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EXHIBIT 4.2
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of September 14, 1998 (the
"Agreement"), between the entities listed on Schedule A attached hereto
(collectively referred to as the "Investor"), SETTONDOWN CAPITAL INTERNATIONAL
LTD. (the "Placement Agent") located at Charlotte House, Charlotte Street, P.O.
Box N. 9204, Nassau, Bahamas, a corporation organized under the laws of Bahamas,
and MUSTANG SOFTWARE, INC., a corporation organized and existing under the laws
of the State of California (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase up to (a)
5,246 shares of Preferred Stock (as defined below), (b) 612,000 shares of Common
Stock, (c) Warrants to purchase up to 240,000 Warrant Shares, and (d) pursuant
to the Company's option of exercising its "Put" rights upon the Investors for
the purchase and sale of up to an additional $5,000,000 of the Common Stock for
a total aggregate purchase price of $6,500,000 (the "Aggregate Purchase Price");
and
WHEREAS, the Company shall issue to the Placement Agent (in addition to
the fees set forth in Section 13.7 below), in return for services rendered, from
time to time as provided herein, up to 210 shares of Series A Convertible
Preferred Stock, a Class A Warrant to purchase up to 50,000 Warrant Shares, a
Class B Warrant to purchase up to 21,000 Warrant Shares, and 15,000 shares of
Common Stock; and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended, and the regulations promulgated
thereunder (the "Securities Act"), and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1 "Additional Shares" shall have that meaning set forth in
Section 2.6 below.
Section 1.2 "Bid Price" shall mean the closing bid price (as reported by
Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.3 "Capital Shares" shall mean the Common Stock and any shares of
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.4 "Capital Shares Equivalents" shall mean any
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securities, rights, or obligations that are convertible into or exchangeable
for, or giving any right to, subscribe for any Capital Shares of the Company or
any warrants, options or other rights to subscribe for or purchase Capital
Shares or any such convertible or exchangeable securities.
Section 1.5 "Certificate of Determination" shall mean the Company's
Certificate of Determination setting forth all of the rights, privileges and
preferences of the Preferred Stock, as annexed hereto as Exhibit A.
Section 1.6 "Closing" shall mean one of the closings of a purchase and sale
of the Common Stock, Warrants, and Preferred Stock pursuant to Article II below.
Section 1.7 "Closing Date" shall mean, with respect to the purchase of the
Initial Shares the Closing Date shall be on the Subscription Date. The Closing
Date for the Put Shares shall be on the Fifth Trading Day following each Put
Date. For each Closing Date, all conditions contained in this Agreement (and in
all Exhibits annexed hereto) must have been fulfilled at or prior to each
Closing Date. In the event such date shall fall on a holiday or a weekend, then
the next Trading Day thereafter shall be the Closing Date.
Section 1.8 "Commitment Amount" shall mean up to the $6,500,000 which the
Investors have agreed to provide to the Company in order to purchase the Initial
Shares, and Put Shares pursuant to the terms and conditions of this Agreement.
Section 1.9 "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) the Effective Date, or (ii) such earlier date as the
Company and all of the Investors may mutually agree in writing, and expiring on
the earliest to occur of (x) the date on which the Investors shall have
purchased Put Shares pursuant to this Agreement for an aggregate Purchase Price
of $5,000,000, (y) the date this Agreement is terminated pursuant to Section
2.4, or (z) the date occurring two years after the Effective Date.
Section 1.10 "Common Stock" shall mean the Company's common stock, no par
value per share.
Section 1.11 "Condition Satisfaction Date" shall have the meaning set forth
in Section 7.2.
Section 1.12 "Damages" shall mean any loss, claim, damage, liability, costs
and expenses which shall include, but not be limited to, reasonable attorney's
fees, disbursements, costs and expenses of expert witnesses and investigation.
Section 1.13 "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
following: (i) two hundred (200%) percent of the Initial Shares of Common Stock,
Underlying Shares (as of the date the Registration Statement is filed), and
Warrant Shares, and (ii) two hundred (200%) percent of that number of shares of
Common Stock, Underlying Shares (as of the date the Registration Statement is
filed), and Warrant Shares issued to the Placement Agent as set forth in Section
13.7 below.
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Section 1.14 "Escrow Agent" shall mean the law firm of Goldstein, Goldstein
& Reis, LLP, pursuant to the terms of the Escrow Agreement attached as Exhibit
B.
Section 1.15 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
Section 1.16 "Forced Conversion Period" shall mean 10 consecutive Trading
Days.
Section 1.17 "Floor Price" shall mean a Bid Price of One Dollar ($1.00) per
share of Common Stock.
Section 1.18 "Initial Shares" shall mean collectively the Initial Shares of
Common Stock and the Initial Shares of Preferred Stock as set forth in Section
2.8.
Section 1.19 "Initial Shares of Common Stock" shall mean the shares of
Common Stock issuable by the Company to the Investors pursuant to Section 2.8
below.
Section 1.20 "Initial Shares of Preferred Stock" shall mean the shares of
Preferred Stock issuable by the Company to the Investors pursuant to Section 2.8
below.
Section 1.21 "Initial Shares Investment Amount" shall mean
$1,500,000.
Section 1.22 "Initial Shares of Common Stock Investment Amount" shall mean
$975,400.
Section 1.23 "Investment Amount" shall mean, upon proper notification by
the Company to each of the Investors, the dollar amount to be invested by each
of the Investors to purchase Put Shares with respect to any Put Notice in
accordance with Section 2.2 hereof.
Section 1.24 "Issuance Price" shall mean $1.875 per share.
Section 1.25 "Legend" shall have the meaning set forth in Section 9.1.
Section 1.26 "Market Price" on any given date shall mean the average of the
three lowest Bid Prices of the Common Stock during the Valuation Period.
Section 1.27 "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company and its subsidiaries and
affiliates, taken as a whole, and/or any condition, circumstance, or situation
that would prohibit or otherwise in any material respect interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Certificate of Determination or the Warrants in any material respect.
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Section 1.28 "Maximum Put Amount" on any Put Date shall mean the amount
indicated opposite the range in which the Closing Price is on such Put Date and
below the 30 Day Average Daily Trading Volume on such Put Date, as set forth in
the Table below:
30-Day 30-Day 30-Day 30-Day 30-Day 30-Day
Avg. Avg. Avg. Avg. Avg. Avg.
Closing Daily Daily Daily Daily Daily Daily
Price Trading Trading Trading Trading Trading Trading
Volume Volume Volume Volume Volume Volume
20,000- 50,001- 75,001- 100,001- 125,001- 150,001-
50,000 75,000 100,000 125,000 150,000 Above
$1.00 - $1.50 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
$1.51 - $2.00 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000
$2.01 - $2.50 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000
$2.51 - $3.00 $250,000 $300,000 $350,000 $400,000 $450,000 $500,000
$3.01 - $3.50 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000
$3.51 - $4.00 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000
$4.01 - $4.50 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000
$4.51 - $5.00 $450,000 $500,000 $550,000 $600,000 $650,000 $700,000
$5.01 - $5.50 $500,000 $550,000 $600,000 $650,000 $700,000 $750,000
$5.51 - $6.00 $550,000 $600,000 $650,000 $700,000 $750,000 $800,000
$6.01 - $6.50 $600,000 $650,000 $700,000 $750,000 $800,000 $850,000
$6.51 - $7.00 $650,000 $700,000 $750,000 $800,000 $850,000 $900,000
$7.01 - Above $700,000 $750,000 $800,000 $850,000 $900,000 $950,000
Section 1.29 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.30 "Outstanding" when used with reference to shares of Common
Stock or Capital Shares (collectively the "Shares"), shall mean, at any date as
of which the number of such Shares is to be determined, all issued and
outstanding Shares, and shall include all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that "Outstanding" shall not mean any
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such Shares then directly or indirectly owned or held by or for the account of
the Company.
Section 1.31 "Person" shall mean an individual, a corporation, a
partnership, an association, a limited liability company, a trust or other
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.32 "Preferred Stock" shall mean the Company's Series A Preferred
Stock with the rights, privileges and preferences, as set forth in the
Certificate of Determination.
Section 1.33 "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq Small Cap Stock Market, the American Stock Exchange, the OTC Electronic
Bulletin Board operated by the National Association of Securities Dealers, Inc.,
the "pink sheets" published by the National Quotation Bureau, Inc., or the New
York Stock Exchange, whichever is at the time the principal trading exchange or
market for the Common Stock.
Section 1.34 "Purchase Price" shall mean (a) with respect to the Initial
Shares of Common Stock, eighty five (85%) percent of the Bid Price on the
Trading Day immediately preceding the Subscription Date, (b) with respect to
each Initial Share of Preferred Stock, an amount equal to $100, and (c) with
respect to Put Shares, eighty eight (88%) percent of the Market Price upon a Put
Date (or such other date on which the Purchase Price is calculated in accordance
with the terms and conditions of this Agreement).
Section 1.35 "Put" shall mean each occasion in which the Company elects to
exercise its right to tender a Put Notice requiring the Investors (pro rata) to
purchase shares of the Company's Common Stock, subject to the terms of this
Agreement.
Section 1.36 "Put Date" shall mean the Trading Day during the Commitment
Period that a Put Notice to issue and sell Put Shares to the Investors is deemed
delivered pursuant to Section 2.2(b) hereof.
Section 1.37 "Put Notice and/or Compliance Certificate" shall mean a
written notice to each of the Investors setting forth the Investment Amount that
the Company intends to Put to the Investors (pro rata), including the
certification that the Company has complied in all material respects with all
obligations and conditions contained in this Agreement, in the form annexed
hereto as Exhibit C.
Section 1.38 "Put Shares" shall mean all shares of Common Stock or other
securities issued or issuable pursuant to a Put that has occurred or may occur
in accordance with the terms and conditions of this Agreement.
