systems, Inc., a New York
Corporation (the "Company") in connection with the above-referenced registration
statement (the "Registration Statement") filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), under which
certain shareholders of the Company intend to sell up to an aggregate of
4,240,000 shares of the Company's Common Stock, par value $0.01 per share (the
"Shares").
This opinion is being furnished in accordance with the
requirements of Item 16 of Form S-3 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the
corporate proceedings taken by the Company in connection with the issuance and
sale of the Shares. Based on such review, we are of the opinion that the Shares
have been duly authorized, and if, as and when issued in accordance with the
Registration Statement and the related prospectus (as amended and supplemented
through the date of issuance) will be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement. In giving this consent, we do not thereby admit
that we are within the category of persons whose consent is required under
Section 7 of the Act, the rules and regulations of the Securities and Exchange
Commission promulgated thereunder, or Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written
above and we disclaim any obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
/s/ Brobeck, Phleger & Harrison
Included as Part of Exhibit 5.1
Exhibit 23.2
Consent of PricewaterhouseCoopers, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3) and related prospectus of SoftNet Systems,
Inc. for the registration of 4,240,000 shares of its common stock and to the
incorporation by reference therein of our report, with respect to the financial
statements of SoftNet Systems, Inc. included in its Annual Report (Form 10-K)
for the fiscal year ended September 30, 1997, filed with the Securities and
Exchange Commission.
October 9, 1998 PRICEWATERHOUSECOOPERS, L.L.P.
San Jose, California
/s/ PricewaterhouseCoopers, L.L.P.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
Dated: August 31, 1998
to Purchase 93,750 Shares of Common Stock of
SOFTNET SYSTEMS, INC.
SOFTNET SYSTEMS, INC., a New York corporation (the "Company"),
hereby certifies that RGC INTERNATIONAL INVESTORS, LDC, its permissible
transferees, designees, successors and assigns (collectively, the "Holder"), for
value received, is entitled to purchase from the Company at any time commencing
on August 31, 1998 ("Issuance Date") and terminating on the fourth anniversary
of the Issuance Date (or such earlier date as is specified in a duly delivered
Call Notice (as defined below)) up to Ninety Three Thousand Seven Hundred and
Fifty (93,750) shares (each a "Share" and collectively the "Shares") of the
Company's common stock (the "Common Stock") at an exercise price per Share of
$9.375 (the "Exercise Price"). The number of Shares purchasable hereunder and
the Exercise Price are subject to adjustment as provided in Section 4 hereof.
1. Exercise of Warrants.
(a) Upon presentation and surrender of this Common Stock Purchase Warrant
Certificate ("Warrant Certificate" or "Certificate"), or a Lost Certificate
Affidavit (as defined below), accompanied by a completed Election to Purchase in
the form attached hereto as Exhibit A (the "Election to Purchase") duly
executed, at the principal office of the Company at 520 Logue Avenue, Mountain
View, CA 94043, Attn: Mark Philips, together with a check payable to the Company
in the amount of the Exercise Price multiplied by the number of Shares being
purchased, the Company or the Company's Transfer Agent as the case may be,
shall, within two (2) trading days of receipt of the foregoing, deliver to the
Holder hereof, certificates of fully paid and nonassessable Common Stock which
in the aggregate represent the number of Shares being purchased; provided,
however, that the Investor may elect, in accordance with paragraph (b), below,
to utilize the cashless exercise provisions set forth below in lieu of SoftNet
Systems, Inc.: Common Stock Purchase Warrant Certificate tendering the Exercise
Price in cash. The certificates so delivered shall be in such denominations as
may be reasonably requested by the Holder and shall be registered in the name of
the Holder or such other name as shall be designated by the Holder. All or less
than all of the Warrants represented by this Certificate may be exercised and,
in case of the exercise of less than all, the Company, upon surrender hereof,
will at the Company's expense deliver to the Holder a new Warrant Certificate or
Certificates (in such denominations as may be requested by the Holder) of like
tenor and dated the date hereof entitling said holder to purchase the number of
Shares represented by this Certificate which have not been exercised and to
receive Registration Rights with respect to such Shares, and all other rights
with respect to the shares which the Holder has on the date hereof.
(b) Cashless Exercise. Notwithstanding the foregoing provision regarding payment
of the Exercise Price in cash, the Holder may elect, in its sole discretion on a
case by case basis, to receive a reduced number of Shares in lieu of tendering
the Exercise Price in cash ("Cashless Exercise"). In such case, the number of
Shares to be issued to the Holder shall be computed using the following
formula;:
X = Y(A-B)
----------
A
where: X = the number of Shares to be issued to the Holder;
Y = the number of Shares to be exercised under this Warrant Certificate;
A = the Market Value (defined below) of one share of Common Stock
on the trading day immediately prior to the date that the Election
to Purchase is duly surrendered to the Company for full or partial
exercise; and B = the Exercise Price.
The term "Market Value" means, for any security as of any date, the last
reported sale price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to the Holder if Bloomberg
Financial Markets is not then reporting last reported sale prices of such
security (collectively, "Bloomberg"), or if the foregoing does not apply, the
last reported sale price of such security in the over-the-counter market or the
electronic bulletin board of such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security that are listed in the "pink
sheets" by the National Quotation Bureau, Inc. If the Market Value cannot be
calculated for such security on such date on any of the foregoing bases, the
Market Value of such security on such date shall be the fair market value as
reasonably determined by an investment banking firm selected by the Company and
reasonably acceptable to the Holder with the costs of such appraisal to be borne
by the Company.
2. Exchange, Transfer and Replacement.
(a) Exchange. At any time prior to the exercise hereof, this Warrant Certificate
may be exchanged upon presentation and surrender to the Company, alone or with
other Warrant Certificates of like tenor of different denominations registered
in the name of the same Holder, together with a duly executed Assignment in
substantially the form and substance of the Form of Assignment which accompanies
this Warrant Certificate. The Warrant Certificate or Certificates shall be
exchanged for another Warrant Certificate or Certificates of like tenor in the
name of such Holder and/or the transferees named in such Assignment, exercisable
for the aggregate number of Shares as the Certificate or Certificates
surrendered, provided that the Company shall not be obligated to issue exchange
or transfer Certificates for an exchange or transfer of less than 10,000 shares.
The Company shall issue any Warrant Certificates reflecting such transfer or
assignment (including such portion of this Warrant Certificate, if any, as shall
not have been transferred or assigned) within three (3) business days after
receipt of the requisite Warrant Certificate(s) and duly completed Assignment.
(b) Replacement of Warrant Certificate. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant Certificate and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company (collectively, a "Lost Certificate Affidavit"),
or, in the case of any such mutilation, upon surrender and cancellation of this
Warrant Certificate, the Company, at its expense, will execute and deliver in
lieu thereof, a new Warrant Certificate of like tenor.
(c) Cancellation; Payment of Expenses. Upon the surrender of this Warrant
Certificate in connection with any transfer, exchange or replacement as provided
in this Section 2, this Warrant Certificate shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
Holder or transferees) and charges payable in connection with the preparation,
execution and delivery of Warrant Certificates pursuant to this Section 2.
(d) Warrant Register. The Company shall maintain, at its principal executive
offices (or at the offices of the transfer agent for the Warrant Certificate or
such other office or agency of the Company as it may designate by notice to the
holder hereoq, a register for this Warrant Certificate (the "Warrant Register"),
in which the Company shall record the name and address of the person in whose
name this Warrant Certificate has been issued, as well as the name and address
of each permitted transferee and each prior owner of this Warrant Certificate.
(e) Company Call Right. Beginning on the business day following the first
anniversary of the Issuance Date, provided that the twenty consecutive trading
day average closing bid price of the Common Stock of the Company for the period
ending on the date prior to delivery of such notice (as reported by Bloomberg)
is equal to or greater than 150% of the Exercise Price, as adjusted pursuant to
Section 4 hereof, the Company shall have the ability to deliver a written notice
to the Holder hereof (a "Call Notice") that the Company is exercising its right
to call this Warrant Certificate. The Call Notice shall specify a date no less
than 30 days following the date of delivery of such Call Notice, and, unless
exercised prior to such date, this Certificate (or any unexercised portion
hereof) shall expire, and Holder shall have no further rights hereunder, on and
following such specified date. The Holder shall have the right to exercise its
rights hereunder during such 30 day notice period.
3. Rights and Obligations of Holders of this Certificate.
The Holder of this Certificate shall not, by virtue hereof, be entitled to any
rights of a stockholder in the Company, either at law or in equity; provided,
however, that in the event any certificate representing shares of Common Stock
or other securities is issued to the holder hereof upon exercise of some or all
of the Warrants, such holder shall, for all purposes, be deemed to have become
the holder of record of such Common Stock on the date on which this Certificate,
together with a duly executed Purchase Form, was surrendered and payment of the
aggregate Exercise Price was made, irrespective of the date of delivery of such
share certificate.
4. Adjustments.
(a) Stock Dividends, Reclassifications, Recapitalizations, Etc. In the event the
Company: (i) pays a dividend in Common Stock or makes a distribution in Common
Stock, (ii) subdivides its outstanding Common Stock into a greater number of
shares, (iii) combines its outstanding Common Stock into a smaller number of
shares or (iv) increases or decreases the number of shares of Common Stock
outstanding by reclassification of its Common Stock (including a
recapitalization in connection with a consolidation or merger in which the
Company is the continuing corporation), then (1) the Exercise Price on the
record date of such division or distribution or the effective date of such
action shall be adjusted by multiplying such Exercise Price by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately before such event and the denominator of which is the number of
shares of Common Stock outstanding immediately after such event, and (2) the
number of shares of Common Stock for which this Warrant Certificate may be
exercised immediately before such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the Exercise Price immediately
before such event and the denominator of which is the Exercise Price immediately
after such event.
(b) Cash Dividends and Other Distributions. In the event that at any time or
from time to time the Company shall distribute to all holders of Common Stock
(i) any dividend or other distribution of cash, evidences of its indebtedness,
shares of its capital stock or any other properties or securities or (ii) any
options, warrants or other rights to subscribe for or purchase any of the
foregoing (other than in each case, (w) the issuance of any rights under a
shareholder rights plan, (x) any dividend or distribution described in Section
4(a), (y) any rights, options, warrants or securities described in Section 4(c)
and (z) any cash dividends or other cash distributions from current earnings),
then the number of shares of Common Stock issuable upon the exercise of each
Warrant Certificate shall be increased to a number determined by multiplying the
number of shares of Common Stock issuable upon the exercise of such Warrant
Certificate immediately prior to the record date for any such dividend or
distribution by a fraction, the numerator of which shall be such Market Value
(as hereinafter defined) per share of Common Stock on the record date for such
dividend or distribution, and the denominator of which shall be such Market
Value per share of Common Stock on the record date for such dividend or
distribution less the sum of (x) the amount of cash, if any, distributed per
share of Common Stock and (y) the fair value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be evidenced by a
board resolution, a copy of which will be sent to the Holders upon request) of
the portion, if any, of the distribution applicable to one share of Common Stock
consisting of evidences of indebtedness, shares of stock, securities, other
property, warrants, options or subscription or purchase rights; and the Exercise
Price shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to such record date by the above fraction. Such adjustments
shall be made whenever any distribution is made and shall become effective as of
the date of distribution, retroactive to the record date for any such
distribution. No adjustment shall be made pursuant to this Section 4(b) which
shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant Certificate or increasing the Exercise
Price.
(c) Rights Issue. In the event that at any time, or from time to time, the
Company shall issue rights, options or warrants entitling the holders thereof to
subscribe for shares of Common Stock, or securities convertible into or
exchangeable or exercisable for Common Stock to all holders of Common Stock
(other than in connection with the adoption of a shareholder rights plan by the
Company) without any charge, entitling such holders to subscribe for or purchase
shares of Common Stock at a price per share that as of the record date for such
issuance is less than the then Market Value per share of Common Stock, the
number of shares of Common Stock issuable upon the exercise of each Warrant
Certificate shall be increased to a number determined by multiplying the number
of shares of Common Stock theretofore issuable upon exercise of each Warrant
Certificate by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding on the date of issuance of such rights, options,
warrant or securities plus the number of additional shares of Common Stock
offered for subscription or purchase or into or for which such securities that
are issued are convertible, exchangeable or exercisable' and the denominator of
which shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, option, warrants or securities plus the total number of
shares of Common Stock which the aggregate consideration expected to be received
by the Company (assuming the exercise or conversion of all such rights, options,
warrants or securities) would purchase at the then Market Value per share of
Common Stock. In the event of any such adjustment, the Exercise Price shall be
adjusted to a number determined by dividing the Exercise price immediately prior
to such date of issuance by the aforementioned fraction. Such adjustment shall
be made immediately after such rights, options or warrants are issued and shall
become effective, retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or securities.
No adjustment shall be made pursuant to this Section 4(c) which shall have the
effect of decreasing the number of shares of Common Stock purchasable upon
exercise or each Warrant Certificate or of increasing the Exercise Price.
(d) Combination: Liquidation.
(i) Except as provided in Section 4(d)(ii) below, in the event of a
Combination (as defined below), each Holder shall have the right to receive upon
exercise of the Warrant Certificates the kind and amount of shares of capital
stock or other securities or property which such Holder would have been entitled
to receive upon or as a result of such Combination had such Warrant Certificate
been exercised immediately prior to such event (subject to further adjustment in
accordance with the terms hereof). Unless paragraph (ii) is applicable to a
Combination, the Company shall provide that the surviving or acquiring Person
(the "Successor Company") in such Combination will assume by written instrument
the obligations under this Section 4 and the obligations to deliver to the
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to acquire. The provisions of
this Section 4(d)(i) shall similarly apply to successive Combinations involving
any Successor Company. "Combination" means an event in which the Company
consolidates with, mergers with or into, or sells all or substantially all of
its assets to another Person, where "Person" means any individual, corporation,
partnership, joint venture, limited liability company, association, jointstock
company, trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.
(ii) In the event of (x) a Combination where consideration to the
holders of Common Stock in exchange for their shares is payable solely in cash
or (y) the dissolution, liquidation or winding-up of the Company, the Holders
shall be entitled to receive, upon surrender of their Warrant Certificates,
distributions on an equal basis with the holders of Common Stock or other
securities issuable upon exercise of the Warrant Certificates, as if the Warrant
Certificates had been exercised immediately prior to such event, less the
Exercise Price. In case of any Combination described in this Section 4(d)(ii),
the surviving or acquiring Person and, in the event of any dissolution,
liquidation or winding-up of the Company, the Company, shall deposit promptly
following the consummation of such combination or at the time of such
dissolution, liquidation or winding-up with an agent or trustee for the benefit
of the Holders of the funds, if any, necessary to pay to the Holders the amounts
to which they are entitled as described above. After such funds and the
surrendered Warrant Certificates are received, the Company is required to
deliver a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Person or Persons as it may be directed in writing by the Holders
surrendering such Warrant Certificates.
(e) Notice of Adjustment. Whenever the Exercise Price or the number of shares of
Common Stock and: other property, if any, issuable upon exercise of the Warrant
Certificates is adjusted, as herein provided, the Company shall deliver to the
holders of the Warrant Certificates in accordance with Section 10 a certificate
of the Company's Chief Financial Officer 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 (i) the Board of
Directors determined the fair value of any evidences of indebtedness, other
securities or property or warrants, options or other subscription or purchase
rights and (ii) the Market Value of the Common Stock was determined, if either
of such determinations were required), and specifying the Exercise Price and
number of shares of Common Stock issuable upon exercise of Warrant Certificates
after giving effect to such adjustment.
(f) Purchase Price Adjustment. In the event that the Company issues or sells any
Common Stock or securities which are convertible into or exchangeable, whether
or not immediately exchangeable or convertible, for its Common Stock or any
convertible securities, or any warrants or other rights to subscribe for or to
purchase or any options for the purchase of its Common Stock or any such
convertible securities (other than shares or options issued or which may be
issued pursuant to the Company's employee or director option plans or shares
issued upon exercise of options, warrants or rights outstanding on the date of
the Agreement and listed in the Company's most recent periodic report filed
under the Exchange Act) (collectively, "Options") at a purchase price per share
on the date of original issuance of such security which is less than 95% of the
Market Value of the Common Stock on the trading day immediately prior to such
issue or sale, then in each such case, the Exercise Price in effect immediately
prior to such issue or sale shall be reduced effective concurrently with such
issue or sale to an amount determined by multiplying the Exercise Price then in
effect by a fraction, (x) the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding immediately prior to such issue or
sale, plus (2) the number of shares of Common Stock which the aggregate
consideration received by the Company for such additional shares would purchase
at such Market Value; and (y) the denominator of which shall be the number of
shares of Common Stock of the Company outstanding immediately after such issue
or sale.
For the purposes of the foregoing adjustment, in the case of the issuance of any
convertible securities, warrants, options or other rights to subscribe for or to
purchase or exchange for, shares of Common Stock ("Convertible Securities"), the
maximum number of shares of Common Stock that would be issuable upon exercise,
exchange or conversion of such Convertible Securities (assuming that shares of
Common Stock were trading at the then Market Value at the time of conversion)
shall be deemed to be outstanding, provided that no further adjustment shall be
made upon the actual issuance of Common Stock upon exercise, exchange or
conversion of such Convertible Securities.
(g) Change in Option Price or Conversion Rate. If there is a change at any time
in (i) the amount of additional consideration payable to the Company upon the
exercise of any Options; (ii) the amount of additional consideration, if any,
payable to the Company upon the conversion or exchange of any convertible
Securities; or (iii) the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock (other than under or by reason
of provisions designed to protect against dilution), the Exercise Price in
effect at the time of such change will be readjusted to the Exercise Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold.
(h) Notice of Certain Transactions. In the event that the Company shall propose
(a) to pay any dividend payable in securities of any class to the holders of its
Common Stock or to make any other non-cash dividend or distribution to the
holders of its Common Stock, (b) to offer the holders of its Common Stock rights
to subscribe for or to purchase any securities convertible into shares of Common
Stock or shares of stock of any class or any other securities, rights or
options, (c) to effect any capital reorganization, reclassification,
consolidation or merger affecting the class of Common Stock, as a whole, or (d)
to effect the voluntary or involuntary dissolution, liquidation or winding-up of
the Company, the Company shall, within the time limits specified below, send to
each Holder a notice of such proposed action or offer. Such notice shall be
mailed to the Holders at their addresses as they appear in the Warrant Register
(as defined in Section 2(d)), which shall specify the record date for the
purposes of such dividend, distribution or rights, or the date such issuance or
event is to take place and the date of participation therein by the holders of
Common Stock, if any such date is to be fixed, and shall briefly indicate the
effect of such action on the number of shares of Common Stock and on the number
and kind of any other shares of stock and on other property, if any, and the
number of shares of Common Stock and other property, if any, issuable upon
exercise of each Warrant Certificate and the Exercise Price after giving effect
to any adjustment pursuant to Section 4 which will be required as a result of
such action. 'Such notice shall be given as promptly as possible and (x) in the
case of any action covered by clause (a) or (b) above, at least 10 days prior to
the record date for determining holders of the Common Stock for purposes of such
action or (y) in the case of any other such action, at least 20 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the earlier.
(i) Other Adjustments. In the event of any other transaction of the type
contemplated by this Section 4, but not expressly provided for by the provisions
hereof, the Board of Directors of the Company will make appropriate adjustment
in the Exercise Price so as to equitably protect the rights of the Holder.
(j) No Impairment of Holder's Rights. The Company will not, by amendment of its
articles of organization or bylaws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, except as contemplated hereby, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant Certificate,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all action as may be necessary or appropriate in order to
protect the rights of the Holder against dilution or other impairment.
5. Company's Representations.
(a) The Company covenants and agrees that all shares of Common Stock issuable
upon exercise of this Warrant Certificate will, upon delivery, be duly and
validly authorized and issued, fully-paid and non-assessable and free from all
taxes, liens, claims and encumbrances.
(b) The Company covenants and agrees that it will at all times reserve and keep
available an authorized number of shares of its Common Stock and other
applicable securities sufficient to permit the exercise in full of all
outstanding options, warrants and rights, including this Warrant Certificate.
(c) The Company shall promptly secure the listing of the Shares upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed or become listed (subject to official
notice of issuance upon exercise of this Warrant Certificate) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant Certificate; and the Company shall so list on each
national securities exchange or automated quotation system, as the case may be,
and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant Certificate if and so long as
any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(d) The Company has taken all necessary action and proceedings as required and
permitted by applicable law, rule and regulation, including, without limitation,
the notification of the principal market on which the Common Stock is traded,
for the legal and valid issuance of this Warrant Certificate to the Holder under
this Warrant Certificate.
(e) With a view to making available to Holder the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the Securities and
Exchange Commission ("SEC") that may at any time permit Holder to sell
securities of the Company to the public without registration, the Company agrees
to use its reasonable best efforts to:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Securities Exchange Act
of 1934, as amended (the "Exchange Act"); and
(iii) furnish to any Holder forthwith upon request a written statement
by the Company that it has complied with the reporting requirements of Rule 144
and of the Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
by the Company as may be reasonably requested to permit any such Holder to take
advantage of any rule or regulation of the SEC permitting the selling of any
such securities without registration.
6. Registration Rights.
The initial Holder is entitled to the benefit of such registration rights in
respect of the Shares as are set forth in the Registration Rights Agreement
dated as of August 31, 1998 by and between the Company and the other investors
parties thereto ("Registration Rights Agreement") as if the Holder was a party
thereto, including the right to assign such rights to certain assignees as set
forth therein as if such Shares were "Registrable Securities" thereunder. The
terms of such Registration Rights Agreement are incorporated by reference as if
fully set forth herein, mutatis mutandis. The Company acknowledges that the
initial Holder may transfer some of the Warrants to certain of its employees on
or about December 31, 1999 and the Company agrees to promptly amend the
Registration Statement to include the resale of shares by each new owner
thereof.
7. Issuance of Certificates.
Within two (2) trading days of receipt of a duly
completed Election to Purchase form, together with this Certificate and payment
of the Exercise Price, the Company, at its expense, will cause to be issued in
the name of and delivered to the Holder of this Warrant, a certificate or
certificates for the number of fully paid and non-assessable shares of Common
Stock to which that holder shall be entitled on such exercise. In the event the
shares of Common Stock are not timely delivered to the Holder, the Company
agrees to (a) indemnify Holder for all damages, including consequential and
special damages, lost profits and expenses, including legal fees, and (b)
beginning on the fifth (5th) day following the Company's receipt of a duly
completed Election to Purchase form, pay a default premium of 2% per day of the
value of underlying shares (based on the highest closing price during the two
(2) day period preceding the date of surrender of the Warrant Certificate). In
lieu of issuance of a fractional share upon any exercise hereunder, the Company
will pay the cash value of that fractional share, calculated on the basis of the
Exercise Price. Prior to registration of the resale of the shares of Common
Stock underlying this Warrant Certificate, and delivery of an Election to
Purchase to the Company, all such certificates shall bear a restrictive legend
to the effect that the Shares represented by such certificate have not been
registered under the 1933 Act, and that the Shares may not be sold or
transferred in the absence of such registration or an exemption therefrom, such
legend to be substantially in the form of the bold-face language appearing at
the top of Page 1 of this Warrant Certificate.
