SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "AGREEMENT"), dated as of May 23, 2005,
by and among GTC Telecom Corp., a Nevada corporation (the "COMPANY"), and the
subscribers identified on the signature page hereto (each a "SUBSCRIBER" and
collectively "SUBSCRIBERS").
WHEREAS, the Company and the Subscribers are executing and delivering this
Agreement in reliance upon an exemption from securities registration afforded by
the provisions of Section 4(2), Section 4(6) and/or Regulation D ("REGULATION
D") as promulgated by the United States Securities and Exchange Commission (the
"COMMISSION") under the Securities Act of 1933, as amended (the "1933 ACT").
WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue and sell to the Subscribers, as
provided herein, and the Subscribers, in the aggregate, shall purchase One
Million and Eighty-Eight Thousand Two Hundred and Thirty-Five Dollars
($1,088,235) (the "PURCHASE PRICE") of principal amount of promissory notes of
the Company ("NOTE" or "NOTES") at an original issue discount of fifteen percent
(15%), which Notes are convertible into shares of the Company's common stock,
$.001 par value (the "COMMON STOCK") at a per share conversion price set forth
in the Note; two (2) shares of Common Stock for each One Dollar ($1.00) of
Purchase Price ("INITIAL SHARES"); and share purchase warrants (the "WARRANTS")
in the forms attached hereto as EXHIBITS A1 AND A2, to purchase shares of Common
Stock (the "WARRANT SHARES"). The Notes, Initial Shares, shares of Common Stock
issuable upon conversion of the Notes (the "SHARES"), the Warrants and the
Warrant Shares are collectively referred to herein as the "SECURITIES"; and
WHEREAS, the aggregate proceeds of the sale of the Notes, Initial Shares and the
Warrants contemplated hereby shall be held in escrow pursuant to the terms of a
Funds Escrow Agreement to be executed by the parties substantially in the form
attached hereto as EXHIBIT B (the "ESCROW AGREEMENT").
NOW, THEREFORE, in consideration of the mutual covenants and other agreements
contained in this Agreement the Company and the Subscribers hereby agree as
follows:
1. Closing. Subject to the satisfaction or waiver of the terms and
conditions of this Agreement, on the "CLOSING DATE" (as defined in Section 13(b)
hereof), each Subscriber shall purchase and the Company shall sell to each
Subscriber a Note in the principal amount designated on the signature page
hereto for the consideration set forth on the signature page hereto, the Initial
Shares, and the amount of Warrants determined pursuant to Section 3 below.
2. Security Interest. The Subscribers will be granted a security
interest in all the assets of the Company, including ownership of Subsidiaries
as defined in Section 5(a) of this Agreement, and the assets of the Subsidiaries
to be memorialized in "SECURITY AGREEMENTS", forms of which are annexed hereto
as EXHIBIT C1 AND C2. The Company will execute such other agreements, documents
and financing statements to be filed at the Company's expense with such
jurisdictions, states and counties designated by the Subscribers. The Company
will also execute all such documents reasonably necessary in the opinion of
Subscriber to memorialize and further protect the security interest described
herein. The Subscribers will appoint a Collateral Agent to represent them
collectively in connection with the security interest to be granted in the
assets of the Company and Subsidiaries. The appointment will be pursuant to a
"COLLATERAL AGENT AGREEMENT", a form of which is annexed hereto as EXHIBIT D.
3. Warrants.
(a) Class A Warrants. On the Closing Date, the Company will issue and
deliver Class A Warrants to the Subscribers. Six Class A Warrants will be
issued for each one dollar of Note principal issued on the Closing Date. The
exercise price to acquire a Warrant Share upon exercise of a Class A Warrant
shall be 110% of the closing bid price of the Common Stock as reported by
Bloomberg LP for the OTC Bulletin Board ("BULLETIN BOARD") for the last trading
day preceding the Closing Date, subject to reduction as described in the Class A
Warrant. The Class A Warrants shall be exercisable until four years after the
Closing Date.
(b) Class B Warrants. On the Closing Date, the Company will issue and
deliver Class B Warrants to the Subscribers. Five Class B Warrants will be
issued for each one dollar of Note principal issued on the Closing Date. The
exercise price to acquire a Warrant Share upon exercise of a Class B Warrant
shall be $0.20. The Class B Warrants shall be exercisable until the
Registration Statement [defined in Section 11.1(iv)] has been effective for the
public unrestricted resale of the Shares and Warrants for 120 days.
4. Subscriber's Representations and Warranties. Each Subscriber
hereby represents and warrants to and agrees with the Company only as to such
Subscriber that:
(a) Organization and Standing of the Subscribers. If the Subscriber is
an entity, such Subscriber is a corporation, partnership or other entity duly
incorporated or organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization.
(b) Authorization and Power. Each Subscriber has the requisite power
and authority to enter into and perform this Agreement and to purchase the
Notes, Initial Shares and Warrants being sold to it hereunder. The execution,
delivery and performance of this Agreement by such Subscriber and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Subscriber or its Board of Directors,
stockholders, partners, members, as the case may be, is required. This
Agreement has been duly authorized, executed and delivered by Subscriber and
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Subscriber enforceable against the Subscriber in
accordance with the terms thereof.
(c) No Conflicts. The execution, delivery and performance of this
Agreement and the consummation by Subscriber of the transactions contemplated
hereby or relating hereto do not and will not (i) result in a violation of such
Subscriber's charter documents or bylaws or other organizational documents or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of any agreement,
indenture or instrument or obligation to which such Subscriber is a party or by
which its properties or assets are bound, or result in a violation of any law,
rule, or regulation, or any order, judgment or decree of any court or
governmental agency applicable to such Subscriber or its properties (except for
such conflicts, defaults and violations as would not, individually or in the
aggregate, have a material adverse effect on such Subscriber). Such Subscriber
is not required 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 to
purchase the Notes or acquire the Warrants in accordance with the terms hereof,
provided that for purposes of the representation made in this sentence, such
Subscriber is assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein.
(d) Information on Company. The Subscriber has been furnished with or
has had access at the EDGAR Website of the Commission to the Company's Form
10-KSB for the year ended June 30, 2004 as filed with the Commission, together
with all subsequently filed Forms 10-QSB, 8-K, and filings made with the
Commission available at the EDGAR website (hereinafter referred to collectively
as the "REPORTS"). The Subscriber has had an opportunity to ask questions and
receive answers from representatives of the Company. In addition, the Subscriber
has received in writing from the Company such other information concerning its
operations, financial condition and other matters as the Subscriber has
requested in writing (such other information is collectively, the "OTHER WRITTEN
INFORMATION"), and considered all factors the Subscriber deems material in
deciding on the advisability of investing in the Securities.
(e) Information on Subscriber. The Subscriber is, and will be at the
time of the conversion of the Notes and exercise of the Warrants, an "ACCREDITED
INVESTOR", as such term is defined in Regulation D promulgated by the Commission
under the 1933 Act, is experienced in investments and business matters, has made
investments of a speculative nature and has purchased securities of United
States publicly-owned companies in private placements in the past and, with its
representatives, has such knowledge and experience in financial, tax and other
business matters as to enable the Subscriber to utilize the information made
available by the Company to evaluate the merits and risks of and to make an
informed investment decision with respect to the proposed purchase, which
represents a speculative investment. The Subscriber has the authority and is
duly and legally qualified to purchase and own the Securities. The Subscriber
is able to bear the risk of such investment for an indefinite period and to
afford a complete loss thereof. The information set forth on the signature page
hereto regarding the Subscriber is accurate. The Subscriber is not required to
be registered as a broker-dealer under Section 15 of the Securities Exchange Act
of 1934, as amended (the "1934 Act") and the Subscriber is not a broker-dealer.
(f) Purchase of Notes and Warrants. On the Closing Date, the
Subscriber will purchase the Notes, Initial Shares and Warrants as principal for
its own account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof.
(g) Compliance with Securities Act. The Subscriber understands and
agrees that the Securities have not been registered under the 1933 Act or any
applicable state securities laws, by reason of their issuance in a transaction
that does not require registration under the 1933 Act (based in part on the
accuracy of the representations and warranties of Subscriber contained herein),
and that such Securities must be held indefinitely unless a subsequent
disposition is registered under the 1933 Act or any applicable state securities
laws or is exempt from such registration.
(h) Shares Legend. The Shares, Initial Shares and the Warrant Shares
shall bear the following or similar legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO GTC TELECOM CORP. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(i) Warrants Legend. The Warrants shall bear the following
or similar legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO GTC TELECOM
CORP. THAT SUCH REGISTRATION IS NOT REQUIRED."
(j) Note Legend. The Note shall bear the following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE
COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO GTC TELECOM CORP. THAT SUCH REGISTRATION IS NOT REQUIRED."
(k) Communication of Offer. The offer to sell the Securities was
directly communicated to the Subscriber by the Company. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
(l) Authority; Enforceability. This Agreement and other agreements
delivered together with this Agreement or in connection herewith have been duly
authorized, executed and delivered by the Subscriber and are valid and binding
agreements enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights generally and
to general principles of equity; and Subscriber has full corporate power and
authority necessary to enter into this Agreement and such other agreements and
to perform its obligations hereunder and under all other agreements entered into
by the Subscriber relating hereto.
