EXHIBIT 4.28
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of {{FundDate}}, by
and among PATRIOT SCIENTIFIC CORPORATION, a Delaware corporation, ("COMPANY"),
and {{FirstName}} {{LastName}}, an individual (the "BUYER").
WHEREAS:
A. The Company and the Buyer are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
under Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT");
B. Buyer desires to purchase and the Company desires to issue and sell,
upon the terms and conditions set forth in this Agreement (i) convertible
debentures of the Company, in the form attached hereto as EXHIBIT "A", in the
aggregate principal amount (the "ORIGINAL PRINCIPAL AMOUNT") of
{{AmtSpell}}Thousand Dollars ({{DebDol}}) (together with any debenture(s) issued
in replacement thereof or as a dividend thereon or otherwise with respect
thereto in accordance with the terms thereof, the "DEBENTURES"), convertible
into shares of common stock, $0.00001 par value per share, of the Company (the
"COMMON STOCK"), upon the terms and subject to the limitations and conditions
set forth in such Debentures and (ii) warrants (the "WARRANTS"), in the form
attached hereto as EXHIBIT "B", to purchase {{NoWarrants}} shares (the "WARRANT
AMOUNT") of Common Stock ; and
C. Contemporaneous with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement, in
the form attached hereto as EXHIBIT "C" (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.
NOW THEREFORE, the Company and the Buyer hereby agree as follows:
1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.
(A) PURCHASE OF DEBENTURES AND WARRANTS. On the Closing Date (as
defined below), the Company shall issue and sell to Buyer and Buyer agrees to
purchase from the Company {{DebDol}} in principal amount (the "Original
Principal Amount") of Debentures and an accompanying number of Warrants, in the
form of EXHIBIT "B" attached, to purchase a number of shares equal to the
Warrant Amount.
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(B) FORM OF PAYMENT. On or before the Closing Date (as defined
below), (i) Buyer shall pay the purchase price for the Debentures and the
Warrants to be issued and sold to it at the Closing (as defined below) (the
"PURCHASE PRICE") by wire transfer of immediately available funds to the
Company, in accordance with the Company's written wiring instructions, against
delivery of duly executed Debentures in the principal amount equal to the
Purchase Price and the number of Warrants equal to the Warrant Amount, and (ii)
the Company shall deliver such Debentures and Warrants duly executed on behalf
of the Company, to such Buyer, against delivery of such Purchase Price.
The Buyer agrees to provide a check for the Purchase Price on the date hereof.
(C) CLOSING DATE. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Debentures and the Warrants pursuant to this
Agreement (the "CLOSING DATE") shall be 4:00 PM Eastern Standard Time on
{{FundDate}} or such other mutually agreed upon time. The closing of the
transactions contemplated by this Agreement (the "CLOSING") shall occur on the
Closing Date at the offices of the Buyer, or at such other location as may be
agreed to by the parties.
(D) BUYER'S OPTION TO PURCHASE ADDITIONAL DEBENTURES. The Buyer, at
its option upon written notice ("Option Notice") to the Company given anytime
during the two (2) year period immediately following the date hereof, may elect
to purchase additional debentures (the "Additional Debentures") in one or more
transactions totaling an aggregate of any amount less than or equal to the
Original Principal Amount of Debentures originally purchased by Buyer, PROVIDED
THAT the Buyer may not give an Option Notice on any date that the Market Price
is less than $0.20. The closing of the purchase and sale of each Additional
Debenture ("Additional Closing Date") shall occur within five (5) business days
after the date that the Company first receives a copy of the applicable Option
Notice. Each Additional Debenture shall be in the form of the Debenture annexed
hereto as EXHIBIT "A," except that the "Initial Conversion Price," as defined
therein, shall equal a negotiated price or 115% of the Market Price (as defined
below) on the date of such closing. Each Additional Debenture shall be
accompanied by a number of warrants ("Additional Warrants") equal to the
original principal amount of the associated Additional Debenture, divided by the
Market Price (as defined below) on the date of such closing. Each Additional
Warrant shall be in the form of the Warrant annexed hereto as EXHIBIT "B,"
except that the initial "Exercise Price," as defined therein, shall equal a
negotiated price or 115% of the Market Price (as defined below) on the date of
such closing.
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"MARKET PRICE," for any security as of any date, shall have the meaning
ascribed to it in the Debentures.
2. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants
to the Company solely as to such Buyer that:
(A) INVESTMENT PURPOSE. As of the date hereof, the Buyer is
purchasing the Debentures and the shares of Common Stock issuable upon
conversion of or otherwise pursuant to the Debentures (including, without
limitation, such additional shares of Common Stock as are issuable as a result
of the events described in Sections 1.3 and 1.4 of the Debentures and Section 2
of the Registration Rights Agreement) (such shares of Common Stock being
collectively referred to herein as the "CONVERSION SHARES") and the Warrants and
the shares of Common Stock issuable upon exercise thereof (the "WARRANT SHARES"
and, collectively with the Debentures, Warrants and Conversion Shares, the
"SECURITIES") for its own account and not with a present view towards the public
sale or distribution thereof, except pursuant to sales registered or exempted
from registration under the 1933 Act; PROVIDED, HOWEVER, that by making the
representations herein, the Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act and applicable state securities
laws.
(B) ACCREDITED INVESTOR STATUS. The Buyer is not an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D (an "ACCREDITED
INVESTOR"). The Buyer has received all documents and disclosures required under
Rule 502(b) of Regulation D for private placements to a non-accredited investor
under Rule 506 of the 1933 Act, including, without limitation, the following
documents of the Company, each as filed with the SEC: (i) S-1 filed June 11,
2003; (ii) DEF 14A filed on September 17, 2003; (iii) 10-K filed on August 19,
2004; (iv) S-8 filed September 4, 2003; ; (v) 10-Q filed on April 21, 2003; (vi)
S-1 filed on February 20, 2003; (vii) SB-2 filed May 21, 2004; (viii) 10-QSB
filed on October 20, 2004, (ix)10-Q filed on January 21, 2004 and (x) 10Q filed
April 8, 2004.
(C) RELIANCE ON EXEMPTIONS. The Buyer understands that the
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Securities.
(D) INFORMATION. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by the Buyer or its advisors. The Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company. Neither such inquiries nor any other due diligence investigation
conducted by Buyer or any of its advisors or representatives shall modify, amend
or affect Buyer's right to rely on the Company's representations and warranties
contained in Section 3 below. The Buyer understands that its investment in the
Securities involves a significant degree of risk.
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(E) GOVERNMENTAL REVIEW. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
(F) TRANSFER OR RE-SALE. The Buyer understands that (i) except as
provided in the Registration Rights Agreement, the sale or re-sale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred or
resold unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the Buyer shall have delivered to the Company
an opinion of counsel (which opinion shall be in form, substance and scope
reasonably satisfactory to counsel to the Company) to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration, (c) the Securities are sold or transferred to
an "affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a
successor rule) ("RULE 144") of the Buyer who agrees to sell or otherwise
transfer the Securities only in accordance with this Section 2(f) and who is an
Accredited Investor, or (d) the Securities are sold pursuant to Rule 144; and
(ii) any sale of such Securities made in reliance on Rule 144 may be made only
in accordance with the terms of said Rule and further, if said Rule is not
applicable, any re-sale of such Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder. Notwithstanding the foregoing or anything else contained herein
to the contrary, the Securities may be pledged as collateral in connection with
a BONA FIDE margin account or other lending arrangement.
(G) LEGENDS. The Buyer understands that the Debentures and the
Warrants and, until such time as the Conversion Shares and Warrant Shares have
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement or otherwise may be sold pursuant to Rule 144 without any restriction
as to the number of securities as of a particular date that can then be
immediately sold, the Conversion Shares and Warrant Shares, may bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the certificates for such Securities):
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"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or
applicable state securities laws. The securities may not be sold,
transferred or assigned in the absence of an effective registration
statement for the securities under said Act, or an opinion of
counsel, in form, substance and scope reasonably satisfactory to
counsel to the Company, that registration is not required under said
Act or unless sold pursuant to Rule 144 under said Act."
Upon the request of any holder and the surrender of certificates, the legend set
forth above shall be removed and the Company shall issue a certificate without
such legend to the holder of any Security upon which it is stamped, if (a) such
Security is registered for sale under an effective registration statement filed
under the 1933 Act or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold, or (b) such holder provides the Company with an opinion of
counsel, in form, substance and scope reasonably satisfactory to counsel to the
Company, to the effect that a public sale or transfer of such Security may be
made without registration under the 1933 Act and such sale or transfer is
effected or (c) such holder provides the Company with reasonable assurances that
such Security can be sold pursuant to Rule 144. The Buyer agrees to sell all
Securities, including those represented by a certificate(s) from which the
legend has been removed, in compliance with applicable prospectus delivery
requirements, if any.
(H) [INTENTIONALLY LEFT BLANK]
(I) RESIDENCY. The Buyer is a resident of the state of
{{Residency}}.
(J) KNOWLEDGE AND EXPERIENCE. Buyer has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of the investment in the Securities.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Buyer that, except as set forth on the Company's disclosure
schedules or any update thereto prior to the Closing Date:
(A) ORGANIZATION AND QUALIFICATION. The Company and each of its
Subsidiaries (as defined below), if any, is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated, with full power and authority (corporate and other) to
own, lease, use and operate its properties and to carry on its business as and
where now owned, leased, used, operated and conducted. SCHEDULE 3(A) sets forth
a list of all of the Subsidiaries of the Company and the jurisdiction in which
each is incorporated. The Company and each of its Subsidiaries is duly qualified
as a foreign corporation to do business and is in good standing in every
jurisdiction in which its ownership or use of property or the nature of the
business conducted by it makes such qualification necessary except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the
Securities, (ii) the business, operations, assets, financial condition or
prospects of the Company and its Subsidiaries, if any, taken as a whole, (iii)
on the transactions contemplated hereby or by the agreements or instruments to
be entered into in connection herewith or (iv) the authority or the ability of
the Company to perform its obligation under this Agreement, the Registration
Rights Agreement, the Debentures or the Warrants. "SUBSIDIARIES" means any
corporation or other organization, whether incorporated or unincorporated, in
which the Company owns, directly or indirectly, any equity or other ownership
interest.
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(B) AUTHORIZATION; ENFORCEMENT. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement, the Debentures and the Warrants and to consummate
the transactions contemplated hereby and thereby and to issue the Securities, in
accordance with the terms hereof and thereof, (ii) except as otherwise set forth
in SCHEDULE 3(B), the execution and delivery of this Agreement, the Registration
Rights Agreement, the Debentures and the Warrants by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including without limitation, the issuance of the Debentures and the Warrants
and the issuance and reservation for issuance of the Conversion Shares issuable
upon conversion of or otherwise pursuant to the Debentures and the Warrant
Shares issuable upon exercise of or otherwise pursuant to the Warrants) have
been duly authorized by the Company's Board of Directors and no further consent
or authorization of the Company, its Board of Directors, or its stockholders is
required, (iii) this Agreement has been duly executed and delivered by the
Company, and (iv) this Agreement constitutes, and upon execution and delivery by
the Company of the Registration Rights Agreement, the Debentures and the
Warrants, each of such agreements and instruments will constitute, a legal,
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms.
(C) CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company is as set forth on SCHEDULE 3(C). All of such outstanding
shares of capital stock set forth in SCHEDULE 3(C) are, or upon issuance will
be, duly authorized, validly issued, fully paid and nonassessable.
No shares of capital stock of the Company are subject to preemptive rights or
any other similar rights of the stockholders of the Company or any liens or
encumbrances imposed through the actions or failure to act of the Company.
Except as disclosed in SCHEDULE 3(C), as of the effective date of this
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe
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for, puts, calls, rights of first refusal, agreements, understandings,
claims or other commitments or rights of any character whatsoever relating to,
or securities or rights convertible into or exchangeable for any shares of
capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
(ii) there are no agreements or arrangements under which the Company or any of
its Subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act (except the Registration Rights Agreement) and
(iii) there are no anti-dilution or price adjustment provisions contained in any
security issued by the Company (or in any agreement providing rights to security
holders) that will be triggered by the issuance of the Debentures, the Warrants,
the Conversion Shares or Warrant Shares. The Company has furnished to the Buyer
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof ("CERTIFICATE OF INCORPORATION"), the Company's
By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all
securities convertible into or exercisable for Common Stock of the Company and
the material rights of the holders thereof in respect thereto. In the event that
the date of execution of this Agreement is not the Closing Date, the Company
shall provide the Buyer with a written update of this representation signed by
the Company's President and Chief Executive or Chief Financial Officer on behalf
of the Company as of the Closing Date.
(D) ISSUANCE OF SHARES. Upon issuance upon conversion of the
Debentures and upon exercise of the Warrants in accordance with their respective
terms, the Conversion Shares and Warrant Shares will be validly issued, fully
paid and non-assessable, and free from all taxes, liens, claims and encumbrances
and shall not be subject to preemptive rights or other similar rights of
stockholders of the Company and will not impose personal liability upon the
holder thereof.
(E) ACKNOWLEDGMENT OF DILUTION. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares upon conversion of or otherwise pursuant to
the Debentures or upon issuance of the Warrant Shares upon exercise of or
otherwise pursuant to the Warrants. The Company's directors and executive
officers have studied and fully understand the nature of the Securities being
sold hereunder. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of or otherwise pursuant to the Debentures and
to issue Warrant Shares upon exercise of or otherwise pursuant to the Warrants
in accordance with this Agreement, the Debentures and the Warrants is absolute
and unconditional regardless of the dilutive effect that such issuance may have
on the ownership interests of other stockholders of the Company. Taking the
foregoing into account, the Company's Board of Directors has determined, in its
good faith business judgment, that the issuance of the Securities hereunder and
under the Debentures and the Warrants and the consummation of the transactions
contemplated hereby and thereby are in the best interest of the Company and its
stockholders.
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(F) NO CONFLICTS. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Debentures and the Warrants by
the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance and reservation
for issuance of the Conversion Shares and Warrant Shares) will not (i) except as
otherwise set forth in SCHEDULE 3(F), conflict with or result in a violation of
any provision of the Certificate of Incorporation or By-laws or (ii) violate or
conflict with, or result in a breach of any provision of, 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, patent, patent
license or instrument to which the Company or any of its Subsidiaries is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations
and regulations of any self-regulatory organizations to which the Company or its
securities are subject) applicable to the Company or any of its Subsidiaries or
by which any property or asset of the Company or any of its Subsidiaries is
bound or affected (except, in the case of clauses (i), (ii) and (iii) above, for
such conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not, individually or in the aggregate, have a Material
Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation
of its Certificate of Incorporation, By-laws or other organizational documents
and neither the Company nor any of its Subsidiaries is in default (and no event
has occurred which with notice or lapse of time or both could put the Company or
any of its Subsidiaries in default) under, and neither the Company nor any of
its Subsidiaries has taken any action or failed to take any action that would
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party or by which any property or assets of the
Company or any of its Subsidiaries is bound or affected, except for possible
defaults as would not, individually or in the aggregate, have a Material Adverse
Effect. The businesses of the Company and its Subsidiaries, if any, are not
being conducted, and shall not be conducted so long as a Buyer owns any of the
Securities, in violation of any law, ordinance or regulation of any governmental
entity the violation of which would have a Material Adverse Effect. Except as
disclosed in SCHEDULE 3(F) and as specifically contemplated by this Agreement
and as required under the 1933 Act and any applicable state securities laws, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency, regulatory
agency, self regulatory organization or stock market or any third party in order
for it to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement, the Debentures or the Warrants in
accordance with the terms hereof or thereof or to issue and sell the Debentures
and Warrants in accordance with the terms hereof and to issue the Conversion
Shares upon conversion of or otherwise pursuant to the Debentures and the
Warrant Shares upon exercise of or otherwise pursuant to the Warrants. Except as
disclosed in SCHEDULE 3(F), all consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company is not in violation of the listing requirements of the OTC-BB and does
not reasonably anticipate that the Common Stock will be delisted by the OTC-BB
in the foreseeable future. The Company and its Subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.
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(G) SEC DOCUMENTS; FINANCIAL STATEMENTS. Since at least January 1,
2001, the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"1934 ACT") (all of the foregoing filed prior to the date hereof and since at
least January 1, 2001 and all exhibits included therein and financial statements
and schedules thereto and documents (other than exhibits to such documents)
incorporated by reference therein, being hereinafter referred to herein as the
"SEC DOCUMENTS"). The Company has delivered to Buyer true and complete copies of
the SEC Documents, except for such exhibits and incorporated documents. As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. None of the
statements made in any such SEC Documents is, or has been, required to be
amended or updated under applicable law (except for such statements as have been
amended or updated in subsequent filings prior to the date hereof). As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed or summary statements) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated Subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except as set forth in the
financial statements of the Company included in the SEC Documents, the Company
has no liabilities, contingent or otherwise, other than (i) liabilities incurred
in the ordinary course of business subsequent to November 30, 2001 and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which, individually or in the aggregate,
are not material to the financial condition or operating results of the Company.
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(H) ABSENCE OF CERTAIN CHANGES. Except for losses incurred in the
ordinary course of business that have been publicly disclosed prior to the date
hereof or as set forth on SCHEDULE 3(H) hereof, since November 30, 2001, there
has been no material adverse change and no material adverse development in the
assets, liabilities, business, properties, operations, financial condition,
results of operations or prospects of the Company or any of its Subsidiaries.
For purposes of this Section 3(h), the terms "material adverse change" and
"material adverse development" shall exclude continuing losses that are
consistent with the Company's historical losses.
(I) ABSENCE OF LITIGATION. Except as disclosed in SCHEDULE 3(I)(A),
to the knowledge of the Company or any of its subsidiaries, there is no action,
suit, claim, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries, or their officers or directors
in their capacity as such, that would have a Material Adverse Effect. SCHEDULE
3(I)(B) contains a complete list and summary description of any known pending or
threatened proceeding against or affecting the Company or any of its
Subsidiaries, without regard to whether it, if adversely decided, would have a
Material Adverse Effect. The Company and its Subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.
