EXHIBIT 99.1 Subscription Agreement
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of July 28,
2005, by and among South Texas Oil Company (formerly known as Nutek Oil, Inc.),
a Nevada corporation (the "Company"), and the subscribers identified on the
signature page hereto (each a "Subscriber" and collectively "Subscribers").
WHEREAS, the Company and the Subscribers are executing and delivering
this Agreement in reliance upon an exemption from securities registration
afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"1933 Act").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase up to Two Million Three Hundred Thousand Dollars ($2,300,000) (the
"Purchase Price") of principal amount of promissory notes of the Company
("Note" or "Notes"), a form of which is annexed hereto as Exhibit A,
convertible into shares of the Company's common stock, $.001 par value (the
"Common Stock") at a per share conversion price set forth in the Note
("Conversion Price"); and share purchase warrants (the "Warrants"), in the form
annexed hereto as Exhibit B, to purchase shares of Common Stock (the "Warrant
Shares"). One Million Three Hundred Thousand Dollars ($1,300,000) of the
Purchase Price ("Initial Closing Purchase Price") shall be payable on the
Initial Closing Date. One Million Dollars ($1,000,000) of the Purchase Price
("Second Closing Purchase Price") shall be payable upon the sooner of within
five (5) days after the Actual Effective Date [as defined in Section 11.1(iv)]
("Effectiveness Event"), or within five (5) days after achievement of the
"Milestones" (as defined on Schedule 1 hereof ("Milestone Event"), or not at
all upon the occurrence of an "Adverse Event" as defined on Schedule 1 hereto.
The first of the Effectiveness Event or Milestone Event is the "Second Closing
Event". The Notes, shares of Common Stock issuable upon conversion of the
Notes (the "Shares"), the Warrants and the Warrant Shares are collectively
referred to herein as the "Securities"; and
WHEREAS, the aggregate proceeds of the sale of the Notes and the
Warrants contemplated hereby shall be held in escrow pursuant to the terms of a
Funds Escrow Agreement to be executed by the parties substantially in the form
attached hereto as Exhibit C (the "Escrow Agreement").
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Subscribers hereby
agree as follows:
1. Closings.
(a) Initial Closing. Subject to the satisfaction or waiver of the
terms and conditions of this Agreement, on the Initial Closing Date, each
Subscriber shall purchase and the Company shall sell to each Subscriber a Note
in the principal amount designated on the signature page hereto ("Initial
Closing Notes"). The aggregate amount of the Notes to be purchased by the
Subscribers on the Initial Closing Date shall, in the aggregate, be equal to
the Initial Closing Purchase Price. The "Initial Closing Date" shall be the
date that subscriber funds representing the net amount due the Company from the
Initial Closing Purchase Price of the Offering is transmitted by wire transfer
or otherwise to or for the benefit of the Company. The consummation of the
transactions contemplated herein for all closings shall take place at the
offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New
York 10176, upon the satisfaction of all conditions to Closing set forth in
this Agreement. Each of the Initial Closing Date and Second Closing Date is
referred to as a "Closing Date".
(b) Second Closing. The closing date in relation to the Second
Closing Purchase Price shall be the fifth (5th) day after the occurrence of the
Second Closing Event (the "Second Closing Date"). Subject to the satisfaction
or waiver of the terms and conditions of this Agreement on the Second Closing
Date, each Subscriber shall purchase and the Company shall sell to each
Subscriber a Note in the principal amount designated on the signature page
hereto ("Second Closing Notes") and Warrants as described in Section 2 of this
Agreement ("Second Closing Warrants"). The aggregate Purchase Price of the
Second Closing Notes for all Subscribers shall be equal to the Second Closing
Purchase Price. The Second Closing Note shall be identical to the Note
issuable on the Initial Closing Date and shall have the same maturity date as
the Note issued on the Initial Closing Date. The Conversion Price shall be
equitably adjusted to offset the effect of stock splits, stock dividends, pro
rata distributions of property or equity interests to the Company's
shareholders after the Initial Closing Date.
(c) Conditions to Second Closing. The occurrence of the Second
Closing is expressly contingent on (i) the truth and accuracy, on the Effective
Date, Actual Filing Date and the Second Closing Date of the representations and
warranties of the Company and Subscriber contained in this Agreement, (ii)
continued compliance with the covenants of the Company set forth in this
Agreement, (iii) the non-occurrence of any Event of Default (as defined in the
Note) or other default by the Company of its obligations and undertakings
contained in this Agreement, (iv) the delivery on the Second Closing Date of
Second Closing Notes for which the Company Shares issuable upon conversion have
been included in the Registration Statement, and (v) the delivery of the Second
Closing Warrants for which the Warrant Shares issuable upon exercise have been
included in the Registration Statement. If the Second Closing Event is the
Effectiveness Event, the Registration Statement must have been declared
effective by the Commission within sixty days after the Effective Date. The
exercise prices of the Warrants issuable on the Second Closing Date shall be
adjusted to offset the effect of stock splits, stock dividends, pro rata
distributions of property or equity interests to the Company's shareholders
after the Initial Closing Date.
(d) Second Closing Deliveries. On the Second Closing Date, the
Company will deliver the Second Closing Notes and Second Closing Warrants to
the Escrow Agent and each Subscriber will deliver his portion of the Purchase
Price to the Escrow Agent. On the Second Closing Date, the Company will
deliver a certificate ("Second Closing Certificate") signed by its chief
executive officer or chief financial officer (i) representing the truth and
accuracy of all the representations and warranties made by the Company
contained in this Agreement, as of the Initial Closing Date, the Actual Filing
Date, and the Second Closing Date, as if such representations and warranties
were made and given on all such dates, (ii) certifying that the information
contained in the schedules and exhibits hereto is substantially accurate as of
the Second Closing Date, (iii) adopting and renewing the covenants and
conditions set forth in Sections 5, 7, 8, 9, 10, 11, and 12 of this Agreement
in relation to the Second Closing Date, Second Closing Notes and Second Closing
Warrants, (iv) representing the timely compliance by the Company with the
Company's registration requirements set forth in Section 11 of this Agreement,
and (v) certifying that an Event of Default and Adverse Event have not
occurred. A legal opinion nearly identical to the legal opinion referred to in
Section 6 of this Agreement shall be delivered to each Subscriber at the Second
Closing in relation to the Company, Second Closing Notes, and Second Closing
Warrants ("Second Closing Legal Opinion"). The Second Closing Legal Opinion
must also state that all of the Registrable Securities have been included for
registration in the registration statement filed as of the Actual Filing Date
and declared effective as of the date of the Effectiveness Event provided the
Effectiveness Event is the Second Closing Event. The Company shall be deemed
to have satisfied the Effectiveness Event provided the Actual Effective Date is
not later than sixty days after the Effective Date [as defined in Section
11.1(iv)].
2. Warrants. On each Closing Date, the Company will issue and deliver
Class A Warrants to the Subscribers. One Class A Warrant will be issued for
each two Shares which would be issued on each Closing Date assuming the
complete conversion of the Notes issued on each Closing Date at the Conversion
Price in effect on the Initial Closing Date assuming such Closing Date were a
Conversion Date. The per Warrant Share exercise price to acquire a Warrant
Share upon exercise of a Class A Warrant shall be equal to $5,000,000 divided
by the number of Shares of Common Stock on a fully diluted basis (as defined in
Section 7.1 (c) of this Agreement) outstanding on the day preceding the Initial
Closing Date after giving effect to the Offering (as defined in Section 8(b) of
this Agreement). The Class A Warrants shall be exercisable until five (5)
years after each Closing Date.
3. Security Interest. The Subscribers will be granted a security interest
in all the assets of the Company, including ownership of Subsidiaries, if any,
as defined in Section 5(a) of this Agreement, to be memorialized in a "Security
Agreement", a form of which is annexed hereto as Exhibit D. Each Subsidiary
will execute and deliver to the Subscribers a form of Guaranty annexed hereto
as Exhibit E. The Company will execute such other agreements, documents and
financing statements reasonably requested by Subscribers, which will be filed
at the Company's expense with such jurisdictions, states and counties
designated by the Subscribers. The Company will also execute all such
documents reasonably necessary in the opinion of Subscriber to memorialize and
further protect the security interest described herein. The Subscribers will
appoint a Collateral Agent to represent them collectively in connection with
the security interest to be granted to the Subscribers. The appointment will
be pursuant to a "Collateral Agent Agreement", a form of which is annexed
hereto as Exhibit F.
4. Subscriber's Representations and Warranties. Each Subscriber hereby
represents and warrants to and agrees with the Company only as to such
Subscriber that:
(a) Organization and Standing of the Subscribers. If the Subscriber
is an entity, such Subscriber is a corporation, partnership or other entity
duly incorporated or organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization.
(b) Authorization and Power. Each Subscriber has the requisite power
and authority to enter into and perform this Agreement and to purchase the
Notes and Warrants being sold to it hereunder. The execution, delivery and
performance of this Agreement by such Subscriber and the consummation by it of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate or partnership action, and no further consent or
authorization of such Subscriber or its Board of Directors, stockholders,
partners, members, as the case may be, is required. This Agreement has been
duly authorized, executed and delivered by such Subscriber and constitutes, or
shall constitute when executed and delivered, a valid and binding obligation of
the Subscriber enforceable against the Subscriber in accordance with the terms
thereof.
(c) No Conflicts. The execution, delivery and performance of this
Agreement and the consummation by such Subscriber of the transactions
contemplated hereby or relating hereto do not and will not (i) result in a
violation of such Subscriber's charter documents or bylaws or other
organizational documents or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument or obligation to which
such Subscriber is a party or by which its properties or assets are bound, or
result in a violation of any law, rule, or regulation, or any order, judgment
or decree of any court or governmental agency applicable to such Subscriber or
its properties (except for such conflicts, defaults and violations as would
not, individually or in the aggregate, have a material adverse effect on such
Subscriber). Such Subscriber is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under this Agreement or to purchase the Notes or acquire the
Warrants in accordance with the terms hereof, provided that for purposes of the
representation made in this sentence, such Subscriber is assuming and relying
upon the accuracy of the relevant representations and agreements of the Company
herein.
(d) Information on Company. The Subscriber has been furnished with
or has had access at the EDGAR Website of the Commission to the Company's Form
10-KSB for the year ended December 31, 2004 and all periodic reports and Forms
SB-2 (and amendments thereto) as filed with the Commission (hereinafter
referred to as the "Reports"). In addition, the Subscriber has received in
writing from the Company such other information concerning its operations,
financial condition and other matters as the Subscriber has requested in
writing (such other information is collectively, the "Other Written
Information"), and considered all factors the Subscriber deems material in
deciding on the advisability of investing in the Securities.
(e) Information on Subscriber. The Subscriber is, and will be at the
time of the conversion of the Notes and exercise of the Warrants, an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the 1933 Act, is experienced in investments and business
matters, has made investments of a speculative nature and has purchased
securities of United States publicly-owned companies in private placements in
the past and, with its representatives, has such knowledge and experience in
financial, tax and other business matters as to enable the Subscriber to
utilize the information made available by the Company to evaluate the merits
and risks of and to make an informed investment decision with respect to the
proposed purchase, which represents a speculative investment. The Subscriber
has the authority and is duly and legally qualified to purchase and own the
Securities. The Subscriber is able to bear the risk of such investment for an
indefinite period and to afford a complete loss thereof. The information set
forth on the signature page hereto regarding the Subscriber is accurate.
