EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of February 6,
1998, by and among INTELECT COMMUNICATIONS, INC., a Delaware corporation, with
headquarters located at 1100 Executive Drive, Richardson, Texas, 75081 (the
"COMPANY"), and the investors listed on the Schedule of Buyers attached hereto
(individually, a "BUYER" and collectively, 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 Rule 506
of Regulation D ("REGULATION D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 ACT");
B. The Company has authorized the following new series of its preferred
stock, par value $0.01 per share: the Company's Series C Convertible Preferred
Stock (the "PREFERRED STOCK"), which shall be convertible into shares of the
Company's Common Stock, par value $0.01 per share (the "COMMON STOCK"), in
accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of the Preferred Stock, substantially in the form
attached hereto as EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, an aggregate of 10,000 shares of the Preferred Stock (the
"PREFERRED SHARES") in the respective amounts set forth opposite each Buyer's
name on the Schedule of Buyers, which Preferred Shares are convertible into
Shares of Common Stock (as converted, the "Conversion Shares"); and
D. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as EXHIBIT B (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company has agreed to provide 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.
a. PURCHASE OF PREFERRED SHARES. Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall
issue and sell to each Buyer and each Buyer severally agrees to purchase from
the Company the respective number of Preferred
Shares set forth opposite such Buyer's name on the Schedule of Buyers (the
"CLOSING"). The purchase price (the "PURCHASE PRICE") of the Preferred Shares at
the Closing shall be $10,000,000.
b. CLOSING DATE. The date of the Closing (the "CLOSING DATE") shall
be within one (1) business day following the date hereof, subject to
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6 and 7 below (or such later date as is mutually agreed to by
the Company and the Buyers). The Closing shall occur on the Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693.
c. FORM OF PAYMENT. On the Closing Date, (i) each Buyer shall pay
the Purchase Price to the Company for the Preferred Shares to be issued and sold
to such Buyer at the Closing, by wire transfer of immediately available funds in
accordance with the Company's written wire instructions, and (ii) the Company
shall deliver to each Buyer, stock certificates (in the denominations as such
Buyer shall request) (the "PREFERRED STOCK CERTIFICATES") representing such
number of the Preferred Shares which such Buyer is then purchasing (as indicated
opposite such Buyer's name on the Schedule of Buyers) hereunder, duly executed
on behalf of the Company and registered in the name of such Buyer or its
designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself that:
a. INVESTMENT PURPOSE. Such Buyer (i) is acquiring the Preferred
Shares and (ii) upon conversion of the Preferred Shares, will acquire the
Conversion Shares then issuable (the Preferred Shares and the Conversion Shares
collectively are referred to herein as the "SECURITIES"), for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act.
b. ACCREDITED INVESTOR STATUS. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. RELIANCE ON EXEMPTIONS. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such securities.
-2-
d. INFORMATION. Such 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 such Buyer. Such 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 investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
in Section 3 below. Such Buyer understands that its investment in the Securities
involves a high degree of risk. Such Buyer has sought such accounting, legal and
tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.
In addition to the foregoing, each Buyer, severally and not jointly,
and its advisors, if any, acknowledge that
(i) it has access to copies of (and acknowledges that the
Company has offered to provide, upon its request, copies of) the SEC
Documents (as defined in Section 3(f) hereof) of the Company and the
Registration Statement of the Company on Form S-3 as filed with the
SEC on December 23, 1997 (collectively, the "Public Documents");
(ii) it has not been furnished with any oral representation or
warranty in connection with the offering of the Preferred Shares by
the Company or any officer, employee, agent, Affiliate or
Subsidiary, which is not contained in or contemplated by the
Transaction Documents (as defined below) or the Certificate of
Designation;
(iii) understands that the purchase of the Preferred Shares
entails various risks including, but not limited to, those outlined
in the Public Documents and in this Agreement, and has determined
that the Preferred Shares are a suitable investment and that at this
time it could bear a complete loss of its investment; and
(iv) any information which such Buyers has heretofore
represented or furnished to the Company with respect to its
financial position and business experience is correct and complete
as of the date of this Agreement.
e. NO GOVERNMENTAL REVIEW. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. TRANSFER OR RESALE. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to
-3-
the Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act, as amended, (or a successor rule thereto) ("RULE 144"); (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the 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.
g. LEGENDS. Such Buyer understands that the certificates or other
instruments representing the Preferred Shares and, until such time as the sale
of the Conversion Shares have been registered under the 1933 Act as contemplated
by the Registration Rights Agreement, the stock certificates representing the
Conversion Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS,
OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES
LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the 1933 Act, (ii) in connection with a
sale transaction, such holder provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale, assignment or
transfer of the Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that the
Securities can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold. To the extent that the above legend is removed pursuant to (i)
above, the Buyers shall satisfy the prospectus delivery requirements of the 1933
Act.