(J) PATENTS, COPYRIGHTS, ETC. All of the Company's material patents,
patent applications, patent rights, inventions, know-how, trade secrets,
trademarks, trademark applications, service marks, service names, trade names
and copyrights ("INTELLECTUAL PROPERTY") are set forth in Schedule A to the
Debenture. The Company and each of its Subsidiaries owns or possesses the
requisite licenses or rights to use all Intellectual Property necessary to
enable it to conduct its business as now operated, including but not limited to
the intellectual property set forth in Schedule A to the Debenture (and, except
as otherwise set forth in SCHEDULE 3(J) hereof, to the best of the Company's
knowledge, as presently contemplated to be operated in the future), except for
such licenses or rights the failure of which to own or possess would not,
individually or in the aggregate, have a Material Adverse Effect; there is no
claim or action by any person pertaining to, or proceeding pending, or to the
Company's knowledge threatened, which challenges the right of the Company or of
a Subsidiary with respect to any Intellectual Property necessary to enable it to
conduct its business as now operated (and, except as otherwise set forth in
SCHEDULE 3(J) hereof, to the best of the Company's knowledge, as presently
contemplated to be operated in the future), except for actions or claims which,
if adversely decided, would not have a Material Adverse Effect; to the best of
the Company's knowledge, the Company's or its Subsidiaries' current and intended
products, services and processes do not infringe on any Intellectual Property or
other rights held by any person, and the Company is unaware of any facts or
circumstances which might give rise to any of the foregoing. The Company and
each of its Subsidiaries have taken reasonable security measures to protect the
secrecy, confidentiality and value of their Intellectual Property. The Company
has liens on its Intellectual Property as detailed in SCHEDULE 3(J) hereof.
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(K) NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor
any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is reasonably likely in the future to
have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries
is a party to any contract or agreement which in the judgment of the Company's
officers has or is reasonably likely to have a Material Adverse Effect.
(L) TAX STATUS. Except as set forth on SCHEDULE 3(L), the Company
and each of its Subsidiaries has made or filed all federal, state and foreign
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim. The Company has not executed a waiver with respect to
the statute of limitations relating to the assessment or collection of any
foreign, federal, state or local tax. Except as set forth on SCHEDULE 3(L), none
of the Company's tax returns is presently being audited by any taxing authority.
(M) CERTAIN TRANSACTIONS. Except as set forth on SCHEDULE 3(M) and
except for arm's length transactions pursuant to which the Company or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options disclosed on SCHEDULE
3(C), none of the officers, directors, or employees of the Company is presently
a party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
29
(N) DISCLOSURE. All information relating to or concerning the
Company or any of its Subsidiaries set forth in this Agreement and provided to
the Buyer pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which has
not been publicly announced or disclosed but under applicable law, rule or
regulation, requires public disclosure or announcement by the Company (assuming
for this purpose that the Company's reports filed under the 1934 Act are being
incorporated into an effective registration statement filed by the Company under
the 1933 Act).
(O) ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF SECURITIES. The
Company acknowledges and agrees that the Buyer is acting solely in the capacity
of arm's length purchaser with respect to this Agreement and the transactions
contemplated hereby. The Company further acknowledges that Buyer is not acting
as a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement and the transactions contemplated hereby and that
any statement made by Buyer or any of its respective representatives or agents
in connection with this Agreement and the transactions contemplated hereby is
not advice or a recommendation and is merely incidental to the Buyer's purchase
of the Securities and has not been relied upon by the Company, its officers or
directors in any way. The Company further represents to Buyer that the Company's
decision to enter into this Agreement has been based solely on the independent
evaluation of the Company and its representatives.
(P) NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration under the
1933 Act of the issuance of the Securities to the Buyer. The issuance of the
Securities to the Buyer will not be integrated with any other issuance of the
Company's securities (past, current or future) for purposes of any stockholder
approval provisions applicable to the Company or its securities.
(Q) NO BROKERS. The Company has taken no action which would give
rise to any claim by any person for brokerage commissions, finder's fees or
similar payments relating to this Agreement or the transactions contemplated
hereby.
(R) PERMITS; COMPLIANCE. The Company and each of its Subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "COMPANY PERMITS"), except where
the failure to so possess any such Company Permits would not have a Material
Adverse Effect, and there is no action pending or, to the knowledge of the
Company, threatened regarding suspension or cancellation of any of the Company
Permits. To the best of the Company's knowledge, neither the Company nor any of
its Subsidiaries is in conflict with, or in default or violation of, any of the
Company Permits, except for any such conflicts, defaults or violations which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect. Since December 31, 2001, neither the Company nor any of
its Subsidiaries has received any notification with respect to possible
conflicts, defaults or violations of applicable laws, except for notices
relating to possible conflicts, defaults or violations, which conflicts,
defaults or violations would not have a Material Adverse Effect.
30
(S) ENVIRONMENTAL MATTERS.
(i) Except as set forth in SCHEDULE 3(S), there are, to the
Company's knowledge, with respect to the Company or any of its Subsidiaries or
any predecessor of the Company, no past or present violations of Environmental
Laws (as defined below), releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 or similar federal, state, local or foreign laws and
neither the Company nor any of its Subsidiaries has received any notice with
respect to any of the foregoing, nor is any action pending or, to the Company's
knowledge, threatened in connection with any of the foregoing. The term
"ENVIRONMENTAL LAWS" means all federal, state, local or foreign laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants contaminants, or toxic
or hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
(ii) Other than those that are or were stored, used or
disposed of in compliance with applicable law, no Hazardous Materials are
contained on or about any real property currently owned, leased or used by the
Company or any of its Subsidiaries, and no Hazardous Materials were released on
or about any real property previously owned, leased or used by the Company or
any of its Subsidiaries during the period the property was owned, leased or used
by the Company or any of its Subsidiaries, except in the normal course of the
Company's or any of its Subsidiaries' business.
31
(iii) Except as set forth in SCHEDULE 3(S), there are no
underground storage tanks on or under any real property owned, leased or used by
the Company or any of its Subsidiaries that are not in compliance with
applicable law.
(T) TITLE TO PROPERTY. The Company and its Subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in SCHEDULE 3(T) or such
as would not have a Material Adverse Effect. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as would not have
a Material Adverse Effect.
(U) INSURANCE. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a Material
Adverse Effect.
(V) INTERNAL ACCOUNTING CONTROLS. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(W) FOREIGN CORRUPT PRACTICES. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any Subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
32
(X) SOLVENCY. The Company (both before and after giving effect to
the transactions contemplated by this Agreement) is solvent (I.E., its assets
have a fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not have the ability to, nor does it intend to
take any action that would impair its ability to, pay its debts from time to
time incurred in connection therewith as such debts mature. Except as disclosed
in SCHEDULE 3(X), the Company did not receive a qualified opinion from its
auditors with respect to its most recent fiscal year end and does not anticipate
or know of any basis upon which its auditors might issue a qualified opinion in
respect of its current fiscal year.
(Y) NO INVESTMENT COMPANY. The Company is not, and upon the issuance
and sale of the Securities as contemplated by this Agreement will not be an
"investment company" required to be registered under the Investment Company Act
of 1940 (an "INVESTMENT COMPANY"). The Company is not controlled by an
Investment Company.
(Z) NON-ACCREDITED INVESTOR DISCLOSURES. The Company has provided to
the Buyer all documents and disclosures required under Rule 502(b) of Regulation
D for private placements to a non-accredited investor under Rule 506 of the 1933
Act.
4. COVENANTS.
(A) BEST EFFORTS. The parties shall use their best efforts to
satisfy timely each of the conditions described in Section 6 and 7 of this
Agreement.
(B) FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to Buyer promptly after such filing. The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for sale to the Buyer at the Closing
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United States (or to obtain an exemption from such qualification),
and shall provide evidence of any such action so taken to Buyer on or prior to
the Closing Date.
33
(C) REPORTING STATUS; ELIGIBILITY TO USE FORM S-1. The Company's
Common Stock is registered under Section 12(g) of the 1934 Act. So long as any
Buyer beneficially owns any of the Securities, the Company shall timely file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination. The Company currently meets, and will take all
necessary action to continue to meet, the "registrant eligibility" requirements
set forth in the general instructions to Form S-1 for registration of the resale
of the securities purchased hereunder.
(D) USE OF PROCEEDS. The Company shall use the proceeds from the
sale of the Debentures and the Warrants in the manner set forth in SCHEDULE 4(D)
attached hereto and made a part hereof and shall not use such proceeds in a
manner inconsistent with the provisions of Article II of the Debentures.
(E) [INTENTIONALLY LEFT BLANK].
(F) [INTENTIONALLY LEFT BLANK].
(G) FINANCIAL INFORMATION. The Company agrees to send the following
reports to Buyer until Buyer transfers, assigns, or sells all of the Securities:
(i) within ten (10) days after the filing with the SEC, a copy of its Annual
Report on Form 10-K, its Quarterly Reports on Form 10-Q and any Current Reports
on Form 8-K; (ii) within one (1) day after release, copies of all press releases
issued by the Company or any of its Subsidiaries; and (iii) contemporaneously
with the making available or giving to the stockholders of the Company, copies
of any notices or other information the Company makes available or gives to such
stockholders.
(H) RESERVATION OF SHARES. The Company covenants that it will
initially reserve (the "INITIAL SHARE RESERVATION") from its authorized and
unissued Common Stock a number of shares of Common Stock equal to at least one
hundred and ten percent (110%) the Original Principal Amount of the Debenture,
divided by the Conversion Price in effect on the date of the Initial Share
Reservation, free from preemptive rights, to provide for the issuance of Common
Stock upon the conversion of the Debenture and shall initially reserve an
additional number of shares equal to the Warrant Amount, free from preemptive
rights, to provide for the issuance of Common Stock upon the exercise of the
Warrants. The Company further covenants that, beginning on the date of the
Initial Share Reservation (the "CONVERSION BEGINNING DATE"), and continuing
throughout the period the conversion right exists, the Company shall at all
times have authorized, and reserved (the "ONGOING SHARE RESERVATION
REQUIREMENT") for the purpose of issuance, a sufficient number of shares of
34
Common Stock to provide for the full conversion or exercise of the outstanding
Debentures and Warrants and issuance of the Conversion Shares and Warrant Shares
in connection therewith (based on the Conversion Price (as defined in the
Debentures) in effect from time to time and the Exercise Price of the Warrants
in effect from time to time). The Company shall not reduce the number of shares
of Common Stock reserved for issuance upon conversion of or otherwise pursuant
to the Debentures and exercise of or otherwise pursuant to the Warrants without
the consent of Buyer. The Company shall use its best efforts at all times to
maintain the number of shares of Common Stock so reserved for issuance at no
less than one hundred and ten percent (110%) the number that is then actually
issuable upon full conversion of the Debentures (based on the Conversion Price
(as defined in the Debentures) in effect from time to time) and full exercise of
the Warrants (based on the Exercise Price of the Warrants in effect from time to
time). If at any time the number of shares of Common Stock authorized and
reserved for issuance is below the number of Conversion Shares issued and
issuable upon conversion of or otherwise pursuant to the Debentures (based on
the Conversion Price (as defined in the Debentures) in effect from time to time)
and Warrant Shares issued or issuable upon exercise of or otherwise pursuant to
the Warrants (based on the Exercise Price of the Warrants in effect from time to
time), the Company will promptly take all corporate action necessary to
authorize and reserve a sufficient number of shares, including, without
limitation, calling a special meeting of stockholders to authorize additional
shares to meet the Company's obligations under this Section 4(h), in the case of
an insufficient number of authorized shares, and using its best efforts to
obtain stockholder approval of an increase in such authorized number of shares.
(I) LISTING. The Company shall use its best efforts to promptly
secure the listing of the Conversion Shares and Warrant Shares upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and, so long as any Buyer owns any of the Securities, shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares from time to time issuable upon conversion of or otherwise
pursuant to the Debentures and all Warrant Shares from time to time issuable
upon exercise of or otherwise pursuant to the Warrants. The Company will use its
best efforts to obtain and, so long as any Buyer owns any of the Securities,
maintain the listing and trading of its Common Stock on the OTC-BB, the Nasdaq
National Market (the "NNM"), the Nasdaq SmallCap Market (the "NASDAQ SMALLCAP"),
the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX")
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers ("NASD") and such exchanges, as applicable. The Company shall promptly
provide to Buyer copies of any notices it receives from the OTC-BB and any other
exchanges or quotation systems on which the Common Stock is then listed
regarding the continued eligibility of the Common Stock for listing on such
exchanges and quotation systems.
35
(J) CORPORATE EXISTENCE. So long as a Buyer beneficially owns any
Debentures or Warrants, the Company shall maintain its corporate existence and
shall not merge, consolidate or sell all or substantially all of the Company's
assets, except in the event of a merger or consolidation or sale of all or
substantially all of the Company's assets, where the (i) the successor or
acquiring entity and, if an entity different from the successor or acquiring
entity, the entity whose securities into which the Debentures shall become
convertible pursuant to Section 1.5(b) of the Debentures, in such transaction
assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith (including the Debentures and
the Warrants) and (ii) the entity whose securities into which the Debentures
shall become convertible pursuant to Section 1.5(b) of the Debentures is a
publicly traded corporation whose Common Stock is listed for trading on the NNM,
NASDAQ SmallCap, NYSE or AMEX.
(K) NO INTEGRATION. The Company shall not make any offers or sales
of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the
1933 Act or cause the offering of the Securities to be integrated with any other
offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.
(L) LIMITATION ON SALE OR DISPOSITION OF INTELLECTUAL PROPERTY. So
long as the Company shall have any obligation under the Debenture or so long as
any of the Warrants remain outstanding, the Corporation shall not sell, convey,
dispose of, spin off or assign any or all of its Intellectual Property
(including but not limited to the Intellectual Property set forth in Schedule A
to the Debenture), or the rights to receive proceeds from patent infringement
litigation or other litigation related to such intellectual property
(collectively, the "INTELLECTUAL PROPERTY RIGHTS"), in each case without Buyer's
written consent, provided that the Company may, without the Buyer's Written
Consent, enter into one or more licensing agreements with respect to its
Intellectual Property so long as such agreements are not with any affiliate (as
such term is defined in Rule 501(b) of Regulation D) of the Company or with any
relative of, or entity controlled by, or any entity 10% or more of which is
owned by, any officer, director, employee or former employee of the Company,
provided, further, that the Company shall not be subject to the restrictions of
this Section 4(l) if the cash consideration received by the Company in exchange
for such Intellectual Property Rights exceeds $ {AMOUNT} million. The Company
will provide at closing duly executed board resolutions attesting to the above
limitations on the disposition of the Company's intellectual property.
(M) [INTENTIONALLY LEFT BLANK].
(N) IRREVOCBLE TRANSFER AGENT INSTRUCTIONS. Within ten (10) business
days after the Closing Date, the Company agrees to deliver to Buyer the
Irrevocable Transfer Agent Instructions (as defined below), in form and
substance satisfactory to the Buyer, which instructions shall be acknowledged in
writing by the Company's Transfer Agent.
36
5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable
instructions to its transfer agent to issue certificates, registered in the name
of Buyer or its nominee, for the Conversion Shares and Warrant Shares in such
amounts as specified from time to time by Buyer to the Company upon conversion
of the Debentures or exercise of the Warrants in accordance with the terms
thereof (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration
of the Conversion Shares and Warrant Shares under the 1933 Act or the date on
which the Conversion Shares and Warrant Shares may be sold pursuant to Rule 144
without any restriction as to the number of securities as of a particular date
that can then be immediately sold, all such certificates shall bear the
restrictive legend specified in Section 2(g) of this Agreement. The Company
warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(f) hereof (in the case of the Conversion Shares and
Warrant Shares, prior to registration of the Conversion Shares and Warrant
Shares under the 1933 Act or the date on which the Conversion Shares and Warrant
Shares may be sold pursuant to Rule 144 without any restriction as to the number
of securities as of a particular date that can then be immediately sold), will
be given by the Company to its transfer agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way the Buyer's obligations and
agreement set forth in Section 2(g) hereof to comply with all applicable
prospectus delivery requirements, if any, upon re-sale of the Securities. If a
Buyer provides the Company with (i) an opinion of counsel in form, substance and
scope customary for opinions in comparable transactions, to the effect that a
public sale or transfer of such Securities may be made without registration
under the 1933 Act and such sale or transfer is effected or (ii) the Buyer
provides reasonable assurances that the Securities can be sold pursuant to Rule
144, the Company shall permit the transfer, and, in the case of the Conversion
Shares and Warrant Shares, promptly instruct its transfer agent to issue one or
more certificates, free from any restrictive legend, in such name and in such
denominations as specified by such Buyer.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the
Company hereunder to issue and sell the Debentures and Warrants to a Buyer at
the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions thereto, provided that these conditions are for
the Company's sole benefit and may be waived by the Company at any time in its
sole discretion:
37
(a) The Buyer shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Company.
(b) The Buyer shall have delivered the Purchase Price in accordance
with Section 1(b) above.
(c) The representations and warranties of the Buyer shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which representations and
warranties shall be true and correct as of such date), and the Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer at or prior to the Closing Date.
(d) No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.
7. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE. The obligation of Buyer
hereunder to purchase the Debentures and Warrants at the Closing is subject to
the satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for such Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion:
(a) The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Buyer.
(b) The Company shall have delivered to such Buyer duly executed
Debentures (in such denominations as the Buyer shall request) and Warrants in
accordance with Section 1(b) above.
(c) [Intentionally Left Blank].
(d) The representations and warranties of the Company contained in
this Agreement, as modified by the Exhibits and Schedules hereto, shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at such time (except for representations and
warranties that speak as of a specific date, which representations and
warranties shall be true and correct as of such date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Buyer shall
have received a certificate or certificates, executed by the President and Chief
Executive Officer of the Company, dated as of the Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by such Buyer
including, but not limited to certificates with respect to the Company's
Certificate of Incorporation, By-laws and Board of Directors' resolutions
relating to the transactions contemplated hereby.
