CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
Between
Pen Interconnect, Inc.
and
the Investors Signatory Hereto
CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT dated as of
February 4, 1999 (the "Agreement"), between, the Investors signatory hereto
(each an "Investor" and together the "Investors"), and Pen Interconnect, Inc., a
corporation organized and existing under the laws of the State of Utah (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 Investors,
and the Investors shall purchase, (i) $1,800,000 liquidation preference of
Convertible Preferred Stock (as defined below) and (ii) Warrants (as defined
below) to purchase up to 50,000 shares of the Common Stock (as defined below) at
120% of the Closing Date closing bid price for such Common Stock and a further
50,000 shares of Common Stock at 135% of the Closing Date closing bid price for
such Common Stock per $1,000,000 liquidation preference of Convertible Preferred
Stock purchased.
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") of the United States Securities Act and
Regulation D ("Regulation D") and the other rules and 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 securities to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
"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.
"Capital Shares Equivalents"
shall mean any securities, rights, or obligations that are convertible into or
exchangeable for or give 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.
"Closing"
shall mean the closing of the purchase and sale of the Convertible Preferred
Stock and Warrants pursuant to Section 2.1.
"Closing Date"
shall mean the date on which all conditions to the Closing have been satisfied
(as defined in Section 2.1 (b) hereto) and the Closing shall have occurred.
"Common Stock"
shall mean the Company's common stock, $0.01 par value per share.
"Conversion Shares"
shall mean the shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock and any shares of Common Stock issued as dividends
upon the Convertible Preferred Stock.
"Convertible Preferred Stock" shall mean the $1,800,000 liquidation preference
amount of Series A Convertible Preferred Stock, as described in the Certificate
of Designations in the form of Exhibit A hereto, to be issued to the Investor
pursuant to this Agreement.
"Damages"
shall mean any loss, claim, damage, judgment, penalty, deficiency, liability,
costs and expenses (including, without limitation, reasonable attorney's fees
and disbursements and reasonable costs and expenses of expert witnesses and
investigation).
"Effective Date"
shall mean the date on which the SEC first declares effective a Registration
Statement registering the resale of the Registrable Securities as set forth in
the Registration Rights Agreement.
"Escrow Agent"
shall have the meaning set forth in the Escrow Agreement.
"Escrow Agreement"
shall mean the Escrow Agreement in substantially the form of Exhibit D hereto
executed and delivered contemporaneously with this Agreement.
"Exchange Act"
shall mean the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
"Legend"
shall mean the legend set forth in Section 9.1.
"Market Price"
on any given date shall mean the average of the two lowest closing bid prices
on the Principal Market (as reported by Bloomberg L.P.) of the Common Stock on
any Trading Day during the twenty-two Trading Day period ending on the Trading
Day immediately prior to the date for which the Market Price is to be
determined.
"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 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
Convertible Preferred Stock or the Warrants in any material respect.
"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 such Shares then directly or
indirectly owned or held by or for the account of the Company.
"Person"
shall mean an individual, a corporation, a partnership, an association, a
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Principal Market"
shall mean the American Stock Exchange, the New York Stock Exchange, the
NASDAQ National Market, or the NASDAQ Small-Cap Market, whichever is at the time
the principal trading exchange or market for the Common Stock, based upon share
volume.
"Purchase Price" shall mean one million five hundred thousand dollars
($1,500,000).
"Registrable Securities"
shall mean the Conversion Shares and the Warrant Shares until (i) the
Registration Statement has been declared effective by the SEC, and all
Conversion Shares and Warrant Shares have been disposed of pursuant to the
Registration Statement, (ii) all Conversion Shares and Warrant Shares have 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) all Conversion Shares and Warrant Shares have been
otherwise transferred to holders who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive legend
or (iv) such time as, in the opinion of counsel to the Company, all Conversion
Shares and Warrant Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act.
"Registration Rights Agreement"
shall mean the agreement regarding the filing of the Registration Statement
for the resale of the Registrable Securities, entered into between the Company
and the Investor as of the Closing Date in the form annexed hereto as Exhibit C.
"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 in accordance with the intended method of distribution of
such securities), for the registration of the resale by the Investor of the
Registrable Securities under the Securities Act.
"Regulation D"
shall have the meaning set forth in the recitals of this Agreement.
"SEC"
shall mean the Securities and Exchange Commission.
"Section 4(2)"
shall have the meaning set forth in the recitals of this Agreement.
"Securities Act"
shall have the meaning set forth in the recitals of this Agreement.
"SEC Documents"
shall mean the Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1998 and each report, proxy statement or registration
statement filed by the Company with the SEC pursuant to the Exchange Act or the
Securities Act since the filing of such Annual Report through the date hereof.
"Shares" shall have the meaning set forth in Section 1.16.
"Trading Day"
shall mean any day during which the Principal Market at such day shall be open
for business.
"Warrants"
shall mean the warrants substantially in the form of Exhibit B to be issued to
the Investors hereunder, half of which for each Investor shall be exercisable at
120% of the Closing Date closing bid price of the Common Stock on the Principal
Market and the other half of which shall be exercisable at 135% of the Closing
Date closing bid price of the Common Stock on the Principal Market.
"Warrant Shares"
shall mean all shares of Common Stock or other securities issued or issuable
pursuant to exercise of the Warrants.
ARTICLE II
Purchase and Sale of Convertible Preferred Stock and Warrants
Section II.1. Investment.