(m) Restricted Securities. Subscriber understands that the Securities
have not been registered under the 1933 Act and such Subscriber will not sell,
offer to sell, assign, pledge, hypothecate or otherwise transfer any of the
Securities unless pursuant to an effective registration statement under the 1933
Act, or unless an exemption from registration is available. Notwithstanding
anything to the contrary contained in this Agreement, such Subscriber may
transfer (without restriction and without the need for an opinion of counsel)
the Securities to its Affiliates (as defined below) provided that each such
Affiliate is an "accredited investor" under Regulation D and such Affiliate
agrees to be bound by the terms and conditions of this Agreement. For the
purposes of this Agreement, an "AFFILIATE" of any person or entity means any
other person or entity directly or indirectly controlling, controlled by or
under direct or indirect common control with such person or entity. Affiliate
includes each subsidiary of the Company. For purposes of this definition,
"CONTROL" means the power to direct the management and policies of such person
or firm, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
(n) No Governmental Review. Each Subscriber understands that no
United States federal or state agency or any other governmental or state agency
has passed on or made recommendations or endorsement of the Securities or the
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.
(o) Correctness of Representations. Each Subscriber represents as
to such Subscriber that the foregoing representations and warranties are true
and correct as of the date hereof and, unless a Subscriber otherwise notifies
the Company prior to the Closing Date shall be true and correct as of the
Closing Date.
(p) Survival. The foregoing representations and warranties shall
survive the Closing Date for a period of three years.
5. Company Representations and Warranties. The Company represents and
warrants to and agrees with each Subscriber that:
(a) Due Incorporation. The Company and each of its Subsidiaries is a
corporation or other entity duly incorporated or organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization and has the requisite corporate power to own its properties and to
carry on its business as presently conducted. The Company and each of its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect. For purposes of this Agreement, a "MATERIAL ADVERSE EFFECT"
shall mean a material adverse effect on the financial condition, results of
operations, properties or business of the Company and its Subsidiaries taken as
a whole. For purposes of this Agreement, "SUBSIDIARY" means, with respect to
any entity at any date, any corporation, limited or general partnership, limited
liability company, trust, estate, association, joint venture or other business
entity of which more than 50% of (i) the outstanding capital stock having (in
the absence of contingencies) ordinary voting power to elect a majority of the
board of directors or other managing body of such entity, (ii) in the case of a
partnership or limited liability company, the interest in the capital or profits
of such partnership or limited liability company or (iii) in the case of a
trust, estate, association, joint venture or other entity, the beneficial
interest in such trust, estate, association or other entity business is, at the
time of determination, owned or controlled directly or indirectly through one or
more intermediaries, by such entity. All the Company's Subsidiaries as of the
Closing Date are set forth on SCHEDULE 5(A) hereto.
(b) Outstanding Stock. All issued and outstanding shares of capital
stock of the Company has been duly authorized and validly issued and are fully
paid and nonassessable.
(c) Authority; Enforceability. This Agreement, the Note, the Warrants,
the Escrow Agreement, Security Agreements and Collateral Agent Agreement, and
any other agreements delivered together with this Agreement or in connection
herewith (collectively "TRANSACTION DOCUMENTS") have been duly authorized,
executed and delivered by the Company and are valid and binding agreements
enforceable in accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights generally and to
general principles of equity. The Company has full corporate power and authority
necessary to enter into and deliver the Transaction Documents and to perform its
obligations thereunder.
(d) Additional Issuances. There are no outstanding agreements or
preemptive or similar rights affecting the Company's common stock or equity and
no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of common stock or equity of the
Company or other equity interest in any of the Subsidiaries of the Company
except as described on SCHEDULE 5(D).
(e) Consents. No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over the
Company, or any of its Affiliates, the Bulletin Board nor the Company's
shareholders is required for the execution by the Company of the Transaction
Documents and compliance and performance by the Company of its obligations under
the Transaction Documents, including, without limitation, the issuance and sale
of the Securities.
(f) No Violation or Conflict. Assuming the representations and
warranties of the Subscribers in Section 4 are true and correct, neither the
issuance and sale of the Securities nor the performance of the Company's
obligations under this Agreement and all other agreements entered into by the
Company relating thereto by the Company will:
(i) violate, conflict with, result in a breach of, or constitute a
default (or an event which with the giving of notice or the lapse of time or
both would be reasonably likely to constitute a default) under (A) the articles
or certificate of incorporation, charter or bylaws of the Company, (B) to the
Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation
or determination applicable to the Company of any court, governmental agency or
body, or arbitrator having jurisdiction over the Company or over the properties
or assets of the Company or any of its Affiliates, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any agreement, stock
option or other similar plan, indenture, lease, mortgage, deed of trust or other
instrument to which the Company or any of its Affiliates is a party, by which
the Company or any of its Affiliates is bound, or to which any of the properties
of the Company or any of its Affiliates is subject, or (D) the terms of any
"lock-up" or similar provision of any underwriting or similar agreement to which
the Company, or any of its Affiliates is a party except the violation, conflict,
breach, or default of which would not have a Material Adverse Effect; or
(ii) result in the creation or imposition of any lien, charge or
encumbrance upon the Securities or any of the assets of the Company or any of
its Affiliates except as described herein; or
(iii) result in the activation of any anti-dilution rights or a reset
or repricing of any debt or security instrument of any other creditor or equity
holder of the Company, nor result in the acceleration of the due date of any
obligation of the Company; or
(iv) result in the activation of any piggy-back registration
rights of any person or entity holding securities of the Company or having the
right to receive securities of the Company.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security interests, liens,
claims or other encumbrances, subject to restrictions upon transfer under the
1933 Act and any applicable state securities laws;
(ii) have been, or will be, duly and validly authorized and on the date of
issuance of the Shares and upon exercise of the Warrants, the Shares and Warrant
Shares will be duly and validly issued, fully paid and nonassessable or if
registered pursuant to the 1933 Act, and resold pursuant to an effective
registration statement will be free trading and unrestricted);
(iii) will not have been issued or sold in violation of any preemptive
or other similar rights of the holders of any securities of the Company;
(iv) will not subject the holders thereof to personal liability by reason
of being such holders; and
(v) assuming the representations warranties of the Subscribers as set forth
in Section 4 hereof are true and correct, will not result in a violation of
Section 5 under the 1933 Act.
(h) Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the Company,
or any of its Affiliates that would affect the execution by the Company or the
performance by the Company of its obligations under the Transaction Documents.
Except as disclosed in the Reports and schedules hereto, there is no pending or,
to the best knowledge of the Company, basis for or threatened action, suit,
proceeding or investigation before any court, governmental agency or body, or
arbitrator having jurisdiction over the Company, or any of its Affiliates which
litigation if adversely determined would have a Material Adverse Effect.
(i) Reporting Company. The Company is a publicly-held company subject to
reporting obligations pursuant to Section 13 of the 1934 Act and has a class of
common shares registered pursuant to Section 12(g) of the 1934 Act. Pursuant to
the provisions of the 1934 Act, the Company has filed all reports and other
materials required to be filed thereunder with the Commission during the
preceding twelve months.
(j) No Market Manipulation. The Company and its Affiliates have not taken,
and will not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Securities
or affect the price at which the Securities may be issued or resold.
(k) Information Concerning Company. The Reports contain all material
information relating to the Company and its operations and financial condition
as of their respective dates which information is required to be disclosed
therein. Since the date of the financial statements included in the Reports, and
except as modified in the Other Written Information or in the Schedules hereto,
there has been no Material Adverse Event relating to the Company's business,
financial condition or affairs not disclosed in the Reports. The Reports do not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances when made.
(l) Stop Transfer. The Company will not issue any stop transfer order or
other order impeding the sale, resale or delivery of any of the Securities,
except as may be required by any applicable federal or state securities laws and
unless contemporaneous notice of such instruction is given to the Subscriber.
(m) Defaults. The Company is not in violation of its articles of
incorporation or bylaws. Except as described on SCHEDULE 5(Q), the Company is
(i) not in default under or in violation of any other material agreement or
instrument to which it is a party or by which it or any of its properties are
bound or affected, which default or violation would have a Material Adverse
Effect, (ii) not in default with respect to any order of any court, arbitrator
or governmental body or subject to or party to any order of any court or
governmental authority arising out of any action, suit or proceeding under any
statute or other law respecting antitrust, monopoly, restraint of trade, unfair
competition or similar matters, or (iii) to the Company's knowledge not in
violation of any statute, rule or regulation of any governmental authority which
violation would have a Material Adverse Effect.
(n) No Integrated Offering. Neither the Company, nor any of its
Affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offer of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
the Bulletin Board. Nor will the Company or any of its Affiliates take any
action or steps that would cause the offer or issuance of the Securities to be
integrated with other offerings. The Company will not conduct any offering other
than the transactions contemplated hereby that will be integrated with the offer
or issuance of the Securities.
(o) No General Solicitation. Neither the Company, nor any
of its Affiliates, nor to its knowledge, any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the 1933 Act) in connection with the
offer or sale of the Securities.
(p) Listing. The Common Stock is quoted on the Bulletin Board.
The Company has not received any oral or written notice that the Common Stock is
not eligible nor will become ineligible for quotation on the Bulletin Board nor
that the Common Stock does not meet all requirements for the continuation of
such quotation and the Company satisfies all the requirements for the continued
quotation of the Common Stock on the Bulletin Board.
(q) No Undisclosed Liabilities. The Company has no liabilities
or obligations which are material, individually or in the aggregate, which are
not disclosed in the Reports and Other Written Information, other than those
incurred in the ordinary course of the Company's businesses since June 30, 2004
and which, individually or in the aggregate, would reasonably be expected to
have a Material Adverse Effect, except as disclosed on SCHEDULE 5(Q). (r) No
Undisclosed Events or Circumstances. Since June 30, 2004, no event or
circumstance has occurred or exists with respect to the Company or its
businesses, properties, 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 Reports.
(s) Capitalization. The authorized and outstanding capital stock
of the Company as of the date of this Agreement and the Closing Date (not
including the Securities) are set forth on SCHEDULE 5(D). Except as set forth on
SCHEDULE 5(D), there are no options, warrants, or rights to subscribe to,
securities, rights or obligations convertible into or exchangeable for or giving
any right to subscribe for any shares of capital stock of the Company or any of
its Subsidiaries. All of the outstanding shares of Common Stock of the Company
have been duly and validly authorized and issued and are fully paid and
nonassessable.