38
(e) No litigation, statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.
(f) Trading in the Common Stock on the OTC-BB shall not have been
suspended by the SEC or the Nasdaq and, within two (2) business days of the
Closing, the Company will make application to the OTC-BB, if legally required by
Nasdaq, to have the Conversion Shares and the Warrant Shares authorized for
quotation.
(g) The Buyer shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer and in substantially the same form as EXHIBIT "D"
attached hereto.
(h) The Buyer shall have received an officer's certificate described
in Section 3(c) above, dated as of the Closing Date.
8. GOVERNING LAW; MISCELLANEOUS.
(A) GOVERNING LAW; ARBITRATION. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of New York. Any
controversy or claim arising out of or related to this Debenture or the breach
thereof, shall be settled by binding arbitration in New York, NY in accordance
with the Expedited Procedures (Rules 53-57) of the Commercial Arbitration Rules
of the American Arbitration Association ("AAA"). A proceeding shall be commenced
upon written demand by the Company or Buyer to the other. The arbitrator(s)
shall enter a judgment by default against any party, which fails or refuses to
appear in any properly noticed arbitration proceeding. The proceeding shall be
conducted by one (1) arbitrator, unless the amount alleged to be in dispute
exceeds two hundred fifty thousand dollars ($250,000), in which case three (3)
arbitrators shall preside. The arbitrator(s) will be chosen by the parties from
a list provided by the AAA, and if the parties are unable to agree within ten
(10) days, the AAA shall select the arbitrator(s). The arbitrators must be
experts in securities law and financial transactions. The arbitrators shall
assess costs and expenses of the arbitration, including all attorneys' and
experts' fees, as the arbitrators believe is appropriate in light of the merits
of the parties' respective positions in the issues in dispute. Each party
submits irrevocably to the jurisdiction of any state court sitting in New York,
NY or to the United States District Court sitting in New York for purposes of
enforcement of any discovery order, judgment or award in connection with such
arbitration. The award of the arbitrator(s) shall be final and binding upon the
parties and may be enforced in any court having jurisdiction. The arbitration
shall be held in such place as set by the arbitrator(s) in accordance with Rule
55. With respect to any arbitration proceeding in accordance with this section,
the prevailing party's reasonable attorney's fees and expenses shall be borne by
the non-prevailing party.
39
Although the parties, as expressed above, agree that all claims,
including claims that are equitable in nature, for example specific performance,
shall initially be prosecuted in the binding arbitration procedure outlined
above, if the arbitration panel dismisses or otherwise fails to entertain any or
all of the equitable claims asserted by reason of the fact that it lacks
jurisdiction, power and/or authority to consider such claims and/or direct the
remedy requested, then, in only that event, will the parties have the right to
initiate litigation respecting such equitable claims or remedies. The forum for
such equitable relief shall be in either a state or federal court sitting in New
York, NY. Each party waives any right to a trial by jury, assuming such right
exists in an equitable proceeding, and irrevocably submits to the jurisdiction
of said New York court. New York law shall govern both the proceeding as well as
the interpretation and construction of this Agreement and the transaction as a
whole.
(B) COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be
executed in one or more counterparts, all of which shall be considered one and
the same agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party. This Agreement, once executed by
a party, may be delivered to the other party hereto by facsimile transmission of
a copy of this Agreement bearing the signature of the party so delivering this
Agreement.
(C) HEADINGS. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
(D) SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
(E) ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
40
(F) NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier (including a recognized
overnight delivery service) or by facsimile and shall be effective five days
after being placed in the mail, if mailed by regular United States mail, or upon
receipt, if delivered personally or by courier (including a recognized overnight
delivery service) or by facsimile, in each case addressed to a party. The
addresses for such communications shall be:
If to the Company: To the address set forth immediately below such
Company's name on the signature pages hereto.
With copy to:
Otto E. Sorensen, Esq.
LUCE, FORWARD, HAMILTON AND SCRIPPS, LLP
600 West Broadway, Suite 2600
San Diego, CA 92191
Tel (619) 699-2534
Fax (619) 232-8311
If to a Buyer: To the address set forth immediately below such Buyer's
name on the signature pages hereto.
Each party shall provide notice to the other party of any change in address.
(G) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Neither
the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, subject to Section 2(f), Buyer may assign its
rights hereunder to any person that purchases Securities in a private
transaction from a Buyer or to any of its "affiliates," as that term is defined
under the 1934 Act, without the consent of the Company; PROVIDED, HOWEVER, that
prior to any assignment of its rights hereunder to a person (other than an
affiliate) that purchases any Debentures or Warrants from such Buyer in a
private transaction such Buyer shall provide the Company with written notice of
its intention to sell some or all of the Debentures or Warrants, which notice
shall disclose the proposed purchase price for such Debentures or Warrants, and
the Company shall have the option, during the ten (10) business day period
following such notice, to purchase all, but not less than all, of such
Debentures and/or Warrants at the proposed purchase price, after which period
the Buyer shall be free to sell the Debentures and/or Warrants to a third party
at such proposed purchase price.
41
(H) THIRD PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
(I) SURVIVAL. The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement shall survive the
closing hereunder for a period of two (2) years notwithstanding any due
diligence investigation conducted by or on behalf of the Buyer.
(J) INDEMNIFICATION. The Company (the "INDEMNIFYING PARTY") agrees
to indemnify and hold harmless the Buyer and all its officers, directors,
employees, agents, members and managers (the "INDEMNIFIED PARTY") for loss or
damage arising as a result of or related to any breach or alleged breach by the
Company of any of its representations, warranties and covenants set forth in
Sections 3 and 4 hereof or any of its covenants and obligations under this
Agreement or the Registration Rights Agreement, including advancement of
expenses as they are incurred with respect to claims by third parties.
Promptly after receipt of notice of the commencement of any action
against an Indemnified Party, such Indemnified Party shall notify the
Indemnifying Party in writing of the commencement thereof and the basis
hereunder upon which a claim for indemnification is asserted, but the failure to
do so shall not relieve the Indemnifying Party of its obligations hereunder
except to the extent the Indemnifying Party is materially prejudiced by such
failure. In the event of the commencement of any such action, the Indemnifying
Party shall be entitled to participate therein and to assume the defense thereof
with counsel satisfactory to the Indemnified Party, and, after notice from the
Indemnifying Party to the Indemnified Party of its election so to assume the
defense thereof, the Indemnifying Party shall not be liable to the Indemnified
Party hereunder for any legal expenses (including attorneys' fees) 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 Party
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.
42
As to cases in which the Indemnifying Party has assumed and is
providing the defense for the Indemnified Party, the control of such defense
shall be vested in the Indemnifying Party; provided that the consent of the
Indemnified Party shall be required prior to any settlement of such case or
action, which consent shall not be unreasonably withheld. As to any action, the
party which is controlling such action shall provide to the other party
reasonable information (including reasonable advance notice of all proceedings
and depositions in respect thereto) regarding the conduct of the action and the
right to attend all proceedings and depositions in respect thereto through its
agents and attorneys, and the right to discuss the action with counsel for the
party controlling such action.
(K) PUBLICITY. The Company and the Buyer shall have the right to
review a reasonable period of time before issuance of any press releases,
filings with the SEC, NASD or any stock exchange or interdealer quotation
system, or any other public statements with respect to the transactions
contemplated hereby; PROVIDED, HOWEVER, that the Company shall be entitled,
without the prior approval of the Buyer, to make any press release or public
filings with respect to such transactions as is required by applicable law and
regulations (although the Buyer shall be consulted by the Company in connection
with any such press release prior to its release and shall be provided with a
copy thereof and be given an opportunity to comment thereon).
(L) FURTHER ASSURANCES. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
(M) NO STRICT CONSTRUCTION. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
(N) REMEDIES. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to Buyer, by vitiating the
intent and purpose of the transactions contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Agreement will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement, that Buyer
shall be entitled, in addition to all other available remedies in law or in
equity, to an injunction or injunctions to prevent or cure any breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions of this Agreement, without the necessity of showing economic loss and
without any bond or other security being required.
(O) NO ORAL AMENDMENTS. There shall be no oral modifications or
amendments to this Agreement. This Agreement may be modified or amended only in
writing.
43
IN WITNESS WHEREOF, the undersigned Buyer and the Company have caused this
Agreement to be duly executed as of the {{ExecDay}} day of November, 2004.
- -------------------------------------------------------------------------------
PATRIOT SCIENTIFIC CORPORATION
By: ________________________
Lowell W. Giffhorn, CFO By: _____________________
{{FirstName}} {{LastName}}
By: ________________________
Jeffrey E. Wallin, Pres. & CEO
ADDRESS:
ADDRESS:
{{Address1}}
PATRIOT SCIENTIFIC CORPORATION {{City}}, {{State}} {{PostalCode}}
10989 Via Frontera Telephone: {{HomePhone}}
San Diego, CA 92127 Facsimile: {{Fax}}
Telephone: (858) 674-5000
FACSIMILE: (858) 674-5005
- -------------------------------------------------------------------------------
44
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE"ACT") OR APPLICABLE STATE SECURITIES
LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN
OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO
COUNSEL TO THE BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
CONVERTIBLE DEBENTURE
FOR VALUE RECEIVED, PATRIOT SCIENTIFIC CORPORATION, a Delaware corporation
(hereinafter called the "BORROWER" or "COMPANY"), hereby promises to pay to the
order of {{FirstName}} {{LastName}}, an individual, or registered assigns (the
"HOLDER") the sum of {{AmtSpell}} Thousand Dollars ({{DebDol}}), on
{{MatDate}} (the "MATURITY DATE"), and to pay interest on the unpaid principal
balance hereof at the rate of eight percent (8%) per annum from {{FundDate}}
(the "ISSUE DATE") until the same becomes due and payable, whether at maturity
or upon acceleration or otherwise. Any amount of principal or interest on this
Convertible Debenture ("the Debenture") which is not paid when due shall bear
interest at the rate of fifteen percent (15%) per annum from the due date
thereof until the same is paid ("DEFAULT INTEREST"). Interest shall commence
accruing on the Issue Date, shall be computed on the basis of a 365-day year and
the actual number of days elapsed and shall be payable monthly, in cash or, to
the extent not yet paid, at maturity or upon acceleration in accordance with the
terms hereof. All payments due hereunder (to the extent not converted into
Common Stock, par value $0.00001 per share, of the Borrower (the "COMMON STOCK")
in accordance with the terms hereof) shall be made in lawful money of the United
States of America provided that, to the extent that any accrued interest has not
been paid when due, at the option of the Holder, in whole or in part, such
accrued and unpaid interest may, upon written notice to the Borrower, be added
to the principal amount of this Debenture, in which event interest shall accrue
thereon in accordance with the terms of this Debenture and such additional
principal amount shall be convertible into Common Stock in accordance with the
terms of this Debenture. All payments shall be made at such address as the
Holder shall hereafter give to the Borrower by written notice made in accordance
with the provisions of this Debenture. Whenever any amount expressed to be due
by the terms of this Debenture is due on any day which is not a business day,
the same shall instead be due on the next succeeding day which is a business
day. Except as otherwise expressly provided herein, this Debenture may not be
prepaid by the Borrower. As used in this Debenture, the term "business day"
shall mean any day other than a Saturday, Sunday or a day on which commercial
banks in the City of New York, New York are authorized or required by law or
executive order to remain closed. Each capitalized term used herein, and not
otherwise defined, shall have the meaning ascribed thereto in that certain
Securities Purchase Agreement, dated {{FundDate}}, pursuant to which this
Debenture was originally issued (the "PURCHASE AGREEMENT"). For purposes hereof,
the term "Debentures" shall be deemed to refer to this Debenture, all other
convertible debentures issued pursuant to the Purchase Agreement and all
convertible debentures issued in replacement hereof or thereof or otherwise with
respect hereto or thereto.
The following terms shall apply to this Debenture:
ARTICLE I.
CONVERSION RIGHTS
1.1 CONVERSION RIGHT.
(A) CONVERSION TIMING AND AMOUNT. Subject to the limitations on conversion
contained herein, the Holder shall have the right from time to time, and at any
time on or after the Conversion Beginning Date and on or prior to the earlier of
(i) the Maturity Date and (ii) the date of payment of the Default Amount (as
defined in Article III) pursuant to Article III or Section 1.6 hereof, to
convert all or any part of the outstanding and unpaid principal amount of this
Debenture into fully paid and non-assessable shares of Common Stock, as such
Common Stock exists on the Issue Date, or any shares of capital stock or other
securities of the Borrower into which such Common Stock shall hereafter be
changed or reclassified, at the Conversion Price (as defined in Section 1.2
below) determined as provided herein (a "CONVERSION");
(B) LIMITATION ON CONVERSION. Notwithstanding the above, in no event shall
the Holder be entitled to convert any portion of this Debenture in excess of
that portion of this Debenture upon conversion of which the sum of (1) the
number of shares of Common Stock beneficially owned by the Holder and any
applicable affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
Debentures, the unexercised Warrants or the unexercised or unconverted portion
of any other security of the Borrower subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (2) the number of
shares of Common Stock issuable upon the conversion of the portion of this
Debenture with respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its affiliates of more
than 4.99% of the outstanding shares of Common Stock (the "4.99% LIMITATION").
For purposes of the proviso to the immediately preceding sentence, (i)
beneficial ownership shall be determined by the Holder in accordance with
Section 13(d) of the Exchange Act and Regulations 13D-G thereunder, except as
otherwise provided in clause (1) of such proviso to the immediately preceding
sentence, and PROVIDED THAT the 4.99% Limitation shall be conclusively satisfied
if the applicable Notice of Conversion includes a signed representation by the
Holder that the issuance of the shares in such Notice of Conversion will not
violate the 4.99% Limitation, and the Company shall not be entitled to require
additional documentation of such satisfaction.
The parties agree that, in the event that the Company receives any tender
offer or any offer to enter into a merger with another entity whereby the
Company shall not be the surviving entity (an "Offer"), then "4.99%" shall be
automatically revised immediately after such offer to read "9.99%" each place it
occurs in the first paragraph of this Section 1(b) above. Notwithstanding the
above, Holder shall retain the option to either exercise or not exercise its
option(s) to acquire Common Stock pursuant to the terms hereof after an Offer.
2
(C) CALCULATION OF CONVERSION AMOUNT. The number of shares of Common Stock
to be issued upon each conversion of this Debenture shall be determined by
dividing the Conversion Amount (as defined herein) by the applicable Conversion
Price. The term "CONVERSION AMOUNT" means, with respect to any conversion of
this Debenture, the sum of (1) the principal amount of this Debenture to be
converted in such conversion, PLUS (2) all accrued and unpaid interest thereon
for the period beginning on the Issue Date and ending on the Conversion Date (as
defined in Section 1.4 hereof), PLUS (3) Default Interest, if any, on the
amounts referred to in the immediately preceding clauses (1) and/or (2), PLUS
(4) at the Holder's option, any amounts owed to the Holder pursuant to Sections
1.3 and 1.4 hereof or pursuant to Section 2 of that certain Registration Rights
Agreement, dated as of {{FundDate}}, executed in connection with the initial
issuance of this Debenture and the other Debentures issued on the Issue Date
(the "REGISTRATION RIGHTS AGREEMENT").
1.2 CONVERSION PRICE.
(A) INITIAL CONVERSION PRICE. Subject to the provisions of Section 1.5
below, the "CONVERSION PRICE" shall initially equal {{ConvPrice}} (the "INITIAL
CONVERSION PRICE"), which represents either a negotiated price or one hundred
and fifteen percent (115%) of the Market Price, as defined herein, determined on
the date of this Debenture (subject to equitable adjustments for stock splits,
stock dividends or rights offerings by the Borrower relating to the Borrower's
securities or the securities of any subsidiary of the Borrower, combinations,
recapitalization, reclassifications, extraordinary distributions and similar
events).
(B) RESETS OF CONVERSION PRICE. In the event that the Market Price
determined on any Reset Date (as defined herein) (each, a "RESET DATE MARKET
PRICE") is less than the lesser of (i) the Initial Conversion Price or (ii) the
lowest Reset Date Market Price for any prior Reset Date (if any)(the lesser of
(i) and (ii) immediately above being referred to herein as the "ADJUSTED
CONVERSION PRICE"), then the Conversion Price shall, beginning on the Trading
Day next following the applicable Reset Date and at all times thereafter (unless
later reset under the terms of this Debenture), equal the Adjusted Conversion
Price for that Reset Date, PROVIDED, HOWEVER, that (x) if the Registration
Statement (as defined in the Registration Rights Agreement) required to be filed
pursuant to Section 2(a) of the Registration Rights Agreement has not been
declared effective by the SEC prior to January 1, 2005 or (y) after January 1,
2005, such Registration Statement after its initial effectiveness lapses (a
"LAPSE") in effect or sales of all of the Registrable Securities (as defined in
the Registration Rights Agreement) otherwise cannot be made thereunder, whether
by reason of the Borrower's failure or inability to amend or supplement the
prospectus (the "PROSPECTUS") included therein in accordance with the
Registration Rights Agreement or otherwise, after such Registration Statement
becomes effective (including, without limitation, during an Allowed Delay (as
defined in Section 3(f) of the Registration Statement)(the date beginning on the
first date of a Lapse and ending on the date on which the Holder is first
notified in writing by the Borrower's counsel that sales of all of the
Registrable Securities may again be made under the Prospectus shall be referred
to as a "LAPSE PERIOD"), then the Conversion Price shall be reset to equal the
lesser of (i) the Conversion Price then in effect, or (ii) (a) in the case of an
event described in clause (x) of this proviso, the lowest Market Price on any
day during the period beginning on January 1, 2005 and ending on the date on
which the Registration Statement is declared effective, or (b) in the case of an
event described in clause (y) of this proviso, the lowest Market Price during
the applicable Lapse Period. The Conversion Price (whether by reference to the
Initial Conversion Price or an Adjusted Conversion Price) shall be subject to
adjustment pursuant to the provisions of Section 1.5.
