<PAGE>
As filed with the Securities and Exchange Commission on June 19, 1998
Registration No. 333-_______
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 11-1817252
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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.
Jason G. Wilson, 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./__/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>------------------------------------------------------------------------------------------------------------------------
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<S> <C> <C> <C> <C>
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE PER AGGREGATE PRICE OFFERING REGISTRATION FEE
UNIT (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value (2) . . . . 2,495,309(2) (3) $11.6875 $29,163,924 $8,604
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</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 June 15, 1998.
(2) Consists of Common Stock issuable upon exercise of certain stock
purchase warrants (the "Warrants"), conversion of 5% Convertible
Subordinated Debentures due 2002 (the "Debentures"), and conversion of
Series B Convertible Preferred Stock (the "Series B 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 Debentures, the Series B 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 B 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>
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.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 19, 1998
PROSPECTUS
SOFTNET SYSTEMS, INC.
2,495,309 Shares of Common Stock
($0.01 par value)
This Prospectus covers the sale from time to time of up to 2,495,309
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
5% Convertible Subordinated Debentures due 2002 (the "Debenture") and the
Company's Series B Convertible Preferred Stock (the "Series B 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 B
Convertible 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 June 18, 1998, the last reported sales price of the Common
Stock on the American Stock Exchange was $12.125 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 June 19, 1998.
<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 Proxy Statement on Schedule 14A filed with the
Commission on January 28, 1998.
3. The Company's Current Report on Form 8-K filed with the Commission
on February 12, 1998.
4. The Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997.
5. The Company's Current Report on Form 8-K filed with the Commission
on April 24, 1998.
6. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
7. The Company's Current Report on Form 8-K filed with the Commission
on June 1, 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.
2
<PAGE>
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.
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 May 31,
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 7,607,462 shares of
Common Stock outstanding on May 31, 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 Debentures or the Series B Preferred Stock as a result of stock
splits, stock dividends and anti-dilution provisions.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BEING
PRIOR TO OFFERING OFFERED
--------------------- ---------
NUMBER PERCENT
------ -------
<S> <C> <C> <C>
RGC International Investors, LDC (1) . . . . . . . . . 1,581,631(2) 17.6% 1,980,000(3)
R.C.W. Mauran. . . . . . . . . . . . . . . . . . . . . 553,526(4) 7.0% 175,000(5)
Dale H. Sizemore, Jr. . . . . . . . . . . . . . . . . 150,716(6) 2.0% 25,000(7)
Shoreline Associates I, LLC (1) . . . . . . . . . . . 95,758(8) 1.2% 220,000(9)
Harlan P. Kleiman. . . . . . . . . . . . . . . . . . . 52,800(7) * 40,000(7)
James L. Kropf . . . . . . . . . . . . . . . . . . . . 8,000(7) * 5,000(7)
Steve Lamar. . . . . . . . . . . . . . . . . . . . . . 7,400(7) * 5,000(7)
Lawrence Fleischman . . . . . . . . . . . . . . . . . 5,154(7) * 5,154(7)
Linda Cappello . . . . . . . . . . . . . . . . . . . 3,093(7) * 3,093(7)
Gerard Cappello . . . . . . . . . . . . . . . . . . . 2,062(7) * 2,062(7)
Bryan Dancer.. . . . . . . . . . . . . . . . . . . . . 25,000(7) * 25,000(7)
Rick Prosser.. . . . . . . . . . . . . . . . . . . . . 15,666(10) * 10,000(7)
</TABLE>
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* Less than 1%.
(1) The number of shares of Common Stock actually issued upon conversion of
the Series A and Series B Convertible Preferred Stock of the Company
(collectively referred to herein as the Series A and Series B Preferred
Stock) is indeterminable as of the date of this Prospectus. The number of
shares of Common Stock set forth in the foregoing table for these Selling
Shareholders reflect the number of shares of Common Stock issuable upon
conversion of the Company's Series A Convertible Preferred Stock (the
"Series A Preferred Stock") at a conversion price of $8.28 per share of
Common Stock, and the number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock at a conversion price of
$13.20 per share of Common Stock, which are the conversion prices in
effect as of the date of this Prospectus.
3
<PAGE>
(2) Consists of (i) 199,946 shares of Common Stock, (ii) 330,000 shares of
Common Stock issuable upon exercise of the Warrants, (iii) 369,867
shares of Common Stock issuable upon conversion of the Series A
Preferred Stock at the conversion price in effect as of the date of this
Prospectus, and (iv) 681,818 shares of Common Stock issuable upon
conversion of the Series B Preferred Stock at the conversion price in
effect as of the date of this Prospectus, held by such Selling
Shareholder. The actual number of shares of Common Stock issuable upon
conversion of the Series A and Series B 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 Series A and Series B Preferred Stock. The Company has
reserved up to 1,093,466 shares of Common Stock for issuance upon
conversion of the Series A Preferred Stock. The maximum number of
shares of Common Stock issuable upon conversion of the Series B
Preferred Stock held by this Selling Stockholder is 1,800,000. If this
Selling Shareholder obtained these share amounts upon conversion of the
Series A and Series B Preferred Stock that it owns, then its ownership
position, including shares of Common Stock owned and underlying its
Warrants, would total 3,223,466 shares of Common Stock, or 29.8% of the
outstanding shares of Common Stock of the Company. Pursuant to the
agreements under which both the Series A and Series B Preferred Stock
were issued, the shareholder is required to give notice of a conversion
that would bring such shareholder's total ownership of the Common Stock
to 4.99% or greater, as determined in accordance with Section 13(d) of
the Exchange Act.