-4-
h. VALIDITY; ENFORCEMENT. This Agreement has been duly and validly
authorized, execut ed and delivered on behalf of such Buyer and is a valid and
binding agreement of such Buyer enforceable against such Buyer in accordance
with its terms, subject as to enforceability to general principles of equity and
to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. RESIDENCY. Each Buyer is a resident of and is organized under the
laws of the jurisdiction specified in the Schedule of Buyers.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that:
a. ORGANIZATION AND QUALIFICATION. The Company and its
"SUBSIDIARIES" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest, a complete list of which is set forth in SCHEDULE 3(A), except
for non-operating Subsidiaries or Subsidiaries in dissolution or winding up,
each as described in SCHEDULE 3(A), which do not have any material assets or
liabilities ("NONMATERIAL SUBSIDIARIES")), are corporations duly organized and
validly existing in good standing under the laws of the jurisdiction in which
they are incorporated, and have the requisite corporate power and authorization
to own their properties and to carry on their business as now being conducted,
except where the failure to be in good standing, either individually or in the
aggregate, would not have a Material Adverse Effect (as defined below). Each of
the Company and its Subsidiaries is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which its ownership
of property or the nature of the business conducted by it makes such
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse
effect on the business, properties, assets, operations, results of operations,
financial condition or prospects of the Company and its Subsidiaries, if any,
taken as a whole, or on the transactions contemplated hereby or by the
agreements and instruments to be entered into in connection herewith, or on the
authority or ability of the Company to perform its obligations under the
Transaction Documents.
b. AUTHORIZATION; ENFORCEMENT; VALIDITY. (i) The Company has the
requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent
Instructions (as defined in Section 5) and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the "TRANSACTION DOCUMENTS"), and to issue the
Securities in accordance with the terms hereof and thereof, (ii) the execution
and delivery of the Transaction Documents and the Certificate of Designations by
the Company and the consummation by it of the transactions contemplated hereby
and thereby, including without limitation the issuance of the Preferred Shares
and the reservation for issuance and the issuance of the Conversion Shares
issuable upon conversion thereof, have been duly authorized by the
-5-
Company's Board of Directors and no further consent or authorization is required
by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company, (iv)
the Transaction Documents constitute the valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies, and (v) prior to the Closing Date, the Certificate of
Designations has been filed with the Secretary of State of the State of Delaware
and will be in full force and effect, enforceable against the Company in
accordance with its terms.
c. CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of (i) 50,000,000 shares of Common Stock, of which
as of the date hereof, 23,954,978 shares are issued and outstanding, 3,818,334
shares are reserved for issuance pursuant to the Company's stock option and
purchase plans and 7,848,847 shares are issuable and reserved for issuance
pursuant to securities (other than the Preferred Shares) exercisable or
exchangeable for, or convertible into, shares of Common Stock, (ii) 12,500
shares of Preferred Stock, of which as of the date hereof, no shares are issued
and outstanding and (iii) 49,990,000 shares of preferred stock (other than
shares of the Preferred Stock), of which as of the date hereof 5,133,695 shares
are issued and outstanding. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except as
disclosed in SCHEDULE 3(C), (i) no shares of the Company's capital stock are
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company, (ii) there are no outstanding
debt securities, (iii) other than the stock option plans of the Company set
forth in the SEC Documents, there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings 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 or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries, (iv) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of their securities under the 1933 Act (except the Registration
Rights Agreement), (v) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries, (vi) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities as described in this
Agreement, and (vii) the Company does not have any stock appreciation rights or
"phantom stock" plans or agreements or any similar plan or agreement. The
Company has furnished to the Buyer true and correct copies of the Company's
Certificate of Incorporation, as amended and as in effect on the date hereof
(the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as amended and
as in effect on the date hereof (the "BY-LAWS"), and the
-6-
terms of all securities convertible into or exercisable for Common Stock and the
material rights of the holders thereof in respect thereto.
d. ISSUANCE OF SECURITIES. The Preferred Shares are duly authorized
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and non-assessable, (ii) free from all taxes, liens and
charges with respect to the issue thereof and (iii) entitled to the rights and
preferences set forth in the Certificate of Designations. 2,905,175 shares of
Common Stock (subject to adjustment pursuant to the Company's covenant set forth
in Section 4(f) below) have been duly authorized and reserved for issuance upon
conversion of the Preferred Shares. Upon conversion in accordance with the
Certificate of Designations the Conversion Shares will be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof, with the holders being entitled to all rights accorded to
a holder of Common Stock. Assuming the accuracy of the representations made by
the Buyers in Section 2 hereof, the issuance by the Company of the Securities is
exempt from registration under the 1933 Act.
e. NO CONFLICTS. Except as disclosed in SCHEDULE 3(E), the
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the reservation
for issuance and issuance of the Conversion Shares) will not (i) result in a
violation of the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any material 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 federal and state
securities laws and regulations and the rules and regulations of the Principal
Market (as defined below)) 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 violations, conflicts or defaults which shall
be waived or corrected as of the Closing and which are set forth on SCHEDULE
3(E). Except as disclosed in SCHEDULE 3(E), neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Certificate
of Incorporation, any Certificate of Designation, Preferences and Rights of any
outstanding series of preferred stock of the Company or By-laws or their
organizational charter or by-laws, respectively, except for such violations,
conflicts or defaults which shall be waived or corrected as of the Closing and
which are set forth on SCHEDULE 3(E). Except as disclosed in SCHEDULE 3(E),
neither the Company or any of its Subsidiaries is in violation or any term of or
in default under any contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or order or any statute, rule or regulation
applicable to the Company or its Subsidiaries, except for such violations or
defaults which would not have a Material Adverse Effect. The business of the
Company and its Subsidiaries is not being conducted, and shall not be conducted,
in violation of any law, ordinance, regulation of any governmental entity,
except for such violations or defaults which would not have a Material Adverse
Effect. Except as specifically contemplated by this Agreement and as required
under the 1933 Act, the Company is not required to obtain any
-7-
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 or
contemplated by the Transaction Documents or to perform its obligations under
the Certificate of Designations, in each case in accordance with the terms
hereof or thereof. Except as disclosed in SCHEDULE 3(E), all consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof. The Company and its Subsidiaries are unaware of any
facts or circumstances which might reasonably be expected to give rise to any of
the foregoing. The Company is not in violation of the listing requirements of
the Principal Market (as defined below), including, without limitation, the
requirements set forth in Rule 4460 of the Principal Market.
f. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31, 1995, the
Company or its predecessor Intelect Communications Systems Limited, a Bermuda
corporation, has 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
incorporated by reference therein being hereinafter referred to as the "SEC
DOCUMENTS"). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act 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 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 exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) of this Agreement, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading. Neither the
Company nor any of its Subsidiaries or any of their officers, directors,
employees or agents have provided the Buyers with any material, nonpublic
information, except for the knowledge of the existence of the transactions
contemplated by the Transaction Documents.
g. ABSENCE OF CERTAIN CHANGES. Except as disclosed in SCHEDULE 3(G)
or in the SEC Documents, since December 31, 1996 there has been no material
adverse change and no
-8-
material adverse development in the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
Subsidiaries. The Company has not taken any steps, and does not currently expect
to take any steps, to seek protection pursuant to any bankruptcy law nor does
the Company or any of its Subsidiaries have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings. Except
as disclosed in SCHEDULE 3(G), since December 31, 1996 the Company has not
declared or paid any dividends on its Common Stock, sold any assets in excess of
$1 million outside of the ordinary course of business or had capital
expenditures in excess of $5 million.
h. ABSENCE OF LITIGATION. There is no action, suit, 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,
the Common Stock or any of the Company's Subsidiaries or any of the Company's or
the Company's Subsidiaries' officers or directors in their capacities as such,
where an adverse order, holding, finding or mandate would have a Material
Adverse Effect, except as set forth in SCHEDULE 3(H) or in the SEC Documents.
i. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF PREFERRED SHARES.
The Company acknowledges and agrees that each of the Buyers is acting solely in
the capacity of arm's length purchaser with respect to the Transaction Documents
and the transactions contemplated hereby and thereby. The Company further
acknowledges that each Buyer is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby and any advice
given by any of the Buyers or any of their respective representatives or agents
in connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to such Buyer's purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
j. NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
CIRCUMSTANCES. Except as set forth on SCHEDULE 3(J) or for liabilities incurred
in the ordinary course of business and consistent with past practices, no
material event, liability, development or circumstance has occurred or exists,
or is contemplated to occur, with respect to the Company or its Subsidiaries or
their respective business, properties, prospects, operations or financial
condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced or previously disclosed in the Public Documents.
k. NO GENERAL SOLICITATION. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
-9-
l. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or, except as set forth in schedule 3(l),
cause this offering of the Securities to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
any exchange or automated quotation system on which any of the securities of the
Company are listed or designated, nor will the Company or any of its
Subsidiaries take any action or steps that would require registration of any of
the Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings for purposes of any applicable shareholder
approval requirement of the Principle Market.
m. DILUTIVE EFFECT. The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Preferred Shares
will increase in certain circumstances. The Company further acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred
Shares in accordance with this Agreement and the Certificate of Designations, is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company.
n. EMPLOYEE RELATIONS. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. None of the
Company's or its Subsidiaries' employees is a member of a union, neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their relations
with their employees are good. No executive officer (as defined in Rule 501(f)
of the 1933 Act) has notified the Company that such officer intends to leave the
Company or otherwise terminate such officer's employment with the Company.
o. INTELLECTUAL PROPERTY RIGHTS. The Company and its Subsidiaries
own or possess adequate rights or licenses to use all material trademarks, trade
names, service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on SCHEDULE 3(O), none of the
Company's material trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, government authorizations, trade secrets or other
intellectual property rights have expired or terminated, or are expected to
expire or terminate within two years from the date of this Agreement. The
Company and its Subsidiaries do not have any knowledge of any infringement by
the Company or its Subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, or of any
such development of similar or identical trade secrets or technical information
by others and, except as set forth on SCHEDULE 3(O) or in the SEC Documents,
there is no claim, action or proceeding being made or brought against, or to the
Company's knowledge, being threatened against, the Company or its Subsidiaries
regarding trademark, trade name, patents, patent rights, invention, copyright,
license, service names, service marks, service mark
-10-
registrations, trade secret or other infringement; and the Company and its
Subsidiaries are unaware of any facts or circumstances which might reasonably be
expected to give rise to any of the foregoing. The Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their intellectual properties.
p. ENVIRONMENTAL LAWS. The Company and its Subsidiaries (i) are in
compliance in all material respects with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance in all material respects with all terms and conditions of any such
permit, license or approval.
q. TITLE. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in SCHEDULE 3(Q) or such as do not
materially affect the value of such property or do not interfere with the use
made and proposed to be made of such property by the Company and any of its
Subsidiaries. Any real property and facilities held under lease by the Company
and any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.
r. 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 been refused any
insurance coverage sought or applied for and 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 materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its Subsidiaries, taken as a whole.
s. REGULATORY PERMITS. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
t. INTERNAL ACCOUNTING CONTROLS. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient 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
-11-
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.
u. 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
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Except as specifically disclosed in the SEC Documents
or as set forth in SCHEDULE 3(G), neither the Company nor any of its
Subsidiaries is a party to any contract or agreement which in the judgment of
the Company's officers has or is reasonably expected to have a Material Adverse
Effect.
v. TAX STATUS. The Company and each of its Subsidiaries has made or
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company 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 provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
w. TRANSACTIONS WITH AFFILIATES. Except as set forth on SCHEDULE
3(W) or in the SEC Documents filed at least ten days prior to the date hereof
and other than the grant of stock options 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 such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
x. NO OTHER AGREEMENTS. The Company has not, directly or indirectly,
made any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents.
y. NONMATERIAL SUBSIDIARIES. The Nonmaterial Subsidiaries have no
(i) liabilities, contingent or otherwise, whether known or unknown, which would
have a Material Adverse Effect or (ii) material assets.