8. Disposition of Warrants or Shares. The Holder of this Warrant Certificate,
each transferee hereof and any holder and transferee of any Shares, by his or
its acceptance thereof, agrees that no public distribution of Warrants or Shares
will be made in violation of the provisions of the 1933 Act. Furthermore, it
shall be a condition to the transfer of the Warrants that any transferee thereof
deliver to the Company his or its written agreement to accept and be bound by
all of the relevant terms and conditions contained in this Warrant Certificate.
9. Notices. Except as otherwise specified herein to the contrary, all notices,
requests, demands and other communications required or desired to be given
hereunder shall only be effective if given in writing by certified or registered
U.S. mail with return receipt requested and postage prepaid; by private
overnight delivery service (e.g. Federal Express); by facsimile transmission (if
no original documents or instruments must accompany the notice); or by personal
delivery. Any such notice shall be deemed to have been given (a) on the business
day immediately following the mailing thereof, if mailed by certified or
registered U.S. mail as specified above; (b) on the business day immediately
following deposit with a private overnight delivery service if sent by said
service; (c) upon receipt of confirmation of transmission if sent by facsimile
transmission; or (d) upon personal delivery of the notice. All such notices
shall be sent to the following addresses (or to such other address or addresses
as a party may have advised the other in the manner provided in this Section
10):
If to the Company:
SoftNet Systems, Inc. 520 Logue Avenue
Mountain View, CA 94043
Attn: Chief Executive Officer
Phone: (650) 962-7451
Fax: (650) 962-7488
With a copy to:
Brobeck, Phleger & Harrison 2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Thomas W. Kellerman, Esq.
Phone: (650) 496-2788
Fax: (650) 496-2777
If to Investor:
RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P.
3 Bala Plaza East, Suite 200
251 St. Asaphs Road
Bala Cynyd, PA 19004
Telephone: (650) 962-7474
Fax: (610) 617-0570
Attn: Gary Kaminsky
and with a copy to:
Morgan Lewis & Bockius
2001 Logan Square
Philadelphia, PA 19103
Telephone: (215) 963-5083
Fax: (215) 963-5299
Attn: Keith Marlowe
in each case with a copy to:
Shoreline Pacific Institutional Finance
3 Harbor Drive, Suite 211
Sausalito, CA 94965
Telephone: (415) 332-7800
Telecopy: (415) 332-7808
Attention: General Counsel
Notwithstanding the time of effectiveness of notices set forth in this Section,
an Election to Purchase shall not be deemed effectively given until it has been
duly completed and submitted to the Company together with the original Warrant
Certificate to be exercised and payment of the Exercise Price in a manner set
forth in this Section.
10. Notwithstanding anything in this Warrant Certificate to the contrary, in no
event shall the holder of this Warrant Certificate be entitled to exercise with
respect to a number of shares of Common Stock to the extent that following such
exercise the sum of (i) the number of shares of Common Stock beneficially owned
by the holder and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unexercised Warrant
Certificates and unconverted shares of Preferred Stock (as defined in the
Securities Purchase Agreement)) or other securities containing restrictions on
conversion or exercise analogous to the provisions in this paragraph), and (ii)
the number of shares of Common Stock issuable upon exercise of the Warrant
Certificates (or portions thereof) with respect to which the determination
described herein is being made, would result in beneficial ownership by the
holder and its affiliates of more than 4.99% of the outstanding shares of Common
Stock. For purposes of the immediately preceding sentence, shall be determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rules 13(d) -(g) thereunder, except as otherwise provided in clause
(i) hereof.
11. Governing Law.
This Warrant Certificate and all rights and obligations hereunder shall be
deemed to be made under and governed by the laws of the State of New York
without giving effect to the conflicts of laws provisions. The Holder hereby
irrevocably consents to the venue and jurisdiction of the State and Federal
Courts located in the State of New York, County of New York.
12. Successors and Assigns.
This Warrant Certificate shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
13. Headings.
The headings of various sections of this Warrant Certificate have been inserted
for reference only and shall not affect the meaning or construction of any of
the provisions hereof.
14. Severability.
If any provision of this Warrant Certificate is held to be unenforceable under
applicable law, such provision shall be excluded from this Warrant Certificate,
and the balance hereof shall be interpreted as if such provision were so
excluded.
15. Modification and Waiver.
This Warrant Certificate and any provision hereof may be amended, waived,
discharged or terminated only by an instrument in writing signed by the Company
and the Holder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
16. Specific Enforcement.
The Company and the Holder acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Warrant Certificate were
not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Warrant Certificate and to enforce specifically the terms and provisions hereof,
this being in addition to any other remedy to which either of them may be
entitled by law or equity.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or by facsimile, by one of its
officers thereunto duly authorized.
Date: SOFTNET SYSTEMS, INC.
By:
Name:
Title:
<PAGE>
ELECTION TO PURCHASE
To Be Executed by the Holder
in Order to Exercise the Common Stock
Purchase Warrant Certificate
The undersigned Holder hereby elects to exercise of the
Warrants represented by the attached Common Stock Purchase Warrant Certificate,
and to purchase the shares of Common Stock issuable upon the exercise of such
Warrants, and requests that certificates for securities be issued in the name
of:
----------------------------------------------------------------
(Please type or print name and address)
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
(Social Security or Tax Identification Number)
and deliver to:
------------------------------------------------------------------------------
------------------------------------------------------------------------------
If such number of Warrants being exercised hereby shall not be all the Warrants
evidenced by the attached Common Stock Purchase Warrant Certificate, a new
Common Stock Purchase Warrant Certificate for the balance of such Warrants shall
be registered in the name of, and delivered to, the Holder at the address set
forth below.
[In full payment of the purchase price with respect to the
Warrants exercised and transfer taxes, if any, the undersigned hereby tenders
payment of $ by check, money order or wire transfer payable in United States
currency to the order of SoftNet Systems, Inc.] or [The undersigned elects
cashless exercise in accordance with Section l(b) of the Common Stock Purchase
Warrant Certificate.]
<PAGE>
Holder hereby represents and covenants that it has complied
with, or will comply with, any and all prospectus delivery requirements with
respect to its sale of the Common Stock of the Company being purchased herewith.
Date: HOLDER:
By:
Name:
Title:
Address:
<PAGE>
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto
______________ the right represented by the within Warrant to purchase
___________ shares of Common Stock of SoftNet Systems, Inc., a New York
corporation, to which the within Warrant relates, and appoints
_____________Attorney to transfer such right on the books of SoftNet Systems,
Inc., a New York corporation, with full power of substitution of premises.
Date: By:
Name:
Title:
(signature must conform to name of holder as specified
on the face of the Warrant)
Address:
Signed in the presence of:
- -------------------------------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
Dated: August 31, 1998
to Purchase _____ Shares of Common Stock of
SOFTNET SYSTEMS, INC.
SOFTNET SYSTEMS, INC., a New York corporation (the "Company"),
hereby certifies that ______________, his permissible transferees, designees,
successors and assigns (collectively, the "Holder"), for value received, is
entitled to purchase from the Company at any time commencing on August 31, 1998
("Issuance Date") and terminating on the fourth anniversary of the Issuance Date
(or such earlier date as is specified in a duly delivered Call Notice (as
defined below)) up to _____ shares (each a "Share" and collectively the
"Shares") of the Company's common stock (the "Common Stock") at an exercise
price per Share of $7.50 (the "Exercise Price"). The number of Shares
purchasable hereunder and the Exercise Price are subject to adjustment as
provided in Section 4 hereof.
1. Exercise of Warrants.
(a) Upon presentation and surrender of this Common Stock Purchase Warrant
Certificate ("Warrant Certificate" or "Certificate"), or a Lost Certificate
Affidavit (as defined below), accompanied by a completed Election to Purchase in
the form attached hereto as Exhibit A (the "Election to Purchase") duly
executed, at the principal office of the Company at 520 Logue Avenue, Mountain
View, CA 94043, Attn: Mark Philips, together with a check payable to the Company
in the amount of the Exercise Price multiplied by the number of Shares being
purchased, the Company or the Company's Transfer Agent as the case may be,
shall, within two (2) trading days of receipt of the foregoing, deliver to the
Holder hereof, certificates of fully paid and nonassessable Common Stock which
in the aggregate represent the number of Shares being purchased; provided,
however, that the Investor may elect, in accordance with paragraph (b), below,
to utilize the cashless exercise provisions set forth below in lieu of SoftNet
Systems, Inc.: Common Stock Purchase Warrant Certificate tendering the Exercise
Price in cash. The certificates so delivered shall be in such denominations as
may be reasonably requested by the Holder and shall be registered in the name of
the Holder or such other name as shall be designated by the Holder. All or less
than all of the Warrants represented by this Certificate may be exercised and,
in case of the exercise of less than all, the Company, upon surrender hereof,
will at the Company's expense deliver to the Holder a new Warrant Certificate or
Certificates (in such denominations as may be requested by the Holder) of like
tenor and dated the date hereof entitling said holder to purchase the number of
Shares represented by this Certificate which have not been exercised and to
receive Registration Rights with respect to such Shares, and all other rights
with respect to the shares which the Holder has on the date hereof.
(b) Cashless Exercise. Notwithstanding the foregoing provision regarding payment
of the Exercise Price in cash, the Holder may elect, in its sole discretion on a
case by case basis, to receive a reduced number of Shares in lieu of tendering
the Exercise Price in cash ("Cashless Exercise"). In such case, the number of
Shares to be issued to the Holder shall be computed using the following
formula;:
X = Y(A-B)
----------
A
where: X = the number of Shares to be issued to the Holder;
Y = the number of Shares to be exercised under this Warrant
Certificate;
A = the Market Value (defined below) of one share of Common Stock
on the trading day immediately prior to the date that the Election
to Purchase is duly surrendered to the Company for full or partial
exercise; and
B = the Exercise Price.
The term "Market Value" means, for any security as of any date, the last
reported sale price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to the Holder if Bloomberg
Financial Markets is not then reporting last reported sale prices of such
security (collectively, "Bloomberg"), or if the foregoing does not apply, the
last reported sale price of such security in the over-the-counter market or the
electronic bulletin board of such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security that are listed in the "pink
sheets" by the National Quotation Bureau, Inc. If the Market Value cannot be
calculated for such security on such date on any of the foregoing bases, the
Market Value of such security on such date shall be the fair market value as
reasonably determined by an investment banking firm selected by the Company and
reasonably acceptable to the Holder with the costs of such appraisal to be borne
by the Company.
2. Exchange, Transfer and Replacement.
(a) Exchange. At any time prior to the exercise hereof, this Warrant Certificate
may be exchanged upon presentation and surrender to the Company, alone or with
other Warrant Certificates of like tenor of different denominations registered
in the name of the same Holder, together with a duly executed Assignment in
substantially the form and substance of the Form of Assignment which accompanies
this Warrant Certificate. The Warrant Certificate or Certificates shall be
exchanged for another Warrant Certificate or Certificates of like tenor in the
name of such Holder and/or the transferees named in such Assignment, exercisable
for the aggregate number of Shares as the Certificate or Certificates
surrendered, provided that the Company shall not be obligated to issue exchange
or transfer Certificates for an exchange or transfer of less than 10,000 shares.
The Company shall issue any Warrant Certificates reflecting such transfer or
assignment (including such portion of this Warrant Certificate, if any, as shall
not have been transferred or assigned) within three (3) business days after
receipt of the requisite Warrant Certificate(s) and duly completed Assignment.
(b) Replacement of Warrant Certificate. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant Certificate and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company (collectively, a "Lost Certificate Affidavit"),
or, in the case of any such mutilation, upon surrender and cancellation of this
Warrant Certificate, the Company, at its expense, will execute and deliver in
lieu thereof, a new Warrant Certificate of like tenor.
(c) Cancellation; Payment of Expenses. Upon the surrender of this Warrant
Certificate in connection with any transfer, exchange or replacement as provided
in this Section 2, this Warrant Certificate shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
Holder or transferees) and charges payable in connection with the preparation,
execution and delivery of Warrant Certificates pursuant to this Section 2.
(d) Warrant Register. The Company shall maintain, at its principal executive
offices (or at the offices of the transfer agent for the Warrant Certificate or
such other office or agency of the Company as it may designate by notice to the
holder hereoq, a register for this Warrant Certificate (the "Warrant Register"),
in which the Company shall record the name and address of the person in whose
name this Warrant Certificate has been issued, as well as the name and address
of each permitted transferee and each prior owner of this Warrant Certificate.
(e) Company Call Right. Beginning on the business day following the first
anniversary of the Issuance Date, provided that the twenty consecutive trading
day average closing bid price of the Common Stock of the Company for the period
ending on the date prior to delivery of such notice (as reported by Bloomberg)
is equal to or greater than 150% of the Exercise Price, as adjusted pursuant to
Section 4 hereof, the Company shall have the ability to deliver a written notice
to the Holder hereof (a "Call Notice") that the Company is exercising its right
to call this Warrant Certificate. The Call Notice shall specify a date no less
than 30 days following the date of delivery of such Call Notice, and, unless
exercised prior to such date, this Certificate (or any unexercised portion
hereof) shall expire, and Holder shall have no further rights hereunder, on and
following such specified date. The Holder shall have the right to exercise its
rights hereunder during such 30 day notice period.
3. Rights and Obligations of Holders of this Certificate.
The Holder of this Certificate shall not, by virtue hereof, be entitled to any
rights of a stockholder in the Company, either at law or in equity; provided,
however, that in the event any certificate representing shares of Common Stock
or other securities is issued to the holder hereof upon exercise of some or all
of the Warrants, such holder shall, for all purposes, be deemed to have become
the holder of record of such Common Stock on the date on which this Certificate,
together with a duly executed Purchase Form, was surrendered and payment of the
aggregate Exercise Price was made, irrespective of the date of delivery of such
share certificate.
4. Adjustments.
(a) Stock Dividends, Reclassifications, Recapitalizations, Etc. In the event the
Company: (i) pays a dividend in Common Stock or makes a distribution in Common
Stock, (ii) subdivides its outstanding Common Stock into a greater number of
shares, (iii) combines its outstanding Common Stock into a smaller number of
shares or (iv) increases or decreases the number of shares of Common Stock
outstanding by reclassification of its Common Stock (including a
recapitalization in connection with a consolidation or merger in which the
Company is the continuing corporation), then (1) the Exercise Price on the
record date of such division or distribution or the effective date of such
action shall be adjusted by multiplying such Exercise Price by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately before such event and the denominator of which is the number of
shares of Common Stock outstanding immediately after such event, and (2) the
number of shares of Common Stock for which this Warrant Certificate may be
exercised immediately before such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the Exercise Price immediately
before such event and the denominator of which is the Exercise Price immediately
after such event.
(b) Cash Dividends and Other Distributions. In the event that at any time or
from time to time the Company shall distribute to all holders of Common Stock
(i) any dividend or other distribution of cash, evidences of its indebtedness,
shares of its capital stock or any other properties or securities or (ii) any
options, warrants or other rights to subscribe for or purchase any of the
foregoing (other than in each case, (w) the issuance of any rights under a
shareholder rights plan, (x) any dividend or distribution described in Section
4(a), (y) any rights, options, warrants or securities described in Section 4(c)
and (z) any cash dividends or other cash distributions from current earnings),
then the number of shares of Common Stock issuable upon the exercise of each
Warrant Certificate shall be increased to a number determined by multiplying the
number of shares of Common Stock issuable upon the exercise of such Warrant
Certificate immediately prior to the record date for any such dividend or
distribution by a fraction, the numerator of which shall be such Market Value
(as hereinafter defined) per share of Common Stock on the record date for such
dividend or distribution, and the denominator of which shall be such Market
Value per share of Common Stock on the record date for such dividend or
distribution less the sum of (x) the amount of cash, if any, distributed per
share of Common Stock and (y) the fair value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be evidenced by a
board resolution, a copy of which will be sent to the Holders upon request) of
the portion, if any, of the distribution applicable to one share of Common Stock
consisting of evidences of indebtedness, shares of stock, securities, other
property, warrants, options or subscription or purchase rights; and the Exercise
Price shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to such record date by the above fraction. Such adjustments
shall be made whenever any distribution is made and shall become effective as of
the date of distribution, retroactive to the record date for any such
distribution. No adjustment shall be made pursuant to this Section 4(b) which
shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant Certificate or increasing the Exercise
Price.
(c) Rights Issue. In the event that at any time, or from time to time, the
Company shall issue rights, options or warrants entitling the holders thereof to
subscribe for shares of Common Stock, or securities convertible into or
exchangeable or exercisable for Common Stock to all holders of Common Stock
(other than in connection with the adoption of a shareholder rights plan by the
Company) without any charge, entitling such holders to subscribe for or purchase
shares of Common Stock at a price per share that as of the record date for such
issuance is less than the then Market Value per share of Common Stock, the
number of shares of Common Stock issuable upon the exercise of each Warrant
Certificate shall be increased to a number determined by multiplying the number
of shares of Common Stock theretofore issuable upon exercise of each Warrant
Certificate by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding on the date of issuance of such rights, options,
warrant or securities plus the number of additional shares of Common Stock
offered for subscription or purchase or into or for which such securities that
are issued are convertible, exchangeable or exercisable' and the denominator of
which shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, option, warrants or securities plus the total number of
shares of Common Stock which the aggregate consideration expected to be received
by the Company (assuming the exercise or conversion of all such rights, options,
warrants or securities) would purchase at the then Market Value per share of
Common Stock. In the event of any such adjustment, the Exercise Price shall be
adjusted to a number determined by dividing the Exercise price immediately prior
to such date of issuance by the aforementioned fraction. Such adjustment shall
be made immediately after such rights, options or warrants are issued and shall
become effective, retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or securities.
No adjustment shall be made pursuant to this Section 4(c) which shall have the
effect of decreasing the number of shares of Common Stock purchasable upon
exercise or each Warrant Certificate or of increasing the Exercise Price.
(d) Combination: Liquidation.
(i) Except as provided in Section 4(d)(ii) below, in the event of a
Combination (as defined below), each Holder shall have the right to receive upon
exercise of the Warrant Certificates the kind and amount of shares of capital
stock or other securities or property which such Holder would have been entitled
to receive upon or as a result of such Combination had such Warrant Certificate
been exercised immediately prior to such event (subject to further adjustment in
accordance with the terms hereof). Unless paragraph (ii) is applicable to a
Combination, the Company shall provide that the surviving or acquiring Person
(the "Successor Company") in such Combination will assume by written instrument
the obligations under this Section 4 and the obligations to deliver to the
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to acquire. The provisions of
this Section 4(d)(i) shall similarly apply to successive Combinations involving
any Successor Company. "Combination" means an event in which the Company
consolidates with, mergers with or into, or sells all or substantially all of
its assets to another Person, where "Person" means any individual, corporation,
partnership, joint venture, limited liability company, association, jointstock
company, trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.
(ii) In the event of (x) a Combination where consideration to the holders
of Common Stock in exchange for their shares is payable solely in cash or (y)
the dissolution, liquidation or winding-up of the Company, the Holders shall be
entitled to receive, upon surrender of their Warrant Certificates, distributions
on an equal basis with the holders of Common Stock or other securities issuable
upon exercise of the Warrant Certificates, as if the Warrant Certificates had
been exercised immediately prior to such event, less the Exercise Price. In case
of any Combination described in this Section 4(d)(ii), the surviving or
acquiring Person and, in the event of any dissolution, liquidation or winding-up
of the Company, the Company, shall deposit promptly following the consummation
of such combination or at the time of such dissolution, liquidation or
winding-up with an agent or trustee for the benefit of the Holders of the funds,
if any, necessary to pay to the Holders the amounts to which they are entitled
as described above. After such funds and the surrendered Warrant Certificates
are received, the Company is required to deliver a check in such amount as is
appropriate (or, in the case of consideration other than cash, such other
consideration as is appropriate) to such Person or Persons as it may be directed
in writing by the Holders surrendering such Warrant Certificates.
(e) Notice of Adjustment. Whenever the Exercise Price or the number of shares of
Common Stock and: other property, if any, issuable upon exercise of the Warrant
Certificates is adjusted, as herein provided, the Company shall deliver to the
holders of the Warrant Certificates in accordance with Section 10 a certificate
of the Company's Chief Financial Officer 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 (i) the Board of
Directors determined the fair value of any evidences of indebtedness, other
securities or property or warrants, options or other subscription or purchase
rights and (ii) the Market Value of the Common Stock was determined, if either
of such determinations were required), and specifying the Exercise Price and
number of shares of Common Stock issuable upon exercise of Warrant Certificates
after giving effect to such adjustment.
(f) Purchase Price Adjustment. In the event that the Company issues or sells any
Common Stock or securities which are convertible into or exchangeable, whether
or not immediately exchangeable or convertible, for its Common Stock or any
convertible securities, or any warrants or other rights to subscribe for or to
purchase or any options for the purchase of its Common Stock or any such
convertible securities (other than shares or options issued or which may be
issued pursuant to the Company's employee or director option plans or shares
issued upon exercise of options, warrants or rights outstanding on the date of
the Agreement and listed in the Company's most recent periodic report filed
under the Exchange Act) (collectively, "Options") at a purchase price per share
on the date of original issuance of such security which is less than 95% of the
Market Value of the Common Stock on the trading day immediately prior to such
issue or sale, then in each such case, the Exercise Price in effect immediately
prior to such issue or sale shall be reduced effective concurrently with such
issue or sale to an amount determined by multiplying the Exercise Price then in
effect by a fraction, (x) the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding immediately prior to such issue or
sale, plus (2) the number of shares of Common Stock which the aggregate
consideration received by the Company for such additional shares would purchase
at such Market Value; and (y) the denominator of which shall be the number of
shares of Common Stock of the Company outstanding immediately after such issue
or sale.
For the purposes of the foregoing adjustment, in the case of the issuance of any
convertible securities, warrants, options or other rights to subscribe for or to
purchase or exchange for, shares of Common Stock ("Convertible Securities"), the
maximum number of shares of Common Stock that would be issuable upon exercise,
exchange or conversion of such Convertible Securities (assuming that shares of
Common Stock were trading at the then Market Value at the time of conversion)
shall be deemed to be outstanding, provided that no further adjustment shall be
made upon the actual issuance of Common Stock upon exercise, exchange or
conversion of such Convertible Securities.
(g) Change in Option Price or Conversion Rate. If there is a change at any time
in (i) the amount of additional consideration payable to the Company upon the
exercise of any Options; (ii) the amount of additional consideration, if any,
payable to the Company upon the conversion or exchange of any convertible
Securities; or (iii) the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock (other than under or by reason
of provisions designed to protect against dilution), the Exercise Price in
effect at the time of such change will be readjusted to the Exercise Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold.
