CONVERTIBLE SECURITIES AGREEMENT
OF INTELECT COMMUNICATIONS SYSTEMS LIMITED
THIS CONVERTIBLE SECURITIES AGREEMENT (hereinafter the "Agreement") is
made and entered into as of this 7th day of June, 1996 by the undersigned in
connection with the sale by INTELECT COMMUNICATIONS SYSTEMS LIMITED, a company
organized under the laws of Bermuda (hereinafter "Seller") of certain debentures
(hereinafter the "Debentures"), convertible into common shares (hereinafter the
"Shares") of Seller to (i) INFINITY INVESTORS, LTD., a corporation organized
under the laws of Nevis, West Indies, and (ii) SECREST CAPITAL LIMITED, a
corporation organized under the laws of Nevis, West Indies (singularly a "Buyer"
and collectively "Buyers"). Each of the Seller and the Buyers (hereinafter
collectively the "Parties") hereby represent, warrant and agree as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(i) Buyers hereby subscribe for an aggregate of Five
Million Dollars ($5 million U.S.) principal amount of Debentures,
convertible into Shares in accordance with the terms set forth in the
form of Debenture attached as Exhibit A to this Agreement.
(ii) Buyers shall pay an aggregate of Five Million Dollars
($5 million U.S.) (the "Purchase Price") for the Debentures by
delivering same day funds in United States dollars against
counter-delivery of the Debentures by Seller, pursuant to the
Instruction Letter in the form attached hereto as Exhibit B, to be
executed contemporaneously herewith (the "Instruction Letter").
(iii) Infinity Investors, Ltd. shall subscribe for $4
million of the Debentures and Secrest Capital Limited shall subscribe
for $1 million of the Debentures.
2. BUYER'S REPRESENTATIONS AND COVENANTS.
Each Buyer severally represents, warrants and covenants to
Seller as follows:
(i) This Agreement has been duly authorized, validly
executed and delivered on behalf of each Buyer and is a valid and
binding agreement of each Buyer in accordance with its terms, subject
to general principles of equity and of bankruptcy or other laws
affecting the enforcement of creditors' rights;
(ii) Each Buyer is purchasing the Debentures for its own
account for investment purposes and not with a view towards
distribution. Each Buyer understands and agrees that it must bear the
economic risks of its investment for an indefinite period of time. Each
Buyer has received and carefully reviewed copies of the Public
Documents (as defined
CONVERTIBLE SECURITIES AGREEMENT - PAGE 1
(INTELECT COMMUNICATION SYSTEMS LIMITED)
below). Each Buyer understands that the offer and sale of the
Debentures are being made only by means of this Agreement. No
representations or warranties have been made to either Buyer by Seller,
the officers or directors of Seller, or any agent, employee or
affiliate of any of them except as set forth herein. Each Buyer is
aware that the purchase of the Debentures involves a high degree of
risk and that it may sustain, and has the financial ability to sustain,
the loss of its entire investment. Each Buyer has had the opportunity
to ask questions of, and receive answers and satisfactory to it from,
Seller's management regarding Seller. Each Buyer understands that no
Federal or State governmental authority has made any finding or
determination relating to the fairness of an investment in the
Debentures and that no Federal or State governmental authority has
recommended or endorsed, or will recommend or endorse, the investment
herein. Each Buyer, in making the decision to purchase the Debentures
subscribed for, has relied upon independent investigations made by it
and has not relied on any information or representations made by third
parties. Each Buyer has significant assets, and upon consummation of
the purchase of the Debentures, will continue to have significant
assets exclusive of the Debentures. Neither Buyer has been organized
for the purpose of acquiring the Debentures;
(iii) Each Buyer is an "accredited investor" within the
meaning of Rule 501 of the Securities Act of 1933, as amended (the
"Securities Act");
(iv) Each Buyer understands that the Debentures are being
offered and sold to it in reliance on specific provisions of Federal
and State securities laws and that Seller is relying upon the truth and
accuracy of the representations, warranties, agreements,
acknowledgments and understandings of each Buyer set forth herein in
order to determine the applicability of such provisions;
(v) Each Buyer, in making the decision to purchase the