(a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investors agree to purchase the Convertible
Preferred Stock and the Warrants at the Purchase Price on the Closing Date as
follows:
(i) Upon execution and delivery of this Agreement, each
Investor shall deliver to the Escrow Agent
immediately available funds in their proportionate
amount of the Purchase Price as set forth on the
signature pages hereto, except that RBB Bank AG shall
be entitled to pay $500,000 of its Purchase Price by
means of tendering back to the Company (through the
Escrow Agent) a convertible promissory note of the
Company dated October, 1998 previously issued to RBB
Bank in the principal amount of $500,000 (the "RBB
Debenture"), and the Company shall deliver the
Convertible Preferred Stock certificates and the
Warrants to the Escrow Agent, in each case to be held
by the Escrow Agent pursuant to the Escrow Agreement.
(ii) Upon satisfaction of the conditions set forth in
Section 2.1(b), the Closing ("Closing") shall occur
at the offices of the Escrow Agent at which the
Escrow Agent (x) shall release the Convertible
Preferred Stock and the Warrants to the Investor and
(y) shall release the Purchase Price (after all fees
have been paid as set forth in the Escrow Agreement)
and the RBB Debenture to the Company, pursuant to the
terms of the Escrow Agreement.
(b) The Closing is subject to the satisfaction of the following
conditions:
(i) acceptance and execution by the Company and by the
Investors, of this Agreement and all Exhibits hereto;
(ii) delivery into escrow by each Investor other than RBB
Bank of immediately available funds in the amount of
the Purchase Price of the Convertible Preferred Stock
and the Warrants, and the delivery by RBB Bank of the
RBB Debenture, as more fully set forth in the Escrow
Agreement;
(iii) all representations and warranties of the Investors
contained herein shall remain true and correct as of
the Closing Date (as a condition to the Company's
obligations);
(iv) all representations and warranties of the Company
contained herein shall remain true and correct as of
the Closing Date (as a condition to the Investors'
obligations);
(v) the Company shall have obtained all permits and
qualifications required by any state for the offer
and sale of the Convertible Preferred Stock and
Warrants, or shall have the availability of
exemptions therefrom;
(vi) the sale and issuance of the Convertible Preferred
Stock and the Warrants hereunder, and the proposed
issuance by the Company to the Investors of the
Common Stock underlying the Convertible Preferred
Stock and the Warrants upon the conversion or
exercise thereof shall be legally permitted by all
laws and regulations to which the Investors and the
Company are subject and there shall be no ruling,
judgment or writ of any court prohibiting the
transactions contemplated by this Agreement;
(vii) delivery of the original fully executed Convertible
Preferred Stock certificates and Warrants
certificates to the Escrow Agent;
(viii) delivery to the Escrow Agent of an opinion of Law
Offices of Oscar Folger, counsel to the Company, in
the form of Exhibit E hereto;
(ix) delivery to the Escrow Agent of the Irrevocable
Instructions to Transfer Agent in the form attached
hereto as Exhibit F;
(x) delivery to the Escrow Agent of the Registration
Rights Agreement; and
(xi) delivery to the Escrow Agent of the written
agreements of each director and officer of the
Company to vote all shares of Common Stock over which
they have voting power in favor of a resolution at
the next meeting of the Company's stockholders to
permit the Company to issue Conversion Shares in
excess of 20% of the Company's issued and outstanding
Common Stock as of the Closing Date.
Liquidated Damages.
The parties hereto acknowledge and agree that the sums payable pursuant to the
Registration Rights Agreement shall constitute liquidated damages and not
penalties. The parties further acknowledge that (a) the amount of loss or
damages likely to be incurred is incapable or is difficult to precisely
estimate, (b) the amounts specified in such Sections bear a reasonable
proportion and are not plainly or grossly disproportionate to the probable loss
likely to be incurred by the Investors in connection with the failure by the
Company to timely cause the registration of the Registrable Securities and (c)
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.
ARTICLE III
Representations and Warranties of Investor
Each Investor, severally and not jointly, represents and warrants to the Company
that:
Intent.
The Investor is entering into this Agreement for its own account and the
Investor has no present arrangement (whether or not legally binding) at any time
to sell the Convertible Preferred Stock, the Warrants, any Conversion Shares or
Warrant Shares to or through any person or entity; provided, however, that by
making the representations herein, the Investor does not agree to hold such
securities for any minimum or other specific term and reserves the right to
dispose of the Conversion Shares and Warrant Shares at any time in accordance
with federal and state securities laws applicable to such disposition.
Sophisticated Investor.
The Investor is a sophisticated investor (as described in Rule 506(b)(2)(ii)
of Regulation D) and an accredited investor (as defined in Rule 501 of
Regulation D), and Investor has such experience in business and financial
matters that it is capable of evaluating the merits and risks of an investment
in the Convertible Preferred Stock, the Warrants and the underlying Common
Stock. The Investor acknowledges that an investment in the Convertible Preferred
Stock, the Warrants and the underlying Common Stock is speculative and involves
a high degree of risk.
Authority.
This Agreement and each agreement attached as an Exhibit hereto which is
required to be executed by Investor has been duly authorized and validly
executed and delivered by the Investor and is a valid and binding agreement of
the Investor enforceable against it 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.
Not an Affiliate.
The Investor is not an officer, director or "affiliate" (as that term is
defined in Rule 405 of the Securities Act) of the Company.