(f) Purchase of Notes and Warrants. On each Closing Date, the
Subscriber will purchase the Notes and Warrants as principal for its own
account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof.
(g) Compliance with Securities Act. The Subscriber understands and
agrees that the Securities have not been registered under the 1933 Act or any
applicable state securities laws, by reason of their issuance in a transaction
that does not require registration under the 1933 Act (based in part on the
accuracy of the representations and warranties of Subscriber contained herein),
and that such Securities must be held indefinitely unless a subsequent
disposition is registered under the 1933 Act or any applicable state securities
laws or is exempt from such registration.
(h) Shares Legend. The Shares and the Warrant Shares shall bear the
following or similar legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW OR
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SOUTH TEXAS OIL COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED."
(i) Warrants Legend. The Warrants shall bear the following
or similar legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR ANY APPLICABLE
STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SOUTH
TEXAS OIL COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(j) Note Legend. The Note shall bear the following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND
THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO SOUTH TEXAS OIL COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED."
(k) Communication of Offer. The offer to sell the Securities was
directly communicated to the Subscriber by the Company. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
(l) Authority; Enforceability. This Agreement and other agreements
delivered together with this Agreement or in connection herewith have been duly
authorized, executed and delivered by the Subscriber and are valid and binding
agreements enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights generally and
to general principles of equity; and Subscriber has full corporate power and
authority necessary to enter into this Agreement and such other agreements and
to perform its obligations hereunder and under all other agreements entered
into by the Subscriber relating hereto.
(m) Restricted Securities. Subscriber understands that the
Securities have not been registered under the 1933 Act and such Subscriber will
not sell, offer to sell, assign, pledge, hypothecate or otherwise transfer any
of the Securities unless pursuant to an effective registration statement under
the 1933 Act. Notwithstanding anything to the contrary contained in this
Agreement, such Subscriber may transfer (without restriction and without the
need for an opinion of counsel) the Securities to its Affiliates (as defined
below) provided that each such Affiliate is an "accredited investor" under
Regulation D and such Affiliate agrees to be bound by the terms and conditions
of this Agreement. For the purposes of this Agreement, an "Affiliate" of any
person or entity means any other person or entity directly or indirectly
controlling, controlled by or under direct or indirect common control with such
person or entity. Affiliate includes each subsidiary of the Company. For
purposes of this definition, "control" means the power to direct the management
and policies of such person or firm, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.
(n) No Governmental Review. Each Subscriber understands that no
United States federal or state agency or any other governmental or state agency
has passed on or made recommendations or endorsement of the Securities or the
suitability of the investment in the Securities nor have such authorities
passed upon or endorsed the merits of the offering of the Securities.
(o) Correctness of Representations. Each Subscriber represents as to
such Subscriber that the foregoing representations and warranties are true and
correct as of the date hereof and, unless a Subscriber otherwise notifies the
Company prior to each Closing Date shall be true and correct as of each Closing
Date.
(p) Survival. The foregoing representations and warranties shall
survive each Closing Date until three years after the latest Closing Date.
5. Company Representations and Warranties. The Company represents and
warrants to and agrees with each Subscriber that except as set forth in the
Reports and as otherwise qualified in the Transaction Documents:
(a) Due Incorporation. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power to own its properties and
to carry on its business is disclosed in the Reports. The Company is duly
qualified as a foreign corporation to do business and is in good standing in
each jurisdiction where the nature of the business conducted or property owned
by it makes such qualification necessary, other than those jurisdictions in
which the failure to so qualify would not have a Material Adverse Effect. For
purpose of this Agreement, a "Material Adverse Effect" shall mean a material
adverse effect on the financial condition, results of operations, properties or
business of the Company taken as a whole. For purposes of this Agreement,
"Subsidiary" means, with respect to any entity at any date, any corporation,
limited or general partnership, limited liability company, trust, estate,
association, joint venture or other business entity) of which more than 50% of
(i) the outstanding capital stock having (in the absence of contingencies)
ordinary voting power to elect a majority of the board of directors or other
managing body of such entity, (ii) in the case of a partnership or limited
liability company, the interest in the capital or profits of such partnership
or limited liability company or (iii) in the case of a trust, estate,
association, joint venture or other entity, the beneficial interest in such
trust, estate, association or other entity business is, at the time of
determination, owned or controlled directly or indirectly through one or more
intermediaries, by such entity. All the Company's Subsidiaries as of the
Closing Date are set forth on Schedule 5(a) hereto.
(b) Outstanding Stock. All issued and outstanding shares of capital
stock of the Company have been duly authorized and validly issued and are fully
paid and nonassessable.
(c) Authority; Enforceability. This Agreement, the Note, the
Warrants, the Escrow Agreement, Security Agreement, Guaranty, and Collateral
Agent Agreement, and any other agreements delivered together with this
Agreement or in connection herewith (collectively "Transaction Documents") have
been duly authorized, executed and delivered by the Company and are valid and
binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights generally and to general principles of equity. The Company has full
corporate power and authority necessary to enter into and deliver the
Transaction Documents and to perform its obligations thereunder.
(d) Additional Issuances. There are no outstanding agreements or
preemptive or similar rights affecting the Company's common stock or equity and
no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of common stock or equity of the
Company or other equity interest in any of the Subsidiaries of the Company
except as described on Schedule 5(d). The Common stock of the Company on a
fully diluted basis outstanding as of the last trading day preceding the
Initial Closing Date is set forth on Schedule 5(d).
(e) Consents. No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over the
Company, or any of its Affiliates, any Principal Market (as defined in Section
9(b) of this Agreement), nor the Company's shareholders is required for the
execution by the Company of the Transaction Documents and compliance and
performance by the Company of its obligations under the Transaction Documents,
including, without limitation, the issuance and sale of the Securities.
(f) No Violation or Conflict. Assuming the representations and
warranties of the Subscribers in Section 4 are true and correct, neither the
issuance and sale of the Securities nor the performance of the Company's
obligations under this Agreement and all other agreements entered into by the
Company relating thereto by the Company will:
(i) violate, conflict with, result in a breach of, or
constitute a default (or an event which with the giving of notice or the lapse
of time or both would be reasonably likely to constitute a default in any
material respect) of a material nature under (A) the articles or certificate of
incorporation, charter or bylaws of the Company, (B) to the Company's
knowledge, any decree, judgment, order, law, treaty, rule, regulation or
determination applicable to the Company of any court, governmental agency or
body, or arbitrator having jurisdiction over the Company or over the properties
or assets of the Company or any of its Affiliates, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any agreement, stock
option or other similar plan, indenture, lease, mortgage, deed of trust or
other instrument to which the Company or any of its Affiliates is a party, by
which the Company or any of its Affiliates is bound, or to which any of the
properties of the Company or any of its Affiliates is subject, or (D) the terms
of any "lock-up" or similar provision of any underwriting or similar agreement
to which the Company, or any of its Affiliates is a party except the violation,
conflict, breach, or default of which would not have a Material Adverse Effect;
or
(ii) result in the creation or imposition of any lien, charge or
encumbrance upon the Securities or any of the assets of the Company or any of
its Affiliates; or
(iii) except as described on Schedule 5(d), result in the
activation of any anti-dilution rights or a reset or repricing of any debt or
security instrument of any other creditor or equity holder of the Company, nor
result in the acceleration of the due date of any obligation of the Company; or
(iv) result in the activation of any piggy-back registration
rights of any person or entity holding securities or debt of the Company or
having the right to receive securities of the Company.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security interests, liens,
claims or other encumbrances, subject to restrictions upon transfer under the
1933 Act and any applicable state securities laws;
(ii) have been, or will be, duly and validly authorized and on the date
of issuance of the Shares and upon exercise of the Warrants, the Shares and
Warrant Shares will be duly and validly issued, fully paid and nonassessable or
if registered pursuant to the 1933 Act, and resold pursuant to an effective
registration statement will be free trading and unrestricted);
(iii) will not have been issued or sold in violation of any preemptive
or other similar rights of the holders of any securities of the Company;
(iv) will not subject the holders thereof to personal liability by
reason of being such holders provided Subscriber's representations herein are
true and accurate and Subscribers take no actions or fail to take any actions
required for their purchase of the Securities to be in compliance with all
applicable laws and regulations; and
(v) will not result in a violation of Section 5 under the 1933 Act.
(h) Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the
Company, or any of its Affiliates that would affect the execution by the
Company or the performance by the Company of its obligations under the
Transaction Documents. Except as disclosed in the Reports, there is no pending
or, to the best knowledge of the Company, basis for or threatened action, suit,
proceeding or investigation before any court, governmental agency or body, or
arbitrator having jurisdiction over the Company, or any of its Affiliates which
litigation if adversely determined would have a Material Adverse Effect.
(i) Reporting Company. The Company is a publicly-held company subject to
reporting obligations pursuant to Section 13 of the Securities Exchange Act of
1934 (the "1934 Act") and has a class of common shares registered pursuant to
Section 12(g) of the 1934 Act. Pursuant to the provisions of the 1934 Act, the
Company has timely filed all reports and other materials required to be filed
thereunder with the Commission during the preceding twelve months.
(j) No Market Manipulation. The Company and its Affiliates have not taken,
and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Securities or affect the price at which the Securities may be issued or
resold, provided, however, that this provision shall not prevent the Company
from engaging in normal investor relations/public relations activities.
(k) Information Concerning Company. The Reports contain all material
information relating to the Company and its operations and financial condition
as of their respective dates and all the information required to be disclosed
therein. Since the date of the most recent audited financial statements
included in the Reports ("Latest Financial Date"), and except as modified in
the Other Written Information or in the Schedules hereto, there has been no
Material Adverse Event relating to the Company's business, financial condition
or affairs not disclosed in the Reports. The Reports do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances when made.
(l) Stop Transfer. The Company will not issue any stop transfer order or
other order impeding the sale, resale or delivery of any of the Securities,
except as may be required by any applicable federal or state securities laws
and unless contemporaneous notice of such instruction is given to the
Subscriber.
(m) Defaults. The Company is not in violation of its articles of
incorporation or bylaws. The Company is (i) not in default under or in
violation of any other material agreement or instrument to which it is a party
or by which it or any of its properties are bound or affected, which default or
violation would have a Material Adverse Effect, (ii) not in default with
respect to any order of any court, arbitrator or governmental body or subject
to or party to any order of any court or governmental authority arising out of
any action, suit or proceeding under any statute or other law respecting
antitrust, monopoly, restraint of trade, unfair competition or similar matters,
or (iii) to the Company's knowledge not in violation of any statute, rule or
regulation of any governmental authority which violation would have a Material
Adverse Effect.
(n) Not an Integrated Offering. Neither the Company, nor any of its
Affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offer of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
the Pink Sheets or any Principal Market which would impair the exemptions
relied upon in this Offering [as defined in Section 8(b)] or the Company's
ability to timely comply with its obligations hereunder. Nor will the Company
or any of its Affiliates take any action or steps that would cause the offer or
issuance of the Securities to be integrated with other offerings which would
impair the exemptions relied upon in this Offering or the Company's ability to
timely comply with its obligations hereunder. The Company will not conduct any
offering other than the transactions contemplated hereby that will be
integrated with the offer or issuance of the Securities, which would impair the
exemptions relied upon in this Offering or the Company's ability to timely
comply with its obligations hereunder.
(o) No General Solicitation. Neither the Company, nor any of its
Affiliates, nor to its knowledge, any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the 1933 Act) in connection with the offer or
sale of the Securities.