-12-
4. COVENANTS.
a. BEST EFFORTS. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. FORM D AND BLUE SKY. 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 in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing pursuant to this Agreement
under applicable securities or "Blue Sky" laws of the states of the United
States, and shall provide evidence of any such action so taken to the Buyers on
or prior to the Closing Date. The Company shall make all filings and reports
relating the offer and sale of the Securities required under applicable
securities or "Blue Sky" laws of the states of the United States following the
Closing Date.
c. REPORTING STATUS. Until the earlier of (i) the date which is one
year after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto), or (ii) the date on which (A) the Investors shall have sold all the
Conversion Shares and (B) none of the Preferred Shares is outstanding (the
"REGISTRATION PERIOD"), the Company shall file all reports 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 otherwise permit such
termination.
d. USE OF PROCEEDS. The Company will use the proceeds from the sale
of the Preferred Shares for working capital and general corporate purposes.
e. FINANCIAL INFORMATION. The Company agrees to send the following
to each Investor (as that term is defined in the Registration Rights Agreement)
during the Registration Period: (i) within two (2) days after the filing thereof
with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports
on Form 10-Q, any Current Reports on Form 8-K and any registration statements
(other than on Form S-8) or amendments filed pursuant to the 1933 Act, provided
that if any such report is not filed with the SEC through EDGAR then the Company
shall deliver a copy of such report to each Investor by facsimile on the same
day it is filed with the SEC and (ii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
f. RESERVATION OF SHARES. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 150% of the number of shares of Common Stock needed to
provide for the issuance of the shares of Common Stock issuable upon conversion
of the Preferred Shares.
-13-
g. ADDITIONAL FINANCING. Subject to Section 4(r) and to the
exceptions described below, the Company agrees that during the period beginning
on the date hereof and ending on the day a Registration Statement (as defined in
the Registration Rights Agreement) on Form S-3, registering the Registrable
Securities (as defined in the Registration Rights Agreement), becomes effective,
neither the Company nor its subsidiaries will, without the prior written consent
of a majority of the Preferred Shares then outstanding, negotiate or contract
with any party for any equity financing (including any debt financing with an
equity component) or issue any equity securities of the Company or any
Subsidiary or securities convertible or exchangeable into or for equity
securities of the Company or any Subsidiary (including debt securities with an
equity component) in any form (the limitations referred to in this sentence
shall be referred to as the "Capital Raising Limitations"). The Capital Raising
Limitations shall not apply to (i) the issuance of warrants or options to
placement agents or advisers in connection with the transactions contemplated
hereby, (ii) a bona-fide loan from a commercial lender which does not have any
equity feature, (iii) the issuance of securities upon exercise or conversion of
the Company's options, warrants or other convertible securities or debt
outstanding as of the date hereof or to be issued following the Closing to
placement agents and advisers in connection with the transactions contemplated
hereby, (iv) the grant of additional options or warrants, or the issuance of
additional securities, under any Company stock option plan, restricted stock
plan or stock purchase plan for the benefit of the Company's employees or
directors, (v) any registered firm commitment underwritten public offering of
securities of the Company, (vi) any transaction intended to be made in reliance
upon Rule 144A under the Securities Act, (vii) any equipment loans or financings
which do not have an equity feature, (viii) any conversion to equity by St.
James Capital Corp. or its Affiliates ("ST. JAMES") of all or part of the
existing debt in the principal amount of $6,000,000 or any new credit facility
from St. James, up to $15,000,000, involving the issuance of convertible debt
with conversion price at or above the Fixed Conversion Price or warrants which
have an exercise price at or above $6.50 per share, provided that such equity is
not convertible into Common Stock or registered under the 1933 Act prior to June
1, 1998, or (ix) shares of Preferred Stock issued in accordance with Section
4(r) hereof.
h. LISTING. The Company shall promptly but in no event later than
the earlier of (i) the date the Registration Statement on Form S-3 registering
the Registrable Securities is declared effective by the SEC or (ii) 30 days
after the Closing Date, secure the listing of all of the Registrable Securities
(as defined in the Registration Rights Agreement) upon each national securities
exchange and automated quotation system, if any, upon which shares of Common
Stock are then listed (subject to official notice of issuance) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all Registrable Securities from time to time issuable under the terms
of the Transaction Documents and the Certificate of Designations. The Company
shall maintain the Common Stock's authorization for quotation on the Nasdaq
National Market or the Nasdaq Small Cap (the "PRINCIPAL MARKET"). Neither the
Company nor any of its Subsidiaries shall take any action which would be
reasonably expected to result in the delisting or suspension of the Common Stock
on the Principal Market. The Company shall promptly, and in no event later than
the following business day, provide to each Buyer copies of any notices it
receives from the Principal Market regarding the continued eligibility of the
Common Stock for listing on such automated quotation system or securities
exchange. The
-14-
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(h).
i. EXPENSES. Subject to Section 9(l) below, within one (1) business
day of the Closing, the Company shall pay a nonaccountable expense allowance of
Twenty-Five Thousand Dollars ($25,000) to the Buyers or their designee(s).