Section 1.39 "Registrable Securities" shall mean the Initial Shares of
Common Stock, the Underlying Shares (not including the shares of Common Stock
underlying the Repricing Shares), the Additional Shares, the Warrant Shares, and
all Securities issued to the Placement Agent, (i) in respect of which the
Registration Statement (covering these securities) has not
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been declared effective by the SEC, (ii) which have not been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) which have not been otherwise transferred to holders who may trade such
shares without restriction under the Securities Act, or (iv) the sales of which,
in the opinion of counsel to the Company, are subject to any time, volume or
manner limitations pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act.
Section 1.40 "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, and the shares of Common Stock underlying the Repricing
Shares, entered into between the Company, the Placement Agent, and the Investors
on the Subscription Date annexed hereto as Exhibit D.
Section 1.41 "Registration Statement" shall mean a registration statement
on Form S-3 (if use of such form is then available to the Company pursuant to
the rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate, and which form shall be available for the resale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement, and the Warrants and in accordance
with the intended method of distribution of such securities), for the
registration of the resale by the Investors and the Placement Agent of the
Registrable Securities under the Securities Act.
Section 1.42 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.43 "Repricing Date" shall mean the earlier to occur of (i) the
Effective Date or (ii) the first anniversary of the Subscription Date.
Section 1.44 "Repricing Shares" shall mean that number of shares of
Preferred Stock issuable pursuant to Section 2.9 below.
Section 1.45 "Reset Price" shall mean eighty five (85%) percent of the
Market Price on the applicable Repricing Date.
Section 1.46 "SEC" shall mean the Securities and Exchange Commission.
Section 1.47 "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.48 "Securities" shall mean the Initial Shares, the Put Shares,
the Repricing Shares, the Underlying Shares, the Additional Shares, the Warrant
Shares and any and all Securities issued to the Placement Agent.
Section 1.49 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.50 "SEC Documents" shall mean the Company's latest Form 10-K (and
all amendments thereto) or 10-KSB (and all amendments thereto) as of the time in
question, all Form 10-Qs or 10-QSBs and Form 8-Ks filed thereafter, and the
Proxy Statement
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for its latest fiscal year as of the time in question until such time as the
Company no longer has an obligation to maintain the effectiveness of a
Registration Statement as set forth in the Registration Rights Agreement.
Section 1.51 "Subscription Date" shall mean the date on which this
Agreement and all Exhibits and attachments hereto, are executed and delivered by
the parties hereto and all of the conditions relating to the Initial Shares
shall have been fulfilled.
Section 1.52 "Trading Cushion" shall mean the mandatory fifteen (15)
Trading Days between Put Dates.
Section 1.53 "Trading Day" shall mean any day during which the New York
Stock Exchange shall be open for business.
Section 1.54 "Underlying Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to conversion of the Preferred
Stock.
Section 1.55 "Valuation Event" shall mean an event in which the Company at
any time during a Valuation Period takes any of the following actions:
(a) subdivides or combines its Common Stock;
(b) pays a dividend in its Capital Shares or makes any other
distribution of its Capital Shares;
(c) issues any additional Capital Shares ("Additional Capital
Shares") at a price per share less, or for other consideration, lower than the
Bid Price in effect immediately prior to such issuance, or without
consideration, other than (i) as provided in the foregoing Subsections (a) and
(b) above, , (ii) upon exercise of warrants and options outstanding on the
Subscription Date, (iii) pursuant to the Company's employee benefit plans as in
effect as of the Subscription Date, and (iv) a firmly underwritten public
offering of the Common Stock;
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Bid Price in
effect immediately prior to the issuance of such warrants, options or other
rights, except pursuant to the Company's employee benefit plan as in effect as
of the Subscription Date;
(e) issues any securities convertible into or exchangeable for
Capital Shares and the consideration per share for which Additional Capital
Shares may at any time thereafter be issuable pursuant to the terms of such
convertible or exchangeable securities shall be at or less than the Bid Price in
effect immediately prior to the issuance of such warrants, options or other
rights, except pursuant to the Company's employee benefit plan as in effect as
of the Subscription Date;
(f) makes a distribution of its assets or evidences of indebtedness to
the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or surplus
legally available for
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dividends under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's assets (other
than under the circumstances provided for in the foregoing subsections (a)
through (e)); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Subsections (a)
through (f) hereof, inclusive, which in the opinion of the Company's Board of
Directors, determined in good faith, would have a Material Adverse Effect upon
the rights of the Investor at the time of a Put or exercise of the Warrants.
Notwithstanding anything to the contrary contained in this Section 1.54, a
Valuation Event shall not include any event involving the issuance of any
Registrable Securities, Common Stock underlying the Repricing Shares, Preferred
Stock or
Warrants.
Section 1.56 "Valuation Period" shall mean, (i) with respect to the
Purchase Price on any Put Date, the five (5) Trading Day period consisting of
the three (3) Trading Days immediately preceding and the one (1) Trading Day
following the Trading Day on which a Put Notice is deemed to be delivered, and
the Trading Day on which such notice is deemed to be delivered; and (ii) with
respect to the Repricing Shares, the five (5) Trading Days immediately preceding
the Repricing Date; provided, however, that if a Valuation Event occurs during a
Valuation Period, a new Valuation Period shall begin on the Trading Day
immediately after the occurrence of such Valuation Event and end on the fifth
Trading Day thereafter.
Section 1.57 "Warrant A" shall have the meaning set forth in Section 2.5
and substantially in the form of Exhibit E.
Section 1.58 "Warrant B" shall have the meaning set forth in Section 2.6
and substantially in the form of Exhibit F.
Section 1.59 "Warrants" shall mean collectively the Warrant A and Warrant
B.
Section 1.60"Warrant Shares" shall mean all shares of Common Stock or other
securities issued or issuable pursuant to the exercise of Warrant A or Warrant
B.
ARTICLE II
Purchase and Sale of Common Stock, Preferred Stock and Warrants
Section 2.1 Investments.
(a) Puts. Upon the terms and conditions set forth herein (including,
without limitation, the provisions of Article VII hereof), on any Put Date the
Company may make a Put by the delivery of a Put Notice/Compliance Certificate in
the form attached hereto as Exhibit C. The number of Put Shares that the
Investors shall receive pursuant to such Put shall be determined by dividing the
Investment Amount specified in the Put Notice by the Purchase Price on such Put
Date, which aggregate Investment Amount shall not exceed the Maximum Put Amount
on such date, and
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shall be distributed pro rata amongst the Investors.
(b) Maximum Aggregate Amount of Puts. Notwithstanding the provisions
of section 2.1(a), the Company may not make a Put, and the Investors may not be
compelled to purchase any Put Shares, unless and until holders of Common Stock
approve the issuance of shares of Common Stock (and securities convertible into
or exercisable for Common Stock) equal to 20% or more of the Common Stock
outstanding immediately prior to the Subscription Date in accordance with
applicable rules of The Nasdaq Stock Market; provided, however, that if at the
time the Company wishes to make a Put, the Common Stock is not listed on The
Nasdaq Stock Market or the rules of the Principal Market do not otherwise
require shareholder approval for the issuance of shares of Common Stock (and
securities convertible into or exercisable for Common Stock) equal to 20% or
more of the Common Stock outstanding immediately prior to the Subscription Date,
such approval by holders of Common Stock shall not be required to make a Put.
Section 2.2 Mechanics For a Put.
(a) Put Notice. At any time after the forty fifth (45th) day
following the Repricing Date, the Company may deliver a Put Notice to the
Investors, subject to the conditions set forth in Section 7.2 and below;
provided, however, the Investment Amount for each Put as designated by the
Company in the applicable Put Notice shall be neither less than $50,000 nor more
than the Maximum Put Amount.
(b) Date of Delivery of Put Notice. A Put Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile or otherwise by the
Investors if such notice is received prior to 12:00 p.m. Eastern Time, or (ii)
the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 12:00 p.m. Eastern Time on a Trading Day or at any time on a day
which is not a Trading Day. No Put Notice may be deemed delivered, on a day that
is not a Trading Day.
Section 2.3 Put Closings. On each Closing Date for a Put (i) the Company
shall deliver to the Escrow Agent for the benefit of the Investors one or more
certificates, at the Investors option, representing the Put Shares to be
purchased by the Investors pursuant to Section 2.1 herein, registered in the
name of the Investors; and (ii) each of the Investors shall deliver to escrow
their portion of the Investment Amount specified in the Put Notice by wire
transfer of immediately available funds to the Escrow Agent on or before the
Closing Date. In addition, on or prior to the Closing Date for a Put, each of
the Company, and the Investors shall deliver to the Escrow Agent all documents,
instruments and writings required to be delivered or reasonably requested by
either of them pursuant to this Agreement in order to implement and effect the
transactions contemplated herein. Payment of funds to the Company, payment of
Placement Agent fees as set forth in Section 13.7 below and delivery of the
certificates to the Investors shall occur on the Closing Date for the applicable
Put in accordance with the Escrow Agreement; provided, however, that to the
extent the Company has not paid the fees, expenses, and disbursements of the
Escrow Agent and Placement Agent in accordance with Section 13.7, the amount of
such fees, expenses and disbursements shall be paid out of the funds that the
Escrow Agent is holding for the Company to the respective parties, in
immediately available funds, at the
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direction of the Investors, with no reduction in the number of Put Shares
issuable to the Investors on such Closing Date.
