EXHIBIT 10.11
SUBSCRIPTION AGREEMENT
FINANCIAL INTRANET, INC.
Re: Private Placement of up to $1,700,000 principal amount of 7%
Convertible Promissory Notes and Warrants to purchase up to 3,333,333 shares of
Common Stock in up to five separate tranches.
Dear Subscriber:
Financial Intranet Inc. (the "Company") is offering 7% convertible
promissory notes ("Promissory Notes", which include the Initial Notes and the
Tranche Notes), warrants to purchase shares of common stock at an exercise price
of $.40 per share (the "Initial Warrants") and warrants to purchase shares of
common stock at an exercise price of $.60 per share (the "Tranche Warrants", and
together with the Initial Warrants referred to as the "Warrants") for an
aggregate offering price of $1,700,000 (the "Offering"). The offer consists of
an initial purchase of a Promissory Note in the principal amount of $600,000
(the "Initial Note") and Initial Warrants to purchase 1,500,000 shares of Common
Stock for a purchase price of $600,000. The later purchases will consist of
separate tranches as follows: (i) a Promissory Note in the principal amount of
$200,000 (a "Tranche Note") and a Tranche Warrant to purchase 333,333 shares of
Common Stock for a purchase price of $200,000, (ii) a Promissory Note in the
principal amount of $300,000 (a "Tranche Note") and a Tranche Warrant to
purchase 500,000 shares of Common Stock, for a purchase price of $300,000, (iii)
a Promissory Note in the principal amount of $300,000 (a "Tranche Note") and a
Tranche Warrant to purchase 500,000 shares of Common Stock, for a purchase price
of $300,000, and (iv) a Promissory Note in the principal amount of $300,000 (a
"Tranche Note") and a Tranche Warrant to purchase 500,000 shares of Common
Stock, for a purchase price of $300,000. The Promissory Notes and Warrants are
being subscribed for on the terms and conditions set forth in this Agreement,
the Guaranty (as defined below), the Pledge and Security Agreement (as defined
below), and the Registration Rights Agreement.
The undersigned ("Investor") has indicated its desire to participate in
this private offering and to subscribe to and agree to purchase the Promissory
Notes and the Warrants as set forth on the
signature page of this Agreement, receipt of which the Company
acknowledges. The Company shall have the right to reject this subscription in
whole or in part and to accept the subscription of a lesser amount.
ARTICLE I
Purchase and Sale of the Promissory Note and Warrants
Section 1.1 Initial Closing. The Company will sell, and the Investor will
buy, on the date indicated on the signature page of this Subscription Agreement
(the "Initial Closing Date"), the Initial Note (attached as Exhibit B) and
Initial Warrant (attached as Exhibit D) to purchase an aggregate of 1,500,000
shares of Common Stock, for the purchase price of SIX HUNDRED THOUSAND
($600,000) Dollars (the "Initial Purchase Price"), provided each of the
conditions set forth in Section 1.5 below have been satisfied or waived in
writing.
Section 1.2 Subsequent Closings - Purchase \ Demand Provisions.
(a) Upon the exercise of the Investor of one or more purchase options
(according to the procedures set forth below, each a "Purchase Option"), or the
exercise by the Company of one or more demand options (according to the
procedures set forth below, each a "Demand Option"), the Company will sell, and
the Investor will buy, on the closing dates for the tranches as set forth below
(each referred to as a Closing Date) associated with such notice (as set forth
below), a Tranche Note (attached as Exhibit C) and a Tranche Warrant (attached
as Exhibit E), for the applicable purchase price with respect to each tranche
provided each of the conditions set forth in this Section and Sections 1.5 and
1.6 below have been satisfied or waived in writing.
(b) The Purchase Options and the Demand Options with respect to the second,
third, fourth and fifth tranches may be exercised during the option periods set
forth in (i) through (iv) below (the "Option Periods") as follows:
(i) Second Tranche Option Period - Commencing on the effective date of the
Registration Statement being filed by the Company pursuant to the Registration
Rights Agreement (attached hereto as Exhibit I) (the "Effective Date") and
terminating on the 30th calendar day following the Effective Date the Company
may serve a Demand Notice or the Investor may serve a Purchase Notice, with
respect to the purchase of a Tranche Note in the principal amount of $200,000
and a
Tranche Warrant for the purchase of 333,333 shares of Common Stock for an
aggregate purchase price of $200,000.
(ii) Third Tranche Option Period - Commencing on the Closing Date for the
second tranche and terminating on the 90th calendar day thereafter the Company
may serve a Demand Notice or the Investor may serve a Purchase Notice with
respect to the purchase of a Tranche Note in the principal amount of $300,000
and a Tranche Warrant for the purchase of 500,000 shares of Common Stock for an
aggregate Purchase Price of $300,000.
(iii) Fourth Tranche Option Period - Commencing on the Closing Date for the
third tranche and terminating on the 90th calendar day thereafter the Company
may serve a Demand Notice or the Investor may serve a Purchase Notice with
respect to the purchase of a Tranche Note in the principal amount of $300,000
and a Tranche Warrant for the purchase of 500,000 shares of Common Stock for an
aggregate purchase price of $300,000.
(iv) Fifth Tranche Option Period - Commencing on the Closing Date for the
fourth tranche and terminating on the 90th day thereafter the Company may serve
a Demand Notice or the Investor may serve a Purchase Notice with respect to the
purchase of a Tranche Note in the principal amount of $300,000 and a Tranche
Warrant for the purchase of 500,000 shares of Common Stock for an aggregate
purchase price of $300,000.
(c) Each Purchase Option may be exercised by the Investor by facsimile
delivery of a purchase notice (the "Purchase Notice") along with a certification
that the Investor has satisfied all conditions precedent for such tranche to the
Company and delivery of the applicable purchase price to Escrow Agent during the
Option Period. Within five business days of the facsimile receipt of the
Purchase Notice, (i) the Company shall deliver the original Tranche Note, the
original Tranche Warrant along with a certification that the Company has
satisfied all conditions precedent for such tranche, and (ii) the Investor shall
deliver the purchase price, with respect to such tranche to The Xxxxxxxxx Law
Group, P.C. ("Escrow Agent").
(d) Each Demand Option may be exercised by the Company (subject to Section
6.2 below) by facsimile delivery of a demand notice (the "Demand Notice") along
with a certification that the Company has satisfied all conditions precedent for
such tranche to the Investor. Within five business days of facsimile receipt of
the Demand Notice, (i) the Investor shall deliver the purchase price, and (ii)
the Company shall deliver the original Tranche Note and the original Tranche
Warrant with respect to such tranche to Escrow Agent.
(e) In the event that the Investor fails to deliver the applicable purchase
price within five business days after receipt of the Demand Notice and the
Company has satisfied all of the conditions precedent to a closing for such
tranche, the exercise price of the Initial Warrants shall increase to the
greater of (i) $2.00 per share or (ii) the average closing bid price per share
of Common Stock for the 10 trading days prior to the date of the Demand Notice
as set forth below. The closing bid price shall be deemed to be the reported
last bid price regular way as reported by Bloomberg LP or if unavailable, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or if the Common Stock is not listed or admitted to trading
on any national securities exchange, the closing bid price as reported by NASDAQ
or such other system then in use, or, if the Common Stock is not quoted by any
such organization, the closing bid price in the over-the-counter market as
furnished by the principal national securities exchange on which the Common
Stock is traded (the "Closing Bid Price").
The number of Initial Warrants subject to such increase in the exercise
price in the event of such default is as follows:
(i) Default with respect to Second Option Period - 350,000 Initial
Warrants.
(ii) Default with respect to Third Option Period - 287,000 Initial
Warrants.
(iii) Default with respect to Fourth Option Period - 192,500 Initial
Warrants.
(iv) Default with respect to Fifth Option Period - 94,500 Initial Warrants.