(3) Consists of (i) 180,000 shares of Common Stock issuable upon exercise of
warrants, and (ii) 1,800,000 shares of Common Stock, which represents
the maximum number of shares potentially issuable upon conversion of the
Series B Preferred Stock held by such Selling Shareholder. The actual
number of shares of Common Stock reserved for issuance upon conversion of
the Series B 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 B Preferred Stock could be materially less than the 1,800,000 set
forth above, depending on various factors, including the floating rate
conversion price mechanism contained in the Series B Preferred Stock.
(4) Consists of (i) 292,407 shares of Common Stock, (ii) 81,481 shares of
Common Stock issuable upon the conversion of $660,000 of the Company's 6%
Convertible Subordinated Debentures due February 28, 2002 and (ii) 179,638
shares of Common Stock issuable upon the conversion of $1,212,556 of the
Company's 9% Convertible Subordinated Debentures due September 15, 2000.
(5) Consists of 175,000 shares of Common Stock issuable upon the conversion of
$1,443,750 of the Company's 5% Convertible Subordinated Debenture due
September 30, 2002, which is not convertible until January 1, 1999.
(6) Consists of (i) 125,716 shares of Common Stock, and (ii) 25,000 shares
of Common Stock issuable upon the exercise of stock purchase warrants.
(7) Consists of shares of Common Stock issuable upon the exercise of stock
purchase warrants.
(8) Consists of (i) 20,000 shares of Common Stock issuable upon exercise of
Warrants, and (ii) 75,758 shares of Common Stock issuable upon
conversion of Series B Preferred Stock at the conversion price in effect
as of the date of this Prospectus, held by such Selling Shareholder.
The actual number of shares of Common Stock issuable upon conversion of
the Series B 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 Series B
Preferred Stock. The maximum number of shares of Common Stock issuable
upon conversion of the Series B Preferred Stock held by this Selling
Shareholder is 200,000. If this Selling Shareholder obtained these
share amounts upon conversion of the Series B Preferred Stock that it
owns, then its ownership position, including shares of Common Stock
owned and underlying its Warrants, would total 220,000 shares of Common
Stock, or 2.8% of the outstanding shares of Common Stock of the Company.
In addition, two owners of the Selling Shareholder own unvested stock
purchase options in the aggregate of 100,000 shares, issued pursuant to
such consulting agreements with the Company.
(9) Consists of (i) 20,000 shares of Common Stock issuable upon exercise of
warrants, and (ii) 200,000 shares of Common Stock, which represents
the maximum number of shares potentially issuable upon conversion of the
Series B Preferred Stock held by such Selling Shareholder. The actual
number of shares of Common Stock reserved for issuance upon conversion of
the Series B 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 B Preferred Stock could be materially less than the 200,000 set
forth above, depending on various factors, including the floating rate
conversion price mechanism contained in the Series B Preferred.
(10) Consists of (i) 5,666 shares of Common Stock issuable upon the exercise of
employee stock options and (ii) 10,000 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
4
<PAGE>
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 among
Messrs. Kleiman, Kropf and 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 after 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 among Messrs.
Kleiman, Kropf and Lamar.
Sean Doherty and Atam Lalchandani are owners of Shoreline. Mr. Doherty is
currently a member of the Company's Board of Directors and Mr. Lalchandani is
currently a consultant to the Company. Shoreline is unrelated to SPIF.
Mr. Prosser is a general manager in the Company's Telecommunications
Division.
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
5
<PAGE>
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 Coopers & Lybrand 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.
6
<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.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee. . . . . . . . . . . . . . . . $ 8,604
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 . . . . . . . . . . . . . . . . . . . . . $78,604
</TABLE>
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.
II-1
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C>
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 5.1).
23.2+ Consent of Coopers & Lybrand 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 B Preferred Stock dated May 28, 1998.
99.2+ Form of Common Stock Purchase Warrant Certificate issued to
Assignees of Shoreline Pacific Institutional Finance dated May 28,
1998.
99.3+ Securities Purchase Agreement by and among the Company and the
Buyers (as defined therein), dated as of May 28, 1998.
99.4+ Registration Rights Agreement by and among the Company and the
Initial Investors (as defined therein), dated as of May 28, 1998.
99.5* Escrow Agreement by and among the Company, the Buyers (as defined
therein), SPIF and the Escrow Holder (as defined therein), dated as
of May 28, 1998.
99.6+ Opinion of Brobeck, Phleger & Harrison L.L.P. regarding the sale of
the Series B Preferred Stock, dated May 28, 1998.
</TABLE>
* To be filed by Amendment
+ 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:
II-2
<PAGE>
(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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in Mountain View, California on June 19, 1998
SOFTNET SYSTEMS, INC.
By: /s/ DR. LAWRENCE 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 June 19, 1998.
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE
/s/ RONALD I. SIMON Chairman of the Board
- -------------------------------------
Ronald I. Simon
/s/ DR. LAWRENCE BRILLIANT Vice Chairman of the Board,
- ------------------------------------- President and Chief Executive
Dr. Lawrence B. Brilliant
Officer
/s/ GARRETT J. GIRVAN Chief Operating Officer and
- ------------------------------------- Chief Financial Officer
Garrett J. Girvan
/s/ MARK A. PHILLIPS Secretary, Treasurer and
- ------------------------------------- Chief Accounting Officer
Mark A. Phillips
/s/IAN B. AARON Director
- -------------------------------------
Ian B. Aaron
II-4
<PAGE>
/s/ JOHN G. HAMM Director
- -------------------------------------
John G. Hamm
Director
- -------------------------------------
Edward A. Bennett
Director
- -------------------------------------
Sean P. Doherty
Director
- -------------------------------------
Robert C. Harris
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
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 5.1).