Section 2.4 Termination of Investment Obligation. The obligation of the
Investors to purchase shares of Common Stock pursuant to a Put shall terminate
permanently (including with respect to a Closing Date that has not yet occurred
but for which a Put Notice has been delivered to the Investors) in the event
that (i) there shall occur any stop order or suspension of the effectiveness of
the Registration Statement for an aggregate of twenty (20) Trading Days during
the Commitment Period, for any reason other than deferrals or suspensions in
accordance with the Registration Rights Agreement as a result of corporate
developments subsequent to the Subscription Date that would require such
Registration Statement to be amended to reflect such event in order to maintain
its compliance with the disclosure requirements of the Securities Act or (ii)
the Company shall at any time fail to comply with the requirements of Section
6.3, 6.4 or 6.6; provided, that in the case of clause (i) above, the Investors'
obligation to purchase shares of Common Stock shall be reinstated when the
Investors receive copies of the supplemented or amended prospectus contemplated
by the Registration Rights Agreement.
Section 2.5 The Warrants.
(a) Warrant A. On the Subscription Date, the Company will issue to the
Investors (pro rata) and the Placement Agent Warrant A's exercisable beginning
on the Subscription Date and then exercisable any time over the two year period
there following, to purchase an aggregate of 150,000 Warrant Shares for the
Investors and 50,000 Warrant Shares for the Placement Agent at the Exercise
Price (as defined in the Warrant). The Warrant A's shall be delivered by the
Company to the Escrow Agent, and delivered to the Investors and Placement Agent
pursuant to the terms of this Agreement and the Escrow Agreement. All of the
aforementioned Warrant Shares shall be registered for resale pursuant to the
Registration Rights Agreement.
(b) Warrant B. On the Subscription Date, and thereafter on the Closing
Date of each of the first two Puts, the Company will issue warrants to the
Investors (pro rata) and the Placement Agent in the form of Warrant B to
purchase an aggregate of 30,000 Warrant Shares for the Investors (pro rata), and
7,000 Warrant shares for the Placement Agent, at the Exercise Price (as defined
in the Warrant). Subject to the express provisions of the Warrant B, each
Warrant B shall be exercisable for a two year period commencing on the date a
Warrant B is issued. When issuable, each Warrant B shall be delivered by the
Company to the Escrow Agent, and delivered to the Investors and the Placement
Agent pursuant to the terms of this Agreement and the Escrow Agreement. All of
the aforementioned Warrant Shares shall be registered for resale pursuant to the
Registration Rights Agreement.
Section 2.6 Additional Shares. In the event that (a) within five Trading
Days after the date in which the Investors and/or the Placement Agent receive
any of the Securities issued hereunder, a "blackout period" occurs in accordance
with the Sections 3(h) and 3(i) of the Registration Rights Agreement, and (b)
the Bid Price on the Trading Day immediately preceding such "blackout period"
(the "Old Bid Price") is greater than the Bid
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Price on the first Trading Day following such "blackout period" (the "New Bid
Price"), the Investors and/or the Placement Agent may sell its Registrable
Securities at the New Bid Price pursuant to an effective Registration Statement,
and the Company shall issue to the Investors and/or the Placement Agent the
number of additional shares equal to the difference between (y) the product of
the number of Registrable Securities held by the Investors and/or the Placement
Agent during such "blackout period" that are or were not otherwise freely
tradeable and the Old Bid Price, divided by the New Bid Price and (z) the number
of Registrable Securities held by the Investors and/or the Placement Agent
during such "blackout period" that were not otherwise freely tradeable during
such Blackout Period.
Section 2.7 Liquidated Damages. In addition to any other provisions for
liquidated damages in this Agreement or any Exhibit annexed hereto, in the event
that the Company does not deliver unlegended Common Stock in connection with the
sale of such Common Stock by the Investor(s) and/or the Placement Agent as set
forth in Article IX below within three (3) Trading Days of surrender by the
Investor(s) of the Common Stock certificate in accordance with the terms and
conditions set forth in Article IX below (such date of receipt is referred to as
the "Receipt Date"), the Company shall pay to the Investor(s), in immediately
available funds, upon demand, as liquidated damages for such failure and not as
a penalty, one (1%) percent of the Purchase Price of the Common Stock
undelivered for every day thereafter for the first ten (10) days and two (2%)
percent for every day thereafter that the unlegended shares of Common Stock are
not delivered, which liquidated damages shall run from the fourth (4th) Trading
Day after the Receipt Date. The parties hereto acknowledge and agree that the
sum payable pursuant to the Registration Rights Agreement and as set forth
above, and the obligation to issue Registrable Securities under Section 2.6
above, shall constitute liquidated damages and not penalties. The parties
further acknowledge that the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, and the parties are
sophisticated business parties and have been represented by sophisticated and
able legal and financial counsel and negotiated this Agreement at arm's length.
Notwithstanding the above, in the event that the Company does not deliver
unlegended Common Stock in connection with the sale of such Common Stock by the
Investor(s) and/or the Placement Agent as set forth in Article IX below within
three (3) Trading Days of the Receipt Date), the Company shall also pay to the
Investor(s), in immediately available funds, interest (at the then current prime
rate) on the Purchase Price of the Common Stock undelivered for every day
thereafter that the unlegended shares of Common Stock are not delivered. Any and
all payments required pursuant to this paragraph shall be payable only in cash.
Section 2.8 Initial Purchase.
(a) The Company agrees to sell and the Investors agree to purchase (i)
an aggregate of 612,000 Initial Shares of Common Stock , and (ii) 5,246 shares
of Preferred Stock, against payment of the Initial Shares Investment Amount. The
Initial Shares of Common Stock will be subject to repricing as described in
Section 2.9 herein.
(b) The right of the Company to receive the Initial
12
Shares Investment Amount from the Investors, and the right of the Investors to
receive the Initial Shares and Warrants A and B (as set forth in Section 2.5) is
subject to the satisfaction on the Closing Date for the Initial Shares, of each
of the following conditions:
(i) acceptance by the Company, and by all of the Investors, of this
Agreement and all duly executed Exhibits thereto by an authorized
officer of the Company;
(ii) delivery into escrow by the Investors of clear funds for the
Initial Shares Investment Amount (as more fully set forth in the
Escrow Agreement attached hereto as Exhibit B);
(iii) all representations and warranties of the Investors and of the
Company contained herein shall remain true and correct in all
material respects as of the Subscription Date;
(iv) the Company shall have obtained all permits and qualifications
required by any state for the offer and sale of the Common Stock
and the Warrants, or shall have the availability of exemptions
therefrom;
(v) the sale and issuance of the Common Stock, the Warrants, and the
proposed issuance of the Common Stock underlying both the
Preferred Stock and Warrants shall be legally permitted by all
laws and regulations to which the Investors and the Company are
subject; and all duly executed Exhibits hereto for the sale of the
Securities;
(vi) delivery of the original Initial Shares and Warrants as described
herein;
(vii) receipt by the Investors of an opinion of counsel of the Company
as set forth in Exhibit G attached hereto and instructions to the
Transfer Agent as set forth in Exhibit H annexed hereto;
(viii) written proof that the Certificate of Determination has been filed
with the Secretary of State of the State of California; and
(ix) payment of all fees as set forth in Section 13.7 below and the
Escrow Agreement.
Section 2.9 Repricing.
(a) If on the Repricing Date, the Reset Price is lower than the
Purchase Price with respect to the Initial Shares of Common Stock, then the
Company shall issue to the Investors pro rata based on the number of Initial
Shares of Common Stock purchased by that Investor on the Subscription Date, that
number of shares of Preferred Stock (if any, rounded to the nearest
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whole share of Preferred Stock) derived from the following formula:
{[(Initial Shares of Common Stock Investment Amount/Reset
Price) - 612,000] x the Bid Price on the Repricing Date}/100
Such shares of Preferred Stock so issuable, if any, pursuant to this
repricing shall be delivered within three (3) Trading Days after the Repricing
Date.
(b) The Company agrees to file and use its best efforts to cause to be
effective, a post effective amendment to the Registration Statement (or
registration statement) to include the shares of Common Stock underlying the
Repricing Shares (pursuant to the terms of the Registration Rights Agreement).
The Company may only issue the Repricing Shares if the Certificate of
Determination remains in full force and effect as of the applicable Repricing
Date and the Company files an amendment to the Certificate of Determination
authorizing these additional shares. In the event the Company is obligated to
issue Repricing Shares, as set forth above, but is unable to issue such
Repricing Shares, for any reason, within five Trading Days after the applicable
Repricing Date, the Company agrees that it shall immediately pay to the
Investors, and/or Placement Agent, the dollar value equal to the number of
shares of Common Stock underlying the Repricing Shares (had the Repricing Shares
been converted on the Repricing Date) to be issued multiplied by the Bid Price
on the Repricing Date. In the event the Company has not obtained approval from a
majority of the holders of the Common Stock of the issuance of shares of Common
Stock (and securities convertible into or exercisable for Common Stock) equal to
20% or more of the Common Stock outstanding immediately prior to the
Subscription Date in accordance with applicable rules of The Nasdaq Stock Market
or the Principal Market, if so required, the Company agrees that it will issue
such Repricing Shares and comply with the provisions set forth in Section 6.11
below.
ARTICLE III
Representations and Warranties of the Investors
Each of the Investors represents and warrants to the Company that:
Section 3.1 Intent. Each of the Investors is entering into this Agreement
for its own account and has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investors do not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
Section 3.2 Sophisticated Investor. Each of the Investors are sophisticated
investors (as described in Rule 506(b)(2)(ii) of Regulation D) and accredited
investors (as defined in Rule 501 of Regulation D), and the Investors have such
experience in business and financial matters that they are capable of evaluating
the merits and risks of an investment in the Securities. Each of the Investors
acknowledge that an investment in the Common Stock is speculative and involves a
high degree of risk. Each of the Investors currently has the ability
14
to fund the purchase of the Initial Shares and the Put Shares.
Section 3.3 Authority. This Agreement has been duly authorized and validly
executed and delivered by each of the Investors and is a valid and binding
agreement of the Investors enforceable against each of them in accordance with
its terms, subject to applicable bankruptcy, insolvency, or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
Section 3.4 Not an Affiliate. None of the Investors is an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 3.5 Organization and Standing. Each of the Investors is duly
organized, validly existing, and in good standing under the laws of the
countries and/or states of their incorporation or organization.