In the event that the Investor defaults with respect to only part of the
amount demanded in any Demand Notice, then the number of Initial Warrants
subject to the increased exercise price shall be decreased prorata. Initial
Warrants with such increased exercise price must be exercised prior to the
exercise of any other Warrants issued hereunder. Such remedies shall be in
addition to any other remedies that may be available to the Company.
(f) In the event that the Company fails to deliver the original Tranche
Notes and/or original Tranche Warrants within five business days after receipt
of a Purchase Notice and the Investor has satisfied all of the conditions
precedent to a closing for such tranche, the Company shall pay liquidated
damages to the Investor through the issuance of a maximum of 350,000 additional
Initial Warrants with an exercise price of the lower of (i) $.40 per share or
(ii) fifty percent of the average Closing Bid Price per share of Common Stock
for the 10 trading days prior to the date of the Purchase Notice as determined
under section (e). In the event that the Company defaults with respect to only
part of the
amount demanded in any Demand Notice or any Option Period, then the number
of Initial Warrants which may be canceled shall be reduced prorata. Such
remedies shall be in addition to any other remedies that may be available to the
Investor.
(g) Each Demand Notice and Purchase Notice may only be served during an
Option Period provided each of the conditions set forth in Section 1.6 have been
satisfied or waived in writing, and shall be deemed to be served on the business
day it is received via facsimile between the hours of 9:00 a.m. and 5:00 p.m.
Eastern Time, or next such business day if after 5:00 p.m. Eastern Time.
(h) Each Demand Notice and Purchase Notice must contain the following
information: (i) applicable purchase price (based upon when exercised during the
Option Period), (ii) the date of such notice, and (iii) authorized signature of
the party making such notice. The Company, in each Demand Notice, must certify
that it has satisfied each of the conditions precedent to a tranche closing have
been satisfied.
(i) The Company may not exercise a Demand Notice at any time when it is in
default under this Agreement or any of the Exhibits attached hereto or the
Pledgor is in default under the Pledge and Security Agreement or the Guarantor
is in default under the Guaranty. The Investor may not exercise a Purchase
Notice at any time when it is in default under this Agreement or any of the
Exhibits attached hereto.
Section 1.3 Form of Payment. The Investor shall pay the applicable purchase
price by delivering good funds in United States Dollars by wire transfer to
Escrow Agent, against delivery of the original Promissory Notes and Warrants for
each Closing. The parties have entered into an Escrow Agreement annexed hereto
as Exhibit F.
Section 1.4 Wire Instructions. Wire instructions for Escrow Agent are as
follows:
Chase Manhattan Bank, N.A. ABA No. 000000000
For the Account of:
United States Trust Company of New York
Account No. 000-0-000000
In favor of:
The Xxxxxxxxx Law Group, P.C. Attorney Escrow Account
Account No. 59-01405
Section 1.5 Initial Notes and Initial Warrants - Initial Closing Date. The
right of the Company to receive the Initial Purchase Price from the Investor,
and the right of the Investor to receive the Initial Note in the principal
amount of $600,000 and Initial Warrants to purchase 1,500,000 shares of Common
Stock is subject to the satisfaction (or written waiver) on the Initial Closing
Date, of each of the following conditions:
(i) acceptance by the Company, and the Investor, of this Agreement
(including execution of the Statement of Accredited Investor Status attached
hereto) and all duly executed Exhibits thereto by an authorized officer of the
Company;
(ii) delivery into escrow by the Investor of clear funds for the Initial
Purchase Price (as more fully set forth in the Escrow Agreement attached hereto
as Exhibit F);
(iii) all representations, covenants, and warranties of the Investor and of
the Company contained herein and in all Exhibits annexed hereto shall remain
true and correct in all material respects as of the applicable Closing Date;
(iv) the Company shall have obtained all permits and qualifications
required by any state for the offer and sale of the Promissory Notes and the
Warrants, or shall have the availability of exemptions therefrom;
(v) the sale and issuance of the Promissory Notes and Warrants, and the
proposed issuance of the shares of Common Stock underlying the Promissory Notes
(the "Underlying Shares") and the shares of Common Stock underlying the Warrants
(the "Warrant Shares") shall be legally permitted by all laws and regulations to
which the Investor and the Company are subject;
(vi) delivery of the original Promissory Notes and Warrants as described
herein;
(vii) receipt by the Investor of an opinion of counsel of the Company as
set forth in Exhibit J attached hereto, and instruction by the Company to the
transfer agent (as set forth in Exhibit K annexed hereto);
(viii) payment of all fees as set forth in Section 7.1 below provided that
certificates representing the shares of Common Stock issuable to the placement
agents are not required to be delivered by the Company as of the Closing Date
but within 10 days of the Closing Date;
(ix) the Pledgor (as defined in the Pledge Agreement) shall have deposited
with Escrow Agent 1,500,000 shares of Common Stock pursuant to the terms of the
executed Pledge and Security Agreement attached hereto as Exhibit G (the "Pledge
Agreement"); Such shares will be pledged as collateral to secure the obligations
of the Company under this Agreement pursuant to a Guaranty attached hereto as
Exhibit H (the "Guaranty");
(x) delivery in escrow of all of the Exhibits to this Agreement fully
executed by the
parties thereto;
(xi) all representations, covenants, and warranties contained in all
Exhibits annexed hereto shall remain true and correct in all material respects
as of the applicable Closing Date; and
(xii) delivery into escrow of a fully executed stock power and power of
attorney (pursuant to the Pledge Agreement);
Section 1.6 Tranche Notes and Tranche Warrants - Subsequent Closing Dates.
The right of the Company to receive the purchase price from the Investor, and
the right of the Investor to receive the Tranche Notes and Tranche Warrants in
connection with the tranches is subject to the satisfaction (or written waiver)
as of each Closing Date for the tranches, of each of conditions (iii) through
(viii), (xi), and (xii) as set forth in Section 1.5 ( provided that the
representation regarding the number of shares of Common Stock issued and
outstanding shall be adjusted to account for the issuance of additional shares
of Common Stock in accordance with this Agreement); and the following additional
conditions:
(i) the Registration Statement described in Section 2.7 shall have been
declared effective by the Securities and Exchange Commission and remain
effective as of the Closing Date of each tranche;
(ii) the Common Stock shall be listed for trading on the OTC Bulletin
Board, NASDAQ or a national securities exchange, the Company shall be in full
compliance with all of the listing requirements of such market or exchange and a
delisting of the Common Stock shall not be pending which would result in the
Common Stock not being listed on the OTC Bulletin Board, the NASDAQ or a
national securities exchange, nor shall have the Company received notice
threatening delisting of the Common Stock;
(iii) the Company shall not have issued shares of
Common Stock of the Company constituting more than 50% of the then outstanding
share of Common Stock of the Company to any person or group of persons (as
defined in Section 13d of the Securities Exchange Act of 1934), unless such
shares of Common Stock have been issued to a Company whose shares of Common
Stock are listed on the OTC Bulletin Board, NASDAQ or a national securities
exchange or the Company consummates a merger or consolidation with another
entity and the Common Stock of the surviving entity is listed on the OTC
Bulletin Board, NASDAQ or a national securities exchange and such surviving
entity expressly assumes the Company's obligations under this Agreement and the
exhibits attached hereto;
(iv) Xxxxxxx Xxxxxxxx shall remain employed by the Company as President;
(v) delivery into escrow by the Investor of clear funds for the purchase
price of such tranche (as more fully set forth in the Escrow Agreement);
(vi) the Company shall have complied with the covenant regarding the Use of
Proceeds as set forth in Section 6.1; (vii) the average daily trading volume (as
reported by Bloomberg, LP) of the Common Stock for the ten consecutive trading
days immediately preceding the Closing Date for a tranche must exceed 90,000
shares, or the market cap of the Common Stock (based upon the closing bid price
as reported by Bloomberg, LP) for the ten consecutive trading days immediately
preceding the Closing Date for a tranche must exceed $60,000; and
(viii) No breach of this Agreement or any Exhibit hereto shall have
occurred as of the applicable Closing Date.