23.2+ Consent of Coopers & Lybrand 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 B Preferred Stock dated May 28, 1998.
99.2+ Form of Common Stock Purchase Warrant Certificate issued to
Assignees of Shoreline Pacific Institutional Finance dated May 28,
1998.
99.3+ Securities Purchase Agreement by and among the Company and the
Buyers (as defined therein), dated as of May 28, 1998.
99.4+ Registration Rights Agreement by and among the Company and the
Initial Investors (as defined therein), dated as of May 28, 1998.
99.5* Escrow Agreement by and among the Company, the Buyers (as defined
therein), SPIF and the Escrow Holder (as defined therein), dated as
of May 28, 1998.
99.6+ Opinion of Brobeck, Phleger & Harrison L.L.P. regarding the sale of
the Series B Preferred Stock, dated May 28, 1998.
</TABLE>
- ------------
* To be filed by Amendment
+ Filed herewith
<PAGE>
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 the Certificate are as follows:
(a) To establish the designations, powers, preferences, and rights
of the Series B 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
<PAGE>
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
2.
<PAGE>
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
3.
<PAGE>
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
4.
<PAGE>
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
5.
<PAGE>
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
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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
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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).
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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.
9.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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,
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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
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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
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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),
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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
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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
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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
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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
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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.
E. 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
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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
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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.
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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
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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
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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
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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
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(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.
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
38.
<PAGE>
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
39.
<PAGE>
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 unanimous written consent of the Board of
Directors pursuant to Section 708 of the New York Business Corporation Law and
the By-laws of SOFTNET SYSTEMS, INC.
40.
<PAGE>
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the
statements made herein are true under penalties of perjury this _____ day of
May, 1998.
SOFTNET SYSTEMS, INC.
By:
------------------------------------
Lawrence Brilliant,
President and Chief Executive Officer
-------------------------------------
Mark Phillips,
Secretary
ATTEST:
-------------------------------
NAME:
-------------------------------
TITLE:
-------------------------------
41.
<PAGE>
June 19, 1998
SoftNet Systems, Inc.
520 Logue Avenue
Mountain View, CA 94043
Re: SoftNet Systems, Inc. Registration Statement on Form S-3 for
2,495,000 Shares of Common Stock
Ladies and Gentlemen:
You have requested our opinion 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 SoftNet Systems, Inc., a New York
corporation (the "Company") intend to sell up to 2,495,000 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.
<PAGE>
Soft Systems, Inc.
Page 2
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
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion by reference in this registration statement on
Form S-3 (Registration No. 333-XXXX) of our report dated December 24, 1997,
on our audits of the financial statements and financial statement schedules
of SoftNet Systems, Inc. and subsidiaries. We also consent to the reference
to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
June 19, 1998
<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: May 28, 1998
to Purchase [NO.] Shares of Common Stock of
SOFTNET SYSTEMS, INC.
SOFTNET SYSTEMS, INC., a New York corporation (the "Company"), hereby
certifies that [NAME OF HOLDER], 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 May 28, 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 [NO.] (#) shares (each a "Share" and collectively the
"Shares") of the Company's common stock (the "Common Stock"), at an exercise
price of $11.00 per Share (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 non-assessable Common Stock
which in the aggregate represent the number of Shares being purchased; provided,
however, that the Holder may elect, in accordance with paragraph (b), below, to
utilize the cashless exercise provisions set forth below in lieu of 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.
<PAGE>
(b) Cashless Exercise. Notwithstanding the foregoing provision
regarding payment of the Exercise Price in cash, the Holder may elect, with the
prior written consent of the Company, which may be granted or withheld in the
Company's 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");
provided that the Holder shall be entitled, without the consent of the Company,
to elect Cashless Exercise at any time that the resale of the Warrant Shares by
the holder is not then registered pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
at any time when registration is so required pursuant to the Registration Rights
Agreement (as defined below). 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) 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
<PAGE>
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 hereof), 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 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.
<PAGE>
(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
<PAGE>
(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, joint-stock 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,
<PAGE>
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 next preceding 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.
<PAGE>
(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
<PAGE>
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
<PAGE>
Registration Rights Agreement dated as of May 28, 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.
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):
<PAGE>
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: Tom Kellerman, Esq.
Phone: (650) 496-2788
Fax: (650) 496-2777
If to [INVESTOR NAME]:
[INVESTOR NAME]
[ADDRESS]
Telephone: [TEL NO]
Telecopy: [FAX NO]
and with a copy to:
[INVESTOR COUNSEL]
[COUNSEL ADDRESS]
Telephone: [TEL NO]
Telecopy: [FAX NO]
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
<PAGE>
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, (x)
beneficial ownership 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, and (y) a holder may waive
the limitations set forth herein upon not less than sixty-one (61) days prior
written notice to the Company (with such waiver taking effect only upon the
expiration of such sixty-one (61) day notice period).
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]
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.
<PAGE>
SOFTNET SYSTEMS, INC.