3
(C) CERTAIN DEFINITIONS. For purposes hereof:
The "VOLUME WEIGHTED AVERAGE PRICE" for any security as of any date means
the volume weighted average sale price on the Over the Counter Electronic
Bulletin Board (the "OTC-BB") as reported by, or as calculated based upon data
reported by, Bloomberg Financial Markets or an equivalent, reliable reporting
service mutually acceptable to and hereafter designated by holders of a majority
in interest of the Debentures and the Borrower ("BLOOMBERG") or, if the OTC-BB
is not the principal trading market for such security, the volume weighted
average sale price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or, if no volume weighted average sale price is reported for such security, then
the last closing trade price of such security as reported by Bloomberg, or, if
no last closing trade price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security that are listed
in the "pink sheets" by the National Quotation Bureau, Inc. If the volume
weighted average price cannot be calculated for such security on such date in
the manner provided above, the volume weighted average price shall be the fair
market value as mutually determined by the Borrower and the holders of a
majority in interest of the Debentures being converted for which the calculation
of the volume weighted average price is required in order to determine the
Conversion Price of such Debentures. "TRADING DAY" shall mean any day on which
the Common Sock is traded for any period on the OTC-BB, or on the principal
securities exchange or other securities market on which the Common Stock is then
being traded.
"RESET DATE" shall mean each three (3) month anniversary of the Issue Date
hereof throughout the term of this Debenture, and, in addition shall mean the
date that a registration statement covering the resale of shares of Common Stock
issuable upon conversion of this Debenture is declared effective.
"MARKET PRICE," as of any date, means (i) the Volume Weighted Average
Price (as defined herein) of the Company's Common Stock during the ten (10)
consecutive trading day period immediately preceding the date in question.
"CLOSING PRICE," as of any date, means the last sale price of the Common
Stock on the OTC BB as reported by Bloomberg or, or, if the OTC-BB is not the
principal trading market for such security, the last sale price of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, Inc., or if no last sale price of
such security is available on the OTC-BB for such security or in any of the
foregoing manners, the average of the bid prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Price cannot be calculated for such security on such date in
the manner provided above, the Closing Price shall be the fair market value as
mutually determined by the Borrower and the Holder.
4
1.3 RESERVATION OF SHARES.
(A) INCREASE AND MAINTENANCE OF AUTHORIZED AND RESERVED AMOUNT. The
Borrower covenants that it will initially reserve (the "INITIAL SHARE
RESERVATION") from its authorized and unissued Common Stock a number of shares
of Common Stock equal to at least two times the initial principal amount of this
Debenture, divided by Conversion Price in effect on the date of the Initial
Share Reservation, free from preemptive rights, to provide for the issuance of
Common Stock upon the conversion of this Debenture. Borrower further covenants
that, beginning on the date of the Initial Share Reservation (the "CONVERSION
BEGINNING DATE"), and continuing throughout the period the conversion right
exists, the Borrower will reserve from its authorized and unissued Common Stock
a sufficient number of shares (the "RESERVED AMOUNT"), free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Debenture. The Reserved Amount shall be increased from time to time in
accordance with the Borrower's obligations pursuant to Section 4(h) of the
Purchase Agreement. The Borrower represents that upon issuance, such shares will
be duly and validly issued, fully paid and non-assessable. In addition, if the
Borrower shall issue any securities or make any change to its capital structure
which would change the number of shares of Common Stock into which the
Debentures shall be convertible at the then applicable Conversion Price, the
Borrower shall at the same time make proper provision so that thereafter there
shall be a sufficient number of shares of Common Stock authorized and reserved,
free from preemptive rights, for conversion of the outstanding Debentures.
(B) INSTRUCTIONS TO TRANSFER AGENT. The Borrower (i) acknowledges that it
has irrevocably instructed its transfer agent to issue certificates for the
Common Stock issuable upon conversion of this Debenture and (ii) agrees that its
issuance of this Debenture shall constitute full authority to its officers and
agents who are charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in accordance
with the terms and conditions of this Debenture.
(C) CONVERSION FAILURE. If, at any time a Holder of this Debenture submits
a Notice of Conversion, and the Borrower does not have sufficient authorized but
unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article I (a "CONVERSION FAILURE"),
subject to Section 5.8, the Borrower shall issue to the Holder all of the shares
of Common Stock which are then available to effect such conversion. The portion
of this Debenture which the Holder included in its Notice of Conversion and
which exceeds the amount which is then convertible into available shares of
Common Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the
contrary contained herein, not be convertible into Common Stock in accordance
with the terms hereof until (and at the Holder's option at any time after) the
date additional shares of Common Stock are authorized and duly reserved for
issuance by the Borrower to permit such conversion. The Borrower shall pay to
the Holder payments ("CONVERSION FAILURE PAYMENTS") for a Conversion Failure in
a dollar amount equal to:
5
(A) a number of shares equal to the total outstanding principal amount
plus accrued but unpaid interest of the Debenture at the time of the
applicable Notice of Conversion, divided by the lowest Conversion Price in
effect during the period beginning on and including the date of the
Conversion Failure and ending on the date (the "AUTHORIZATION DATE") that
the Borrower authorizes a sufficient number of shares of Common Stock to
effect conversion of the full outstanding principal balance of this
Debenture (a "CONVERSION FAILURE PERIOD"),
multiplied by
(B) the difference of:
(x) the highest Closing Price per share for the Company's Common
Stock for any trading day during the applicable Conversion Failure
Period,
minus
(y) the lowest Conversion Price per share in effect at any time
during the Conversion Failure Period.
The Borrower shall use its best efforts to authorize a sufficient number
of shares of Common Stock as soon as practicable following the earlier of (i)
such time that the Holder notifies the Borrower or that the Borrower otherwise
becomes aware that there are or likely will be insufficient authorized and
unissued shares to allow full conversion of outstanding amount of this Debenture
and (ii) a Conversion Failure. The Borrower shall send notice to the Holder of
the authorization of additional shares of Common Stock, the Authorization Date
and the amount of the Holder's accrued Conversion Failure Payments.
(D) PAYMENT OF ACCRUED CONVERSION FAILURE PAYMENTS. The accrued Conversion
Failure Payments for each Conversion Failure Period shall be paid in cash on or
before the fifth (5th) day following the last business day of the applicable
Conversion Failure Period in which they have accrued, PROVIDED that, at the
option of the Holder (by written notice to the Borrower), such payments shall be
added to the principal amount of this Debenture, in which event interest shall
accrue thereon in accordance with the terms of this Debenture and such
additional principal amount shall be convertible into Common Stock in accordance
with the terms of this Debenture. Nothing herein shall limit the Holder's right
to pursue actual damages (to the extent in excess of the Conversion Failure
Payments) for the Borrower's failure to maintain a sufficient number of
authorized shares of Common Stock, and the Holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief). Notwithstanding the above, if a
particular Conversion Failure results in an Event of Default pursuant to Section
3.2, then the Conversion Failure Payment, for that Conversion Failure only,
shall be considered to have been satisfied upon payment to the Holder of the
Default Amount, in full, payable in accordance with Article III.
1.4 METHOD OF CONVERSION.
(A) MECHANICS OF CONVERSION. Subject to Section 1.1 and the other
provisions of this Debenture, this Debenture may be converted by the Holder in
whole or in part at any time and from time to time after the Issue Date, by (A)
submitting to the Borrower a duly executed notice of conversion in the form
attached hereto as Exhibit A ("NOTICE OF CONVERSION") by facsimile dispatched
prior to Midnight, New York City time (the "CONVERSION NOTICE DEADLINE") on the
date specified therein on the Conversion Date (as defined herein) (or by other
means resulting in, or reasonably expected to result in, written notice to the
Borrower on the date specified therein as the Conversion Date) to the office of
the Borrower; which notice shall specify the principal amount of this Debenture
to be converted, the applicable Conversion Price, and the number of shares of
Common Stock issuable upon such conversion; and (B) subject to Section 1.4(b),
surrendering this Debenture at the principal office of the Borrower.
6
(B) SURRENDER OF DEBENTURE UPON CONVERSION. Notwithstanding anything to
the contrary set forth herein, upon conversion of this Debenture in accordance
with the terms hereof, the Holder shall not be required to physically surrender
this Debenture to the Borrower unless the entire unpaid principal amount of this
Debenture is so converted. The Holder and the Borrower shall maintain records
showing the principal amount so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Borrower, so as not to require physical surrender of this Debenture upon each
such conversion. In the event of any dispute or discrepancy, such records of the
Borrower shall be controlling and determinative in the absence of manifest
error. Notwithstanding the foregoing, if any portion of this Debenture is
converted as aforesaid, the Holder may not transfer this Debenture unless the
Holder first physically surrenders this Debenture to the Borrower, whereupon the
Borrower will forthwith issue and deliver upon the order of the Holder a new
Debenture of like tenor, registered as the Holder (upon payment by the Holder of
any applicable transfer taxes) may request, representing in the aggregate the
remaining unpaid principal amount of this Debenture. The Holder and any
assignee, by acceptance of this Debenture, acknowledge and agree that, by reason
of the provisions of this paragraph, following conversion of a portion of this
Debenture, the unpaid and unconverted principal amount of this Debenture
represented by this Debenture may be less than the amount stated on the face
hereof.
(C) PAYMENT OF TAXES. The Borrower shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock or other securities or property on conversion
of this Debenture in a name other than that of the Holder (or in street name),
and the Borrower shall not be required to issue or deliver any such shares or
other securities or property unless and until the person or persons (other than
the Holder or the custodian in whose street name such shares are to be held for
the Holder's account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.
(D) LOST OR STOLEN DEBENTURES. Upon receipt by the Borrower of evidence of
the loss, theft, destruction or mutilation of this Debenture, and (in the case
of loss, theft or destruction) of indemnity reasonably satisfactory to the
Borrower, and upon surrender and cancellation of this Debenture, if mutilated,
the Borrower shall execute and deliver a new Debenture of like tenor and date.
7
(E) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon submission of a Notice
of Conversion, the Borrower shall, within three business days after the
Conversion Date (the "DELIVERY PERIOD"), issue and deliver (or cause its
Transfer Agent so to issue and deliver) in accordance with the terms hereof and
the Purchase Agreement to or upon the order of the Holder that number of shares
of Common Stock for the portion of this Debenture converted as shall be
determined in accordance herewith.
(F) DELIVERY FAILURE. In addition to any other remedies available to the
Holder, including actual damages and/or equitable relief, in the event that the
Borrower fails to deliver to the Holder Common Stock (a "DELIVERY FAILURE")
issuable upon conversion of this Debenture pursuant to the Notice of Conversion
by the date that is a two-day grace period following the Delivery Period, the
Borrower shall pay to the Holder an amount ("DELIVERY FAILURE PAYMENTS") for a
Delivery Failure in a dollar amount equal to:
(A) a number of shares equal to the total outstanding principal amount and
any accrued but unpaid interest of the Debentures at the time of the
applicable Notice of Conversion, divided by the lowest Conversion Price in
effect during the period beginning on and including the date of the
Delivery Failure and ending on the date (the "DELIVERY DATE") that the
Borrower delivers to the Holder all of the Common Stock issuable upon
conversion of this Debenture pursuant to the Notice of Conversion (a
"DELVERY FAILURE PERIOD"),
multiplied by
(B) the difference of:
(x) the highest Closing Price per share for the Company's Common Stock for
any trading day during the applicable Delivery Failure Period,
minus
(y) the lowest Conversion Price per share in effect at any time
during the applicable Delivery Failure Period.
(G) PAYMENT OF ACCRUED DELIVERY FAILURE PAYMENTS. The accrued Delivery
Failure Payments for each Delivery Failure Period shall be paid in cash on or
before the fifth (5th) day following the last business day of the Delivery
Failure Period in which they have accrued, PROVIDED that, at the option of the
Holder (by written notice to the Borrower), such payments shall be added to the
principal amount of this Debenture, in which event interest shall accrue thereon
in accordance with the terms of this Debenture and such additional principal
amount shall be convertible into Common Stock in accordance with the terms of
this Debenture; PROVIDED, HOWEVER, in the event of a failure by the Borrower to
deliver shares upon conversion as a result of a Conversion Failure, the Holder
shall not be entitled to receive Delivery Failure Payments but shall be entitled
to receive Conversion Failure Payments in accordance with Section 1.3.
Notwithstanding the above, if a particular Delivery Failure results in an Event
of Default pursuant to Section 3.2, then the Delivery Failure Payment, for that
Delivery Failure only, shall be considered to have been satisfied upon payment
to the Holder of the Default Amount, in full, payable in accordance with Article
III.
8
(H) DELIVERY OF ELECTRONIC SHARES. In lieu of delivering physical
certificates representing the Common Stock issuable upon conversion, provided
the Borrower's Transfer Agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon written
request of the Holder and its compliance with the provisions contained in
Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to
cause its Transfer Agent to electronically transmit the Common Stock issuable
upon conversion to the Holder by crediting the account of the Holder's Prime
Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.
The time periods for delivery and penalties described in the immediately
preceding paragraph shall apply to the electronic transmittals described herein.
(I) OBLIGATION OF BORROWER TO DELIVER COMMON STOCK. Upon receipt by the
Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder
of record of the Common Stock issuable upon such conversion, the outstanding
principal amount and the amount of accrued and unpaid interest on this Debenture
shall be reduced to reflect such conversion, and, unless the Borrower defaults
on its obligations hereunder, all rights with respect to the portion of this
Debenture being so converted shall forthwith terminate except the right to
receive the Common Stock or other securities, cash or other assets, as herein
provided, on such conversion. If the Holder shall have given a Notice of
Conversion as provided herein, the Borrower's obligation to issue and deliver
the certificates for Common Stock shall be absolute and unconditional,
irrespective of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or any action to enforce the same, any failure or
delay in the enforcement of any other obligation of the Borrower to the holder
of record, or any setoff, counterclaim, recoupment, limitation or termination,
or any breach or alleged breach by the Holder of any obligation to the Borrower,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with such conversion.
(J) NO FRACTIONAL SHARES. If any conversion of this Debenture would result
in a fractional share of Common Stock or the right to acquire a fractional share
of Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon conversion of this Debenture shall be the
next higher number of shares.
(K) CONVERSION DATE. The "CONVERSION DATE" shall be the date specified in
the Notice of Conversion, provided that the Notice of Conversion is submitted by
facsimile (or by other means resulting in, or reasonably expected to result in,
written notice) to the Borrower or its Transfer Agent before Midnight, New York
City time, on the date so specified, otherwise the Conversion Date shall be the
first business day after the date so specified (provided that the Notice of
Conversion is actually received by the Borrower or its Transfer Agent on such
business day). The person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all purposes as the record
holder or holders of such securities as of the Conversion Date and all rights
with respect to this Debenture (or portion thereof) surrendered shall forthwith
terminate except the rights set forth in Sections 1.4(f) and Section 1.7 hereof.
9
1.5 EFFECT OF CERTAIN EVENTS.
(A) EFFECT OF MERGER, CONSOLIDATION, ETC. At the option of the Holder, the
sale, conveyance or disposition of all or substantially all of the assets of the
Borrower, the effectuation by the Borrower of a transaction or series of related
transactions in which more than 50% of the voting power of the Borrower is
disposed of, or the consolidation, merger or other business combination of the
Borrower with or into any other Person (as defined herein) or Persons when the
Borrower is not the survivor shall, at the Holder's option, either: (i) be
deemed to be an Event of Default (as defined in Article III) pursuant to which
the Borrower shall be required to pay to the Holder upon the consummation of and
as a condition to such transaction an amount equal to the Default Amount (as
defined in Article III) or (ii) be treated pursuant to Section 1.5(b) hereof.
"PERSON" shall mean any individual, corporation, limited liability company,
partnership, association, trust or other entity or organization.
(B) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when
this Debenture is issued and outstanding and prior to conversion of all of the
Debentures, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the Borrower shall be changed into the same or a
different number of shares of another class or classes of stock or securities of
the Borrower or another entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in connection with a
plan of complete liquidation of the Borrower (each, a "CHANGE OF CONTROL
TRANSACTION"), then the Holder of this Debenture shall thereafter have the right
to receive upon conversion of this Debenture, upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities or
assets which the Holder would have been entitled to receive in such transaction
had this Debenture been converted in full immediately prior to such transaction
(without regard to any limitations on conversion set forth herein, including but
not limited to without regard to the 4.99% Limitation), and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the Holder of this Debenture to the end that the provisions hereof (including,
without limitation, provisions for adjustment of the Conversion Price and of the
number of shares issuable upon conversion of the Debenture) shall thereafter be
applicable, as nearly as may be practicable in relation to any securities or
assets thereafter deliverable upon the conversion hereof. The Borrower shall not
effect any transaction described in this Section 1.5(b) unless (a) it first
gives, to the extent practicable, thirty (30) days prior written notice (but in
any event at least fifteen (15) business days prior written notice) of the
record date of the special meeting of shareholders to approve, or if there is no
such record date, the consummation of, such merger, consolidation, exchange of
shares, recapitalization, reorganization or other similar event or sale of
assets (during which time the Holder shall be entitled to convert this
Debenture) and (b) the resulting successor or acquiring entity (if not the
Borrower) and, if an entity different from the successor or acquiring entity,
the entity whose capital stock or assets the holders of Common Stock are
entitled to receive as a result of such Change of Control Transaction, assumes
by written instrument the obligations of this Debenture, including this Section
1.5(b). The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.
10
(C) ADJUSTMENT DUE TO DISTRIBUTION. If the Borrower shall declare or make
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the Borrower's shareholders
in cash or shares (or rights to acquire shares) of capital stock of a subsidiary
(i.e., a spin-off) (a "DISTRIBUTION"), then the Holder of this Debenture shall
be entitled, upon any conversion of this Debenture after the date of record for
determining shareholders entitled to such Distribution, to receive the amount of
such assets which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of shareholders entitled to such Distribution.