Absence of Conflicts.
The execution and delivery of this Agreement and the agreements the forms of
which are attached as Exhibits hereto and executed in connection herewith, and
the consummation of the transactions contemplated hereby and thereby, and
compliance with the requirements hereof and thereof, will not violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
Investor or (a) violate any provision of any indenture, instrument or agreement
to which Investor is a party or is subject, or by which Investor or any of its
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 Investor 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
Investor is subject or to which any of its assets, operations or management may
be subject.
Disclosure; Access to Information.
The Investor has received all documents, records, books and other publicly
available information pertaining to Investor's investment in the Company that
have been requested by the Investor. The Company is subject to the periodic
reporting requirements of the Exchange Act, and the Investor has reviewed or
received copies of all SEC Documents that have been requested by it.
Manner of Sale.
At no time was Investor presented with or solicited by or through any leaflet,
public promotional meeting, television advertisement or any other form of
general solicitation or advertising.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investor that, except as set forth on
the Disclosure Schedule attached hereto:
Organization of the Company.
The Company is a corporation duly incorporated and existing in good standing
under the laws of the State of Utah and has all requisite corporate authority to
own its properties and to carry on its business as now being conducted. The
Company does not have any subsidiaries and does not own more that fifty percent
(50%) of or control any other business entity except as set forth in the SEC
Documents. The Company is duly qualified and is in good standing as a foreign
corporation to do business 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 have a Material
Adverse Effect.
Authority.
(i) The Company has the requisite corporate power and corporate authority to
enter into and perform its obligations under this Agreement, the Registration
Rights Agreement, the Escrow Agreement, and the Warrants and to issue the
Convertible Preferred Stock, the Conversion Shares, the Warrants and the Warrant
Shares pursuant to their respective terms, (ii) the execution, issuance and
delivery of this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Convertible Preferred Stock and the Warrants 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 or stockholders is
required, and (iii) this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Convertible Preferred Stock and the Warrants have been
duly executed and delivered by the Company and at the Closing shall 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. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock sufficient in number
for the conversion of the Convertible Preferred Stock and for the exercise of
the Warrants. The Company understands and acknowledges the potentially dilutive
effect to the Common Stock of the issuance of the Conversion Shares and, upon
any redemption of the Warrants, the Warrant Shares. The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Convertible Preferred Stock and Warrant Shares upon exercise of the Warrants
in accordance with this Agreement and the Convertible Preferred Stock is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company and
notwithstanding the commencement of any case under 11 U.S.C. ss. 101 et seq.
(the "Bankruptcy Code"). The Company shall not seek judicial relief from its
obligations hereunder except pursuant to the Bankruptcy Code. In the event the
Company is a debtor under the Bankruptcy Code, the Company hereby waives to the
fullest extent permitted any rights to relief it may have under 11 U.S.C. ss.
362 in respect of the conversion of the Convertible Preferred Stock and the
exercise of the Warrants. The Company agrees, without cost or expense to the
Investor, to take or consent to any and all action necessary to effectuate
relief under 11 U.S.C. ss. 362.
Capitalization.
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $0.01 par value per share, of which 6,068,481 shares are issued
and outstanding as of January 31, 1999 and 5,000,000 shares of preferred stock,
par value $0.01 per share, of which no shares are issued and outstanding. The
Company has duly designated 1,800 shares of its preferred stock as Series A
Convertible Preferred Stock. Except for outstanding options and warrants to
acquire a total of 8,070,000 shares of Common Stock, there are no outstanding
Capital Shares Equivalents. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
non-assessable.
Common Stock.
The Company has registered its Common Stock pursuant to Section 12(b) or (g)
of the Exchange Act and is in full compliance with all reporting requirements of
the Exchange Act, and the Company is in compliance with all requirements for the
continued listing or quotation of its Common Stock, and such Common Stock is
currently listed or quoted on the Principal Market. As of the date hereof, the
Principal Market is the Nasdaq National Market and the Company has not received
any notice regarding, and to its knowledge there is no threat, of the
termination or discontinuance of the eligibility of the Common Stock for such
listing.
SEC Documents.
The Company has delivered or made available to the Investors true and complete
copies of the SEC Documents. The Company has not provided to 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. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act, and rules
and regulations of the SEC promulgated thereunder and the SEC Documents did not
contain any untrue statement of a material fact or omit 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 complied 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 at the time of such
inclusion. 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 exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company nor any
of its subsidiaries has any material indebtedness, obligations or liabilities of
any kind (whether accrued, absolute, contingent or otherwise, and whether due or
to become due) that would have been required to be reflected in, reserved
against or otherwise described in the financial statements or in the notes
thereto in accordance with GAAP, which was not fully reflected in, reserved
against or otherwise described in the financial statements or the notes thereto
included in the SEC Documents or was not incurred in the ordinary course of
business consistent with the Company's past practices since the last date of
such financial statements.
Exemption from Registration; Valid Issuances.
