SETTLEMENT AGREEMENT
EXHIBIT
99.1
SETTLEMENT
AGREEMENT
(the
"Agreement"),
dated
as of August 14, 2006, by and between Telkonet,
Inc.,
a Utah
corporation with headquarters located at 00000 Xxxxxx Xxxxxxx Xxxxxxx,
Xxxxxxxxxx, Xxxxxxxx 00000 (the "Company")
and
Portside
Growth and Opportunity Fund (the
"Investor").
WHEREAS:
A.
The
Company and the Investor entered into that certain Securities Purchase
Agreement, dated as of October 27, 2005, as amended (the "Securities
Purchase Agreement"),
pursuant to which, among other things, the Investor purchased from the Company
a
Senior Convertible Note, dated as of October 28, 2005, (the "Note"),
which
is convertible into shares of the Company's common stock, par value $0.001
per
share (the "Common
Stock"),
in
accordance with the terms thereof.
B.
The
Company and the Investor desire to enter into this Settlement Agreement,
pursuant to which, among other things, the parties agree (i) to deem August
15,
2005 to be an Installment Date under the Note (the "Additional
Installment Date"),
(ii)
on such Additional Installment Date, the Company shall pay to the Investor
and
the other investor holding Notes (the "Other
Investor")
an
aggregate amount of $9,910,392.50 (which amount includes the aggregate
Accelerated Amounts to be paid to the Investor and the Other Investor pursuant
to this Agreement and the Other Settlement Agreement (as defined below)) plus
any accrued but unpaid interest thereon (the "Additional
Installment Amount")
in
satisfaction of the amounts currently outstanding under the Notes, inclusive
of
any premium payable with respect thereto, of which $3,250,000 (the "Investor
Additional Installment Amount")
shall
be delivered to the Investor in cash, (iii) that Kings Road Investments, Ltd.,
in its capacity as the LC Agent under, and as defined in the Securities Purchase
Agreement (the "LC
Agent"),
shall
draw $3,250,000 under the Letter of Credit for payment of the Investor
Additional Installment Amount, (iv) that the Company shall exercise its
Accelerated Payment Option pursuant to Section 8(d) of the Note with respect
to
the Additional Installment Date for payment to the Investor of an Accelerated
Amount equal to $1,705,196.25 plus the accrued but unpaid interest on the
Investor's pro rata portion of the Additional Installment Amount (the
"Investor
Accelerated Amount"),
which
Accelerated Amount shall be paid in Common Shares pursuant to a Company
Conversion and (v) that the LC Agent shall instruct the Letter of Credit Bank
to
reduce the Letter of Credit Amount by $1,500,000.
C.
Capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings ascribed to them in the Securities Purchase Agreement and the
Note.
NOW,
THEREFORE,
in
consideration of the foregoing recitals and the mutual promises hereinafter
set
forth, the Company and the Investor hereby agree as follows:
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1.
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PAYMENT
OF ADDITIONAL INSTALLMENT AMOUNT AND ACCELERATED AMOUNT; REDUCTION
OF
LETTER OF CREDIT AMOUNT.
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(a)
Payment
of Investor Additional Installment Amount.
i)
Upon the
execution of this Agreement, the LC Agent shall deliver a drawing certificate
to
the Letter of Credit Bank demanding payment of $3,250,000 in accordance with
the
wire instructions therein. Following receipt of the Investor Additional
Installment Amount from the Letter of Credit Bank on or before the Additional
Installment Date, the Company shall be deemed to have satisfied its obligation
to pay the Investor Additional Installment Amount.
(ii) Payment
of Additional Installment Amount to Investor.
In order to confirm that the payment of Additional Installment Amount shall
be
made to the Investor, the Investor shall receive a fully executed copy of a
Settlement Agreement, in form and substance identical to this Agreement, entered
into between the Company and the Other Investor (the "Other
Settlement Agreement"),
which
Other Settlement Agreement provides that the LC Agent shall deliver a drawing
certificate to the Letter of Credit Bank demanding payment of the Investor
Additional Installment Amount to the Investor.
(b)
Accelerated
Payment.
ii)
On the
Additional Installment Date, the Company shall also pay to the Holder the
Investor Accelerated Amount in accordance with Section 8(c) of the Note.
Notwithstanding anything to the contrary in the Note, for purposes of
determining the Company Conversion Price applicable to the Additional
Installment Date, the Company Conversion Measuring Period shall be deemed to
be
the twenty (20) Trading Day period commencing on the Trading Day immediately
after the Additional Installment Date. The Investor hereby waives the Volume
Limitation with respect to the Investor Accelerated Amount to be paid on the
Additional Installment Date.