Section 1.7 No Registration of Securities. The Promissory Notes and
Warrants have not been registered under the registration provisions of the
Securities Act of 1933, as amended (the "Securities Act"), or the laws of any
state, and are being offered and sold by the Company in reliance upon an
exemption from registration under Sections 4(2) of the Securities Act. Absent an
exemption from registration contained in the federal or state securities laws,
the issuance and sale of the Promissory Notes and Warrants would require
registration, and the reliance upon such exemption is based upon the Investor 's
representations, warranties, and agreements contained in this Agreement.
ARTICLE II
Description of Securities Contained in Promissory Notes and Warrants
The following summary of the terms contained in the Promissory Notes and
Warrants and the registration rights with respect to the Common Stock issuable
upon conversion or exercise of the Securities is qualified in its entirety by
the forms of Promissory Notes, Warrants and Registration Rights Agreement
(Exhibit I)) attached to this agreement.
Section 2.1 Promissory Notes. At the Initial Closing, the Company will
issue an Initial Note substantially in the form of Exhibit B which will be
convertible into Common Stock of the Company in the principal amount of
$600,000, with $240,000 principal amount, and all accrued interest thereon,
payable upon conversion by the holder thereof commencing February 16, 1999, and
$360,000 principal amount, and all accrued interest thereon, payable upon
conversion by the holder
thereof commencing 90 days after the Initial Closing Date. The Company's
obligations under the Initial Note shall be subject to a Guaranty in the form of
Exhibit F and secured by the Pledge Agreement of 1,500,000 shares of Common
Stock (with 600,000 shares of Common Stock as collateral for the Company's
obligation payable on February 16, 1999, and 900,000 shares as collateral for
the Company's obligation payable 90 days after the Initial Closing Date).
At the Closing Date for each tranche, the Company will issue a Tranche Note
substantially in the form of Exhibit C which will be convertible into Common
Stock of the Company in the principal amount of $200,000 for the second tranche,
and $300,000 for each of the third, fourth and fifth tranches.
Section 2.2 Interest. The holders of each Promissory Note shall be entitled
to receive interest, payable at the option of the Company in cash or registered
Common Stock, at the rate of seven percent on the outstanding principal amount,
per annum based upon a 365 day year commencing on the date such Promissory Note
is issued, payable upon the conversion of the Promissory Note. Such interest
shall be cumulative and shall be compounded on a yearly basis.
Section 2.3 Conversion. The Initial Note may be converted with respect to
$240,000 principal amount at any time on or after February 16, 1999 and the
balance of $360,000 principal amount may be converted at any time commencing 90
days after the Initial Closing Date. The Tranche Notes in the aggregate
principal amount of $1,100,000 may be converted, in whole or in part, at any
time after issuance at the option of the holder. Notwithstanding anything else
herein to the contrary, the holder of the Promissory Notes may not convert any
Promissory Note to the extent that after such conversion, the number of shares
of Common Stock beneficially owned by the holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Promissory Notes and unexercised
portion of the Warrants issued to the holder and its affiliates as of the date
of such conversion), would result in ownership by the Investor and its
affiliates of 4.99% or more of the Company's issued and outstanding shares of
Common Stock following such exercise or conversion. The foregoing restriction
shall not be deemed to prohibit the holder of the Promissory Notes and Warrants
from converting and/or exercising the Promissory Notes and/or Warrants such that
the aggregate total number of shares of Common Stock issuable upon conversion
and/or exercise over time is more than 4.99% of the then outstanding shares of
Common Stock over time. This restriction shall be binding upon any transferee of
the Promissory Notes or Warrants from the Investor.
Section 2.4 Automatic Conversion. Three years from each Closing Date the
Company shall be required to automatically convert any and all remaining
outstanding principal amount and accrued
interest of the Promissory Note issued on such Closing Date at the
Conversion Price on such date into the Company's Common Stock (the "Automatic
Conversion"). The 4.99% limitations set forth in Section 2.3 and in the
Promissory Notes and Warrants shall not apply to the Automatic Conversion
provision contained herein.
Section 2.5 Conversion Price. The "Conversion Price" shall be the lessor of
: (i) 75% of the average of the five lowest closing bid prices of the Common
Stock during the 30 trading days ending on the trading day immediately preceding
the Conversion Date, or (ii)(A) $.40 per share with respect to the Initial Note,
(B) $.50 per share with respect to the Tranche Note for Subsequent Closing in
the principal amount of $200,000 and (C) $.60 per share with respect to the
Tranche Notes for the Subsequent Closings in the principal amounts of $300,000.
The closing bid price shall be deemed to be the reported last bid price regular
way as reported by Bloomberg LP or if unavailable, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or if the Common Stock is not listed or admitted to trading on any national
securities exchange, the closing bid price as reported by NASDAQ or such other
system then in use, or, if the Common Stock is not quoted by any such
organization, the closing bid price in the over-the-counter market as furnished
by the principal national securities exchange on which the Common Stock is
traded.
Section 2.6 Warrants. The Warrants will entitle the holder to purchase
shares of Common Stock at an exercise price per share of Common Stock (the
"Warrant Shares") of $.40 for the Initial Warrants and $.60 for the Tranche
Warrants. The applicable exercise price per share shall be further reduced by
15% of the difference between $.80 and the average closing bid price per share
of Common Stock for the 10 trading days prior to the applicable Closing Date, if
the average closing bid price is lower. The Warrants may be exercised for the
period commencing upon the date the Warrants are issued, and ending five years
thereafter.
Section 2.7 Registration Rights. The Company and the Investor have executed
the Registration Rights Agreement annexed hereto as Exhibit "I". The Company is
required to file a registration statement (the "Registration Statement") under
the Securities Act with respect to the shares of Common Stock issuable upon
conversion of the Promissory Note (the "Underlying Shares") and exercise of the
Warrants (the "Warrant Shares", the Warrant Shares and the Underlying Shares are
collectively referred to as the "Registrable Shares").
ARTICLE III
Investor's Representations
Section 3.1 The Investor represents and warrants to the Company as follows:
(a) The Investor has carefully read this Agreement, including certain risk
factors and the Company's audited financial statements for the year ended
December 31, 1997 (attached hereto as Exhibit A) and the forms of Registration
Rights Agreement, Warrants, Guaranty, Pledge Agreement, Escrow Agreement, and
Promissory Notes (collectively, the "Disclosure Materials"), all of which the
Investor acknowledges have been provided to the Investor. The Investor has been
given the opportunity to ask questions, and receive answers, concerning the
terms and conditions of the sale of the Promissory Notes and Warrants and the
Disclosure Materials and to obtain such additional written information, to the
extent the Company possesses such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of same as the
Investor desires in order to evaluate the investment. The Investor further
acknowledges that he or she fully understands the Disclosure Materials. The
Investor acknowledges that the Investor has received no representations or
warranties from the Company or its employees or agents in making this investment
decision except as set forth in this Agreement. The Investor has been informed
of all facts pertaining to the Company as it may have required or believed
desirable in connection with its investment (including access to the Certificate
of Incorporation and By-Laws of the Company) and is not relying on any
information concerning them not contained in the Disclosure Materials.
(b) The Investor is aware that the purchase of the Promissory Notes and
Warrants is a speculative investment involving a high degree of risk and that
there is no guarantee that the Investor will realize any gain from this
investment, and that the Investor could lose the total amount of the Investor's
investment and that the Investor can bear the economic risk of such investment.
(c) The Investor understands that no federal or state agency has made any
finding or determination regarding the fairness of this Offering of the
Promissory Notes and Warrants for investment, or any recommendation or
endorsement of this Offering of the Promissory Notes and Warrants. Any
representation to the contrary is a criminal offense.