Subject to the accuracy of the Investors' representations in Article III, the
sale of the Convertible Preferred Stock, the Conversion Shares, the Warrants and
the Warrant Shares will not require registration under the Securities Act and/or
any applicable state securities law. When issued and paid for in accordance with
the Warrants and validly converted in accordance with the terms of the
Convertible Preferred Stock, the Conversion Shares and the Warrant Shares will
be duly and validly issued, fully paid, and non-assessable. Neither the sales of
the Convertible Preferred Stock, the Conversion Shares, the Warrants or the
Warrant Shares pursuant to, nor the Company's performance of its obligations
under, this Agreement, the Registration Rights Agreement, the Escrow Agreement,
the certificate of designation for the Convertible Preferred Stock, or the
Warrants will (i) result in the creation or imposition by the Company of any
liens, charges, claims or other encumbrances upon the Convertible Preferred
Stock, the Conversion Shares, the Warrants or the Warrant Shares or, except as
contemplated herein, 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. The
Convertible Preferred Stock, the Conversion Shares, the Warrants and the Warrant
Shares shall not subject the Investors to personal liability to the Company or
its creditors by reason of the possession thereof.
No General Solicitation or Advertising in Regard to this Transaction.
Neither the Company nor any of its affiliates nor, to the knowledge of the
Company, 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 Convertible
Preferred Stock, the Conversion 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
Convertible Preferred Stock, the Conversion Shares, the Warrants or the Warrant
Shares under the Securities Act.
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 Convertible Preferred Stock,
the Conversion Shares, the Warrants and the Warrant Shares, do not and will not
(i) result in a violation of the Company's Certificate 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 or instrument, or any "lock-up" 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 material
property or asset of the Company is bound or affected, nor is the Company
otherwise in violation of, conflict with or default under any of the foregoing
(except in each case for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not 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 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 Convertible Preferred
Stock or the Warrants in accordance with the terms hereof (other than any SEC,
Nasdaq or state securities filings that may be required to be made by the
Company subsequent to Closing, any registration statement that may be filed
pursuant hereto, and any shareholder approval required by the rules applicable
to companies whose common stock trades on the Nasdaq Stock Market); 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.
No Material Adverse Change.
Since September 30, 1998, no Material Adverse Effect has occurred or exists
with respect to the Company, except as disclosed in the SEC Documents.
No Undisclosed Events or Circumstances.
Since September 30, 1998, 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.
No Integrated Offering.
Other than pursuant to an effective registration statement under the
Securities Act, or pursuant to the issuance or exercise of employee stock
options, or pursuant to its discussion with the Investors in connection with the
transactions contemplated hereby, the Company has not issued, offered or sold
the Convertible Preferred Stock, the Warrants or any shares of Common Stock
(including for this purpose any securities of the same or a similar class as the
Convertible Preferred Stock, the Warrants or Common Stock, or any securities
convertible into a exchangeable or exercisable for the Convertible Preferred
Stock or Common Stock or any such other securities) within the six-month period
next preceding the date hereof, and the Company shall not permit any of its
directors, officers or Affiliates directly or indirectly to take, any action
(including, without limitation, any offering or sale to any person or entity of
the Convertible Preferred, Warrants or shares of Common Stock), so as to make
unavailable the exemption from Securities Act registration being relied upon by
the Company for the offer and sale to Investors of the Convertible Preferred
Stock (and the Conversion Shares) or the Warrants (and the Warrant Shares) as
contemplated by this Agreement.
Litigation and Other Proceedings.
Except as disclosed 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 could 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, to the
knowledge of the Company, requested of any court, arbitrator or governmental
agency which could result in a Material Adverse Effect.
No Misleading or Untrue Communication.
The Company and, to the knowledge of the Company, any person representing the
Company, or any other person selling or offering to sell the Convertible
Preferred Stock or the Warrants in connection with the transaction contemplated
by this Agreement, have not made, at any time, any oral communication in
connection with the offer or sale of the same which contained any untrue
statement of a material fact or omitted to state any material fact necessary in
order to make the statements, in the light of the circumstances under which they
were made, not misleading.
Material Non-Public Information.
Except as set forth in the Disclosure Schedule, the Company has not disclosed
to the Investors any material non-public information that (i) if disclosed,
would reasonably be expected to have a material effect on the price of the
Common Stock or (ii) according to applicable law, rule or regulation, should
have been disclosed publicly by the Company prior to the date hereof but which
has not been so disclosed.
Insurance.
The Company maintains property and casualty, general liability, workers'
compensation, environmental hazard, personal injury and other similar types of
insurance with financially sound and reputable insurers that is adequate,
consistent with industry standards and the Company's historical claims
experience. The Company has not received notice from, and has no knowledge of
any threat by, any insurer (that has issued any insurance policy to the Company)
that such insurer intends to deny coverage under or cancel, discontinue or not
renew any insurance policy presently in force.
Section IV.16. Tax Matters.