(h) Notice of Certain Transactions. In the event that the Company shall propose
(a) to pay any dividend payable in securities of any class to the holders of its
Common Stock or to make any other non-cash dividend or distribution to the
holders of its Common Stock, (b) to offer the holders of its Common Stock rights
to subscribe for or to purchase any securities convertible into shares of Common
Stock or shares of stock of any class or any other securities, rights or
options, (c) to effect any capital reorganization, reclassification,
consolidation or merger affecting the class of Common Stock, as a whole, or (d)
to effect the voluntary or involuntary dissolution, liquidation or winding-up of
the Company, the Company shall, within the time limits specified below, send to
each Holder a notice of such proposed action or offer. Such notice shall be
mailed to the Holders at their addresses as they appear in the Warrant Register
(as defined in Section 2(d)), which shall specify the record date for the
purposes of such dividend, distribution or rights, or the date such issuance or
event is to take place and the date of participation therein by the holders of
Common Stock, if any such date is to be fixed, and shall briefly indicate the
effect of such action on the number of shares of Common Stock and on the number
and kind of any other shares of stock and on other property, if any, and the
number of shares of Common Stock and other property, if any, issuable upon
exercise of each Warrant Certificate and the Exercise Price after giving effect
to any adjustment pursuant to Section 4 which will be required as a result of
such action. 'Such notice shall be given as promptly as possible and (x) in the
case of any action covered by clause (a) or (b) above, at least 10 days prior to
the record date for determining holders of the Common Stock for purposes of such
action or (y) in the case of any other such action, at least 20 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the earlier.
(i) Other Adjustments. In the event of any other transaction of the type
contemplated by this Section 4, but not expressly provided for by the provisions
hereof, the Board of Directors of the Company will make appropriate adjustment
in the Exercise Price so as to equitably protect the rights of the Holder.
(j) No Impairment of Holder's Rights. The Company will not, by amendment of its
articles of organization or bylaws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, except as contemplated hereby, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant Certificate,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all action as may be necessary or appropriate in order to
protect the rights of the Holder against dilution or other impairment.
5. Company's Representations.
(a) The Company covenants and agrees that all shares of Common Stock issuable
upon exercise of this Warrant Certificate will, upon delivery, be duly and
validly authorized and issued, fully-paid and non-assessable and free from all
taxes, liens, claims and encumbrances.
(b) The Company covenants and agrees that it will at all times reserve and keep
available an authorized number of shares of its Common Stock and other
applicable securities sufficient to permit the exercise in full of all
outstanding options, warrants and rights, including this Warrant Certificate.
(c) The Company shall promptly secure the listing of the Shares upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed or become listed (subject to official
notice of issuance upon exercise of this Warrant Certificate) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant Certificate; and the Company shall so list on each
national securities exchange or automated quotation system, as the case may be,
and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant Certificate if and so long as
any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(d) The Company has taken all necessary action and proceedings as required and
permitted by applicable law, rule and regulation, including, without limitation,
the notification of the principal market on which the Common Stock is traded,
for the legal and valid issuance of this Warrant Certificate to the Holder under
this Warrant Certificate.
(e) With a view to making available to Holder the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the Securities and
Exchange Commission ("SEC") that may at any time permit Holder to sell
securities of the Company to the public without registration, the Company agrees
to use its reasonable best efforts to:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Act and the Securities Exchange Act of 1934,
as amended (the "Exchange Act"); and
(iii) furnish to any Holder forthwith upon request a written statement by
the Company that it has complied with the reporting requirements of Rule 144 and
of the Act and the Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so filed by the
Company as may be reasonably requested to permit any such Holder to take
advantage of any rule or regulation of the SEC permitting the selling of any
such securities without registration.
6. Registration Rights.
The initial Holder is entitled to the benefit of such registration rights in
respect of the Shares as are set forth in the Registration Rights Agreement
dated as of August 31, 1998 by and between the Company and the other investors
parties thereto ("Registration Rights Agreement") as if the Holder was a party
thereto, including the right to assign such rights to certain assignees as set
forth therein as if such Shares were "Registrable Securities" thereunder. The
terms of such Registration Rights Agreement are incorporated by reference as if
fully set forth herein, mutatis mutandis. The Company acknowledges that the
initial Holder may transfer some of the Warrants to certain of its employees on
or about December 31, 1999 and the Company agrees to promptly amend the
Registration Statement to include the resale of shares by each new owner
thereof.
7. Issuance of Certificates.
Within two (2) trading days of receipt of a duly completed Election to Purchase
form, together with this Certificate and payment of the Exercise Price, the
Company, at its expense, will cause to be issued in the name of and delivered to
the Holder of this Warrant, a certificate or certificates for the number of
fully paid and non-assessable shares of Common Stock to which that holder shall
be entitled on such exercise. In the event the shares of Common Stock are not
timely delivered to the Holder, the Company agrees to (a) indemnify Holder for
all damages, including consequential and special damages, lost profits and
expenses, including legal fees, and (b) beginning on the fifth (5th) day
following the Company's receipt of a duly completed Election to Purchase form,
pay a default premium of 2% per day of the value of underlying shares (based on
the highest closing price during the two (2) day period preceding the date of
surrender of the Warrant Certificate). In lieu of issuance of a fractional share
upon any exercise hereunder, the Company will pay the cash value of that
fractional share, calculated on the basis of the Exercise Price. Prior to
registration of the resale of the shares of Common Stock underlying this Warrant
Certificate, and delivery of an Election to Purchase to the Company, all such
certificates shall bear a restrictive legend to the effect that the Shares
represented by such certificate have not been registered under the 1933 Act, and
that the Shares may not be sold or transferred in the absence of such
registration or an exemption therefrom, such legend to be substantially in the
form of the bold-face language appearing at the top of Page 1 of this Warrant
Certificate.
8. Disposition of Warrants or Shares.
The Holder of this Warrant Certificate, each transferee hereof and any holder
and transferee of any Shares, by his or its acceptance thereof, agrees that no
public distribution of Warrants or Shares will be made in violation of the
provisions of the 1933 Act. Furthermore, it shall be a condition to the transfer
of the Warrants that any transferee thereof deliver to the Company his or its
written agreement to accept and be bound by all of the relevant terms and
conditions contained in this Warrant Certificate.
9. Notices.
Except as otherwise specified herein to the contrary, all notices, requests,
demands and other communications required or desired to be given hereunder shall
only be effective if given in writing by certified or registered U.S. mail with
return receipt requested and postage prepaid; by private overnight delivery
service (e.g. Federal Express); by facsimile transmission (if no original
documents or instruments must accompany the notice); or by personal delivery.
Any such notice shall be deemed to have been given (a) on the business day
immediately following the mailing thereof, if mailed by certified or registered
U.S. mail as specified above; (b) on the business day immediately following
deposit with a private overnight delivery service if sent by said service; (c)
upon receipt of confirmation of transmission if sent by facsimile transmission;
or (d) upon personal delivery of the notice. All such notices shall be sent to
the following addresses (or to such other address or addresses as a party may
have advised the other in the manner provided in this Section 10): If to the
Company:
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
Attn: Chief Executive Officer
Phone: (650) 962-7451
Fax: (650) 962-7488
With a copy to:
Brobeck, Phleger & Harrison
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Thomas W. Kellerman, Esq.
Phone: (650) 496-2788
Fax: (650) 496-2777
If to Holder:
-----------------------
c/o Shoreline Pacific Equity, Ltd.
3 Harbor Drive, Suite 211
Sausalito, CA 94965
Telephone: (415) 332-7800
Telecopy: (415) 332-7808
Attention: General Counsel
Notwithstanding the time of effectiveness of notices set forth in this Section,
an Election to Purchase shall not be deemed effectively given until it has been
duly completed and submitted to the Company together with the original Warrant
Certificate to be exercised and payment of the Exercise Price in a manner set
forth in this Section.
10. Notwithstanding anything in this Warrant Certificate to the contrary, in no
event shall the holder of this Warrant Certificate be entitled to exercise with
respect to a number of shares of Common Stock to the extent that following such
exercise the sum of (i) the number of shares of Common Stock beneficially owned
by the holder and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unexercised Warrant
Certificates and unconverted shares of Preferred Stock (as defined in the
Securities Purchase Agreement)) or other securities containing restrictions on
conversion or exercise analogous to the provisions in this paragraph), and (ii)
the number of shares of Common Stock issuable upon exercise of the Warrant
Certificates (or portions thereof) with respect to which the determination
described herein is being made, would result in beneficial ownership by the
holder and its affiliates of more than 4.99% of the outstanding shares of Common
Stock. For purposes of the immediately preceding sentence, shall be determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rules 13(d) -(g) thereunder, except as otherwise provided in clause
(i) hereof.
11. Governing Law.
This Warrant Certificate and all rights and obligations hereunder shall be
deemed to be made under and governed by the laws of the State of New York
without giving effect to the conflicts of laws provisions. The Holder hereby
irrevocably consents to the venue and jurisdiction of the State and Federal
Courts located in the State of New York, County of New York. 12. Successors and
Assigns. This Warrant Certificate shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. 13. Headings. The headings of various sections of this Warrant
Certificate have been inserted for reference only and shall not affect the
meaning or construction of any of the provisions hereof. 14. Severability. If
any provision of this Warrant Certificate is held to be unenforceable under
applicable law, such provision shall be excluded from this Warrant Certificate,
and the balance hereof shall be interpreted as if such provision were so
excluded. 15. Modification and Waiver. This Warrant Certificate and any
provision hereof may be amended, waived, discharged or terminated only by an
instrument in writing signed by the Company and the Holder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
16. Specific Enforcement.
The Company and the Holder acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Warrant Certificate were
not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Warrant Certificate and to enforce specifically the terms and provisions hereof,
this being in addition to any other remedy to which either of them may be
entitled by law or equity.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or by facsimile, by one of its
officers thereunto duly authorized.
Date: SOFTNET SYSTEMS, INC.
By:
Name:
Title:
<PAGE>
ELECTION TO PURCHASE
To Be Executed by the Holder
in Order to Exercise the Common Stock
Purchase Warrant Certificate
The undersigned Holder hereby elects to exercise of the
Warrants represented by the attached Common Stock Purchase Warrant Certificate,
and to purchase the shares of Common Stock issuable upon the exercise of such
Warrants, and requests that certificates for securities be issued in the name
of:
----------------------------------------------------------------
(Please type or print name and address)
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
(Social Security or Tax Identification Number)
and deliver to:
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
If such number of Warrants being exercised hereby shall not be all the Warrants
evidenced by the attached Common Stock Purchase Warrant Certificate, a new
Common Stock Purchase Warrant Certificate for the balance of such Warrants shall
be registered in the name of, and delivered to, the Holder at the address set
forth below.
[In full payment of the purchase price with respect to the
Warrants exercised and transfer taxes, if any, the undersigned hereby tenders
payment of $ by check, money order or wire transfer payable in United States
currency to the order of SoftNet Systems, Inc.] or [The undersigned elects
cashless exercise in accordance with Section l(b) of the Common Stock Purchase
Warrant Certificate.]
<PAGE>
Holder hereby represents and covenants that it has complied
with, or will comply with, any and all prospectus delivery requirements with
respect to its sale of the Common Stock of the Company being purchased herewith.
Date: HOLDER:
By:
Name:
Title:
Address:
<PAGE>
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto
______________ the right represented by the within Warrant to purchase
___________ shares of Common Stock of SoftNet Systems, Inc., a New York
corporation, to which the within Warrant relates, and appoints
_____________Attorney to transfer such right on the books of SoftNet Systems,
Inc., a New York corporation, with full power of substitution of premises.
Date: By:
Name:
Title:
(signature must conform to name of
holder as specified on the face of
the Warrant)
Address:
Signed in the presence of:
- -------------------------------
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
Dated: August 31, 1998
to Purchase _____ Shares of Common Stock of
SOFTNET SYSTEMS, INC.
SOFTNET SYSTEMS, INC., a New York corporation (the "Company"),
hereby certifies, as of August 31, 1998 (the "Issuance Date"), that
_______________, his permissible transferees, designees, successors and assigns
(collectively, the "Holder"), for value received, is entitled to purchase from
the Company at any time commencing on the date of the Second Closing (as defined
in the Securities Purchase Agreement dated August 31, 1998, between SoftNet
Systems, Inc. and Rose Glen International Investors, LDC) and terminating on the
fourth anniversary of the date of such Second Closing (or such earlier date as
is specified in a duly delivered Call Notice (as defined below)) up to _____
shares (each a "Share" and collectively the "Shares") of the Company's common
stock (the "Common Stock") at an exercise price per Share of $7.50 (the
"Exercise Price"). The number of Shares purchasable hereunder and the Exercise
Price are subject to adjustment as provided in Section 4 hereof. If the Second
Closing has not occurred on or prior to September 1, 1999, this Warrant
Certificate shall automatically, without further action of the Company, expire
and be of no further force or effect.
1. Exercise of Warrants.
(a) Upon presentation and surrender of this Common Stock Purchase Warrant
Certificate ("Warrant Certificate" or "Certificate"), or a Lost Certificate
Affidavit (as defined below), accompanied by a completed Election to Purchase in
the form attached hereto as Exhibit A (the "Election to Purchase") duly
executed, at the principal office of the Company at 520 Logue Avenue, Mountain
View, CA 94043, Attn: Mark Philips, together with a check payable to the Company
in the amount of the Exercise Price multiplied by the number of Shares being
purchased, the Company or the Company's Transfer Agent as the case may be,
shall, within two (2) trading days of receipt of the foregoing, deliver to the
Holder hereof, certificates of fully paid and nonassessable Common Stock which
in the aggregate represent the number of Shares being purchased; provided,
however, that the Investor may elect, in accordance with paragraph (b), below,
to utilize the cashless exercise provisions set forth below in lieu of SoftNet
Systems, Inc.: Common Stock Purchase Warrant Certificate tendering the Exercise
Price in cash. The certificates so delivered shall be in such denominations as
may be reasonably requested by the Holder and shall be registered in the name of
the Holder or such other name as shall be designated by the Holder. All or less
than all of the Warrants represented by this Certificate may be exercised and,
in case of the exercise of less than all, the Company, upon surrender hereof,
will at the Company's expense deliver to the Holder a new Warrant Certificate or
Certificates (in such denominations as may be requested by the Holder) of like
tenor and dated the date hereof entitling said holder to purchase the number of
Shares represented by this Certificate which have not been exercised and to
receive Registration Rights with respect to such Shares, and all other rights
with respect to the shares which the Holder has on the date hereof.
(b) Cashless Exercise. Notwithstanding the foregoing provision regarding payment
of the Exercise Price in cash, the Holder may elect, in its sole discretion on a
case by case basis, to receive a reduced number of Shares in lieu of tendering
the Exercise Price in cash ("Cashless Exercise"). In such case, the number of
Shares to be issued to the Holder shall be computed using the following
formula;:
X = Y(A-B)
---------
A
where: X = the number of Shares to be issued to the Holder;
Y = the number of Shares to be exercised under this Warrant
Certificate;
A = the Market Value (defined below) of one share of Common Stock
on the trading day immediately prior to the date that the Election
to Purchase is duly surrendered to the Company for full or partial
exercise; and
B = the Exercise Price.
The term "Market Value" means, for any security as of any date, the last
reported sale price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to the Holder if Bloomberg
Financial Markets is not then reporting last reported sale prices of such
security (collectively, "Bloomberg"), or if the foregoing does not apply, the
last reported sale price of such security in the over-the-counter market or the
electronic bulletin board of such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security that are listed in the "pink
sheets" by the National Quotation Bureau, Inc. If the Market Value cannot be
calculated for such security on such date on any of the foregoing bases, the
Market Value of such security on such date shall be the fair market value as
reasonably determined by an investment banking firm selected by the Company and
reasonably acceptable to the Holder with the costs of such appraisal to be borne
by the Company.
2. Exchange, Transfer and Replacement.
(a) Exchange. At any time prior to the exercise hereof, this Warrant Certificate
may be exchanged upon presentation and surrender to the Company, alone or with
other Warrant Certificates of like tenor of different denominations registered
in the name of the same Holder, together with a duly executed Assignment in
substantially the form and substance of the Form of Assignment which accompanies
this Warrant Certificate. The Warrant Certificate or Certificates shall be
exchanged for another Warrant Certificate or Certificates of like tenor in the
name of such Holder and/or the transferees named in such Assignment, exercisable
for the aggregate number of Shares as the Certificate or Certificates
surrendered, provided that the Company shall not be obligated to issue exchange
or transfer Certificates for an exchange or transfer of less than 10,000 shares.
The Company shall issue any Warrant Certificates reflecting such transfer or
assignment (including such portion of this Warrant Certificate, if any, as shall
not have been transferred or assigned) within three (3) business days after
receipt of the requisite Warrant Certificate(s) and duly completed Assignment.
(b) Replacement of Warrant Certificate. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant Certificate and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company (collectively, a "Lost Certificate Affidavit"),
or, in the case of any such mutilation, upon surrender and cancellation of this
Warrant Certificate, the Company, at its expense, will execute and deliver in
lieu thereof, a new Warrant Certificate of like tenor.
(c) Cancellation; Payment of Expenses. Upon the surrender of this Warrant
Certificate in connection with any transfer, exchange or replacement as provided
in this Section 2, this Warrant Certificate shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
Holder or transferees) and charges payable in connection with the preparation,
execution and delivery of Warrant Certificates pursuant to this Section 2.
(d) Warrant Register. The Company shall maintain, at its principal executive
offices (or at the offices of the transfer agent for the Warrant Certificate or
such other office or agency of the Company as it may designate by notice to the
holder hereoq, a register for this Warrant Certificate (the "Warrant Register"),
in which the Company shall record the name and address of the person in whose
name this Warrant Certificate has been issued, as well as the name and address
of each permitted transferee and each prior owner of this Warrant Certificate.
(e) Company Call Right. Beginning on the business day following the first
anniversary of the Issuance Date, provided that the twenty consecutive trading
day average closing bid price of the Common Stock of the Company for the period
ending on the date prior to delivery of such notice (as reported by Bloomberg)
is equal to or greater than 150% of the Exercise Price, as adjusted pursuant to
Section 4 hereof, the Company shall have the ability to deliver a written notice
to the Holder hereof (a "Call Notice") that the Company is exercising its right
to call this Warrant Certificate. The Call Notice shall specify a date no less
than 30 days following the date of delivery of such Call Notice, and, unless
exercised prior to such date, this Certificate (or any unexercised portion
hereof) shall expire, and Holder shall have no further rights hereunder, on and
following such specified date. The Holder shall have the right to exercise its
rights hereunder during such 30 day notice period.
3. Rights and Obligations of Holders of this Certificate.
The Holder of this Certificate shall not, by virtue hereof, be entitled to any
rights of a stockholder in the Company, either at law or in equity; provided,
however, that in the event any certificate representing shares of Common Stock
or other securities is issued to the holder hereof upon exercise of some or all
of the Warrants, such holder shall, for all purposes, be deemed to have become
the holder of record of such Common Stock on the date on which this Certificate,
together with a duly executed Purchase Form, was surrendered and payment of the
aggregate Exercise Price was made, irrespective of the date of delivery of such
share certificate.
4. Adjustments.
(a) Stock Dividends, Reclassifications, Recapitalizations, Etc. In the event the
Company: (i) pays a dividend in Common Stock or makes a distribution in Common
Stock, (ii) subdivides its outstanding Common Stock into a greater number of
shares, (iii) combines its outstanding Common Stock into a smaller number of
shares or (iv) increases or decreases the number of shares of Common Stock
outstanding by reclassification of its Common Stock (including a
recapitalization in connection with a consolidation or merger in which the
Company is the continuing corporation), then (1) the Exercise Price on the
record date of such division or distribution or the effective date of such
action shall be adjusted by multiplying such Exercise Price by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately before such event and the denominator of which is the number of
shares of Common Stock outstanding immediately after such event, and (2) the
number of shares of Common Stock for which this Warrant Certificate may be
exercised immediately before such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the Exercise Price immediately
before such event and the denominator of which is the Exercise Price immediately
after such event.
(b) Cash Dividends and Other Distributions. In the event that at any time or
from time to time the Company shall distribute to all holders of Common Stock
(i) any dividend or other distribution of cash, evidences of its indebtedness,
shares of its capital stock or any other properties or securities or (ii) any
options, warrants or other rights to subscribe for or purchase any of the
foregoing (other than in each case, (w) the issuance of any rights under a
shareholder rights plan, (x) any dividend or distribution described in Section
4(a), (y) any rights, options, warrants or securities described in Section 4(c)
and (z) any cash dividends or other cash distributions from current earnings),
then the number of shares of Common Stock issuable upon the exercise of each
Warrant Certificate shall be increased to a number determined by multiplying the
number of shares of Common Stock issuable upon the exercise of such Warrant
Certificate immediately prior to the record date for any such dividend or
distribution by a fraction, the numerator of which shall be such Market Value
(as hereinafter defined) per share of Common Stock on the record date for such
dividend or distribution, and the denominator of which shall be such Market
Value per share of Common Stock on the record date for such dividend or
distribution less the sum of (x) the amount of cash, if any, distributed per
share of Common Stock and (y) the fair value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be evidenced by a
board resolution, a copy of which will be sent to the Holders upon request) of
the portion, if any, of the distribution applicable to one share of Common Stock
consisting of evidences of indebtedness, shares of stock, securities, other
property, warrants, options or subscription or purchase rights; and the Exercise
Price shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to such record date by the above fraction. Such adjustments
shall be made whenever any distribution is made and shall become effective as of
the date of distribution, retroactive to the record date for any such
distribution. No adjustment shall be made pursuant to this Section 4(b) which
shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant Certificate or increasing the Exercise
Price.
(c) Rights Issue. In the event that at any time, or from time to time, the
Company shall issue rights, options or warrants entitling the holders thereof to
subscribe for shares of Common Stock, or securities convertible into or
exchangeable or exercisable for Common Stock to all holders of Common Stock
(other than in connection with the adoption of a shareholder rights plan by the
Company) without any charge, entitling such holders to subscribe for or purchase
shares of Common Stock at a price per share that as of the record date for such
issuance is less than the then Market Value per share of Common Stock, the
number of shares of Common Stock issuable upon the exercise of each Warrant
Certificate shall be increased to a number determined by multiplying the number
of shares of Common Stock theretofore issuable upon exercise of each Warrant
Certificate by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding on the date of issuance of such rights, options,
warrant or securities plus the number of additional shares of Common Stock
offered for subscription or purchase or into or for which such securities that
are issued are convertible, exchangeable or exercisable' and the denominator of
which shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, option, warrants or securities plus the total number of
shares of Common Stock which the aggregate consideration expected to be received
by the Company (assuming the exercise or conversion of all such rights, options,
warrants or securities) would purchase at the then Market Value per share of
Common Stock. In the event of any such adjustment, the Exercise Price shall be
adjusted to a number determined by dividing the Exercise price immediately prior
to such date of issuance by the aforementioned fraction. Such adjustment shall
be made immediately after such rights, options or warrants are issued and shall
become effective, retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or securities.