Debentures subscribed for, has relied upon independent investigations
made by it and has not relied on any information or representations
made by third parties; and
(vi) Each Buyer understands that neither the Debentures
nor the Shares have been registered under the Securities Act and
therefore it cannot dispose of any or all of the Debentures or the
Shares unless such Debentures or Shares are subsequently registered
under the Securities Act or exemptions from such registration are
available. Each Buyer acknowledges that a legend substantially as
follows will be placed on the certificates representing the Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN WITHOUT A
VIEW TO THE DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT OF 1993, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH SUCH ACT AND THE RULES
AND REGULATIONS THEREUNDER AND IN
CONVERTIBLE SECURITIES AGREEMENT - PAGE 2
(INTELECT COMMUNICATION SYSTEMS LIMITED)
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER OF THESE
SHARES WILL NOT TRANSFER SUCH SHARES EXCEPT UPON RECEIPT OF EVIDENCE
SATISFACTORY TO THE COMPANY THAT THE REGISTRATION PROVISIONS OF SUCH
ACT HAVE BEEN COMPLIED WITH OR THAT SUCH REGISTRATION IS NOT REQUIRED
AND THAT SUCH TRANSFER WILL NOT VIOLATE ANY APPLICABLE STATE SECURITIES
LAWS.
3. SELLER'S REPRESENTATIONS AND COVENANTS.
Seller represents, warrants and covenants to Buyers as
follows:
(i) Seller has been duly incorporated and is validly
existing and in good standing under the laws of Bermuda. Seller has
registered its common shares pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is in full
compliance with all reporting requirements of the Exchange Act, and
Seller's common shares traded on the Nasdaq National Market, Symbol
ICOMF;
(ii) Seller has furnished each Buyer with copies of
Seller's most recent Annual Report on its Form 10-K filed with the
Securities and Exchange Commission ("SEC") and all Forms 10-Q and 8-K
filed thereafter (the "Public Documents"). The Public Documents at the
time of their filing do not include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements contained therein, in light of the circumstances under which
they were made, not misleading. Seller currently has 12,885,537 common
shares, and no preferred shares, issued and outstanding;
(iii) Seller has filed all materials required to be filed
pursuant to all applicable reporting obligations under either Section
13(a) or 15(d) of the Exchange Act for a period necessary to meet the
eligibility requirements of the SEC with respect to the use of a
Registration Statement on Form S-3 for the filing of a resale
registration statement with the SEC, and Seller currently meets such
eligibility requirements;
(iv) The Debentures, and the Shares when issued and
delivered upon conversion thereof, have been and will be duly and
validly authorized and issued, and with respect to the Shares,
fully-paid and nonassessable, free from all encumbrances and
restrictions other than restrictions on transfer imposed by applicable
securities laws and/or this Agreement, and will not subject the holders
thereof to personal liability by reason of being such holders. Except
for preemptive rights as to which Seller has received effective
waivers, there are no preemptive rights of any shareholder of Seller
with respect to the Debentures or the Shares;
(v) This Agreement has been duly authorized, validly
executed and delivered on behalf of Seller and is a valid and binding
agreement of Seller in accordance with its terms,
CONVERTIBLE SECURITIES AGREEMENT - PAGE 3
(INTELECT COMMUNICATION SYSTEMS LIMITED)
subject to general principles of equity and to bankruptcy or other laws
affecting the enforcement of creditors' rights generally;
(vi) The execution and delivery of this Agreement and the
consummation of the issuance of the Debentures, and the Shares upon
conversion thereof, and the transactions contemplated by this Agreement
do not and will not conflict with or result in a breach by Seller of
any of the terms or provisions of, or constitute a default under, the
articles of association or Byelaws of Seller, or any indenture,
mortgage, deed of trust or other material agreement or instrument to
which Seller is a party or by which it or any of its properties or
assets are bound, or any existing applicable decree, judgment or order
of any court, Federal or State regulatory body, administrative agency