Date: By:
----------------- ---------------------------------
Name:
Title:
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 delivered to:______________________________________________________________
_____________________________________________________________________________ .
(Please type or print name and address if different from above)
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 1(b) of the Common Stock Purchase
Warrant Certificate.]
Holder hereby represents and convenants 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.
HOLDER:
Dated: By:
------------------- -------------------------------------
Name:
Title:
<PAGE>
Address:
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.
Dated: By:
Name:
Title:
(signature must conform to name
of holder as specified on the fact
of the Warrant)
Address:
Signed in the presence of :
SoftNet Systems, Inc.: Common Stock Purchase Warrant Certificate Page / /
SHARED FILES:Legal:Transactions 1998:SOF:Shoreline Warrant:Shoreline Warrant
SoftNet Systems, Inc: Common Stock Purchase Warrant Certificate
<PAGE>
EXHIBIT B TO
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 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: May 28, 1998
to Purchase [NO.] Shares of Common Stock of
SOFTNET SYSTEMS, INC.
SOFTNET SYSTEMS, INC., a New York corporation (the "Company"), hereby
certifies that [NAME OF HOLDER], 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 May 28, 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 [NO.] (#) shares (each a "Share" and collectively the
"Shares") of the Company's common stock (the "Common Stock"), at an exercise
price of $13.75 per Share (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 non-assessable Common Stock
which in the aggregate represent the number of Shares being purchased; provided,
however, that the Holder may elect, in accordance with paragraph (b), below, to
utilize the cashless exercise provisions set forth below in lieu of 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
<PAGE>
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, with the
prior written consent of the Company, which may be granted or withheld in the
Company's 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");
provided that the Holder shall be entitled, without the consent of the Company,
to elect Cashless Exercise at any time that the resale of the Warrant Shares by
the holder is not then registered pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
at any time when registration is so required pursuant to the Registration Rights
Agreement (as defined below). 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) 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
<PAGE>
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 hereof), 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 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
<PAGE>
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
<PAGE>
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, joint-stock 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
<PAGE>
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 next preceding 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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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 May 28, 1998 by and between the
Company, the Holder and the other investors parties thereto ("Registration
Rights Agreement"), including the right to assign such rights to certain
assignees as set forth therein.
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
<PAGE>
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: Tom Kellerman, Esq.
Phone: (650) 496-2788
Fax: (650) 496-2777
If to [INVESTOR NAME]:
[INVESTOR NAME]
[ADDRESS]
Telephone: [TEL NO]
Telecopy: [FAX NO]
and with a copy to:
[INVESTOR COUNSEL]
[COUNSEL ADDRESS]
Telephone: [TEL NO]
Telecopy: [FAX NO]
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.
<PAGE>
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, (x) beneficial
ownership 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, and (y) a holder may waive the
limitations set forth herein upon not less than sixty-one (61) days prior
written notice to the Company (with such waiver taking effect only upon the
expiration of such sixty-one (61) day notice period).
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]
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.
<PAGE>
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.
SOFTNET SYSTEMS, INC.
Date: By:
----------------- ---------------------------------
Name:
Title:
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 delivered to:______________________________________________________________
_____________________________________________________________________________ .
(Please type or print name and address if different from above)
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 1(b) of the Common Stock Purchase
Warrant Certificate.]
Holder hereby represents and convenants 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.
HOLDER:
<PAGE>
Dated: By:
------------------- -------------------------------------
Name:
Title:
Address:
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.
Dated: By:
Name:
Title:
(signature must conform to name
of holder as specified on the
fact of the Warrant)
Address:
Signed in the presence of :
SoftNet Systems, Inc.: Common Stock Purchase Warrant Certificate Page / /
SHARED FILES:Legal:Transactions 1998:SOF:INVESTOR WARRANT:SOF Investor War 5/27
SoftNet Systems, Inc: Common Stock Purchase Warrant Certificate
<PAGE>
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of May 28,
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 a new series of preferred stock, designated as
its Series B Convertible Preferred Stock (the "Preferred Stock"), having the
voting powers, preferences and rights set forth in Article Third, Section 2 of
the Company's Amended and Restated Certificate of Incorporation, filed May 28,
1998, attached hereto as Exhibit "A" (the "Certificate of Designation");
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 Designation;
D. The Company has authorized the issuance to the Buyers of warrants to
purchase in the aggregate up to 200,000 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) Ten Thousand
(10,000) shares of Preferred Stock, and (ii) the Warrants, for an aggregate
purchase price of Ten Million Dollars ($10,000,000); 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 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 Preferred Stock
(together with any Preferred Stock issued in replacement thereof or as a
dividend thereon or otherwise with respect thereto in accordance with the terms
thereof, the "Preferred Shares") and Warrants set forth under Buyer's name on
<PAGE>
the signature page hereto executed by each Buyer, for an aggregate purchase
price of Ten Million U.S. Dollars (the "Purchase Price") and a per share of
Preferred Stock purchase price of One Thousand Dollars ($1,000). The issuance,
sale and purchase of the Preferred Shares and Warrants shall take place at the
closing (the "Closing"), subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below. At the Closing,
the Company shall issue and sell to each Buyer and each Buyer shall purchase
from the Company Twenty Thousand (20,000) Warrants for each $1,000,000 of
Preferred Shares purchased.
b. Form of Payment. The Purchasers shall pay their respective
Purchase Price for the 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
Closing specified herein, the escrowed Purchase Price shall be released to the
Company against delivery of duly executed certificates representing the number
of Preferred Shares and Warrants which the Buyers are purchasing.
c. Closing Date. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, and further
subject to the terms and conditions of the Escrow Agreement, the date and time
of the issuance and sale of the Preferred Shares and Warrants pursuant to this
Agreement shall be 10:00 a.m. Pacific Standard Time on May 28, 1998 or such
other mutually agreed upon date or time (the "Closing Date").