(t) Dilution. The Company's executive officers and directors
understand the nature of the Securities being sold hereby and recognize that the
issuance of the Securities will have a potential dilutive effect on the equity
holdings of other holders of the Company's equity or rights to receive equity of
the Company. The board of directors of the Company has concluded, in its good
faith business judgment that the issuance of the Securities is in the best
interests of the Company. The Company specifically acknowledges that its
obligation to issue the Shares upon conversion of the Notes, and the Warrant
Shares upon exercise of the Warrants is binding upon the Company and enforceable
regardless of the dilution such issuance may have on the ownership interests of
other shareholders of the Company or parties entitled to receive equity of the
Company.
(u) No Disagreements with Accountants and Lawyers. There are
no disagreements of any kind presently existing, or reasonably anticipated by
the Company to arise, between the Company and the accountants and lawyers
formerly or presently employed by the Company, including but not limited to
disputes or conflicts over payment owed to such accountants and lawyers.
(v) DTC Status. The Company's transfer agent is a participant in
and the Common Stock is eligible for transfer pursuant to the Depository Trust
Company Automated Securities Transfer Program.
(w) Investment Company. Neither the Company nor any
Affiliate is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(x) Subsidiary Representations. The Company makes each of
the representations contained in Sections 5(a), (b), (d), (f), (h), (k), (m),
(q) through (s), (u) and (w) of this Agreement, as same relate to each
Subsidiary of the Company.
(y) Company Predecessor. All representations made by or relating
to the Company of a historical or prospective nature and all undertaking
described in Sections 9.1(g) through 9.1(l) shall relate and refer to the
Company, its predecessors, and the Subsidiaries.
(z) Correctness of Representations. The Company represents that
the foregoing representations and warranties are true and correct as of the date
hereof in all material respects, and, unless the Company otherwise notifies the
Subscribers prior to the Closing Date, shall be true and correct in all material
respects as of the Closing Date.
(AA) Survival. The foregoing representations and warranties shall
survive the Closing Date for a period of three years.
6. Regulation D Offering. The offer and issuance of the Securities to
the Subscribers is being made pursuant to the exemption from the registration
provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933
Act and/or Rule 506 of Regulation D promulgated thereunder. On the Closing
Date, the Company will provide an opinion reasonably acceptable to Subscriber
from the Company's legal counsel opining on the availability of an exemption
from registration under the 1933 Act as it relates to the offer and issuance of
the Securities and other matters reasonably requested by Subscribers. A form of
the legal opinion is annexed hereto as EXHIBIT E. The Company will provide, at
the Company's expense, such other legal opinions in the future as are reasonably
necessary for the issuance and/or resale of the Initial Shares, and the Common
Stock issuable upon conversion of the Notes and exercise of the Warrants
pursuant to an effective registration statement.
7.1. Conversion of Note.
(a) Upon the conversion of a Note or part thereof, the Company shall,
at its own cost and expense, take all necessary action, including obtaining and
delivering, an opinion of counsel to assure that the Company's transfer agent
shall issue stock certificates in the name of Subscriber (or its nominee) or
such other persons as designated by Subscriber and in such denominations to be
specified at conversion representing the number of shares of Common Stock
issuable upon such conversion. The Company warrants that no instructions other
than these instructions have been or will be given to the transfer agent of the
Company's Common Stock and that, unless waived by the Subscriber, the Shares
will be free-trading, and freely transferable, and will not contain a legend
restricting the resale or transferability of the Shares provided the Shares are
being sold pursuant to an effective registration statement covering the Shares
or are otherwise exempt from registration.
(b) Subscriber will give notice of its decision to exercise its right
to convert the Note, interest, any sum due to the Subscriber under the
Transaction Documents including Liquidated Damages, or part thereof by
telecopying an executed and completed Notice of Conversion (a form of which is
annexed as EXHIBIT A to the Note) to the Company via confirmed telecopier
transmission or otherwise pursuant to Section 13(a) of this Agreement. The
Subscriber will not be required to surrender the Note until the Note has been
fully converted or satisfied. Each date on which a Notice of Conversion is
telecopied to the Company in accordance with the provisions hereof shall be
deemed a CONVERSION DATE. The Company will itself or cause the Company's
transfer agent to transmit the Company's Common Stock certificates representing
the Shares issuable upon conversion of the Note to the Subscriber via express
courier for receipt by such Subscriber within three (3) business days after
receipt by the Company of the Notice of Conversion (such third day being the
"DELIVERY DATE"). In the event the Shares are electronically transferable, then
delivery of the Shares must be made by electronic transfer provided request for
such electronic transfer has been made by the Subscriber and the Subscriber has
complied with all applicable securities laws in connection with the sale of the
Common Stock, including, without limitation, the prospectus delivery
requirements. A Note representing the balance of the Note not so converted
will be provided by the Company to the Subscriber if requested by Subscriber,
provided the Subscriber delivers the original Note to the Company. In the event
that a Subscriber elects not to surrender a Note for reissuance upon partial
payment or conversion, the Subscriber hereby indemnifies the Company against any
and all loss or damage attributable to a third-party claim in an amount in
excess of the actual amount then due under the Note.
(c) The Company understands that a delay in the delivery of the Shares
in the form required pursuant to Section 7.1 hereof, or the Mandatory Redemption
Amount described in Section 7.2 hereof, respectively after the Delivery Date or
the Mandatory Redemption Payment Date (as hereinafter defined) could result in
economic loss to the Subscriber. As compensation to the Subscriber for such
loss, the Company agrees to pay (as liquidated damages and not as a penalty) to
the Subscriber for late issuance of Shares in the form required pursuant to
Section 7.1 hereof upon Conversion of the Note in the amount of $100 per
business day after the Delivery Date for each $10,000 of Note principal amount
being converted of the corresponding Shares which are not timely delivered. The
Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Furthermore, in addition to any other remedies
which may be available to the Subscriber, in the event that the Company fails
for any reason to effect delivery of the Shares by the Delivery Date or make
payment by the Mandatory Redemption Payment Date, the Subscriber will be
entitled to revoke all or part of the relevant Notice of Conversion or rescind
all or part of the notice of Mandatory Redemption by delivery of a notice to
such effect to the Company whereupon the Company and the Subscriber shall each
be restored to their respective positions immediately prior to the delivery of
such notice, except that the liquidated damages described above shall be payable
through the date notice of revocation or rescission is given to the Company.
(d) Nothing contained herein or in any document referred to herein or
delivered in connection herewith shall be deemed to establish or require the
payment of a rate of interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Subscriber and thus refunded to the
Company.
7.2. Mandatory Redemption at Subscriber's Election. In the event the
Company is prohibited from issuing Shares, or fails to timely deliver Shares on
a Delivery Date, or upon the occurrence of any other Event of Default (as
defined in the Note or in this Agreement) that is not cured during any
applicable cure period and an additional ten days thereafter, then at the
Subscriber's election, the Company must pay to the Subscriber ten (10) business
days after request by the Subscriber, at the Subscriber's election, a sum of
money determined by (i) multiplying up to the outstanding principal amount of
the Note designated by the Subscriber by 115%, or (ii) multiplying the number of
Shares otherwise deliverable upon conversion of an amount of Note principal
and/or interest designated by the Subscriber (with the date of giving of such
designation being a "DEEMED CONVERSION DATE") at the then Conversion Price that
would be in effect on the Deemed Conversion Date by the highest closing price of
the Common Stock on the principal market for the period commencing on the Deemed
Conversion Date until the day prior to the receipt of the Mandatory Redemption
Payment, whichever is greater, together with accrued but unpaid interest thereon
and any other sums arising and outstanding under the Transaction Documents
("MANDATORY REDEMPTION PAYMENT"). The Mandatory Redemption Payment must be
received by the Subscriber on the same date as the Company Shares otherwise
deliverable or within ten (10) business days after request, whichever is sooner
("MANDATORY REDEMPTION PAYMENT DATE"). Upon receipt of the Mandatory Redemption
Payment, the corresponding Note principal and interest will be deemed paid and
no longer outstanding. Liquidated damages calculated pursuant to Section 7.1(c)
hereof, that have been paid or accrued for the twenty day period prior to the
actual receipt of the Mandatory Redemption Payment by the Subscriber shall be
credited against the Mandatory Redemption Payment calculated pursuant to
subsections (i) and (ii) above of this Section 7.2. In the event of a "CHANGE
IN CONTROL" (as defined below), the Subscriber may demand, and the Company shall
pay, a Mandatory Redemption Payment equal to 115% of the outstanding principal
amount of the Note designated by the Subscriber together with accrued but unpaid
interest thereon and any other sums arising and outstanding under the
Transaction Documents. For purposes of this Section 7.2, "CHANGE IN CONTROL"
shall mean (i) the Company no longer having a class of shares publicly tradable
and listed on a Principal Market, (ii) the Company becoming a Subsidiary of
another entity or merging into or with another entity, (iii) a majority of the
board of directors of the Company as of the Closing Date no longer serving as
directors of the Company, other than due to natural causes, (iv) if the holders
of the Company's Common Stock as of the Closing Date beneficially owning at any
time after the Closing Date less than thirty-five percent of the Common stock
owned by them on the Closing Date, or (v) the sale, lease, license or transfer
of substantially all the assets of the Company or Subsidiaries.