Section 3.6 Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investors, or, to
the Investors knowledge, (a) violate any provision of any indenture, instrument
or agreement to which any of the Investors are a party or are subject, or by
which any of the Investors or any of their assets is bound; (b) conflict with or
constitute a material default thereunder; (c) result in the creation or
imposition of any lien pursuant to the terms of any such indenture, instrument
or agreement, or constitute a breach of any fiduciary duty owed by Investors to
any third party; or (d) require the approval of any third-party (which has not
been obtained) pursuant to any material contract, agreement, instrument,
relationship or legal obligation to which any of the Investors is subject or to
which any of their assets, operations or management may be subject.
Section 3.7 Disclosure; Access to Information. Each of the Investors has
received all documents, records, books and other information pertaining to
Investors investment in the Company that have been requested by Investors,
including the opportunity to ask questions and receive answers. The Company is
subject to the periodic reporting requirements of the Exchange Act, and each of
the Investors has reviewed or received copies of any such reports that have been
requested by it. Each of the Investors represents that it has reviewed the
Company's, Form 10- KSB for the year ended December 31, 1997, Form 10-QSB's, the
proxy statement for the Company's 1998 Annual Meeting, and Form 8- K's filed for
the twelve months prior to the Subscription Date.
Section 3.8 Manner of Sale. At no time were any of the Investors presented
with or solicited by or through any leaflet, public promotional meeting,
television advertisement or any other form of general solicitation or
advertising.
Section 3.9 Registration or Exemption Requirements. Each of the Investors
further acknowledges and understands that the Securities may not be transferred,
resold or otherwise disposed of except in a transaction registered under the
Securities Act and any applicable state securities laws, or unless an exemption
15
from such registration is available. Each of the Investors understands that the
certificate(s) evidencing the Securities will be imprinted with a legend that
prohibits the transfer of these Securities unless (i) they are registered or
such registration is not required, and (ii) if the transfer is pursuant to an
exemption from registration.
Section 3.10 No Legal, Tax or Investment Advice. Each of the Investors
understands that nothing in this Agreement or any other materials presented to
the Investors in connection with the purchase and sale of the Securities
constitutes legal, tax or investment advice. The Investors have relied on, and
have consulted with, such legal, tax and investment advisors as they, in their
sole discretion, have deemed necessary or appropriate in connection with their
purchase of the Securities.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investors and the Placement
Agent that:
Section 4.1 Organization of the Company. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of
California and has all requisite corporate authority to own its properties and
to carry on its business as now being conducted except as described in the SEC
Documents. The Company is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
other than those in which the failure so to qualify would not reasonably be
expected to have a Material Adverse Effect.
Section 4.2 Authority. (i) The Company has the requisite corporate power
and authority to enter into and perform its obligations under this Agreement,
and all Exhibits annexed hereto, and to issue the Common Stock and Preferred
Stock to the Placement Agent, the Initial Shares, Underlying Shares, Additional
Shares, Put Shares, Repricing Shares, Preferred Stock, Warrants and the Warrant
Shares, (ii) the execution, issuance and delivery of this Agreement, and all
Exhibits annexed hereto by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors, and (iii) this Agreement, and all Exhibits annexed hereto
have been duly executed and delivered by the Company and constitute valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application.
Section 4.3 Capitalization. The authorized capital stock of the Company
consists of 30,000,000 shares of Common Stock, no par value per share, of which
3,457,365 shares are issued and outstanding, and 10,000,000 shares of Preferred
Stock, no par value per share, none of which are issued and outstanding. All of
the outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid
16
and nonassessable.
Section 4.4 Common Stock. The Company has registered its Common Stock
pursuant to Section 12(g) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and such Common Stock is currently
listed or quoted on the Nasdaq National Market.
Section 4.5. SEC Documents. The Company has delivered or made available to
the Investors true and complete copies of the SEC Documents filed by the Company
with the SEC during the twelve (12) months immediately preceding the
Subscription Date (including, without limitation, proxy information and
solicitation materials). The Company has not provided to any of the Investors
any information that, according to applicable law, rule or regulation, should
have been disclosed publicly prior to the date hereof by the Company, but which
has not been so disclosed. The SEC Documents comply in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and rules and regulations of the SEC promulgated thereunder and none of the
SEC Documents 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. The financial statements of the Company included in the
SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 4.6 Valid Issuances. When issued and payment has been made therefor
(in the case of the Investors), the Common Stock, Preferred Stock, Repricing
Shares, Underlying Shares, Warrants, and Warrant Shares, issued to the Placement
Agent, and the Initial Shares, the Put Shares, the Additional Shares, the
Repricing Shares, the Underlying Shares, the Warrants, and the Warrant Shares
sold to the Investors will be duly and validly issued, fully paid, and
nonassessable. Neither the issuance of Common Stock, Preferred Stock, Repricing
Shares, Underlying Shares, Warrants, or Warrant Shares, to the Placement Agent,
nor the sale of the Initial Shares, the Additional Shares, the Put Shares, the
Repricing Shares, the Underlying Shares, the Warrants, or the Warrant Shares to
the Investors, pursuant to, nor the Company's performance of its obligations
under, this Agreement, and all Exhibits annexed hereto will (i) result in the
creation or imposition by the Company of any liens, charges, claims or other
encumbrances upon the Common Stock, Preferred Stock, Warrant Shares, Repricing
Shares, or Underlying Shares, issued to the Placement Agent, the Initial Shares,
the Additional Shares, the Put Shares, the Repricing Shares, the Preferred
Stock, the Underlying Shares, the Warrant Shares issued to the
17
Investors, or any of the assets of the Company, or (ii) entitle the holders of
Outstanding Capital Shares to preemptive or other rights to subscribe to or
acquire the Capital Shares or other securities of the Company.
Section 4.7 No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Initial Shares, Put Shares,
the Additional Shares, the Repricing Shares, the Underlying Shares, the
Warrants, or the Warrant Shares, or (ii) made any offers or sales of any
security or solicited any offers to buy any security under any circumstances
that would require registration of the Common Stock issued to the Placement
Agent, the Initial Shares, the Additional Shares, the Put Shares, the Repricing
Shares, the Underlying Shares, the Warrants, or the Warrant Shares under the
Securities Act.
Section 4.8 Corporate Documents. The Company has furnished or made
available to each of the Investors true and correct copies of the Company's
Articles of Incorporation, as amended and in effect on the date hereof (the
"Certificate"), and the Company's By-Laws, as amended and in effect on the date
hereof (the "By-Laws").
Section 4.9 No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the Common
Stock, Preferred Stock, Underlying Shares, Warrants, and Warrant Shares, do not
and will not (i) result in a violation of the Company's Articles of
Incorporation or By-Laws or (ii) conflict with, or constitute a material default
(or an event that 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, instrument or any "lockup"
or similar provision of any underwriting or similar agreement to which the
Company is a party, or (iii) result in a violation of any federal, state or
local law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations) applicable to the Company or by which any
property or asset of the Company is bound or affected, nor is the Company
otherwise in violation of, conflict with or in default under any of the
foregoing as would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect. The business of the Company is not being
conducted in violation of any law, ordinance or regulation of any governmental
entity, except for possible violations that either singly or in the aggregate
would not reasonably be expected to have a Material Adverse Effect. The Company
is not required under federal, state or local law, rule or regulation to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under this Agreement or issue and sell the Common Stock,
Preferred Stock, or Warrants A and B, in accordance with the terms hereof;
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investors herein.
18
Section 4.10 No Material Adverse Change. Since December 31, 1997, no
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents, or as publicly announced.
Section 4.11 No Undisclosed Liabilities. The Company has no liabilities or
obligations which are material, individually or in the aggregate, that are not
disclosed in the SEC Documents or otherwise publicly announced, other than those
set forth in the Company's financial statements or as incurred in the ordinary
course of the Company's businesses since December 31, 1997, and which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect.
Section 4.12 No Undisclosed Events or Circumstances. Since December 31,
1997, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in the SEC Documents.
Section 4.13 No Integrated Offering. To the Company's knowledge, 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, other than pursuant to this Agreement
or pursuant to the Company's existing employee benefit plan, under circumstances
that would require registration of the Common Stock under the Securities Act, or
cause the offering of the Securities pursuant to this Agreement to be integrated
with prior or future offerings by the Company for purposes of the Securities Act
or any applicable stockholder approval provisions, except as set forth in the
SEC Documents.
Section 4.14 Litigation and Other Proceedings. Except as may be set forth
in the SEC Documents, there are no lawsuits or proceedings pending or to the
knowledge of the Company threatened, against the Company, nor has the Company
received any written or oral notice of any such action, suit, proceeding or
investigation, which would reasonably be expected to have a Material Adverse
Effect. Except as set forth in the SEC Documents, no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which would
be reasonably expected to result in a Material Adverse Effect.
Section 4.15 Accuracy of Reports and Information. The Company is in
compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12(g) or 15(d) of the 1934 Act. The Company has registered
its Common Stock pursuant to Section 12 of the 1934 Act and the Common Stock is
listed and trades on the Nasdaq National Market. The Company has complied in all
material respects and to the extent applicable with all reporting obligations,
under either Section 13(a) or 15(d) of the 1934 Act for a period of at least
twelve (12) months immediately preceding the offer and sale of the Securities
(or for such shorter period that the Company has been required to file such
material).
19
Section 4.16 Dilution. The Company is aware and acknowledges that issuance
of the Common Stock, and the conversion of the Preferred Stock and the Repricing
Shares, and/or exercise of the Warrants, may cause dilution to existing
stockholders and may significantly increase the outstanding number of shares of
Common Stock.