(ii) Accelerated
Payment Option Warrants.
Notwithstanding anything to the contrary in the Note, on the applicable
Installment Settlement Date, the Company shall issue to the Investor Accelerated
Payment Option Warrants (the "Investor
Accelerated Payment Option Warrants")
in the
form attached hereto as Exhibit
A
(i)
exercisable for a number of Common Shares equal to 65% of the quotient of (A)
the Investor Accelerated Amount divided by (B) the applicable Company Conversion
Price and (ii) with an exercise price equal to the applicable Company Conversion
Price. The Common Shares issuable upon exercise of such Investor Accelerated
Payment Option Warrants shall be governed by the applicable provisions of the
Registration Rights Agreement.
(c)
Reduction
of Letter of Credit.
Following the payment of the Investor Additional Installment Amount and the
delivery of the Pre-Installment Conversion Shares in respect of the Investor
Accelerated Amount on the Additional Installment Date (and the confirmation
by
the Company of the payment and delivery of such similar amount and shares due
pursuant to the Other Settlement Agreement), the LC Agent shall issue a written
instruction to the Letter of Credit Bank to request the reduction of the Letter
of Credit Amount by $1,500,000.
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2.
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WAIVER;
RELEASE; CANCELLATION OF NOTE.
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(a)
Waiver.
Upon
the consummation of the transactions set forth in Section 1 of this Agreement,
the Investor hereby waives the Company's failure to satisfy the Minimum Revenue
Test for the Fiscal Quarter ended June 30, 2006 as required by Section 14(e)
of
the Note and any Event of Default that would arise under the Note solely as
a
result of the failure to satisfy the Minimum Revenue Test for such Fiscal
Quarter. Notwithstanding the foregoing, the Company has indicated that it
neither admits nor denies that an Event of Default has occurred and is
continuing with respect to the Company's failure to satisfy the Minimum Revenue
Test for such Fiscal Quarter.
(b)
Release.
iii)
For
purposes of this Agreement, "Released
Claims"
shall
mean any purported event of default, rights or causes of action or any other
claims arising out of the events, facts and circumstances prior to the date
hereof arising out of Company's failure to satisfy the Minimum Revenue Test
for
the Fiscal Quarter ended June 30, 2006 as required by Section 14(e) of the
Note.
In consideration of the releases set forth in Section 2(b)(ii), the payment
of
the Investor Additional Installment Amount and the Investor Accelerated Amount
and the delivery of the Investor Accelerated Payment Option Warrants, effective
as of consummation of all of the transactions set forth in Section 1 of this
Agreement, the Investor, only on behalf of itself and, to the extent permitted
by law, its heirs, executors, administrators, devisees, trustees, partners,
directors, officers, shareholders, employees, consultants, representatives,
predecessors, principals, agents, parents, associates, affiliates, subsidiaries,
attorneys, accountants, successors, successors-in-interest and assignees
(collectively, the "Investor
Releasing Persons"),
hereby waives and releases, to the fullest extent permitted by law, any and
all
claims, rights and causes of action, but solely relating to the Released Claims
(collectively, the "Investor
Claims"),
that
any of the Investor Releasing Persons had, currently has or may have against
(i)
the Company, (ii) any of the Company's current or former parents, affiliates,
subsidiaries, predecessors, assigns, attorneys or counsel, accountants,
employees, consultants or representatives, or (iii) any of the Company's or
such
other persons' or entities' current or former officers, directors, employees,
agents, principals, and signatories (collectively, the "Company
Released Persons"),
including, without limitation, any Investor Claims arising out of any of the
Transaction Documents. For the avoidance of doubt, claims arising after the
date
hereof that relate to events or circumstances occurring, or actions taken or
failed to be taken, after the Closing are not waived or released hereby. Except
for the Released Claims, any claims, rights or causes of cause of action arising
out of or based upon events, facts or circumstances occurring, or actions taken
or failed to be taken, prior to or after the date hereof are not waived or
released hereby.