7.3. Maximum Conversion. The Subscriber shall not be entitled to
convert on a Conversion Date that amount of the Note in connection with that
number of shares of Common Stock which would be in excess of the sum of (i) the
number of shares of common stock beneficially owned by the Subscriber and its
Affiliates on a Conversion Date, and (ii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the determination
of this provision is being made on a Conversion Date, which would result in
beneficial ownership by the Subscriber and its Affiliates of more than 4.99% of
the outstanding shares of common stock of the Company on such Conversion Date.
For the purposes of the provision to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
Subject to the foregoing, the Subscriber shall not be limited to aggregate
conversions of only 4.99% and aggregate conversions by the Subscriber may exceed
4.99%. The Subscriber may waive the conversion limitation described in this
Section 7.3, in whole or in part, or increase the permitted beneficial ownership
amount upon and effective after 61 days prior written notice to the Company.
The Subscriber may allocate which of the equity of the Company deemed
beneficially owned by the Subscriber shall be included in the 4.99% amount
described above and which shall be allocated to the excess above 4.99%.
7.4. Injunction Posting of Bond. In the event a Subscriber shall elect
to convert a Note or part thereof or exercise the Warrant in whole or in part,
the Company may not refuse conversion or exercise based on any claim that such
Subscriber or any one associated or affiliated with such Subscriber has been
engaged in any violation of law, or for any other reason, unless, an injunction
from a court, on notice, restraining and or enjoining conversion of all or part
of such Note or exercise of all or part of such Warrant shall have been sought
and obtained by the Company and the Company has posted a surety bond for the
benefit of such Subscriber in the amount of 120% of the amount of the Note, or
aggregate purchase price of the Warrant Shares which are sought to be subject to
the injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Subscriber to the extent Subscriber obtains judgment.
7.5. Buy-In. In addition to any other rights available to the Subscriber,
if the Company fails to deliver to the Subscriber such shares issuable upon
conversion of a Note by the Delivery Date and if after seven (7) business days
after the Delivery Date the Subscriber purchases (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by
such Subscriber of the Common Stock which the Subscriber was entitled to receive
upon such conversion (a "BUY-IN"), then the Company shall pay in cash to the
Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the Note
for which such conversion was not timely honored, together with interest thereon
at a rate of 15% per annum, accruing until such amount and any accrued interest
thereon is paid in full (which amount shall be paid as liquidated damages and
not as a penalty). For example, if the Subscriber purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of $10,000 of note principal and/or interest, the
Company shall be required to pay the Subscriber $1,000, plus interest. The
Subscriber shall provide the Company written notice indicating the amounts
payable to the Subscriber in respect of the Buy-In.
7.6 Adjustments. The Conversion Price, Warrant exercise price and amount of
Shares issuable upon conversion of the Notes and exercise of the Warrants shall
be equitably adjusted and as otherwise described in this Agreement, the Notes
and Warrants.
7.7. Redemption. The Note shall not be redeemable or callable except as
described in the Note. The Warrants shall not be callable or redeemable.
8. Broker/Legal Fees.
(a) Broker's Fee. The Company on the one hand, and each Subscriber (for
himself only) on the other hand, agree to indemnify the other against and hold
the other harmless from any and all liabilities to any persons claiming
brokerage commissions or finder's fees other than Hunter Wise Securities, LLC
("BROKER") 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 and arising out of such party's actions. The Company agrees
that on the Closing Date, the Company will pay the Broker the fee as described
on SCHEDULE 8 hereto ("BROKER'S FEE"). The Company represents that there are no
other parties entitled to receive fees, commissions, or similar payments in
connection with the Offering except the Broker.
(b) Legal Fees. The Company shall pay to Grushko & Mittman, P.C., a fee of
$18,000 ("LEGAL FEES") (of which $5,000 has been paid) as reimbursement for
services rendered to the Subscribers in connection with this Agreement and the
purchase and sale of the Notes, Initial Shares and Warrants (the "OFFERING") and
acting as Escrow Agent for the Offering. The Legal Fees will be payable out of
funds held pursuant to the Escrow Agreement. Grushko & Mittman, P.C. will be
reimbursed at Closing for all UCC search and filing fees.
9. Covenants of the Company. The Company covenants and agrees
with the Subscribers as follows:
(a) Stop Orders. The Company will advise the Subscribers, promptly
after it receives notice of issuance by the Commission, any state securities
commission or any other regulatory authority of any stop order or of any order
preventing or suspending any offering of any securities of the Company, or of
the suspension of the qualification of the Common Stock of the Company for
offering or sale in any jurisdiction, or the initiation of any proceeding for
any such purpose.
(b) Listing. The Company shall promptly secure the listing of the
Initial Shares, Shares and the Warrant Shares upon each national securities
exchange, or electronic or automated quotation system upon which they are or
become eligible for listing and shall maintain such listing so long as any Notes
or Warrants are outstanding. The Company will maintain the listing of its Common
Stock on the American Stock Exchange, Nasdaq SmallCap Market, Nasdaq National
Market System, Bulletin Board, or New York Stock Exchange (whichever of the
foregoing is at the time the principal trading exchange or market for the Common
Stock (the "PRINCIPAL MARKET")), and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the Principal Market, as applicable. The Company will provide the Subscribers
copies of all notices it receives notifying the Company of the threatened and
actual delisting of the Common Stock from any Principal Market. As of the date
of this Agreement and the Closing Date, the Bulletin Board is and will be the
Principal Market.
(c) Market Regulations. The Company shall notify the Commission,
the Principal Market and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall take
all other necessary action and proceedings as may be required and permitted by
applicable law, rule and regulation, for the legal and valid issuance of the
Securities to the Subscribers and promptly provide copies thereof to Subscriber.
(d) Filing Requirements. From the date of this Agreement and until the
sooner of (i) three (3) years after the Closing Date, or (ii) until all the
Shares, Initial Shares and Warrant Shares have been resold or transferred by all
the Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitation, the Company will (A) cause its Common Stock
to continue to be registered under Section 12(b) or 12(g) of the 1934 Act, (B)
comply in all respects with its reporting and filing obligations under the 1934
Act, (C) comply with all reporting requirements that are applicable to an issuer
with a class of shares registered pursuant to Section 12(b) or 12(g) of the 1934
Act, as applicable, and (D) comply with all filing requirements related to any
registration statement filed pursuant to this Agreement. The Company will use
its best efforts not to take any action or file any document (whether or not
permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate
or suspend such registration or to terminate or suspend its reporting and filing
obligations under said acts until three (3) years after the Closing Date. Until
the earlier of the resale of the Shares, Initial Shares and Warrant Shares by
each Subscriber or until three (3) years after the Warrants have been exercised,
the Company will use its best efforts to continue the listing or quotation of
the Common Stock on a Principal Market and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the Principal Market. The Company agrees to timely file a Form D with respect to
the Securities if required under Regulation D and to provide a copy thereof to
each Subscriber promptly after such filing.
(e) Use of Proceeds. The proceeds of the Offering must be employed by
the Company for the purposes set forth on SCHEDULE 9(E) hereto. Except as set
forth on SCHEDULE 9(E), the Purchase Price may not and will not be used for
accrued and unpaid officer and director salaries, payment of financing related
debt, redemption of outstanding notes or equity instruments of the Company nor
non-trade obligations outstanding on a Closing Date. The proceeds of the
Offering to be used for designated purposes as set forth on SCHEDULE 9(E) will
be paid out of the escrow account pursuant to the Escrow Agreement.
(f) Reservation. Prior to the Closing Date, the Company undertakes to
reserve, pro rata, on behalf of each holder of a Note or Warrant, from its
authorized but unissued common stock, a number of common shares equal to 175% of
the amount of Common Stock necessary to allow each holder of a Note to be able
to convert all such outstanding Notes and interest and reserve the amount of
Warrant Shares issuable upon exercise of the Warrants. Failure to have
sufficient shares reserved pursuant to this Section 9(f) for three (3)
consecutive business days or ten (10) days in the aggregate shall be a material
default of the Company's obligations under this Agreement and an Event of
Default under the Note.
(g) Taxes. From the date of this Agreement and until the sooner of
(i) three (3) years after the Closing Date, or (ii) until all the Shares,
Initial Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful
taxes, assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company; provided, however, that any such
tax, assessment, charge or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the
Company shall have set aside on its books adequate reserves with respect
thereto, and provided, further, that the Company will pay all such taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefore.
(h) Insurance. From the date of this Agreement and until the sooner
of (i) three (3) years after the Closing Date, or (ii) until all the Shares,
Initial Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep its assets which are
of an insurable character insured by financially sound and reputable insurers
against loss or damage by fire, explosion and other risks customarily insured
against by companies in the Company's line of business, in amounts sufficient to
prevent the Company from becoming a co-insurer, and the Company will maintain,
with financially sound and reputable insurers, insurance against other hazards
and risks and liability to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated and to the
extent available on commercially reasonable terms.
(i) Books and Records. From the date of this Agreement and until the
sooner of (i) three (3) years after the Closing Date, or (ii) until all the
Shares, Initial Shares and Warrant Shares have been resold or transferred by all
the Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep true records and
books of account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and affairs in accordance
with generally accepted accounting principles applied on a consistent basis.
(j) Governmental Authorities. From the date of this Agreement and until the
sooner of (i) three (3) years after the Closing Date, or (ii) until all the
Shares, Initial Shares and Warrant Shares have been resold or transferred by all
the Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall duly observe and conform
in all material respects to all valid requirements of governmental authorities
relating to the conduct of its business or to its properties or assets. (k)
Intellectual Property. From the date of this Agreement and until the sooner of
(i) three (3) years after the Closing Date, or (ii) until all the Shares,
Initial Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall maintain in full force
and effect its corporate existence, rights and franchises and all licenses and
other rights to use intellectual property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.