Section 4.17 Employee Relations. The Company is not involved in any labor
dispute, nor, to the knowledge of the Company, is any such dispute threatened
which could reasonably be expected to have a Material Adverse Effect. None of
the Company's employees is a member of a union and the Company believes that its
relations with its employees are good.
Section 4.18 Environmental Laws. The Company is (i) in compliance with any
and all 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 and which the Company know is
applicable to them ("Environmental Laws"), (ii) has received all permits,
licenses or other approvals required under applicable Environmental Laws to
conduct its business, and (iii) is in compliance with all terms and conditions
of any such permit, license or approval.
Section 4.20 Insurance. The Company is 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 is engaged. The Company has no notice to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires, or 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 operation, of the Company.
Section 4.21 Board Approval and Agreement To Vote. The board of directors
of the Company has concluded, in its good faith business judgment, that the
issuances of the securities of the Company in connection with this Agreement are
in the best interests of the Company.
ARTICLE V
Covenants of the Investors
Section 5.1 4.99% Limitation. The number of shares of Common Stock required
to be acquired by any of the Investors pursuant to the terms of this Agreement
shall not exceed the number of such shares which, when aggregated with all other
shares of Common Stock then owned by any of the Investors beneficially or deemed
beneficially owned by any of the Investors inclusive of Warrant Shares, would
result in any of the Investors owning more than 4.99% of all of such Common
Stock as would be outstanding on such Closing Date, as determined in accordance
with Rule 13d-3 of the Exchange Act and the regulations promulgated thereunder.
For purposes of this Section, in the event that the amount of Common Stock
outstanding as determined in accordance with Rule 13d-3 of the Exchange Act and
the regulations promulgated thereunder is greater on a Closing Date
20
than on the date upon which any Put Notice associated with such Closing Date is
given, the amount of Common Stock outstanding on such Closing Date shall govern
for purposes of determining whether any of the Investors, when aggregating all
purchases of Common Stock made pursuant to this Agreement and, if any, Warrant
Shares, would own more than 4.99% of the Common Stock following such Closing.
Each Investor agrees that it will not convert any share or shares of Preferred
Stock which would result, at any one time, in any Investor being the owner of
more than 4.99% of the total number of shares of Common Stock then outstanding.
The preceding sentence shall not interfere with any Investor's right to convert
Preferred Stock into more than 4.99% of the then outstanding shares of Common
Stock in the aggregate, over time, and is not intended to mean that each
Investor is limited in its conversion to an aggregate total of no more than
4.99% of then outstanding shares of Common Stock. The foregoing limitation shall
not apply to the Automatic Conversion provision contained in Section IV K of the
Certificate of Determination.
Section 5.2 Forced Conversion.
(a) Circumstances of Forced Conversion. Subject to the other
provisions of this Section 5.2, from and after the Effective Date the Company
shall have the right to force conversion by the holders of the Preferred Stock
of up to a cumulative aggregate of 75% of the total number of shares of
Preferred Stock issued by the Company by telecopying written notice of its
election to force conversion containing the information set forth in Section
5.2(c) (the "Forced Conversion Notice") to the holders under the following
circumstances:
1. In the event at any time and from time to time the Closing Bid
Price of the Common Stock is equal to or greater than 150% of the
Issuance Price during a Forced Conversion Period the Company may force
conversion by the holder of up to a maximum of 15% of the total number
of shares of Preferred Stock - issued by the Company to the holders.
Such right to force conversion pursuant to the provisions of this
Subsection 5.2(a) 1 shall continue until the total number of shares of
Preferred Stock converted by holders pursuant to the provisions of
this Subsection 5.2(a) equals 25% of the total number of shares of
Preferred Stock issued by the Company.
2. In the event, at any time and from time to time, the Closing
Bid Price of the Common Stock is equal to or greater than 175% of the
Issuance Price during a Forced Conversion Period, the Company may
force conversion by the holder of up to a maximum of 15% of the total
number of shares of Preferred Stock issued by the Company to the
holders. Such right to force conversion pursuant to the provisions of
this Subsection 5.2(a) 2 shall continue until the total number of
shares of Preferred Stock converted by holders pursuant to the
provisions of this Subsection 5.2(a) 2 equals 25% of the total number
of shares of Preferred Stock issued by the Company.
3. In the event, at any time and from time to time, the Closing
Bid Price of the Common Stock is equal to or greater than 200% of the
Issuance Price during a Forced Conversion Period the Company may force
21
conversion by the holder of up to a maximum of 15% of the total number
of shares of Preferred Stock issued by the Company to the holders.
Such right to force conversion pursuant to the provisions of this
Subsection 5.2(a) 3 shall continue until the total number of shares of
Preferred Stock converted by holders pursuant to the provisions of
this Subsection 5.2(a) 3 equals 25% of the total number of shares of
Preferred Stock issued by the Company.
4. In the event the Company causes a forced conversion as set
forth herein the Accrual Deduction shall not apply. A Forced
Conversion Notice shall not be deemed to affect or otherwise reduce
the holders conversion rights as set forth herein as to the shares of
Preferred Stock not subject to a Forced Conversion Notice.
(b) Delivery of Forced Conversion Notice. No more than 15% of the
total number of shares of Preferred Stock issued by the Company shall be subject
to forced conversion pursuant to the provisions of Section 5.2(a) during any
single 30 calendar day period. The Company shall effect such forced conversions
pro rata amongst the holders according to the number of shares of Preferred
Stock held by each holder of Preferred Stock. The Forced Conversion Notice must
be delivered by the Company prior to 12:00 p.m. Eastern Time on the first
Trading Day immediately following the expiration of the Forced Conversion
Period. A Forced Conversion Notice shall be deemed delivered on (i) the Trading
Day it is faxed by the Company if such notice is faxed (with confirmation that
it was received by the holder) prior to 12:00 p.m. Eastern Time, or (ii) the
immediately succeeding Trading Day if it is faxed (with confirmation that it was
received by the holder) after 12:00 p.m. Eastern Time on a Trading Day or at any
time on a day which is not a Trading Day. No Forced Conversion Notice may be
deemed delivered, on a day that is not a Trading Day. The Company must forward
the original Forced Conversion Notice to the holder via reputable overnight
courier for delivery on the Trading Day immediately following transmission of
the Forced Conversion Notice via facsimile. In the event the original Forced
Conversion Notice is not sent to the holder of the Preferred Stock as set forth
above, the Forced Conversion Notice shall be deemed revoked and ineffective.
Once the Company has exercised its right to force conversion of the Preferred
Stock by giving a Forced Conversion Notice to the holder as set forth above it
shall be deemed irrevocable. Each Trading Day on which the Forced Conversion
Notice is telecopied to and received by the holder shall be deemed a Conversion
Date for the purposes of completing the forced conversion and calculating the
number of shares of Common Stock to be issued upon the forced conversion. The
Company will transmit the certificates representing shares of Common Stock
issuable pursuant to the Forced Conversion Notice (together with the
certificates representing the remaining shares of Preferred Stock not being
forced to convert, if any) to the holder via reputable overnight courier, by
electronic transfer or otherwise within three (3) Trading Days after the Forced
Conversion Notice was faxed to holder (the "Forced Conversion Date"). In the
event the Company does not deliver the shares of Common Stock upon the forced
conversion within seven days after the Forced Conversion Notice was faxed to
holder, the holder shall be entitled to liquidated damages determined as set
forth in Section IV D above. In the event the Company fails to comply with the
terms of the
22
forced conversion in any manner on more than three separate occasions, which
shall not include any such failure which has been amicably resolved between the
Company and two thirds of the holders within seven days after the holder has
received a Forced Conversion Notice or a Forced Conversion Notice within the
meaning of the last sentence of this Section, it shall have waived its right to
serve a Forced Conversion Notice upon that particular holder at any time in the
future. A Forced Conversion Notice shall be deemed to be effective if the
information it contains is inaccurate provided that the actual facts would have
supported the delivery of the Forced Conversion Notice and the holders are not
prejudiced by the inaccurate information.
(c) Contents of Forced Conversion Notice. The Forced Conversion
Notice shall set forth (i) a calculation referencing the conversion formula
contained herein showing the number of shares of Common Stock being issued
pursuant to the applicable forced conversion, and (ii) a statement identifying
which subsection among 5.2(a)1, 5.2(a) 2, or 5.2(a) 3, that the Company is
relying on to force conversion, and the Closing Bid Prices of the Common Stock
during the Forced Conversion Period.
(d) Mechanics of Forced Conversion. Upon the Company's full
compliance with the forced conversion provisions set forth in Sections
5.2(a),(b) and (c), the shares of Preferred Stock that are the subject of a
forced conversion shall be automatically canceled and converted into a right to
receive shares of Common Stock, and all rights of the Preferred Stock which are
the subject of the forced conversion, including the right to conversion, shall
cease without further action, provided the holder receives the correct number of
shares of Common Stock due upon the forced conversion. Immediately following
receipt of the Forced Conversion Notice, if the holder concurs with the
Company's conversion calculations in the Forced Conversion Notice, the holder
shall surrender their original shares of Preferred Stock which are the subject
of the Forced Conversion Notice at the office of the Company, and the Company
shall send to the holder a new Preferred Stock certificate for that number of
shares of Preferred Stock which remains outstanding, if any, within three
Business Days after such surrender by the holder.
(e) Adjustments. The number of shares of Common Stock issuable upon
the forced conversion of the Preferred Stock shall be adjusted in the manner and
under the circumstances as set forth in Section IV of the Certificate of
Determination.
(f) Holders' Right to Convert. At any time up to the date immediately
prior to the Forced Conversion Date, the holders shall have the right to convert
the Preferred Stock into Common Stock as more fully provided in Section IV of
the Certificate of Determination.