(p) Listing. The Company's common stock is quoted on the Pink Sheets. The
Company has not received any oral or written notice that its common stock is
not eligible nor will become ineligible for quotation on the Pink Sheets nor
that its common stock does not meet all requirements for the continuation of
such quotation. The Company satisfies all the requirements for the continued
quotation of its common stock on the Pink Sheets.
(q) No Undisclosed Liabilities. The Company has no liabilities or
obligations which are material, individually or in the aggregate, which are not
disclosed in the Reports and Other Written Information, other than those
incurred in the ordinary course of the Company's businesses since the Latest
Financial Date and which, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect, except as disclosed on Schedule
5(q).
(r) No Undisclosed Events or Circumstances. Since the Latest Financial
Date, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the Reports.
(s) Capitalization. The authorized and outstanding capital stock of the
Company as of the date of this Agreement and the Initial Closing Date (not
including the Securities) are set forth on Schedule 5(d). Except as set forth
on Schedule 5(d), there are no options, warrants, or rights to subscribe to,
securities, rights or obligations convertible into or exchangeable for or
giving any right to subscribe for any shares of capital stock of the Company or
any of its Subsidiaries. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
nonassessable.
(t) Dilution. The Company's executive officers and directors understand
the nature of the Securities being sold hereby and recognize that the issuance
of the Securities will have a potential dilutive effect on the equity holdings
of other holders of the Company's equity or rights to receive equity of the
Company. The board of directors of the Company has concluded, in its good
faith business judgment that the issuance of the Securities is in the best
interests of the Company. The Company specifically acknowledges that its
obligation to issue the Shares upon conversion of the Notes, and the Warrant
Shares upon exercise of the Warrants is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company or parties entitled to receive
equity of the Company.
(u) No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants and lawyers formerly
or presently employed by the Company, including but not limited to disputes or
conflicts over payment owed to such accountants and lawyers.
(v) DTC Status. The Company's transfer agent is a participant in and the
Common Stock is eligible for transfer pursuant to the Depository Trust Company
Automated Securities Transfer Program. The name, address, telephone number, fax
number, contact person and email of the Company transfer agent is set forth on
Schedule 5(v) hereto.
(w) Investment Company. Neither the Company nor any Affiliate is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
(x) Subsidiary Representations. The Company makes each of the
representations contained in Sections 5(a), (b), (d), (e), (f), (h), (k), (m),
(q), (r), (s), (u) and (w) of this Agreement, as same relate to each Subsidiary
of the Company.
(y) Company Predecessor. All representations made by or relating to the
Company of a historical or prospective nature and all undertaking described in
Sections 9(g) through 9(l) shall relate and refer to the Company, its
predecessors, and the Subsidiaries.
(z) Correctness of Representations. The Company represents that the
foregoing representations and warranties are true and correct as of the date
hereof in all material respects, and, unless the Company otherwise notifies the
Subscribers prior to each Closing Date, shall be true and correct in all
material respects as of each Closing Date.
(aa) Survival. The foregoing representations and warranties shall survive
each Closing Date until three years after the latest Closing Date.
6. Regulation D Offering. The offer and issuance of the Securities to the
Subscribers is being made pursuant to the exemption from the registration
provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933
Act and/or Rule 506 of Regulation D promulgated thereunder. On the Closing
Date, the Company will provide an opinion reasonably acceptable to Subscriber
from the Company's legal counsel opining on the availability of an exemption
from registration under the 1933 Act as it relates to the offer and issuance of
the Securities and other matters reasonably requested by Subscribers. A form
of the legal opinion is annexed hereto as Exhibit G. The Company will provide,
at the Company's expense, such other legal opinions in the future as are
reasonably necessary for the issuance and resale of the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants pursuant to an
effective registration statement. Subscriber agrees that any legal opinions
required hereunder or under any other Transaction Documents may be supplied by
the Company's in house General Counsel.
7.1. Conversion of Note.
(a) Upon the conversion of a Note or part thereof, the Company shall,
at its own cost and expense, take all necessary action, including obtaining and
delivering, an opinion of counsel to assure that the Company's transfer agent
shall issue stock certificates in the name of Subscriber (or its nominee) or
such other persons as designated by Subscriber and in such denominations to be
specified at conversion representing the number of shares of Common Stock
issuable upon such conversion. The Company warrants that no instructions other
than these instructions have been or will be given to the transfer agent of the
Company's Common Stock and that, unless waived by the Subscriber, the Shares
will be free-trading, and freely transferable, and will not contain a legend
restricting the resale or transferability of the Shares provided the Shares are
being sold pursuant to an effective registration statement covering the Shares
or are otherwise exempt from registration.
(b) Subscriber will give notice of its decision to exercise its right
to convert the Note, interest, any sum due to the Subscriber under the
Transaction Documents including Liquidated Damages, or part thereof by
telecopying an executed and completed Notice of Conversion (a form of which is
annexed as Exhibit A to the Note) to the Company via confirmed telecopier
transmission or otherwise pursuant to Section 14(a) of this Agreement. The
Subscriber will not be required to surrender the Note until the Note has been
fully converted or satisfied. Each date on which a Notice of Conversion is
telecopied to the Company in accordance with the provisions hereof shall be
deemed a Conversion Date. The Company will itself or cause the Company's
transfer agent to transmit the Company's Common Stock certificates representing
the Shares issuable upon conversion of the Note to the Subscriber via express
courier for receipt by such Subscriber within three (3) business days after
receipt by the Company of the Notice of Conversion (such fifth day being the
"Delivery Date"). In the event the Shares are electronically transferable,
then delivery of the Shares must be made by electronic transfer provided
request for such electronic transfer has been made by the Subscriber and the
Subscriber has complied with all applicable securities laws in connection with
the sale of the Common Stock, including, without limitation, the prospectus
delivery requirements. A Note representing the balance of the Note not so
converted will be provided by the Company to the Subscriber if requested by
Subscriber, provided the Subscriber delivers the original Note to the Company.
In the event that a Subscriber elects not to surrender a Note for reissuance
upon partial payment or conversion, the Subscriber hereby indemnifies the
Company against any and all loss or damage attributable to a third-party claim
in an amount in excess of the actual amount then due under the Note. The
Company will obtain from the Company's transfer agent a signed letter in the
form annexed hereto as Exhibit H, and deliver such letter to the Subscribers on
the Closing Date. "Business day" and "trading day" as employed in the
Transaction Documents is a day that the New York Stock Exchange is open for
trading for three or more hours.
(c) The Company shall issue for each $1,000 of Note principal and
interest for which a Notice of Conversion is given an amount of Common Stock
equal to 0.000195652 of the Common Stock of the Company outstanding on a fully
diluted basis as of the last day preceding the relevant Conversion Date. For
the purposes of the aforedescribed calculation, "fully diluted basis" shall
include all of the Shares of Common Stock issuable upon conversion of the Notes
as if such Notes were fully converted on the Initial Closing Date but shall not
thereafter include shares of Common Stock issued upon actual conversion of the
Notes and exercise of the Warrants; it being the intention of the Company and
Subscribers that the conversion price be based on a "post-money" valuation of
45% of the outstanding Common Stock of the Company at all times on a fully
diluted basis. The Subscriber may rely conclusively on the amount of shares of
Common Stock outstanding on a fully diluted basis determined pursuant to
filings made with the Commission or other public announcements or private
communications made by or in connection with the Company. The Company will
respond in writing and with supporting calculations within two business days
after request by a Subscriber requesting a statement of the number of shares of
Common Stock outstanding on a fully diluted basis as of any particular date.
As employed in the Transaction Documents, except as modified above, "fully
diluted basis" means all of the outstanding Common Stock together with all
Common stock that may be issued upon the conversion or exercise of all
outstanding options, warrants, convertible instruments and similar agreements
as of a determination date including Common Stock added to treasury after the
Initial Closing Date.
(d) The Company understands that a delay in the delivery of the Shares
in the form required pursuant to Section 7.1 hereof, or the Mandatory
Redemption Amount described in Section 7.2 hereof, respectively after the
Delivery Date or the Mandatory Redemption Payment Date (as hereinafter defined)
could result in economic loss to the Subscriber. As compensation to the
Subscriber for such loss, the Company agrees to pay (as liquidated damages and
not as a penalty) to the Subscriber for late issuance of Shares in the form
required pursuant to Section 7.1 hereof upon Conversion of the Note in the
amount of $100 per business day after the Delivery Date for each $10,000 of
Note principal amount being converted of the corresponding Shares which are not
timely delivered. The Company shall pay any payments incurred under this
Section in immediately available funds upon demand. Furthermore, in addition
to any other remedies which may be available to the Subscriber, in the event
that the Company fails for any reason to effect delivery of the Shares by the
Delivery Date or make payment by the Mandatory Redemption Payment Date, the
Subscriber may revoke all or part of the relevant Notice of Conversion or
rescind all or part of the notice of Mandatory Redemption by delivery of a
notice to such effect to the Company whereupon the Company and the Subscriber
shall each be restored to their respective positions immediately prior to the
delivery of such notice, except that the liquidated damages described above
shall be payable through the date notice of revocation or rescission is given
to the Company.
(e) Nothing contained herein or in any document referred to herein or
delivered in connection herewith shall be deemed to establish or require the
payment of a rate of interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Subscriber and thus refunded to the
Company.
7.2. Mandatory Redemption at Subscriber's Election. In the event (i) the
Company is prohibited from issuing Shares, (ii) the Company fails to timely
deliver Shares on a Delivery Date, (iii) upon the occurrence of any other Event
of Default (as defined in the Note or in this Agreement), (iv) of the
liquidation, dissolution or winding up of the Company, or (v) a Change of
Control (as defined below) that continues for more than ten days, then at the
Subscriber's election, the Company must pay to the Subscriber ten (10) business
days after request by the Subscriber, at the Subscriber's election, a sum of
money determined by (y) multiplying up to the outstanding principal amount of
the Note designated by the Subscriber by 120%, or (z) multiplying the number of
Shares otherwise deliverable upon conversion of an amount of Note principal
and/or interest designated by the Subscriber (with the date of giving of such
designation being a "Deemed Conversion Date") at the Conversion Price that
would be in effect on the Deemed Conversion Date by the highest closing price
of the Common Stock on the Principal Market for the period commencing on the
Deemed Conversion Date until the day prior to the receipt by the Subscriber of
the Mandatory Redemption Payment, whichever is greater, together with accrued
but unpaid interest thereon ("Mandatory Redemption Payment"). The Mandatory
Redemption Payment must be received by the Subscriber on the same date as the
Company Shares otherwise deliverable or within ten (10) business days after
request, whichever is sooner ("Mandatory Redemption Payment Date"). Upon
receipt of the Mandatory Redemption Payment, the corresponding Note principal
and interest will be deemed paid and no longer outstanding. Liquidated damages
calculated pursuant to Section 7.1(c) hereof, that have been paid or accrued
for the twenty day period prior to the actual receipt of the Mandatory
Redemption Payment by the Subscriber shall be credited against the Mandatory
Redemption Payment. For purposes of this Section 7.2, "Change in Control"
shall mean (i) the Company no longer having a class of shares publicly traded
or listed on a Principal Market, (ii) the Company becoming a Subsidiary of
another entity, (iii) a majority of the board of directors of the Company as of
the Closing Date no longer serving as directors of the Company except due to
natural causes, (iv) if the holders of the Company's Common Stock as of the
Closing Date beneficially own at any time after the Closing Date less than
forty percent of the Common stock owned by them on the Closing Date, and (v)
the sale, lease or transfer of substantially all the assets of the Company or
Subsidiaries.