(D) PURCHASE RIGHTS. If, at any time when any Debentures are issued and
outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the "PURCHASE RIGHTS")
pro rata to the record holders of any class of Common Stock, then the Holder of
this Debenture will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Debenture (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(E) ADDITIONAL ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall
be subject to adjustment from time to time as provided in this Section 1.5(e).
(i) ADJUSTMENT OF CONVERSION PRICE. If, and whenever on or
after the date of issuance of this Debenture, the Borrower issues or
sells any shares of Common Stock for no consideration or for a
consideration per share less than the Conversion Price then in
effect, or issues any convertible securities, warrants (other than
those issuable to the Holder), options (including but not limited to
employee stock options), equity line type offerings or other
underwritten offerings, or any other type of security that is
convertible or exchangeable into common stock at a rate or price
that is less than the Conversion Price then in effect, or carries
with it the right to receive additional shares of Common Stock at a
later date, such that the average price per share for such shares of
Common Stock is less than the Conversion Price then in effect, then
the Conversion Price shall immediately be reduced to equal the price
per share of such other Common Stock, options, or other securities.
(ii) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the
Borrower at any time subdivides (by any stock split, stock dividend,
recapitalization, reorganization, reclassification or otherwise) the
shares of Common Stock acquirable hereunder into a greater number of
shares, then, after the date of record for effecting such
subdivision, the Conversion Price in effect immediately prior to
such subdivision will be proportionately reduced. If the Borrower at
any time combines (by reverse stock split, recapitalization,
reorganization, reclassification or otherwise) the shares of Common
Stock acquirable hereunder into a smaller number of shares, then,
after the date of record for effecting such combination, the
Conversion Price in effect immediately prior to such combination
will be proportionately increased.
11
(F) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events described in this
Section 1.5, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Borrower
shall, upon the written request at any time of the Holder, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of the Debenture.
1.6 [INTENTIONALLY LEFT BLANK].
1.7 STATUS AS SHAREHOLDER. Upon submission of a Notice of Conversion by a
Holder, (i) the shares covered thereby (other than the shares, if any, which
cannot be issued because their issuance would exceed such Holder's allocated
portion of the Reserved Amount) shall be deemed converted into shares of Common
Stock and (ii) the Holder's rights as a Holder of such converted portion of this
Debenture shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies provided herein
or otherwise available at law or in equity to such Holder because of a failure
by the Borrower to comply with the terms of this Debenture. Notwithstanding the
foregoing, if a Holder has not received certificates for all shares of Common
Stock prior to the tenth (10th) business day after the expiration of the
deadline with respect to a conversion of any portion of this Debenture for any
reason, then (unless the Holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Borrower) the Holder shall regain the
rights of a Holder of this Debenture with respect to such unconverted portions
of this Debenture and the Borrower shall, as soon as practicable, return such
unconverted Debenture to the Holder or, if the Debenture has not been
surrendered, adjust its records to reflect that such portion of this Debenture
has not been converted. In all cases, the Holder shall retain all of its rights
and remedies (including, without limitation, the right to receive Conversion
Failure Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Failure and any subsequent Conversion Failure) for the Borrower's
failure to convert this Debenture.
ARTICLE II.
CERTAIN COVENANTS
2.1 DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall have any
obligation under this Debenture, the Borrower shall not, without the Holder's
written consent, (a) pay, declare or set apart for such payment, any dividend or
other distribution (whether in cash, property or other securities) on shares of
capital stock other than dividends on shares of Common Stock solely in the form
of additional shares of Common Stock or (b) directly or indirectly or through
any subsidiary make any other payment or distribution in respect of its capital
stock.
12
2.2 RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall have
any obligation under this Debenture, the Borrower shall not, without the
Holder's written consent, redeem, repurchase or otherwise acquire (whether for
cash or in exchange for property or other securities or otherwise) in any one
transaction or series of related transactions any shares of capital stock of the
Borrower or any warrants, rights or options to purchase or acquire any such
shares, except for any such repurchases made by the Borrower in connection with
the termination of employment of any of its employees, PROVIDED that such
repurchases are (i) made at no greater than the Market Price of such shares of
capital stock and (ii) approved by a majority of the Borrower's disinterested
directors.
2.3 BORROWINGS. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written consent,
create, incur, assume or suffer to exist any liability for borrowed money,
except (a) borrowings in existence or committed on the date hereof and of which
the Borrower has informed the Holder in writing prior to the date hereof, (b)
indebtedness to trade creditors incurred in the ordinary course of business, (c)
borrowings, the proceeds of which shall be used to repay this Debenture, or (d)
asset-based borrowings involving accounts receivable or inventory financing or
leaseholds.
2.3 ADVANCES AND LOANS. So long as the Borrower shall have any obligation
under this Debenture, the Borrower shall not, without the Holder's written
consent, lend money, give credit or make advances to any person, firm, joint
venture or corporation, including, without limitation, officers, directors,
employees, subsidiaries and affiliates of the Borrower, except loans, credits or
advances (a) in existence or committed on the date hereof and which the Borrower
has informed the Holder in writing prior to the date hereof, (b) made in the
ordinary course of business, as determined by a majority of the Borrower's
disinterested directors or (c) relating to (i) the recruitment or retention of
employees or (ii) transactions with joint venture partners or subsidiaries,
provided that such loans, credits or advances referred to in (i) and (ii) are
approved by a majority of the Borrower's disinterested directors.
2.4 CONTINGENT LIABILITIES. So long as the Borrower shall have any
obligation under this Debenture, the Company shall not without the Holder's
written consent, assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any person, firm, partnership,
joint venture or corporation, except by the endorsement of negotiable
instruments for deposit or collection and except assumptions, guarantees,
endorsements and contingencies (a) in existence or committed on the date hereof
and which the Borrower has informed the Holder in writing prior to the date
hereof, (b) made in the ordinary course of business, as determined by a majority
of the Borrower's disinterested directors or (c) relating to (i) the recruitment
or retention of employees or (ii) transactions with joint venture partners or
subsidiaries, provided that such assumptions, guarantees, endorsements and
contingencies referred to in (i) and (ii) are approved by a majority of the
Borrower's disinterested directors.
13
ARTICLE III.
EVENTS OF DEFAULT
Each of the following events shall be considered to be an "EVENT OF
DEFAULT", unless waived by the Holder:
3.1 FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to pay the
principal hereof or interest thereon when due on this Debenture, whether at
maturity, upon mandatory prepayment, upon acceleration or otherwise;
3.2 CONVERSION AND THE SHARES. The Borrower (a) fails to issue shares of
Common Stock to the Holder upon exercise by the Holder of the conversion rights
of the Holder in accordance with the terms of this Debenture (for a period of at
least sixty (60) days, if such failure is a Conversion Failure solely as a
result of a shortage of authorized shares and the Borrower is using its best
efforts to authorize a sufficient number of shares of Common Stock as soon as
practicable or for a period of at least thirty (30) days if such failure is a
Delivery Failure under Section 1.4(f) and is not as a result of a shortage of
authorized shares), (b) at any time, the Company announces or states in writing
that it will not honor its obligations to issue shares of Common Stock to the
Holder upon exercise by the Holder of the conversion rights of the Holder in
accordance with the terms of this Debenture, (c) fails to transfer or cause its
transfer agent to transfer (electronically or in certificated form) any
certificate for shares of Common Stock issued to the Holder upon conversion of
this Debenture as and when required by this Debenture or the Registration Rights
Agreement, or (d) fails to remove any restrictive legend (or to withdraw any
stop transfer instructions in respect thereof) on any certificate for any shares
of Common Stock issued to the Holder upon conversion of this Debenture as and
when required by this Debenture, the Purchase Agreement or the Registration
Rights Agreement (or makes any announcement or written statement that it does
not intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement or written statement not to
honor its obligations shall not be rescinded in writing) for ten (10) days after
the Borrower shall have been notified thereof in writing by the Holder;
3.3 FAILURE TO EFFECT REGISTRATION. The Borrower fails to file with the
Securities and Exchange Commission on or before January 1, 2005 the Registration
Statement(s) (as defined in the Registration Rights Agreement) required to be
filed pursuant to Section 2(a) of the Registration Rights Agreement, or fails to
obtain effectiveness with the Securities and Exchange Commission prior to March
1, 2005 of the Registration Statement(s) (as defined in the Registration Rights
Agreement) required to be filed pursuant to Section 2(a) of the Registration
Rights Agreement, or fails to obtain the effectiveness of any additional
Registration Statement (required to be filed pursuant to Section 3(b) of the
Registration Rights Agreement) within 60 days after the Registration Trigger
Date (as defined in the Registration Rights Agreement), or as promptly as
practicable in the event the Company is required to increase its authorized
shares, or any such Registration Statement, after its initial effectiveness and
during the Registration Period (as defined in the Registration Rights
Agreement), lapses in effect or sales of all of the Registrable Securities (as
defined in the Registration Rights Agreement) cannot otherwise be made
thereunder (whether by reason of the Borrower's failure to amend or supplement
the prospectus included therein in accordance with the Registration Rights
Agreement, the Borrower's failure to file and obtain effectiveness with the SEC
of an additional Registration Statement required pursuant to Section 3(b) of the
Registration Rights Agreement or otherwise) for more than twenty (20)
consecutive days or sixty (60) days in any twelve month period after such
Registration Statement becomes effective;
14
3.4 BREACH OF COVENANTS. The Borrower breaches any material covenant or
other material term or condition contained in Article II hereof or in Sections
1.3, 1.4 or 1.5 of this Debenture, or Sections 4(b), 4(c), 4(d), 4(e), 4(h),
4(i), 4(j), 4(k), 4(l), 4(m) or 5 of the Purchase Agreement and such breach
continues for a period of ten (10) business days after written notice thereof to
the Borrower from the Holder;
3.5 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto (including, without limitation,
pursuant to the Purchase Agreement and the Registration Rights Agreement), shall
be false or misleading in any material respect when made and the breach of which
has a material adverse effect on the rights of the Holder with respect to this
Debenture, the Purchase Agreement or the Registration Rights Agreement;
3.6 RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the Borrower
shall make an assignment for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee for it or for a substantial part of
its property or business, or such a receiver or trustee shall otherwise be
appointed;
3.7 JUDGMENTS. Any money judgment, writ or similar process shall be
entered or filed by a court against the Borrower or any subsidiary of the
Borrower or any of its property or other assets for more than $1,000,000, and
shall remain unvacated, unbonded or unstayed for a period of twenty (20) days
unless otherwise consented to by the Holder, which consent will not be
unreasonably withheld;
3.8 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower or any
"significant subsidiary" (as defined in Rule 1-02(w) of Regulation S-X
promulgated under the 1933 Act) of the Borrower;
3.9 DELISTING OF COMMON STOCK. The Borrower shall fail to maintain the
listing of the Common Stock on at least one of the NNM, the Nasdaq Small Cap,
the NYSE, OTC-BB or the AMEX;
3.10 DEFAULT UNDER OTHER DEBENTURES. An Event of Default has occurred and
is continuing under any of the other Debentures issued pursuant to the Purchase
Agreement or under any of the warrants ("WARRANTS") issued pursuant to the
Purchase Agreement;
15
3.11 FAILURE TO AUTHORIZE AND RESERVE COMMON STOCK. The Borrower shall
fail to authorize and reserve, and maintain authorized and reserved, shares of
Common Stock as required under Section 1.3 hereof; or
3.12 ACCEPTANCE OF A TENDER OFFER BY THE BORROWER. The Borrower shall
accept a tender offer ("TENDER OFFER") from any person or entity to acquire
fifty percent (50%) or more of the Borrower's shares of Common Stock.
If any Events of Default shall occur then, unless waived by the Holder,
upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, 3.10, 3.11 or 3.12, at
the option of the Holder, such option exercisable through the delivery of
written notice to the Borrower by such Holders (the "DEFAULT NOTICE"), or upon
the occurrence of an Event of Default specified in Section 3.6 or 3.8, the
Debentures shall become immediately due and payable and the Borrower shall pay
to the Holder, in full satisfaction of its obligations hereunder, an amount
equal to the greater of:
(i) 115% TIMES the SUM of
(w) the then outstanding principal amount of this Debenture, PLUS
(x) all accrued and unpaid interest thereon for the period beginning
on the Issue Date and ending on the date of payment of the Default
Amount (the "DEFAULT PAYMENT DATE"), PLUS
(y) Default Interest, if any, on the amounts referred to in clauses
(w) and/or (x), PLUS
(z) any amounts owed to the Holder pursuant to Section 2(c) of the
Registration Rights Agreement
(the then outstanding principal amount of this Debenture to the date
of payment PLUS the amounts referred to in clauses (x), (y) and (z)
shall collectively be known as the "DEFAULT SUM"),
or
(ii) the Parity Value of the Default Sum to be prepaid, where "PARITY
VALUE" means
(a) the highest number of shares of Common Stock issuable upon
conversion of such Default Sum in accordance with Article I (without
giving any effect to any limitation on conversion of the Debenture
contained herein, including but not limited to the 4.99% Limitation)
calculated as follows: the Default Sum divided by the lowest
Conversion Price in effect at any time after the Holder delivers a
Default Notice to the Borrower, through the date that the Borrower
pays the Default Amount,
MULTIPLIED BY
16
(b) the highest Closing Price (as defined herein) for the Common
Stock during the period beginning on the date of first occurrence of
the Event of Default (provided that, with respect to a Conversion
Failure or Delivery Failure that has resulted in an Event of Default
under this Article III, such period shall begin on the date of the
applicable Notice of Conversion) and ending one day prior to the
Default Payment Date.
The greater of (i) and (ii) immediately above is referred to herein as the
"DEFAULT AMOUNT". The Conversion Price shall continue to be reset and adjusted
in accordance with the terms of this Debenture notwithstanding a Default, up
until the Default Amount is paid to the Holder in full. The Default Amount,
together with all other amounts payable hereunder, shall immediately become due
and payable, all without demand, presentment or notice, all of which hereby are
expressly waived, together with all costs, including, without limitation, legal
fees and expenses, of collection, and the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity.
If the Borrower fails to pay the Default Amount within five (5) business
days of written notice that such amount is due and payable (the "Default Amount
Due Date"), then the Holder shall have the right at any time, so long as the
Borrower remains in default (and so long and to the extent that there are
sufficient authorized shares), to require the Borrower, upon written notice
(which may be given one or more times, from time to time anytime after the
Default Amount Due Date), to immediately issue, in lieu of all or any specified
portion (the "Specified Portion") of the unpaid portion (the "Unpaid Portion")
of the Default Amount, a number of shares (the "Default Shares") of Common Stock
of the Borrower, subject to the 9.99% Limitation, equal to the Specified Portion
of the Default Amount divided by the Conversion Price in effect on the date such
shares are issued to the Holder, PROVIDED THAT, the Holder may require that such
payment of shares be made in one or more installments at such time and in such
amounts as Holder chooses.
The Holder shall not be entitled to receive Default Shares on a given date
if and to the extent that such issuance would cause the 9.99% Amount, as defined
below, to be exceeded (the "9.99% LIMITATION"). If and to the extent that the
issuance of Default Shares with respect to a given Specified Portion would
result in the a violation of the 9.99% Limitation, then that particular
Specified Portion shall be automatically reduced to a value that would cause the
number of Default Shares to be issued to equal the 9.99% Amount, and the amount
of such reduction shall be added back to the Unpaid Portion of the Default
Amount.
For purposes hereof, "9.99% Amount" shall mean a number of Default Shares
to be issued with respect to a particular Specified Portion of the Default
Amount which would, when aggregated with all other shares of Common Stock held
by the Holder and its affiliates at the time of such issuance, result in
beneficial ownership by the Holder and its affiliates of exactly 9.99% of the
outstanding shares of Common Stock of the Borrower, with beneficial ownership
being determined in accordance with Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"), and Regulations 13D-G thereunder,
PROVIDED THAT the 9.99% Limitation shall be conclusively satisfied if the Holder
provides a signed representation that the issuance of the applicable shares will
not violate the 9.99% Limitation, and the Company shall not be entitled to
require additional documentation of such satisfaction.
17
ARTICLE IV.
COLLATERALIZATION
As security for the repayment of the principal, all accrued and unpaid
interest and all other payments that are or become due pursuant to this
Debenture, the Borrower does hereby grant, pledge, transfer, sell, assign,
convey and deliver to the Holder, and do grant to the Holder a security interest
in, all of the right, title and interest of such Borrower, in, to and under the
following (hereinafter collectively referred to as the "Collateral"): All of the
Borrower's patents, trademarks and other intellectual property, including but
not limited to those set forth on Schedule A annexed hereto (collectively, the
"INTELLECTUAL PROPERTY").
Except as otherwise set forth on Schedule B annexed hereto, the Borrower
hereby represents that the Holder has a senior lien on the Collateral, and
agrees not to grant any liens on the Collateral that are either senior to, or in
parity with, the Holder's lien. The Borrower agrees to take all necessary
actions to assist the Holder in perfecting the Holder's lien on each piece of
Collateral within fifteen (15) days of the date hereof, including but not
limiting to signing and delivering the appropriate forms.
ARTICLE V.
MISCELLANEOUS
5.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
5.2 NOTICES. Any notice herein required or permitted to be given shall be
in writing and may be personally served or delivered by courier or sent by
United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission) or
sent by courier or five (5) days after being deposited in the United States
mail, certified, with postage pre-paid and properly addressed, if sent by mail.
For the purposes hereof, the address of the Holder shall be as shown on the
records of the Borrower; and the address of the Borrower shall be PATRIOT
SCIENTIFIC CORPORATION, 10989 Via Frontera, San Diego, CA 92127, Telephone:
(858) 674-5000, Facsimile: (858) 674-5005. Both the Holder and the Borrower may
change the address for service by service of written notice to the other as
herein provided.