j. FILING OF FORM 8-K. On or before the fifth (5th) business day
following the Closing Date, the Company shall file a Form 8-K with the SEC
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act.
k. TRANSACTIONS WITH AFFILIATES. So long as any Preferred Shares are
outstanding, the Company shall not, and shall cause each of its Subsidiaries not
to, enter into, amend, modify or supplement, or permit any Subsidiary to enter
into, amend, modify or supplement, any agreement, transaction, commitment or
arrangement with any of its or any Subsidiary's officers, directors, person who
were officers or directors at any time during the previous two years,
stockholders who beneficially own 5% or more of the Common Stock, or affiliates
or with any individual related by blood, marriage or adoption to any such
individual or with any entity in which any such entity or individual owns a 5%
or more beneficial interest (each a "RELATED PARTY"), except for (a) benefits
under any Company stock option plan, restricted stock plan or stock purchase
plan for the benefit of the Company's employees, officers or directors, (b)
customary employment arrangements and benefit programs on reasonable terms, (c)
any agreement, transaction, commitment or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such Related Party, or (d) any agreement, transaction,
commitment or arrangement which is approved by a majority of the disinterested
directors of the Company, as determined under the Delaware General Corporation
Law. "AFFILIATE" for purposes hereof means, with respect to any person or
entity, another person or entity that, directly or indirectly, (i) has a 5% or
more equity interest in that person or entity, (ii) has 5% or more common
ownership with that person or entity, (iii) controls that person or entity, or
(iv) shares common control with that person or entity. "CONTROL" or "CONTROLS"
for purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.
l. CAPITAL AND SURPLUS; SPECIAL RESERVES. The Company agrees that
the capital of the Company (as such term is used in Section 154 of the General
Corporation Law of Delaware) in respect of the Preferred Shares shall be equal
to the aggregate par value of such Preferred Shares and that it shall not
increase the capital of the Company with respect to any shares of the Company's
capital stock at anytime on or after the date of this Agreement. The Company
also agrees that it shall not create any special reserves under Section 171 of
the General Corporation Law of Delaware without the prior written consent of
each holder of Preferred Shares.
m. REDUCTION OF CAPITAL. So long as any Preferred Shares remain
outstanding, the Company shall not account for as surplus or transfer to or
otherwise allocate to the Company's surplus account for purposes of the Delaware
General Corporation Law any of the capital
-15-
represented by the Preferred Shares, including, without limitation, for the
purpose of reducing any of its capital stock as contemplated by Section 244 of
the Delaware General Corporation Law.
n. PROXY STATEMENT. In the event that at the close of trading on any
trading day the Proxy Statement Triggering Shares (as defined below) exceeds 15%
of the number of shares of Common Stock issued and outstanding immediately prior
to the Closing (the "PROXY CRITERIA"), the Company shall provide written notice
of such occurrence to the holders of Preferred Shares (the "COMPANY PROXY
NOTICE") no later than one (1) business day following such trading day on which
such event occurs. Any holder of Preferred Shares may provide written notice to
the Company (a "HOLDER PROXY NOTICE") upon such holder becoming aware of the
satisfaction of the Proxy Criteria. "PROXY STATEMENT TRIGGERING SHARES" shall
mean as of any date that number of shares of Common Stock equal to the sum of
(A) the number of shares of Common Stock previously issued upon conversion of
any of the shares of Preferred Stock, (B) the number of shares of Common Stock
issuable upon conversion of all the outstanding shares of Preferred Stock based
on the Conversion Price in effect on the day of such determination (without
regard to any limitation upon the conversion of any shares of Preferred Stock
except for those set forth in Section 2(d)(ii) of the Certificate of
Designation) ((A) and (B) together, the "COMBINED CONVERSION SHARES") and (C)
the number of shares of Common Stock issued or, in the case of securities which
are convertible or exercisable into or exchangeable for shares of Common Stock,
the number of shares of Common Stock issuable upon conversion, exercise or
exchange of such securities as of the date of such determination, in any
transaction which the holders of a majority of the shares of Preferred Stock
outstanding advise the Company in writing that such holders have a reasonable
belief there exists a bona fide question regarding whether the issuance of such
other securities would be integrated with the issuance of the Combined
Conversion Shares pursuant to the Principal Market's rules and regulations (the
"OTHER SECURITIES"). Notwithstanding the foregoing, the term Other Securities
shall not include any security with respect to which the Company has indicated
that in its reasonable belief the issuance of such securities will not be
integrated with the issuance of the Combined Conversion Shares unless and until
the Company has failed to obtain a Written Confirmation (as defined below)
within 30 days of the Company's receipt of the notice referred to in clause (C)
in the immediately preceding sentence. Upon the earlier to occur of (i) the date
the Company Proxy Notice is given or (ii) the date a Holder Proxy Notice is
deemed delivered (pursuant to Section 9(f) hereof) (the "APPROVAL DEADLINE"),
the Company shall use its best efforts to obtain within 60 days, either (I) the
written waiver from the Principal Market of the requirements of its shareholder
approval requirements as it applies to the Proxy Statement Triggering Shares
("WRITTEN WAIVER") or (II) obtain the approval of the Company's stockholders, in
accordance with the requirements of the applicable Principal Market, to allow
for the issuance of greater than 20% of its outstanding Common Stock upon
issuance of the Proxy Statement Triggering Shares and to recommend such proposal
to its stockholders. If at any time after a Company Proxy Notice or a Holder
Proxy Notice has been given but prior to the receipt of Written Waiver or
shareholder approval, the Company receives a Written Confirmation with respect
to a number of Other Securities which had such Other Securities been excluded
from the Proxy Statement Triggering Shares as of the date the Company was
required to deliver the Company Proxy Notice (the "COMPANY PROXY NOTICE DATE"),
then if on each day during the period beginning on the Company Proxy Notice Date
and ending on the date the Company received Written Confirmation the Proxy
Criteria would not have been satisfied, then the Company shall no longer be
obligated to seek shareholder approval or Written Waiver until such
-16-
future time as the Proxy Criteria is satisfied. "WRITTEN CONFIRMATION" shall
mean the written confirmation from the Principal Market that the issuance of the
Other Securities will not be integrated with the issuance of the Combined
Conversion Shares for the purposes of applying the shareholder approval
requirements of the Principal Market. The Company shall be obligated to provide
each Buyer with written notice within three (3) business days of the closing of
any transaction which involves the issuance of any equity security or security
which is convertible, exchangeable, or exercisable into or for Common Stock of
the Company, and a statement by the Company as to whether it believes the
issuance of the Other Securities will be integrated with the issuance of the
Combined Conversion Shares under the rules of the Principal Market relating to
shareholder approval requirements.