(d) Without limiting the Investor's right to transfer, sell or assign the
Promissory Notes, Warrants and Underlying Shares and Warrant Shares (provided
such transfer, sale or assignment is in compliance with applicable law), the
Investor is purchasing the Promissory Notes and Warrants for the Investor's own
account, with the intention of holding the Promissory Notes and Warrants, with
no present intention of dividing or allowing others to participate in this
investment or of reselling or otherwise participating, directly or indirectly,
in a distribution of the Promissory Notes and Warrants. The Investor understands
that the Promissory Notes and Warrants are unregistered and may be required
to be held until such time as they are registered under the Securities Act
and any applicable state securities laws, or until such time as an exemption
from such registration is available. The Investor agrees that (a) it will not
offer, sell, pledge, hypothecate, or otherwise dispose of the Promissory Notes
and Warrants unless such offer, sale, pledge, hypothecation or other disposition
is (i) registered under the Securities Act, or (ii) such offer, sale, pledge,
hypothecation or other disposition thereof does not violate the Securities Act.
(e) The Investor agrees to the imprinting, so long as is required by this
Section, of the following legend (or such substantially similar legend as is
acceptable to the Investor and their counsel, the parties agreeing that any
unacceptable legended securities shall be replaced promptly by and at the
Company's cost) on the securities:
Legend
[FOR PROMISSORY NOTES AND WARRANTS] NEITHER THESE SECURITIES NOR
THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE]
[EXERCISABLE] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED
OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS.
[ONLY FOR UNDERLYING SHARES AND WARRANT SHARES TO THE EXTENT THE
RESALE THEREOF IS NOT COVERED BY AN EFFECTIVE REGISTRATION STATEMENT
AT THE TIME OF CONVERSION, ISSUANCE OR EXERCISE] THE SHARES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
The Underlying Shares and/or Warrant Shares shall not contain the legend
set forth above or any other restrictive legend if the conversion of the
Promissory Notes, exercise of Warrants or other issuances of Underlying Shares
and/or Warrant Shares, as the case may be, occurs at any time while a
Registration Statement is effective under the Securities Act in connection with
the resale of the shares of Common Stock or, in the event there is not an
effective Registration Statement at such time, if in the opinion of counsel to
the Company such legend is not required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements issued by
the staff of the Securities and Exchange Commission (the "Commission")). The
Company agrees that it will provide the Investor, upon request, with a
certificate or certificates representing Underlying Shares and/or Warrant
Shares, free from such legend at such time as such legend is no longer required
hereunder. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company which enlarge the restrictions
of transfer set forth in this Section.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit K hereto. Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement. It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investors to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and except as provided below, without consultation
by the transfer agent with the Company or its counsel and without the need for
any further advice or instruction or documentation to the transfer agent by or
from the Company or its counsel or the Investors:
(i) at any time after the effective date of the Registration Statement (the
"Effective Date"), upon surrender of one or more certificates evidencing the
Warrants, Promissory Notes, Underlying Shares or Warrant Shares that bear the
aforementioned Legend, to the extent accompanied by a notice requesting the
issuance of new certificates free of the aforementioned legend to replace those
surrendered; provided that: (i) the Registration Statement shall then be
effective; (ii) the Investor confirms to the transfer agent in writing (with a
copy to the Company) 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 third party that is not an affiliate of the Company; (iii) the
Investor confirms to the transfer agent that the
Investor has complied with the prospectus delivery requirement and (iv)
with respect to the issuance of the Warrant Shares, the Investor has paid the
Company the purchase price for such shares.
(ii) at any time upon any surrender of one or more certificates evidencing
Registrable Securities, that bear the aforementioned legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of such
legend to replace those surrendered (and delivered a Form 144 if such form is
required) and containing representations that (a) the Investor is permitted to
dispose of such Registrable Securities, without limitation as to amount or
manner of sale pursuant to Rule 144(k) under the Securities Act or some other
exemption under the Securities Act, or (b) the Investor has sold, pledged or
otherwise transferred or agreed to sell, pledge or otherwise transfer such
Registrable Securities, in a manner other than pursuant to an effective
registration statement, to a transferee who will upon such transfer be entitled
to freely tradeable securities. The Company shall have counsel provide any and
all opinions necessary for the sale under Rule 144.
Any of the notices referred to above in this Section may be sent by
facsimile to the Company's transfer agent, with a copy to the Company.
(f) No legend other than the one specified in this Article has been or
shall be placed on the share certificates representing the Common Stock, and no
instructions or "stop transfer orders," so called, "stock transfer
restrictions," or other restrictions have been or shall be given to the
Company's transfer agent with respect thereto other than as expressly set forth
in this Article.
(g) Nothing in this Article shall affect in any way any of the Investor's
obligations under any agreement to comply with all applicable securities laws
upon resale of the Common Stock.
(h) Investor confirms that the Investor has the financial means to make the
proposed investment, that the Investor has sufficient knowledge and experience
in financial matters to evaluate the merits and risks of the transaction, and
that the Investor is relying on advisers (including such attorneys, accountants
and financial advisers as the Investor deem appropriate) to evaluate the merits
and risks of the transaction on the Investor's behalf. Investor has had access
to such professional advisors as the Investor deems necessary in connection with
the evaluation, execution and delivery of this Agreement.
(i) If the Investor is a partnership, corporation, trust or other entity,
(i) the Investor represents and warrants that it was not organized or
reorganized for the specific purpose of
acquiring Promissory Notes and Warrants, and (ii) the Investor has the full
power and authority to execute this Agreement on behalf of such entity and to
make the representations and warranties made herein on its behalf, and (iv) this
investment in the Company has been affirmatively authorized, if required, by the
governing board of such entity and is not prohibited by the governing documents
of the entity.
(j) The address shown under the Investor's signature at the end of this
Agreement is the Investor's principal residence if he or she is an individual or
its principal business address if a corporation or other entity.
(k) The Investor agrees to hold in strict confidence the information
regarding the Company disclosed to Investor in the Disclosure Materials, shall
not use such information for any purpose other than the evaluation of the
Company's business, finances and operations, shall not reproduce such
information in whole or in part except as the Company expressly authorizes, and
shall not disclose, divulge, or otherwise furnish such information to anyone
other than Investor's accountants, legal counsel or consultants, who are
involved in evaluating or implementing the proposed transaction.
(l) The Investor is an "accredited investor" as defined in section 2(15) of
the Securities Act and Regulation D promulgated by the Securities and Exchange
Commission thereunder and is not an "affiliate" of the Company as defined in
Rule 144 of the Securities Act.
(m) The Investor has not as of the date hereof, and covenants that on
behalf of its affiliates and agents that neither the Investor nor any affiliate
or agent of Investor will at any time in which the Investor or any affiliate of
the Investor owns a Promissory Note which has not been converted into Common
Stock or retains the right to exercise a Purchase Option, engage, directly or
indirectly, in any short sales of, or hedging or arbitrage transactions with
respect to the Common Stock or any other securities of the Company, or sell
"put" options or similar instruments with respect to the Common Stock or any
other securities of the Company; provided, however, that the undersigned may
maintain a short position with respect to the shares of Common Stock issuable
upon conversion of the Promissory Note and provided that such short position (i)
is not commenced earlier than the date of the delivery of a Conversion Notice
(as defined in the Promissory Note) and (ii) does not exceed the number of
shares subject to such Conversion Notice.
ARTICLE IV
Company's Representations
The Company represents and warrants to the Investor as follows:
Section 4.1 Organization. The Company is a corporation duly organized and
existing in good standing under the laws of the jurisdictions in which it is
incorporated, and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material Adverse
Effect. "Material Adverse Effect" shall mean any effect on the business,
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole, and/or any condition, circumstance, or situation that would prohibit
or otherwise in any material respect interfere with the ability of the Company
to enter into and perform any of its obligations under this Agreement, the
Registration Rights Agreement, the Pledge Agreement, the Escrow Agreement, the
Promissory Notes or the Warrants in any material respect.