(ii) In
consideration of the Investor entering into this Agreement, effective as of
the
date of this Agreement, the Company on behalf of itself and, to the extent
permitted by law, its administrators, devisees, trustees, partners, directors,
officers, shareholders, employees, consultants, representatives, predecessors,
principals, agents, parents, associates, affiliates, subsidiaries, attorneys,
accountants, successors, successors-in-interest and assignees (collectively,
the
"Company
Releasing Persons"),
hereby waives and releases, to the fullest extent permitted by law, any and
all
claims, rights and causes of action, whether known or unknown, arising out
of
events, facts and circumstances, or actions taken or failed to be taken, prior
to the date hereof (collectively, the "Company
Claims"),
that
any of the Company Releasing Persons had, currently has or may have against
(i)
the Investor, (ii) any of the Investor's current or former parents, members,
partners, shareholders, affiliates, subsidiaries, predecessors or assigns,
or
(iii) any of the Investor's or such other persons' or entities' current or
former officers, directors, members, partners, shareholders, employees, agents,
principals, investors, signatories, advisors, consultants, spouses, heirs,
estates, executors, attorneys, auditors and associates and members of their
immediate families (collectively, the "Investor
Released Persons"),
including, without limitation, any Company Claims arising out of any of the
Transaction Documents, the transactions contemplated hereby and the transactions
contemplated in the Other Settlement Agreement. Company Claims arising after
the
date hereof that relate to events, facts or circumstances occurring, or actions
taken or failed to be taken, after such date are not waived or released
hereby.
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(c)
Cancellation
of Note.
Effective immediately following the receipt by the Investor of (i) the Investor
Additional Installment Amount, (ii) the Common Shares delivered in respect
of
the Investor Accelerated Amount and (iii) the Investor Accelerated Payment
Option Warrants, all of the outstanding Principal and accrued but unpaid
Interest under the Note shall be deemed paid in full and the Note shall
automatically be deemed cancelled.
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3.
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REPRESENTATIONS
AND WARRANTIES
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(a)
Authorization;
Enforcement; Validity.
The
Company has the requisite power and authority to enter into and perform its
obligations under this Agreement. This Agreement has been duly and validly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company, enforceable in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws from time to time in
effect that affect creditors’ rights generally, and by legal and equitable
limitations on the availability of specific remedies.
(b)
No
Conflicts.
The
execution, delivery and performance by the Company of this Agreement and
consummation by the Company of the transactions contemplated by this Agreement
do not and will not: (i) violate the organizational documents of the Company,
(ii) violate any decree or judgment of any court or other governmental authority
applicable to or binding on the Company; (iii) violate any provision of any
federal or state statute, rule or regulation which is applicable to the Company;
or (iv) violate any contract to which the Company or any of its assets or
properties are bound, or 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 to which Company is
a
party.
(c)
Approvals;
Principal Market.
The
Company has obtained all governmental, regulatory or third party consents and
approvals if any, and approval from its stockholders, necessary, if any, to
consummate the transactions contemplated by this Agreement. The
Common
Stock has not have been suspended by the SEC or the Principal Market from
trading on the Principal Market and no suspension have been threatened by the
SEC or the Principal Market either (A) in writing by the SEC or the Principal
Market or (B) by falling below the minimum listing maintenance requirements
of
the Principal Market.
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(d)
Resale.
The
Common Shares issuable to the Investor as payment for the Accelerated Amount
on
each of the Additional Installment Date and the applicable Installment
Settlement Date, if any, shall be eligible for immediate resale by the Investor
under the Registration Statement.
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4.
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CERTAIN
COVENANTS AND AGREEMENTS.
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(a)
Disclosure
of Transactions and Other Material Information.
On or
before 8:30 a.m., New York Time, on the
second (2nd)
Business Day following the date of this Agreement, the Company shall file a
Current Report on Form 8-K describing the terms of the transactions contemplated
by this Agreement and attaching a copy of this Agreement.
(b)
Fees
and Expenses.
The
Company shall reimburse the Investor for its legal and due diligence fees and
expenses in connection with the preparation and negotiation of this Agreement
(the “Investor
Counsel Expense”) with
any
remaining fees and expenses to be paid on the Additional Installment Date.
The
Company shall pay all stamp and other taxes and duties levied in connection
with
the issuance of the shares delivered as payment of the Investor Accelerated
Amount.
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5.
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CONDITIONS
TO COMPANY'S OBLIGATIONS
HEREUNDER.
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The
obligations of the Company to the Investor hereunder are subject to the
satisfaction of each of the following conditions, provided that these conditions
are for the 'Company's sole benefit and may be waived by the Company at any
time
in its sole discretion by providing the Investor with prior written notice
thereof:
(a)
The
Investor shall have executed this Agreement and delivered the same to the
Company.
(b)
The
Other
Investor shall have executed the Other Settlement Agreement and delivered the
same to the Company.
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6.
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CONDITIONS
TO INVESTOR'S OBLIGATIONS
HEREUNDER.