o. RESTRICTIONS ON SALES OF CONVERSION SHARES. So long as a Buyer
holds any Preferred Shares, the Buyers shall not sell, on any single day, a
number of shares of Common Stock issued pursuant to the conversion of Preferred
Shares in excess of that number of shares of Common Stock equal to 20% of the
daily trading volume for the Common Stock (as reported by Bloomberg) on such
date of determination. Notwithstanding the foregoing, the sales restriction set
forth in this Section 2(o) shall not apply (i) on any day (the "Restriction
Release Date") where such daily trading volume, excluding any trading volume in
the Common Stock by an individual holder of Preferred Shares who would seek to
apply this exclusion to Section 2(o), is in excess of 200% of the average daily
trading volume for the Common Stock (as reported by Bloomberg) for the six (6)
month period which ends on, and includes, the day prior to the Restriction
Release Date and begins on, and includes, the day which is six months prior to
such Restriction Release Date or (ii) at any time on or after an Extraordinary
Event, a Major Transaction or a Triggering Event (each as defined in the
Certificate of Designation).
p. CONVERSION RESTRICTION. A Buyer will not submit a Conversion
Notice (as defined in the Certificate of Designation) unless, individually or in
the aggregate, Buyer(s) have submitted one or more Conversion Notices for the
conversion of at least 500 shares of Preferred Stock on the same day.
Notwithstanding the foregoing, nothing shall restrict an individual Buyer from
submitting a Conversion Notice for the Conversion of less than 500 shares of
Preferred Stock if (i) such Buyer on the Conversion Date holds less than 500
shares of Preferred Stock and (ii) such Buyer submits a Conversion Notice for
all Preferred Shares held by such Buyer.
q. LIMITATION ON SHORT SALES OF COMMON STOCK. Each Buyer agrees
that, for as long as such Buyer owns any Preferred Shares, neither such Buyer
nor its Affiliates will enter into a "short sale" (as such term is defined in
Rule 3b-3 of the 1934 Act) of Common Stock; provided, however, that a sale which
would otherwise be deemed a short sale shall not be prohibited by this Agreement
so long as the selling Buyer submits on the date of such sale a Conversion
Notice of Preferred Shares entitling such Buyer to receive a number of shares of
Common Stock at least equal to the number of shares so sold.
r. ADDITIONAL ISSUANCE OF PREFERRED STOCK. So long as a Buyer or any
of its Affiliates beneficially owns Preferred Shares, the Company shall not
issue or agree to issue any additional Preferred Stock unless (i) the additional
purchaser of shares of Preferred Stock is The Coastal Corporation Second Pension
Trust or an affiliate of The Coastal Corporation Second Pension
-17-
Trust, (ii) the additional purchaser of the shares of Preferred Stock enters
into a securities purchase agreement and registration rights agreement in
substantially the form of and with terms no more favorable to such purchasers
than those set forth in this Agreement and the Registration Rights Agreement,
respectively, and (iii) the issuance of such additional shares of Preferred
Stock is consummated within 5 days of the Closing.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
in such amounts as specified from time to time by each Buyer to the Company upon
conversion of the Preferred Shares (the "IRREVOCABLE TRANSFER AGENT
INSTRUCTIONS"). Prior to registration of the Conversion Shares under the 1933
Act, all such certificates shall bear the restrictive legend 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 Sections 2(f) and 4(p) hereof
(in the case of the Conversion Shares, prior to registration of the Conversion
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 5 shall affect in any way
each Buyer's obligations and agreements set forth in Section 2(g) to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Securities or any of its obligations in this Agreement, the Certificate of
Designation or the Registration Rights Agreement. If a Buyer provides the
Company with an opinion of counsel, in a generally acceptable form, to the
effect that a public sale, assignment or transfer of the Securities may be made
without registration under the 1933 Act or the Buyer provides the Company with
reasonable assurances that the Securities can be sold pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the
transfer, and, in the case of the Conversion Shares, promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Buyer and without any restrictive legend.