Section 4.2 Authorization. The Company has the requisite corporate power
and authority to enter into and perform this Agreement, the Pledge Agreement,
the Escrow Agreement, the Registration Rights Agreement, to issue and sell the
Promissory Notes and the Warrants and to issue the Registrable Shares in
accordance with the terms of the Promissory Notes and the Warrants, (ii) the
execution, delivery and performance of this Agreement, the Pledge Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Promissory Notes and
the Warrants by the Company and the consummation by it of the transactions
contemplated hereby and thereby have been duly authorized by the Company's Board
of Directors and no further consent or authorization of the Company, its Board
of Directors, or its stockholders is required, (iii) this Agreement, the Pledge
Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Warrants, and the Promissory Notes have been duly and validly authorized,
executed and delivered by the Company, and (iv) this Agreement, the Pledge
Agreement, the Registration Rights Agreement, the Escrow Agreement, the Warrants
and the Promissory Notes constitute the valid and binding obligations of the
Company enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting, generally, the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
Section 4.3 Issuance. The Registrable Shares are all duly authorized and
reserved for issuance, and in all cases upon issuance shall be validly issued,
fully paid and non-assessable, free
from all taxes, liens and charges with respect to the issue thereof, and
will not be subject to preemptive rights or other similar rights of stockholders
of the Company.
Section 4.4 No Conflict / No Violation. The execution, delivery and
performance of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby will not (i) result in a violation of
the Certificate of Incorporation or Bylaws, 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 to which
the Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations) applicable to the Company or by which any
property or asset of the Company is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect). The Company is not in violation of its Certificate of
Incorporation or other organizational documents, and the Company is not in
default (and no event has occurred which, with notice or lapse of time or both,
would put the Company or any of its subsidiaries in default) under, nor has
there occurred any event giving others (with notice or lapse of time or both)
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, except for possible defaults or rights as would not, in
the aggregate or individually, have a Material Adverse Effect. The business of
the Company and its subsidiaries is not being conducted, and shall not be
conducted so long as the Investor owns any of the Securities, in violation of
any law, ordinance or regulation of any governmental entity, except for possible
violations which neither singly or in the aggregate would have a Material
Adverse Effect. Except as specifically contemplated by this Agreement and as
required under the Securities Act and any applicable state securities laws, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations under this
Agreement, the Pledge Agreement, the Escrow Agreement, the Registration Rights
Agreement, the Promissory Notes or the Warrants in accordance with the terms
hereof and thereof.
Section 4.5 Listing. The shares of the Company's Common Stock are listed on
the OTC Bulletin Board. The Company has received no notice, either written or
oral, with respect to the continued eligibility of the Common Stock for such
listing, and the Company has maintained all applicable requirements for the
continuation of such listing, and the Company does not reasonably anticipate
that the Common Stock will be delisted from the OTC Bulletin Board for the
foreseeable future. The Company shall use its best efforts to continue to keep
its stock listed on the OTC Bulletin Board, and comply with all of its listing
requirements, or become listed on NASDAQ or a national securities comparable
stock market or exchange.
Section 4.6 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock, $0.001 par value per share, of
which approximately 21,293,496 shares are issued and outstanding, and no shares
of Preferred Stock are outstanding. All of the outstanding shares of Common
Stock and Preferred Stock of the Company have been duly and validly authorized
and issued and are fully paid and nonassessable. No shares of Common Stock are
entitled to preemptive or similar rights. Except as specifically disclosed
herein by the Company (including the exhibits attached hereto), there are no
outstanding options, warrants, rights to subscribe to, calls or commitments of
any character whatsoever giving any person or entity any right to subscribe for
or acquire, any shares of Common Stock, or contracts, commitments,
understandings, or arrangements by which the Company or any subsidiary is or may
become bound to issue additional shares of Common Stock or securities or rights
convertible or exchangeable into shares of Common Stock. To the knowledge of the
Company and except as disclosed herein or in the Disclosure Materials, no person
or group of persons beneficially owns (as determined pursuant to Rule 13d-3
promulgated under the Exchange Act) or has the right to acquire by agreement
with or by obligation binding upon the Company beneficial ownership of in excess
of five percent of the Common Stock.
Section 4.7 Financial Statements. The Company has delivered or made
available to the Investor true and complete copies of the Company's most recent
audited financial statements and the Company's interim financial statements for
the current fiscal year and its latest annual report (collectively referred to
as "Financial Statements"). The Financial Statements do not contain any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Financial
Statements of the Company comply as to form in all material respects with
applicable accounting requirements and all other applicable rules and
regulations with respect thereto. Such Financial Statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such Financial Statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended.
Section 4.8 Valid Issuance. When issued and payment has been made therefor,
the Promissory Notes, Warrants, Underlying Shares and Warrant Shares, sold to
the Investor will be duly and validly issued, fully paid, and nonassessable.
Neither the issuance of the Promissory Notes, Warrants, Underlying Shares and
Warrant Shares, to the Investor, pursuant to, nor the Company's performance of
its obligations under this Agreement, and all Exhibits annexed hereto will (i)
result in the creation or imposition by the Company of any liens, charges,
claims or other encumbrances upon Promissory Notes, Warrants, Underlying Shares
and Warrant Shares issued to the Investor, or any of
the assets of the Company, or (ii) except as set forth in the Disclosure
Materials, entitle the holders of outstanding capital stock to preemptive or
other rights to subscribe to or acquire the Common Stock or other securities of
the Company.
Section 4.9 No Advertisements. Neither the Company nor any of its
affiliates nor any distributor or any person acting on its or their behalf (i)
has conducted or will conduct any general solicitation (as that term is used in
Rule 502(c) of Regulation D) or general advertising with respect to any of the
Promissory Notes, Warrants, Underlying Shares and Warrant Shares, or (ii) made
any offers or sales of any security or solicited any offers to buy any security
under any circumstances that would require registration of the Promissory Notes,
Warrants, Underlying Shares and Warrant Shares under the Securities Act.
Section 4.10 Articles of Incorporation and By Laws. The Company has
furnished or made available to the Investor true and correct copies of the
Company's Articles of Incorporation, as amended and in effect on the date
hereof, and the Company's by-laws, as amended and in effect on the date hereof
(the By-Laws).
Section 4.11 No Integration. To the Company's knowledge, 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, other than pursuant to this Agreement
or pursuant to the Company's existing employee benefit plan, under circumstances
that would require registration of the Common Stock under the Securities Act, or
cause the offering of the Promissory Notes and Warrants pursuant to this
Agreement to be integrated with prior or future offerings by the Company for
purposes of the Securities Act or any applicable stockholder approval
provisions, except that the Company makes no representation with respect to the
sale by the Company of a promissory note and warrants for a purchase price of
$500,000 in December 1998 or any public offering of the Company's Common Stock.
The Company shall not and shall use its best efforts to ensure that no
affiliate shall sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security of the Company that would be integrated
with the offer or sale of the Promissory Notes and Warrants in a manner that
would require the registration under the Securities Act of the issue, offer or
sale of the Promissory Notes and Warrants to the Investor. The Promissory Notes
and Warrants are being offered and sold pursuant to the terms hereunder, are not
being offered and sold as part of a previously commenced private placement of
securities, except that the Company makes no representation with respect to the
sale by the Company of a promissory note and warrants for a purchase price of
$500,000 in December 1998 or any public offering of the Company's Common Stock.
Section 4.12 No Litigation. Except as set forth in the Financial
Statements, there are no
lawsuits or proceedings pending or to the knowledge of the Company
threatened, against the Company, nor has the Company received any written or
oral notice of any such action, suit, proceeding or investigation, which would
reasonably be expected to have a Material Adverse Effect. Except as set forth in
the Financial Statements, no judgment, order, writ, injunction or decree or
award has been issued by or, so far as is known by the Company, requested of any
court, arbitrator or governmental agency which would be reasonably expected to
result in a Material Adverse Effect.