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The
obligations of the Investor hereunder are subject to the satisfaction of each
of
the following conditions, provided that these conditions are for the 'Investor's
sole benefit and may be waived by the Investor at any time in its sole
discretion by providing the Company with prior written notice
thereof:
(a)
The
Company shall have executed this Agreement and delivered the same to the
Investor.
(b)
The
Company and the Other Investor shall have executed the Other Settlement
Agreement and the Company shall have delivered a copy thereof to the Investor
in
accordance with Section 1(a)(ii).
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(c)
The
Company shall have paid the Investor Counsel Expense.
(d)
The
Company shall have delivered to the Investor such other documents relating
to
the transactions contemplated by this Agreement as the Investor or its counsel
may reasonably request.
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7.
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MISCELLANEOUS.
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(a)
Governing
Law; Jurisdiction; Jury Trial.
All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision
or
rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State
of
New York. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting in The City of New York,
Borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding
is
improper. Each party hereby irrevocably waives personal service of process
and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it
under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
EACH
PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.
(b)
Counterparts.
This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if
the
signature were an original, not a facsimile signature.
(c)
Headings.
The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.
(d)
Severability.
If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or
the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
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(e)
No
Third Party Beneficiaries.
This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person.
(f)
Further
Assurances.
Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.
(g)
No
Strict Construction.
The
language used in this Agreement will be deemed to be the language chosen by
the
parties to express their mutual intent, and no rules of strict construction
will
be applied against any party.
(h)
Notices.
Any
notices, consents, waivers or other communications required or permitted to
be
given under the terms of this Agreement must be in writing and will be deemed
to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one Business Day after deposit with an overnight courier service,
in
each case properly addressed to the party to receive the same. The addresses
and
facsimile numbers for such communications shall be:
If
to the
Company:
Telkonet,
Inc.
00000
Xxxxxx Xxxxxxx Xxxxxxx
Xxxxxxxxxx,
Xxxxxxxx 00000
Telephone: (000)
000-0000
Facsimile: (000)
000-0000
Attention: Chief
Financial Officer
With
a
copy (for informational purposes only) to:
Xxxxx
& Xxxxxxxxx LLP
000
Xxxxxxxxxxx Xxxxxx
Xxxxxxxxxx,
X.X. 00000
Telephone: (000)
000-0000
Facsimile: (000)
000-0000
Attention: Xxxxxxx
X. Xxxxx, Esq.
If
to the
Investor, to its address and facsimile number set forth in the Securities
Purchase Agreement, with copies to the Investor's representatives as set forth
on the Securities Purchase Agreement,
with
a
copy (for informational purposes only) to:
7
or
to
such other address and/or facsimile number and/or to the attention of such
other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such change. Written
confirmation of receipt (A) given by the recipient of such notice, consent,
waiver or other communication, (B) mechanically or electronically generated
by
the sender's facsimile machine containing the time, date, recipient facsimile
number and an image of the first page of such transmission or (C) provided
by an
overnight courier service shall be rebuttable evidence of personal service,
receipt by facsimile or receipt from an overnight courier service in accordance
with clause (i), (ii) or (iii) above, respectively.
(i)
Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns in accordance with the terms of the
Securities Purchase Agreement.
(j)
Further
Assurances.
Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.
(k)
Survival.
The
representations and warranties of the Company and the Investor contained herein
and the agreements and covenants set forth herein shall survive the date hereof
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(l)
Remedies.
The
Investor shall have all rights and remedies set forth in the Transaction
Documents and all rights and remedies which such holders have been granted
at
any time under any other agreement or contract and all of the rights which
such
holders have under any law. Any Person having any rights under any provision
of
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach
of
any provision of this Agreement and to exercise all other rights granted by
law.
Furthermore, the Company recognizes that in the event that it fails to perform,
observe, or discharge any or all of its obligations under this Agreement, any
remedy at law may prove to be inadequate relief to the Investor. The Company
therefore agrees that the Investor shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.
[Signature
Page Follows]
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IN
WITNESS WHEREOF,
the
Investor and the Company have caused their respective signature page to this
Agreement to be duly executed as of the date first written above.
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COMPANY:
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TELKONET,
INC.
By:
_______________________________
Name:
Title:
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IN
WITNESS WHEREOF,
the
Investor and the Company have caused their respective signature page to this
Agreement to be duly executed as of the date first written above.
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INVESTOR:
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PORTSIDE
GROWTH AND OPPORTUNITY FUND
By:
___________________________________
Name:
Title:
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Exhibit
A
Form
of Accelerated Payment Option Warrant
