EXHIBIT 10.11
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "AGREEMENT"), dated as of March 2,
2005, by and among Dyneco Corporation, a Minnesota corporation (the "COMPANY"),
and the subscribers identified on the signature page hereto (each a "SUBSCRIBER"
and collectively "SUBSCRIBERS").
WHEREAS, the Company and the Subscribers are executing and delivering
this Agreement in reliance upon an exemption from securities registration
afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D
("REGULATION D") as promulgated by the United States Securities and Exchange
Commission (the "COMMISSION") under the Securities Act of 1933, as amended (the
"1933 ACT").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase up to Three Hundred Thousand Dollars ($300,000) (the "PURCHASE PRICE")
of principal amount of promissory notes of the Company ("NOTE" or "NOTES")
convertible into shares of the Company's common stock, $.01 par value (the
"COMMON STOCK") at a per share conversion price of $0.10, and share purchase
warrants (the "WARRANTS") in the forms attached hereto as EXHIBIT A1, EXHIBIT A2
AND EXHIBIT A3, to purchase shares of Common Stock (the "WARRANT SHARES"). The
Notes, shares of Common Stock issuable upon conversion of the Notes (the
"SHARES"), the Warrants and the Warrant Shares are collectively referred to
herein as the "SECURITIES"; and
WHEREAS, the aggregate proceeds of the sale of the Notes and the
Warrants contemplated hereby, and the other documents, instruments and payments
contemplated hereby shall be held in escrow pursuant to the terms of a Funds
Escrow Agreement to be executed by the parties substantially in the form
attached hereto as EXHIBIT B (the "ESCROW AGREEMENT").
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Subscribers hereby
agree as follows:
1. Closing. Subject to the satisfaction or waiver of the
terms and conditions of this Agreement, on the "CLOSING DATE" (as defined in
Section 13(b) hereof), each Subscriber shall purchase and the Company shall sell
to each Subscriber a Note in the principal amount designated on the signature
page hereto and the amount of Warrants determined pursuant to Section 3 below.
The aggregate principal amount of the Notes to be purchased by the Subscribers
on the Closing Date shall, in the aggregate, be equal to the Purchase Price.
2. Security Interest. The Subscribers will be granted a
security interest in the assets of the Company and to the extent provided in a
"SECURITY AGREEMENT", a form of which is annexed hereto as EXHIBIT C. The
Company will execute such other agreements, documents and financing statements
to be filed at the Company's expense with such jurisdictions, states and
counties designated by the Subscribers. The Company will also execute all such
documents reasonably necessary in the opinion of Subscriber to memorialize and
further protect the security interest described herein. The Subscribers will
appoint a Collateral Agent to represent them collectively in connection with the
security interest to be granted in the assets of the Company. The appointment
will be pursuant to a "COLLATERAL AGENT AGREEMENT", a form of which is annexed
hereto as EXHIBIT D.
3. Warrants.
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(a) Class A Warrants. On the Closing Date, the
Company will issue and deliver Class A Warrants to the Subscribers. One Class A
Warrant will be issued for each one Share which would be issued on the Closing
Date assuming the complete conversion of the Notes issued on the Closing Date at
the Conversion Price in effect on the Closing Date. The per Warrant Share
exercise price to acquire a Warrant Share upon exercise of a Class A Warrant
shall be equal to 125% of the closing bid price of the Common Stock as reported
by Bloomberg LP for the OTC Bulletin Board ("BULLETIN BOARD") for the last
trading day preceding the Closing Date. The Class A Warrants shall be
exercisable until five (5) years after the Closing Date.
(b) Class B Warrants. On the Closing Date, the
Company will issue and deliver Class B Warrants to the Subscribers. One Class B
Warrant will be issued for each two Shares which would be issued on the Closing
Date assuming the complete conversion of the Notes issued on the Closing Date at
the Conversion Price in effect on the Closing Date. The per Warrant Share
exercise price to acquire a Warrant Share upon exercise of a Class B Warrant
shall be $0.25. The Class B Warrants shall be exercisable from the Closing Date
until five (5) years after the Closing Date.