or other governmental body having jurisdiction over Seller or any of
its properties or assets;
(vii) No authorization, approval, filing with or consent of
any governmental body is required for the issuance and sale of the
Debentures, or the Shares upon conversion thereof, as contemplated by
this Agreement;
(viii) Seller will issue one or more Debentures in the name
of each Buyer in the ratios specified in Section 1 above in
denominations of $100,000. Upon conversion of the Debentures, Seller
will issue one or more certificates representing the Shares in the name
of each Buyer, with a legend substantially in the form specified by
Section 2(vi) above, and in such denominations to be specified by each
Buyer prior to conversion;
(ix) Seller will comply with all applicable securities
laws and regulations with respect to the sale and issuance of the
Debentures (and the Shares into which they are convertible) to each
Buyer, including but not limited to the filing of all reports required
to be filed in connection therewith with the SEC or any stock exchange
or NASDAQ or any other regulatory authority, and shall maintain its
eligibility to use Form S-3 for the filing of a resale registration
statement with respect to the Shares with the SEC;
(x) Seller will maintain the listing of its Shares on the
NASDAQ Stock Market, and will reserve from its authorized shares of
common stock a sufficient number of shares to permit conversion in full
of all outstanding Debentures;
(xi) Until such time as Buyers have converted one hundred
percent (100%) of the Debentures into Shares, Seller shall not
repurchase its common shares or otherwise enter into any transaction
which would cause a decrease in the number of its common shares issued
and outstanding (other than transactions that similarly decrease the
number of common shares into which the Debentures are convertible);
(xii) Seller agrees that it will not issue a press release
or other communication to the public containing either Buyer's name or
other identifying information without said
CONVERTIBLE SECURITIES AGREEMENT - PAGE 4
(INTELECT COMMUNICATION SYSTEMS LIMITED)
Buyer's written consent, except as required by law, including the
Exchange Act, and in fulfilling its obligations under the Registration
Rights Agreement; and
(xiii) This Agreement, including the Exhibits hereto, does
not contain an untrue statement of material fact, or, when taken as a
whole, omit any material fact necessary in order to make the statements
contained herein or therein not misleading.
4. REGISTRATION. Buyers hereby notify Seller that they intend to
offer for public sale all or any portion of the Shares into which the Debentures
are convertible (the "Notice"). Immediately following the Closing, Seller shall
be required, at Seller's expense, to effect the registration of the Shares
issuable upon conversion of the Debentures held by both Buyers under the
Securities Act and relevant Blue Sky laws. Such registration shall be effected
in accordance with the terms of the Registration Rights Agreement attached
hereto as Exhibit C (the "Registration Rights Agreement"). In the event either
the registration of the Shares issuable upon conversion of the Debentures is not
effective with the SEC within sixty (60) days of the Closing Date (the
"Registration Date"), then such failure shall be a breach of the Debentures
entitling Buyers to paid by Seller the "Damage Amount", as liquidated damages
and not as a penalty. The Damage Amount shall mean $500 for each $1 million of
Debentures for each NASDAQ trading day following the Registration Date in which
the registration of the Shares is not effective with the SEC as provided herein,
which amount shall increase to (i) $666 for each $1 million of Debentures for
each NASDAQ trading day in which such registration is not effective commencing
thirty (30) days after the Registration Date and (ii) $1,000 for each $1 million
of Debentures for each NASDAQ trading day in which such registration is not
effective commencing sixty (60) days after the Registration Date. The Damage
Amount shall be payable in cash as of the end of each calendar week following
the Delivery Date, and shall be payable whether or not an Event of Default (as
defined in the Debenture) has occurred.
5. CLOSING. The Debentures shall be dated and delivered, and the
Purchase Price shall be paid on, June 7, 1996, or at such time to be mutually
agreed in accordance with the Instruction Letter (the "Closing Date").