(l) Properties. From the date of this Agreement and until the sooner
of (i) three (3) years after the Closing Date, or (ii) until all the Shares,
Initial Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement (as defined in Section
11.1(iv) hereof) or pursuant to Rule 144, without regard to volume limitations,
the Company will keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
necessary and proper repairs, renewals, replacements, additions and improvements
thereto; and the Company will at all times comply with each provision of all
leases to which it is a party or under which it occupies property if the breach
of such provision could reasonably be expected to have a Material Adverse
Effect.
(m) Confidentiality/Public Announcement. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date, or
(ii) until all the Shares, Initial Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company agrees
that except in connection with a Form 8-K or the Registration Statement, it will
not disclose publicly or privately the identity of the Subscribers unless
expressly agreed to in writing by a Subscriber or only to the extent required by
law and then only upon five days prior notice to Subscriber. In any event and
subject to the foregoing, the Company shall file a Form 8-K or make a public
announcement describing the Offering not later than the first business day after
the Closing Date. In the Form 8-K or public announcement, the Company will
specifically disclose the amount of common stock outstanding immediately after
the Closing. A form of the proposed Form 8-K or public announcement to be
employed in connection with the Offering is annexed hereto as EXHIBIT F.
(n) Further Registration Statements. Except for a registration
statement filed on behalf of the Subscribers pursuant to Section 11 of this
Agreement the Company will not file any registration statements or amend any
already filed registration statement, including but not limited to Form S-8,
with the Commission or with state regulatory authorities without the consent of
the Subscriber until the sooner of (i) the Registration Statement shall have
been current and available for use in connection with the resale of the
Registrable Securities (as defined in Section 11.1(i) for a period of 120 days,
or (ii) until all the Shares, Initial Shares, and Warrant Shares have been
resold or transferred by the Subscribers pursuant to the Registration Statement
or Rule 144, without regard to volume limitations ("EXCLUSION PERIOD"). The
Exclusion Period will be tolled during the pendency of an Event of Default as
defined in the Note.
(o) Blackout. The Company undertakes and covenants that until the
end of the Exclusion Period, the Company will not enter into any acquisition,
merger, exchange or sale or other transaction that could have the effect of
delaying the effectiveness of any pending registration statement or causing an
already effective registration statement to no longer be effective or current
for a period twenty (20) or more days.
(p) Non-Public Information. The Company covenants and agrees that
neither it nor any other person acting on its behalf will provide any Subscriber
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such
Subscriber shall have agreed in writing to receive such information. The
Company understands and confirms that each Subscriber shall be relying on the
foregoing representations in effecting transactions in securities of the
Company.
(q) Limited Standstill. The Company will deliver to the Subscribers
on or before the Closing Date and enforce the provisions of irrevocable
standstill agreements ("LIMITED STANDSTILL AGREEMENTS") in the form annexed
hereto as EXHIBIT G, with the parties identified on SCHEDULE 9(Q) hereto.
10. Covenants of the Company and Subscriber Regarding Indemnification.
(a) The Company agrees to indemnify, hold harmless, reimburse and
defend the Subscribers, the Subscribers' officers, directors, agents,
Affiliates, control persons, and principal shareholders, against any claim,
cost, expense, liability, obligation, loss or damage (including reasonable legal
fees) of any nature, incurred by or imposed upon the Subscriber or any such
person which results, arises out of or is based upon (i) any material
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant hereto; or (ii) after any applicable notice and/or cure
periods, any breach or default in performance by the Company of any covenant or
undertaking to be performed by the Company hereunder, or any other agreement
entered into by the Company and Subscriber relating hereto.
(b) Each Subscriber agrees to indemnify, hold harmless, reimburse and
defend the Company and each of the Company's officers, directors, agents,
Affiliates, control persons against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company or any such person which results, arises
out of or is based upon (i) any material misrepresentation by such Subscriber in
this Agreement or in any Exhibits or Schedules attached hereto, or other
agreement delivered pursuant hereto; or (ii) after any applicable notice and/or
cure periods, any breach or default in performance by such Subscriber of any
covenant or undertaking to be performed by such Subscriber hereunder, or any
other agreement entered into by the Company and Subscribers, relating hereto.
(c) In no event shall the liability of any Subscriber or permitted
successor hereunder or under any Transaction Document or other agreement
delivered in connection herewith be greater in amount than the dollar amount of
the net proceeds actually received by such Subscriber upon the sale of
Registrable Securities (as defined herein).
(d) The procedures set forth in Section 11.6 shall apply to the
indemnification set forth in Sections 10(a) and 10(b) above.
11.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
(i) On one occasion, for a period commencing one hundred and forty-one
(141) days after the Closing Date, but not later than two (2) years after the
Closing Date ("REQUEST DATE"), upon a written request therefor from any record
holder or holders of more than 50% of the Initial Shares, Shares issued and
issuable upon conversion of the Notes and Warrant Shares actually issued upon
exercise of the Warrants, the Company shall prepare and file with the Commission
a registration statement under the 1933 Act registering the Initial Shares,
Shares issuable upon conversion of all sums due under the Notes and Warrant
Shares issuable upon exercise of the Warrants (collectively "REGISTRABLE
SECURITIES") which are the subject of such request for unrestricted public
resale by the holder thereof. For purposes of Sections 11.1(i) and 11.1(ii),
Registrable Securities shall not include Securities (A) which are registered for
resale in an effective registration statement, (B) included for registration in
a pending registration statement, or (C) which have been issued without further
transfer restrictions after a sale or transfer pursuant to Rule 144 under the
1933 Act. Upon the receipt of such request, the Company shall promptly give
written notice to all other record holders of the Registrable Securities that
such registration statement is to be filed and shall include in such
registration statement Registrable Securities for which it has received written
requests within ten (10) days after the Company gives such written notice. Such
other requesting record holders shall be deemed to have exercised their demand
registration right under this Section 11.1(i).
(ii) If the Company at any time proposes to register any of its securities
under the 1933 Act for sale to the public, whether for its own account or for
the account of other security holders or both, except with respect to
registration statements on Forms S-4, S-8 or another form not available for
registering the Registrable Securities for sale to the public, provided the
Registrable Securities are not otherwise registered for resale by the
Subscribers or Holder pursuant to an effective registration statement, each such
time it will give at least fifteen (15) days' prior written notice to the record
holder of the Registrable Securities of its intention so to do. Upon the written
request of the holder, received by the Company within ten (10) days after the
giving of any such notice by the Company, to register any of the Registrable
Securities not previously registered, the Company will cause such Registrable
Securities as to which registration shall have been so requested to be included
with the securities to be covered by the registration statement proposed to be
filed by the Company, all to the extent required to permit the sale or other
disposition of the Registrable Securities so registered by the holder of such
Registrable Securities (the "SELLER" or "SELLERS"). In the event that any
registration pursuant to this Section 11.1(ii) shall be, in whole or in part, an
underwritten public offering of common stock of the Company, the number of
shares of Registrable Securities to be included in such an underwriting may be
reduced by the managing underwriter if and to the extent that the Company and
the underwriter shall reasonably be of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by the Company
therein; provided, however, that the Company shall notify the Seller in writing
of any such reduction. Notwithstanding the foregoing provisions, or Section 11.4
hereof, the Company may withdraw or delay or suffer a delay of any registration
statement referred to in this Section 11.1(ii) without thereby incurring any
liability to the Seller.
(iii) If, at the time any written request for registration is received by
the Company pursuant to Section 11.1(i), the Company has determined to proceed
with the actual preparation and filing of a registration statement under the
1933 Act in connection with the proposed offer and sale for cash of any of its
securities for the Company's own account and the Company actually does file such
other registration statement, such written request shall be deemed to have been
given pursuant to Section 11.1(ii) rather than Section 11.1(i), and the rights
of the holders of Registrable Securities covered by such written request shall
be governed by Section 11.1(ii).
(iv) The Company shall file with the Commission a Form SB-2 or Form S-3
registration statement (the "REGISTRATION STATEMENT") (or such other form that
it is eligible to use) in order to register the Registrable Securities for
resale and distribution under the 1933 Act) not later than forty-seven (47) days
after the Closing Date (the "FILING DATE"), and cause it to be declared
effective not later than one hundred and forty (140) days after the Closing Date
(the "EFFECTIVE DATE"). The Company will register not less than a number of
shares of Common Stock in the aforedescribed registration statement that is
equal to 175% of the Shares issuable upon conversion of the Notes and all of the
Initial Shares and Warrant Shares issuable upon exercise of the Warrants and
Broker's Warrants (as described on SCHEDULE 8 hereto). The Registrable
Securities shall be reserved and set aside exclusively for the benefit of each
Subscriber and Warrant holder, pro rata, and not issued, employed or reserved
for anyone other than each such Subscriber and Warrant holder. The Registration
Statement will immediately be amended or additional registration statements will
be immediately filed by the Company as necessary to register additional shares
of Common Stock to allow the public resale of all Common Stock included in and
issuable by virtue of the Registrable Securities. Without the written consent of
the Subscriber, no securities of the Company other than the Registrable
Securities will be included in the Registration Statement except as described on
SCHEDULE 11.1, hereto. It shall be deemed a Non-Registration Event if at any
time after the date the Registration Statement is declared effective by the
Commission ("ACTUAL EFFECTIVE DATE") the Company has registered for unrestricted
resale on behalf of a Subscriber fewer than 125% of the amount of Common Shares
issuable upon full conversion of all sums due under the Notes and 100% of the
Initial Shares and Warrant Shares issuable upon exercise of the Warrants and
Broker's Warrants.