(a) The Company has filed all Tax Returns which it is required to file
under applicable laws; all such Tax Returns are true and accurate and have been
prepared in compliance with all applicable laws; the Company has paid all Taxes
due and owing by it (whether or not such Taxes are required to be shown on a Tax
Return) and have withheld and paid over to the appropriate taxing authorities
all Taxes which it is required to withhold from amounts paid or owing to any
employee, stockholder, creditor or other third parties; and since December 31,
1997, the charges, accruals and reserves for Taxes with respect to the Company
(including any provisions for deferred income taxes) reflected on the books of
the Company are adequate to cover any Tax liabilities of the Company if its
current tax year were treated as ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction
where the Company does not file tax returns that such corporation is or may be
subject to taxation by that jurisdiction. There are no foreign, federal, state
or local tax audits or administrative or judicial proceedings pending or being
conducted with respect to the Company; no information related to Tax matters has
been requested by any foreign, federal, state or local taxing authority; and,
except as disclosed above, no written notice indicating an intent to open an
audit or other review has been received by the Company from any foreign,
federal, state or local taxing authority. There are no material unresolved
questions or claims concerning the Company's Tax liability. The Company (A) has
not executed or entered into a closing agreement pursuant to ss. 7121 of the
Internal Revenue Code or any predecessor provision thereof or any similar
provision of state, local or foreign law; or (B) has not agreed to or is
required to make any adjustments pursuant to ss. 481 (a) of the Internal Revenue
Code or any similar provision of state, local or foreign law by reason of a
change in accounting method initiated by the Company or any of its subsidiaries
or has any knowledge that the IRS has proposed any such adjustment or change in
accounting method, or has any application pending with any taxing authority
requesting permission for any changes in accounting methods that relate to the
business or operations of the Company. The Company has not been a United States
real property holding corporation within the meaning of ss. 897(c)(2) of the
Internal Revenue Code during the applicable period specified in ss.
897(c)(1)(A)(ii) of the Internal Revenue Code.
(c) The Company has not made an election under ss. 341(f) of the
Internal Revenue Code. The Company is not liable for the Taxes of another person
that is not a subsidiary of the Company under (A) Treas. Reg. ss. 1.1502-6 (or
comparable provisions of state, local or foreign law), (B) as a transferee or
successor, (C) by contract or indemnity or (D) otherwise. The Company is not a
party to any tax sharing agreement. The Company has not made any payments, is
obligated to make payments or is a party to an agreement that could obligate it
to make any payments that would not be deductible under ss. 280G of the Internal
Revenue Code.
(d) For purposes of this Section 4.16:
"IRS" means the United States Internal Revenue Service.
"Tax" or "Taxes" means federal, state, county, local, foreign,
or other income, gross receipts, ad valorem, franchise,
profits, sales or use, transfer, registration, excise,
utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other
withholding, employment, social security, severance, stamp,
occupation, alternative or add-on minimum, estimated and other
taxes of any kind whatsoever (including, without limitation,
deficiencies, penalties, additions to tax, and interest
attributable thereto) whether disputed or not.
"Tax Return" means any return, information report or filing
with respect to Taxes, including any schedules attached
thereto and including any amendment thereof.
Property.
Neither the Company nor any of its subsidiaries owns any real property. Each
of the Company and its subsidiaries has good and marketable title to all
personal property owned by it, free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company; and to the Company's knowledge any real property,
mineral or water rights, and buildings held under lease by the Company as tenant
are held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
intended to be made of such property, mineral or water rights, and buildings by
the Company.
Intellectual Property.
Each of the Company and its subsidiaries owns or possesses adequate and
enforceable rights to use all patents, patent applications, trademarks,
trademark applications, trade names, service marks, copyrights, copyright
applications, licenses, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures) and other similar rights and proprietary knowledge (collectively,
"Intangibles") necessary for the conduct of its business as now being conducted.
To the Company's knowledge, except as disclosed in the SEC Documents neither the
Company nor any of its subsidiaries is infringing upon or in conflict with any
right of any other person with respect to any Intangibles. Except as disclosed
in the SEC Documents, no claims have been asserted by any person to the
ownership or use of any Intangibles and the Company has no knowledge of any
basis for such claim.
Internal Controls and Procedures.
The Company maintains books and records and internal accounting controls which
provide reasonable assurance that (i) all transactions to which the Company is a
party or by which its properties are bound are executed with management's
authorization; (ii) the recorded accounting of the Company's assets is compared
with existing assets at regular intervals; (iii) access to the Company's assets
is permitted only in accordance with management's authorization; and (iv) all
transactions to which the Company is a party or by which its properties are
bound are recorded as necessary to permit preparation of the financial
statements of the Company in accordance with U.S. generally accepted accounting
principles.
Payments and Contributions.
Neither the Company nor any of its directors, officers or, to its knowledge,
other employees has (i) used any Company funds for any unlawful contribution,
endorsement, gift, entertainment or other unlawful expense relating to political
activity; (ii) made any direct or indirect unlawful payment of Company funds to
any foreign or domestic government official or employee; (iii) violated or is in
violation of any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any bribe, rebate, payoff, influence payment, kickback or
other similar payment to any person with respect to Company matters.
No Misrepresentation.
Except as set forth in the Disclosure Schedule, no representation or warranty
of the Company contained in this Agreement, any schedule, annex or exhibit
hereto or any agreement, instrument or certificate furnished by the Company to
the Investors pursuant to this Agreement, contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, not misleading.
ARTICLE V
Covenants of the Investors
Compliance with Law.
The Investor's trading activities with respect to shares of the Company's
Common Stock will be in compliance with all applicable state and federal
securities laws, rules and regulations and rules and regulations of the
Principal Market on which the Company's Common Stock is listed.
Short Sales.
The Investor and its affiliates shall not engage in short sales of the
Company's Common Stock until after the effective date of the Registration
Statement. It shall not be a breach of this covenant if an Investor converts any
of its Convertible Preferred Stock prior to the earlier of the 120th day
following the Closing Date or the effective date of the Registration Statement,
and then hedges that long position by any lawful means.
ARTICLE VI
Covenants of the Company
Registration Rights.
The Company shall cause the Registration Rights Agreement to remain in full
force and effect and the Company shall comply in all material respects with the
terms thereof.