No adjustment shall be made pursuant to this Section 4(c) which shall have the
effect of decreasing the number of shares of Common Stock purchasable upon
exercise or each Warrant Certificate or of increasing the Exercise Price.
(d) Combination: Liquidation.
(i) Except as provided in Section 4(d)(ii) below, in the event of a
Combination (as defined below), each Holder shall have the right to receive upon
exercise of the Warrant Certificates the kind and amount of shares of capital
stock or other securities or property which such Holder would have been entitled
to receive upon or as a result of such Combination had such Warrant Certificate
been exercised immediately prior to such event (subject to further adjustment in
accordance with the terms hereof). Unless paragraph (ii) is applicable to a
Combination, the Company shall provide that the surviving or acquiring Person
(the "Successor Company") in such Combination will assume by written instrument
the obligations under this Section 4 and the obligations to deliver to the
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to acquire. The provisions of
this Section 4(d)(i) shall similarly apply to successive Combinations involving
any Successor Company. "Combination" means an event in which the Company
consolidates with, mergers with or into, or sells all or substantially all of
its assets to another Person, where "Person" means any individual, corporation,
partnership, joint venture, limited liability company, association, jointstock
company, trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.
(ii) In the event of (x) a Combination where consideration to the holders
of Common Stock in exchange for their shares is payable solely in cash or (y)
the dissolution, liquidation or winding-up of the Company, the Holders shall be
entitled to receive, upon surrender of their Warrant Certificates, distributions
on an equal basis with the holders of Common Stock or other securities issuable
upon exercise of the Warrant Certificates, as if the Warrant Certificates had
been exercised immediately prior to such event, less the Exercise Price. In case
of any Combination described in this Section 4(d)(ii), the surviving or
acquiring Person and, in the event of any dissolution, liquidation or winding-up
of the Company, the Company, shall deposit promptly following the consummation
of such combination or at the time of such dissolution, liquidation or
winding-up with an agent or trustee for the benefit of the Holders of the funds,
if any, necessary to pay to the Holders the amounts to which they are entitled
as described above. After such funds and the surrendered Warrant Certificates
are received, the Company is required to deliver a check in such amount as is
appropriate (or, in the case of consideration other than cash, such other
consideration as is appropriate) to such Person or Persons as it may be directed
in writing by the Holders surrendering such Warrant Certificates.
(e) Notice of Adjustment. Whenever the Exercise Price or the number of shares of
Common Stock and: other property, if any, issuable upon exercise of the Warrant
Certificates is adjusted, as herein provided, the Company shall deliver to the
holders of the Warrant Certificates in accordance with Section 10 a certificate
of the Company's Chief Financial Officer 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 (i) the Board of
Directors determined the fair value of any evidences of indebtedness, other
securities or property or warrants, options or other subscription or purchase
rights and (ii) the Market Value of the Common Stock was determined, if either
of such determinations were required), and specifying the Exercise Price and
number of shares of Common Stock issuable upon exercise of Warrant Certificates
after giving effect to such adjustment.
(f) Purchase Price Adjustment. In the event that the Company issues or sells any
Common Stock or securities which are convertible into or exchangeable, whether
or not immediately exchangeable or convertible, for its Common Stock or any
convertible securities, or any warrants or other rights to subscribe for or to
purchase or any options for the purchase of its Common Stock or any such
convertible securities (other than shares or options issued or which may be
issued pursuant to the Company's employee or director option plans or shares
issued upon exercise of options, warrants or rights outstanding on the date of
the Agreement and listed in the Company's most recent periodic report filed
under the Exchange Act) (collectively, "Options") at a purchase price per share
on the date of original issuance of such security which is less than 95% of the
Market Value of the Common Stock on the trading day immediately prior to such
issue or sale, then in each such case, the Exercise Price in effect immediately
prior to such issue or sale shall be reduced effective concurrently with such
issue or sale to an amount determined by multiplying the Exercise Price then in
effect by a fraction, (x) the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding immediately prior to such issue or
sale, plus (2) the number of shares of Common Stock which the aggregate
consideration received by the Company for such additional shares would purchase
at such Market Value; and (y) the denominator of which shall be the number of
shares of Common Stock of the Company outstanding immediately after such issue
or sale.
For the purposes of the foregoing adjustment, in the case of the issuance of any
convertible securities, warrants, options or other rights to subscribe for or to
purchase or exchange for, shares of Common Stock ("Convertible Securities"), the
maximum number of shares of Common Stock that would be issuable upon exercise,
exchange or conversion of such Convertible Securities (assuming that shares of
Common Stock were trading at the then Market Value at the time of conversion)
shall be deemed to be outstanding, provided that no further adjustment shall be
made upon the actual issuance of Common Stock upon exercise, exchange or
conversion of such Convertible Securities.
(g) Change in Option Price or Conversion Rate. If there is a change at any time
in (i) the amount of additional consideration payable to the Company upon the
exercise of any Options; (ii) the amount of additional consideration, if any,
payable to the Company upon the conversion or exchange of any convertible
Securities; or (iii) the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock (other than under or by reason
of provisions designed to protect against dilution), the Exercise Price in
effect at the time of such change will be readjusted to the Exercise Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold.
(h) Notice of Certain Transactions. In the event that the Company shall propose
(a) to pay any dividend payable in securities of any class to the holders of its
Common Stock or to make any other non-cash dividend or distribution to the
holders of its Common Stock, (b) to offer the holders of its Common Stock rights
to subscribe for or to purchase any securities convertible into shares of Common
Stock or shares of stock of any class or any other securities, rights or
options, (c) to effect any capital reorganization, reclassification,
consolidation or merger affecting the class of Common Stock, as a whole, or (d)
to effect the voluntary or involuntary dissolution, liquidation or winding-up of
the Company, the Company shall, within the time limits specified below, send to
each Holder a notice of such proposed action or offer. Such notice shall be
mailed to the Holders at their addresses as they appear in the Warrant Register
(as defined in Section 2(d)), which shall specify the record date for the
purposes of such dividend, distribution or rights, or the date such issuance or
event is to take place and the date of participation therein by the holders of
Common Stock, if any such date is to be fixed, and shall briefly indicate the
effect of such action on the number of shares of Common Stock and on the number
and kind of any other shares of stock and on other property, if any, and the
number of shares of Common Stock and other property, if any, issuable upon
exercise of each Warrant Certificate and the Exercise Price after giving effect
to any adjustment pursuant to Section 4 which will be required as a result of
such action. 'Such notice shall be given as promptly as possible and (x) in the
case of any action covered by clause (a) or (b) above, at least 10 days prior to
the record date for determining holders of the Common Stock for purposes of such
action or (y) in the case of any other such action, at least 20 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the earlier.
(i) Other Adjustments. In the event of any other transaction of the type
contemplated by this Section 4, but not expressly provided for by the provisions
hereof, the Board of Directors of the Company will make appropriate adjustment
in the Exercise Price so as to equitably protect the rights of the Holder.
(j) No Impairment of Holder's Rights. The Company will not, by amendment of its
articles of organization or bylaws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, except as contemplated hereby, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant Certificate,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all action as may be necessary or appropriate in order to
protect the rights of the Holder against dilution or other impairment.
5. Company's Representations.
(a) The Company covenants and agrees that all shares of Common Stock issuable
upon exercise of this Warrant Certificate will, upon delivery, be duly and
validly authorized and issued, fully-paid and non-assessable and free from all
taxes, liens, claims and encumbrances.
(b) The Company covenants and agrees that it will at all times reserve and keep
available an authorized number of shares of its Common Stock and other
applicable securities sufficient to permit the exercise in full of all
outstanding options, warrants and rights, including this Warrant Certificate.
(c) The Company shall promptly secure the listing of the Shares upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed or become listed (subject to official
notice of issuance upon exercise of this Warrant Certificate) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant Certificate; and the Company shall so list on each
national securities exchange or automated quotation system, as the case may be,
and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant Certificate if and so long as
any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(d) The Company has taken all necessary action and proceedings as required and
permitted by applicable law, rule and regulation, including, without limitation,
the notification of the principal market on which the Common Stock is traded,
for the legal and valid issuance of this Warrant Certificate to the Holder under
this Warrant Certificate.
(e) With a view to making available to Holder the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the Securities and
Exchange Commission ("SEC") that may at any time permit Holder to sell
securities of the Company to the public without registration, the Company agrees
to use its reasonable best efforts to:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Act and the Securities Exchange Act of 1934,
as amended (the "Exchange Act"); and
(iii) furnish to any Holder forthwith upon request a written statement by
the Company that it has complied with the reporting requirements of Rule 144 and
of the Act and the Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so filed by the
Company as may be reasonably requested to permit any such Holder to take
advantage of any rule or regulation of the SEC permitting the selling of any
such securities without registration.
6. Registration Rights.
The initial Holder is entitled to the benefit of such registration rights in
respect of the Shares as are set forth in the Registration Rights Agreement
dated as of August 31, 1998 by and between the Company and the other investors
parties thereto ("Registration Rights Agreement") as if the Holder was a party
thereto, including the right to assign such rights to certain assignees as set
forth therein as if such Shares were "Registrable Securities" thereunder. The
terms of such Registration Rights Agreement are incorporated by reference as if
fully set forth herein, mutatis mutandis. The Company acknowledges that the
initial Holder may transfer some of the Warrants to certain of its employees on
or about December 31, 1999 and the Company agrees to promptly amend the
Registration Statement to include the resale of shares by each new owner
thereof.
7. Issuance of Certificates. Within two (2) trading days of receipt of a duly
completed Election to Purchase form, together with this Certificate and payment
of the Exercise Price, the Company, at its expense, will cause to be issued in
the name of and delivered to the Holder of this Warrant, a certificate or
certificates for the number of fully paid and non-assessable shares of Common
Stock to which that holder shall be entitled on such exercise. In the event the
shares of Common Stock are not timely delivered to the Holder, the Company
agrees to (a) indemnify Holder for all damages, including consequential and
special damages, lost profits and expenses, including legal fees, and (b)
beginning on the fifth (5th) day following the Company's receipt of a duly
completed Election to Purchase form, pay a default premium of 2% per day of the
value of underlying shares (based on the highest closing price during the two
(2) day period preceding the date of surrender of the Warrant Certificate). In
lieu of issuance of a fractional share upon any exercise hereunder, the Company
will pay the cash value of that fractional share, calculated on the basis of the
Exercise Price. Prior to registration of the resale of the shares of Common
Stock underlying this Warrant Certificate, and delivery of an Election to
Purchase to the Company, all such certificates shall bear a restrictive legend
to the effect that the Shares represented by such certificate have not been
registered under the 1933 Act, and that the Shares may not be sold or
transferred in the absence of such registration or an exemption therefrom, such
legend to be substantially in the form of the bold-face language appearing at
the top of Page 1 of this Warrant Certificate.
8. Disposition of Warrants or Shares.
The Holder of this Warrant Certificate, each transferee hereof and any holder
and transferee of any Shares, by his or its acceptance thereof, agrees that no
public distribution of Warrants or Shares will be made in violation of the
provisions of the 1933 Act. Furthermore, it shall be a condition to the transfer
of the Warrants that any transferee thereof deliver to the Company his or its
written agreement to accept and be bound by all of the relevant terms and
conditions contained in this Warrant Certificate.
9. Notices.
Except as otherwise specified herein to the contrary, all notices, requests,
demands and other communications required or desired to be given hereunder shall
only be effective if given in writing by certified or registered U.S. mail with
return receipt requested and postage prepaid; by private overnight delivery
service (e.g. Federal Express); by facsimile transmission (if no original
documents or instruments must accompany the notice); or by personal delivery.
Any such notice shall be deemed to have been given (a) on the business day
immediately following the mailing thereof, if mailed by certified or registered
U.S. mail as specified above; (b) on the business day immediately following
deposit with a private overnight delivery service if sent by said service; (c)
upon receipt of confirmation of transmission if sent by facsimile transmission;
or (d) upon personal delivery of the notice. All such notices shall be sent to
the following addresses (or to such other address or addresses as a party may
have advised the other in the manner provided in this Section 10): If to the
Company:
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
Attn: Chief Executive Officer
Phone: (650) 962-7451
Fax: (650) 962-7488
With a copy to:
Brobeck, Phleger & Harrison
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Thomas W. Kellerman, Esq.
Phone: (650) 496-2788
Fax: (650) 496-2777
If to Holder:
------------------------
c/o Shoreline Pacific Equity, Ltd.
3 Harbor Drive, Suite 211
Sausalito, CA 94965
Telephone: (415) 332-7800
Telecopy: (415) 332-7808
Attention: General Counsel
Notwithstanding the time of effectiveness of notices set forth in this Section,
an Election to Purchase shall not be deemed effectively given until it has been
duly completed and submitted to the Company together with the original Warrant
Certificate to be exercised and payment of the Exercise Price in a manner set
forth in this Section.
10. Notwithstanding anything in this Warrant Certificate to the contrary, in no
event shall the holder of this Warrant Certificate be entitled to exercise with
respect to a number of shares of Common Stock to the extent that following such
exercise the sum of (i) the number of shares of Common Stock beneficially owned
by the holder and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unexercised Warrant
Certificates and unconverted shares of Preferred Stock (as defined in the
Securities Purchase Agreement)) or other securities containing restrictions on
conversion or exercise analogous to the provisions in this paragraph), and (ii)
the number of shares of Common Stock issuable upon exercise of the Warrant
Certificates (or portions thereof) with respect to which the determination
described herein is being made, would result in beneficial ownership by the
holder and its affiliates of more than 4.99% of the outstanding shares of Common
Stock. For purposes of the immediately preceding sentence, shall be determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rules 13(d) -(g) thereunder, except as otherwise provided in clause
(i) hereof.
11. Governing Law.
This Warrant Certificate and all rights and obligations hereunder shall be
deemed to be made under and governed by the laws of the State of New York
without giving effect to the conflicts of laws provisions. The Holder hereby
irrevocably consents to the venue and jurisdiction of the State and Federal
Courts located in the State of New York, County of New York.
12. Successors and Assigns.
This Warrant Certificate shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
13. Headings.
The headings of various sections of this Warrant Certificate have been inserted
for reference only and shall not affect the meaning or construction of any of
the provisions hereof.
14. Severability.
If any provision of this Warrant Certificate is held to be unenforceable under
applicable law, such provision shall be excluded from this Warrant Certificate,
and the balance hereof shall be interpreted as if such provision were so
excluded. 15. Modification and Waiver. This Warrant Certificate and any
provision hereof may be amended, waived, discharged or terminated only by an
instrument in writing signed by the Company and the Holder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
16. Specific Enforcement.
The Company and the Holder acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Warrant Certificate were
not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Warrant Certificate and to enforce specifically the terms and provisions hereof,
this being in addition to any other remedy to which either of them may be
entitled by law or equity.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or by facsimile, by one of its
officers thereunto duly authorized.
Date: SOFTNET SYSTEMS, INC.
By:
Name:
Title:
<PAGE>
ELECTION TO PURCHASE
To Be Executed by the Holder
in Order to Exercise the Common Stock
Purchase Warrant Certificate
The undersigned Holder hereby elects to exercise of the
Warrants represented by the attached Common Stock Purchase Warrant Certificate,
and to purchase the shares of Common Stock issuable upon the exercise of such
Warrants, and requests that certificates for securities be issued in the name
of:
----------------------------------------------------------------
(Please type or print name and address)
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
(Social Security or Tax Identification Number)
and deliver to:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
If such number of Warrants being exercised hereby shall not be all the Warrants
evidenced by the attached Common Stock Purchase Warrant Certificate, a new
Common Stock Purchase Warrant Certificate for the balance of such Warrants shall
be registered in the name of, and delivered to, the Holder at the address set
forth below.
[In full payment of the purchase price with respect to the
Warrants exercised and transfer taxes, if any, the undersigned hereby tenders
payment of $ by check, money order or wire transfer payable in United States
currency to the order of SoftNet Systems, Inc.] or [The undersigned elects
cashless exercise in accordance with Section l(b) of the Common Stock Purchase
Warrant Certificate.]
<PAGE>
Holder hereby represents and covenants that it has complied
with, or will comply with, any and all prospectus delivery requirements with
respect to its sale of the Common Stock of the Company being purchased herewith.
Date: HOLDER:
By:
Name:
Title:
Address:
<PAGE>
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto
______________ the right represented by the within Warrant to purchase
___________ shares of Common Stock of SoftNet Systems, Inc., a New York
corporation, to which the within Warrant relates, and appoints
_____________Attorney to transfer such right on the books of SoftNet Systems,
Inc., a New York corporation, with full power of substitution of premises.
Date: By:
Name:
Title:
(signature must conform to name of holder as
specified on the face of the Warrant)
Address:
Signed in the presence of:
- -------------------------------
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated
as of August 31, 1998, by and among SOFTNET SYSTEMS, INC., a New York
corporation, with headquarters located at 520 Logue Avenue, Mountain View,
California 94043 (the "Company"), and the Buyers set forth on the signature page
hereto (the "Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering
this Agreement in reliance upon the exemption from securities registration
afforded by Section 4(2) of the Securities Act of 1933, as amended, (the "1933
Act"), and Rule 506 under Regulation D ("Regulation D") as promulgated by the
United States Securities and Exchange Commission (the "SEC") under the 1933 Act;
B. The Company has authorized two new series of preferred
stock, designated as its Series E Convertible Preferred Stock (the "Series E
Preferred Stock") and its Series D Convertible Preferred Stock (the "Series D
Preferred Stock", collectively with the Series E Preferred Stock, the "Preferred
Stock"). The Series E Preferred Stock has the voting powers, preferences and
rights set forth in Article Third, Section 3, and the Series D Preferred Stock
has the voting powers, preferences and rights set forth in Article Third,
Section 4, of the Company's Amended and Restated Certificate of Incorporation,
filed August 31, 1998, attached hereto as Exhibit "A" (the "Certificate of
Designations");
C. The Preferred Stock is convertible into shares of Common
Stock, par value $0.01 per share, of the Company (the "Common Stock"), upon the
terms and subject to the limitations and conditions set forth in the Certificate
of Designations;
D. The Company has authorized the issuance to the Buyers of
warrants to purchase in the aggregate up to 187,500 shares of Common Stock, in
the form attached hereto as Exhibit "B" (the "Warrants");
E. The Buyers desire to purchase from the Company and the
Company desires to issue and sell to the Buyers, upon the terms and conditions
and in reliance on the representations and warranties set forth in this
Agreement, (i) Fifteen Thousand (15,000) shares of Preferred Stock, and (ii) the
Warrants, for an aggregate purchase price of Fifteen Million Dollars
($15,000,000); and
F. Contemporaneous with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement, in the form attached hereto as Exhibit "C" (the "Registration Rights
Agreement"), pursuant to which the Company has agreed to provide to the Buyers
certain registration rights under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as
follows:
1. PURCHASE AND SALE OF PREFERRED SHARES AND WARRANTS.
a. Purchase of Series E Preferred Shares and Warrants. The Company shall issue
and sell to the Buyers and each Buyer agrees, on a several and not a joint
basis, to purchase from the Company such number of shares of Series E Preferred
Stock (together with any Series E Preferred Stock issued in replacement thereof
or as a dividend thereon or otherwise with respect thereto in accordance with
the terms thereof, the "Series E Preferred Shares") and Warrants to be issued in
connection therewith set forth under such Buyer's name on the signature page
hereto executed by each Buyer, for an aggregate purchase price of Seven Million
Five Hundred Thousand U.S. Dollars (the "Series E Purchase Price") and a per
share of Series E Preferred Stock purchase price of One Thousand Dollars
($1,000). The issuance, sale and purchase of the Series E Preferred Shares and
Warrants issued in connection therewith shall take place at the closing (the
"First Closing"), subject to the satisfaction (or waiver) of the conditions
thereto set forth in Section 6 below. At the First Closing, the Company shall
issue and sell to each Buyer and each Buyer shall purchase from the Company
Twelve Thousand Five Hundred (12,500) Warrants for each $1,000,000 of Series E
Preferred Shares purchased.
b. Purchase of Series D Preferred Shares and Warrants. The Company shall issue
and sell to the Buyers and each Buyer agrees, on a several and not a joint
basis, to purchase from the Company such number of shares of Series D Preferred
Stock (together with any Series D Preferred Stock issued in replacement thereof
or as a dividend thereon or otherwise with respect thereto in accordance with
the terms thereof, the "Series D Preferred Shares") and Warrants to be issued in
connection therewith set forth under such Buyer's name on the signature page
hereto executed by each Buyer, for an aggregate purchase price of Seven Million
Five Hundred Thousand U.S. Dollars (the "Series D Purchase Price") and a per
share of Series D Preferred Stock purchase price of One Thousand Dollars
($1,000). The issuance, sale and purchase of the Series D Preferred Shares and
Warrants issued in connection therewith shall take place at the closing (the
"Second Closing"), subject to the satisfaction (or waiver) of the conditions
thereto set forth in Section 7 below. At the Second Closing, the Company shall
issue and sell to each Buyer and each Buyer shall purchase from the Company
Twelve Thousand Five Hundred (12,500) Warrants for each $1,000,000 of Series D
Preferred Shares purchased.
c. Form of Payment. The Purchasers shall pay their Series E Purchase Price for
the Series E Preferred Shares and their Series D Purchase Price for the Series D
Preferred Shares by wire transfer to the account designated pursuant to the
Escrow Agreement by and among the Company, each Purchaser and the escrow agent
("Escrow Agent") designated therein in the form attached hereto as Exhibit "D"
("Escrow Agreement"), all in accordance with the terms of the Escrow Agreement.
Upon satisfaction of the other conditions to the First Closing specified herein,
the escrowed Series E Purchase Price shall be released to the Company against
delivery of duly executed certificates representing the number of Series E
Preferred Shares and Warrants which the Buyers are purchasing. Upon satisfaction
of the other conditions to the Second Closing specified herein, the escrowed
Series D Purchase Price shall be released to the Company against delivery of
duly executed certificates representing the number of Series D Preferred Shares
and Warrants which the Buyers are purchasing.
d. Closing Date. Subject to the satisfaction or waiver of the conditions thereto
set forth in Article 6 below, and further subject to the terms and conditions of
the Escrow Agreement, the date and time of the First Closing shall be 10:00 a.m.