7.3. Maximum Conversion. The Subscriber shall not be entitled to convert on
a Conversion Date that amount of the Note in connection with that number of
shares of Common Stock which would be in excess of the sum of (i) the number of
shares of common stock beneficially owned by the Subscriber and its Affiliates
on a Conversion Date, and (ii) the number of shares of Common Stock issuable
upon the conversion of the Note with respect to which the determination of this
provision is being made on a Conversion Date, which would result in beneficial
ownership by the Subscriber and its Affiliates of more than 4.99% of the
outstanding shares of common stock of the Company on such Conversion Date. For
the purposes of the provision to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
Subject to the foregoing, the Subscriber shall not be limited to aggregate
conversions of only 4.99% and aggregate conversions by the Subscriber may
exceed 4.99%. The Subscriber may waive the conversion limitation described in
this Section 7.3, in whole or in part, upon and effective after 61 days prior
written notice to the Company. The Subscriber may decide whether to convert a
Note or exercise Warrants to achieve an actual 4.99% ownership position.
7.4. Injunction Posting of Bond. In the event a Subscriber shall elect to
convert a Note or part thereof or exercise the Warrant in whole or in part, the
Company may not refuse conversion or exercise based on any claim that such
Subscriber or any one associated or affiliated with such Subscriber has been
engaged in any violation of law, or for any other reason, unless, an injunction
from a court, on notice, restraining and or enjoining conversion of all or part
of such Note or exercise of all or part of such Warrant shall have been sought
and obtained by the Company and the Company has posted a surety bond for the
benefit of such Subscriber in the amount of 120% of the outstanding principal
and interest of the Note, or aggregate purchase price of the Warrant Shares
which are sought to be subject to the injunction, which bond shall remain in
effect until the completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Subscriber to the extent Subscriber
obtains judgment. Notwithstanding the foregoing, if the Company receives an
order restraining it from converting from a court or administration agency of
competent jurisdiction, it shall comply without a bond requirement.
7.5. Buy-In. In addition to any other rights available to the Subscriber, if
the Company fails to deliver to the Subscriber such shares issuable upon
conversion of a Note by the Delivery Date and if after seven (7) business days
after the Delivery Date the Subscriber purchases (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by
such Subscriber of the Common Stock which the Subscriber was entitled to
receive upon such conversion (a "Buy-In"), then the Company shall pay in cash
to the Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the
Note for which such conversion was not timely honored, together with interest
thereon at a rate of 15% per annum, accruing until such amount and any accrued
interest thereon is paid in full (which amount shall be paid as liquidated
damages and not as a penalty). For example, if the Subscriber purchases shares
of Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of $10,000 of note principal and/or
interest, the Company shall be required to pay the Subscriber $1,000, plus
interest. The Subscriber shall provide the Company written notice indicating
the amounts payable to the Subscriber in respect of the Buy-In.
7.6 Adjustments. The Conversion Price, Warrant exercise price and amount
of Shares issuable upon conversion of the Notes and exercise of the Warrants
shall be adjusted as described in this Agreement, the Notes and Warrants.
7.7. Redemption. The Note and Warrants shall not be redeemable or callable
except as described in the Note and Warrants.
8. Finder's Fee/Legal Fees.
(a) Finder's Fee. The Company agrees to indemnify, reimburse, make
whole and hold harmless the Subscribers and their agents and representatives
from any and all liabilities to any persons claiming commissions, finder's fees
or similar payments on account of services purported to have been rendered in
connection with this Agreement, the transactions contemplated hereby, or in
connection with any investment in the Company, whether or not such investment
was consummated. The Company agrees that the Subscribers have no liability to
the Company or any other party, directly or indirectly for any finder's fees,
commissions, or similar payments. The Company represents that there are no
parties entitled to receive finder's fees, commissions, or similar payments
from the Company in connection with the transactions described in this
Agreement.
(b) Legal Fees. The Company shall pay to Grushko & Mittman, P.C., a
cash fee of $20,000 ("Legal Fees") as reimbursement for services rendered to
the Subscribers in connection with this Agreement and the purchase and sale of
the Notes and Warrants (the "Offering"). The Legal Fees will be delivered at
the Initial Closing. The Legal Fees and reimbursement for estimated UCC
searches and filing fees (less any amounts paid prior to a Closing Date) will
be payable on the Initial Closing Date out of funds held pursuant to the Escrow
Agreement.
(c) Reimbursement. The Subscriber identified on Schedule 8 hereto as
"Lead Investor" or its nominee will be paid $25,000 out of funds held pursuant
to the Escrow Agreement on a non-accountable basis on the Initial Closing Date
as reimbursement for due diligence expenses ("Reimbursement").
9. Covenants of the Company. The Company covenants and agrees with the
Subscribers as follows:
(a) Stop Orders. The Company will advise the Subscribers, within two
hours after the Company receives notice of issuance by the Commission, any
state securities commission or any other regulatory authority of any stop order
or of any order preventing or suspending any offering of any securities of the
Company, or of the suspension of the qualification of the Common Stock of the
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) Listing. The Company shall promptly secure the listing of the
shares of Common Stock and the Warrant Shares upon each national securities
exchange, or electronic or automated quotation system upon which they are or
become eligible for listing and shall maintain such listing so long as any
Notes or Warrants are outstanding. The Company will maintain the listing of
its Common Stock on the American Stock Exchange, Nasdaq SmallCap Market, Nasdaq
National Market System, OTC Bulletin Board, Pink Sheets or New York Stock
Exchange (whichever of the foregoing is at the time the principal trading
exchange or market for the Common Stock (the "Principal Market")), and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market, as applicable.
The Company will provide the Subscribers copies of all notices it receives
notifying the Company of the threatened and actual delisting of the Common
Stock from any Principal Market. As of the date of this Agreement, the Pink
Sheet is the Principal Market.
(c) Market Regulations. The Company shall notify the Commission, the
Principal Market and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall
take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Securities to the Subscribers and promptly provide copies
thereof to Subscriber.
(d) Filing Requirements. From the date of this Agreement and until
the sooner of (i) two (2) years after the Second Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will (A) cause its Common
Stock to continue to be registered under Section 12(b) or 12(g) of the 1934
Act, (B) comply in all respects with its reporting and filing obligations under
the 1934 Act, (C) comply with all reporting requirements that are applicable to
an issuer with a class of shares registered pursuant to Section 12(b) or 12(g)
of the 1934 Act, as applicable, and (D) comply with all requirements related to
any registration statement filed pursuant to this Agreement. The Company will
use its best efforts not to take any action or file any document (whether or
not permitted by the 1933 Act or the 1934 Act or the rules thereunder) to
terminate or suspend such registration or to terminate or suspend its reporting
and filing obligations under said acts until two (2) years after the Second
Closing Date. Until the earlier of the resale of the Common Stock and the
Warrant Shares by each Subscriber or two (2) years after the Warrants have been
exercised, the Company will use its best efforts to continue the listing or
quotation of the Common Stock on a Principal Market and will comply in all
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of the Principal Market. The Company agrees to timely file a
Form D with respect to the Securities if required under Regulation D and to
provide a copy thereof to each Subscriber promptly after such filing.
(e) Use of Proceeds. The proceeds of the Offering will be employed by
the Company for the purposes set forth on Schedule 9(e) hereto. Except as set
forth on Schedule 9(e), the Purchase Price may not and will not be used for
accrued and unpaid officer and director salaries, payment of financing related
debt, redemption of outstanding notes or equity instruments of the Company,
litigation related expenses or settlements, brokerage fees, nor non-trade
obligations outstanding on a Closing Date. For so long as any Notes are
outstanding, the Company will not prepay any financing related debt obligations
nor redeem any equity instruments of the Company.
(f) Reservation. Prior to the Closing Date, the Company undertakes
to reserve, pro rata, on behalf of the Subscribers from its authorized but
unissued common stock, a number of common shares equal to 175% of the amount of
Common Stock necessary to allow each Subscriber to be able to convert all Notes
issuable pursuant to this Agreement and interest thereon and reserve 100% of
the amount of Warrant Shares issuable upon exercise of the Warrants. Failure
to have sufficient shares reserved pursuant to this Section 9(f) for five (5)
consecutive business days or fifteen (15) days in the aggregate shall be a
material default of the Company's obligations under this Agreement and an Event
of Default under the Note.
(g) Taxes. From the date of this Agreement and until the sooner of
(i) two (2) years after the Second Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitations, the Company will promptly pay and discharge, or cause to
be paid and discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, property or
business of the Company; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall
have set aside on its books adequate reserves with respect thereto, and
provided, further, that the Company will pay all such taxes, assessments,
charges or levies forthwith upon the commencement of proceedings to foreclose
any lien which may have attached as security therefore.
(h) Insurance. From the date of this Agreement and until the sooner
of (i) two (2) years after the Second Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep its assets which
are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks customarily
insured against by companies in the Company's line of business, in amounts
sufficient to prevent the Company from becoming a co-insurer and not in any
event less than one hundred percent (100%) of the insurable value of the
property insured; and the Company will maintain, with financially sound and
reputable insurers, insurance against other hazards and risks and liability to
persons and property to the extent and in the manner customary for companies in
similar businesses similarly situated and to the extent available on
commercially reasonable terms.
(i) Books and Records. From the date of this Agreement and until the
sooner of (i) two (2) years after the Second Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep true records and
books of account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and affairs in accordance
with generally accepted accounting principles applied on a consistent basis.
(j) Governmental Authorities. From the date of this Agreement and
until the sooner of (i) two (2) years after the Second Closing Date, or (ii)
until all the Shares and Warrant Shares have been resold or transferred by all
the Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall duly observe and
conform in all material respects to all valid requirements of governmental
authorities relating to the conduct of its business or to its properties or
assets.
(k) Intellectual Property. From the date of this Agreement and until
the sooner of (i) two (2) years after the Second Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall maintain in full force
and effect its corporate existence, rights and franchises and all licenses and
other rights to use intellectual property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business, unless it is
sold for value.
(l) Properties. From the date of this Agreement and until the sooner
of (i) two (2) years after the Second Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement (as defined in Section
11.1(iv) hereof) or pursuant to Rule 144, without regard to volume limitations,
the Company will keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
necessary and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have a
Material Adverse Effect.
(m) Confidentiality/Public Announcement. From the date of this
Agreement and until the sooner of (i) two (2) years after the Second Closing
Date, or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company agrees
that except in connection with a Form 8-K or the Registration Statement or as
otherwise required in any other Commission filing, it will not disclose
publicly or privately the identity of the Subscribers unless expressly agreed
to in writing by a Subscriber, only to the extent required by law and then only
upon five days prior notice to Subscriber. In any event and subject to the
foregoing, the Company shall file a Form 8-K or make a public announcement
describing the Offering not later than the first business day after each
Closing Date. In the Form 8-K or public announcement, the Company will
specifically disclose the amount of common stock outstanding immediately after
the Closing. A form of the proposed Form 8-K or public announcement to be
employed in connection with the Closing is annexed hereto as Exhibit I.
(n) Further Registration Statements. Except for a registration
statement filed on behalf of the Subscribers pursuant to Section 11 of this
Agreement and as set forth on Schedule 11.1 hereto, the Company will not file
any registration statements or amend any already filed registration statement,
including but not limited to Forms S-8, with the Commission or with state
regulatory authorities without the consent of the Subscriber until the sooner
of (i) the Registration Statement shall have been current and available for use
in connection with the resale of the Registrable Securities (as defined in
Section 11.1(i) for a period of 365 days, or (ii) until all the Shares and
Warrant Shares have been resold or transferred by the Subscribers pursuant to
the Registration Statement or Rule 144, without regard to volume limitations
("Exclusion Period"). The Exclusion Period will be tolled during the pendency
of an Event of Default as defined in the Note.