ARTICLE VI
Covenants of the Company
Section 6.1 Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect so long as any Registrable
Securities remain outstanding and the Company shall comply in all material
respects with the terms thereof.
23
Section 6.2 Reservation of Common Stock. As of the date hereof, the Company
has reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to satisfy any obligation to issue the Additional Shares,
Repricing Shares, Underlying Shares, Put Shares and Warrant Shares; such amount
of shares of Common Stock to be reserved shall be calculated based upon the
minimum Purchase Price therefor under the terms of this Agreement, the
Certificate of Determination, the Warrants. The number of shares so reserved
shall be increased or decreased to reflect potential increases or decreases in
the Common Stock that the Company may thereafter be so obligated to issue by
reason of adjustments to the Preferred Stock, the Warrants.
Section 6.3 Listing of Common Stock. The Company hereby agrees to maintain
the listing of the Common Stock on the Principal Market, and as soon as
practicable (but in any event prior to the commencement of the Commitment
Period) to list all of the Initial Shares of Common Stock, the Additional
Shares, the Put Shares, the shares of Common Stock underlying the Repricing
Shares, the Underlying Shares, and the Warrant Shares issuable hereunder. The
Company further agrees, if the Company applies to have the Common Stock traded
on any other Principal Market, it will include in such application all of the
Initial Shares of Common Stock, the Put Shares, the Additional Shares, the
shares of Common Stock underlying the Repricing Shares, the Underlying Shares,
and the Warrant Shares, and will take such other action as is reasonably
necessary or desirable in the opinion of the Investors to cause the Common Stock
to be listed on such other Principal Market as promptly as possible. The Company
will comply with the listing and trading requirements of its Common Stock on a
Principal Market (including, without limitation, maintaining sufficient net
tangible assets) and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal Market.
In the event the Company receives notification from Nasdaq concerning delisting
of the Common Stock on the Principal Market, the Company will comply with all
applicable listing standards of the Principal Market. The Company has received
notice from the Nasdaq National Market that the Company does not meet the
listing requirements of the Nasdaq National Market, and the Company represents
that immediately following the Closing of the Initial Shares the Company will
not meet all of the listing requirements of the Nasdaq National Market.
Section 6.4 Exchange Act Registration. Until the earlier to occur of (i)
four years after the Subscription Date, or (ii) the Securities are no longer
held by the Investors, the Company will use its best efforts to maintain the
registration of its Common Stock under Section 12 of the Exchange Act, will
comply in all respects with its reporting and filing obligations under the
Exchange Act, and until the earlier to occur of (i) four years after the
Subscription Date or (ii) the Securities are no longer held by the Investors,
the Company will not take any action or file any document (whether or not
permitted by Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Act.
Section 6.5 Legends. The certificates evidencing the Common Stock to be
sold by the Investors pursuant to Section 9.1
24
shall be free of legends, except as set forth in Article IX.
Section 6.6 Corporate Existence. The Company will take all steps necessary
to preserve and continue the corporate existence of the Company.
Section 6.7 Notice of Certain Events Affecting Registration; Suspension of
Right to Make a Put. The Company will immediately notify each of the Investors
and the placement Agent upon the occurrence of any of the following events in
respect of a registration statement or related prospectus in respect of an
offering of Registrable Securities: (i) receipt of any request for additional
information by the SEC or any other federal or state governmental authority
during the period of effectiveness of the Registration Statement for amendments
or supplements to the Registration Statement or related prospectus; (ii) the
issuance by the SEC or any other federal or state governmental authority of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in the
Registration Statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate. The Company will
promptly make available to the Investors any such supplement or amendment to the
related prospectus. The Company shall not deliver to the Investors any Put
Notice during the continuation of any of the foregoing events.
Section 6.8 Consolidation; Merger. The Company shall not, at any time after
the date hereof, effect any merger or consolidation of the Company with or into,
or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investors and the Placement Agent such shares of
stock and/or securities as the Investors and the Placement Agent are entitled to
receive pursuant to this Agreement.
Section 6.9 Issuance of Put Shares, Underlying Shares, Common Stock
underlying the Repricing Shares, and Warrant Shares. The issuance of the
Underlying Shares, Put Shares, and the Warrant Shares pursuant to exercise of
Warrants A and B, and the conversion of the Preferred Stock, shall be made in
accordance with the provisions and requirements of Section 4(2) of the
Securities Act, or Regulation D and any applicable state
25
securities law.
Section 6.10 Legal Opinion. The Company's independent counsel shall deliver
to the Investors upon execution of this Agreement, and upon the Closings for (i)
Initial Shares, and (ii) Put Shares as set forth in Section 7.2 (m) below, an
opinion in the form of Exhibit G annexed hereto. The Company will obtain for the
Investors and the Placement Agent, at the Company's expense, any and all
opinions of counsel which may be reasonably required in order to convert the
Preferred Stock, including, but not limited to, obtaining for the Investors and
the Placement Agent an opinion of counsel, subject only to receipt of a notice
of conversion (the "Notice of Conversion") in the form of Exhibit I, directing
the Transfer Agent to remove the legend from the certificate.
Section 6.11 20% Rule Limitation. If required by The Nasdaq Stock Market or
otherwise on the Principal Market on which the Company's Common Stock is then
listed, the Company shall use its best efforts to obtain, as soon as
practicable, but no later than seventy-five days after the Subscription Date,
shareholder approval of the below market issuances of shares of Common Stock
(and securities convertible into and exercisable for Common Stock) to the
Investors and the Placement Agent in excess of twenty percent (20%) of the
number of shares of Common Stock outstanding as of Subscription Date. In the
event that the aforementioned proposal is not so approved (other than in a case
where the failure to so obtain shareholder approval has resulted from the
failure of the Investors or the Placement Agent to vote all Capital Shares owned
by them on the applicable record date in favor of the relevant proposal), the
Company shall seek a waiver from The Nasdaq Stock Market (or such other
Principal Market) for such below market issuances. In the event the Company does
not receive such waiver within the earlier of ten (10) days after the
stockholders meeting or eighty-five days after the Subscription Date, the
Company shall delist the Common Stock from The Nasdaq Stock Market and
immediately list the Common Stock on the OTC Bulletin Board.
Section 6.12 Restrictions on Future Financings. The Company agrees that it
will not, without the prior written consent of all of the Investors, enter into
any subsequent or further offer or sale of Common Stock, or any securities or
other instruments convertible into shares of Common Stock, with any party that
is not a party to this Agreement until the Registration Statement has been
effective for sixty days. This restriction shall not apply to: (a) the issuance
of securities (other than for cash) in connection with a merger, consolidation,
sale of assets, or other disposition, (b) the exchange of Capital Shares for
assets, stock, or joint venture interest, (c) an offering of any of the
Company's securities at then current market prices with no repricing or reset
provisions, or (d) any employee benefit plan; provided, however, that any action
contemplated under this Section is subject to the condition that registration
right if any, in connection with such action shall not require the filing by the
Company of a registration statement of such shares prior to sixty days after the
Effective Date.
Section 6.13 Conversion of Preferred Stock. The Company will permit the
Investors and the Placement Agent to exercise their right to convert the
Preferred Stock by telecopying an executed and completed Notice of Conversion to
the Company as is set forth in the Certificate of Determination.
26
Section 6.14 Restriction on Future Issuances of Preferred Stock. The
Company agrees that except as provided for in this Agreement, it will not issue
any additional share or shares of Preferred Stock.
Section 6.15 Forced Conversion Limitation. The Company may not serve a
Forced Conversion Notice (as defined in Section 5.2(c)) upon any of the
Investors if such notice would result in any one Investor holding, at any time,
more than 9.99% of the number of shares of Common Stock then outstanding.
ARTICLE VII
Conditions to Delivery of Puts and Conditions to Closing
Section 7.1 Conditions Precedent to the Obligation of the Company to Issue
and Sell Common Stock Associated With A Put. The obligation hereunder of the
Company to issue and sell the Put Shares to the Investors incident to each
Closing for Put Shares is subject to the satisfaction, at or before each such
Closing, of each of the conditions set forth below.
(a) Accuracy of each of the Investors Representation and Warranties.
The representations and warranties of each of the Investors shall be true and
correct in all material respects as of the date of this Agreement and as of the
date of each such Closing as though made at each such time.
(b) Performance by the Investors. The Investors shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Investors at or prior to such Closing.
Section 7.2 Conditions Precedent to the Right of the Company to Deliver a
Put Notice and the Obligation of the Investors to Purchase Put Shares. The right
of the Company to deliver a Put Notice and the obligation of the Investors
hereunder to acquire and pay for the Put Shares incident to a Closing for Put
Shares is subject to the satisfaction, on (i) the date of delivery of such Put
Notice and (ii) the applicable Closing Date for each Put (each a "Condition
Satisfaction Date"), of the conditions in Section 2.1, 2.2, 2.3 above, and each
of the following conditions:
(a) Registration of the Common Stock with the SEC. The Company shall
have filed with the SEC a Registration Statement with respect to the resale of
that number of Put Shares indicated in the applicable Put Notice and all
Registrable Securities, and the shares of Common Stock underlying the Repricing
Shares, if any, in accordance with the terms of the Registration Rights
Agreement. As set forth in the Registration Rights Agreement and herein, the
Registration Statement (including all Put Shares in the Put Notice) shall have
previously become effective and shall remain effective during at least the five
Trading Days immediately preceding each Condition Satisfaction Date and each Put
Date, and (i) neither the Company nor any of the Investors shall have received
notice that the SEC has issued or intends to issue a stop order with respect to
the Registration Statement or that the SEC otherwise has suspended or withdrawn
the effectiveness of the Registration Statement, either
27
temporarily or permanently, or intends or has threatened to do so, and (ii) no
other suspension of the use or withdrawal of the effectiveness of the
Registration Statement or related prospectus shall exist.