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 issue the Conversion
Shares and the Warrant Shares pursuant to any conversion of the Convertible
Preferred Stock or exercise of the Warrants; such amount of shares of Common
Stock to be reserved shall be calculated based upon a Market Price for the
Common Stock under the terms of the Convertible Preferred Stock of $0.25. The
number of shares so reserved from time to time, as theretofore increased or
reduced as hereinafter provided, may be reduced by the number of shares actually
delivered pursuant to any conversion of the Convertible Preferred Stock or
exercise of the Warrants and 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 obligated to issue by reason of adjustments
to the Warrants.
Listing of Common Stock.
The Company hereby agrees to maintain the listing of the Common Stock on a
Principal Market, and as soon as reasonably practicable following the Closing to
list the Conversion Shares and the Warrant Shares on the Principal Market. 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 the
Conversion Shares and the Warrant Shares, and will take such other action as is
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 take all action to continue the listing and trading 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
and shall provide Investors with copies of any correspondence to or from such
Principal Market which questions or threatens delisting of the Common Stock,
within three (3) Business Days of the Company's receipt thereof, until the
Investors have disposed of all of their Registrable Securities.
Exchange Act Registration.
The Company will cause its Common Stock to continue to be registered under
Section 12(b) or (g) of the Exchange Act, will use its best efforts to comply in
all respects with its reporting and filing obligations under the Exchange Act,
and will not take any action or file any document (whether or not permitted by
the 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 until the Investors has disposed of all of its Registrable
Securities.
Legends.
The certificates evidencing the Registrable Securities shall be free of
legends, except as set forth in Article IX.
Corporate Existence.
The Company will take all steps necessary to preserve and continue the
corporate existence of the Company.
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 or by operation of law the
obligation to deliver to the Investors such shares of stock and/or securities as
the Investors are entitled to receive pursuant to this Agreement.
Issuance of Convertible Preferred Stock and Warrant Shares.
The sale of the Convertible Preferred Stock and the issuance of the Warrant
Shares pursuant to exercise of the Warrants and the Conversion Shares upon
conversion of the Convertible Preferred Stock shall be made in accordance with
the provisions and requirements of Section 4(2) of Regulation D and any
applicable state securities law. The Company shall make any necessary SEC and
"blue sky" filings required to be made by the Company in connection with the
sale of the Securities to the Investors as required by all applicable Laws, and
shall provide a copy thereof to the Investors promptly after such filing.
Limitation on Future Financing.
The Company agrees that it will not enter into any sale of its securities for
cash at a discount to Market Price until 120 days after the effective date of
the Registration Statement, without giving the Investors a pro-rata right of
first refusal to provide such financing, which the Investors must accept within
five (5) Trading Days, except (i) pursuant to any presently existing employee
benefit plan which plan has been approved by the Company's stockholders, (ii)
pursuant to any compensatory plan for a full-time employee or key consultant,
(iii) pursuant to any repricing of any existing warrants or options outstanding
on the Closing Date (but not to any exercise price below the closing bid price
of the Common Stock on the Principal Market on the date of such repricing, or
(iv) with the prior approval of a majority in interest of the Investors, which
will not be unreasonably withheld, in connection with a strategic partnership or
other business transaction, the principal purpose of which is not simply to
raise money.
Pro-Rata Redemption. The Company agrees that if it shall redeem any of the
Convertible Preferred Stock, that it shall make such redemption pro-rata among
all Investors in proportion their respective initial purchases of such
securities pursuant to this Agreement.
ARTICLE VII
Survival; Indemnification
Survival.
The representations, warranties and covenants made by each of the Company and
each Investor in this Agreement, the annexes, schedules and exhibits hereto and
in each instrument, agreement and certificate entered into and delivered by them
pursuant to this Agreement, shall survive the Closing and the consummation of
the transactions contemplated hereby. In the event of a breach or violation of
any of such representations, warranties or covenants, the party to whom such
representations, warranties or covenants have been made shall have all rights
and remedies for such breach or violation available to it under the provisions
of this Agreement or otherwise, whether at law or in equity, irrespective of any
investigation made by or on behalf of such party on or prior to the Closing
Date.
Indemnity.
(a) The Company hereby agrees to indemnify and hold harmless the Investors,
their respective Affiliates and their respective officers, directors, partners
and members (collectively, the "Investor Indemnitees"), from and against any and
all Damages, and agrees to reimburse the Investor Indemnitees for all reasonable
out-of-pocket expenses (including the reasonable fees and expenses of legal
counsel), in each case promptly as incurred by the Investor Indemnitees and to
the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any
of the Company's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company
pursuant to this Agreement; or
(ii) any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement, the annexes, schedules or exhibits hereto
or any instrument, agreement or certificate entered into or delivered
by the Company pursuant to this Agreement.
(a) Each Investor, severally and not jointly hereby agrees to indemnify
and hold harmless the Company, its Affiliates and their respective officers,
directors, partners and members (collectively, the "Company Indemnitees"), from
and against any and all Damages, and agrees to reimburse the Company Indemnitees
for reasonable all out-of-pocket expenses (including the reasonable fees and
expenses of legal counsel), in each case promptly as incurred by the Company
Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact, or breach of any
of the Investor's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Investor
pursuant to this Agreement; or
(ii) any failure by the Investor to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement or any instrument, certificate or agreement
entered into or delivered by the Investor pursuant to this Agreement.