5.3 AMENDMENTS. Except as otherwise expressly provided herein, this
Debenture and any provision hereof may only be amended by an instrument in
writing signed by the Borrower and the Holder. The term "Debenture" and all
reference thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented.
18
5.4 ASSIGNABILITY. This Debenture shall be binding upon the Borrower and
its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns.
5.5 COST OF COLLECTION. If default is made in the payment of this
Debenture, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
5.6 GOVERNING LAW; ARBITRATION. This Debenture shall be governed by and
construed in accordance with the internal laws of the State of New York. Any
controversy or claim arising out of or related to this Debenture or the breach
thereof, shall be settled by binding arbitration in New York, NY in accordance
with the Expedited Procedures (Rules 53-57) of the Commercial Arbitration Rules
of the American Arbitration Association ("AAA"). A proceeding shall be commenced
upon written demand by Company or the Holder to the other. The arbitrator(s)
shall enter a judgment by default against any party, which fails or refuses to
appear in any properly noticed arbitration proceeding. The proceeding shall be
conducted by one (1) arbitrator, unless the amount alleged to be in dispute
exceeds two hundred fifty thousand dollars ($250,000), in which case three (3)
arbitrators shall preside. The arbitrator(s) will be chosen by the parties from
a list provided by the AAA, and if they are unable to agree within ten (10)
days, the AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe is appropriate in light of the merits of the parties'
respective positions in the issues in dispute. Each party submits irrevocably to
the jurisdiction of any state court sitting in New York, NY or to the United
States District Court sitting in New York for purposes of enforcement of any
discovery order, judgment or award in connection with such arbitration. The
award of the arbitrator(s) shall be final and binding upon the parties and may
be enforced in any court having jurisdiction. The arbitration shall be held in
such place as set by the arbitrator(s) in accordance with Rule 55. With respect
to any arbitration proceeding in accordance with this section, the prevailing
party's reasonable attorney's fees and expenses shall be borne by the
non-prevailing party.
Although the parties, as expressed above, agree that all claims, including
claims that are equitable in nature, for example specific performance, shall
initially be prosecuted in the binding arbitration procedure outlined above, if
the arbitration panel dismisses or otherwise fails to entertain any or all of
the equitable claims asserted by reason of the fact that it lacks jurisdiction,
power and/or authority to consider such claims and/or direct the remedy
requested, then, in only that event, will the parties have the right to initiate
litigation respecting such equitable claims or remedies. The forum for such
equitable relief shall be in either a state or federal court sitting in New
York, NY. Each party waives any right to a trial by jury, assuming such right
exists in an equitable proceeding, and irrevocably submits to the jurisdiction
of said New York court. New York law shall govern both the proceeding as well as
the interpretation and construction of the Debenture and the transaction as a
whole.
5.7 CERTAIN AMOUNTS. Whenever pursuant to this Debenture the Borrower is
required to pay an amount in excess of the outstanding principal amount (or the
portion thereof
19
required to be paid at that time) plus accrued and unpaid interest plus Default
Interest on such interest, the Borrower and the Holder agree that the actual
damages to the Holder from the receipt of cash payment on this Debenture may be
difficult to determine and the amount to be so paid by the Borrower represents
stipulated damages and not a penalty and is intended to compensate the Holder in
part for loss of the opportunity to convert this Debenture and to earn a return
from the sale of shares of Common Stock acquired upon conversion of this
Debenture at a price in excess of the price paid for such shares pursuant to
this Debenture. The Borrower and the Holder hereby agree that such amount of
stipulated damages is not plainly disproportionate to the possible loss to the
Holder from the receipt of a cash payment without the opportunity to convert
this Debenture into shares of Common Stock.
5.8 ALLOCATIONS OF AND RESERVED AMOUNT. The Reserved Amount shall be
allocated pro rata among the holders of Debentures based on the principal amount
of such Debentures issued to the Holder. Each increase to the Reserved Amount
shall be allocated pro rata among the holders of Debentures based on the
principal amount of such Debentures held by the Holder at the time of the
increase in the Reserved Amount. In the event a Holder shall sell or otherwise
transfer any of such Holder's Debentures, each transferee shall be allocated a
pro rata portion of such transferor's Reserved Amount. Any portion of the
Reserved Amount which remains allocated to any person or entity which does not
hold any Debentures shall be allocated to the remaining Holders of Debentures,
pro rata based on the principal amount of such Debentures then held by such
Holders.
5.9 DAMAGES SHARES. The shares of Common Stock that may be issuable to the
Holder pursuant to Sections 1.3 and 1.4 hereof and pursuant to Section 2 of the
Registration Rights Agreement ("DAMAGES SHARES") shall be treated as Common
Stock issuable upon conversion of this Debenture for all purposes hereof and
shall be subject to all of the limitations and afforded all of the rights of the
other shares of Common Stock issuable hereunder, including without limitation,
the right to be included in the Registration Statement filed pursuant to the
Registration Rights Agreement. For purposes of calculating interest payable on
the outstanding principal amount hereof, except as otherwise provided herein,
amounts convertible into Damages Shares ("DAMAGES AMOUNTS") shall not bear
interest but must be converted prior to the conversion of any outstanding
principal amount hereof, until the outstanding Damages Amounts is zero.
5.10 DENOMINATIONS. At the request of the Holder, upon surrender of this
Debenture, the Borrower shall promptly issue new Debentures in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations
as the Holder shall request.
5.11 PURCHASE AGREEMENT. By its acceptance of this Debenture, the Holder
agrees to be bound by the applicable terms of the Purchase Agreement.
5.12 NOTICE OF CORPORATE EVENTS. Except as otherwise provided in this
Debenture, the Holder of this Debenture shall have no rights as a Holder of
Common Stock unless and only to the extent that it converts this Debenture into
Common Stock. The Borrower shall provide the Holder with prior notification of
any meeting of the Borrower's shareholders (and copies of proxy materials and
other information sent to shareholders). In the event of any taking by the
20
Borrower of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Borrower or any proposed
liquidation, dissolution or winding up of the Borrower, the Borrower shall mail
a notice to the Holder, at least twenty (20) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
The Borrower shall make a public announcement of any event requiring
notification to the Holder hereunder substantially simultaneously with the
notification to the Holder in accordance with the terms of this Section 5.12.
5.13 REMEDIES. The Borrower acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the
Borrower acknowledges that the remedy at law for a breach of its obligations
under this Debenture will be inadequate and agrees, in the event of a breach or
threatened breach by the Borrower of the provisions of this Debenture, that the
Holder shall be entitled, in addition to all other available remedies at law or
in equity, to an injunction or injunctions restraining, preventing or curing any
breach of this Debenture and to enforce specifically the terms and provisions
thereof, without the necessity of showing economic loss and without any bond or
other security being required.
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in its
name by its duly authorized officer this {{ExecDay}} day of November, 2004.
BORROWER:
PATRIOT SCIENTIFIC CORPORATION
By:_____________________________
Lowell W. Giffhorn, Exec. V.P. and CFO
By: _____________________________
Jeffrey E. Wallin, Pres. and CEO
21
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debentures)
The undersigned hereby irrevocably elects to convert $__________ principal
amount of the Debenture (defined herein) into shares of common stock, par value
$____ per share ("Common Stock"), of PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation (the "BORROWER") according to the conditions of the convertible
debentures of the Borrower dated as of {{FundDate}} (the "DEBENTURES"), as of
the date written below. If securities are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates. No fee will
be charged to the Holder for any conversion, except for transfer taxes, if any.
The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
TRANSFER").
Name of DTC Prime Broker:______________________________
Account Number:________________________________________
In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Borrower issue a certificate or certificates for the
number of shares of Common Stock set forth above (which numbers are
based on the Holder's calculation attached hereto) in the name(s)
specified immediately below or, if additional space is necessary, on an
attachment hereto:
Name: _________________________________________________
Address: _______________________________________________
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Debentures shall be made pursuant to registration of the securities under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.
Date of Conversion:_______________________________
Applicable Conversion Price:________________________
Number of Shares of Common ______________________
Stock to be Issued Pursuant to (i): ____________________
Conversion of the Debentures:_______________________
22
(ii) Conversion of Conversion Failure Payments, Delivery
Failure Payments and/or payments pursuant to Section 2(c) of
the Registration Rights Agreement: __________________________
Signature: __________________________________________________
Name: _______________________________________________________
Address: ____________________________________________________
Subject to Section 1.4(b) of the Debenture(s), the Borrower is not
required to issue shares of Common Stock until the original Debenture(s) (or
evidence of loss, theft or destruction thereof) to be converted are received by
the Borrower or its Transfer Agent. The Borrower shall issue and deliver shares
of Common Stock to an overnight courier not later than two business days
following receipt of the original Debenture(s) to be converted, and shall make
payments pursuant to the Debentures for the number of business days such
issuance and delivery is late.
23
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
{{FundDate}}, by and between PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation (the "Company"), and {{FirstName}} {{LastName}}, an individaul.
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties hereto of even date herewith (the "Securities Purchase Agreement"), the
Company has agreed, upon the terms and subject to the conditions contained
therein, to issue and sell to the Buyer (i) convertible debentures (the
"Debentures") that are convertible into shares of the Company's common stock,
par value $0.00001 per share (the "Common Stock"), upon the terms and subject to
the limitations and conditions set forth in such Debentures and (ii) warrants
(the "Warrants") to purchase {{NoWarrants}} shares of Common Stock, upon the
terms and conditions and subject to the limitations and conditions set forth in
the Warrants dated {{FundDate}}; and
B. To induce the Buyer to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws;
NOW, THEREFORE, In consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyer hereby
agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the following
meanings:
(i) "BUYER" means {{FirstName}} {{LastName}}, and any transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
24
(iii) "REGISTRABLE SECURITIES" means (a) the shares of Common Stock
(the "Conversion Shares") issued or issuable upon conversion of or otherwise
pursuant to the Debentures (including, without limitation, any shares issued or
issuable pursuant to Sections 1.3 and 1.4 of the Debentures and Section 2
herein) (b) any shares of Common Stock (the "Warrant Shares") issued or issuable
upon exercise of or otherwise pursuant to the Warrants and (c) any shares of
capital stock issued or issuable as a dividend on or in exchange for or
otherwise with respect to any of the foregoing.
(iv) "REGISTRATION STATEMENT(S)" means a registration statement(s)
of the Company under the 1933 Act.
b. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
A. MANDATORY REGISTRATION. The Company shall prepare, and, on or prior to
January 1, 2005 (the "FILING DATE") file with the SEC a Registration Statement
on Form S-3 (or, if Form S-3 is not then available, on such form of Registration
Statement as is then available to effect a registration of the Registrable
Securities, subject to the consent of the Buyer, which consent will not be
unreasonably withheld) covering the resale of the Registrable Securities, which
Registration Statement, to the extent allowable under the 1933 Act and the rules
and regulations promulgated thereunder (including Rule 416), shall state that
such Registration Statement also covers such indeterminate number of additional
shares of Common Stock as may become issuable upon conversion of or otherwise
pursuant to the Debentures and exercise of or otherwise pursuant to the Warrants
to prevent dilution resulting from stock splits, stock dividends or similar
transactions. The number of shares of Common Stock initially included in such
Registration Statement shall be no less than one and one-half (1.5) times the
aggregate number of Conversion Shares that are then issuable upon conversion of
or otherwise pursuant to the Debentures (based on the Conversion Price (as
defined in the Debentures) then in effect) and the aggregate number of Warrant
Shares that are then issuable upon exercise of or otherwise pursuant to the
Warrants, without regard to any limitation on the Buyer's ability to convert the
Debentures or exercise the Warrants. The Company acknowledges that the number of
shares initially included in the Registration Statement represents a good faith
estimate of the maximum number of shares issuable upon conversion of or
otherwise pursuant to the Debentures and exercise of or otherwise pursuant to
the Warrants. The Registration Statement (and each amendment or supplement
thereto, and each request for acceleration of effectiveness thereof) shall be
provided to (and subject to the approval of) the Buyer and its counsel prior to
its filing or other submission.
B. [INTENTIONALLY OMITTED].
C. PAYMENTS BY THE COMPANY. The Company shall use its best efforts to
obtain effectiveness of the Registration Statement as soon as practicable, but
in any event not later than March 1, 2005 (the "REGISTRATION DEADLINE"). If (i)
the Registration Statement covering the Registrable Securities required to be
filed by the Company pursuant to
2
Section 2(a) hereof is not declared effective by the SEC by the Registration
Deadline, or (ii) after the Registration Statement has been declared effective
by the SEC, sales of all of the Registrable Securities cannot be made pursuant
to the Registration Statement, or (iii) the Common Stock is not listed or
included for quotation on the Over the Counter Electronic Bulletin Board (the
"OTC-BB"), the Nasdaq National Market ("NNM"), the Nasdaq Small Cap Market
("NASDAQ SMALL CAP"), the New York Stock Exchange (the "NYSE") or the American
Stock Exchange (the "AMEX"), then the Company will make payments to the Buyer in
such amounts and at such times as shall be determined pursuant to this Section
2(c) as partial relief for the damages to the Buyer by reason of any such delay
in or reduction of its ability to sell the Registrable Securities (which remedy
shall not be exclusive of any other remedies available at law or in equity). The
Company shall pay to each holder of the Debentures or Registrable Securities an
amount equal to the then outstanding principal amount of the Debentures (and, in
the case of holders of Registrable Securities, the principal amount of
Debentures from which such Registrable Securities were converted or the
aggregate exercise price paid for such Registrable Securities upon exercise of
the Warrants) ("OUTSTANDING PRINCIPAL AMOUNT") multiplied by the Applicable
Percentage (as defined below) times the number of months (prorated for partial
months) after the Registration Deadline and prior to the date the Registration
Statement is declared effective by the SEC;
The term "APPLICABLE PERCENTAGE" means 2.0 hundredths (.02). (For example,
if the Registration Statement becomes effective one (1) month after the
Registration Deadline, the Company would pay $20,000 for each $1,000,000 of
Outstanding Principal Amount. If thereafter, sales of all of the Registrable
Securities could not be made pursuant to the Registration Statement for an
additional period of one (1) month, the Company would pay an additional $20,000
for each $1,000,000 Outstanding Principal Amount. Such amounts shall be paid in
cash within five (5) days after the end of each period that gives rise to such
obligation, PROVIDED that, if any such period extends for more than thirty (30)
days, interim payments shall be made for each such thirty (30) day period,
PROVIDED, FURTHER, that, if such amounts are not paid within the period
specified, at the Buyer's option, such amounts may be added to the Conversion
Amount (as defined in the Debentures) of the Debentures and thereafter be
convertible into Common Stock at the "CONVERSION PRICE" (as defined in the
Debentures) in accordance with the terms of the Debentures. Any shares of Common
Stock issued upon conversion of such amounts shall be Registrable Securities.
Nothing herein shall limit the Buyer's right to pursue damages for the failure
to timely obtain effectiveness of the Registration Statement by the Registration
Deadline or to thereafter maintain the effectiveness of the Registration
Statement as required pursuant to this Agreement or to maintain the listing of
the Common Stock;
D. PIGGY-BACK REGISTRATIONS. If at any time prior to the expiration of the
Registration Period (as hereinafter defined) the Company shall determine to file
with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the 1933 Act of any of its equity
securities (other than on Form S-4 or Form S-8 or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans), the Company shall
send to Buyer written notice of such determination and, if within fifteen (15)
days after the effective date of such notice, the Buyer shall so request in
writing, the Company shall include in such Registration Statement all or any
part of the Registrable Securities the Buyer requests to be registered, except
that if, in connection with any underwritten public offering for the account of
the Company, the managing underwriter(s) thereof shall impose a limitation on
the number of shares of Common Stock which may be included in the Registration
Statement because, in such underwriter(s)' judgment, marketing or other factors
dictate such limitation is necessary to facilitate public distribution, then the
Company shall be obligated to include in such Registration Statement only such
limited portion of the Registrable Securities with respect to which the Buyer
has requested inclusion hereunder as the underwriter shall permit;
3
PROVIDED, HOWEVER, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities, the
holders of which are not entitled by contract to inclusion of such securities in
such Registration Statement or are not entitled to pro rata inclusion with the
Registrable Securities; and
PROVIDED, FURTHER, HOWEVER, that, after giving effect to the immediately
preceding proviso, any exclusion of Registrable Securities shall be made pro
rata with holders of other securities having the contractual right to include
such securities in the Registration Statement other than holders of securities
entitled to inclusion of their securities in such Registration Statement by
reason of demand registration rights. No right to registration of Registrable
Securities under this Section 2(d) shall be construed to limit any registration
required under Section 2(a) hereof. If an offering in connection with which the
Buyer is entitled to registration under this Section 2(d) is an underwritten
offering, then the Buyer shall, unless otherwise agreed by the Company, offer
and sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering. Notwithstanding anything to the contrary set forth
herein, the registration rights of the Buyer pursuant to this Section 2(d) shall
only be available in the event the Company fails to timely file, obtain
effectiveness or maintain effectiveness of any Registration Statement to be
filed pursuant to Section 2(a) in accordance with the terms of this Agreement.