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants to the Company as of the date
hereof and as of the 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 (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 for investment only 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.
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
<PAGE>
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) subsequently included
in 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) sold
under Rule 144 promulgated under the 1933 Act (or a successor rule) 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 or
otherwise may be sold by the Buyer under Rule 144, as contemplated by the
Registration Rights Agreement, the Conversion Shares and Warrant Shares, shall
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for such
Securities):
<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 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(k) under the 1933 Act (or a successor rule thereto).
h. Authorization; Enforcement. This Agreement and the Registration
Rights 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. Each Buyer acknowledges that, as previously
publicly announced, the Company is considering offers to purchase its
telecommunications unit, Kansas Communications, Inc.
k. Concurrent Debt Offering. Each Buyer acknowledges that, as
publicly announced in the Press Release (as defined below), concurrent with the
transactions contemplated hereby, the Company is negotiating the issuance of
debt securities. Nothing in this Agreement, the Registration Rights Agreement,
the Certificate of Designation, or other document contemplated herein or
therein, prohibits the Company from incurring additional indebtedness, including
the indebtedness to be incurred as a result of the issuance of such debt
securities.
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.
<PAGE>
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 hereunder 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 Designation. "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 Designation 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 Designation, the
issuance of the Preferred Shares and the Warrants and the issuance and
reservation for issuance of the Conversion Shares and Warrant Shares issuable
upon conversion or exercise thereof) 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 Designation 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 Designation
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
7,595,796 shares are issued and outstanding, 1,438,233 shares are reserved for
issuance pursuant to the Company's employee and director stock option plans,
3,195,866 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 and 2,200,000 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); (ii)
<PAGE>
4,000,000 shares of preferred stock, par value $.10 per share, of which 3,062.5
shares of Series A Convertible Preferred Stock are issued and outstanding and
2,000 shares of Series A Convertible Preferred Stock are held in the Company's
treasury after being converted. 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 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
Designation 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(d), 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 term Conversion Shares includes the shares of Common Stock
issuable upon conversion of the Preferred Shares, including without limitation,
such additional shares, if any, as are issuable as a result of the events
described in Section 2(c) of the Registration Rights Agreement. 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 Designation 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.
<PAGE>
e. Series of Preferred Stock. Other than the Preferred Stock and
the Series A Convertible 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 Designation.
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
Designation 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 anti-dilution provision),
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its Subsidiaries is a party, or 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 Designation in
each case in accordance with the terms hereof or thereof. 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
<PAGE>
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. 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 of the type 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
<PAGE>
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' 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
<PAGE>
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
advice given by any Buyer or any of its representatives or agents in connection
with this Agreement and the transactions contemplated hereby 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) 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.
<PAGE>
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
<PAGE>
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
<PAGE>
"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.
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).
<PAGE>
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 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, 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 2,200,000 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 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 Designation)) upon conversion or
exercise of the Preferred Shares and the Warrants. The Company will use its
best efforts to obtain and maintain the listing and trading of its Common Stock
on the Nasdaq National Market System ("Nasdaq"), the American Stock Exchange
<PAGE>
("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 the 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 will not conduct any future offering
that will be integrated with the issuance of the Securities for purposes of the
rules promulgated by the SEC, AMEX or Nasdaq.
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 on its behalf) 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 on the Buyer's behalf).
<PAGE>
(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 common shares
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
$15.00.
o. Sales by Buyer. Each Buyer agrees to sell all Securities,
including those represented by a certificate(s) 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, except in connection with block trades of at least Five Thousand
(5,000) shares of Common Stock by brokers.
5. TRANSFER AGENT INSTRUCTIONS.
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 the
Closing Date to obtain the written acknowledgement of such transfer agent of
receipt of such instructions. 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 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 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 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
<PAGE>
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 COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Preferred
Shares and the Warrants to a Buyer at the 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:
a. 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.
b. The applicable Buyer shall have delivered the Purchase Price to
the Escrow Agent in accordance with Section 1(b) above, and an aggregate
Purchase Price of at least $10,000,000 shall have been received by the Escrow
Agent.
c. The Certificate of Designation shall have been accepted for
filing with the Secretary of State of the State of New York.
d. 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 Closing Date 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 Closing Date.
e. 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.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Preferred Shares and
the Warrants at the Closing is subject to the satisfaction, at or before the
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:
a. The Company shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, and delivered the same to the Buyer.
b. The Certificate of Designation 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.
<PAGE>
c. The Company shall have delivered to the Escrow Agent duly
executed certificates (in such denominations as the applicable Buyer shall
reasonably request) representing the Preferred Shares and the Warrants being so
purchased in accordance with Section 1(b) above.
d. 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
Closing Date 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 Closing Date. 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 Closing Date, 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 Closing Date.
e. 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.
f. Trading and listing of the Common Stock on the AMEX shall not
have been suspended by the SEC or the AMEX.
g. The Buyers shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyers and in substantially the same form as Exhibit "F"
attached hereto.
h. The Common Stock required to be authorized and reserved pursuant
to Section V(A) of the Certificate of Designation shall have been duly
authorized and reserved by the Company.
i. An aggregate Purchase Price of at least $10,000,000 shall have
been received by the Escrow Agent.
j. 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.