(o) Blackout. The Company undertakes and covenants that until the
end of the Exclusion Period, the Company will not enter into any acquisition,
merger, exchange or sale or other transaction that could have the effect of
delaying the effectiveness of any pending registration statement or causing an
already effective registration statement to no longer be effective or current
for a period ten (10) or more consecutive days nor more than fifteen (15) days
during any consecutive three hundred and sixty-five (365) day period.
(p) Non-Public Information. The Company covenants and agrees that
neither it nor any other person acting on its behalf will provide any
Subscriber or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto such
Subscriber shall have agreed in writing to receive such information. The
Company understands and confirms that each Subscriber shall be relying on the
foregoing representations in effecting transactions in securities of the
Company.
(q) Limited Standstill. The Company will deliver to the Subscribers
on or before the Closing Date and enforce the provisions of irrevocable
standstill agreements ("Limited Standstill Agreements") in the form annexed
hereto as Exhibit J, with the parties identified on Schedule 9(q) hereto.
(r) Board Observer. The Company agrees until such time as 90% of the
initial principal amount outstanding on the Notes shall have been fully paid or
converted that the Lead Investor identified on Schedule 8 hereto shall have the
right, but not the obligation, from time to time to designate in writing a
nominee to designate an observer, who shall be entitled to attend and
participate (but not vote) in all meetings of the Board of Directors of the
Company and to receive all notices, reports, information, correspondence and
communications sent by the Company to members of the Board of Directors. All
reasonable costs and expenses incurred in connection therewith by any such
designated observer or by the Lead Investor on behalf of such observer shall be
reimbursed by the Company to the extent that the Company reimburses such
expenses incurred by any directors of the Company. It is provided and agreed
that the actions and advice of any person while serving pursuant to this
section as an observer at meetings of the Board of Directors shall be construed
to be the actions and advice of that person alone and not be construed as
actions of any Subscriber as to any notice, requirements or rights of any
Subscriber under the Transaction Documents, nor as action of any Subscriber to
approve modifications, consents, amendments or waivers thereof; and all such
actions or notices shall be deemed actions or notices to the Subscribers only
when duly provided in writing and given in accordance with the provisions of
the Transaction Documents. The relationship between the Company and the
Subscribers is, and shall at all times remain, solely that of the Company with
a purchaser of its securities. The Subscribers neither undertake nor assume
any responsibility or duty to the Company to review, inspect, supervise, pass
judgment upon, or inform the Company of any matter in connection with any phase
of the Company's business, operations, or condition, financial or otherwise.
The Company shall rely entirely upon its own judgment with respect to such
matters, and any review, inspection, supervision, exercise of judgment, or
information supplied to the Company by the Subscribers, or any representative
or agent of the Subscribers, in connection with any such matter is for the
protection of the Subscribers, and neither the Company nor any third party is
entitled to rely thereon. It shall be deemed a default of a material
obligation under the Notes if Company does not comply with the requirements of
this section.
10. Covenants of the Company and Subscriber Regarding Indemnification.
(a) The Company agrees to indemnify, hold harmless, reimburse and
defend the Subscribers, the Subscribers' officers, directors, agents,
Affiliates, control persons, and principal shareholders, against any claim,
cost, expense, liability, obligation, loss or damage (including reasonable
legal fees) of any nature, incurred by or imposed upon the Subscriber or any
such person which results, arises out of or is based upon (i) any material
misrepresentation by Company or material breach of any warranty by Company in
this Agreement or in any Exhibits or Schedules attached hereto, or other
agreement delivered pursuant hereto; or (ii) after any applicable notice and/or
cure periods, any material breach or default in performance by the Company of
any covenant or undertaking to be performed by the Company hereunder, or any
other agreement entered into by the Company and Subscriber relating hereto.
(b) Each Subscriber agrees to indemnify, hold harmless, reimburse and
defend the Company and each of the Company's officers, directors, agents,
Affiliates, control persons against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company or any such person which results,
arises out of or is based upon (i) any material misrepresentation by such
Subscriber in this Agreement or in any Exhibits or Schedules attached hereto,
or other agreement delivered pursuant hereto; or (ii) after any applicable
notice and/or cure periods, any material breach or default in performance by
such Subscriber of any covenant or undertaking to be performed by such
Subscriber hereunder, or any other agreement entered into by the Company and
Subscribers, relating hereto.
(c) In no event shall the liability of any Subscriber or permitted
successor hereunder or under any Transaction Document or other agreement
delivered in connection herewith be greater in amount than the dollar amount of
the net proceeds actually received by such Subscriber upon the sale of
Registrable Securities (as defined herein).
(d) The procedures set forth in Section 11.6 shall apply to the
indemnification set forth in Sections 10(a) and 10(b) above.
11.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
(i) On one occasion, for a period commencing one hundred and twenty-
one (121) days after the Initial Closing Date, but not later than two (2) years
after the Second Closing Date, upon a written request therefor from any record
holder or holders of more than 50% of the Shares issued and issuable upon
conversion of the outstanding Notes and outstanding Warrant Shares, the Company
shall prepare and file with the Commission a registration statement under the
1933 Act registering the Registrable Securities, as defined in Section 11.1(iv)
hereof, which are the subject of such request for unrestricted public resale by
the holder thereof. For purposes of Sections 11.1(i) and 11.1(ii), Registrable
Securities shall not include Securities which are (A) registered for resale in
an effective registration statement, (B) included for registration in a pending
registration statement, or (C) which have been issued without further transfer
restrictions after a sale or transfer pursuant to Rule 144 under the 1933 Act.
Upon the receipt of such request, the Company shall promptly give written
notice to all other record holders of the Registrable Securities that such
registration statement is to be filed and shall include in such registration
statement Registrable Securities for which it has received written requests
within ten (10) days after the Company gives such written notice. Such other
requesting record holders shall be deemed to have exercised their demand
registration right under this Section 11.1(i).
(ii) If the Company at any time proposes to register any of its
securities under the 1933 Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms S 4, S 8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscribers or Holder pursuant to an effective registration statement, each
such time it will give at least fifteen (15) days' prior written notice to the
record holder of the Registrable Securities of its intention so to do. Upon the
written request of the holder, received by the Company within ten (10) days
after the giving of any such notice by the Company, to register any of the
Registrable Securities not previously registered, the Company will cause such
Registrable Securities as to which registration shall have been so requested to
be included with the securities to be covered by the registration statement
proposed to be filed by the Company, all to the extent required to permit the
sale or other disposition of the Registrable Securities so registered by the
holder of such Registrable Securities (the "Seller" or "Sellers"). In the event
that any registration pursuant to this Section 11.1(ii) shall be, in whole or
in part, an underwritten public offering of common stock of the Company, the
number of shares of Registrable Securities to be included in such an
underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be
sold by the Company therein; provided, however, that the Company shall notify
the Seller in writing of any such reduction. Notwithstanding the foregoing
provisions, or Section 11.4 hereof, the Company may withdraw or delay or suffer
a delay of any registration statement referred to in this Section 11.1(ii)
without thereby incurring any liability to the Seller.
(iii) If, at the time any written request for registration is received
by the Company pursuant to Section 11.1(i), the Company has determined to
proceed with the actual preparation and filing of a registration statement
under the 1933 Act in connection with the proposed offer and sale for cash of
any of its securities for the Company's own account and the Company actually
does file such other registration statement, such written request shall be
deemed to have been given pursuant to Section 11.1(ii) rather than Section
11.1(i), and the rights of the holders of Registrable Securities covered by
such written request shall be governed by Section 11.1(ii).
(iv) The Company shall file with the Commission a Form SB-2
registration statement (the "Registration Statement") (or such other form that
it is eligible to use) in order to register the Registrable Securities for
resale and distribution under the 1933 Act within thirty (30) calendar days
after the Initial Closing Date (the "Filing Date"), and cause to be declared
effective not later than one hundred and twenty (120) calendar days after the
Filing Date (the "Effective Date"). The Company will register not less than a
number of shares of common stock in the aforedescribed registration statement
that is equal to 175% of the Shares issuable upon conversion of all of the
Notes issuable to the Subscribers, 100% of the Warrant Shares issuable pursuant
to this Agreement upon exercise of the Class A Warrants (collectively the
"Registrable Securities"). The Registrable Securities shall be reserved and set
aside exclusively for the benefit of each Subscriber and Warrant holder, pro
rata, and not issued, employed or reserved for anyone other than each such
Subscriber and Warrant holder. The Registration Statement will immediately be
amended or additional registration statements will be immediately filed by the
Company as necessary to register additional shares of Common Stock to allow the
public resale of all Common Stock included in and issuable by virtue of the
Registrable Securities. Except with the written consent of the Subscriber, or
as described on Schedule 11.1 hereto, no securities of the Company other than
the Registrable Securities will be included in the Registration Statement. It
shall be deemed a Non-Registration Event if at any time after the date the
Registration Statement is declared effective by the Commission ("Actual
Effective Date") the Company has registered for unrestricted resale on behalf
of the Sellers fewer than 125% of the amount of Common Shares issuable upon
full conversion of all sums due under the Notes and 100% of the Warrant Shares
issuable upon exercise of the Warrants.
11.2. Registration Procedures. If and whenever the Company is required by the
provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the registration of
any Registrable Securities under the 1933 Act, the Company will, as
expeditiously as possible:
(a) subject to the timelines provided in this Agreement, prepare and
file with the Commission a registration statement required by Section 11, with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for the period of the distribution
contemplated thereby (determined as herein provided), promptly provide to the
holders of the Registrable Securities copies of all filings and Commission
letters of comment and notify Subscribers (by telecopier and by e-mail
addresses provided by Subscribers) and Grushko & Mittman, P.C. (by telecopier
and by email to Counslers@aol.com) on or before 6:00 PM EST on the first
business day that the Company receives notice that (i) the Commission has no
comments or no further comments on the Registration Statement, and (ii) the
registration statement has been declared effective (failure to timely provide
notice as required by this Section 11.2(a) shall be a material breach of the
Company's obligation and an Event of Default as defined in the Notes and a Non-
Registration Event as defined in Section 10.4 of this Agreement);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective until such registration statement has been effective for a period of
two (2) years, and comply with the provisions of the 1933 Act with respect to
the disposition of all of the Registrable Securities covered by such
registration statement in accordance with the Sellers' intended method of
disposition set forth in such registration statement for such period;
(c) furnish to the Sellers, at the Company's expense, such number of
copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as such persons reasonably may request
in order to facilitate the public sale or their disposition of the securities
covered by such registration statement or make them electronically available;
(d) use its commercially reasonable best efforts to register or
qualify the Registrable Securities covered by such registration statement under
the securities or "blue sky" laws of New York and such jurisdictions as the
Sellers shall request in writing, provided, however, that the Company shall not
for any such purpose be required to qualify generally to transact business as a
foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process in any such jurisdiction;
(e) if applicable, list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock
of the Company is then listed;
(f) notify the Subscribers within two hours of the Company's becoming
aware that a prospectus relating thereto is required to be delivered under the
1933 Act, of the happening of any event of which the Company has knowledge as a
result of which the prospectus contained in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing
or which becomes subject to a Commission, state or other governmental order
suspending the effectiveness of the registration statement covering any of the
Shares; and
(g) provided same would not be in violation of the provision of
Regulation FD under the 1934 Act, make available for inspection by the Sellers,
and any attorney, accountant or other agent retained by the Seller or
underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
attorney, accountant or agent in connection with such registration statement.