Section 4.13 Acknowledgment of Dilution. The Company is aware and
acknowledges that issuance of Common Stock upon the conversion of the Promissory
Note(s) and/or exercise of the Warrant(s), may result in dilution of the
outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions. The Company further acknowledges that its obligation
to issue (i) the Underlying Shares in accordance with the conversion rights in
the Promissory Note(s), and (iii) the Warrant Shares in accordance with exercise
rights in the Warrant(s) is unconditional and absolute regardless of the effect
of any such dilution.
Section 4.14 No Labor Disputes. The Company is not involved in any labor
dispute, nor, to the knowledge of the Company, is any such dispute threatened
which could reasonably be expected to have a Material Adverse Effect. None of
the Company's employees is a member of a union and the Company believes that its
relations with its employees are good.
Section 4.15 Environmental Laws. The Company is (i) in compliance with any
and all foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants and which the Company know is
applicable to them ("Environmental Laws"), (ii) has received all permits,
licenses or other approvals required under applicable Environmental Laws to
conduct its business, and (iii) is in compliance with all terms and conditions
of any such permit, license or approval.
Section 4.16 Insurance. The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company is engaged. The Company has no notice to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires, or obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operation, of the Company.
Section 4.17 Board of Directors. The board of directors of the Company has
concluded, in its good faith business judgment, that the issuances of the
securities of the Company in connection with this Agreement are in the best
interests of the Company.
Section 4.18 Intellectual Property. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses, trade secrets and other intellectual
property rights which it currently uses in connection with its business for
which the failure to so have would have a Material Adverse Effect (collectively,
the "Intellectual Property Rights"). To the best knowledge of the Company, none
of the Intellectual Property Rights infringe on any rights of any other Person,
and the Company either owns or has duly licensed or otherwise acquired all
necessary rights with respect to the Intellectual Property Rights. The Company
has not received any notice from any third party of any claim of infringement by
the Company of any of the Intellectual Property Rights, and has no reason to
believe there is any basis for any such claim. To the best knowledge of the
Company, there is no existing infringement by another Person on any of the
Intellectual Property Rights.
Section 4.19 Subsidiaries. Except for Financial Intranet Telcom, Inc. and
as disclosed in the Financial Statements, the Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
partnership, association or other business entity.
ARTICLE V
Registration Rights
Section 5.1 Registration Rights Agreement. The registration rights are more
fully set forth in the Registration Rights Agreement, attached hereto as Exhibit
G.
ARTICLE VI
Covenants of the Company
Section 6.1 Use of Proceeds. The Company will use the proceeds from the
sale of the Promissory Notes and Warrants for general business purposes and not
for the repayment of any judgment or currently outstanding promissory note.
Section 6.2 NASDAQ Listing / 20% Rule Limitation. In the event shareholder
consent is required pursuant to the rules of the principal market or exchange
where the Common Stock is listed,
for the below market issuance of shares of Common Stock exceeding twenty
percent (20%) of the outstanding shares of Common Stock, the Company shall call
a meeting of its shareholders, to be held no later than 60 calendar days after
the Company becomes subject to such a requirement (the "Listing Date"), seeking
shareholder approval of the below market issuances of shares of Common Stock
(and securities convertible into and exercisable for Common Stock) to the
Investor of an aggregate of 20% or more of the number of shares of Common Stock
outstanding as of the Closing Date. In the event that the aforementioned
proposal is not so approved with such 60 calendar day period, the Company shall
seek a waiver from the NASDAQ (or such other principal market or exchange) for
such below market issuances. In the event the Company does not receive such
waiver within the earlier of ten calendar days after the aforementioned
shareholders meeting, or 70 calendar days after the Listing Date, the Company
shall either delist the Common Stock from such principal market or exchange and
immediately (within two Trading Days thereafter) list the Common Stock on the
OTC Bulletin Board (however, if the OTC Bulletin Board is then the principal
market for the Common Stock the Company must make the payments as set forth
below) or with respect to the aggregate shares of Common Stock issuable upon
conversion of the Promissory Notes and exercise of the Warrants which exceed 20%
of the Company's issued and outstanding shares of Common Stock as of the Closing
Date (the "Excess Shares"), (assuming that the 70th calendar day after the
Listing Date is the Conversion Date), the Company shall pay the Investor a sum
equal to (i) the number of Excess Shares multiplied by the closing bid price per
share of Common Stock as quoted on such principal market or exchange on such
date minus (ii) the number of Excess Shares that are Warrant Shares multiplied
by the Exercise Price. Upon making the payment described in this Section, that
principal amount of the Promissory Notes and Warrants which are the subject of
the aforementioned payment shall be delivered by the Investor to the Company and
such portion of the Promissory Notes shall be deemed converted and such portion
of the Warrants shall be deemed exercised with respect to the Excess Shares. In
the event the Company does not obtain shareholder approval, or a waiver, as set
forth herein, the Company shall not be permitted to serve a Demand Notice.
Section 6.3 Restrictions on Future Financings. For a period of the later of
one hundred twenty (120) days following (i) the last Closing Date, or (ii) upon
the termination of the Company's right to exercise any additional Demand Options
under Section 1.2, the Company may not issue additional shares of Common Stock
or securities convertible into shares of Common Stock, unless such securities
are being issued pursuant to the terms of this Agreement, or are subject to a
one year statutory or contractual hold period or, if not subject to such a hold
period, unless (i) the Investor no longer holds any Promissory Notes, Warrants,
Underlying Shares, or Warrant Shares, and neither party has the right to serve a
Demand Notice or Purchase Notice, or (ii) the Investor has been offered such
securities (in writing via facsimile) for purchase for its own account on the
same terms and conditions as are being offered to the third party, and the
Investor has not accepted such offer within
seven days of receipt of notice of such offer. Notwithstanding the
foregoing, the restrictions set forth above do not apply to the following types
of transactions by the Company: (1) "project financing" transactions, which
provide for the issuance of non-recourse debt instruments in connection with the
operation of the Company's business as presently conducted or as proposed to be
conducted; and (2) a registered public offering of the Common Stock, provided
that such offering provides for the registration of the Common Stock to be
received by the Investor as a result of the exercise of the Warrants and
conversion of the Promissory Notes or such shares of Common Stock are subject to
an effective registration statement. Any restriction on future financings shall
terminate upon the Investor's failure to deliver the applicable purchase price
under Section 1.2
Section 6.4 Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect so long as any Registrable
Securities remain outstanding and the Company shall comply in all material
respects with the terms thereof.
Section 6.5 Reservation of Common Stock. As of the date hereof, the Company
has authorized and reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue the
Underlying Shares and Warrant Shares; such amount of shares of Common Stock to
be reserved shall be calculated based upon the Conversion Price and the Exercise
Price therefor under the terms of this Agreement, the Promissory Notes and
Warrants. The number of shares so reserved shall be increased or decreased to
reflect potential increases or decreases in the Common Stock that the Company
may thereafter be so obligated to issue by reason of adjustments to the
Promissory Notes and the Warrants.
Section 6.6 Corporate Existence. The Company will take all steps necessary
to preserve and continue the corporate existence of the Company.
Section 6.7 Notice of Certain Events Affecting Registration. The Company
will immediately notify the Investor upon the occurrence of any of the following
events in respect of a registration statement or related prospectus in respect
of an offering of Registrable Securities: (i) receipt of any request for
additional information by the Commission or any other federal or state
governmental authority during the period of effectiveness of the Registration
Statement for amendments or supplements to the Registration Statement or related
prospectus; (ii) the issuance by the Commission or any other federal or state
governmental authority of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose;
(iii) receipt of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; (iv) the happening of any event that makes any
statement made in the
Registration Statement or related prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material respect
or that requires the making of any changes in the Registration Statement,
related prospectus or documents so that, in the case of the Registration
Statement, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading, and that in the case of the related
prospectus, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; and (v) the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be appropriate. The
Company will immediately make available to the Investor any such supplement or
amendment to the related prospectus.