11.2. Registration Procedures. If and whenever the Company is required
by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the
registration of any Registrable Securities under the 1933 Act, the Company will,
as expeditiously as possible:
(a) subject to the timelines provided in this Agreement, prepare and
file with the Commission a registration statement required by Section 11, with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for the period of the distribution
contemplated thereby (determined as herein provided), promptly provide to the
holders of the Registrable Securities copies of all filings and Commission
letters of comment and notify Subscribers (by telecopier and by e-mail addresses
provided by Subscribers) and Grushko & Mittman, P.C. (by telecopier and by email
to Counslers@aol.com) on or before 3:00 PM EST on the next business day that the
Company receives notice that (i) the Commission has no comments or no further
comments on the Registration Statement, and (ii) the registration statement has
been declared effective (failure to timely provide notice as required by this
Section 11.2(a) shall be a material breach of the Company's obligation and an
Event of Default as defined in the Notes and a Non-Registration Event as defined
in Section 11.4 of this Agreement);
(b) prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective until such
registration statement has been effective for a period of three (3) years, and
comply with the provisions of the 1933 Act with respect to the disposition of
all of the Registrable Securities covered by such registration statement in
accordance with the Sellers' intended method of disposition set forth in such
registration statement for such period;
(c) furnish to the Sellers, at the Company's expense, such number of copies
of the registration statement and the prospectus included therein (including
each preliminary prospectus) as such persons reasonably may request in order to
facilitate the public sale or their disposition of the securities covered by
such registration statement;
(d) use its commercially reasonable best efforts to register or qualify the
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of New York and such jurisdictions as the Sellers
shall request in writing, provided, however, that the Company shall not for any
such purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) if applicable, list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) notify the Subscribers within two hours of the Company's becoming aware
that a prospectus relating thereto is required to be delivered under the 1933
Act, of the happening of any event of which the Company has knowledge as a
result of which the prospectus contained in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing or which
becomes subject to a Commission, state or other governmental order suspending
the effectiveness of the registration statement covering any of the Shares; and
(g) provided same would not be in violation of the provision of Regulation
FD under the 1934 Act, make available for inspection by the Sellers, and any
attorney, accountant or other agent retained by the Seller or underwriter, all
publicly available, non-confidential financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all publicly available,
non-confidential information reasonably requested by the seller, attorney,
accountant or agent in connection with such registration statement.
11.3. Provision of Documents. In connection with each registration
described in this Section 11, each Seller will furnish to the Company in writing
such information and representation letters with respect to itself and the
proposed distribution by it as reasonably shall be necessary in order to assure
compliance with federal and applicable state securities laws.
11.4. Non-Registration Events. The Company and the Subscribers agree that
the Sellers will suffer damages if the Registration Statement is not filed by
the Filing Date and not declared effective by the Commission by the Effective
Date, and any registration statement required under Section 11.1(i) or 11.1(ii)
is not filed within 60 days after written request and declared effective by the
Commission within 120 days after such request, and maintained in the manner and
within the time periods contemplated by Section 11 hereof, and it would not be
feasible to ascertain the extent of such damages with precision. Accordingly, if
(A) the Registration Statement is not filed on or before the Filing Date, (B) is
not declared effective on or before the Effective Date, (C) the Registration
Statement is not declared effective within three (3) business days after receipt
by the Company or its attorneys of a written or oral communication from the
Commission that the Registration Statement will not be reviewed or that the
Commission has no further comments, (D) if the registration statement described
in Sections 11.1(i) or 11.1(ii) is not filed within 60 days after such written
request, or is not declared effective within 120 days after such written
request, or (E) any registration statement described in Sections 11.1(i),
11.1(ii) or 11.1(iv) is filed and declared effective but shall thereafter cease
to be effective (without being succeeded within fifteen (15) business days by an
effective replacement or amended registration statement) for a period of time
which shall exceed 20 days in the aggregate per year (defined as a period of 365
days commencing on the date the Registration Statement is declared effective)
(each such event referred to in clauses (A) through (E) of this Section 11.4 is
referred to herein as a "Non-Registration Event"), then the Company shall
deliver to the holder of Registrable Securities, as Liquidated Damages, an
amount equal to two percent (2%) for each thirty (30) days or part thereof,
thereafter of the Purchase Price of the Notes remaining unconverted and purchase
price of Shares issued upon conversion of the Notes owned of record by such
holder which are subject to such Non-Registration Event. The Company must pay
the Liquidated Damages in cash. The Liquidated Damages must be paid within ten
(10) days after the end of each thirty (30) day period or shorter part thereof
for which Liquidated Damages are payable. In the event a Registration Statement
is filed by the Filing Date but is withdrawn prior to being declared effective
by the Commission, then such Registration Statement will be deemed to have not
been filed. All oral or written comments received from the Commission relating
to the Registration Statement must be satisfactorily responded to within ten
(10) business days after receipt of comments from the Commission. Failure to
timely respond to Commission comments is a Non-Registration Event for which
Liquidated Damages shall accrue and be payable by the Company to the holders of
Registrable Securities at the same rate set forth above. Notwithstanding the
foregoing, the Company shall not be liable to the Subscriber under this Section
11.4 for any events or delays occurring as a consequence of the acts or
omissions of the Subscribers contrary to the obligations undertaken by
Subscribers in this Agreement. Liquidated Damages will not accrue nor be
payable pursuant to this Section 11.4 nor will a Non-Registration Event be
deemed to have occurred for times during which Registrable Securities are
transferable by the holder of Registrable Securities pursuant to Rule 144(k)
under the 1933 Act.
11.5. Expenses. All expenses incurred by the Company in complying with
Section 11, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, fees and expenses (including reasonable counsel
fees) incurred in connection with complying with state securities or "blue sky"
laws, fees of the National Association of Securities Dealers, Inc., transfer
taxes, fees of transfer agents and registrars, costs of insurance and fee of one
counsel for all Sellers are called "REGISTRATION EXPENSES." All underwriting
discounts and selling commissions applicable to the sale of Registrable
Securities, including any fees and disbursements of one counsel to the Seller,
are called "SELLING EXPENSES." The Company will pay all Registration Expenses in
connection with the registration statement under Section 11. Selling Expenses in
connection with each registration statement under Section 11 shall be borne by
the Seller and may be apportioned among the Sellers in proportion to the number
of shares sold by the Seller relative to the number of shares sold under such
registration statement or as all Sellers thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable Securities under
the 1933 Act pursuant to Section 11, the Company will, to the extent permitted
by law, indemnify and hold harmless the Seller, each officer of the Seller, each
director of the Seller, each underwriter of such Registrable Securities
thereunder and each other person, if any, who controls such Seller or
underwriter within the meaning of the 1933 Act, against any losses, claims,
damages or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Securities was registered under the 1933 Act
pursuant to Section 11, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances when made, and will subject to the provisions of
Section 11.6(c) reimburse the Seller, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable to
the Seller to the extent that any such damages arise out of or are based upon an
untrue statement or omission made in any preliminary prospectus if (i) the
Seller failed to send or deliver a copy of the final prospectus delivered by the
Company to the Seller with or prior to the delivery of written confirmation of
the sale by the Seller to the person asserting the claim from which such damages
arise, (ii) the final prospectus would have corrected such untrue statement or
alleged untrue statement or such omission or alleged omission, or (iii) to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by any such Seller, or
any such controlling person in writing specifically for use in such registration
statement or prospectus.
(b) In the event of a registration of any of the Registrable Securities
under the 1933 Act pursuant to Section 11, each Seller severally but not jointly
will, to the extent permitted by law, indemnify and hold harmless the Company,
and each person, if any, who controls the Company within the meaning of the 1933
Act, each officer of the Company who signs the registration statement, each
director of the Company, each underwriter and each person who controls any
underwriter within the meaning of the 1933 Act, against all losses, claims,
damages or liabilities, joint or several, to which the Company or such officer,
director, underwriter or controlling person may become subject under the 1933
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the registration
statement under which such Registrable Securities were registered under the 1933
Act pursuant to Section 11, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such officer, director,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action, provided, however, that the Seller will be
liable hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such Seller, as such, furnished
in writing to the Company by such Seller specifically for use in such
registration statement or prospectus, and provided, further, however, that the
liability of the Seller hereunder shall be limited to the net proceeds actually
received by the Seller from the sale of Registrable Securities covered by such
registration statement.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 11.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 11.6(c), except and only if and to the extent the indemnifying
party is prejudiced by such omission. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 11.6(c) for any legal expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison with counsel
so selected, provided, however, that, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified parties, as a group, shall have the right to select one
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the reasonable expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in the
event of joint liability under the 1933 Act in any case in which either (i)
a Seller, or any controlling person of a Seller, makes a claim for
indemnification pursuant to this Section 11.6 but it 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 this Section 11.6 provides for
indemnification in such case, or (ii) contribution under the 1933 Act may
be required on the part of the Seller or controlling person of the Seller
in circumstances for which indemnification is not provided under this
Section 11.6; then, and in each such case, the Company and the Seller will
contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so
that the Seller is responsible only for the portion represented by the
percentage that the public offering price of its securities offered by the
registration statement bears to the public offering price of all securities
offered by such registration statement, provided, however, that, in any
such case, (y) the Seller will not be required to contribute any amount in
excess of the public offering price of all such securities sold by it
pursuant to such registration statement; and (z) no person or entity guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.