Pacific Standard Time on August 31, 1998 or such other mutually agreed upon date
or time. Subject to the satisfaction or waiver of the conditions thereto set
forth in Article 7 below, and further subject to the terms and conditions of the
Escrow Agreement, the Second Closing shall occur on the day that is no less than
ten and no greater than twenty business days following receipt by the investors
of notice that the conditions to the Second Closing set forth in Article 7(b)
have been satisfied; provided that the Second Closing shall occur no later than
120 days following the date of the First Closing. The date of each Closing shall
be referred to as a "Closing Date". In the event the Second Closing does not
occur within 120 days of the First Closing, the Company's and the Buyer's
obligations with respect to the Second Closing and the Series D Preferred Stock
contained herein and in the agreements and instruments to be entered into and
filed herewith shall expire.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants to the Company as of the
date hereof and as of each Closing, severally and solely with respect to itself
and its purchase hereunder and not with respect to any other Buyer, as set forth
in this Section 2. Each Buyer makes no other representations or warranties,
express or implied, to the Company in connection with the transactions
contemplated hereby and any and all prior representations and warranties, if
any, which may have been made by the Buyers to the Company in connection with
the transactions contemplated hereby shall be deemed to have been merged into
this Agreement and any such prior representations and warranties, if any, shall
not survive the execution and delivery of this Agreement.
a. Investment Purpose. As of the date hereof, the Buyer is purchasing the
Preferred Shares and the shares of Common Stock issuable upon conversion thereof
or otherwise with respect thereto including, but not limited to, shares issuable
as a result of Conversion Default Payments or any payments pursuant to the
Registration Rights Agreement (the "Conversion Shares") and the Warrants and the
shares of Common Stock issuable upon exercise thereof (the "Warrants Shares",
and collectively with the Preferred Shares, Conversion Shares and Warrants, the
"Securities") for its own account and not with a present view towards the public
sale or distribution thereof, except pursuant to sales registered or exempted
from registration under the 1933 Act; provided, however, that by making the
representation herein, the Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1993 Act.
b. Accredited Investor Status. The Buyer is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D. Buyer has delivered an Investor
Questionnaire in the form of Exhibit "E" to the Company and Shoreline Pacific
(as defined below).
c. Reliance on Exemptions. The Buyer understands that the Securities are being
offered and sold to it in reliance upon specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Securities.
d. Information. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
requested by the Buyer or its advisors. The Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigation conducted by Buyer or any of
its advisors or representatives shall modify, amend or affect Buyer's right to
rely on the Company's representations and warranties contained in Section 3
below. The Buyer acknowledges and understands that its investment in the
Securities involves a significant degree of risk, including the risks reflected
in the SEC Documents (as defined below).
e. Governmental Review. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed upon or
made any recommendation or endorsement of the Securities.
f. Transfer or Resale. The Buyer understands that (i) except as provided in the
Registration Rights Agreement, the Securities have not been and are not being
registered under the 1933 Act or any applicable state securities laws, and the
Securities may not be transferred unless (a) the Securities are sold pursuant to
an effective registration statement under the 1933 Act; (b) the Buyer shall have
delivered to the Company an opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that the Securities to be sold or transferred may be
sold or transferred pursuant to an exemption from such registration; (c) the
Securities are sold or transferred pursuant to Rule 144 promulgated under the
1933 Act (or a successor rule) ("Rule 144") or (d) sold or transferred to an
affiliate (as defined in Rule 144) of the Buyer; (ii) any sale of such
Securities made in reliance on Rule 144 may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such Securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under
the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such Securities under the 1933 Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder (in each case, other
than pursuant to the Registration Rights Agreement). Notwithstanding the
foregoing or anything else contained herein to the contrary, the Securities may
be pledged as collateral in connection with a bona fide margin account or other
lending arrangement.
g. Legends. The Buyer understands that the certificates representing the
Preferred Shares, Warrants and, until such time as the Conversion Shares and
Warrant Shares have been registered under the 1933 Act, as contemplated by the
Registration Rights Agreement, or otherwise may be sold by the Buyer without
restriction as to the number of securities as of a particular date that can then
be immediately sold under Rule 144, the Conversion Shares and Warrant Shares,
shall bear a restrictive legend in substantially the following form (and a
stoptransfer order may be placed against transfer of the certificates for such
Securities):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of
any state of the United States. The securities have been acquired for
investment and may not be sold, transferred or assigned in the absence
of an effective registration statement for the securities under
applicable securities laws, or unless offered, sold or transferred
pursuant to an available exemption from the registration requirements
of those laws.
The legend set forth above shall be removed and the Company
shall issue a certificate without such legend to the holder of any certificate
upon which it is stamped, if, unless otherwise required by applicable state
securities laws, (a) the Securities represented by such certificate are
registered for sale under an effective registration statement filed under the
1933 Act, or (b) such holder provides the Company with an opinion of counsel, in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Securities
may be made without registration under the 1933 Act and such sale either has
occurred or may occur without restriction on the manner of such sale or transfer
or (c) such holder provides the Company with reasonable assurances that such
Security can be sold under Rule 144 under the 1933 Act (or a successor rule
thereto).
h. Authorization; Enforcement. This Agreement, the Registration Rights Agreement
and the Escrow Agreement have been duly and validly authorized, executed and
delivered on behalf of the Buyer and are valid and binding agreements of the
Buyer enforceable in accordance with their terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the rights of creditors generally and the application of general
principles of equity.
i. Residency. The Buyer is a resident of the jurisdiction set forth immediately
below such Buyer's name on the signature pages hereto.
j. Sale of Assets. The Buyer acknowledges that, as previously publicly
announced, the Company is implementing a strategic refocus to concentrate on its
Internet services business. In connection with such refocus, the Company is
considering offers to purchase its telecommunications unit, Kansas
Communications, Inc. The Buyer acknowledges that nothing in this Agreement or
the agreements or instruments to be entered into or filed in connection herewith
shall affect the ability of the Company to sell any or all of its non-Internet
business units.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Buyers as of the
date hereof and as of the Closing, as set forth in this Section 3. The Company
makes no other warranties, express or implied, to the Buyers in connection with
the transactions contemplated hereby and any and all prior representations and
warranties, if any, which may have been made by the Company to the Buyers in
connection with the transactions contemplated hereby shall be deemed to have
been merged into this Agreement and any such prior representation and
warranties, if any, shall not survive the execution and delivery of this
Agreement.
a. Organization and Qualification. The Company and each of its Subsidiaries (as
defined below), if any, is duly incorporated, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated, with
full power and authority (corporate and other) to own, lease, use and operate
its properties and to carry on its business as and where now owned, leased,
used, operated and conducted. Schedule 3(a) sets forth a list of all of the
Subsidiaries of the Company and the jurisdiction in which each is incorporated.
The Company and each of its Subsidiaries is duly qualified to do business and is
in good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary except where the failure to
be so qualified or in good standing would not have a Material Adverse Effect.
"Material Adverse Effect" means any material adverse effect on (i) the business,
operations, assets or financial condition of the Company or its Subsidiaries, if
any, taken as a whole, or (ii) on the ability of the Company to perform its
obligations pursuant to the transactions contemplated hereby or under the
agreements or instruments to be entered into or filed in connection herewith, or
(iii) the ability of the Company to perform its obligations with respect to the
Securities, as set forth in the Certificate of Designations. "Subsidiaries"
means any corporation or other organization, whether incorporated or
unincorporated, in which the Company owns, directly or indirectly, 50% or more
of the equity or other ownership interests.
b. Authorization; Enforcement. (i) The Company has all requisite corporate power
and authority to file and perform its obligations under the Certificate of
Designations and to enter into and to perform its obligations under this
Agreement, the Registration Rights Agreement, the Escrow Agreement and the
Warrants and to consummate the transactions contemplated hereby and thereby and
to issue the Securities, in accordance with the terms hereof and thereof, (ii)
the execution, delivery and performance of this Agreement, the Registration
Rights Agreement and the Warrants by the Company and the consummation by it of
the transactions contemplated hereby and thereby (including without limitation
the filing of the Certificate of Designations, the issuance of the Preferred
Shares and the Warrants and the issuance and reservation for issuance of the
Conversion Shares in accordance with the Certificate of Designations and Warrant
Shares issuable in accordance with the terms of the Warrants have been duly
authorized by the Company's Board of Directors and no further consent or
authorization of the Company, its Board or Directors, or its shareholders is
required, (iii) this Agreement, the Registration Rights Agreement, the Escrow
Agreement and the Warrants have been duly executed and delivered and the
Certificate of Designations has been duly filed by the Company, and (iv) each of
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Warrants and the Certificate of Designations constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, or moratorium or similar laws affecting the rights of creditors
generally and the application of general principles of equity.
c. Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (i) 25,000,000 shares of Common Stock of which 8,190,338
shares are issued and outstanding, 1,370,865 shares are reserved for issuance
pursuant to the Company's employee and director stock option plans, 1,217,322
shares are reserved for issuance pursuant to securities (other than securities
issued under the foregoing plans, the Preferred Shares and the Warrants)
exercisable for, or convertible into or exchangeable for shares of Common Stock,
2,474,226 shares are reserved for issuance upon conversion of the Preferred
Shares and exercise of the Warrants (subject to adjustment pursuant to the
Company's covenant set forth in Section 4(h) below) and 1,513,885 shares are
reserved for issuance under the company's cable affiliates incentive program;
(ii) 4,000,000 shares of preferred stock, par value $.10 per share, of which
3,062.5 shares of Series A Convertible Preferred Stock and of which 10,000
shares of Series B Convertible Preferred Stock are issued and outstanding. All
of such outstanding shares of capital stock are, or upon issuance will be, duly
authorized, validly issued, fully paid and nonassessable. Except as disclosed in
Schedule 3(c), no shares of capital stock of the Company, including the
Securities, are subject to preemptive rights or any other similar rights of the
stockholders of the Company or any liens or encumbrances imposed through the
actions or failure to act of the Company. Except as disclosed in Schedule 3(c)
and except for the transactions contemplated hereby, as of the date of this
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe for, puts, calls, rights of first refusal, agreements, understandings,
claims or other commitments or rights of any character whatsoever relating to,
or securities or rights convertible into, exercisable for, or exchangeable for
any shares of capital stock of the Company or any of its Subsidiaries, or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries, and (ii) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
its or their securities under the 1933 Act (except pursuant to the Registration
Rights Agreements dated December 31, 1997, and May 28, 1998 between the Company
and the investors party thereto and except the Registration Rights Agreement)
and (iii) there are no anti-dilution or price adjustment provisions contained in
any security issued by the Company (or in any agreement providing rights to
security holders) that will be triggered by the issuance of the Preferred
Shares, Conversion Shares, Warrants or Warrant Shares. The Company has furnished
to the Buyers true and correct copies of the Company's Certificate of
Incorporation, as amended, as in effect on the date hereof ("Certificate of
Incorporation"), the Company's By-laws as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock of the Company and the material rights of the holders thereof in
respect thereto.
d. Issuance of Shares. The Preferred Shares, Conversion Shares and Warrant
Shares are duly authorized and, upon issuance in accordance with the terms of
this Agreement (including the issuance of the Conversion Shares upon conversion
of the Preferred Shares in accordance with the Certificate of Designations and
the issuance of the Warrant Shares upon exercise of the Warrants in accordance
with the terms thereof) will be validly issued, fully paid and non-assessable,
and free from all taxes, liens, claims, encumbrances, and charges with respect
to the issue thereof and, except as disclosed in Schedule 3(c), shall not be
subject to preemptive rights or other similar rights of stockholders of the
Company and will not impose personal liability on the holders thereof. The
Company understands and acknowledges the potentially dilutive effect to the
Common Stock of the issuance of the Conversion Shares and Warrant Shares upon
conversion or exercise of the Preferred Shares or Warrants. The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Preferred Shares and Warrant Shares upon exercise of the Warrants in
accordance with this Agreement, the Certificate of Designations 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. Taking the foregoing into account, the Company's Board of Directors has
determined that the issuance of the Securities and the consummation of the other
transactions contemplated hereby are in the best interests of the Company and
its stockholders.
e. Series of Preferred Stock. Other than the Series A Convertible Preferred
Stock, the Series B Convertible Preferred Stock, the Series E Preferred Stock
and the Series D Preferred Stock, the Company has not designated or established
any other preferred stock of the Company. The terms, designations, powers,
preferences and relative, participating, and optional or special rights, and the
qualifications, limitations, and restrictions of the Preferred Stock are as
stated in the Certificate of Designations.
f. No Conflicts. The execution, delivery and performance of this Agreement, the
Registration Rights Agreement and the Warrants by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the filing of the Certificate of Designations
and the issuance and reservation for issuance of the Preferred Shares, Warrants,
Conversion Shares and Warrant Shares) will not (i) conflict with or result in a
violation of any provision of the Certificate of Incorporation or By-laws or
(ii) except as described in Schedule 3(f), violate or conflict with, or result
in a breach of any provision of, or constitute a default (or an event which with
notice or lapse of time or both could become a default) under, or give to others
any rights of termination, amendment (including without limitation, the
triggering of any antidilution provision), acceleration or cancellation of, any
agreement, indenture, patent, patent license or instrument to which the Company
or any of its Subsidiaries is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree (including U.S. federal and
state securities laws and regulations and regulations of any self-regulatory
organizations to which the Company or its securities are subject) applicable to
the Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected (except for such
conflicts, breaches, defaults, terminations, amendments, accelerations,
cancellations and violations as would not, individually or in the aggregate,
have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries
is in violation of its Certificate of Incorporation, By-laws or other
organizational documents and neither the Company nor any of its Subsidiaries is
in default (and no event has occurred which with notice or lapse of time or both
could put the Company or any of its Subsidiaries in default) under, and neither
the Company nor any of its Subsidiaries has taken any action or failed to take
any action that (and no event has occurred which, without notice or lapse of
time or both) would give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its Subsidiaries is a party or by which any property or
assets of the Company or any of its Subsidiaries is bound or affected, except
for possible defaults as would not, individually or in the aggregate, have a
Material Adverse Effect. The businesses of the Company and its Subsidiaries, if
any, are not being conducted in violation of any law, ordinance or regulation of
any governmental entity, the failure to comply with which would, individually or
in the aggregate, have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act and any
applicable state securities laws or any listing agreement with any securities
exchange or automated quotation system, the Company is not required to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency or any regulatory or self regulatory agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement or the Warrants or to perform its
obligations under the Certificate of Designations in each case in accordance
with the terms hereof or thereof or to issue and sell the Preferred Shares and
Warrant in accordance with the terms hereof and to issue the Conversion Shares
upon conversion of the Preferred Shares and the Warrant Shares upon exercise of
the Warrants. Except as discussed in Schedule 3(f), all consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof. The Company is not in violation of the listing
requirements of the American Stock Exchange and does not reasonably anticipate
that the Common Stock will be delisted by the American Stock Exchange in the
foreseeable future. The Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
g. SEC Documents, Financial Statements. Since September 30, 1996, the Company
has timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents (other than exhibits)
incorporated by reference therein, being hereinafter referred to herein as the
"SEC Documents"). The Company has delivered to each Buyer true and complete
copies of the SEC Documents, except for such exhibits and incorporated
documents. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act or the 1933 Act, as the
case may be, and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, at the time they
were filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. None of the statements made in any such SEC
Documents is, or has been, required to be amended or updated under applicable
law (except for such statements as have been amended or updated in subsequent
filings prior to the date hereof). As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the consolidated financial position of the Company and
its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).
Except as set forth in the financial statements included in the SEC Documents,
the Company has no liabilities, contingent or otherwise, other than liabilities
incurred in the ordinary course of business subsequent to September 30, 1996,
and liabilities of the type not required under generally accepted accounting
principles to be reflected in such financial statements. Such liabilities
incurred subsequent to September 30, 1996 are not, in the aggregate, material to
the financial condition or operating results of the Company.
h. Absence of Certain Changes. Except as disclosed in the SEC Documents, since
September 30, 1996, there has been no material adverse change and no material
adverse development in the assets, liabilities, business, properties,
operations, financial condition, prospects or results of operations of the
Company or any of its Subsidiaries.
i. Absence of Litigation. There is no action, suit, claim, proceeding, inquiry
or investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the Company
or any of its Subsidiaries, threatened against or affecting the Company or any
of its Subsidiaries or any of its officers or directors acting as such that
could, individually or in the aggregate, have a Material Adverse Effect. Neither
the Company nor any of its Subsidiaries are aware of any facts or circumstances
which would reasonably be expected to give rise to any action or proceeding
described in the foregoing sentence. Schedule 3(i) contains a complete list and
summary description of any pending or, to the knowledge of the Company,
threatened proceeding against or affecting the Company or any of its
Subsidiaries, without regard to whether it could have a Material Adverse Effect.
The Company and its Subsidiaries are unaware of any facts or circumstances which
would reasonably be expected to give rise to the foregoing.
j. Patents, Copyrights, etc. The Company and each of its Subsidiaries owns or
possesses the requisite licenses or rights to use all patents, patent
applications, patent rights, inventions, know-how, trade secrets, trademarks,
trademark applications, service marks, service names, trade names and copyrights
("Intellectual Property") to its knowledge necessary to enable it to conduct its
business as now operated; there is no claim or action by any person pertaining
to, or proceeding pending, or to the Company's knowledge threatened, which
challenges the right of the Company or of a Subsidiary with respect to any
Intellectual Property necessary to enable it to conduct its business as now
operated; to the Company's knowledge, the Company's or its Subsidiaries' current
and intended products, services and processes do not infringe on any
Intellectual Property or other rights held by any person; and the Company is
unaware of any facts or circumstances which might give rise to any of the
foregoing. The Company and each of its Subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of their
Intellectual Property.
k. No Materially Adverse Contracts, Etc. Neither the Company nor any of its
Subsidiaries is subject to any charter, corporate or other legal restriction, or
any judgment, decree, order, rule or regulation which in the reasonable judgment
of the Company's officers has or is expected in the future, individually or in
the aggregate, to have a Material Adverse Effect. Neither the Company nor any of
its Subsidiaries is a party to any contract or agreement which in the reasonable
judgment of the Company's officers has or is expected to have a Material Adverse
Effect.
l. Tax Status. Except as set forth on Schedule 3(l), the Company and each of its
Subsidiaries has made or filed all federal, state and foreign income and all
other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its Subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim. The Company has not executed a waiver with respect to the statute of
limitations relating to the assessment or collection of any foreign, federal,
state or local tax. Except as set forth on Schedule 3(l), none of the Company's
tax returns is presently being audited by any taxing authority.
m. Certain Transactions. Except as disclosed in the SEC Documents or as set
forth on Schedule 3(m) and except for arm's length transactions pursuant to
which the Company or any of its Subsidiaries makes payments in the ordinary
course of business upon terms no less favorable than the Company or any of its
Subsidiaries could obtain from third parties and other than the grant of stock
options or the ownership of other securities and rights disclosed on Schedule
3(c), none of the officers, directors, or employees of the Company is presently
a party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or employee has a substantial interest or is an
officer, director, trustee or partner.
n. Disclosure. All information relating to or concerning the Company or any of
its Subsidiaries set forth in this Agreement and provided to the Buyers pursuant
to Section 2(d) hereof in connection with the transactions contemplated hereby,
when taken as a whole, is true and correct in all material respects and the
Company has not omitted to state any material fact necessary in order to make
the statements made herein or therein, in light of the circumstances under which
they were made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or its
or their business, properties, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed
(assuming for this purpose that the Company's reports filed under the 1934 Act
are being incorporated into an effective registration statement filed by the
Company under the 1933 Act).
o. Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm's length purchaser with respect to this Agreement and the transactions
contemplated hereby. The Company further acknowledges that no Buyer is acting as
a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement and the transactions contemplated hereby and any
statement made by any Buyer or any of their respective representatives or agents
in connection with this Agreement and the transactions contemplated hereby is
not advice or a recommendation and is merely incidental to the Buyer's purchase
of the Securities and has not been relied on by the Company in any way. The
Company further represents to each Buyer that the Company's decision to enter
into this Agreement has been based solely on an independent evaluation by the
Company and its representatives.
p. No Integrated Offering. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales in any security or solicited any offers to buy any security
under circumstances that would require registration under the 1933 Act of the
issuance of the Securities to the Buyers. The issuance of the Securities to the
Buyers will not be integrated with any other issuance of the Company's
securities (past, current or future) except for the issuance of the Series A
Preferred Stock and Series B Preferred Stock, for purposes of the 1933 Act or
any applicable rules of the American Stock Exchange.
q. No Brokers. The Company has taken no action which would give rise to any
claim by any person for brokerage commissions, finder's fees or similar payments
relating to this Agreement or the transactions contemplated hereby, except for
dealings with Shoreline Pacific Institutional Financial, the Institutional
Division of Financial West Group ('Shoreline Pacific"), whose commissions and
fees will be paid for by the Company.
r. Permits; Compliance. The Company and each of its Subsidiaries is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted except those the failure of which to possess would
not, individually or in the aggregate, have a Material Adverse Effect
(collectively, the "Company Permits"), and there is no action pending or, to the
knowledge of the Company, threatened regarding suspension or cancellation of any
of the Company Permits. Neither the Company nor any of its Subsidiaries is in
conflict with, or in default or violation of, any of the Company Permits, except
for any such conflicts, defaults or violations which, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect.
Since December 31, 1997, neither the Company nor any of its Subsidiaries has
received any notification with respect to possible conflicts, defaults or
violations of applicable laws that would have a Material Adverse Effect.
s.Environmental Matters.
(i) Except as set forth in Schedule 3(s), there are, to the Company's
knowledge, with respect to the Company or any of its Subsidiaries or any
predecessor of the Company, no past or present violations of Environmental Laws
(as defined below), releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 or similar federal, state, local or foreign laws and
neither the Company nor any of its Subsidiaries has received any notice with
respect to any of the foregoing, nor is any action pending or, to the Company's
knowledge, threatened in connection with any of the foregoing. The term
"Environmental Laws" means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants contaminants, or toxic
or hazardous substances or wastes (collectively, "Hazardous Materials") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
(ii) Other than those that are or were stored, used or disposed of in
compliance with applicable law, no Hazardous Materials are contained on or about
any real property currently owned, leased or used by the Company or any of its
Subsidiaries, and no Hazardous Materials were released on or about any real
property previously owned, leased or used by the Company or any of its
Subsidiaries during the period the property was owned, leased or used by the
Company or any of its Subsidiaries.