Section 6.8 Consolidation; Merger. The Company shall not, at any time after
the date hereof, effect any merger or consolidation of the Company with or into,
or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investors are entitled to receive pursuant to this Agreement.
Section 6.9 Issuance of Underlying Shares and Warrant Shares. The issuance
of the Warrant Shares pursuant to exercise of the Warrants and the Underlying
Shares pursuant to the conversion of the Promissory Notes, shall be made in
accordance with the provisions and requirements of Section 4(2) of the
Securities Act, or Regulation D and any applicable state securities law.
Section 6.10 Legal Opinion. The Company's independent counsel shall deliver
to the Investor upon execution of this Agreement, and upon each Closing for a
tranche (dated as of the date of such closing), an opinion in the form of
Exhibit J annexed hereto. The Company will obtain for the Investor, at the
Company's expense, any and all opinions of counsel which may be reasonably
required in order to convert the Promissory Notes and/or exercise the Warrants,
including, but not limited to, obtaining for the Investor an opinion of counsel,
subject only to receipt of a notice of conversion (the "Notice of Conversion")
in the form attached to the Initial Notes or the Tranche Notes, and/or subject
only to a receipt of a notice of exercise in the form annexed to the Warrant,
directing the Transfer Agent to remove the legend from the certificate.
Section 6.11 Conversion of Promissory Notes and Exercise of Warrants. The
Company will permit the Investor to exercise its right to convert the Promissory
Notes, and/or exercise the Warrants, by telecopying an executed and completed
Notice of Conversion, and/or Notice of Exercise to the
Company in accordance with the terms of the Promissory Notes and Warrant.
Section 6.12 Increase in Authorized Shares. At such time as the Company
would be, if a Notice of Conversion and/or notice of exercise (as the case may
be) were to be delivered on such date, precluded from (a) converting in full all
of the shares of the Promissory Note(s) that remain unconverted at such date
(and paying any accrued but unpaid dividends in respect thereof in shares of
Common Stock), or (b) honoring the exercise in full of the Warrants, due to the
unavailability of a sufficient number of shares of authorized but unissued or
re-acquired Common Stock, the Board of Directors of the Company shall promptly
(and in any case within 60 calendar days from such date) hold a shareholders
meeting in which the shareholders would vote for authorization to amend the
Company's certificate of incorporation to increase the number of shares of
Common Stock which the Company is authorized to issue to at least a number of
shares equal to the sum of (i) all shares of Common Stock then outstanding, (ii)
the number of shares of Common Stock issuable on account of all outstanding
warrants, options and convertible securities (other than the Promissory Notes
and the Warrants) and on account of all shares reserved under any stock option,
stock purchase, warrant or similar plan, (iii) 200% of the number of Underlying
Shares as would then be issuable upon a conversion in full of the then
outstanding shares of Promissory Notes and as payment of all future dividends
thereon in shares of Common Stock in accordance with the terms of this Agreement
and the Promissory Notes, and (iv) such number of Warrant Shares as would then
be issuable upon the exercise in full of the Warrants. In connection therewith,
the Board of Directors shall promptly (x) adopt proper resolutions authorizing
such increase, (y) recommend to and otherwise use its best efforts to promptly
and duly obtain shareholder approval to carry out such resolutions and (z)
within three Business Days of obtaining such shareholder authorization, file an
appropriate amendment to the Company's certificate of incorporation to evidence
such increase. In no way shall the aforementioned be deemed a waiver of the
Company's obligations contained in Section 6.5 above.
Section 6.16 Notice of Breaches. Each of the Company on the one hand, and
the Investor on the other, shall give prompt written notice to the other of any
breach by it of any representation, covenant, warranty or other agreement
contained in this Agreement or any Exhibit annexed hereto, as well as any events
or occurrences arising after the date hereof, which would reasonably be likely
to cause any representation, covenant, or warranty or other agreement of such
party, as the case may be, contained in this Agreement or any Exhibit annexed
hereto, to be incorrect or breached as of such date. However, no disclosure by
either party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in this Agreement or any
Exhibit annexed hereto. Notwithstanding the generality of the foregoing, the
Company shall promptly notify the Investor of any notice or claim (written or
oral) that it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by this Agreement or any Exhibit
annexed hereto, violates or would violate any written agreement or
understanding between such lender and the Company, and the Company shall
promptly furnish by facsimile to Investor a copy of any written statement in
support of or relating to such claim or notice.
Section 6.17 Transfer of Intellectual Property Rights. Except in the
ordinary course of the Company's business consistent with past practice or in
connection with the sale of all or substantially all of the assets of the
Company, the Company shall not transfer, sell or otherwise dispose of, any
Intellectual Property Rights that are material to the Company's business, or
allow any such Intellectual Property Rights to become subject to any Liens, or
fail to renew such Intellectual Property Rights (if renewable and would
otherwise expire).
Section 6.18 Right of First Refusal. The Company shall grant the Investor a
right of first refusal in respect of issuance of the Company's Common Stock or
securities convertible into Common Stock at a price less than the then market
price of the Common Stock on the date of such proposed issuance. The Investor
must exercise such right of first refusal by providing notice to the Company
within seven (7) days of receipt of the Company's written notice of its
intention to sell Common Stock or securities convertible into Common Stock at a
price less than the then market price of the Common Stock on the date of such
proposed issuance (the "Company Notice"). The Investor's notice shall state its
interest to purchase such securities on the same terms and conditions as stated
in the Company Notice. The Company Notice shall also specify the terms of the
proposed transaction. The Investor's right of first refusal expires upon the
earlier to occur of (i) one hundred twenty (120) days after the last Closing
Date, or (ii) the termination of the Investor's Demand Option.
ARTICLE VII
Fees and Expenses
Section 7.1 Fees and Expenses. Each of the parties shall pay its own fees
and expenses (including the fees of any attorneys, accountants, appraisers or
others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby, except that the Company agrees to pay on each
Closing Date, out of the Purchase Price, fees, in cash payable out of escrow,
to: (i) the Placement Agent Cardinal Capital Management, Inc., the sum equal to
four and one half (4.5%) percent of the Purchase Price pursuant to this
Agreement; (ii) the Placement Agent Josephberg, Xxxxx & Co., the sum equal to
three and one half (3.5%) percent of the Purchase Price pursuant to this
Agreement. In addition, on the Initial Closing Date, the Company will pay The
Xxxxxxxxx Law Group. P.C. the sum of $5,000 for the legal, administrative and
escrow fees. In addition, on each Closing Date with respect to the second,
third, fourth and fifth tranches, the Company will pay The
Xxxxxxxxx Law Group. P.C. the sum of $800 for the legal, administrative and
escrow fees. If the fees of The Xxxxxxxxx Law Group P.C. in connection with the
closings of the second, third, fourth or fifth tranches or in connection with
any amendments to this Agreement or the Exhibits attached hereto or with respect
to any additional documents executed by the parties prior to the closings of the
second, third, fourth or fifth tranches exceed the $800 payable with respect to
a tranche, then the Company will pay The Xxxxxxxxx Law Group P.C. the amount of
such additional fee on such Closing Date.
Placement Agent Cardinal Capital Management, Inc., as part of its fee shall
also receive, on the Initial Closing Date, 15,000 shares of Common Stock and
Tranche Warrants to purchase 75,000 shares of Common Stock at an exercise price
equal to $0.60 per share of Common Stock and otherwise on terms set forth in the
Common Stock Purchase Warrant included herein as Exhibit "C"; and the Placement
Agent Josephberg, Xxxxx & Co., as part of its fee shall also receive 15,000
shares of Common Stock and Tranche Warrants to purchase 75,000 shares of Common
Stock at an exercise price equal to $0.60 per share of Common Stock.