Each party acknowledges that a breach by it of its obligations under this
Section 5 will cause irreparable harm to the other party by vitiating the intent
and purpose of the transaction contemplated hereby. Accordingly, each party
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 such party of the provisions of this Section 5, that the other party
shall be entitled, in addition to all other available remedies, to an order
and/or injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond or
other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Preferred Shares to each Buyer 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 the Company's sole benefit and may be
-18-
waived by the Company at any time in its sole discretion by providing each Buyer
with prior written notice thereof:
a. Such Buyer shall have executed each of the Transaction Documents
to which it is a party and delivered the same to the Company.
b. The Certificate of Designations shall have been filed with the
Secretary of State of the State of Delaware.
c. Such Buyer shall have delivered to the Company the Purchase Price
for the Preferred Shares being purchased by such Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions
provided by the Company.
d. The representations and warranties of such 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), and such 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 such Buyer at or prior to the Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Preferred
Shares 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 Buyer's sole benefit and may be waived by such Buyer at any time in its
sole discretion by providing the Company with prior written notice thereof:
a. The Company shall have executed each of the Transaction Documents
and delivered the same to such Buyer.
b. The Certificate of Designations, shall have been filed with the
Secretary of State of the State of Delaware, and a copy thereof certified by
such Secretary of State shall have been delivered to such Buyer.
c. The Common Stock shall be authorized for quotation on the
Principal Market, trading in the Common Stock shall not have been suspended by
the SEC or the Principal Market.
d. The representations and warranties of the Company shall be true
and correct 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) and the Company shall have performed, satisfied and complied with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Buyer shall have received a certificate, executed by the
Chief Executive Officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other
-19-
matters as may be reasonably requested by such Buyer including, without
limitation, an update as of the Closing Date regarding the representation
contained in Section 3(c) above, in the form attached here to as EXHIBIT E.
e. Such Buyer shall have received the opinion of the Company's
counsel dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to such Buyer and in substantially the form of EXHIBIT C attached
hereto.
f. The Company shall have executed and delivered to such Buyer the
Preferred Stock Certificates (in such denominations as such Buyer shall request)
for the Preferred Shares being purchased by such Buyer at the Closing.
g. The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer.
h. As of the Closing Date, the Company shall have reserved out of
its authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Preferred Shares, at least 2,905,175 shares of Common
Stock.
i. The Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT D attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
j. The Company shall have delivered to such Buyer a certificate
evidencing the incorporation of the Company and each Subsidiary and good
standing of the Company in such corporation's state of incorporation issued by
the Secretary of State of such state of incorporation as of a date within 10
days of the Closing Date.
k. The Company shall have delivered to such Buyer a certified copy
of the Articles of Incorporation as certified by the Secretary of State of the
State of Delaware within ten days of the Closing Date.
l. The Company shall have delivered to such Buyer a secretary's
certificate, dated as the Closing Date, as to (i) the resolutions described in
Section 7(g), (ii) the Certificate of Incorporation and (iii) the Bylaws, each
as in effect at the Closing.
m. The Company shall have made all filings necessary, if any, under
all applicable federal and state securities laws to consummate the issuance of
the Securities pursuant to this Agreement in compliance with such laws.
n. The Company shall provide all documentation relating to the
waiver or cure of any violation, conflict or default of any material agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party.
-20-
o. The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents and the Certificate of Designations, the Company shall defend,
protect, indemnify and hold harmless each Buyer and each other holder of the
Securities and all of their stockholders, officers, directors, employees and
direct or indirect investors and any of the foregoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
the Certificate of Designations or any other certificate, instrument or document
contemplated hereby or thereby or (c) any cause of action, suit or claim brought
or made against such Indemnitee and arising out of or resulting from the
execution, delivery, performance or enforcement of the Transaction Documents or
the Certificate of Designations or any other certificate, instrument or document
contemplated hereby or thereby and attributable to a breach or misrepresentation
or alleged breach or misrepresentation set forth in (a) or (b) above. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
9. GOVERNING LAW; MISCELLANEOUS.
a. GOVERNING LAW. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting the City of New York, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it
-21-
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law.
b. COUNTERPARTS. This Agreement may be executed in two or more
identical 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; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
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 in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all other
prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and 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 amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
f. NOTICES. Any notices consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically generated and kept on file by the
sending party); or (iii) one day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
INTELECT COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
Telephone: (972)367-2100
Facsimile: (972) 367-2771
-22-
Attention: CEO
With a copy to:
RYAN & SUDAN, L.L.P.
Two Houston Center
909 Fannin Street, 39th Floor
Houston, Texas 77010
Telephone: (713) 652-0501
Facsimile: (713) 652-0503
Attention: Philip P. Sudan, Jr., Esq.
If to the Transfer Agent:
AMERICAN STOCK TRANSFER & TRUST COMPANY
6201 15th Avenue, 3rd Floor
Brooklyn, NY 11219
Telephone: (718) 921-8247
Facsimile: (718) 331-1852
Attention: Wilbert Myles
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers or to such other address and/or facsimile number and/or to the
attention of such other person as the recipient party has specified by written
notice given to each other party five days prior to the effectiveness of such
change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) provided by a courier or
overnight courier service or (C) mechanically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of such transmission shall be rebuttable evidence of personal delivery,
overnight or courier delivery or transmission by facsimile in accordance with
clause (i), (iii) or (ii) above, respectively.