6. ADDITIONAL AGREEMENTS.
(i) Seller hereby grants to Buyers a right of first
refusal on all private financings offered by Seller within a period of
120 days following the date of this Agreement, except for underwritten
private financings. Such right of first refusal shall authorize Buyers
or any affiliates of Buyers which are accredited investors, at their
option, to participate in all or a portion of such financing. Seller
shall afford Buyers at least 15 days notice to exercise said option
following delivery of the written terms of the proposed financing,
during which period Buyers shall be entitled to obtain all available
information from Seller with respect to the financing and Seller's
current reports as filed with the SEC.
CONVERTIBLE SECURITIES AGREEMENT - PAGE 5
(INTELECT COMMUNICATION SYSTEMS LIMITED)
(ii) Buyers hereby agree to acquire an additional $5
million of debentures from Seller on substantially the same terms as
set forth in this Agreement, with said sum to be advanced 135 days
after the Closing Date (the "Future Transaction"). Consummation of the
Future Transaction shall be subject to the following conditions:
(a) Execution and delivery of documentation
substantially similar to that set forth in this Agreement (and the
Exhibits attached hereto) by each of Seller and Buyers, where
applicable;
(b) There shall have been no material adverse
change in the business, operations, financial condition, properties
or prospects of Seller from the Closing Date until the date of
consummation of the Future Transaction;
(c) The current market price per share of common
shares of Seller (as such phrase is used in the Debenture) shall not,
on average over a 10 trading day period ending on the date of
consummation of the Future Transaction (the "Testing Period") be (I)
less than $6.00, or (II) more than $17.50;
(d) The average trading volume of Seller's
shares of common shares on NASDAQ for the Testing Period shall not be
less than 75,000;
(e) Seller shall have at least 12,885,537 common
shares issued and outstanding on the date of consummation of the Future
Transaction; and
(f) Seller shall have complied in all respects
prior to the date of the Future Transaction with all terms and
conditions of this Agreement and of the Debentures, including, without
limitation, timely satisfying the registration requirement set forth
in Section 4 by the applicable Registration Date (and such
registration statement shall have continuously remained effective
through the date of consummation of the Future Transaction).
7. MISCELLANEOUS.
(i) This Agreement shall be governed by and interpreted
in accordance with the laws of Bermuda. Facsimile signatures of this
Agreement shall be binding on all parties hereto.
(ii) This Agreement may be executed by facsimile signature
and in counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
CONVERTIBLE SECURITIES AGREEMENT - PAGE 6
(INTELECT COMMUNICATION SYSTEMS LIMITED)
(iii) Seller shall pay to Buyers $7,500 at the Closing, in
the manner described in the Instruction Letter, to reimburse Buyers for
attorneys' fees and related costs of consummating the transactions
contemplated herein.
[Signature page follows]
CONVERTIBLE SECURITIES AGREEMENT - PAGE 7
(INTELECT COMMUNICATION SYSTEMS LIMITED)
IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
Official Signatory of Buyer:
INFINITY INVESTORS, LTD.
By:___________________________________
Title:________________________________
Address:
27 Wellington Road
Cork, Ireland
(Telephone) 353 21 501 109
(Fax) 353 21 501 255
Attn: Mr. James G. O'Brien
SECREST CAPITAL LIMITED
By:___________________________________
Title:________________________________
Address:
27 Wellington Road
Cork, Ireland
(Telephone) 353 21 501 109
(Fax) 353 21 501 255
Attn: Mr. James G. O'Brien
Official Signatory of Seller:
INTELECT COMMUNICATIONS SYSTEMS LIMITED
By:___________________________________
Peter G. Leighton, President
Address:
Reid House, 31 Church Street
Hamilton, Bermuda
(Telephone) 441/295-8639
(Fax) 441/292-5560
Attn: Peter G. Leighton
CONVERTIBLE SECURITIES AGREEMENT - PAGE 7
(INTELECT COMMUNICATION SYSTEMS LIMITED)
EXHIBIT A
FORM OF DEBENTURE
(The attached form applies to Infinity)