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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 Designation for the Series
A Preferred Stock, if the issuance of Series B 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 shall be aggregated with the shares of Common
Stock issuable pursuant to the shares of Series B 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]
BUYERS:
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.
Investment Manager
By: RGC General Partner Corp.
By:
Name:
Its: Managing Director
<PAGE>
Aggregate Subscription Amount: $9,000,000
No. of Shares of Preferred Stock: 9,000
No. of Warrants: 180,000
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
[SIGNATURES CONTINUED ONTO NEXT PAGE]
BUYER SIGNATURES CONTINUED:
SHORELINE ASSOCIATES I, LLC
By:
Name:
Title:
Aggregate Subscription Amount: $1,000,000
No. of Shares of Preferred Stock: 1,000
No. of Warrants: 20,000
RESIDENCE: Delaware
ADDRESS:
Shoreline Associates I, LLC
101 University Avenue, Suite 220
Palo Alto, CA 94301
Fax: (650) 463-1511
Telephone: (650) 463-4234
Attn: Mr. Sean P. Doherty
Exhibit A
Certificate of Designation
Exhibit B
Stock Purchase Warrant
Exhibit C
<PAGE>
Registration Rights Agreement
Exhibit D
Form of Escrow Agreement
Exhibit E
Form of Investor Questionnaire
Exhibit F
Form of Legal Opinion
Exhibit G
Form of Press Release
Exhibit H
Form of Notice of Conversion
(See attached)
EXHIBIT H
SOFTNET SYSTEMS, INC.
CONVERSION NOTICE - SERIES B CONVERTIBLE PREFERRED STOCK
Reference is made to the Statement of Terms (the "Article Third, Section 2") of
the Series B 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 the Article Third, Section 2,
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 certificate(s)
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
<PAGE>
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:
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: ]
SoftNet Systems, Inc.: Securities Purchase Agreement Page 24
29
SHARED FILES:Legal:Transactions 1998:SOF:SECURITIES PURCHASE AGT:Purchase
Agreement 5/26
SoftNet Systems, Inc.: Securities Purchase Agreement
SoftNet Systems, Inc.: Securities Purchase Agreement
<PAGE>
SHARED FILES:Legal:Transactions 1998:SOF:SECURITIES PURCHASE AGT:Purchase
Agreement 5/26
<PAGE>
EXHIBIT C
TO SECURITIES
PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 28, 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)
10,000 shares of its Series B Convertible Preferred Stock (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,
Section 2 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 Two Hundred Thousand (200,000) 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
<PAGE>
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 2,200,000 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
<PAGE>
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). In the event the Company does not exercise its option to
redeem the Preferred Stock pursuant to Section VII(C)(i) of the Certificate of
Designation, 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
<PAGE>
(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 non-public 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
underwriter(s) 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
<PAGE>
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:
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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(f) 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,
<PAGE>
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,
<PAGE>
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.
<PAGE>
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(f) 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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
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:
Name:
Title
[SIGNATURES CONTINUED ONTO NEXT PAGE]
INITIAL INVESTORS:
RGC INTERNATIONAL INVESTORS, LDC
By: Rose Glen Capital Management, L.P.
Investment Manager
By: RGC General Partner Corp.
By:
Name:
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. Wayne Bloch
[SIGNATURES CONTINUED ONTO NEXT PAGE]
SHORELINE ASSOCIATES I, LLC
By:
Name:
Title:
RESIDENCE: Delaware
<PAGE>
ADDRESS:
Shoreline Associates I, LLC
101 University Avenue, Suite 220
Palo Alto, CA 94301
Fax: (650) 463-1511
Telephone: (650) 463-4234
Attn: Mr. Sean P. Doherty
SoftNet Systems, Inc.: Registration Rights Agreement Page 18
0190/14895-001 NYLIB2/478686 v1 12/15/97 07:26 PM (10624)
SHARED FILES:Legal:Transactions 1998:SOF:REG RIGHTS AGT:SOF RRA 5/26/98
SoftNet Systems, Inc.: Registration Rights Agreement
SoftNet Systems, Inc.: Registration Rights Agreement
<PAGE>
May 28, 1998
To the Investors Listed on the
Schedule of Investors to the
SoftNet Systems, Inc. Series B Stock
Purchase Agreement dated as of
May 28, 1998
Ladies and Gentlemen:
We have acted as counsel for SoftNet Systems, Inc., a New York
corporation (the "Company"), in connection with the issuance and sale of shares
of its Series B Convertible Preferred Stock pursuant to the SoftNet Systems,
Inc. Series B Stock Purchase Agreement dated as of May 28, 1998 (the "Stock
Purchase Agreement") among the Company and you. This opinion letter is being
rendered to you pursuant to Section 7.g. of the Stock Purchase Agreement in
connection with the Closing of the sale of the Series B Convertible Preferred
Stock. Capitalized terms not otherwise defined in this opinion letter have the
meaning given them in the Stock Purchase Agreement.
In connection with the opinions expressed herein we have made such
examination of matters of law and of fact as we considered appropriate or
advisable for purposes hereof. As to matters of fact material to the opinions
expressed herein, we have relied upon the representations and warranties as to
factual matters contained in and made by the Company pursuant to the Stock
Purchase Agreement and upon certificates and statements of government officials
and of officers of the Company. We have also examined originals or copies of
such corporate documents or records of the Company as we have considered
appropriate for the opinions expressed herein. We have assumed for the purposes
of this opinion letter the genuineness of all signatures and the legal capacity
of natural persons (other than persons acting on behalf of the Company), the
authenticity of the documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as certified, facsimile
or photostatic copies, and the authenticity of the originals of such copies.