On each Closing Date for a tranche: (i) Placement Agent Cardinal Capital
Management, Inc., as part of its fee shall also receive, 1,727 shares of Common
Stock for each $100,000 funded to the Company by the Investor and Tranche
Warrants to purchase 10,000 shares of Common Stock on the Closing Date for each
$100,000 funded on the second tranche and Tranche Warrants to purchase 8,333
shares of Common Stock on each Closing Date for each $100,000 funded on the
third, fourth and fifth tranches; and (ii) Placement Agent Josephberg, Xxxxx &
Co., as part of its fee shall also receive 1,727 shares of Common Stock for each
$100,000 funded to the Company by the Investor and Tranche Warrants to purchase
10,000 shares of Common Stock on the Closing Date for each $100,000 funded on
the second tranche and Tranche Warrants to purchase 8,333 shares of Common Stock
on each Closing Date for each $100,000 funded on the third, fourth and fifth
tranches. The Tranche Warrants will have an exercise price of $0.60 per share.
ARTICLE VIII
Miscellaneous
Section 8.1 No Waiver. No party shall be deemed to have waived any of his
or her or its rights hereunder unless such waiver is in writing and signed by
the party waiving said right.
Section 8.2 Entire Agreement. The parties have not made any representations
or warranties with respect to the subject matter hereof not set forth herein,
and this Agreement, together with any instruments executed simultaneously
herewith, constitutes the entire agreement between them with respect to the
subject matter hereof. All understandings and agreements heretofore had between
the parties with respect to the subject matter hereof are merged in this
Agreement and any such instrument, which alone fully and completely expresses
their agreement.
Section 8.3 No Alteration. This Agreement may not be changed, modified,
extended, terminated or discharged orally, but only by an agreement in writing,
which is signed by all of the parties to this Agreement.
Section 8.4 Execution. The parties agree to execute any and all such other
and further instruments and documents, and to take any and all such further
actions reasonably required to effectuate this Agreement and the intent and
purposes hereof.
Section 8.5 Choice of Laws. This Agreement will be construed and enforced
exclusively in accordance with and governed by the laws of the State of New
York, except for matters arising under the Securities Act, without reference to
principles of conflicts of law.
Section 8.6 Jurisdiction. Any litigation based thereon, or arising out of,
under, or in connection with, this agreement or any course of conduct, course of
dealing, statements (whether oral or written) or actions of the Company or
Investor shall be brought and maintained exclusively in the Federal Courts of
the state of New York without reference to its conflicts of laws rules or
principles. The Company and the Investor hereby expressly and irrevocably
submits to the exclusive jurisdiction of the Federal Court of the state of New
York sitting in the Southern District for the purpose of any such litigation as
set forth above. Each party further irrevocably consents to the service of
process by registered mail, postage prepaid, or by personal service within or
without the State of New York. To the extent that the Investor has or hereafter
may acquire any immunity from jurisdiction of any court or from any legal
process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
property, The Investor hereby irrevocably waives such immunity in respect of its
obligations under this agreement and the other documents.
Section 8.7 Notices. Any notice required by the provisions of this
Agreement will be in writing and will be deemed effectively given: (a) upon
personal delivery to the party to be notified; (b) when sent by confirmed telex
or facsimile if sent during normal business hours of the recipient; if not, then
on the next business day; (c) five (5) days after having been sent by registered
or certified mail, return receipt requested, postage prepaid; or (d) one (1) day
after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt.
i. If to the Company, at:
Financial Intranet, Inc.
000 Xxx Xxxx Xxxxx Xxxx
Xxxxxxx, Xxx Xxxx 00000
Attn.: Xxxxxxx Xxxxxxxx
Tel: (000) 000-0000
Facsimile: (000) 000-0000
with a copy to:
Xxxxxx Xxxxxxxx, Esq.
XxXxxxxxxx & Xxxxx, LLP
000 Xxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Tel: (000) 000-0000
Facsimile: (000) 000-0000
Any delay in forwarding copy to Company counsel shall not be deemed a
waiver of any obligation or rights set forth herein.
ii. if to the Investor, to the address and facsimile as it appears on the
signature page hereto.
ARTICLE IX
Indemnification
Section 9.1 Company Indemnification. The Company agrees to indemnify and
hold harmless the Investor and each officer, director of the Investor or person,
if any, who controls the Investor within the meaning of the Securities Act
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Investor may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the breach, by the Company, of any term of this
Agreement. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
Section 9.2 Investor Indemnification. The Investor agrees that it will
indemnify and hold harmless the Company, and each officer, director of the
Company or person, if any, who controls the Company within the meaning of the
Securities Act, against any losses, claims, damages or liabilities (which shall,
for all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such officer, director or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
breach, by the Investor, of any term of this Agreement. This indemnity agreement
will be in addition to any liability which the Investor or any subsequent
assignee may otherwise have.
Section 9.3 Procedure. Promptly after receipt by an indemnified party under
this Article of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Article, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Article. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Article for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
one of the Investors, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Investors and the indemnifying party and the Investors shall have been advised
by such counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Investor (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of the Investor,
it being understood, however, that the indemnifying party shall, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Investor, which firm
shall be designated in writing by the Investor). No settlement of any action
against an indemnified party shall be made without the prior written consent of
the indemnified party, which consent shall not be unreasonably withheld.
EXECUTION BY INVESTOR WHO IS A NATURAL PERSON
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this 8th day of February, 1999.
Promissory Notes and Warrants of up to $1,700,000
Exact Name in Which Title is to be Held
(Signature)
Xxxxxx Xxxx
Name (Please Print)
Residence: Number and Sreet
City State Country Postal Code
Social Security Number Telecopy Number
Accepted this 8th day of February, 1999
FINANCIAL INTRANET, INC.
By:/s/Xxxxxxx Xxxxxxxx
EXECUTION BY INVESTOR WHICH IS A CORPORATION,
PARTNER, TRUST, ETC.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this ____ day of ________, 1999.
Promissory Notes and Warrants Subscribed for a maximum of $1,700,000
Exact Name in Which Title is to be Held
(Signature)
Name (Please Print)
Title of Person Executing Agreement
Address: Number and Street
City State Zip Code
_________________________________________________________________
Tax Identification Number Telecopy Number
Accepted this ___ day of , 1999.
FINANCIAL INTRANET, INC.
By:_____________________________
ACCREDITED INVESTOR STATUS
1. Please check whether one or more of the following definitions of
"accredited investor," if any, applies to you. If none of the following applies
to you, please leave a blank.
(a) A Bank as defined in Section 3(a)(2) of the Securities Act of 1933, as
amended (the "Securities Act"), or any savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the Securities Act whether
acting in its individual or fiduciary capacity; any broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); an insurance company as defined in Section 2(13) of the
Securities Act; an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in Section 2(a)(48) of
that act; a Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; any plan established and maintained by a state, or its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; any employee benefit plan within the meaning of
the Employee Retirement Income Security Act of 1974, if the investment decision
is made by a plan fiduciary, as defined in Section 3(21) of such act, which is
either a bank, savings and loan association, insurance company, or registered
investment advisor, or if the employee benefit plan has total assets in excess
of $5,000,000 or, if a self-directed plan, with investment decisions made solely
by persons that are Accredited Investors.
(b) A Private Business Development Company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940.
(c) An organization described in Section 501(c)(3) of the Internal Revenue
Code or corporation, Massachusetts or similar business trust, or partnership,
not formed for the specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000.
(d) A natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of purchase exceeds $1,000,000.
(e) A natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year.
(f) Any trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the Promissory Notes and Warrants, whose
purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) of Regulation D.
(g) Any entity in which all of the equity owners are Accredited Investors.