11.3. Provision of Documents. In connection with each registration described
in this Section 11, each Seller will furnish to the Company in writing such
information and representation letters with respect to itself and the proposed
distribution by it as reasonably shall be necessary in order to assure
compliance with federal and applicable state securities laws.
11.4. Non-Registration Events. The Company and the Subscribers agree that the
Sellers will suffer damages if the Registration Statement is not filed by the
Filing Date and not declared effective by the Commission by the Effective Date,
and any registration statement required under Section 11.1(i) or 11.1(ii) is
not filed within 60 days after written request and declared effective by the
Commission within 120 days after such request, and maintained in the manner and
within the time periods contemplated by Section 11 hereof, and it would not be
feasible to ascertain the extent of such damages with precision. Accordingly,
if (A) the Registration Statement is not filed on or before the Filing Date,
(B) is not declared effective on or before the Effective Date, (C) due to the
action or inaction of the Company the Registration Statement is not declared
effective within three (3) business days after receipt by the Company or its
attorneys of a written or oral communication from the Commission that the
Registration Statement will not be reviewed or that the Commission has no
further comments, (D) if the registration statement described in Sections
11.1(i) or 11.1(ii) is not filed within 60 days after such written request, or
is not declared effective within 120 days after such written request, or (E)
any registration statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv)
is filed and declared effective but shall thereafter cease to be effective
without being succeeded within fifteen (15) business days by an effective
replacement or amended registration statement or for a period of time which
shall exceed 30 days in the aggregate per year (defined as a period of 365 days
commencing on the Actual Effective Date (each such event referred to in clauses
A through E of this Section 11.4 is referred to herein as a "Non-Registration
Event"), then the Company shall deliver to the holder of Registrable
Securities, as Liquidated Damages, an amount equal to two percent (2%) for each
thirty (30) days or part thereof of the Purchase Price of the Notes remaining
unconverted and purchase price of Shares issued upon conversion of the Notes
owned of record by such holder which are subject to such Non-Registration
Event. The Company must pay the Liquidated Damages in cash or at the
Subscriber's election with shares of Common stock valued at one-half of the
Conversion Price in effect on the first trading day of each thirty day or
shorter period for which liquidated damages are payable. The Liquidated
Damages must be paid within ten (10) days after the end of each thirty (30) day
period or shorter part thereof for which Liquidated Damages are payable. In
the event a Registration Statement is filed by the Filing Date but is withdrawn
prior to being declared effective by the Commission, then such Registration
Statement will be deemed to have not been filed. All oral or written comments
received from the Commission relating to the Registration Statement must be
satisfactorily responded to within ten (10) business days after receipt of
comments from the Commission. Failure to timely respond to Commission comments
is a Non-Registration Event for which Liquidated Damages shall accrue and be
payable by the Company to the holders of Registrable Securities at the same
rate set forth above. Notwithstanding the foregoing, the Company shall not be
liable to the Subscriber under this Section 11.4 for any events or delays
occurring as a consequence of the acts or omissions of the Subscribers contrary
to the obligations undertaken by Subscribers in this Agreement. Liquidated
Damages will not accrue nor be payable pursuant to this Section 11.4 nor will a
Non-Registration Event be deemed to have occurred for times during which
Registrable Securities are transferable by the holder of Registrable Securities
pursuant to Rule 144(k) under the 1933 Act.
11.5. Expenses. All expenses incurred by the Company in complying with
Section 11, including, without limitation, all registration and filing fees,
printing expenses (if required), fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., transfer taxes, and fees of transfer agents and registrars, are
called "Registration Expenses." All underwriting discounts and selling
commissions applicable to the sale of Registrable Securities are called
"Selling Expenses." The Company will pay all Registration Expenses in
connection with the registration statement under Section 11. Selling Expenses
in connection with each registration statement under Section 11 shall be borne
by the Seller and may be apportioned among the Sellers in proportion to the
number of shares sold by the Seller relative to the number of shares sold under
such registration statement or as all Sellers thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable Securities under
the 1933 Act pursuant to Section 11, the Company will, to the extent permitted
by law, indemnify and hold harmless the Seller, each officer of the Seller,
each director of the Seller, each underwriter of such Registrable Securities
thereunder and each other person, if any, who controls such Seller or
underwriter within the meaning of the 1933 Act, against any losses, claims,
damages or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such Registrable Securities was registered under the 1933
Act pursuant to Section 11, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances when made, and will subject to the
provisions of Section 11.6(c) reimburse the Seller, each such underwriter and
each such controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable to the Seller to the extent that any such damages arise out of or
are based upon an untrue statement or omission made in any preliminary
prospectus if (i) the Seller failed to send or deliver a copy of the final
prospectus delivered by the Company to the Seller with or prior to the delivery
of written confirmation of the sale by the Seller to the person asserting the
claim from which such damages arise, (ii) the final prospectus would have
corrected such untrue statement or alleged untrue statement or such omission or
alleged omission, or (iii) to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with
information furnished by any such Seller, or any such controlling person in
writing specifically for use in such registration statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the 1933 Act pursuant to Section 11, each Seller severally but
not jointly will, to the extent permitted by law, indemnify and hold harmless
the Company, and each person, if any, who controls the Company within the
meaning of the 1933 Act, each officer of the Company who signs the registration
statement, each director of the Company, each underwriter and each person who
controls any underwriter within the meaning of the 1933 Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such officer, director, underwriter or controlling person may become subject
under the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the 1933 Act pursuant to Section 11, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and each such officer, director, underwriter and controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that the Seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with
information pertaining to such Seller, as such, furnished in writing to the
Company by such Seller specifically for use in such registration statement or
prospectus, and provided, further, however, that the liability of the Seller
hereunder shall be limited to the net proceeds actually received by the Seller
from the sale of Registrable Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 11.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 11.6(c), except and only if and to the extent the indemnifying
party is prejudiced by such omission. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in and, to the extent it shall wish, to assume and undertake the defense
thereof with counsel satisfactory to such indemnified party, and, after notice
from the indemnifying party to such indemnified party of its election so to
assume and undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 11.6(c) for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison
with counsel so selected, provided, however, that, if the defendants in any
such action include both the indemnified party and the indemnifying party and
the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party or if the interests of the
indemnified party reasonably may be deemed to conflict with the interests of
the indemnifying party, the indemnified parties, as a group, shall have the
right to select one separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the reasonable
expenses and fees of such separate counsel and other expenses related to such
participation to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in the
event of joint liability under the 1933 Act in any case in which either (i) a
Seller, or any controlling person of a Seller, makes a claim for
indemnification pursuant to this Section 11.6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 11.6 provides for indemnification in
such case, or (ii) contribution under the 1933 Act may be required on the part
of the Seller or controlling person of the Seller in circumstances for which
indemnification is not provided under this Section 11.6; then, and in each such
case, the Company and the Seller will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Seller is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (y) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities sold by it pursuant to such registration statement; and (z) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) will be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation.
11.7. Delivery of Unlegended Shares.
(a) Within three (3) business days (such third business day being the
"Unlegended Shares Delivery Date") after the business day on which the Company
has received (i) a notice that Shares or Warrant Shares or any other Common
Stock held by a Subscriber have been sold pursuant to the Registration
Statement or Rule 144 under the 1933 Act, (ii) a representation that the
prospectus delivery requirements, or the requirements of Rule 144, as
applicable and if required, have been satisfied, and (iii) the original share
certificates representing the shares of Common Stock that have been sold, and
(iv) in the case of sales under Rule 144, customary representation letters of
the Subscriber and/or Subscriber's broker regarding compliance with the
requirements of Rule 144, the Company at its expense, (y) shall deliver, and
shall cause legal counsel selected by the Company to deliver to its transfer
agent (with copies to Subscriber) an appropriate instruction and opinion of
such counsel, directing the delivery of shares of Common Stock without any
legends including the legend set forth in Section 4(h) above, reissuable
pursuant to any effective and current Registration Statement described in
Section 11 of this Agreement or pursuant to Rule 144 under the 1933 Act (the
"Unlegended Shares"); and (z) cause the transmission of the certificates
representing the Unlegended Shares together with a legended certificate
representing the balance of the submitted Shares certificate, if any, to the
Subscriber at the address specified in the notice of sale, via express courier,
by electronic transfer or otherwise on or before the Unlegended Shares Delivery
Date. Transfer fees shall be the responsibility of the Seller.
(b) In lieu of delivering physical certificates representing the
Unlegended Shares, if the Company's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program,
upon request of a Subscriber, so long as the certificates therefor do not bear
a legend and the Subscriber is not obligated to return such certificate for the
placement of a legend thereon, the Company shall cause its transfer agent to
electronically transmit the Unlegended Shares by crediting the account of
Subscriber's prime Broker with DTC through its Deposit Withdrawal Agent
Commission system. Such delivery must be made on or before the Unlegended
Shares Delivery Date.
(c) The Company understands that a delay in the delivery of the
Unlegended Shares pursuant to Section 11 hereof later than two business days
after the Unlegended Shares Delivery Date could result in economic loss to a
Subscriber. As compensation to a Subscriber for such loss, the Company agrees
to pay late payment fees (as liquidated damages and not as a penalty) to the
Subscriber for late delivery of Unlegended Shares in the amount of $100 per
business day after the Delivery Date for each $10,000 of purchase price of the
Unlegended Shares subject to the delivery default. If during any 360 day
period, the Company fails to deliver Unlegended Shares as required by this
Section 11.7 for an aggregate of thirty (30) days, then each Subscriber or
assignee holding Securities subject to such default may, at its option, require
the Company to redeem all or any portion of the Shares and Warrant Shares
subject to such default at a price per share equal to 130% of the Purchase
Price of such Common Stock and Warrant Shares ("Unlegended Redemption Amount").
The amount of the aforedescribed liquidated damages that have accrued or been
paid for the twenty day period prior to the receipt by the Subscriber of the
Unlegended Redemption Amount shall be credited against the Unlegended
Redemption Amount. The Company shall pay any payments incurred under this
Section in immediately available funds upon demand.
(d) In addition to any other rights available to a Subscriber, if the
Company fails to deliver to a Subscriber Unlegended Shares as required pursuant
to this Agreement, within seven (7) business days after the Unlegended Shares
Delivery Date and the Subscriber purchases (in an open market transaction or
otherwise) shares of common stock to deliver in satisfaction of a sale by such
Subscriber of the shares of Common Stock which the Subscriber was entitled to
receive from the Company (a "Buy-In"), then the Company shall pay in cash to
the Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of common stock so
purchased exceeds (B) the aggregate purchase price of the shares of Common
Stock delivered to the Company for reissuance as Unlegended Shares together
with interest thereon at a rate of 15% per annum, accruing until such amount
and any accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if a Subscriber
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to $10,000 of purchase price of shares of Common
Stock delivered to the Company for reissuance as Unlegended Shares, the Company
shall be required to pay the Subscriber $1,000, plus interest. The Subscriber
shall provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.