In rendering this opinion letter we have also assumed: (A) that the
Stock Purchase Agreement, the Registration Rights Agreement, and the Warrants
(collectively, the "Transaction Agreements") have been duly and validly executed
and delivered by you or on your behalf, that each of you has the power to enter
into and perform all your obligations thereunder, and that the Transaction
Agreements constitute valid, legal, binding and enforceable obligations upon
you; (B) that the representations and warranties made in the Stock Purchase
Agreement by you are true and correct; (C) that any wire transfers, drafts or
checks tendered by you will be honored; and (D) if you are a corporation or
other entity, that you have filed any required state
<PAGE>
May 28, 1998
Page 2
franchise, income or similar tax returns and have paid any required state
franchise, income or similar taxes.
As used in this opinion letter, the expression "we are not aware" or
the phrase "to our knowledge", or any similar expression or phrase with respect
to our knowledge of matters of fact, means as to matters of fact that, based on
the actual knowledge of individual attorneys within the firm principally
responsible for handling current matters for the Company (and not including any
constructive or imputed notice of any information), and after an examination of
documents referred to herein and after inquiries of certain officers of the
Company, no facts have been disclosed to us that have caused us to conclude that
the opinions expressed are factually incorrect; but beyond that we have made no
factual investigation for the purposes of rendering this opinion letter.
Specifically, but without limitation, we have made no inquiries of securities
holders or employees of the Company, other than such officers, and we have not
reviewed, or made any independent investigation regarding, any contract,
agreement or instrument to which the Company is a party or by which it is bound,
other than the Transaction Agreements.
With respect to our opinions in paragraph 3 regarding the issued and
outstanding shares of Series A Preferred Stock and Common Stock, we have relied
solely upon a certificate of the Company's Transfer Agent.
This opinion letter relates solely to the laws of the State of
California, the Business Corporation Law of the State of New York and the
federal law of the United States and we express no opinion with respect to the
effect or application of any other laws. Special rulings of authorities
administering such laws or opinions of other counsel have not been sought or
obtained.
Based upon our examination of and reliance upon the foregoing and
subject to the limitations, exceptions, qualifications and assumptions set forth
below and except as set forth in the Transaction Agreements or the Schedules
thereto, we are of the opinion that as of the date hereof:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of New York, and the Company
has the requisite corporate power and authority to own its properties and to
conduct its business as described in the Company's Amended Report on Form 10-K
for the fiscal year ended December 30, 1997 and is duly qualified as a foreign
corporation in California.
2. The Company has the requisite corporate power and authority to
enter into and perform all of its obligations under the Transaction Agreements
and to issue the Series B Preferred Stock, Warrants and Registrable Securities,
in accordance with the terms thereof. Each of the foregoing has been duly and
validly authorized by the Company, and no further consent or authorization of
the Company, its Board of Directors, or its stockholders is required for the
Company to enter into or perform any of its obligations under the Transaction
Agreements, other
<PAGE>
May 28, 1998
Page 3
than as specifically contemplated by the Transaction Agreements. Each of the
Transaction Agreements has been duly executed and delivered by an authorized
officer of the Company and constitutes a legal, valid and binding obligation of
the Company, enforceable by you against the Company in accordance with its
terms.
3. The capitalization of the Company is as follows:
(a) Preferred Stock. 4,000,000 shares of Preferred Stock, par
value $.10/share (the "Preferred Stock"), of which (i) 5,000 shares have been
designated Series A Convertible Preferred Stock, to our knowledge 3,062.5 of
which are currently issued and outstanding, and (ii) 10,000 shares have been
designated Series B Convertible Preferred Stock and some or all of which may be
purchased pursuant to the Stock Purchase Agreement. The shares of Series B
Convertible Preferred Stock to be purchased at the Closing have been duly
authorized, validly issued, nonassessable and fully paid, and free from all
taxes, liens and charges created by the Company. The respective rights,
privileges, restrictions and preferences of the Series A and Series B
Convertible Preferred Stock are as stated in the Company's Restated Certificate
attached as Exhibit A to the Stock Purchase Agreement (the "Restated
Certificate").
(b) Common Stock. 25,000,000 shares of Common Stock, par value
$.01/share (the "Common Stock") authorized, to our knowledge, 7,595,796 of which
are currently issued and outstanding.
(c) A sufficient number of shares of Common Stock issuable upon
conversion of the Series B Convertible Preferred Stock and exercise of the
Warrants to be purchased at the Closing have been duly and validly reserved for
issuance in accordance with the terms of the Transaction Agreements and, when
and if issued upon such conversion in accordance with the Company's Restated
Certificate or exercise in accordance with the terms of the Warrants will be
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges created by the Company.
(d) Except for (i) the conversion privileges of 3,062.5 shares
of the Series A Preferred Stock, (ii) the conversion privileges of 10,000 shares
of the Series B Convertible Preferred Stock, (iii) warrants to purchase 200,000
shares of Common Stock issued to you in connection with the purchase of Series B
Convertible Preferred Stock, (iv) outstanding warrants and options to purchase
2,396,133 shares of Common Stock, (v) outstanding convertible debentures that
are convertible into up to 537,912 shares of Common Stock and (vi) warrants to
purchase 50,000 shares of Common Stock to be issued to Shoreline Pacific
Institutional Finance in connection with the issuance of Series B Convertible
Preferred Stock, there are no preemptive rights or, to our knowledge, options,
warrants, conversion privileges or other rights (or agreements for any such
rights) outstanding to purchase or otherwise obtain from the Company any of the
Company's equity securities.