11.7. Delivery of Unlegended Shares.
(a) Within three (3) business days (such third business day being the
"UNLEGENDED SHARES DELIVERY DATE") after the business day on which the Company
has received (i) a notice that Shares, Initial Shares or Warrant Shares have
been sold pursuant to the Registration Statement or Rule 144 under the 1933 Act,
(ii) a representation that the prospectus delivery requirements, or the
requirements of Rule 144, as applicable and if required, have been satisfied,
and (iii) the original share certificates representing the shares of Common
Stock that have been sold, and (iv) in the case of sales under Rule 144,
customary representation letters of the Subscriber and/or Subscriber's broker
regarding compliance with the requirements of Rule 144, the Company at its
expense, (y) shall deliver, and shall cause legal counsel selected by the
Company to deliver to its transfer agent (with copies to Subscriber) an
appropriate instruction and opinion of such counsel, directing the delivery of
shares of Common Stock without any legends including the legend set forth in
Section 4(h) above, reissuable pursuant to any effective and current
Registration Statement described in Section 11 of this Agreement or pursuant to
Rule 144 under the 1933 Act (the "UNLEGENDED SHARES"); and (z) cause the
transmission of the certificates representing the Unlegended Shares together
with a legended certificate representing the balance of the submitted
certificates, if any, to the Subscriber at the address specified in the notice
of sale, via express courier, by electronic transfer or otherwise on or before
the Unlegended Shares Delivery Date. Transfer fees shall be the responsibility
of the Seller.
(b) In lieu of delivering physical certificates representing the Unlegended
Shares, if the Company's transfer agent is participating in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program, upon request of a
Subscriber, so long as the certificates therefor do not bear a legend and the
Subscriber is not obligated to return such certificate for the placement of a
legend thereon, the Company shall cause its transfer agent to electronically
transmit the Unlegended Shares by crediting the account of Subscriber's prime
Broker with DTC through its Deposit Withdrawal Agent Commission system. Such
delivery must be made on or before the Unlegended Shares Delivery Date.
(c) The Company understands that a delay in the delivery of the
Unlegended Shares pursuant to Section 11 hereof later than the Unlegended Shares
Delivery Date could result in economic loss to a Subscriber. As compensation to
a Subscriber for such loss, the Company agrees to pay late payment fees (as
liquidated damages and not as a penalty) to the Subscriber for late delivery of
Unlegended Shares in the amount of $100 per business day after the Delivery Date
for each $10,000 of purchase price of the Unlegended Shares subject to the
delivery default. If during any 360 day period, the Company fails to deliver
Unlegended Shares as required by this Section 11.7 for an aggregate of thirty
(30) days, then each Subscriber or assignee holding Securities subject to such
default may, at its option, require the Company to redeem all or any portion of
the Shares, Initial Shares and Warrant Shares subject to such default at a price
per share equal to 115% of the purchase price or value described in Section
12(e) hereof, of such Shares, Initial Shares and Warrant Shares ("UNLEGENDED
REDEMPTION AMOUNT"). The amount of the aforedescribed liquidated damages that
have accrued or been paid for the twenty day period prior to the receipt by the
Subscriber of the Unlegended Redemption Amount shall be credited against the
Unlegended Redemption Amount. The Company shall pay any payments incurred under
this Section in immediately available funds upon demand.
(d) In addition to any other rights available to a Subscriber, if the
Company fails to deliver to a Subscriber Unlegended Shares as required pursuant
to this Agreement, within seven (7) business days after the Unlegended Shares
Delivery Date and the Subscriber purchases (in an open market transaction or
otherwise) shares of common stock to deliver in satisfaction of a sale by such
Subscriber of the shares of Common Stock which the Subscriber was entitled to
receive from the Company (a "BUY-IN"), then the Company shall pay in cash to the
Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of common stock so
purchased exceeds (B) the aggregate purchase price of the shares of Common Stock
delivered to the Company for reissuance as Unlegended Shares together with
interest thereon at a rate of 15% per annum, accruing until such amount and any
accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if a Subscriber
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to $10,000 of purchase price of shares of Common
Stock delivered to the Company for reissuance as Unlegended Shares, the Company
shall be required to pay the Subscriber $1,000, plus interest. The Subscriber
shall provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.
(e) In the event a Subscriber shall request delivery of Unlegended
Shares as described in Section 11.7 and the Company is required to deliver such
Unlegended Shares pursuant to Section 11.7, the Company may not refuse to
deliver Unlegended Shares based on any claim that such Subscriber or any one
associated or affiliated with such Subscriber has been engaged in any violation
of law, or for any other reason, unless, an injunction or temporary restraining
order from a court, on notice, restraining and or enjoining delivery of such
Unlegended Shares or exercise of all or part of said Warrant shall have been
sought and obtained and the Company has posted a surety bond for the benefit of
such Subscriber in the amount of 120% of the amount of the aggregate purchase
price of the Common Stock and Warrant Shares which are subject to the injunction
or temporary restraining order, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Subscriber to the extent Subscriber obtains judgment in
Subscriber's favor.
12. (a) Right of First Refusal. Until the Registration Statement
has been effective for the public unrestricted resale of the Registrable
Securities for 365 days, the Subscribers shall be given not less than seven (7)
business days prior written notice of any proposed sale by the Company of its
common stock or other securities or debt obligations, except in connection with
(i) as a result of the exercise of options or warrants or conversion of
convertible Notes or amounts which are granted, issued or accrue pursuant to
this Agreement, (ii) as has been described in the Reports or Other Written
Information filed with the Commission or delivered to the Subscribers prior to
the Closing Date, (iii) full or partial consideration in connection with a
strategic merger, consolidation or purchase of substantially all of the
securities or assets of corporation or other entity, (iv) the Company's issuance
of securities in connection with strategic license agreements and other
partnering arrangements so long as such issuances are not for the purpose of
raising capital, and (v) the Company's issuance of Common Stock or the issuance
or grants of options to purchase Common Stock pursuant to the Company's stock
option plans and employee stock purchase plans as they now exist, which copies
of such plans have been delivered to the Subscribers (collectively the foregoing
are "EXCEPTED ISSUANCES"). The Subscribers who exercise their rights pursuant
to this Section 12(a) shall have the right during the seven (7) business days
following receipt of the notice to purchase in the aggregate up to 100% of such
offered common stock, debt or other securities in accordance with the terms and
conditions set forth in the notice of sale in the same proportion to each other
as their purchase of Notes in the Offering. In the event such terms and
conditions are modified during the notice period, the Subscribers shall be given
prompt notice of such modification and shall have the right during the seven (7)
business days following the notice of modification, whichever is longer, to
exercise such right.
(b) Offering Restrictions. Other than the Excepted Issuances, until
the Registration Statement has been effective for the public unrestricted resale
of the Shares, Initial Shares and Warrant Shares for sixty days and during the
pendency of an Event of Default, or when any compensatory or liquidated damages
are accruing or are outstanding, the Company will not enter into an agreement to
nor issue any equity, convertible debt or other securities convertible into
common stock or equity of the Company nor modify any of the foregoing which may
be outstanding at anytime, without the prior written consent of the Subscriber,
which consent may be withheld for any reason. For so long as the Notes are
outstanding the Company will not enter into any equity line of credit or similar
agreement, nor issue or agree to issue any floating or variable priced equity
linked instruments nor any of the foregoing or equity with price reset rights.
(c) Favored Nations Provision. Except for the Excepted Issuances, if
at any time Notes or Warrants are outstanding the Company shall offer, issue or
agree to issue any common stock or securities convertible into or exercisable
for shares of common stock (or modify any of the foregoing which may be
outstanding) to any person or entity at a price per share or conversion or
exercise price per share which shall be less than the Conversion Price in
respect of the Shares, or if less than the Warrant exercise price in respect of
the Warrant Shares, without the consent of each Subscriber holding Notes,
Shares, Warrants, or Warrant Shares, then the Company shall issue, for each such
occasion, additional shares of Common Stock to each Subscriber so that the
average per share purchase price of the shares of Common Stock issued to the
Subscriber (of only the Common Stock or Warrant Shares still owned by the
Subscriber) is equal to such other lower price per share and the Conversion
Price and Warrant Exercise Price shall automatically be reduced to such other
lower price per share. The average Purchase Price of the Shares and average
exercise price in relation to the Warrant Shares shall be calculated separately
for the Shares and Warrant Shares. The foregoing calculation and issuance shall
be made separately for Shares received upon Note conversion and separately for
Warrant Shares. The delivery to the Subscriber of the additional shares of
Common Stock shall be not later than the closing date of the transaction giving
rise to the requirement to issue additional shares of Common Stock. The
Subscriber is granted the registration rights described in Section 11 hereof in
relation to such additional shares of Common Stock except that the Filing Date
and Effective Date vis- -vis such additional common shares shall be,
respectively, the thirtieth (30th) and sixtieth (60th) date after the closing
date giving rise to the requirement to issue the additional shares of Common
Stock. For purposes of the issuance and adjustment described in this paragraph,
the issuance of any security of the Company carrying the right to convert such
security into shares of Common Stock or of any warrant, right or option to
purchase Common Stock shall result in the issuance of the additional shares of
Common Stock upon the sooner of the agreement to or actual issuance of such
convertible security, warrant, right or option and again at any time upon any
subsequent issuances of shares of Common Stock upon exercise of such conversion
or purchase rights if such issuance is at a price lower than the Conversion
Price or Warrant exercise price in effect upon such issuance. The rights of the
Subscriber set forth in this Section 12 are in addition to any other rights the
Subscriber has pursuant to this Agreement, the Note, any Transaction Document,
and any other agreement referred to or entered into in connection herewith.
(d) Option Plan Restrictions. The only officer, director, employee
and consultant stock option or stock incentive plan currently in effect or
contemplated by the Company has been submitted to the Subscribers or is
described with Reports. No other plan will be adopted nor may any options or
equity not included in such plan be issued until after the Exclusion Period.