(iii) Except as set forth in Schedule 3(s), to the best knowledge of
the Company, there are no underground storage tanks on or under any real
property owned, leased or used by the Company or any of its Subsidiaries that
are not in compliance with applicable law.
t. Title to Property. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(t) or such as would not have
a Material Adverse Effect. Any real property and facilities held under lease by
the Company and its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as would not have a Material Adverse
Effect.
u. Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.
v. Internal Accounting Controls. The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient, in the judgment of
the Company's board of directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
w. Employment Matters. The Company and its Subsidiaries are in compliance with
all federal, state, local and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and hours
except where failure to be in compliance would not have a Material Adverse
Effect. There are no pending investigations involving the Company or any of its
Subsidiaries by the U.S. Department of Labor or any other governmental agency
responsible for the enforcement of such federal, state, local or foreign laws
and regulations. There is no unfair labor practice charge or complaint against
the Company or any of its Subsidiaries pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any of its
Subsidiaries. Except as set forth in Schedule 3(w), no representation question
exists respecting the employees of the Company or any of its Subsidiaries, and
no collective bargaining agreement or modification thereof is currently being
negotiated by the Company or any of its subsidiaries. No grievance or
arbitration proceeding is pending under any expired or existing collective
bargaining agreements of the Company or any of its Subsidiaries. No material
labor dispute with the employees of the Company or any of its Subsidiaries
exists or, to the knowledge of the Company, is imminent.
x. ERISA Matters. Except as set forth on Schedule 3(x), the Company has no
"employee benefit plans" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended, or intended to be qualified
under Section 401(a) of the Internal Revenue Code.
y. Investment Company Status. The Company is not and upon consummation of the
sale of the Securities will not be an "investment company," a company controlled
by an "investment company" or an "affiliated person" of, or promoter" or
"principal underwriter" for, an "investment company" as such terms are defined
in the Investment Company Act of 1940, as amended.
z. No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
aa. Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries,
nor any director, officer, agent, employee or other person acting on behalf of
the Company or any Subsidiary has, in the course of his actions for, or on
behalf of, the Company, used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expenses relating to political activity;
made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977; or
made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts to satisfy timely each
of the conditions described in Section 6 and 7 of this Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with respect to
the Securities as required under Regulation D and to provide a copy thereof to
each Buyer promptly after such filing. The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for sale to the Buyers pursuant to this
Agreement under applicable securities or "blue sky" laws of the states of the
United States (or to obtain an exemption from such qualification), and shall
provide evidence of any such action so taken to the Buyers on or prior to the
Closing Date. The Company agrees to file a Form 8-K disclosing this Agreement
and the transactions contemplated hereby with the SEC within ten (10) business
days following the Closing Date and afford the Buyers the opportunity to review
and comment on such filing prior to its filing.
c. Reporting Status; Eligibility to Use Form S-3. The Company's Common Stock is
registered under Section 12(b) of the 1934 Act. Throughout the Registration
Period (as defined in the Registration Rights Agreement), the Company shall
timely file all reports, schedules, forms, statements and other documents
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination. The Company currently meets, and will take all
reasonably necessary action to continue to meet, the "registrant eligibility"
requirements set forth in the general instructions to Form S-3.
d. Use of Proceeds. The Company shall use the proceeds from the sale of the
Preferred Shares and Warrants in the manner set forth in Schedule 4(d) attached
hereto and made a part hereof and shall not otherwise, directly or indirectly,
use such proceeds for any loan to or investment in any other corporation,
partnership, enterprise or other person (except in connection with its direct or
indirect Subsidiaries).
e. Expenses. The Company and the Buyers shall each be liable for their own
expenses incurred in connection with the negotiation, preparation, execution and
delivery of this Agreement and the other agreements to be executed in connection
herewith, including, without limitation, attorneys' and consultants' fees and
expenses.
f. Financial Information. The financial statements of the Company will be
prepared in accordance with U.S. generally accepted accounting principles,
consistently applied, and will fairly present in all material respects the
consolidated financial position of the Company and its consolidated subsidiaries
and results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). The Company agrees to send the following reports to each Buyer
during the Registration Period (as defined in the Registration Rights
Agreement): (i) within ten (10) days after the filing with the SEC, a copy of
its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K; (ii) within one (1) day after release, copies of
all press releases issued by the Company or any of its Subsidiaries; and (iii)
contemporaneously with the making available or giving to the stockholders of the
Company, copies of any notices or other information the Company makes available
or gives to such stockholders.
g. Reservation of Shares. Subject to the Maximum Share Amount (as defined in the
Certificate of Designations), the Company shall at all times have authorized,
and reserved for the purpose of issuance, a sufficient number of shares of
Common Stock to provide for the full conversion of the outstanding Preferred
Shares and issuance of the Conversion Shares in connection therewith (based on
the Conversion Price of the Preferred Shares in effect from time to time) and
the full exercise of the Warrants and the issuance of the Warrant Shares in
connection therewith (based upon the Exercise Price of the Warrants in effect
from time to time). The Company shall not reduce the number of shares of Common
Stock reserved for issuance upon conversion of the Preferred Shares or exercise
of the Warrants without the consent of all the Buyers. The Company shall use its
best efforts at all times to maintain the number of shares of Common Stock so
reserved for issuance at no less than 2,662,000 shares of Common Stock. If at
any time the number of shares of Common Stock authorized and reserved for
issuance is below the number of Conversion Shares and Warrant Shares issued and
issuable upon conversion of the Preferred Shares and exercise of the Warrants
(based on the Conversion Price of the Preferred Shares and Exercise Price of the
Warrants then in effect), the Company will promptly take all corporate action
necessary to authorize and reserve a sufficient number of shares, including,
without limitation, calling a special meeting of shareholders to authorize
additional shares to meet the Company's obligations under this Section 4(g), in
the case of an insufficient number of authorized shares, and using its best
efforts to obtain shareholder approval of an increase in such authorized number
of shares.
h. Listing. The Company shall, on or before 10 business days following the date
hereof, secure the listing of the Conversion Shares and Warrant Shares upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and, so long as any Buyer owns any of the Securities, shall maintain such
listing of all Conversion Shares and Warrant Shares from time to time issuable
(subject to the Maximum Share Limit (as defined in the Certificate of
Designations)) upon conversion or exercise of the Preferred Shares and the
Warrants. The Company will use its best efforts to obtain and, so long as any
Buyer owns any of the Securities, maintain the listing and trading of its Common
Stock on the Nasdaq National Market System ("Nasdaq"), the American Stock
Exchange ("AMEX") or the New York Stock Exchange ("NYSE"), and will comply in
all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the Nasdaq or other exchanges, as applicable. The Company
shall promptly provide to each Buyer copies of any notices it receives regarding
the continued eligibility of the Common Stock for listing on AMEX or other
principal exchange or quotation system on which the Common Stock is listed or
traded.
i. Corporate Existence. So long as any Preferred Stock is outstanding, the
Company shall maintain its corporate existence in good standing under the laws
of the jurisdiction in which it is incorporated and shall not sell all or
substantially all of the Company's assets, except in the event of a merger or
consolidation or sale of all or substantially all of the Company's assets, where
the Company complies with Article X.B in the Certificate of Designations.
j. Solvency; Compliance with Law. The Company (both before and after giving
effect to the transactions contemplated by this Agreement) is solvent (i.e., its
assets have a fair market value in excess of the amount required to pay its
probable liabilities on its existing debts as they become absolute and matured)
and currently the Company has no information that would lead it to reasonably
conclude that the Company would not have, nor does it intend to take any action
that would impair, its ability to pay its debts from time to time incurred in
connection therewith as such debts mature. The Company will conduct its business
in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without limitation,
all applicable local, state and federal environmental laws and regulations the
failure to comply with which would have a Material Adverse Effect.
k. Insurance. The Company shall maintain liability, casualty and other insurance
(subject to customary deductions and retentions) with responsible insurance
companies against such risk of the types and in the amounts customarily
maintained by companies of comparable size to the Company.
l. No Integration. The Company shall not make any offers or sales of any
security (other than the Securities) under circumstances that would require
registration of the Securities being offered or sold hereunder under the 1933
Act or cause the offering of Securities to be integrated with any other offering
of securities by the Company for the purpose of any stockholder approval
provision applicable to the Company or its securities.
m. No Qualified Opinion. The Company did not receive a qualified opinion from
its auditors with respect to its most recent fiscal year end and does not
anticipate or know of any basis upon which its auditors might issue a qualified
opinion in respect of its current fiscal year.
n. Selling Restrictions. Each Buyer, on behalf of itself and any affiliates,
agrees that, in connection with the securities purchased hereunder:
(i) during any period of determination of any Market Price (as defined
in the Certificate of Designations), if Buyer (or others acting under its
direction or control) engages in short sale transactions or other hedging
activities which involve, among other things, sales of common shares, Buyer will
place its sale orders for such shares of Common Stock in the course of such
activities so as not to complete or effect any such sale on any trading day
during such period at a price which is lower than the lowest sale effected for
shares of Common Stock on such day by persons other than Buyer (or others acting
under its direction or control).
(ii) Buyer will not create new trading lows through sales of common
shares in order to create a lower Market Price applicable to conversions of
Preferred Stock; and
(iii) Buyer will not on any day sell a number of shares of Common Stock
issued or issuable in conversion of the Preferred Shares purchased hereunder
greater than 10% of the previous day's trading volume or, if greater, the
current day's trading volume on AMEX (or, if the Company's common shares are in
the future traded on the Nasdaq, 20% of the previous day's (or, if greater,
current day's), trading volume on Nasdaq), unless otherwise authorized by the
Company, such authorization not to be unreasonably withheld or delayed; provided
that the prohibition contained in this Section 4(n)(iii) shall not apply to (a)
block trades of at least 50,000 shares of Common Stock, and (b) block trades of
at least 10,000 shares of Common Stock at a per share price of not less than
$8.61.
o. Sales by Buyer. Each Buyer agrees to sell all Securities, including those
represented by a certificates) from which the legend has been removed, in
compliance with applicable prospectus delivery requirements, if any, or
otherwise in compliance with the requirements for an exemption from registration
under the 1933 Act and the rules and regulations promulgated thereunder.
p. Additional Equity Capital. The Company agrees that during the period
beginning on the Closing Date with respect to the First Closing and ending 180
days from the date the Registration Statement (as defined in the Registration
Rights Agreement) is declared effective (plus any days in which sales cannot be
made thereunder), if the Company intends to complete a private convertible
preferred equity offering, or other similar non-public offering of a convertible
equity security that includes a floating conversion mechanism, then the Company
will use reasonable efforts to give Buyers an opportunity to participate in such
offering.
5. TRANSFER AGENT INSTRUCTIONS.
For each Closing, the Company shall issue irrevocable
instructions to its transfer agent to issue certificates, registered in the name
of each Buyer or its nominee, for the Conversion Shares and Warrant Shares in
such amounts as specified from time to time by such Buyer to the Company upon
conversion or exercise of the Preferred Shares and the Warrants in accordance
with the terms thereof (the "Irrevocable Transfer Agent Instructions") and shall
exercise best efforts following each Closing Date to obtain the written
acknowledgement of such transfer agent of receipt of such instructions. Prior to
registration of the conversion Shares and Warrant Shares under the 1933 Act, all
such certificates shall bear the restrictive legend as and when specified in
Section 2(g) of this Agreement. The Company warrants that no instruction other
than the Irrevocable Transfer Agent Instructions referred to in this Section 5,
and stop transfer instructions to give effect to Section 2(f) hereof (in the
case of the Conversion Shares or Warrant Shares, prior to registration of the
Conversion Shares or Warrant Shares under the 1933 Act), will be given by the
Company to its transfer agent and that the Securities shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section shall affect in any way the Buyer's obligations and agreement set
forth in Section 2(g) hereof to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Securities. If a Buyer provides the
Company with (i) an opinion of counsel in form, substance and scope customary
for opinions of counsel in comparable transactions, that registration of a
resale by such Buyer of any of the Securities is not required under the 1933 Act
or (ii) the Buyer provides the Company with reasonable assurances that such
Securities may be sold under Rule 144, the Company shall permit the transfer,
and, in the case of the Conversion Shares or Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates, free from any restrictive
legend, in such name and in such denominations as specified by such Buyer. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyer, by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section, that the Buyer shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate transfer, without the necessity of showing
economic loss and without any bond or other security being required.
6. CONDITIONS TO THE FIRST CLOSING.
a. Conditions to the Company's Obligation to Sell the Series E Preferred Shares.
The obligation of the Company hereunder to issue and sell the Series E Preferred
Shares and the Warrants to be issued in connection therewith to each Buyer at
the First Closing is subject to the satisfaction, at or before the Closing Date
of each of the following conditions thereto, provided that these conditions are
for the Company's sole benefit and may be waived by the Company at any time in
its sole discretion:
(i) The applicable Buyer shall have executed this Agreement, the
Registration Rights Agreement and the Escrow Agreement, and delivered the same
to the Company and the Escrow Agent.
(ii) The applicable Buyer shall have delivered the Series E Purchase
Price to the Escrow Agent in accordance with Section l(c) above, and an
aggregate Purchase Price of at least $7,500,000 shall have been received by the
Escrow Agent.
(iii) The Certificate of Designations shall have been accepted for
filing with the Secretary of State of the State of New York.
(iv) The representations and warranties of the applicable Buyer shall
be true and correct in all material respects as of the date when made and as of
the date of the First Closing as though made at that time (except for
representations and warranties that speak as of a specific date which
representations and warranties shall be correct as of such date), and the
applicable Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the applicable Buyer at
or prior to the date of the First Closing.
(v) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
b. Conditions to Buyers' Obligation to Purchase the Series E Preferred Shares.
The obligation of each Buyer hereunder to purchase the Series E Preferred Shares
and the Warrants to be issued in connection therewith at the First Closing is
subject to the satisfaction, at or before the date of the First Closing of each
of the following conditions, provided that these conditions are for each such
Buyer's respective benefit and may be waived by each such Buyer at any time in
its sole discretion:
(i) The Company shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, and delivered the same to the Buyer.
(ii) The Certificate of Designations shall have been accepted for
filing with the Secretary of State of the State of New York, and evidence
thereof reasonably satisfactory to the applicable Buyer shall have been
delivered to such Buyer.
(iii) The Company shall have delivered to the Escrow Agent duly
executed certificates (in such denominations as the applicable Buyer shall
reasonably request) representing the Series E Preferred Shares and the Warrants
being so purchased in accordance with Section l(a) above.
(iv) The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the date
of the First Closing as though made at such time (except for representations and
warranties that speak as of a specific date which representations and warranties
shall be true and correct as of such date) and the Company shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the date of the First Closing. The Buyers
shall have received a certificate or certificates, executed by the Chief
Executive Officer or the Treasurer of the Company, dated as of the date of the
First Closing, to the foregoing effect and as to such other matters as may be
reasonably requested by such Buyer including, but not limited to certificates
with respect to the Company's Certificate of Incorporation, By-laws, Board of
Directors' resolutions relating to the transactions contemplated hereby and the
incumbency and signatures of each of the officers of the Company who shall
execute on behalf of the Company any document delivered on the date of the First
Closing.
(v) No litigation, statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by or in any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
(vi) Trading and listing of the Common Stock on the AMEX (or Nasdaq, in
the event the Company has secured listing of the Common Stock or Nasdaq prior to
the First Closing) shall not have been suspended by the SEC or the AMEX (or
Nasdaq).
(vii) The Buyers shall have received an opinion of the Company's
counsel, dated as of the date of the First Closing, in form, scope and substance
reasonably satisfactory to the Buyers and in substantially the same form as
Exhibit "F" attached hereto.
(viii) The Common Stock required to be authorized and reserved pursuant
to Section V(A) of the Certificate of Designations shall have been duly
authorized and reserved by the Company.
(ix) An aggregate Series E Purchase Price of at least $7,500,000 shall
have been received by the Escrow Agent.
(x) The Irrevocable Transfer Agent Instructions, in form and substance
satisfactory to a majority in interest of the Buyers, shall have been delivered
to the transfer agent with respect to the Series E Preferred Shares.
7. CONDITIONS TO THE SECOND CLOSING.
a. Conditions to the Company's Obligation to Sell the Series D Preferred Shares.
The obligation of the Company hereunder to issue and sell the Series D Preferred
Shares and the Warrants to be issued in connection therewith to each Buyer at
the Second Closing is subject to the satisfaction, at or before the date of the
Second Closing of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
(i) The applicable Buyer shall have delivered the Series D Purchase
Price to the Escrow Agent in accordance with Section l(c) above, and an
aggregate Series D Purchase Price of at least $7,500,000 shall have been
received by the Escrow Agent.
(ii) The representations and warranties of the applicable Buyer shall
be true and correct in all material respects as of the date when made and as of
the date of the Second Closing as though made at that time (except for
representations and warranties that speak as of a specific date which
representations and warranties shall be correct as of such date), and the
applicable Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the applicable Buyer at
or prior to the date of the Second Closing. (iii) No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.
b. Conditions to Buyers' Obligation to Purchase the Series D Preferred Shares.
The obligation of each Buyer hereunder to purchase the Series D Preferred Shares
and the Warrants to be issued in connection therewith at the Second Closing is
subject to the satisfaction, at or before the first Closing Date of each of the
following conditions, provided that these conditions are for each such Buyer's
respective benefit and may be waived by each such Buyer at any time in its sole
discretion:
(i) The Company shall have delivered to the Escrow Agent duly executed
certificates (in such denominations as the applicable Buyer shall reasonably
request) representing the Series D Preferred Shares and the Warrants being so
purchased in accordance with Section l(b) above.
(ii) The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the date
of the Second Closing as though made at such time (except for representations
and warranties that speak as of a specific date which representations and
warranties shall be true and correct as of such date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the date of the Second Closing.
The Buyers shall have received a certificate or certificates, executed by the
Chief Executive Officer or the Treasurer of the Company, dated as of the date of
the Second Closing, to the foregoing effect and as to such other matters as may
be reasonably requested by such Buyer including, but not limited to certificates
with respect to the Company's Certificate of Incorporation, By-laws, Board of
Directors' resolutions relating to the transactions contemplated hereby and the
incumbency and signatures of each of the officers of the Company who shall
execute on behalf of the Company any document delivered on the date of the
Second Closing.
(iii) No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement (or Nasdaq, in the event the Company has secured
listing of the Common Stock on Nasdaq prior to the First Closing).
(iv) Trading and listing of the Common Stock on the AMEX (or Nasdaq, in
event the Company has secured listing of the Common Stock on Nasdaq prior to the
Second Closing) shall not have been suspended by the SEC or the AMEX (or
Nasdaq).
(v) The Buyers shall have received an opinion of the Company's counsel,
dated as of the date of the Second Closing, in form, scope and substance
reasonably satisfactory to the Buyers and in substantially the same form as
Exhibit "F" attached hereto, with appropriate modification to reflect the
issuance of the Series D Preferred Shares.
(vi) The Common Stock required to be authorized and reserved pursuant
to Section V(A) of the Certificate of Designations shall have been duly
authorized and reserved by the Company.
(vii) An aggregate Series D Purchase Price of at
least $7,500,000 shall have been received by the Escrow Agent.
(viii) The Shareholder Approval (as defined in the Certificate of
Designations) shall have been obtained, and shall not have been revoked,
modified or otherwise subject to challenge.
(ix) The Registration Statement required to be filed pursuant to the
Registration Rights Agreement shall be effective so as to permit the resale of
the shares of Common Stock issuable upon conversion of the Series E Preferred
Shares and the Series D Preferred Shares and upon exercise of the Warrants.
(x) The Irrevocable Transfer Agent instruments in form and substance
satisfactory to a majority in interest of the Buyers, shall have been delivered
to the transfer agent with respect to the Series D Preferred Shares.
(xi) The Company shall, on or simultaneously with the Second Closing,
have raised aggregate gross proceeds of $20,000,000 in debt or non-floating-rate
or non-reset equity other than in connection with the issuance of the Preferred
Shares and the Warrants.
(xii) The five trading day average closing bid price of the Common
Stock shall be greater than 150% of the Closing Price (as defined in the
Certificate of Designations).
(xiii) No event or circumstance having a Material Adverse Effect shall
have occurred and be continuing since the First Closing.
8.GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction. This Agreement shall be governed by and
interpreted in accordance with the laws of New York State without regard to the
principles of conflict of laws. The parties hereto hereby submit to the
exclusive jurisdiction of the United States Federal and state courts located in
New York, New York with respect to any dispute arising under this Agreement, the
agreements entered into in connection herewith or the transactions contemplated
hereby or thereby.
b. Counterparts; Signatures by Facsimile. This Agreement may be executed in two
or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. This Agreement, once executed by a
party, may be delivered to the other party hereto by facsimile transmission of a
copy of this Agreement bearing the signature of the party so delivering this
Agreement.
c. Headings. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments referenced
herein contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile and shall be effective five days
after being placed in the mail, if mailed by regular U.S. mail, or upon receipt,
if delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile, in each case addressed to a party. The addresses for
such communications shall be:
If to the Company:
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
Attn: Chief Executive Officer
Phone: (650) 962-7451
Fax: (650) 962-7488
With a copy to:
Brobeck, Phleger & Harrison
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Thomas W. Kellerman, Esq.
Phone: (650) 496-2788
Fax: (650) 496-2777
If to a Buyer: To the address set forth immediately below such
Buyer's name on the signature pages hereto.
Each party shall provide notice to the other party of any
change in address.
g. Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and assigns. Except as provided
herein or therein, neither the Company nor any Buyer shall assign this
Agreement, the Registration Rights Agreement or the Warrants or any rights or
obligations hereunder or thereunder without the prior written consent of the
other. Notwithstanding the foregoing, any Buyer may assign its rights hereunder
to any person that purchases Securities in a private transaction from a Buyer or
to any of its "affiliates," as that term is defined under the 1934 Act, without
the consent of the Company.
h. Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not
for the benefit of, nor may any provision hereof be enforced by, any other
person.
i. Survival. The representations and warranties of the Company and the
agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the
closing hereunder notwithstanding any due diligence investigation conducted by
or on behalf of any Buyer. The Company agrees to indemnify and hold harmless
each Buyer and all such Buyer's respective officers, directors, employees,
partners, members, affiliates, and agents for loss or damage arising as a result
of or related to any breach or alleged breach by the Company of any of its
representations, warranties and covenants set forth in Sections 3 and 4 hereof
or any of its covenants and obligations under this Agreement or the Registration
Rights Agreement, including advancement of expenses as they are incurred.
j. Publicity. The Company and each Buyer shall have the right to review, a
reasonable period of time before issuance thereof, any press releases, or
relevant portions of any SEC, AMEX or Nasdaq filings, or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of the
Buyers, to make any press release or SEC, AMEX or Nasdaq filings with respect to
such transactions as are required by applicable law and regulations (although
the Company shall make reasonable efforts to consult with the Buyers in
connection with any such press release prior to its release and filing and shall
be provided with a copy thereof and be given an opportunity to comment thereon).
k. Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
l. No Strict Construction. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
m. Equitable Relief. The Company recognizes that in the event that it fails to
perform, observe, or discharge any or all of its obligations under this
Agreement, any remedy at law may prove to be inadequate relief to the Buyers.
The Company therefore agrees that the Buyers shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
n. Clarification Regarding Series A Preferred Stock. For purposes of determining
the aggregate number of shares of Common Stock issuable upon conversion of the
Series A Convertible Preferred Stock (the "Series A Preferred Stock") pursuant
to Article V.B of the Certificate of Designations for the Series A Preferred
Stock, Certificate of Designations if the issuance of Series E Preferred Stock
and/or Series D Preferred Stock is aggregated with the Series A Preferred Stock
pursuant to the regulations of AMEX or the Nasdaq Stock Market, the shares of
Common Stock issuable upon conversion of the shares of Series A Preferred Stock
and/or shall be aggregated with the shares of Common Stock issuable pursuant to
and/or upon conversion of the shares of Series E Preferred Stock and Series D
Preferred Stock for purposes of calculation of any shareholder approval
requirement with respect to the Series A Preferred Stock.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the undersigned Buyers and the Company
have caused this Agreement to be duly executed as of the date first above
written.