<PAGE>
May 28, 1998
Page 4
(e) To our knowledge, 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 as
specifically identified in Schedule 3(c) to the Stock Purchase Agreement.
4. Neither the Restated Certificate nor the Bylaws of the Company
are in violation of the New York Business Corporation law. The Company's
execution and delivery of, and its performance and compliance as of the date
hereof with the terms of, the Transaction Agreements and the issuance of the
Series B Preferred Stock, Warrants and Registrable Securities do not violate any
provision of any federal, California or New York corporate law, rule or
regulation applicable to the Company or any provision of the Company's Restated
Certificate or Bylaws and have not resulted and will not result in, any
violation of, or constitute a default under (or an event which, with the passage
of time or the giving of notice or both, would constitute a default under) any
contract, agreement, instrument, judgment, writ, decree or order known to us,
which is binding upon the Company and which, individually or in the aggregate,
would have a Material Adverse Effect.
5. Other than necessary approvals that have been obtained, and such
stockholder approval as may eventually be required under American Stock Exchange
rules, as described in the Transaction Agreements, all consents, approvals,
permits, orders or authorizations of, and all qualifications, registrations,
designations or declarations with, any court, federal or New York corporate or
California state governmental authority, regulatory agency, self-regulatory
organization, stock exchange or market, or the stockholders of the Company or,
to our knowledge, any third party pursuant to any contract, agreement or
instrument binding upon the Company, on the part of the Company required in
connection with the execution and delivery of the Stock Purchase Agreement and
consummation at the Closing of the transactions contemplated by the Stock
Purchase Agreement have been obtained, and are effective, and we are not aware
of any proceedings, or written threat of any proceedings, that question the
validity thereof.
6. Based in part upon the representations of you in the Stock
Purchase Agreement, the offer and sale of the Series B Convertible Preferred
Stock and Warrants to you pursuant to the terms of the Stock Purchase Agreement
are exempt from the registration requirements of Section 5 of the Securities Act
of 1933, as amended (the "Act"), by virtue of Section 4(2) thereof.
7. We are not aware that there is any action, suit, proceeding or
governmental inquiry or investigation pending, or threatened in writing, against
the Company which questions the validity of the Transaction Agreements or the
right of the Company to enter into such Transaction Agreements or that would
have a Material Adverse Effect on the Company on a consolidated basis, nor are
we aware of any litigation pending, or threatened in writing, against the
Company by reason of the proposed activities of the Company, the past employment
<PAGE>
May 28, 1998
Page 5
relationships of its officers, directors or employees, or negotiations by the
Company with possible investors in the Company or its business.
Our opinions expressed above are specifically subject to the following
limitations, exceptions, qualifications and assumptions:
(a) The legality, validity, binding nature and enforceability of
the Company's obligations under the Transaction Agreements may be subject to or
limited by applicable (1) bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent transfer and other similar laws affecting the rights of
creditors generally; (2) general principles of equity (whether relief is sought
in a proceeding at law or in equity), including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and the discretion of
any court of competent jurisdiction in awarding specific performance or
injunctive relief and other equitable remedies; and (3), without limiting the
generality of the foregoing, the effect of California court decisions and
statutes which indicate that provisions of the Transaction Agreements which
permit any of you to take action or make determinations may be subject to a
requirement that such action be taken or such determinations be made on a
reasonable basis in good faith or that it be shown that such action is
reasonably necessary for your protection.
(b) We express no opinion as to the Company's compliance or
noncompliance with applicable federal or state antifraud or antitrust statutes,
laws, rules and regulations.
(c) We express no opinion concerning the past, present or future
fair market value of any securities.
(d) We express no opinion as to the enforceability under certain
circumstances of any provisions prohibiting waivers of any terms of the
Transaction Agreements other than in writing, or prohibiting oral modifications
thereof or modification by course of dealing.
(e) Our opinions are subject to the effect of judicial decisions
which may permit the introduction of extrinsic evidence to interpret the terms
of written contracts.
(f) We express no opinion as to the effect of any law or
equitable principle that provides that a court may refuse to enforce, or may
limit the application of, a contract or any clause thereof which the court finds
to have been unconscionable at the time it was made or contrary to public
policy.
(g) We express no opinion as to the compliance of the Company,
any Investor or the sale of the Series B Convertible Preferred Stock to the
Investors with the provisions of the Small Business Investment Act of 1958, as
amended, or any of the regulations promulgated thereunder.
<PAGE>
May 28, 1998
Page 6
(h) We express no opinion as to the applicability or effect of
any preference or similar law on the Transaction Agreements or any transaction
contemplated thereby.
(i) We express no opinion as to any provision providing for the
exclusive jurisdiction of a particular court or purporting to waive objections
to the laying of venue or to forum on the basis of forum non conveniens, in
connection with any litigation arising out of or pertaining to the Transaction
Agreements.
This opinion letter is rendered as of the date first written above
solely for your benefit in connection with the Stock Purchase Agreement and may
not be delivered to, quoted or relied upon by any person other than you, or for
any other purpose, without our prior written consent. 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. We
assume no 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 opinions expressed herein.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