(e) Paid In Kind. The Subscriber may demand that some or all of the sums
payable to the Subscriber pursuant to Sections 7.1(c), 7.2, 7.5, 11.4, 11.7(c),
11.7(d) and 11.7(e) that are not paid within ten business days of the required
payment date be paid in shares of Common Stock valued at the Conversion Price in
effect at the time Subscriber makes such demand or, at the Subscriber's
election, at such other valuation described in the Transaction Documents. In
addition to any other rights granted to the Subscriber herein, the Subscriber is
also granted the registration rights set forth in Section 11.1(ii) hereof in
relation to such shares of Common Stock and the Common Stock issuable pursuant
to this Section 12(e). For purposes only of determining any liquidated damages
pursuant to the Transaction Documents, the entire Purchase Price shall be
allocated to the Notes and none to the Initial Shares or Warrants; the Initial
Shares shall be valued at the Conversion Price in effect at the time liquidated
damages accrued; and the Warrant Shares shall be valued at the actual exercise
price thereof.
(f) Maximum Exercise of Rights. In the event the exercise of the rights
described in Sections 12(a), 12(c) and 12(e) would result in the issuance of an
amount of common stock of the Company that would exceed the maximum amount that
may be issued to a Subscriber calculated in the manner described in Section 7.3
of this Agreement, then the issuance of such additional shares of common stock
of the Company to such Subscriber will be deferred in whole or in part until
such time as such Subscriber is able to beneficially own such common stock
without exceeding the maximum amount set forth calculated in the manner
described in Section 7.3 of this Agreement. The determination of when such
common stock may be issued shall be made by each Subscriber as to only such
Subscriber.
13. Miscellaneous.
(a) 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 express 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: (i) if to the Company, to: GTC Telecom Corp., 3151
Airway Avenue, Suite P-3, Costa Mesa, CA 92626, Attn: Vi Bui, Esq., telecopier
number: (714) 549-7707, and (ii) if to the Subscribers, to: the one or more
addresses and telecopier numbers indicated on the signature pages hereto, with
an additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth
Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-3575.
(b) Closing. The consummation of the transactions contemplated herein shall
take place at the offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite
1601, New York, New York 10176, upon the satisfaction of all conditions to
Closing set forth in this Agreement ("CLOSING DATE").
(c) Entire Agreement; Assignment. This Agreement and other documents
delivered in connection herewith represent the entire agreement between the
parties hereto with respect to the subject matter hereof and may be amended only
by a writing executed by both parties. Neither the Company nor the Subscribers
have relied on any representations not contained or referred to in this
Agreement and the documents delivered herewith. No right or obligation of the
Company shall be assigned without prior notice to and the written consent of the
Subscribers.
(d) Counterparts/Execution. This Agreement may be executed in any number
of counterparts and by the different signatories hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. This
Agreement may be executed by facsimile signature and delivered by facsimile
transmission.
(e) Law Governing this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
conflicts of lawsprinciples that would result in the application of the
substantive laws of another jurisdiction. Any action brought by either party
against the other concerning the transactions contemplated by this Agreement
shall be brought only in the state courts of New York or in the federal courts
located in the state of New York. THE PARTIES AND THE INDIVIDUALS EXECUTING
THIS AGREEMENT AND OTHER AGREEMENTS REFERRED TO HEREIN OR DELIVERED IN
CONNECTION HEREWITH ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION
OF SUCH COURTS AND WAIVE TRIAL BY JURY. The prevailing party shall be entitled
to recover from the other party its reasonable attorney's fees and costs. In
the event that any provision of this Agreement or any other agreement delivered
in connection herewith is invalid or unenforceable under any applicable statute
or rule of law, then such provision shall be deemed inoperative to the extent
that it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of any agreement.
(f) Specific Enforcement, Consent to Jurisdiction. The Company and
Subscriber acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to one or more preliminary
and final injunctions to prevent or cure breaches of the provisions of this
Agreement and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity. Subject to Section 13(e) hereof, each of the Company, Subscriber
and any signator hereto in his personal capacity hereby waives, and agrees not
to assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction in New York of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Nothing in this Section shall
affect or limit any right to serve process in any other manner permitted by law.
(g) Independent Nature of Subscribers. The Company acknowledges that the
obligations of each Subscriber under the Transaction Documents are several and
not joint with the obligations of any other Subscriber, and no Subscriber shall
be responsible in any way for the performance of the obligations of any other
Subscriber under the Transaction Documents. The Company acknowledges that each
Subscriber has represented that the decision of each Subscriber to purchase
Securities has been made by such Subscriber independently of any other
Subscriber and independently of any information, materials, statements or
opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or
prospects of the Company which may have been made or given by any other
Subscriber or by any agent or employee of any other Subscriber, and no
Subscriber or any of its agents or employees shall have any liability to any
Subscriber (or any other person) relating to or arising from any such
information, materials, statements or opinions. The Company acknowledges that
nothing contained in any Transaction Document, and no action taken by any
Subscriber pursuant hereto or thereto (including, but not limited to, the (i)
inclusion of a Subscriber in the Registration Statement and (ii) review by, and
consent to, such Registration Statement by a Subscriber) shall be deemed to
constitute the Subscribers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Subscribers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company
acknowledges that each Subscriber shall be entitled to independently protect and
enforce its rights, including without limitation, the rights arising out of the
Transaction Documents, and it shall not be necessary for any other Subscriber to
be joined as an additional party in any proceeding for such purpose. The
Company acknowledges that it has elected to provide all Subscribers with the
same terms and Transaction Documents for the convenience of the Company and not
because Company was required or requested to do so by the Subscribers. The
Company acknowledges that such procedure with respect to the Transaction
Documents in no way creates a presumption that the Subscribers are in any way
acting in concert or as a group with respect to the Transaction Documents or the
transactions contemplated thereby.
[THIS SPACE INTENTIONALLY LEFT BLANK]
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
GTC TELECOM CORP.
a Nevada corporation
By: /s/ S. Paul Sandhu
Name: S. Paul Sandhu
Title: CEO
Dated: May 23, 2005
SUBSCRIBER NOTE PAYMENT INITIAL CLASS A CLASS B
PRINCIPAL AFTER SHARES WARRANTS WARRANTS
ORIGINAL
ISSUE
DISCOUNT
ALPHA CAPITAL $352,941.00 $300,000.00 705,882 2,117,646 1,764,705
AKTIENGESELLSCHAFT
Pradafant 7
9490 Furstentums
Vaduz, Lichtenstein
Fax: 011-42-32323196
/s/ Signature illegible
(Signature)
By:
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
GTC TELECOM CORP.
a Nevada corporation
By: /s/ S. Paul Sandhu
Name: S. Paul Sandhu
Title: CEO
Dated: May 23, 2005
SUBSCRIBER NOTE PAYMENT INITIAL CLASS A CLASS B
PRINCIPAL AFTER SHARES WARRANTS WARRANTS
ORIGINAL
ISSUE
DISCOUNT
DCOFI MASTER LDC $352,941.00 $300,000.00 705,882 2,117,646 1,764,705
830 Third Avenue,
14th Floor
New York, NY 10022
Fax: (212) 922-2081
/s/Jeffrey M. Haas
(Signature)
By: Jeffrey M. Haas
Authorized Signatory
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (C)
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
GTC TELECOM CORP.
a Nevada corporation
By: /s/ S. Paul Sandhu
Name: S. Paul Sandhu
Title: CEO
Dated: May 23, 2005
SUBSCRIBER NOTE PAYMENT INITIAL CLASS A CLASS B
PRINCIPAL AFTER SHARES WARRANTS WARRANTS
ORIGINAL
ISSUE
DISCOUNT
SCG CAPITAL, LLC $147,059.00 $125,000.00 294,118 882,354 735,295
19495 Biscayne Boulevard,
Suite 608
Aventura, FL 33180
Attn: Steven Geduld,
President
Fax: (305) 466-4415
/s/ Steven Geduld
(Signature)
By: Steven Geduld
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (D)
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
GTC TELECOM CORP.
a Nevada corporation
By: /s/ S. Paul Sandhu
Name: S. Paul Sandhu
Title: CEO
Dated: May 23, 2005
SUBSCRIBER NOTE PAYMENT INITIAL CLASS A CLASS B
PRINCIPAL AFTER SHARES WARRANTS WARRANTS
ORIGINAL
ISSUE
DISCOUNT
SILVER OAK
INVESTMENTS, INC. $176,470.00 $150,000.00 352,940 1,058,820 882,350
350 California Street,
Suite 1750
San Francisco, CA 94104
Fax: (415) 217-7072
/s/ Murry Todd
(Signature)
By: Murry Todd
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (E)
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
GTC TELECOM CORP.
a Nevada corporation
By: /s/ S. Paul Sandhu
Name: S. Paul Sandhu
Title: CEO
Dated: May 23, 2005
SUBSCRIBER NOTE PAYMENT INITIAL CLASS A CLASS B
PRINCIPAL AFTER SHARES WARRANTS WARRANTS
ORIGINAL
ISSUE
DISCOUNT
ELLIS INTERNATIONAL LTD. $58,824.00 $50,000.00 117,648 352,944 294,120
53rd Street Urbanizacion
Obarrio
Swiss Tower, 16th Floor,
Panama
Republic of Panama
Fax: (516) 887-8990
/s/ Wilhelm Unger
(Signature)
By: Wilhelm Unger, Officer
LIST OF EXHIBITS AND SCHEDULES
Exhibit A1 Form of Class A Warrant
Exhibit A2 Form of Class B Warrant
Exhibit B Escrow Agreement
Exhibit C1 Security Agreement (Company)
Exhibit C2 Security Agreement (Subsidiary)
Exhibit D Collateral Agent Agreement
Exhibit E Form of Legal Opinion
Exhibit F Form of Public Announcement or Form 8-K
Exhibit G Form of Limited Standstill Agreement
Schedule 5(a) Subsidiaries
Schedule 5(d) Additional Issuances / Capitalization
Schedule 5(q) Undisclosed Liabilities
Schedule 8 Broker
Schedule 9(e) Use of Proceeds
Schedule 9(q) Providers of Limited Standstill Agreements
Schedule 11.1 Other Securities to be Registered