COMPANY:
SOFTNET SYSTEMS, INC.
By:__________________________________________
Name:
Title:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
<PAGE>
BUYERS:
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.
Investment Manager
By: RGC General Partner Corp.
By:_____________________________________________
Name:
Its: Managing Director
Aggregate Subscription Amount: $15,000,000
No. of Shares of Series E Preferred Stock: 7,500
No. of Warrants at First Closing: 93,750
No. of Shares of Series D Preferred Stock: 7,500
No. of Warrants at Second Closing: 93,750
RESIDENCE: Cayman Islands
ADDRESS:
c/o Rose Glen Capital Management, L.P.
3 Bala Plaza East, Suite 200
251 St. Asaphs Road
Bala Cynwyd, PA 19004
Fax: (610) 617-0570
Telephone: (610) 617-5900
Attn: Wayne Bloch
<PAGE>
Exhibit A
Certificate of Designation
<PAGE>
Exhibit B
Stock Purchase Warrant
<PAGE>
Exhibit C
Registration Rights Agreement
<PAGE>
Exhibit D
Form of Escrow Agreement
<PAGE>
Exhibit E
Form of Investor Questionnaire
<PAGE>
Exhibit F
Form of Legal Opinion
<PAGE>
Exhibit G
Form of Press Release
<PAGE>
Exhibit H
Form of Notice of Conversion
(See attached)
<PAGE>
Exhibit I
SOFTNET SYSTEMS, INC.
CONVERSION NOTICE - SERIES [C/Dl CONVERTIBLE PREFERRED STOCK
Reference is made to the Statement of Terms (the "Article Third, Section [3/4]")
of the Series [C/D] Convertible Preferred Stock, face amount $1,000 per share
(the "Preferred Shares"), of SoftNet Systems, Inc., a New York corporation (the
"Company"). In accordance with and pursuant to Article Third, Section [3/4], the
undersigned hereby elects to convert the number of Preferred Shares indicated
below into shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of the Company, by tendering the stock certificates) representing the
share(s) of Preferred Stock specified below as of the date specified below.
Date of Conversion:
Number of Preferred Shares to be converted:
Stock certificate no(s). of Preferred Shares to be converted:
Please confirm the following information:
Conversion Price:
Number of shares of Common Stock
to be issued:
Please issue the Common Stock and, if applicable, any check drawn on an account
of the Company into which the Preferred Shares are being converted in the
following name and to the following address:
Issue to:
Facsimile Number:
Authorization:
By:
Title:
Dated:
<PAGE>
The undersigned hereby represents and covenants that it has complied, or will
comply, with any and all prospectus delivery requirements with respect to its
sale of the Common Stock of the Company being issued herewith.
[ADD INFORMATION RE: DTC / DWAC PROCEDURES]
[ACKNOWLEDGED AND AGREED:
SOFTNET SYSTEMS, INC.
By:
Name:
Title:
Date:
EXHIBIT C
TO SECURITIES
PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
August 31, 1998, by and between SOFTNET SYSTEMS, INC., a New York corporation
(the "Company"), and the undersigned investors (together with their affiliates
and any assignee or transferee of all of their rights hereunder, the "Initial
Investors").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and
among the parties hereto of even date herewith (the "Securities Purchase
Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell, in the aggregate, to the
Initial Investors (i) 7,500 shares of its Series E Convertible Preferred Stock
and (ii) 7,500 shares of its Series D Convertible Preferred Stock (collectively,
the "Preferred Stock") that are convertible into shares (the "Conversion
Shares") of the Company's common stock, par value $.01 per share (the "Common
Stock"), upon the terms and subject to the limitations and conditions set forth
in Article Third, Sections 3 and 4 of the Company's Amended and Restated
Certificate of Incorporation with respect to such Preferred Stock (the
"Certificate of Designation") and (ii) warrants (the "Warrants") to acquire up
to One Hundred Eighty Seven Thousand Five Hundred (187,500) shares of Common
Stock (the "Warrant Shares"), upon the terms and subject to the limitations and
conditions set forth in the Warrants dated of even date herewith; and
B. To induce the Initial Investors to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have
the following meanings:
(i) "Investors" means the Initial Investors and any transferee or assignee who
agrees to become bound by the provisions of this Agreement in accordance with
Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any
successor rule providing for offering securities on a continuous basis ("Rule
415"), and the declaration or ordering of effectiveness of such Registration
Statement by the United States Securities and Exchange Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares and the Warrant
Shares (including any Conversion Shares issuable with respect to Conversion
Default Payments under the Certificate of Designation or in redemption of any
Preferred Stock and any Warrant Shares issuable with respect to Exercise Default
Payments under the Warrants) issued or issuable with respect to the Warrants and
the Preferred Stock and any shares of capital stock issued or issuable, from
time to time (with any adjustments), as a distribution on or in exchange for or
otherwise with respect to any of the foregoing. As to any particular securities,
such Securities shall cease to be Registrable Securities when they have been
sold pursuant to an effective registration statement or in compliance with Rule
144 or are eligible to be sold pursuant to Rule 144(k) under the 1933 Act (or
any similar rule then in force). (iv) "Registration Statement" means a
registration statement of the Company under the 1933 Act. b. Capitalized terms
used herein and not otherwise defined herein shall have the respective meanings
set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, on
or prior to the date which is twenty (20) business days after the date of the
Closing under the Securities Purchase Agreement (the "Closing Date"), file with
the SEC a Registration Statement on Form S-3 and pursuant to Rule 415 (or, if
Form S-3 is not then available, on Form S-1 (at the time provided for in Section
2(e)), to effect a registration of all of the Registrable Securities covering
the resale of the Registrable Securities underlying the Preferred Stock and
Warrants issued or issuable pursuant to the Securities Purchase Agreement, which
Registration Statement, to the extent allowable under the 1933 Act and the Rules
promulgated thereunder (including Rule 416), shall state that such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Preferred Stock and exercise
of the Warrants (i) to prevent dilution resulting from stock splits, stock
dividends or similar transactions or (ii) by reason of changes in the Conversion
Price of the Preferred Stock in accordance with the terms of the Certificate of
Designation or the Exercise Price of the Warrants in accordance with the terms
thereof. The number of shares of Common Stock initially included in such
Registration Statement shall be no less than 4,187,500 Shares.
b. Underwritten Offering. If any offering pursuant to a
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering, with the consent of the
Initial Investors, shall have the right to select one legal counsel and an
investment banker or bankers and manager or managers to administer the offering,
which investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Company.
c. Payments by the Company. The Company shall use best efforts
to (A) obtain effectiveness of the Registration Statement as soon as
practicable, (B) exclusive of Allowed Delays, maintain the effectiveness of such
Registration Statement and the ability of the Investors to sell Registrable
Securities pursuant thereto, and (C) maintain the listing of the Common Stock
for quotation on the Nasdaq, NYSE or AMEX and trading thereon after the
Registration Statement has been declared effective If (i) the Registration
Statement(s) covering the Registrable Securities required to be filed by the
Company pursuant to Section 2(a) hereof is not declared effective by the SEC
within ninety (90) days after the Closing Date or (ii), after the Registration
Statement has been declared effective by the SEC, sales cannot be made pursuant
to the Registration Statement, or (iii) the Common Stock is not listed or
included for quotation on any one or more of the Nasdaq National Market
("Nasdaq"), the New York Stock Exchange (the "NYSE") or the American Stock
Exchange (the "AMEX") after being so listed or included for quotation, then the
Company will make payments to the Investors in such amounts and at such times as
shall be determined pursuant to this Section 2(c) as partial relief for the
damages to the Investors by reason of any such delay in or reduction of their
ability to sell the Registrable Securities (which remedy shall not be exclusive
of any other remedies available at law or in equity). The Company shall pay to
each holder of the Preferred Stock or Registrable Securities an amount equal to
the face value of the Preferred Stock ("Purchase Price") multiplied by two
hundredths (.020) (or, solely for the first month of any period of delay in the
initial effectiveness of the Registration Statement after the end of such 90-day
period, one hundredth (.010)) times the sum of: (i) the number of months
(prorated for partial months) after the end of such 90-day period and prior to
the date the Registration Statement is declared effective by the SEC; provided,
however, that there shall be excluded from such period any delays which are
solely attributable to changes required by the Investors in the Registration
Statement with respect to information relating to the Investors, including,
without limitation, changes to the plan of distribution, or to the failure of
the Investors to conduct their review of the Registration Statement pursuant to
Section 3(h) below in a reasonably prompt manner; (ii) exclusive of Allowed
Delays (as defined below), the number of months (prorated for partial months)
that sales cannot be made pursuant to the Registration Statement after the
Registration Statement has been declared effective (including, without
limitation, when sales cannot be made by reason of the Company's failure to
properly supplement or amend the prospectus included therein in accordance with
the terms of this Agreement or when such prospectus otherwise contains a
material misstatement or omission) and (iii) the number of months (prorated for
partial months) that the Common Stock is not listed or included for quotation on
the Nasdaq, NYSE or AMEX or that trading thereon is halted after the
Registration Statement has been declared effective. (For example, if the
Registration Statement becomes effective one (1) month after the end of such
90-day period, the Company would pay $10,000 for each $1,000,000 of Purchase
Price. If thereafter, sales could not be made pursuant to the Registration
Statement for an additional period of one (1) month (exclusive of Allowed
Delays), the Company would pay an additional $20,000 for each $1,000,000 of
Purchase Price. Such amounts shall be paid in cash or, at each Investor's
option, may be convertible into Common Stock at the "Conversion Price" (as
defined in the Certificate of Designation).
Any shares of Common Stock issued upon conversion of the
foregoing amounts shall be Registrable Securities. If any Investor desires to
convert the amounts due hereunder into Registrable Securities, it shall so
notify the Company in writing within two (2) business days of the date on which
such amounts are first payable in cash and such amounts shall be so convertible
(pursuant to the mechanics set forth under Section IV of the Certificate of
Designation), beginning on the last day upon which the cash amount would
otherwise be due in accordance with the following sentence. Payments of cash
pursuant hereto shall be made within five (5) days after the end of each period
that gives rise to such obligation, provided that, if any such period extends
for more than thirty (30) days, interim payments shall be made for each such
thirty (30) day period. The term "Purchase Price" means the purchase price paid
by the Investors for the Preferred Stock.
If at any time during the Registration Period, counsel to the
Company should determine in good faith that the compliance by the Company with
its disclosure obligations in connection with the Registration Statement may
require the disclosure of information which the Board of Directors of the
Company has identified as material and which the Board of Directors has
determined that the Company has a bona fide business purpose for preserving as
confidential, the Company shall promptly, (i) notify the Investors in writing of
the existence of (but in no event, without the prior written consent of an
Investor, shall the Company disclose to such investor any of the facts or
circumstances regarding) material nonpublic information and (ii) advise the
Investors in writing to cease all sales under the Registration Statement until
such information is disclosed to the public or ceases to be material. In such
instance, the Company's obligation to make payments under clause (ii) of the
penultimate sentence in the first paragraph of this Section 2(c) shall be
suspended for a period (an "Allowed Delay") expiring upon the earlier to occur
of (A) the date on which such material information is disclosed to the public or
ceases to be material or the Company is able to so comply with its disclosure
obligations or (B) 15 trading days after the Company first notifies the Investor
of such good faith determination. There shall not be more than two (2) Allowed
Delays in any twelve (12) month period nor more than three (3) Allowed Delays in
any twenty-four (24) month period.
d. Piggy-Back Registrations. If at any time prior to the
expiration of the Registration Period (as hereinafter defined) at which time no
Registration Statement is then effective with respect to the Registrable
Securities, the Company shall file with the SEC a Registration Statement
relating to an offering for its own account or the account of others (unless
inclusion therein would require the consent of such other party, and the Company
is unable, despite exercise of good faith efforts, to obtain such consent) under
the 1933 Act of any of its equity securities (other than on Form S-4 or Form S-8
or their then equivalents relating to equity securities to be issued solely in
connection with any acquisition of any entity or business or equity securities
issuable in connection with stock option, stock purchase or other employee
benefit plans), the Company shall send to each Investor who is entitled to
registration rights under this Section 2(d) written notice of such determination
and, if within fifteen (15) days after the effective date of such notice, such
Investor shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company the managing
underwriters) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit; provided,
however, that the Company shall not exclude any Registrable Securities unless
the Company has first excluded all outstanding securities, the holders of which
are not entitled to inclusion of such securities in such Registration Statement;
and provided, further, however , that, after giving effect to the immediately
preceding proviso, any exclusion of Registrable Securities shall be made pro
rata with holders of other securities having the right to include such
securities in the Registration Statement other than holders of securities not
subject to a similar cut-back provision. No right to registration of Registrable
Securities under this Section 2(d) shall be construed to limit any registration
required under Section 2(a) hereof. If an offering in connection with which an
Investor is entitled to registration under this Section 2(d) is an underwritten
offering, then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering.
e. Eligibility for Form S-3. The Company represents and
warrants that it meets the registrant eligibility and transaction requirements
for the use of Form S-3 for registration of the sale by the Investors of the
Registrable Securities and the Company shall file all reports required to be
filed by the Company with the SEC in a timely manner so as to maintain such
eligibility for the use of Form S-3. In the event that the Company is advised by
the SEC that it is not eligible to use Form S-3 in connection with the
registration of the Registrable Securities, it shall file a Registration
Statement covering the Registrable Securities on Form S-1 or other available
form as promptly as practicable and not more than 20 business days after such
advice from the SEC, and the Company shall use its best efforts to obtain
eligibility to use Form S-3 as promptly as practicable thereafter and shall
convert, prior to its effectiveness, the Form S-1 Registration Statement to a
Form S-3 Registration Statement as soon as it is permitted to do so thereafter.
f. Rule 416. The Company and the Investors each acknowledge
that, absent guidance from the SEC or other definitive authority to the
contrary, an indeterminate number of Registrable Securities shall be registered
pursuant to Rule 416 under the Securities Act so as to include in such
Registration Statement any and all Registrable Securities which may become
issuable (i) as a result of stock splits, stock dividends or similar
transactions and (ii) by reason of reductions in the Conversion Price of the
Preferred Stock in accordance with the terms thereof, including, but not limited
to, the terms which cause the Conversion Price to decrease to the extent the
closing bid price of the Common Stock decreases (collectively, the "Rule 416
Securities"). In this regard, the Company agrees to take all steps necessary to
ensure that all Registrable Securities are registered pursuant to Rule 416 under
the Securities Act in the Registration Statement and, absent guidance from the
SEC or other definitive authority to the contrary, the Company shall
affirmatively support and not take any action adverse to the position that the
Registration Statements filed hereunder cover all of the Rule 416 Securities. If
the Company determines that the Registration Statements filed hereunder do not
cover all of the Rule 416 Securities, the Company shall immediately provide to
each Investor written notice (a "Rule 416 Notice") setting forth the basis for
the Company's position and the authority therefor. If the Investors provide the
Company with an opinion of counsel that is contrary to the Rule 416 Notice, the
Company shall continue to act in a manner consistent with its obligations under
this Section 2(f).
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable
Securities, the Company shall have the following obligations:
a. The Company shall prepare and, on or prior to the date
which is twenty (20) business days after the Closing Date, file with the SEC, a
Registration Statement with respect to the number of Registrable Securities
provided in Section 2(a), and thereafter use its best efforts to cause such
Registration Statement relating to Registrable Securities to become effective as
soon as possible after such filing, and keep the Registration Statement
effective pursuant to Rule 415 at all times until such date as is the earlier of
(i) the date on which all of the Registrable Securities have been sold and (ii)
the date on which the Registrable Securities (in the opinion of counsel to the
Initial Investors) may be immediately sold without restriction (including
without limitation as to volume by each holder thereof) without registration
under the 1933 Act (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to keep the Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement. In the event that Rule 416
is determined by the SEC not to permit the registration of an indeterminate
number of shares, and the number of shares available under a Registration
Statement filed pursuant to this Agreement is insufficient to cover all of the
Registrable Securities issued or issuable upon conversion of the Preferred Stock
or exercise of the Warrants, the Company shall amend the Registration Statement,
or file a new Registration Statement (on the short form available therefore, if
applicable), or both, so as to cover all of the Registrable Securities, in each
case, as soon as practicable, but in any event within twenty (20) business days
after the necessity therefor arises (based on the market price of the Common
Stock and other relevant factors on which the Company reasonably elects to
rely). The Company shall use its best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. The provisions of Section 2(c) above shall be applicable with
respect to such obligation, with the ninety (90) days running from the day after
the date on which the Company reasonably first determines (or reasonably should
have determined) the need therefor.
c. The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement and, if
requested by such investor, its legal counsel (i) promptly after the same is
prepared and publicly distributed, filed with the SEC, or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
and, in the case of the Registration Statement referred to in Section 2(a), each
letter written by or on behalf of the Company to the SEC or the staff of the
SEC, and each item of correspondence from the SEC or the staff of the SEC, in
each case relating to such Registration Statement (other than any portion of any
thereof which contains information for which the Company has sought confidential
treatment), and (ii) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor. The
Company will immediately notify each Investor by facsimile of the effectiveness
of the Registration Statement or any post-effective amendment. The Company will
promptly respond to any and all comments received from the SEC, with a view
towards causing any Registration Statement or any amendment thereto to be
declared effective by the SEC as soon as practicable and shall promptly file an
acceleration request as soon as practicable following the resolution or
clearance of all SEC comments or, if applicable, following notification by the
SEC that the Registration Statement or any amendment thereto will not be subject
to review.
d. The Company shall use best efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as the Investors who hold a majority-in-interest of the Registrable
Securities being offered reasonably request, (ii) prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (a) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (b) subject itself
to general taxation in any such jurisdiction, (c) file a general consent to
service of process in any such jurisdiction, (d) provide any undertakings that
cause the Company undue expense or burden, or (e) make any change in its charter
or bylaws, which in each case the Board of Directors of the Company determines
to be contrary to the best interests of the Company and its stockholders.
e. In the event Investors who hold a two-thirds
majority-in-interest of the Registrable Securities being offered in an offering
registered hereunder select underwriters for the offering, the Company shall
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, including, without limitation, customary indemnification and
contribution obligations, with the underwriters of such offering.
f. As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and use its best
efforts promptly (but subject to Allowed Delays as set forth in Section 2(c)) to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, and deliver such number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request.
g. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest possible moment and to notify each
Investor who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of such order
and the resolution thereof.
h. The Company shall permit a single firm of counsel and a
single firm of accountants designated by the Initial Investors to review the
Registration Statement and all amendments and supplements thereto (as well as
all requests for acceleration or effectiveness thereof) a reasonable period of
time prior to their filing with the SEC, and not file any document in a form to
which such counsel reasonably objects and will not request acceleration of the
Registration Statement without prior notice to such counsel. The sections of the
Registration Statement covering information with respect to the Investors, the
Investors' beneficial ownership of securities of the Company or the Investors'
intended method of disposition of Registrable Securities shall conform to the
information provided to the Company by the Investors.
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in accordance with
the provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish,
on the date that Registrable Securities are delivered to an underwriter, if any,
for sale in connection with the Registration Statement (i) an opinion, dated as
of such date, from counsel representing the Company for purposes of such
Registration Statement, in form, scope and substance as is customarily given in
an underwritten public offering, addressed to the underwriters and the Investors
and (ii) a letter, dated such date, from the Company's independent certified
public accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters and the Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Initial Investors, and (iv) one firm of
attorneys retained by all such underwriters (collectively, the "Inspectors") all
pertinent financial and other records, and pertinent corporate documents and
properties of the Company (collectively, the "Records"), as shall be reasonably
deemed necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; provided, however, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into confidentiality agreements (in
form and substance satisfactory to the Company) with the Company with respect
thereto, substantially in the form of this Section 3(k). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and any Investor) shall be deemed
to limit the Investor's ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
m. The Company shall (i) cause all the Registrable Securities
covered by the Registration Statement to be listed on each national securities
exchange on which securities of the same class or series issued by the Company
are then listed, if any, if the listing of such Registrable Securities is then
permitted under the rules of such exchange, or (ii) secure the designation and
quotation, of all the Registrable Securities covered by the Registration
Statement on the Nasdaq National Market System or, if not eligible for the
Nasdaq National Market System on the Nasdaq Small Cap and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register with the Nasdaq National Market System as such with respect to such
Registrable Securities.
n. The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts, as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request, and,
within three (3) business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver and shall cause legal counsel selected by the Company to deliver to the
transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement) an
instruction in the form attached hereto as Exhibit 1 and an opinion from such
counsel and a letter from the Company, which letter has been acknowledged by the
Company's transfer agent as sufficient to permit the issuance of unlegended
Conversion Shares and Warrant Shares which are not subject to a stop transfer
notation in the form attached hereto as Exhibit 2.
p. At the request of any Investor, the Company shall prepare
and file with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.
q. The Company shall comply with all applicable laws related
to a Registration Statement and offering and sale of securities and all
applicable rules and regulations of governmental authorities in connection
therewith (including without limitation the Securities Act and the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated by
the SEC.)
r. From and after the date of this Agreement, the Company
shall not, and shall not agree to, allow the holders of any securities of the
Company to include any of their securities in any Registration Statement under
Section 2(a) hereof or any amendment or supplement thereto under Section 3(b)
hereof without the consent of the holders of a majority-in-interest of the
Registrable Securities. Nothing herein shall prohibit the Company from making
concurrent registrations of the Company's securities on separate registration
statements.
s. The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Investors of Registrable
Securities pursuant to the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable
Securities, the Investors shall each, on a several and not a joint basis, have
the following obligations:
a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least five (5)
business days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information the Company
requires from each such Investor.
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
c. In the event Investors holding a two-thirds
majority-in-interest of the Registrable Securities being registered (with the
approval of a majority-in-interest of the Initial Investors) determine to engage
the services of an underwriter, each Investor agrees to enter into and perform
such Investor's obligations under an underwriting agreement, in usual and
customary form, including, without limitation, customary indemnification and
contribution obligations, with the managing underwriter of such offering and
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of the Registrable Securities, unless such Investor
has notified the Company in writing of such Investor's election to exclude all
of such Investor's Registrable Securities from the Registration Statement.
d. Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(f)
or 3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(o or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten
registration hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements in
usual and customary form entered into by the Company, (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, including any lock-up agreement with respect to any
Registrable Securities not being sold in such underwriting as may reasonably be
requested by the managing underwriter, and (iii) agrees to pay its pro rata
share of all underwriting discounts and commissions and any expenses in excess
of those payable by the Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualification fees, printers and accounting fees, the
fees and disbursements of counsel for the Company shall be borne by the Company.