E. ELIGIBILITY FOR FORM SB-2. The Company represents and warrants that it
meets the registrant eligibility and transaction requirements for the use of
Form SB-2 for registration of the sale by the Buyer of the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form SB-2.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the
Registrable Securities, the Company shall have the following obligations:
a. The Company shall prepare promptly, and file with the SEC as soon as
practicable after the date of the Closing under the Securities Purchase
Agreement (the "CLOSING DATE") (but no later than the Filing Date), a
Registration Statement with respect to the number of Registrable Securities
provided in Section 2(a), and thereafter use its best efforts to
4
cause such Registration Statement relating to Registrable Securities to become
effective as soon as possible after such filing (but in no event later than the
Registration Deadline), and keep the Registration Statement effective pursuant
to Rule 415 at all times until such date as is the earlier of (i) the date on
which all of the Registrable Securities have been sold and (ii) the date on
which the Registrable Securities (in the opinion of counsel to the Buyer) may be
immediately sold to the public without registration or restriction (including
without limitation as to volume by each holder thereof) under the 1933 Act (the
"REGISTRATION PERIOD"), which Registration Statement (including any amendments
or supplements thereto and prospectuses contained therein) shall 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.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statements and the prospectus used in connection with the Registration
Statements as may be necessary to keep the Registration Statements effective at
all times during the Registration Period, and, during such period, comply with
the provisions of the 1933 Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statements
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statements. In the event that on any
Trading Day (as defined in the Debentures) (the "REGISTRATION TRIGGER DATE") the
number of shares available under a Registration Statement filed pursuant to this
Agreement is insufficient to cover all of the Registrable Securities issued or
issuable upon conversion of or otherwise pursuant to the Debentures (based on
the Conversion Price (as defined in the Debentures) then in effect) and exercise
of or otherwise pursuant to the Warrants, in each case without giving effect to
any limitations on the Buyer' ability to convert the Debentures or exercise the
Warrants, the Company shall amend the Registration Statement, or file a new
Registration Statement (on the short form available therefore, if applicable),
or both, so as to cover one hundred fifty percent (150%) of all of the
Registrable Securities so issued or issuable (without giving effect to any
limitations on conversion contained in the Debentures or exercise contained in
the Warrants) as of the Registration Trigger Date, in each case, as soon as
practicable, but in any event within twenty (20) business days after the
necessity therefore arises (based on the market price of the Common Stock and
other relevant factors on which the Company reasonably elects to rely),
provided, however that the Company shall have a sufficient number of authorized
and unissued shares. In the event the Company does not have a sufficient number
of authorized and unissued shares, the Company shall use its best efforts to
obtain all necessary shareholder approvals and to make all necessary filings to
increase its authorized shares as promptly as practicable and, within twenty
(20) business days after the necessary increase in its authorized shares shall
become effective, amend the Registration Statement or file a new Registration
Statement as set forth above. The Company shall use its best efforts to cause
such amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof, but in any event within sixty (60)
days of the Registration Trigger Date or as promptly as practicable in the event
the Company is required to increase its authorized shares. The provisions of
Section 2(c) above shall be applicable with respect to the Company's obligations
under this Section 3(b).
5
c. The Company shall furnish to the Buyer and its legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of each Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC, and each item of correspondence from the SEC or the
staff of the SEC, in each case relating to such Registration Statement (other
than any portion of any thereof which contains information for which the Company
has sought confidential treatment), and (ii) such number of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as the Buyer may reasonably request
in order to facilitate the disposition of the Registrable Securities owned by
the Buyer. The Company will immediately notify the Buyer by facsimile of the
effectiveness of each Registration Statement or any post-effective amendment.
The Company will promptly respond to any and all comments received from the SEC,
with a view towards causing each Registration Statement or any amendment thereto
to be declared effective by the SEC as soon as practicable and shall file an
acceleration request as soon as practicable, but no later than three (3)
business days (the "ACCELERATION REQUEST DEADLINE"), following the resolution or
clearance of all SEC comments or, if applicable, following notification by the
SEC that any such Registration Statement or any amendment thereto will not be
subject to review.
d. The Company shall use reasonable efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statements under such
other securities or "blue sky" laws of such jurisdictions in the United States
as the Buyer, (ii) prepare and file in those jurisdictions such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
e. [INTENTIONALLY OMITTED]
f. As promptly as practicable after becoming aware of such event, the
Company shall notify the Buyer of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in any
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, and use its best
efforts promptly to prepare a supplement or amendment to any Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to the Buyer as the Buyer may
reasonably request; provided that, for not more than twenty (20) consecutive
days (or a total of not more than sixty (60) days in any twelve (12) month
period), the Company may delay the disclosure of material non-public information
concerning the Company (as well as prospectus or Registration Statement
updating) the disclosure of which at the time is not, in the good faith opinion
of the Company,
6
in the best interests of the Company (an "ALLOWED DELAY"); provided, further,
that the Company shall promptly (i) notify the Buyer in writing of the existence
of (but in no event, without the prior written consent of the Buyer, shall the
Company disclose to the Buyer any of the facts or circumstances regarding)
material non-public information giving rise to an Allowed Delay and (ii) advise
the Buyer in writing to cease all sales under such Registration Statement until
the end of the Allowed Delay, provided the above actions are consistent with the
requirements of the 1933 Act and/or 1934 Act or other applicable law. Upon
expiration of the Allowed Delay, the Company shall again be bound by the first
sentence of this Section 3(f) with respect to the information giving rise
thereto.
g. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of any Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest possible moment and to notify the Buyer who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof.
h. The Company shall permit a single firm of counsel designated by the
Buyer to review such Registration Statement and all amendments and supplements
thereto (as well as all requests for acceleration or effectiveness thereof) a
reasonable period of time prior to their filing with the SEC (not less than
three (3) business days but not more then five (5) business days) and not file
any document in a form to which such counsel reasonably objects and will not
request acceleration of such Registration Statement without prior notice to such
counsel.
i. The Company shall make generally available to its security holders as
soon as practicable, but not later than ninety (90) days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
j. At the request of the Buyer participating in an underwritten offering
pursuant to Section 2(d), the Company shall furnish, on the date that
Registrable Securities are delivered to an underwriter for sale in connection
with any Registration Statement pursuant to Section 2(d), (i) an opinion, dated
as of such date, from counsel representing the Company for purposes of such
Registration Statement, in form, scope and substance as is customarily given in
an underwritten public offering, addressed to the underwriters, if any, and the
Buyer and (ii) a letter, dated such date, from the Company's independent
certified public accountants in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and the Buyer.
k. The Company shall make available for inspection by (i) the Buyer,
and (ii) one firm of attorneys and one firm of accountants or other agents
retained by the Buyer (collectively, the "INSPECTORS") all pertinent financial
and other records, and pertinent corporate documents and properties of the
Company (collectively, the "RECORDS"), as shall be reasonably deemed necessary
by each Inspector to enable each Inspector to exercise its due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information which any Inspector may reasonably request for purposes
of such due diligence;
7
PROVIDED, HOWEVER, that each Inspector shall hold in confidence and shall
not make any disclosure (except to the Buyer) of any Record or other information
which the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (a) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement, (b) the release of such Records is ordered pursuant to a
subpoena or other order from a court or government body of competent
jurisdiction, or (c) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements (in form and substance
satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(k). The Buyer agrees that it shall,
upon learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and the Buyer) shall be deemed to
limit the Buyer's ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure of
information concerning the Buyer provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction, or (iv) such information has
been made generally available to the public other than by disclosure in
violation of this or any other agreement. The Company agrees that it shall, upon
learning that disclosure of such information concerning the Buyer is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Buyer prior to making such disclosure, and
allow the Buyer, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
m. The Company shall use its best efforts to (i) cause all the Registrable
Securities covered by the Registration Statement to be listed on each national
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) to the
extent the securities of the same class or series are not then listed on a
national securities exchange, secure the designation and quotation, of all the
Registrable Securities covered by the Registration Statement on the NNM or, if
not eligible for the NNM on the Nasdaq Small Cap or, if not eligible for the
Nasdaq Small Cap, on the Over the Counter electronic bulletin board and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities.
8
n. The Company shall provide a transfer agent and registrar, which may be
a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.
o. The Company shall cooperate with the Buyer who holds Registrable
Securities being offered and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities to be offered
pursuant to such Registration Statement and enable such certificates to be in
such denominations or amounts, as the case may be, as the managing underwriter
or underwriters, if any, or the Buyer may reasonably request and registered in
such names as the managing underwriter or underwriters, if any, or the Buyer may
request, and, within three (3) business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Buyer) an appropriate instruction and an opinion of such counsel in the form
required by the transfer agent in order to issue the Registrable Securities free
of restrictive legends.
p. At the request of the holders of a majority-in-interest of the
Registrable Securities, the Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to a
Registration Statement and any prospectus used in connection with the
Registration Statement as may be necessary in order to change the plan of
distribution set forth in such Registration Statement.
q. The Company shall not, and shall not agree to, allow the holders of any
securities of the Company to include any of their securities in any Registration
Statement under Section 2(a) hereof or any amendment or supplement thereto under
Section 3(b) hereof without the consent of the holders of a majority-in-interest
of the Registrable Securities. In addition, the Company shall not offer any
securities for its own account or the account of others in any Registration
Statement under Section 2(a) hereof or any amendment or supplement thereto under
Section 3(b) hereof without the consent of the holders of a majority-in-interest
of the Registrable Securities.
r. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Buyer of Registrable Securities
pursuant to a Registration Statement.
s. The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including without limitation the 1933 Act and the 1934 Act and the rules and
regulations promulgated by the SEC).
9
4. OBLIGATIONS OF THE BUYER. In connection with the registration of the
Registrable Securities, the Buyer shall have the following obligations:
a. It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of the Buyer that the Buyer shall furnish to the Company
such information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request. At least three (3) business days prior to the
first anticipated filing date of the Registration Statement, the Company shall
notify the Buyer of the information the Company requires from each the Buyer.
b. The Buyer, by the Buyer's acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of the Registration Statements
hereunder, unless the Buyer has notified the Company in writing of the Buyer's
election to exclude all of the Buyer's Registrable Securities from the
Registration Statements.
c. In the event of an underwritten offering pursuant to Section 2(d) in
which any Registrable Securities are to be included, the Buyer agrees to enter
into and perform the Buyer's obligations under an underwriting agreement, in
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities, unless the
Buyer has notified the Company in writing of the Buyer's election to exclude all
of the Buyer's Registrable Securities from such Registration Statement.
d. The Buyer agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 3(f) or 3(g), the
Buyer will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until the Buyer's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the
Company, the Buyer shall deliver to the Company (at the expense of the Company)
or destroy (and deliver to the Company a certificate of destruction) all copies
in the Buyer's possession, of the prospectus covering such Registrable
Securities current at the time of receipt of such notice.
e. No Buyer may participate in any underwritten registration hereunder
unless the Buyer (i) agrees to sell the Buyer's Registrable Securities on the
basis provided in any underwriting arrangements in usual and customary form
entered into by the Company, (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, and (iii)
agrees to pay its pro rata share of all underwriting discounts and commissions
and any expenses in excess of those payable by the Company pursuant to Section 5
below.
10
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 and 3,
including, without limitation, all registration, listing and qualification fees,
printers and accounting fees, the fees and disbursements of counsel for the
Company, and the reasonable fees and disbursements of one counsel selected by
the Buyer pursuant to Sections 2(b) and 3(h) hereof shall be borne by the
Company.
6. INDEMNIFICATION. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) the Buyer, (ii) the directors, officers, partners,
managers, members, employees, agents and each person who controls any Buyer
within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as
amended (the "1934 ACT"), if any, (iii) any underwriter (as defined in the 1933
Act) for the Buyer in connection with an underwritten offering pursuant to
Section 2(d) hereof, and (iv) the directors, officers, partners, employees and
each person who controls any such underwriter within the meaning of the 1933 Act
or the 1934 Act, if any (each, an "INDEMNIFIED PERSON"), against any joint or
several losses, claims, damages, liabilities or expenses (collectively, together
with actions, proceedings or inquiries by any regulatory or self-regulatory
organization, whether commenced or threatened, in respect thereof, "CLAIMS") to
which any of them may become subject insofar as such Claims arise out of or are
based upon: (i) any untrue statement or alleged untrue statement of a material
fact in a Registration Statement or the omission or alleged omission to state
therein a material fact required to be stated or necessary to make the
statements therein not misleading; (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading; or (iii) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities (the matters in the foregoing clauses (i)
through (iii) being, collectively, "VIOLATIONS"). Subject to the restrictions
set forth in Section 6(c) with respect to the number of legal counsel, the
Company shall reimburse the Indemnified Person, promptly as such expenses are
incurred and are due and payable, for any reasonable legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of such Registration
Statement or any such amendment thereof or supplement thereto; (ii) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; and (iii) with respect to any preliminary prospectus,
shall not inure to the benefit of any Indemnified Person if the untrue statement
or omission of material fact contained in the preliminary prospectus was
corrected on a timely basis in the prospectus, as then amended or supplemented,
such corrected prospectus was timely made available by the Company pursuant to
Section 3(c) hereof, and the Indemnified Person was promptly advised in writing
not to use the incorrect prospectus prior to the use giving rise to a Violation
and such Indemnified Person, notwithstanding such advice, used it. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Buyer pursuant to Section 9.
11
b. [Intentionally Omitted].
c. Promptly after receipt by an Indemnified Person under this Section 6 of
notice of the commencement of any action (including any governmental action),
such Indemnified Person shall, if Claim in respect thereof is to be made against
any the Company under this Section 6, deliver to the Company a written notice of
the commencement thereof, and the Company shall have the right to participate
in, and, to the extent the Company so desires, to assume control of the defense
thereof with counsel mutually satisfactory to the Company and the Indemnified
Person, as the case may be.
PROVIDED, HOWEVER, that an Indemnified Person shall have the right to
retain its own counsel with the fees and expenses to be paid by the Company, if,
in the reasonable opinion of counsel retained by the Company, the representation
by such counsel of the Indemnified Person and the Company would be inappropriate
due to actual or potential differing interests between such Indemnified Person
and any other party represented by such counsel in such proceeding. The Company
shall pay for only one separate legal counsel for the Indemnified Persons, and
such legal counsel shall be selected by Buyer, if the Buyer is entitled to
indemnification hereunder. The failure to deliver written notice to the Company
within a reasonable time of the commencement of any such action shall not
relieve the Company of any liability to the Indemnified Person under this
Section 6, except to the extent that the Company is actually prejudiced in its
ability to defend such action. The indemnification required by this Section 6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by the Company is
prohibited or limited by law, the Company agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law.
8. REPORTS UNDER THE 1934 ACT. With a view to making available to the
Buyer the benefits of Rule144 promulgated under the 1933 Act or any other
similar rule or regulation of the SEC that may at any time permit the Buyer to
sell securities of the Company to the public without registration ("RULE 144"),
the Company agrees to:
12
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to the Buyer so long as the Buyer owns Registrable Securities,
promptly upon request, (i) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, the 1933 Act and the 1934
Act, (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company, and (iii) such
other information as may be reasonably requested to permit the Buyers to sell
such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement
shall be automatically assignable by the Buyers to any transferee of all or any
portion of Registrable Securities if: (i) the Buyer agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration rights
are being transferred or assigned, (iii) following such transfer or assignment,
the further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act and applicable state securities laws, (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein, and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with
written consent of the Company, the Buyer (to the extent such Buyer still owns
Registrable Securities) and Buyers who hold a majority interest of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon the Buyer and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
13
b. Any notices required or permitted to be given under the terms hereof
shall be sent by certified or registered mail (return receipt requested) or
delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile and shall be effective five days after being placed in
the mail, if mailed by regular United States mail, or upon receipt, if delivered
personally or by courier (including a recognized overnight delivery service) or
by facsimile, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company: To the address set forth immediately below such
Company's name on the signature pages hereto.
With copy to:
Otto Sorensen, Esq.
LUCE, FORWARD, HAMILTON AND SCRIPPS, LLP
600 West Broadway, Suite 2600
San Diego, CA 92191
Tel (619) 699-2534
Fax (619) 232-8311
If to a Buyer: To the address set forth immediately below such Buyer's
name on the signature pages hereto.
Each party shall provide notice to the other party of any change in address.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of New York. Any controversy or claim arising out
of or related to this Debenture or the breach thereof, shall be settled by
binding arbitration in New York, NY in accordance with the Expedited Procedures
(Rules 53-57) of the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"). A proceeding shall be commenced upon written demand by
Company or the Buyer to the other. The arbitrator(s) shall enter a judgment by
default against any party, which fails or refuses to appear in any properly
noticed arbitration proceeding. The proceeding shall be conducted by one (1)
arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty
thousand dollars ($250,000), in which case three (3) arbitrators shall preside.
The arbitrator(s) will be chosen by the parties from a list provided by the AAA,
and if they are unable to agree within ten (10) days, the AAA shall select the
arbitrator(s). The arbitrators must be experts in securities law and financial
transactions. The arbitrators shall assess costs and expenses of the
arbitration, including all attorneys' and experts' fees, as the arbitrators
believe is appropriate in light of the merits of the parties' respective
positions in the issues in dispute. Each party submits irrevocably to the
jurisdiction of any state court sitting in New York, NY or to the United States
District Court sitting in New York for purposes of enforcement of any discovery
order, judgment or award in connection with such arbitration. The award of the
arbitrator(s) shall be final and binding upon the parties and may be enforced in
any court having jurisdiction. The arbitration shall be held in such place as
set by the arbitrator(s) in accordance with Rule 55. With respect to any
arbitration proceeding in accordance with this section, the prevailing party's
reasonable attorney's fees and expenses shall be borne by the non-prevailing
party.
14
Although the parties, as expressed above, agree that all claims, including
claims that are equitable in nature, for example specific performance, shall
initially be prosecuted in the binding arbitration procedure outlined above, if
the arbitration panel dismisses or otherwise fails to entertain any or all of
the equitable claims asserted by reason of the fact that it lacks jurisdiction,
power and/or authority to consider such claims and/or direct the remedy
requested, then, in only that event, will the parties have the right to initiate
litigation respecting such equitable claims or remedies. The forum for such
equitable relief shall be in either a state or federal court sitting in New
York, NY. Each party waives any right to a trial by jury, assuming such right
exists in an equitable proceeding, and irrevocably submits to the jurisdiction
of said New York court. New York law shall govern both the proceeding as well as
the interpretation and construction of the Debenture and the transaction as a
whole.
e. This Agreement and the Securities Purchase Agreement (including all
schedules and exhibits thereto) constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement and the Securities
Purchase Agreement supersede all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
g. The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
j. Except as otherwise provided herein, all consents and other
determinations to be made by the Buyer pursuant to this Agreement shall be made
by Buyers holding a majority of the Registrable Securities, determined as if the
all of the Debentures then outstanding have been converted into for Registrable
Securities.