g. SUCCESSORS AND ASSIGNS. The rights under this Agreement shall not
be assignable by the holders of Preferred Shares without the prior written
consent of the Company. Notwithstanding the foregoing, the rights under this
Agreement shall be assignable by the holders of Preferred Shares, without the
consent of the Company, to any Affiliated Transferee (as defined below) upon the
transfer of all or any portion of Preferred Shares if: (i) the holders of
Preferred Shares agrees in writing with the Affiliated Transferee 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 the
name and address of such Affiliated Transferee; (iii) immediately following such
transfer or assignment the further disposition of such securities by the
Affiliated Transferee is restricted under the 1933 Act and applicable state
securities laws; (iv) at or before the time the Company receives the written
notice contemplated by clause (ii) of this sentence the Affiliated Transferee
agrees in writing with the Company to be bound by all of the provisions
contained herein; and (v) such transfer shall have been made in accordance with
the applicable requirements of the Transaction
-23-
Documents. Any attempted assignment without the prior written consent of the
Company, other than to an Affiliated Transferee shall be void and without
effect. An "AFFILIATED TRANSFEREE" shall mean (i) an Affiliate (as such term is
defined in the Securities Purchase Agreement) of a Buyer, (ii) any holder of
Preferred Shares and (iii) any Affiliate of a holder of Preferred Shares.
h. NO 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. Unless this Agreement is terminated under Section 9(l),
the representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive the
Closing. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. PUBLICITY. The Company and each Buyer shall have the right to
approve before issuance any press releases 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 any Buyer, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release and shall be provided with a copy
thereof).
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. TERMINATION. In the event that the Closing shall not have
occurred with respect to a Buyer on or before five (5) business days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 9(l), the Company shall remain obligated to reimburse the
nonbreaching Buyers for the expenses described in Section 4(i) above.
m. PLACEMENT AGENT. The Company acknowledges that it has engaged
Lifeline Industries Inc. as placement agent in connection with the sale of the
Preferred Shares, which placement agent may have formally or informally engaged
other agents on its behalf. The Company shall be responsible for the payment of
any placement agent's fees or broker's commissions relating to or arising out of
the transactions contemplated hereby which agents or brokers have been or are
alleged to have been engaged by the Company. The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, attorneys' fees and out-
-24-
of-pocket expenses) arising in connection with any such claim. Each Buyer,
severally and not jointly, represents and warrants that it has not engaged any
placement agent or broker in connection with the acquisition of the Securities.
Each buyer, severally and not jointly, shall pay and hold the Company harmless
from any liability, loss or expense (including, without limitation, attorneys'
fees and out-of-pocket expense) arising in connection with any claims for
placement agent fees or broker commissions which agents or brokers have been or
are alleged to have been engaged by such Buyer.
n. 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.
o. REMEDIES. Each Buyer and each holder of Preferred Shares and
Conversion Shares shall have all rights and remedies set forth in this Agreement
and the Certificate of Designation and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law. Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
p. PAYMENT SET ASIDE. To the extent that the Company makes a payment
or payments to the Buyers hereunder or pursuant to the Certificate of
Designations or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
* * * * * *
-25-
IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
INTELECT COMMUNICATIONS, INC. NELSON PARTNERS
By: /S/ HERMAN M. FRIETSCH By: /S/ NITIN AGGARWAL
Name:Herman M. Frietsch Name:Nitin Aggarwal
Its: Chief Executive Officer Its: Officer
OLYMPUS SECURITIES, LTD.
By: /S/ NITIN AGGARWAL
Name: Nitin Aggarwal
ts: Director
CCG INTERNATIONAL FUND LTD.
By: /S/ KENNETH A. SIMPLER
Name: Kenneth A. Simpler
Its: Vice President
CCG CAPITAL LTD.
By: /S/ KENNETH A. SIMPLER
Name: Kenneth A. Simpler
Its: Vice President
SCHEDULE OF BUYERS
NUMBER OF
INVESTOR ADDRESS PREFERRED INVESTOR'S LEGAL REPRESENTATIVES'
INVESTOR'S NAME AND FACSIMILE NUMBER RESIDENCE SHARES ADDRESS AND FACSIMILE NUMBER
- --------------- ------------------------------ --------- --------- ---------------------------------
Nelson Partners c/o Leeds Management Services Bermuda 3,421 Katten Muchin & Zavis
129 Front Street, 5th Floor 525 W. Monroe Street
Hamilton HM12 Bermuda Chicago, Illinois 60661-3693
Attn: Anne Dupuy Attention: Robert J. Brantman, Esq.
Facsimile: (441) 292-2239 Facsimile: (312) 902-1061
Residence: Bermuda Telephone: (312) 902-5200
With copy to:
Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Michael J. Hughes
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
Olympus Securities, Ltd. c/o Leeds Management Services Bermuda 6,354 Katten Muchin & Zavis
129 Front Street, 5th Floor 525 W. Monroe Street
Hamilton HM12 Bermuda Chicago, Illinois 60661-3693
Attn: Anne Dupuy Attention: Robert J. Brantman, Esq.
Facsimile: (441) 292-2239 Facsimile: (312) 902-1061
Residence: Bermuda Telephone: (312) 902-5200
With copy to:
Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Michael J. Hughes
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
CCG International Fund Ltd. c/o Citadel Investment Group, L.L.C. Cayman 125 Katten Muchin & Zavis
225 West Washington Street Islands 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Michael J. Hughes Attention: Robert J. Brantman, Esq.
Facsimile: (312) 368-4347 Facsimile: (312) 902-1061
Telephone: (312) 696-2165 Telephone: (312) 902-5200
CCG Capital Ltd. c/o Citadel Investment Group, L.L.C. Cayman 100 Katten Muchin & Zavis
225 West Washington Street Islands 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Michael J. Hughes Attention: Robert J. Brantman, Esq.
Facsimile: (312) 368-4347 Facsimile: (312) 902-1061
Telephone: (312) 696-2165 Telephone: (312) 902-5200