In addition, the Company shall pay all of the Investors' reasonable costs
(including legal fees) incurred in connection with the successful enforcement of
the Investors' rights hereunder.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, (ii) the directors, officers, partners, employees, agents and each
person who controls any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), if any, (iii) any
underwriter (as defined in the 1933 Act) for the Investors, and (iv) the
directors, officers, partners, employees and each person who controls any such
underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each, an
"Indemnified Person"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "Claims") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading; (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading; or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to the restrictions set forth in
Section 6(c) with respect to the number of legal counsel, the Company shall
reimburse each Indemnified Person, promptly as such expenses are incurred and
are due and payable, for any reasonable legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any prospectus, shall not inure to the benefit of any
Indemnified Person if the untrue statement or omission of material fact
contained in a preliminary prospectus or final prospectus or any supplement
thereto was corrected on a timely basis in the prospectus, as then amended or
supplemented as required by Section 3(f), such corrected prospectus was timely
made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the incorrect or
incomplete prospectus prior to the use giving rise to a Violation and such
Indemnified Person, notwithstanding such advice, used it. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such stockholder or underwriter within the meaning of the 1933 Act or
the 1934 Act (collectively and together with an Indemnified Person, an
"Indemnified Party"), against any Claim to which any of them may become subject,
under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out
of or is based upon any Violation by such Investor, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and subject to
Section 6(c) such Investor will reimburse any legal or other expenses (promptly
as such expenses are incurred and are due and payable) reasonably incurred by
them in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; and provided, further, that the Investor's liability
hereunder shall be limited in amount to the net amount of proceeds received by
such seller from the sale of Registrable Securities Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.
Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however that such indemnifying party shall not be
entitled to assume such defense and an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The indemnifying party shall pay for only one
separate legal counsel for the Indemnified Persons or the Indemnified Parties,
as applicable, and such legal counsel shall be selected by Investors holding a
majority-in-interest of the Registrable Securities included in the Registration
Statement to which the Claim relates (with the approval of the Initial
Investors), if the Investors are entitled to indemnification hereunder, or the
Company, if the Company is entitled to indemnification hereunder, as applicable.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
actually prejudiced in its ability to defend such action. The indemnification
required by this Section 6 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as such expense,
loss, damage or liability is incurred and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of such fraudulent misrepresentation, and (iii) contribution (together
with any indemnification or other obligations under this Agreement) by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits
of Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration ("Rule 144"), the
Company agrees, for as long as there shall be any Series B Convertible Preferred
Stock, Warrants, Conversion Shares or Warrant Shares held by an Investor, to:
a. make and keep public information available, as those terms
are understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically
assignable by the Investors to any transferee of all or a portion of Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment, (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such transferee or assignee, and
(b) the securities with respect to which such registration rights are being
transferred or assigned, (iii) following such transfer or assignment, the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act and applicable state securities laws, (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein, (v) such transfer
shall have been made in accordance with the applicable requirements of the
Securities Purchase Agreement, and (vi) such transferee shall be an "accredited
investor" as that term defined in Rule 501 of Regulation D promulgated under the
1933 Act and shall have made appropriate representations to that effect to the
Company.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company, the
Initial Investors (to the extent such Initial Investors still own Registrable
Securities) and Investors who hold a two-thirds majority interest of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the
terms hereof shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile and shall be effective five days
after being placed in the mail, if mailed by regular U.S. mail, or upon receipt,
if delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile, in each case addressed to a party. The addresses for
such communications shall be:
If to the Company:
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
Attn: Chief Executive Officer
Phone: (650) 962-7451
Fax: (650) 962-7488
With a copy to:
Brobeck, Phleger & Harrison
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Thomas W. Kellerman, Esq.
Phone: (650) 496-2788
Fax: (650) 496-2777
If to the Initial Investors: To the address set forth
immediately below such Initial Investor's name on the signature pages hereto.
c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. This Agreement shall be enforced, governed by and construed
in accordance with the laws of New York applicable to agreements made and to be
performed entirely within such State. In the event that any provision of this
Agreement is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any provision hereof which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
hereof. The parties hereto hereby submit to the exclusive jurisdiction of the
United States Federal Courts located in New York with respect to any dispute
arising under this Agreement or the transactions contemplated hereby.
e. This Agreement, the Securities Purchase Agreement
(including all schedules and exhibits thereto), and the Warrants constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement, the Securities Purchase Agreement and the Warrants supersede all
prior agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. Except as otherwise provided herein, all consents and other
determinations to be made by the Investors pursuant to this Agreement shall be
made by Investors holding a two-thirds majority of the Registrable Securities,
determined as if the all of the shares of Preferred Stock and Warrants then
outstanding have been converted into or exercised for Registrable Securities.
k. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules
of strict construction will be applied against any party.
<PAGE>
IN WITNESS WHEREOF, the Company and the undersigned Initial
Investors have caused this Agreement to be duly executed as of the date first
above written.
SOFTNET SYSTEMS, INC.
By: /s/ Mark A. Phillips
----------------------------------
Name: Mark A. Phillips
Title: Treasurer
INITIAL INVESTORS:
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.
Investment Manager
By: RGC General Partner Corp.
By: Gary S. Kaminsky
Name: Gary S. Kaminsky
Its: Managing Director
RESIDENCE Cayman Islands
ADDRESS:
c/o Rose Glen Capital Management, L.P.
3 Bala Plaza East, Suite 200
251 St. Asaphs Road
Bala Cynwyd, PA 19004
Fax: (610) 617-0570
Telephone: (610) 617-5900
Attn: Mr. Gary S. Kaminsky
ESCROW AGREEMENT
The undersigned parties hereby establish Chase Manhattan Bank
and Trust Company, N.A. Escrow No. C27110A (the "Escrow") and agree to be bound
by this Escrow Agreement, dated as of August 31, 1998, as follows:
1. Parties and Transaction. The following entities are parties to
this Escrow Agreement:
(a) Seller: SoftNet Systems, Inc. IRS EIN# 11-1817252
520 Logue Avenue
Mountain View, CA 94043
Attn: Mark Philips, Treasurer
Telephone: (650) 962-7474
Fax: (650) 962-7488 ("Seller")
(b) Buyer: RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P.
3 Bala Plaza East, Suite 200 251 St. Asaphs Road
Bala Cynwyd, PA 19004
Attn: Mr. Wayne Bloch
Telephone: (610) 617-5900
Fax: (610) 617-0570 ("Buyer").
(c) Shoreline: Shoreline Pacific Institutional Finance, the
Institutional Division of Financial West Group, Three Harbor
Drive, Suite 211, Sausalito, California, 94965, Attn: General
Counsel, telephone number (415) 332-7800, facsimile number
(415) 332-7808 ("Shoreline"). Shoreline is acting as agent for
Buyers and Seller in this transaction and will be paid a
commission of Three Hundred and Seventy Five Thousand Dollars
($375,000) U.S. by Seller. No commission is being charged to
Buyers. Shoreline will not receive any payment for order flow
relating to any of the securities offered by Seller in
connection with this transaction, including any shares of
Seller's common stock.
(d) Escrow Holder: Chase Manhattan Bank and Trust Company, N.A., a
subsidiary of Chase Manhattan Corporation, 101 California
Street, Suite 2725, San Francisco, California, 94111,
telephone number: (415) 954-9518, facsimile number: (415)
693-8850 ("Escrow Holder").
This Escrow Agreement contains the closing information for the
transaction effected between and on behalf of Buyers and Seller involving the
sale by Seller and the purchase by Buyers of Seven Thousand Five Hundred 7,500
shares of Seller's Series E Preferred Stock ("Preferred Shares"), at a purchase
price of $1,000 per share, for an aggregate purchase price of Seven and One Half
Million Dollars ($7,500,000) U.S., pursuant to the Securities Purchase Agreement
dated as of August 31, 1998 ("Purchase Agreement"), by and among Seller and
Buyers. Seller represents that said Preferred Shares are issued by Seller
pursuant to Section 4(2) of the Securities Act of 1933, as amended and/or
Regulation D thereunder. Upon request of any party hereto, Escrow Holder will
furnish the date and time this transaction took place.
In the event funds transfer instructions are given by any
party to this Agreement (other than in writing at the time of execution of the
Agreement), whether in writing, by telecopier or otherwise, the Escrow Agent is
authorized to seek confirmation of such instructions by telephone call-back to
the person or persons designated above, and the Escrow Agent may rely upon the
confirmations of anyone purporting to be the person or persons so designated.
The persons and telephone numbers for call-backs may be changed only in a
writing actually received and acknowledged by the Escrow Agent. The parties to
this Agreement acknowledge that such security procedure is commercially
reasonable.
2. Deliveries.
(a) Deliveries By Seller. Seller shall deliver the following documents
to Escrow Holder or to Shoreline, as provided herein, no later 12:00 P.M.
Pacific Standard Time on the "Closing Date," as such term is defined below:
(1) Seller shall deliver to Escrow Holder, with a copy to
Shoreline, a copy of this Escrow Agreement, duly executed by Seller (which
delivery may be made by facsimile so long as a manually executed original of the
Escrow Agreement is delivered to Escrow Holder by Seller by overnight courier
within one (1) business day following the Closing Date).
(2) Seller shall deliver to Escrow Holder Seven Thousand Five
Hundred (7,500) Preferred Shares in the name of each Buyer and in face amounts
and denominations more particularly set forth in the Closing Schedule annexed
hereto as Exhibit C (the "Preferred Share Certificates"). The Preferred Share
Certificates shall each bear substantially the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
A copy of the form of Seller's Preferred Share Certificate is
attached hereto as Exhibit A and is incorporated herein by this reference.
(3) The Seller shall deliver to Escrow Holder, with copy to
Shoreline, a writtenconfirmation in the form attached hereto as Exhibit B (the
"Closing Confirmation", delivery of which may be made by facsimile so long as a
manually executed original thereof is delivered to the Escrow Agent by Seller by
overnight courier within one (1) business day of the Closing Date), stating
that, subject to Escrow Holder's receipt of the items to be delivered by Buyer
specified in Section 2(a) hereof, all of the conditions to the Closing as set
forth in Article VI of the Purchase Agreement have been satisfied in full or
waived as of the date of delivery of such confirmation with respect to Seller.
(b) Deliveries By Buyer. Each Buyer shall deliver the following to
Escrow Holder or to Shoreline, as provided herein, not later than 12:00 P.M.
Pacific Standard Time on the Closing Date:
(1) Each Buyer shall deliver to Escrow Holder, with a copy to
Shoreline, a copy of this Escrow Agreement, duly executed by such Buyer (which
delivery may be made by facsimile so long as a manually executed original of the
Escrow Agreement is delivered to Escrow Holder by Buyer by overnight courier
within one (1) business day following the Closing Date).
(2) Each Buyer shall wire funds in the amount specified for
such Buyer on Exhibit C hereof to Escrow Holder at the account set forth below:
The Chase Manhattan Bank
New York, New York
ABA #021000021
Credit: CTCC Operating Account #507874439
Ref: Shoreline Pacific/SoftNet Systems, Inc./Escrow No. C2711OA/ RGC
International Investors, LDC
(3) Each Buyer shall deliver to Escrow Holder, with copy to
Shoreline, a written confirmation in the form attached hereto as Exhibit B (the
"Closing Confirmation", delivery of which may be made by facsimile so long as a
manually executed original thereof is delivered to the Escrow Agent by Buyer by
overnight courier within one (1) business day of the Closing Date), stating
that, subject to Escrow Holder's receipt of the items to be delivered by Seller
specified in Section 2(a) hereof, all of the conditions to the Closing as set
forth in Article VI of the Purchase Agreement have been satisfied in full or
waived as of the date of delivery of such confirmation with respect to Buyer.
3. Closing. The closing of the purchase by Buyers (the "Closing") is scheduled
to occur on August 31, 1998, or on such other date as Seller, Buyers, and
Shoreline shall agree (the "Closing Date"). At the Closing, Escrow Holder shall
undertake the following:
(a) Original Deliveries to Buyer. Escrow Holder shall deliver
to each Buyer at the addresses noted in Exhibit C hereto, by overnight courier,
the original Preferred Share Certificates.
(b) Deliveries to Shoreline. Escrow Holder shall deliver to
Shoreline, by wire transfer, its commission in the amount of Three Hundred and
Seventy Five Thousand ($375,000) U.S. The wiring instructions for Shoreline are
as follows:
Bank of New York
ABA #021000018
BNF-Correspondent Services Corp.
AC #8900186968
Financial West Group/UA99100
(c) Deliveries to Seller. Escrow Holder shall deliver to
Seller, by wire transfer, the funds delivered to it by Buyer less (i) the
commission payable to Shoreline specified in Section 3(b), and (ii) Escrow
Holder's fees and charges as specified in Section 5. The wiring instructions for
Seller are as follow:
Bankers Trust Company
130 Liberty Street MS 2203
New York, NY 10006
For the Benefit of SoftNet Systems,lnc. Account No. 00-379-188
ABA#021001033
Attn: Mr. Scott O'Kula (212) 250-8566
4. Authorization to Escrow Holder to Close. By their signatures appearing below,
and subject to the provisions of Section 6(k) hereof, each Buyer, Seller and
Shoreline each authorize Escrow Holder to close the Escrow upon occurrence of
the following:
(a) Escrow Holder's receipt from Seller of all documents as
set forth in Section 2(a) hereof;
(b) Escrow Holder's receipt from each Buyer of wire transfers
in the amounts set forth in the Closing Schedule annexed hereto as Exhibit C and
all documents as set forth in Section 2(b) hereof;
(c) Escrow Holder's receipt of a Closing Confirmation from
each Buyer and Seller; and
(d) Escrow Holder's notification from Shoreline that copies of
the documents required to be received from Seller and Buyers pursuant to the
Purchase Agreement have been received by Shoreline and receipt from Shoreline of
written notice to close the Escrow (the "Shoreline Closing Notice"), which
notice may be delivered by facsimile transmission, provided that a manually
executed original thereof shall be delivered to Escrow Holder within one (1)
business day following the Closing.
Each party understands and agrees that its signature appearing
below confirms its approval of the documents and instruments delivered to Escrow
Holder and that, except for delivery of the Closing Confirmation, no further
approval of any of the documents and instruments is required by any party. Each
Buyer and Seller each agree that Escrow Holder is authorized to close the Escrow
upon receipt of the items specified in this Section 4.
5. Costs and Charges Due to Escrow Holder. Seller, each Buyer and Shoreline each
hereby authorize Escrow Holder to make the following charges:
(a) Escrow Holder's charges shall be borne by and billed to
Seller, and Escrow Holder shall debit Seller and credit itself with its
customary fees, not to exceed in the aggregate $1,000. Neither Buyer nor
Shoreline shall have any liability to pay Escrow Holder's charges; provided
however, that if the Closing does not occur and fees are due to Escrow Holder as
a result thereof, Shoreline will bear all of Escrow Holder's reasonable charges
incurred in connection herewith, up to a maximum of $500.00, plus any reasonable
out of pocket expenses.
6. Additional Provisions.
(a) Indemnification. Seller, each Buyer and Shoreline
acknowledge and agree that Escrow Holder is acting as an escrow agent in this
transaction and in no other capacity. Except for the negligence or willful
misconduct of Escrow Holder, Seller, each Buyer and Shoreline each hereby agree
to indemnify and to hold Escrow Holder harmless from any claim, liability, cost,
expense or damage, including reasonable attorneys' fees and costs, incurred by
Escrow Holder in connection with any action taken or not taken by Escrow Holder
pursuant to this Escrow Agreement. Seller, each Buyer and Shoreline, jointly and
severally, shall reimburse Escrow Holder for all of its reasonable expenses
covered by the foregoing indemnification as and when such expenses are incurred.
(b) Facsimile Signatures. Facsimile signatures on this Escrow
Agreement and the documents referred to herein are binding upon any party
submitting same.
(c) Notices. Any notice, request, demand, instruction or other
communication given hereunder by any party must be in writing and will be
validly and timely given or made to another party if (i) delivered personally,
(ii) deposited in the United States mail, certified or registered, with postage
prepaid and return receipt requested, (iii) delivered by overnight courier, or
(iv) sent by telecopier, to each of the parties at the addresses and facsimile
numbers contained in Section 1 hereof. If such notice is served personally, such
notice will be deemed to be given at the time of such personal delivery. If
notice is served by mail, such notice will be deemed to be given two days after
the deposit of same in any United States mail post office box. If such notice is
served by overnight courier, such notice will be deemed to be given on the next
business day following the acceptance of such notice for delivery by such
overnight courier. If such notice is served by telecopier, such notice will be
deemed to be given upon confirmation of transmission. Any person entitled to
receive notice under this agreement may change the address or telecopier number
to which such notice may be sent, by giving notice thereof pursuant to this
Section 6(c).
(d) Attorneys' Fees. Should any legal action be brought for
the enforcement of this Escrow Agreement or any term hereof, or due to any
alleged dispute, breach, default or misrepresentation in connection with any
provisions herein contained, the prevailing party shall be entitled to its
reasonable attorneys' fees and costs and other costs incurred in any such action
or proceeding and including any such action which results in an arbitration of
the matters herein, in addition to such other relief as may be granted by the
courts or arbitration proceedings.
(e) Applicable Law. The existence, validity, and construction
of this Escrow Agreement and all matters pertaining hereto shall be determined
in accordance with the laws of the State of New York.
(f) Further Assurances. Each of the parties agrees that it
will, without further consideration, execute, acknowledge and deliver such other
documents and take such other actions as may be reasonably requested by the
other party in order to consummate the purposes and subject matter hereof.
(g) Assignment. No party hereto shall have any right
whatsoever to voluntarily assign its rights or delegate its duties hereunder to
any third party, without the prior written consent of the other parties.
(h) Validity. If any provision of this Escrow Agreement may be
prohibited by law or otherwise held invalid, such prohibition or invalidity
shall be effective only to the extent of such prohibition or invalidity and
shall not invalidate or otherwise render ineffective the remaining provisions of
this Escrow Agreement.
(i) Counterparts. This Escrow Agreement may be executed in
several counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument.
(j) Survival. The representations, warranties and covenants
contained in this Escrow Agreement shall survive the Closing, if any.
(k) Timing. If at any time any party hereto has made written
demand upon Escrow Holder for the return of documents and/or funds deposited by
such party, Escrow Holder may withhold and stop all further proceedings in this
Escrow upon notice to the parties, and may then return all documents and/or
funds to the party from which received within two business days of receipt of
said notice, without liability for interest on funds held or for damages.
Additionally, should the Closing not occur by 5 PM Central Time on August 31,
1998, then Escrow Holder shall, on the next business day, return to each Buyer
by wire transfer any and all funds received by Escrow Holder from such Buyer(s)
and return to Seller by overnight mail service all Preferred Share Certificates
received from Seller.
(l) Reliance Upon Provided Information. It is understood that
the Escrow Agent and the beneficiary's banks in any funds transfer may rely
solely upon any account numbers or similar identifying number provided by any of
the parties hereto to identify (i) the beneficiary, (ii) the beneficiary's bank,
or (iii) an order it executes using any such identifying number, even where its
use may result in a person other than the beneficiary being paid, or the
transfer of funds to a bank other than the beneficiary's bank, or an
intermediary bank designated.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
(m) Representation or Warranties of Escrow Holder. Escrow
Holder shall make no representation or warranty with respect to the genuineness
or any other matter concerning any document or instrument deposited herein and
shall have no liability to any other party hereto with respect to such items;
provided, however, that Escrow Holder shall inspect the Preferred Share
Certificates to (i) confirm that required number of Preferred Share Certificates
have been delivered by Seller, in the denominations and face amounts set forth
on the Closing Schedule annexed hereto as Exhibit C, and (ii) that the legend
appearing on the Preferred Share Certificates conforms to the legend language
set forth in Section 2(a)(2) above.
THE COMPANY:
SOFTNET SYSTEMS, INC.
By:
Name:
Title:
DATE:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
<PAGE>
BUYERS:
RGC INTERNATIONAL INVESTORS, LDC
By:
Name:
Title:
DATE:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
<PAGE>
SHORELINE:
SHORELINE PACIFIC INSTITUTIONAL FINANCE,
THE INSTITUTIONAL DIVISION
OF FINANCIAL WEST GROUP
By:
Harlan P. Kleiman
President
DATE:
ESCROW HOLDER:
CHASE MANHATTAN BANK AND TRUST COMPANY, N.A.,
a subsidiary of Chase Manhattan Corporation
By:
Chii Ling Lei
Assistant Vice President
DATE:
<PAGE>
EXHIBIT A
Form of Preferred Share Certificate
<PAGE>
EXHIBIT B
[INVESTOR'S LETTERHEAD]
August 31, 1998
Facsimile No. (415) 693-8850
Ms. Chii Ling Lei
Assistant Vice President
Chase Manhattan Bank and Trust Company, N.A.
101 California Street, Suite 2725
San Francisco, California 94111
Re: SOFTNET SYSTEMS INC. Financing; Closing Confirmation
Dear Ms. Lei:
Please accept this letter as confirmation from [INVESTOR] that, subject to your
receipt of the items specified in Section 2(a) of the Escrow Agreement dated
August 31, 1998, the conditions to the Closing in Article VI of the Securities
Purchase Agreement have been satisfied in full or waived as of the date hereof.
Accordingly, this shall serve as our Closing Confirmation as required pursuant
to Section 4(c) of said Escrow Agreement.
Please call me if you have any questions or require further information.
Sincerely,
Name:
Title:
cc: Shoreline Pacific
<PAGE>
CLOSING SCHEDULE - EXHIBIT C
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------- ------------------------------ -----------------------------------------------------
INVESTOR/CERTIFICATE DELIVERY ADDRESS: AGGREGATE NO. OF PREFERRED PREFERRED SHARE CERTIFICATE DENOMINATIONS:
SHARES PURCHASED/AGGREGATE
PURCHASE PRICE:
- --------------------------------------------- ------------------------------ -----------------------------------------------------
- --------------------------------------------- ------------------------------ -----------------------------------------------------
<S> <C> <C>
RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P. 7,500 Preferred Shares 7 Preferred Share Certificate representing 1,000
3 Bala Plaza East, Suite 200 Preferred Shares and 1 Preferred Share Certificate
251 St. Asaphs Road $7,500,000 representing 500 Preferred Shares
Bala Cynwyd, PA 19004
(650) 962-7474
- --------------------------------------------- ------------------------------ -----------------------------------------------------
- --------------------------------------------- ------------------------------ -----------------------------------------------------
[INVESTOR NAME, DELIVERY ADDRESS & TEL NO.] ___ Preferred Share certificate representing
__________ Preferred Shares __________ Preferred Shares
$------------
- --------------------------------------------- ------------------------------ -----------------------------------------------------
- --------------------------------------------- ------------------------------ -----------------------------------------------------
[INVESTOR NAME, DELIVERY ADDRESS & TEL NO.] ___ Preferred Share certificate representing
__________ Preferred Shares __________ Preferred Shares
$------------
- --------------------------------------------- ------------------------------ -----------------------------------------------------
- --------------------------------------------- ------------------------------ -----------------------------------------------------
[INVESTOR NAME, DELIVERY ADDRESS & TEL NO.] ___ Preferred Share certificate representing
__________ Preferred Shares __________ Preferred Shares
$------------
- --------------------------------------------- ------------------------------ -----------------------------------------------------
</TABLE>