15
k. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyer by vitiating the intent and
purpose of the transactions contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for breach of its obligations hereunder will
be inadequate and agrees, in the event of a breach or threatened breach by the
Company of any of the provisions hereunder, that the Buyer shall be entitled, in
addition to all other available remedies in law or in equity, to an injunction
or injunctions to prevent or cure breaches of the provisions of this Agreement
and to enforce specifically the terms and provisions hereof, without the
necessity of showing economic loss and without any bond or other security being
required.
l. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.
m. In the event that any provision of this Agreement 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
provision hereof which may prove invalid or unenforceable under any law shall
not affect the validity or enforceability of any other provision hereof.
n. The initial number of Registrable Securities included in any
Registration Statement and each increase to the number of Registrable Securities
included therein shall be allocated pro rata among the Buyers based on the
number of Registrable Securities held by the Buyer at the time of such
establishment or increase, as the case may be. In the event an Buyer shall sell
or otherwise transfer any of such holder's Registrable Securities, each
transferee shall be allocated a pro rata portion of the number of Registrable
Securities included in a Registration Statement for such transferor. Any shares
of Common Stock included on a Registration Statement and which remain allocated
to any person or entity which does not hold any Registrable Securities shall be
allocated to the remaining Buyers, pro rata based on the number of shares of
Registrable Securities then held by the Buyers. For the avoidance of doubt, the
number of Registrable Securities held by an Buyer shall be determined as if all
the Debentures and Warrants then outstanding and held by an Buyer were converted
into or exercised for Registrable Securities.
[INTENTIONALLY LEFY BLANK].
16
o. There shall be no oral modifications or amendments to this Agreement.
This Agreement may be modified or amended only in writing.
IN WITNESS WHEREOF, the undersigned Buyer and the Company have caused this
Agreement to be duly executed as of the {{ExecDay}} day of November, 2004.
- -------------------------------------------------------------------------------
PATRIOT SCIENTIFIC CORPORATION
By: ________________________
Lowell W. Giffhorn, CFO By: ______________________
{{FirstName}} {{LastName}}
By: ________________________
Jeffrey E. Wallin, Pres. and CEO
ADDRESS:
ADDRESS:
{{Address1}}
PATRIOT SCIENTIFIC CORPORATION {{City}}, {{State}} {{PostalCode}}
10989 Via Frontera Telephone: {{HomePhone}}
San Diego, CA 92127 Facsimile: {{Fax}}
Telephone: (858) 674-5000
FACSIMILE: (858) 674-5005
- -------------------------------------------------------------------------------
17
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED.
Warrant to Purchase
{{NoWarrants}} shares Warrant Number ____
- --------------
WARRANT TO PURCHASE COMMON STOCK
OF
PATRIOT SCIENTIFIC CORP.
THIS CERTIFIES that {{FirstName}} {{LastName}} or any subsequent holder
hereof ("Holder") has the right to purchase from Patriot Scientific Corp., a
Delaware corporation (the "Company"), up to {{NoWarrants}} fully paid and
nonassessable shares, of the Company's common stock, $0.00001 par value per
share ("Common Stock"), subject to adjustment as provided herein, at a price
equal to the Exercise Price as defined in Section 3 below, at any time beginning
on the Date of Issuance (defined below) and ending at 5:00 p.m., New York, New
York time, on the date that is seven (7) years after the Date of Issuance (the
"Exercise Period").
Holder agrees with the Company that this Warrant to Purchase Common Stock
of the Company (this "Warrant" or this "Agreement") is issued and all rights
hereunder shall be held subject to all of the conditions, limitations and
provisions set forth herein.
1. Date of Issuance and Term.
This Warrant shall be deemed to be issued on {{FundDate}} ("Date of
Issuance"). The term of this Warrant is seven (7) years from the Date of
Issuance.
Notwithstanding anything to the contrary herein, the applicable portion of
this Warrant shall not be exercisable during any time that, and only to the
extent that, the number of shares of Common Stock to be issued to Holder upon
such exercise, when added to the number of shares of Common Stock, if any, that
the Holder otherwise beneficially owns (outside of this Warrant, and not
including any other warrants having a provision substantially similar to this
paragraph) at the time of such exercise, would exceed 4.99% of the number of
shares of Common Stock then outstanding, as determined in accordance with
Section 13(d) of the Exchange Act (the "4.99% Limitation"). The 4.99% Limitation
shall be conclusively satisfied if the applicable Exercise Notice includes a
signed representation by the Holder that the issuance of the shares in such
Exercise Notice will not violate the 4.99% Limitation, and the Company shall not
be entitled to require additional documentation of such satisfaction.
18
Notwithstanding the above, in the event that the Company receives any
tender offer or any offer to enter into a merger with another entity whereby the
Company shall not be the surviving entity (an "Offer"), then "4.99%" shall be
automatically revised immediately after such offer to read "9.99%" each place it
occurs in this Section 1. Notwithstanding the above, Holder shall retain the
option to either exercise or not exercise its option(s) to acquire Common Stock
pursuant to the terms hereof after an Offer, and, in the event of a cash
exercise following a tender offer, the Exercise Price per share that would
otherwise be due shall instead be offset against the tender price per share to
be received by the Holder, provided, however, that in the event a tender offer
is not completed, Holder shall promptly pay to the Company the Exercise Price
that would have been due at the time the Warrant was exercised.
2. Exercise.
(a) Manner of Exercise. During the Exercise Period, this Warrant may be
exercised as to all or any lesser number of full shares of Common Stock covered
hereby (the "Warrant Shares") upon surrender of this Warrant, with the Exercise
Form attached hereto as Exhibit A (the "Exercise Form") duly completed and
executed, together with the full Exercise Price (as defined below) for each
share of Common Stock as to which this Warrant is exercised, at the office of
the Company, Patriot Scientific Corporation, Attn: Lowell W. Giffhorn, CFO;
10989 Via Frontera, San Diego, CA 92127; Telephone: (858) 674-5000, Facsimile:
(858) 674-5005 or at such other office or agency as the Company may designate in
writing, by overnight mail, with an advance copy of the Exercise Form sent to
the Company and its Transfer Agent by facsimile (such surrender and payment of
the Exercise Price hereinafter called the "Exercise of this Warrant").
(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile. The Company shall not be required to deliver the shares of Common
Stock to the Holder until the requirements of Section 2(a) above are satisfied.
(c) Cancellation of Warrant. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
19
(d) Holder of Record. Each person in whose name any Warrant for shares of
Common Stock is issued shall, for all purposes, be deemed to be the Holder of
record of such shares on the Date of Exercise of this Warrant, irrespective of
the date of delivery of the Common Stock purchased upon the Exercise of this
Warrant. Nothing in this Warrant shall be construed as conferring upon Holder
any rights as a stockholder of the Company.
3. Payment of Warrant Exercise Price.
The Exercise Price ("Exercise Price") shall initially equal {{WarrPrice}}
per share (the "Initial Exercise Price") or, if the Date of Exercise is more
than six (6) months after the Date of Issuance, the lesser of (i) the Initial
Exercise Price or (ii) the "Lowest Reset Price," as that term is defined below.
The Company shall calculate a "Reset Price" on each six-month anniversary date
of the Date of Issuance which shall equal the Market Price (as defined below) on
such six-month anniversary date of the Date of Issuance. The "Lowest Reset
Price" shall equal the lowest Reset Price determined on any six-month
anniversary date of the Date of Issuance preceding the Date of Exercise, taking
into account, as appropriate, any adjustments made pursuant to Section 5 hereof.
Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:
(i) Cash Exercise: cash, bank or cashiers check or wire transfer; or
(ii) Cashless Exercise: surrender of this Warrant at the principal office
of the Company together with notice of cashless election, in which event the
Company shall issue Holder a number of shares of Common Stock computed using the
following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is
being exercised.
A = the Market Price of one (1) share of Common Stock (for purposes
of this Section 3(ii), where "MARKET PRICE," as of any date,
means the Volume Weighted Average Price (as defined herein) of the
Company's Common Stock during the ten (10) consecutive trading day
period immediately preceding the date in question.
As used herein, the "VOLUME WEIGHTED AVERAGE PRICE" for any security as of
any date means the volume weighted average sale price on the Over the
Counter Electronic Bulletin Board (the "OTC-BB") as reported by, or based
upon data reported by, Bloomberg Financial Markets or an equivalent,
reliable reporting service mutually acceptable to and hereafter designated
by holders of a majority in interest of the Warrants and the Company
("BLOOMBERG") or, if the OTC-BB is not the principal trading market for
such security, the volume weighted average sale price of such security on
the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or, if no volume weighted
average sale price is reported for such security, then the last closing
trade price of such security as reported by Bloomberg, or, if no last
closing trade price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security that are
listed in the "pink sheets" by the National Quotation Bureau, Inc. If the
Volume Weighted Average Price cannot be calculated for such security on
such date in the manner provided above, the volume weighted average price
shall be the fair market value as mutually determined by the Company and
the holders of a majority in interest of the Warrants being exercised for
which the calculation of the volume weighted average price is required in
order to determine the Exercise Price of such Warrants. "TRADING DAY"
shall mean any day on which the Common Sock is traded for any period on
the OTC-BB, or on the principal securities exchange or other securities
market on which the Common Stock is then being traded.
B = the Exercise Price.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant in a cashless exercise transaction shall be deemed to
have been acquired at the time this Warrant was issued. Moreover, it is
intended, understood and acknowledged that the holding period for the Common
Stock issuable upon exercise of this Warrant in a cashless exercise transaction
shall be deemed to have commenced on the date this Warrant was issued.
4. Transfer and Registration.
(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
(b) Registrable Securities. The Common Stock issuable upon the exercise of
this Warrant has registration rights pursuant to that certain Registration
Rights Agreements between the Company and {{FirstName}} {{LastName}} dated
{{FundDate}}.
5. Anti-Dilution Adjustments.
(a) Stock Dividend. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then Holder, upon Exercise of this Warrant
after the record date for the determination of holders of Common Stock entitled
to receive such dividend, shall be entitled to receive upon Exercise of this
Warrant, in addition to the number of shares of Common Stock as to which this
Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) Recapitalization or Reclassification. If the Company shall at any time
effect a recapitalization, reclassification or other similar transaction of such
character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which Holder shall be
entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).
(c) Distributions. If the Company shall at any time distribute for no
consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding years) then,
in any such case, Holder shall be entitled to receive, upon Exercise of this
Warrant, with respect to each share of Common Stock issuable upon such exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which Holder would have been entitled to receive with respect to each such share
of Common Stock as a result of the happening of such event had this Warrant been
exercised immediately prior to the record date or other date fixing shareholders
to be affected by such event (the "Determination Date").
(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the Company or another entity or there
is a sale of all or substantially all the Company's assets (a "Corporate
Change"), then this Warrant shall be exerciseable into such class and type of
securities or other assets as Holder would have received had Holder exercised
this Warrant immediately prior to such Corporate Change; provided, however, that
Company may not affect any Corporate Change unless it first shall have given
thirty (30) days notice to Holder hereof of any Corporate Change.
(e) Exercise Price Adjusted. As used in this Warrant, the term "Exercise
Price" shall mean the purchase price per share specified in Section 3 of this
Warrant, until the occurrence of an event stated in subsection (a), (b) or (c)
of this Section 5, and thereafter shall mean said price as adjusted from time to
time in accordance with the provisions of said subsection. No such adjustment
under this Section 5 shall be made unless such adjustment would change the
Exercise Price at the time by $.01 or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate thereof
would change the Exercise Price at the time by $.01 or more. No adjustment made
pursuant to any provision of this Section 5 shall have the net effect of
increasing the Exercise Price in relation to the split adjusted and distribution
adjusted price of the Common Stock. The number of shares of Common Stock subject
hereto shall increase proportionately with each decrease in the Exercise Price.
(f) Adjustments: Additional Shares, Securities or Assets. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
Holder shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. Fractional Interests.
No fractional shares or scrip representing fractional shares shall be
issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.
7. Reservation of Shares.
From and after June 1, 2002, the Company shall at all times reserve for
issuance such number of authorized and unissued shares of Common Stock (or other
securities substituted therefor as herein above provided) as shall be sufficient
for the Exercise of this Warrant and payment of the Exercise Price. If at any
time the number of shares of Common Stock authorized and reserved for issuance
is below the number of shares sufficient for the Exercise of this Warrant and
payment of the Exercise Price (based on the Exercise Price in effect from time
to time), the Company will promptly take all corporate action necessary to
authorize and reserve a sufficient number of shares, including, without
limitation, calling a special meeting of stockholders to authorize additional
shares to meet the Company's obligations under this Section 7, in the case of an
insufficient number of authorized shares, and using its best efforts to obtain
stockholder approval of an increase in such authorized number of shares. The
Company covenants and agrees that upon the Exercise of this Warrant, all shares
of Common Stock issuable upon such exercise shall be duly and validly issued,
fully paid, nonassessable and not subject to preemptive rights, rights of first
refusal or similar rights of any person or entity.
8. Restrictions on Transfer.
(a) Registration or Exemption Required. This Warrant has been issued in a
transaction exempt from the registration requirements of the Act by virtue of
Regulation D and exempt from state registration under applicable state laws. The
Warrant and the Common Stock issuable upon the Exercise of this Warrant may not
be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.
(b) Assignment. If Holder can provide the Company with reasonably
satisfactory evidence that the conditions of (a) above regarding registration or
exemption have been satisfied, Holder may sell, transfer, assign, pledge or
otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a
written notice to Company, substantially in the form of the Assignment attached
hereto as Exhibit B, indicating the person or persons to whom the Warrant shall
be assigned and the respective number of warrants to be assigned to each
assignee. The Company shall effect the assignment within ten (10) days, and
shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of
like tenor and terms for the appropriate number of shares.
9. Benefits of this Warrant.
Nothing in this Warrant shall be construed to confer upon any person other
than the Company and Holder any legal or equitable right, remedy or claim under
this Warrant and this Warrant shall be for the sole and exclusive benefit of the
Company and Holder.
10. Arbitration; Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made in and wholly to be
performed in that jurisdiction, except for matters arising under the Act or the
Securities Exchange Act of 1934, which matters shall be construed and
interpreted in accordance with such laws. Any controversy or claim arising out
of or related to the this Agreement or the breach thereof, shall be settled by
binding arbitration in New York, New York in accordance with the Expedited
Procedures (Rules 53-57) of the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"). A proceeding shall be commenced upon written
demand by Company or any Lender to the other. The arbitrator(s) shall enter a
judgment by default against any party, which fails or refuses to appear in any
properly noticed arbitration proceeding. The proceeding shall be conducted by
one (1) arbitrator, unless the amount alleged to be in dispute exceeds two
hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators
shall preside. The arbitrator(s) will be chosen by the parties from a list
provided by the AAA, and if they are unable to agree within ten (10) days, the
AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe is appropriate in light of the merits of the parties'
respective positions in the issues in dispute. Each party submits irrevocably to
the jurisdiction of any state court sitting in New York, New York or to the
United States District Court sitting in New York for purposes of enforcement of
any discovery order, judgment or award in connection with such arbitration. The
award of the arbitrator(s) shall be final and binding upon the parties and may
be enforced in any court having jurisdiction. The arbitration shall be held in
such place as set by the arbitrator(s) in accordance with Rule 55. With respect
to any arbitration proceeding in accordance with this section, the prevailing
party's reasonable attorney's fees and expenses shall be borne by the
non-prevailing party.
Although the parties, as expressed above, agree that all claims, including
claims that are equitable in nature, for example specific performance, shall
initially be prosecuted in the binding arbitration procedure outlined above, if
the arbitration panel dismisses or otherwise fails to entertain any or all of
the equitable claims asserted by reason of the fact that it lacks jurisdiction,
power and/or authority to consider such claims and/or direct the remedy
requested, then, in only that event, will the parties have the right to initiate
litigation respecting such equitable claims or remedies. The forum for such
equitable relief shall be in either a state or federal court sitting in New
York, New York. Each party waives any right to a trial by jury, assuming such
right exists in an equitable proceeding, and irrevocably submits to the
jurisdiction of said New York court. New York law shall govern both the
proceeding as well as the interpretation and construction of this Agreement and
the transaction as a whole.
11. Loss of Warrant.
Upon receipt by the Company of evidence of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
12. Notice or Demands.
Notices or demands pursuant to this Warrant to be given or made by Holder
to or on the Company shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed, until
another address is designated in writing by the Company, to the address set
forth in Section 2(a) above. Notices or demands pursuant to this Warrant to be
given or made by the Company to or on Holder shall be sufficiently given or made
if sent by certified or registered mail, return receipt requested, postage
prepaid, and addressed, to the address of Holder set forth in the Company's
records, until another address is designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
{{ExecDay}} day of November, 2004.
PATRIOT SCIENTIFIC CORP.
By: ______________________________________
LOWELL W. GIFFHORN, CHIEF FINANCIAL OFFICER
By: _________________________________________
JEFFREY E. WALLIN, PRES. AND CEO
EXHIBIT A
EXERCISE FORM FOR WARRANT
TO: PATRIOT SCIENTIFIC CORP.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock (the "Common Stock") of Patriot
Scientific Corp., a Delaware corporation (the "Company"), evidenced by the
attached warrant (the "Warrant"), and herewith makes payment of the exercise
price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated:
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
Print Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- --------------------------------------------------------------------------------
EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of Patriot
Scientific Corp., evidenced by the attached Warrant and does hereby irrevocably
constitute and appoint _______________________ attorney to transfer the said
Warrant on the books of the Company, with full power of substitution in the
premises.
Dated:
------------------------------ ------------------------------------
Signature
Fill in for new registration of Warrant:
------------------------------------
Name
------------------------------------
Address
------------------------------------
Please print name and address of assignee
(including zip code number)
- ----------------------------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.