(e) In the event a Subscriber shall request delivery of Unlegended
Shares as described in Section 11.7 and the Company is required to deliver such
Unlegended Shares pursuant to Section 11.7, the Company may not refuse to
deliver Unlegended Shares based on any claim that such Subscriber or any one
associated or affiliated with such Subscriber has been engaged in any violation
of law, or for any other reason, unless, an injunction or temporary restraining
order from a court, on notice, restraining and or enjoining delivery of such
Unlegended Shares or exercise of all or part of said Warrant shall have been
sought and obtained and the Company has posted a surety bond for the benefit of
such Subscriber in the amount of 130% of the amount of the aggregate purchase
price of the Common Stock and Warrant Shares which are subject to the
injunction or temporary restraining order, which bond shall remain in effect
until the completion of arbitration/litigation of the dispute and the proceeds
of which shall be payable to such Subscriber to the extent Subscriber obtains
judgment in Subscriber's favor.
12. (a) Right of First Refusal. Until the end of the Exclusion Period,
the Subscribers shall be given not less than seven (7) business days prior
written notice of any proposed sale by the Company of its common stock or other
securities or debt obligations, except in connection with (i) full or partial
consideration in connection with a strategic merger, acquisition, consolidation
or purchase of substantially all of the securities or assets of corporation or
other entity which holders of such securities or debt are not granted
registration rights, (ii) the Company's issuance of securities in connection
with strategic license agreements and other partnering arrangements so long as
such issuances are not for the purpose of raising capital which holders of such
securities or debt are not granted registration rights, (iii) the Company's
issuance of Common Stock or the issuances or grants of options to purchase
Common Stock pursuant to stock option plans and employee stock purchase plans
described on Schedule 5(d) hereto, (iv) as a result of the exercise of Warrants
or conversion of Notes which are granted or issued pursuant to this Agreement,
(v) the payment of any interest on the Notes and Liquidated Damages, (vi) as
has been described in the Reports or Other Written Information filed with the
Commission or delivered to the Subscribers prior to the Closing Date, and (vii)
as described on Schedule 11.1 (collectively the foregoing are "Excepted
Issuances"). The Subscribers who exercise their rights pursuant to this
Section 12(a) shall have the right during the seven (7) business days following
receipt of the notice to purchase such offered common stock, debt or other
securities in accordance with the terms and conditions set forth in the notice
of sale in the same proportion to each other as their purchase of Notes in the
Offering. In the event such terms and conditions are modified during the
notice period, the Subscribers shall be given prompt notice of such
modification and shall have the right during the seven (7) business days
following the notice of modification to exercise such right.
(b) Offering Restrictions. Until the expiration of the Exclusion
Period and during the pendency of an Event of Default, except for the Excepted
Issuances, the Company will not enter into an agreement to nor issue any
equity, convertible debt or other securities convertible into common stock or
equity of the Company nor modify any of the foregoing which may be outstanding
at anytime, without the prior written consent of the Subscriber, which consent
may be withheld for any reason. For so long as the Notes are outstanding, the
Company will not enter into any equity line of credit or similar agreement, nor
issue nor agree to issue any floating or variable priced equity linked
instruments nor any of the foregoing or equity with price reset rights.
(c) Favored Nations Provision. Other than in connection with the
Excepted Issuances, if at any time Notes or Warrants are outstanding the
Company shall offer, issue or agree to issue any common stock or securities
convertible into or exercisable for shares of common stock (or modify any of
the foregoing which may be outstanding) to any person or entity at a price per
share or conversion or exercise price per share which shall be less than the
Conversion Price in respect of the Shares, or if less than the Warrant exercise
price in respect of the Warrant Shares, without the consent of each Subscriber
holding Notes, Shares, Warrants, or Warrant Shares, then the Company shall
issue, for each such occasion, additional shares of Common Stock to each
Subscriber so that the average per share purchase price of the shares of Common
Stock issued to the Subscriber (of only the Common Stock or Warrant Shares
still owned by the Subscriber) is equal to such other lower price per share and
the Conversion Price and Warrant exercise price shall automatically be adjusted
as provided in the Notes and the Warrants. The average Purchase Price of the
Shares and average exercise price in relation to the Warrant Shares shall be
calculated separately for the Shares and Warrant Shares. The foregoing
calculation and issuance shall be made separately for Shares received upon
conversion and separately for Warrant Shares. The delivery to the Subscriber
of the additional shares of Common Stock shall be not later than the closing
date of the transaction giving rise to the requirement to issue additional
shares of Common Stock. The Subscriber is granted the registration rights
described in Section 11 hereof in relation to such additional shares of Common
Stock except that the Filing Date and Effective Date vis-{a`}-vis such
additional common shares shall be, respectively, the thirtieth (30th) and
sixtieth (60th) date after the closing date giving rise to the requirement to
issue the additional shares of Common Stock. For purposes of the issuance and
adjustment described in this paragraph, the issuance of any security of the
Company carrying the right to convert such security into shares of Common Stock
or of any warrant, right or option to purchase Common Stock shall result in the
issuance of the additional shares of Common Stock upon the sooner of the
agreement to or actual issuance of such convertible security, warrant, right or
option and again at any time upon any subsequent issuances of shares of Common
Stock upon exercise of such conversion or purchase rights if such issuance is
at a price lower than the Conversion Price or Warrant exercise price in effect
upon such issuance. The rights of the Subscriber set forth in this Section 12
are in addition to any other rights the Subscriber has pursuant to this
Agreement, the Note, any Transaction Document, and any other agreement referred
to or entered into in connection herewith.
(d) Paid In Kind. The Subscriber may demand that some or all of the
sums payable to the Subscriber pursuant to Sections 7.1(d), 7.2, 7.5, 11.4,
11.7(c), 11.7(d) and 11.7(e) that are not paid within ten business days of the
required payment date be paid in shares of Common Stock valued at the
Conversion Price in effect at the time Subscriber makes such demand or, at the
Subscriber's election, at such other valuation described in the Transaction
Documents. In addition to any other rights granted to the Subscriber herein,
the Subscriber is also granted the registration rights set forth in Section
11.1(ii) hereof in relation to the aforedescribed shares of Common Stock.
(e) Maximum Exercise of Rights. In the event the exercise of the
rights described in Sections 12(a), 12(c) and 12(d) would result in the
issuance of an amount of common stock of the Company that would exceed the
maximum amount that may be issued to a Subscriber calculated in the manner
described in Section 7.3 of this Agreement, then the issuance of such
additional shares of common stock of the Company to such Subscriber will be
deferred in whole or in part until such time as such Subscriber is able to
beneficially own such common stock without exceeding the maximum amount set
forth calculated in the manner described in Section 7.3 of this Agreement. The
determination of when such common stock may be issued shall be made by each
Subscriber as to only such Subscriber.
13. Miscellaneous.
(a) Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile,
addressed as set forth below or to such other address as such party shall have
specified most recently by written notice. Any notice or other communication
required or permitted to be given hereunder shall be deemed effective (a) upon
hand delivery or delivery by facsimile, with accurate confirmation generated by
the transmitting facsimile machine, at the address or number designated below
(if delivered on a business day during normal business hours where such notice
is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.
The addresses for such communications shall be: (i) if to the Company, to:
South Texas Oil Company, 6330 McLeod Drive, Suite 1, Las Vegas, NV 89120, Attn:
Murray Conradie, President and CEO, telecopier: (210) 568-9761, with an
additional copy by telecopier only to: Owen M. Naccarato, Esq., Naccarato &
Associates, 18301 Von Karman Ave., Suite 430, Irvine, CA 92612, telecopier:
(949) 851-9262, and (ii) if to the Subscribers, to: the one or more addresses
and telecopier numbers indicated on the signature pages hereto, with an
additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth
Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-
3575.
(b) Entire Agreement; Assignment. This Agreement and other documents
delivered in connection herewith represent the entire agreement between the
parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by both parties. Neither the Company nor the
Subscribers have relied on any representations not contained or referred to in
this Agreement and the documents delivered herewith. No right or obligation
of the Company shall be assigned without prior notice to and the written
consent of the Subscribers.
(c) Counterparts/Execution. This Agreement may be executed in any
number of counterparts and by the different signatories hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. This
Agreement may be executed by facsimile signature and delivered by facsimile
transmission.
(d) Law Governing this Agreement. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York without
regard to conflicts of laws principles that would result in the application of
the substantive laws of another jurisdiction. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the civil or state courts of New York or in
the federal courts located in New York County. The parties and the individuals
executing this Agreement and other agreements referred to herein or delivered
in connection herewith on behalf of the Company agree to submit to the
jurisdiction of such courts and waive trial by jury. The prevailing party
shall be entitled to recover from the other party its reasonable attorney's
fees and costs. In the event that any provision of this Agreement or any other
agreement delivered in connection herewith is invalid or unenforceable under
any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of any agreement.
(e) Specific Enforcement, Consent to Jurisdiction. The Company and
Subscriber acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to one or more
preliminary and final injunctions to prevent or cure breaches of the provisions
of this Agreement and to enforce specifically the terms and provisions hereof,
this being in addition to any other remedy to which any of them may be entitled
by law or equity. Subject to Section 13(d) hereof, each of the Company,
Subscriber and any signator hereto in his personal capacity hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction in New York of such court, that
the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Nothing in this Section
shall affect or limit any right to serve process in any other manner permitted
by law.
(f) Damages. In the event the Subscriber is entitled to receive any
liquidated damages pursuant to the Transactions, the Subscriber may elect to
receive the greater of actual damages or such liquidated damages.
(g) Independent Nature of Subscribers. The Company acknowledges
that the obligations of each Subscriber under the Transaction Documents are
several and not joint with the obligations of any other Subscriber, and no
Subscriber shall be responsible in any way for the performance of the
obligations of any other Subscriber under the Transaction Documents. The
Company acknowledges that each Subscriber has represented that the decision of
each Subscriber to purchase Securities has been made by such Subscriber
independently of any other Subscriber and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company which may have been made or given by any
other Subscriber or by any agent or employee of any other Subscriber, and no
Subscriber or any of its agents or employees shall have any liability to any
Subscriber (or any other person) relating to or arising from any such
information, materials, statements or opinions. The Company acknowledges that
nothing contained in any Transaction Document, and no action taken by any
Subscriber pursuant hereto or thereto (including, but not limited to, the (i)
inclusion of a Subscriber in the Registration Statement and (ii) review by, and
consent to, such Registration Statement by a Subscriber) shall be deemed to
constitute the Subscribers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Subscribers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company
acknowledges that each Subscriber shall be entitled to independently protect
and enforce its rights, including without limitation, the rights arising out of
the Transaction Documents, and it shall not be necessary for any other
Subscriber to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that it has elected to provide all
Subscribers with the same terms and Transaction Documents for the convenience
of the Company and not because Company was required or requested to do so by
the Subscribers. The Company acknowledges that such procedure with respect to
the Transaction Documents in no way creates a presumption that the Subscribers
are in any way acting in concert or as a group with respect to the Transaction
Documents or the transactions contemplated thereby.