Notice.
Promptly after receipt by either party hereto seeking indemnification pursuant
to Section 7.2 (an "Indemnified Party") of written notice of any investigation,
claim, proceeding or other action in respect of which indemnification is being
sought (each, a "Claim"), the Indemnified Party promptly shall notify the party
against whom indemnification pursuant to Section 7.2 is being sought (the
"Indemnifying Party") of the commencement thereof; but the omission to so notify
the Indemnifying Party shall not relieve it from any liability that it otherwise
may have to the Indemnified Party, except to the extent that the Indemnifying
Party is materially prejudiced and forfeits substantive rights and defenses by
reason of such failure. In connection with any Claim as to which both the
Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party
shall be entitled to assume the defense thereof. Notwithstanding the assumption
of the defense of any Claim by the Indemnifying Party, the Indemnified Party
shall have the right to employ separate legal counsel and to participate in the
defense of such Claim, and the Indemnifying Party shall bear the reasonable
fees, out-of-pocket costs and expenses of such separate legal counsel to the
Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed
to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party
and the Indemnifying Party reasonably shall have concluded that representation
of the Indemnified Party and the Indemnifying Party by the same legal counsel
would not be appropriate due to actual or, as reasonably determined by legal
counsel to the Indemnified Party, potentially differing interests between such
parties in the conduct of the defense of such Claim, or if there may be legal
defenses available to the Indemnified Party that are in addition to or disparate
from those available to the Indemnifying Party, or (z) the Indemnifying Party
shall have failed to employ legal counsel reasonably satisfactory to the
Indemnified Party within a reasonable period of time after notice of the
commencement of such Claim. If the Indemnified Party employs separate legal
counsel in circumstances other than as described in clauses (x), (y) or (z)
above, the fees, costs and expenses of such legal counsel shall be borne
exclusively by the Indemnified Party. Except as provided above, the Indemnifying
Party shall not, in connection with any Claim in the same jurisdiction, be
liable for the fees and expenses of more than one firm of legal counsel for the
Indemnified Party (together with appropriate local counsel). The Indemnifying
Party shall not, without the prior written consent of the Indemnified Party
(which consent shall not unreasonably be withheld), settle or compromise any
Claim or consent to the entry of any judgment that does not include an
unconditional release of the Indemnified Party from all liabilities with respect
to such Claim or judgment.
Direct Claims.
In the event one party hereunder should have a claim for indemnification that
does not involve a claim or demand being asserted by a third party, the
Indemnified Party promptly shall deliver notice of such claim to the
Indemnifying Party. If the Indemnified Party disputes the claim, such dispute
shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association as set forth in
Article X. Judgment upon any award rendered by any arbitrators may be entered in
any court having competent jurisdiction thereof.
ARTICLE VIII
Due Diligence Review; Non-Disclosure of Non-Public Information.
Due Diligence Review.
Subject to Section 8.2, 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 and who are reasonably
acceptable to the Company), 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, Nasdaq or other filing, all SEC Documents
and other filings with the SEC, and all other publicly available 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 publicly available information reasonably requested
by 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 VIII.2. Non-Disclosure of Non-Public Information.
(a) The Company shall not disclose material 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 the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. Other than disclosure of any comment letters
received from the SEC staff with respect to the Registration Statement, the
Company may, as a condition to disclosing any non-public information hereunder,
require 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 material
non-public information to the Investors or their advisors or representatives,
and the Company represents that it does not disseminate material 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, promptly 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 material 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 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 8.2 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 as set forth in Section 8.2(a)) 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; Transfer Agent Instructions
Legends.
Unless otherwise provided below, each certificate representing Registrable
Securities will bear the following legend or equivalent (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.
Transfer Agent Instructions. 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 F 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 provided in the Registration Rights
Agreement.
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 Registrable Securities 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.
Investors' Compliance.
Nothing in this Article shall affect in any way each Investor's obligations
under any agreement to comply with all applicable securities laws upon resale of
the Common Stock.
ARTICLE X
Choice of Law
Governing Law/Arbitration.
This Agreement shall be governed by and construed in accordance with the laws
of the State of New York applicable to contracts made in New York by persons
domiciled in New York City and without regard to its principles of conflicts of
laws. Any dispute under this Agreement or any Exhibit attached hereto shall be
submitted to arbitration under the American Arbitration Association (the "AAA")
in New York City, New York, and shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three (3) members
(hereinafter referred to as the "Board of Arbitration") selected as according to
the rules governing the AAA. The Board of Arbitration shall meet on consecutive
business days in New York City, New York, and shall reach and render a decision
in writing (concurred in by a majority of the members of the Board of
Arbitration) with respect to the amount, if any, which the losing party is
required to pay to the other party in respect of a claim filed. In connection
with rendering its decisions, the Board of Arbitration shall adopt and follow
the laws of the State of New York. To the extent practical, decisions of the
Board of Arbitration shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. Any decision made by the Board of Arbitration (either
prior to or after the expiration of such thirty (30) calendar day period) shall
be final, binding and conclusive on the parties to the dispute, and entitled to
be enforced to the fullest extent permitted by law and entered in any court of
competent jurisdiction. The Board of Arbitration shall be authorized and is
hereby directed to enter a default judgment against any party failing to
participate in any proceeding hereunder within the time periods set forth in the
AAA rules. The non-prevailing party to any arbitration (as determined by the
Board of Arbitration) shall pay the expenses of the prevailing party including
reasonable attorney's fees, in connection with such arbitration. Any party shall
be entitled to obtain injunctive relief from a court in an appropriate case.