(b) Authority. The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the Put Shares,
or shall have the availability of exemptions therefrom. The sale and issuance of
the Put Shares shall be legally permitted by all laws and regulations to which
the Company is subject.
(c) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company in this Agreement and all Exhibits
attached hereto shall be true and correct in all material respects as of each
Condition Satisfaction Date as though made at each such time with respect to all
periods, and as to all events and circumstances occurring or existing to and
including each Condition Satisfaction Date.
(d) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement, the Escrow Agreement, the
Registration Rights Agreement, the Certificate of Determination, the Warrants to
be performed, satisfied or complied with by the Company at or prior to each
Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits or adversely affects any of the transactions contemplated by this
Agreement or any of the Exhibits annexed hereto, and no proceeding shall have
been commenced that may have the effect of prohibiting or adversely affecting
any of the transactions contemplated by this Agreement or any of the Exhibits
annexed hereto.
(f) Adverse Changes. No event that had or is reasonably likely to have
a Material Adverse Effect has occurred since the Subscription Date.
(g) No Suspension of Trading In or Delisting of Common Stock. The
trading of the Common Stock (including, without limitation, the Put Shares) is
not suspended by the SEC or the Principal Market, and the Common Stock
(including, without limitation, the Put Shares) shall have been approved for
listing or quotation on and shall not have been delisted from the Principal
Market. The issuance of shares of Common Stock with respect to the applicable
Put Closing, if any, shall not violate the shareholder approval requirements of
the Principal Market. The Company shall not have received any notice from the
Principal Market concerning delisting of the Common Stock on the Principal
Market (other than that set forth in this Agreement), and the Company shall meet
all listing requirements during the thirty (30) day period immediately preceding
any Closing Date for a Put. However, in no event shall the Company be permitted
to serve a Put Notice if the Principal Market is the "pink sheets".
(h) 9.99% Percent Limitation. On each Closing Date
28
for the Put Shares, the number of Put Shares then to be purchased by any of the
Investors shall not exceed the number of such shares of Common Stock which, when
aggregated with all other shares of Common Stock then owned by any of the
Investors beneficially or deemed beneficially owned by any of the Investors,
would result in any of the Investors owning more than 9.99% of all of such
Common Stock as would be outstanding on such Closing Date, as determined in
accordance with Rule 16a-1 of the Exchange Act and the regulations promulgated
thereunder. For purposes of this Section 7.2(h), in the event that the amount of
Common Stock outstanding as determined in accordance with Rule 16 a-1 of the
Exchange Act and the regulations promulgated thereunder is greater on a Closing
Date than on the date upon which the Put Notice associated with such Closing
Date is given, the amount of Common Stock outstanding on such Closing Date shall
govern for purposes of determining whether any of the Investors, when
aggregating all purchases of Common Stock made pursuant to this Agreement and,
if any, Warrant Shares, would own more than 9.99% of the Common Stock following
such Closing.
(i) Minimum Bid Price. The Bid Price must equal or exceed the Floor
Price during the three Trading Day immediately preceding each Condition
Satisfaction Date (as adjusted for stock splits, stock dividends, reverse stock
splits, and similar events);
(j) Minimum Average Trading Volume. The average trading volume for the
Common Stock during the 30 Trading Days immediately preceding each Condition
Satisfaction Date must exceed 20,000 shares per Trading Day.
(k) No Knowledge. The Company has no knowledge of any event more
likely than not to have the effect of causing such Registration Statement
(including all Put Shares in the Put Notice) to be suspended or otherwise
ineffective (which event is more likely than not to occur within the ten Trading
Days following the Trading Day on which such Notice is deemed delivered).
(l) Trading Cushion. The Trading Cushion shall have elapsed since the
next preceding Put Date.
(m) Legal Opinion. The Investors shall receive an opinion from
counsel to the Company substantially in the form of Exhibit G annexed hereto on
each Closing for Put Shares, dated as of the particular Put Closing Date.
(n) 20% Approval. The Company shall have obtained shareholder
approval (or a waiver) for the issuance of below market securities pursuant to
the terms of this Agreement, including the Put Shares in the Put Notice, if
required by the Principal Market.
(o) Other. On each Condition Satisfaction Date, the Investors shall
have received from the Company and been reasonably satisfied with such other
certificates and documents as shall have been reasonably requested by the
Investors in order for the Investors to confirm the Company's satisfaction of
the conditions set forth in this Section 7.2, including, without limitation, a
certificate in substantially the form and substance of Exhibit C hereto,
executed in either case by an executive officer of the Company and to the effect
that all the conditions
29
to such Closing shall have been satisfied as at the date of each such
certificate.
ARTICLE VIII
Due Diligence Review; Non-Disclosure of Non-Public Information
Section 8.1 Due Diligence Review. The Company shall make available for
inspection and review by the Investors, advisors to and representatives of the
Investors (who may or may not be affiliated with the Investors), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, NASD or other
filing, all financial and other records, all SEC Documents and other filings
with the SEC, and all other corporate documents and properties of the Company as
may be reasonably necessary for the purpose of such review, and cause the
Company's officers, directors and employees to supply all such information
reasonably requested by any of the Investors or any such representative, advisor
or underwriter in connection with such Registration Statement (including,
without limitation, in response to all questions and other inquiries reasonably
made or submitted by any of them), prior to and from time to time after the
filing and effectiveness of the Registration Statement for the sole purpose of
enabling the Investors and such representatives, advisors and underwriters and
their respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
Section 8.2 Non-Disclosure of Non-Public Information
(a) The Company shall not disclose non-public information to the
Investors, advisors to, or representatives of, the Investors unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides each Investor, and its advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a condition to disclosing
any non-public information hereunder, require each of the Investors advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investors.
(b) Nothing herein shall require the Company to disclose non-public
information to any of the Investors or their advisors or representatives, and
the Company represents that it does not disseminate non-public information to
any investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investors and, if
any, underwriters, of any event or the existence of any circumstance (without
any obligation to disclose the specific event or circumstance) of which it
becomes aware, constituting non-public information (whether or not requested of
the Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include
30
a material misstatement or to omit a material fact required to be stated therein
in order to make the statements, therein, in light of the circumstances in which
they were made, not misleading. Nothing contained in this Section shall be
construed to mean that such persons or entities other than the Investors
(without the written consent of the Investors prior to disclosure of such
information) may not obtain non-public information in the course of conducting
due diligence in accordance with the terms of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading.
ARTICLE IX
Legends
Section 9.1 Legends. Unless otherwise provided below, or covered by an
effective registration statement or an exemption to registration, each
certificate representing the Initial Shares of Common Stock, Warrants, Preferred
Stock, and the shares of Common Stock underlying the Repricing Shares, will bear
the following legend (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
In addition to the Legend, each certificate representing Preferred Stock
will bear the following legend:
"These securities may be forcibly converted and are subject to a
restriction on transfer provided in that certain Securities Purchase
Agreement dated September __, 1998 (the `Agreement') by and between Mustang
Software, Inc., the entities listed on Schedule A attached to the Agreement
and Settondown Capital International Ltd. A copy of the Agreement is
available upon request from Mustang Software, Inc., 6200 Lake Ming Road,
Bakersfield, CA 93306, Attention: Chief Financial Officer."
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit H hereto. Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly
31
provided in the Registration Rights Agreement. It is the intent and purpose of
such instructions, as provided therein, to require the transfer agent for the
Common Stock from time to time upon transfer of Registrable Securities by the
Investors or the Placement Agent to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and without consultation by the transfer agent with
the Company or its counsel and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investors:
(a) at any time after the Effective Date, or the effective date of the
effective date of a registration statement covering the shares of Common Stock
underlying the Repricing Shares, upon surrender of one or more certificates
evidencing the Initial Shares of Common Stock, Warrants, Preferred Stock, or
shares of Common Stock underlying the Repricing Shares, that bear the Legend, to
the extent accompanied by a notice requesting the issuance of new certificates
free of the Legend to replace those surrendered; provided that (i) the
Registration Statement (or a registration statement covering the shares of
Common Stock underlying the Repricing Shares) shall then be effective; (ii) the
Investor(s) and/or the Placement Agent confirm to the transfer agent that it has
sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise
transfer such Common Stock in a bona fide transaction to a third party that is
not an affiliate of the Company; and (iii) the Investor(s) and/or Placement
Agent confirm to the transfer agent that the Investor(s) and/or Placement Agent
have complied with the prospectus delivery requirement.
(b) at any time upon any surrender of one or more certificates
evidencing Registrable Securities or shares of Common Stock underlying the
Repricing Shares, that bear the Legend, to the extent accompanied by a notice
requesting the issuance of new certificates free of the Legend to replace those
surrendered and containing representations that (i) the Investor(s) and/or the
Placement Agent is permitted to dispose of such Registrable Securities, or
shares of Common Stock underlying the Repricing Shares, without limitation as to
amount or manner of sale pursuant to Rule 144(k) under the Securities Act or
(ii) the Investor(s) and/or Placement Agent has sold, pledged or otherwise
transferred or agreed to sell, pledge or otherwise transfer such Registrable
Securities, or shares of Common Stock underlying the Repricing Shares, in a
manner other than pursuant to an effective registration statement, to a
transferee who will upon such transfer be entitled to freely tradeable
securities. The Company shall have counsel provide any and all opinions
necessary for the sale under Rule 144.
Any of the notices referred to above in this Section 9.1 may be sent by
facsimile to the Company's transfer agent.
Section 9.2 No Other Legend or Stock Transfer Restrictions. No legend other
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Common Stock, and no instructions or "stop
transfer orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article IX.