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription Agreement by
signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
SOUTH TEXAS OIL COMPANY
a Nevada corporation
By:_________________________________
Name: Murray Conradie
Title: President
Dated: July _____, 2005
SUBSCRIBER INITIAL CLOSING SECOND CLOSING
NOTE PRINCIPAL NOTE PRINCIPAL
LONGVIEW EQUITY FUND, LP $254,348.00 $195,652.00
600 Montgomery Street, 44th Floor
San Francisco, CA 94111
Fax: (415) 981-5300
______________________________________
(Signature)
By: Wayne H. Coleson, Investment Advisor
SUBSCRIBER INITIAL CLOSING SECOND CLOSING
NOTE PRINCIPAL NOTE PRINCIPAL
LONGVIEW FUND, LP $960,870.00 $739,130.00
600 Montgomery Street, 44th Floor
San Francisco, CA 94111
Fax: (415) 981-5300
______________________________________
(Signature)
By: S. Michael Rudolph, Investment Advisor
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)
Please acknowledge your acceptance of the foregoing Subscription Agreement by
signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
SOUTH TEXAS OIL COMPANY
a Nevada corporation
By:_________________________________
Name: Murray Conradie
Title: President
Dated: July _____, 2005
SUBSCRIBER INITIAL CLOSING SECOND CLOSING
NOTE PRINCIPAL NOTE PRINCIPAL
LONGVIEW INTL. EQUITY FUND, LP $84,783.00 $65,217.00
600 Montgomery Street, 44th Floor
San Francisco, CA 94111
Fax: (415) 981-5300
______________________________________
(Signature)
By: Wayne H. Coleson, Investment Advisor
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Form of Note
Exhibit B Form of Class A Warrant
Exhibit C Escrow Agreement
Exhibit D Form of Security Agreement
Exhibit E Form of Guaranty Agreement
Exhibit F Form of Collateral Agent Agreement
Exhibit G Form of Legal Opinion
Exhibit H Transfer Agent Instructions
Exhibit I Form of Form 8-K or Public Announcement
Exhibit J Form of Limited Standstill Agreement
Schedule 1 Milestones and Adverse Events
Schedule 5(a) Subsidiaries
Schedule 5(d) Additional Issuances / Capitalization
Schedule 5(q) Undisclosed Liabilities
Schedule 5(u) Disagreements with Accountants and Lawyers
Schedule 5(v) Transfer Agent
Schedule 8 Lead Investor
Schedule 9(e) Use of Proceeds
Schedule 9(q) Providers of Limited Standstill Agreements
EXHIBIT H
INSTRUCTIONS TO TRANSFER AGENT
_____________________________________
[TRANSFER AGENT]
Dear Sirs:
Reference is made to the Subscription Agreement (the "Agreement"), dated as of
July ____, 2005 among certain subscribers (the "Subscriber") and South Texas
Oil Company (the "Company"). Pursuant to the Agreement, subject to the terms
and conditions set forth in the Agreement the Subscriber has agreed to purchase
from the Company and the Company has agreed to sell to the Subscriber from time
to time during the term of the Agreement shares of Common Stock of the Company,
$.001 par value (the "Common Stock"). As a condition to the effectiveness of
the Agreement, the Company has agreed to issue to you, as the transfer agent
for the Common Stock (the "Transfer Agent"), these instructions relating to the
Common Stock to be issued to the Subscriber (or a permitted assignee) pursuant
to the Agreement. All terms used herein and not otherwise defined shall have
the meaning set forth in the Agreement.
1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND
Pursuant to the Agreement, the Company is required to prepare and file with the
SEC, and maintain the effectiveness of, a registration statement or
registration statements registering the resale of the Common Stock to be
acquired by the Subscriber under the Agreement. The Company will advise the
Transfer Agent in writing of the effectiveness of any such registration
statement promptly upon its being declared effective. The Transfer Agent shall
be entitled to rely on such advice and shall assume that the effectiveness of
such registration statement remains in effect unless the Transfer Agent is
otherwise advised in writing by the Company and shall not be required to
independently confirm the continued effectiveness of such registration
statement. In the circumstances set forth in the following two paragraphs, the
Transfer Agent shall deliver to the Subscriber certificates representing Common
Stock not bearing the Legend without requiring further advice or instruction or
additional documentation from the Company or its counsel or the Subscriber or
its counsel or any other party (other than as described in such paragraphs).
At any time after the effective date of the applicable registration statement
(provided that the Company has not informed the Transfer Agent in writing that
such registration statement is not effective) upon any surrender of one or more
certificates evidencing Common Stock which bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered, the Transfer Agent shall deliver to the
Subscriber the certificates representing the Common Stock not bearing the
Legend, in such names and denominations as the Subscriber shall request,
provided that:
(a) in connection with such event, the Subscriber (or its permitted
assignee) shall confirm in writing to the Transfer Agent that (i) the
Subscriber confirms to the transfer agent that it has sold, pledged or
otherwise transferred or agreed to sell, pledge or otherwise transfer such
Common Stock in a bona fide transaction to a transferee that is not an
affiliate of the Company; and (ii) the Subscriber confirms to the transfer
agent that the Subscriber has complied with the prospectus delivery
requirement;
(b) the Subscriber (or its permitted assignee) shall represent that it
is permitted to dispose thereof with limitation as to amount of manner of sale
pursuant to Rule 144(k) under the Securities Act; or
(c) the Subscriber, its permitted assignee, or either of their brokers
confirms to the transfer agent that (i) the Subscriber has held the shares of
Common Stock for at least one year, (ii) counting the shares surrendered as
being sold upon the date the unlegended Certificates would be delivered to the
Subscriber (or the Trading Day immediately following if such date is not a
Trading Day), the Subscriber will not have sold more than the greater of (a)
one percent (1%) of the total number of outstanding shares of Common Stock or
(b) the average weekly trading volume of the Common Stock for the preceding
four weeks during the three months ending upon such delivery date (or the
Trading Day immediately following if such date is not a Trading Day), and
(iii) the Subscriber has complied with the manner of sale and notice
requirements of Rule 144 under the Securities Act.
Any advice, notice or instructions to the Transfer Agent required or permitted
to be given hereunder may be transmitted via facsimile to the Transfer Agent's
facsimile number of __________.
2. MECHANICS OF DELIVERY OF CERTIFICATES REPRESENTING COMMON STOCK
In connection with any Closing pursuant to which the Subscriber acquires Common
Stock under the Agreement, the Transfer Agent shall deliver certificates
representing Common Stock (with or without the Legend, as appropriate) as
promptly as practicable, but in no event later than three business days, after
such Closing.
3. FEES OF TRANSFER AGENT; INDEMNIFICATION
The Company agrees to pay the Transfer Agent for all fees incurred in
connection with these irrevocable instructions. The Company agrees to indemnify
the Transfer Agent and its officers, employees and agents, against any losses,
claims, damages or liabilities, joint or several, to which it or they become
subject based upon the performance by the Transfer Agent of its duties in
accordance with the Irrevocable Instructions.
4. THIRD PARTY BENEFICIARY
The Company and the Transfer Agent acknowledge and agree that the Subscriber is
an express third party beneficiary of these Irrevocable Instructions and shall
be entitled to rely upon, and enforce, the provisions hereof.
SOUTH TEXAS OIL COMPANY
By:_________________________________
Name: Murray Conradie
Title: President
AGREED:
[TRANSFER AGENT]
By:_______________________________
EXHIBIT J
LIMITED STANDSTILL AGREEMENT
This AGREEMENT (the "Agreement") is made as of the ___ day of July,
2005, by the signatories hereto (each a "Holder"), in connection with his
ownership of shares of South Texas Oil Company, a Nevada corporation (the
"Company").
NOW, THEREFORE, for good and valuable consideration, the sufficiency and
receipt of which consideration are hereby acknowledged, Holder agrees as
follows:
1. Background.
a. Holder is the beneficial owner of the amount of shares of
the Common Stock, $0.001 par value, of the Company ("Common Stock") and rights
to purchase Common Stock designated on the signature page hereto, some or all
of which are owned by virtue of Holder's ownership of a note convertible into
Common Stock.
b. Holder acknowledges that the Company has entered into or
will enter into an agreement with each subscriber ("Subscription Agreement") to
the Company's secured convertible promissory notes and warrants (the
"Subscribers"), for the sale to the Subscribers of an aggregate of up to
$2,300,000 of principal amount of secured convertible promissory notes and
warrants (the "Offering"). Holder understands that, as a condition to
proceeding with the Offering, the Subscribers have required, and the Company
has agreed to obtain an agreement from the Holder to refrain from selling any
securities of the Company from the date of the Subscription Agreement until the
end of the Exclusion Period as defined in the Subscription Agreement (the
"Restriction Period").
2. Share Restriction.
a. Holder hereby agrees that during the Restriction Period,
the Holder will not sell or otherwise dispose of any shares of Common Stock or
any options, warrants or other rights to purchase shares of Common Stock or any
other security of the Company which Holder owns or has a right to acquire as of
the date hereof or acquires hereafter during the Restriction Period, other than
in connection with an offer made to all shareholders of the Company in
connection with any merger, consolidation or similar transaction involving the
Company. Holder further agrees that the Company is authorized to and the
Company agrees to place "stop orders" on its books to prevent any transfer of
shares of Common Stock or other securities of the Company held by Holder in
violation of this Agreement.
b. Any subsequent issuance to and/or acquisition of shares or
the right to acquire shares by Holder will be subject to the provisions of this
Agreement.
c. The foregoing restrictions notwithstanding the Holder may
sell during the Restriction Period, up to five percent (5%) of the amount of
shares of Common Stock actually owned by Holder on the Initial Closing Date (as
defined in the Subscription Agreement). In no event may more than one percent
(1%) of the amount of shares of Common Stock actually owned by the Holder on
the Initial Closing Date be sold during any thirty (30) day period.
d. Notwithstanding the foregoing restrictions on transfer, the
Holder may, at any time and from time to time during the Restriction Period,
transfer the Common Stock (i) as bona fide gifts or transfers by will or
intestacy, (ii) to any trust for the direct or indirect benefit of the
undersigned or the immediate family of the Holder, provided that any such
transfer shall not involve a disposition for value, (iii) to a partnership
which is the general partner of a partnership of which the Holder is a general
partner, provided, that, in the case of any gift or transfer described in
clauses (i), (ii) or (iii), each donee or transferee agrees in writing to be
bound by the terms and conditions contained herein in the same manner as such
terms and conditions apply to the undersigned. For purposes hereof, "immediate
family" means any relationship by blood, marriage or adoption, not more remote
than first cousin.
3. Miscellaneous.
a. At any time, and from time to time, after the signing of
this Agreement Holder will execute such additional instruments and take such
action as may be reasonably requested by the Subscribers to carry out the
intent and purposes of this Agreement.
b. This Agreement shall be governed, construed and enforced in
accordance with the laws of the State of New York without regard to conflicts
of laws principles that would result in the application of the substantive laws
of another jurisdiction, except to the extent that the securities laws of the
state in which Holder resides and federal securities laws may apply. Any
proceeding brought to enforce this Agreement may be brought exclusively in
courts sitting in New York County, New York.
c. This Agreement contains the entire agreement of the Holder
with respect to the subject matter hereof.
d. This Agreement shall be binding upon Holder, its legal
representatives, successors and assigns.
e. This Agreement may be signed and delivered by facsimile and
such facsimile signed and delivered shall be enforceable.
f. The Company agrees not to take any action or allow any act
to be taken which would be inconsistent with this Agreement.
IN WITNESS WHEREOF, and intending to be legally bound hereby,
Holder has executed this Agreement as of the day and year first above written.
HOLDER:
________________________________
(Signature of Holder)
_________________________________
(Print Name of Holder)
_________________________________
Number of Shares of Common Stock
Beneficially Owned
_________________________________
Note Principal Owned on the date of
This Agreement
COMPANY:
SOUTH TEXAS OIL COMPANY
By:______________________________
SCHEDULE 8
LEAD INVESTOR
LONGVIEW EQUITY FUND, LP
600 Montgomery Street, 44th Floor
San Francisco, CA 94111
Fax: (415) 981-5300
DUE DILIGENCE FEE RECIPIENT
GHILLIE FINANCE AG