ARTICLE XI
Assignment
Assignment.
Neither this Agreement nor any rights of the Investors or the Company
hereunder may be assigned by either party to any other person. Notwithstanding
the foregoing, (a) the provisions of this Agreement shall inure to the benefit
of, and be enforceable by, any permitted transferee of any of the Convertible
Preferred Stock or Warrants purchased or acquired by any Investor hereunder with
respect to the Convertible Preferred Stock or Warrants held by such person, and
(b) upon the prior written consent of the Company, which consent shall not
unreasonably be withheld or delayed, each Investor's interest in this Agreement
may be assigned at any time, in whole or in part, to any other person or entity
(including any affiliate of the Investor) who agrees to make the representations
and warranties contained in Article III and who agrees to be bound by the terms
of this Agreement.
ARTICLE XII
Notices
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 the Company: Pen Interconnect, Inc.
1601 Alton Parkway
Irvine, CA 92606
Attention: Stephen J. Fryer, President
Telephone: (949) 261-3118
Facsimile: (949) 261-3199
if to the Investors: As set forth on the signature pages hereto
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Facsimile: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
ARTICLE XIII
Miscellaneous
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 documents shall be
as effective and enforceable as the original. This Agreement may be amended only
by a writing executed by all parties.
Entire Agreement.
This Agreement, the agreements attached as Exhibits hereto, which include, but
are not limited to the Convertible Preferred Stock, the Warrants, 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 to this
Agreement are incorporated herein by this reference and shall constitute part of
this Agreement as is fully set forth herein.
Severability.
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.
Headings.
The headings used in this Agreement are used for convenience only and are not
to be considered in construing or interpreting this Agreement.
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 shall be Bloomberg, L.P. or any successor thereto. The written
mutual consent of the Investors and the Company shall be required to employ any
other reporting entity.
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
Convertible Preferred Stock or any Conversion Shares or Warrants or any Warrant
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 (which shall not exceed that
required by the Company's transfer agent in the ordinary course) 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.
Fees and Expenses.
Each of the Company and the Investors agrees to pay its own expenses incident
to the performance of its obligations hereunder, except that the Company shall
pay the fees, expenses and disbursements of Epstein Becker & Green, P.C.,
counsel to the investors other than RBB Bank, in an amount equal to $10,000, all
as set forth in the Escrow Agreement.
Brokerage.
Each of the parties hereto represents that it has had no dealings in
connection with this transaction with any finder or broker who will demand
payment of any fee or commission from the other party except for JWGenesis
Financial Services Corp., whose fee shall be paid by the Company. The Company on
the one hand, and the Investors, on the other hand, agree to indemnify the other
against and hold the other harmless from any and all liabilities to any person
claiming brokerage commissions or finder's fees on account of services purported
to have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
PEN INTERCONNECT, INC.
By: /s/Stephen Fryer
Stephen Fryer, President
Address: Investor: Austost Anstalt Schaan, $250,000
Fax: By:/s/Austost Anstalt Schaan
Name:
Authorized Signatory
Address: Investor: Balmore Funds, S.A., $250,000
Fax: By: /s/Balmore Funds, S.A.
Name:
Authorized Signatory
Address: c/o Ultra Finanz Investor: AMRO International, S.A., $500,000
Grossmunster Platz 26
Zurich CH 8022, Switzerland
Fax: 011-411-262-5515 By:/s/H.U. Bachofen
Name: H.U. Bachofen, Director
Address: Investor: RBB Bank AG, $800,000
Fax: By:/s/Herbert Strauss
Herbert Strauss, Head Trader
DISCLOSURE SCHEDULE TO0
Convertible Preferred Stock and Warrant Purchase Agreement by and between
RBB Bank AG, Austost Anstalt Schaan, Balmore Funds, S.A.,
and AMRO International, S.A. and Pen Interconnect, Inc.,
(the "Company"), dated as of February 4, 1999 (the "Agreement")
Numbers refer to the relevant sections of the Purchase Agreement
4.4) The Company has received notifications from The Nasdaq Stock Market
questioning whether the Company meets the market capitalization and net
tangible asset requirements for continued listing on The Nasdaq Stock
Market and can generally continue in compliance with all continued
listing standards. The Company has requested an oral hearing to
demonstrate compliance with or request temporary exceptions from the
listing requirements. This oral hearing is scheduled for February 26,
1999.
4.5) Since September 30, 1998, the Company has constantly varying balances
on its principal bank financing with FINOVA and has continued to incur
material operating losses.
4.10) See 4.4 and 4.5.
4.13) YC International, Inc., a California corporation., d/b/a Yamada
International Corporation vs. Pen Interconnect, Inc., a Utah
corporation, Case #990200093DC before the 3rd Judicial District Court,
Salt Lake County, State of Utah, Murray Dept. claims $79,309.52 for
goods sold to the Company plus accrued interest. An answer is due
2/12/99 and the Company is involved in settlement discussions.
4.15(i) See 4.4 and 4.5. Also, the Company is in the process of closing the
sale of its Salt Lake City-based MOTOSAT division to James Pendleton
and affiliates. The letter of intent for this sale was previously
announced to the public but, as of the date of the Purchase Agreement,
the Company had not made any announcements relating to the closing.