32
Section 9.3 Investor's Compliance. Nothing in this Article shall affect in
any way any of the Investors obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
ARTICLE X
Choice of Law
Section 10.1 Choice of Law; Venue; Jurisdiction. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of California, except for matters arising under the Securities Act, without
reference to principles of conflicts of law. The party commencing any legal
action shall have the option of choosing the jurisdiction of the U.S. District
Court sitting in the Southern District of the State of New York or in the
Northern or Central District of California in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any country having jurisdiction over the party
against whom such judgment was obtained, and each party hereby waives any
defenses available to it under local law and agrees to the enforcement of such a
judgment. Each party to this Agreement irrevocably consents to the service of
process in any such proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in any other
manner permitted by law. Each party waives its right to a trial by jury.
ARTICLE XI
Assignment; Entire Agreement, Amendment; Termination
Section 11.1 Assignment. The Investor's interest in this Agreement and its
ownership of Preferred Stock may be assigned or transferred at any time, in
whole or in part, to any other person or entity (including any affiliate of the
Investor) who agrees to, and truthfully can, make the representations and
warranties contained in Article III and who agrees to be bound by the covenants
of Article V. The provisions of this Agreement shall inure to the benefit of,
and be enforceable by, any transferee of any of the Common Stock purchased or
acquired by the Investors hereunder with respect to the Common Stock held by
such person.
Section 11.2 Termination. This Agreement shall terminate upon the earliest
of (i) the date that all the Registrable Securities have been sold by the
Investors pursuant to the Registration Statement; (ii) the date the Investors
receive an opinion from counsel to the Company that all of the Registrable
Securities may be sold under the provisions of Rule 144; or (iii) three years
after the commencement of the Commitment Period; provided, however, that the
provisions of Articles III, IV, V, VI (as long as the Securities are
beneficially owned by any of the Investors or the Placement Agent, or their
permitted assigns), VIII, IX, X, XI, and XII, herein, and the registration
rights
33
provisions for the Registrable Securities held by the Investors and the
Placement Agent set forth in this Agreement, and the Registration Rights
Agreement, shall survive the termination of this Agreement.
ARTICLE XII
Notices
Section 12.1 Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to Mustang Software, Inc.:
Mustang Software, Inc.
6200 Lake Ming Road
Bakersfield, CA 93306
Attention: Jim Harrer
Facsimile: (805) 873-2457
Telephone: (805) 873-2500
If to the Investors, at the addresses listed on Schedule A.
If to the Placement Agent, at the address listed on the first page of this
Agreement.
with a copy to:
Goldstein, Goldstein & Reis, LLP
65 Broadway, 10th Floor
New York, NY 10006
Attention: Scott H. Goldstein, Esq.
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 12.1 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the other
party hereto.
34
Section 12.2 Indemnification. The Company agrees to indemnify and hold
harmless each of the Investors and each officer, director of the Investors or
person, if any, who controls the Investor within the meaning of the Securities
Act against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Investors may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the breach of any term of this Agreement. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
Each Investor agrees that it will indemnify and hold harmless the Company,
and each officer, director of the Company or person, if any, who controls the
Company within the meaning of the Securities Act, against any losses, claims,
damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such officer, director or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the breach of any term of this
Agreement. This indemnity agreement will be in addition to any liability which
the Investors or any subsequent assignee may otherwise have.
Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the indemnifying
party from any liability which it may have to any indemnified party otherwise
than as to the particular item as to which indemnification is then being sought
solely pursuant to this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
one of the Investors, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including
35
any impleaded parties) include both the Investor and the indemnifying party and
the Investor shall have been advised by such counsel that there may be one or
more legal defenses available to the indemnifying party different from or in
conflict with any legal defenses which may be available to the Investors (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the Investors, it being understood, however, that
the indemnifying party shall, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable only for the
reasonable fees and expenses of one separate firm of attorneys for the
Investor(s), which firm shall be designated in writing by the Investor(s)). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 12.3 Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 12.2 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 12.2 hereof
provide for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any indemnified party, then the
Company and the applicable Investor shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in Section 12.2 shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contributions from any person who was
not guilty of such fraudulent misrepresentation.
ARTICLE XIII
Miscellaneous
Section 13.1 Counterparts; Facsimile; Amendments. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original
36
documents shall be as effective and enforceable as the original. This Agreement
may be amended only by a writing executed by the Company on the one hand, and
all of the Investors, and the Placement Agent, on the other hand.
Section 13.2 Entire Agreement. This Agreement, the Exhibits or Attachments
hereto, which include, but are not limited to the Certificate of Determination,
Warrant A and B, the Escrow Agreement, and the Registration Rights Agreement set
forth the entire agreement and understanding of the parties relating to the
subject matter hereof and supersedes all prior and contemporaneous agreements,
negotiations and understandings between the parties, both oral and written
relating to the subject matter hereof. The terms and conditions of all Exhibits
and Attachments to this Agreement are incorporated herein by this reference and
shall constitute part of this Agreement as is fully set forth herein.
Section 13.3 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 13.4 Title and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 13.5 Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement and all
Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual
consent of the Investor and the Company shall be required to employ any other
reporting entity.
Section 13.6 Replacement of Certificates. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Put Shares and (ii) in the case of
any such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form and amount to
the Company or (iii) in the case of any such mutilation, on surrender and
cancellation of such certificate, the Company at its expense will execute and
deliver, in lieu thereof, a new certificate of like tenor.
Section 13.7 Fees and Expenses. Each of the parties shall pay its own fees
and expenses (including the fees of any attorneys, accountants, appraisers or
others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby, except that the Company shall pay on the
Subscription Date (i) the sum of Twelve Thousand ($12,000) Dollars in cash out
of the proceeds received by the Company on the Subscription Date to Goldstein,
Goldstein & Reis, LLP for legal, administrative, and escrow fees, and (ii) to
the Placement Agent (A) the sum equal to four percent (4%) of the Initial Shares
Investment Amount payable in cash out of the proceeds
37
received by the Company on the Subscription Date, (B) 210 shares of Preferred
Stock, (C) a Warrant A to purchase 50,000 Warrant Shares, (D) a Warrant B to
purchase 7,000 Warrant Shares and (E) 29,480 shares of Common Stock, for
Placement Agent fees. On each Closing Date for a Put, the Company shall pay (i)
one-half of one (.5%) percent of the proceeds to Goldstein, Goldstein & Reis,
LLP for legal, administrative, and escrow agent fees, and (ii) five and one-half
(5.50%) percent of the proceeds to the Placement Agent. In addition to the
aforementioned fees, on the first Closing for a Put, the Company shall issue to
the Placement Agent 5,000 shares of Common Stock to be included in the
Registration Statement and a Warrant B to purchase 7,000 shares of Common Stock,
and on the second Closing for a Put, the Company shall issue to the Placement
Agent 5,000 shares of Common Stock and a Warrant B to purchase 7,000 shares of
Common Stock for Placement Agent fees.
Section 13.8 Noncircumvention. The Company and the Investors agree that
they shall not circumvent this Agreement and the Company's obligation to pay
fees to the Placement Agent, and the Company, the Investors and the Placement
Agent agree that they will not circumvent the provisions of this Agreement or
the Escrow Agreement and the Company's obligation for the payment of fees to the
Escrow Agent.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
MUSTANG SOFTWARE, INC.
By /s/ JAMES A. HARRER
---------------------------------
James A Harrer, President
By /s/ DONALD M. LEONARD
---------------------------------
Donald M. Leonard,
Chief Financial Officer
SETTONDOWN CAPITAL INTER-
NATIONAL LTD., Placement Agent
By /s/ [Signature Illegible]
---------------------------------
SETTONDOWN CAPITAL INTER-
NATIONAL LTD., Investor
By /s/ [Signature Illegible]
---------------------------------
38
THE CUTTY HUNK FUND LIMITED,
Investor
By /s/ [SIGNATURE ILLEGIBLE]
----------------------------------
CANAL LTD, Investor
By /s/ [SIGNATURE ILLEGIBLE]
----------------------------------
MANCHESTER ASSET
MANAGEMENT LTD, Investor
By /s/ [SIGNATURE ILLEGIBLE]
----------------------------------
SCHEDULE A
INVESTORS:
1. Settondown Capital International, Ltd., Charlotte House, Charlotte Street,
P.O. Box N. 9204, Nassau, Bahamas, Attention: Anthony L.M. Inder Riden,
Telephone: (242) 325- 1033,
Facsimile: (242) 323-7918.
Initial Investment Amount: $375,000
No. of Initial Shares of Common Stock: 153,000
No. of Initial Shares of Preferred Stock: 1,312
Warrant A: 37,500
Warrant B: 7,500
2. The Cuttyhunk Fund Limited, 73 Front Street, Hamilton HM 12, Bermuda,
Attention: Robert Rans, Telephone: (441) 295-8658,
Facsimile: (441) 292-6274.
Initial Investment Amount: $375,000
No. of Initial Shares of Common Stock: 153,000
No. of Initial Shares of Preferred Stock: 1,311
Warrant A: 37,500
Warrant B: 7,500
3. Canal, Ltd., c/o Hemisphere Management Limited, Hemisphere House, 9 Church
Street, P.O. Box HM 951, Hamilton, HM DX Bermuda, Attention: Marty Brandt,
Telephone: (441) 295-9166,
Facsimile: (441) 292-6145.
Initial Investment Amount: $375,000
No. of Initial Shares of Common Stock: 153,000
No. of Initial Shares of Preferred Stock: 1,312
Warrant A: 37,500
Warrant B: 7,500
4. Manchester Asset Management Ltd., Charlotte House, Charlotte Street, P.O.
Box N. 9204, Nassau, Bahamas, Attention: Anthony L.M. Inder Riden,
Telephone: (242) 325-1033,
Facsimile: (242) 323-7918.
Initial Investment Amount: $375,000
No. of Initial Shares of Common Stock: 153,000
No. of Initial Shares of Preferred Stock: 1,311
Warrant A: 37,500
Warrant B: 7,500