(c) Class C Warrants. On the Closing Date, the
Company will issue and deliver Class C Warrants to the Subscribers. One Class C
Warrant will be issued for each one Share which would be issued on the Closing
Date assuming the complete conversion of the Notes issued on the Closing Date at
the Conversion Price in effect on the Closing Date. The per Warrant Share
exercise price to acquire a Warrant Share upon exercise of a Class C Warrant
shall be $0.10. The Class C Warrants shall be exercisable until five (5) years
after the Closing Date. The Class C Warrants will be subject to Call as
described in EXHIBIT A3.
(d) Collectively, the Class A, Class B and Class
C Warrants are referred to herein as Warrants.
4. Subscriber's Representations and Warranties. Each
Subscriber hereby represents and warrants to and agrees with the Company only as
to such Subscriber that:
(a) Organization and Standing of the
Subscribers. If the Subscriber is an entity, such Subscriber is a corporation,
partnership or other entity duly incorporated or organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization and Power. Each Subscriber has
the requisite power and authority to enter into and perform this Agreement and
to purchase the Notes and Warrants being sold to it hereunder. The execution,
delivery and performance of this Agreement by such Subscriber and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Subscriber or its Board of Directors,
stockholders, partners, members, as the case may be, is required. This Agreement
has been duly authorized, executed and delivered by such Subscriber and
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Subscriber enforceable against the Subscriber in
accordance with the terms thereof.
(c) No Conflicts. The execution, delivery and
performance of this Agreement and the consummation by such Subscriber of the
transactions contemplated hereby or relating hereto do not and will not (i)
result in a violation of such Subscriber's charter documents or bylaws or other
organizational documents or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument or obligation to which
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such Subscriber is a party or by which its properties or assets are
bound, or result in a violation of any law, rule, or regulation, or any order,
judgment or decree of any court or governmental agency applicable to such
Subscriber or its properties (except for such conflicts, defaults and violations
as would not, individually or in the aggregate, have a material adverse effect
on such Subscriber). Such Subscriber is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or to purchase the Notes or acquire the
Warrants in accordance with the terms hereof, provided that for purposes of the
representation made in this sentence, such Subscriber is assuming and relying
upon the accuracy of the relevant representations and agreements of the Company
herein.
(d) Information on Company. The Subscriber has
been furnished with or has had access at the XXXXX Website of the Commission to
the Company's Form SB-2 initially filed on February 6, 2004, as amended,
containing audited financial statements for the year ended December 31, 2003 and
unaudited financial statements for the nine months ended September 30, 2004, as
filed with the Commission (hereinafter referred to as the "REPORTS"). In
addition, the Subscriber has received in writing from the Company such other
information concerning its operations, financial condition and other matters as
the Subscriber has requested in writing (such other information is collectively,
the "OTHER WRITTEN INFORMATION"), and considered all factors the Subscriber
deems material in deciding on the advisability of investing in the Securities.
(e) Information on Subscriber. The Subscriber
is, and will be at the time of the conversion of the Notes and exercise of the
Warrants, an "ACCREDITED INVESTOR", as such term is defined in Regulation D
promulgated by the Commission under the 1933 Act, is experienced in investments
and business matters, has made investments of a speculative nature and has
purchased securities of United States publicly-owned companies in private
placements in the past and, with its representatives, has such knowledge and
experience in financial, tax and other business matters as to enable the
Subscriber to utilize the information made available by the Company to evaluate
the merits and risks of and to make an informed investment decision with respect
to the proposed purchase, which represents a speculative investment. The
Subscriber has the authority and is duly and legally qualified to purchase and
own the Securities. The Subscriber is able to bear the risk of such investment
for an indefinite period and to afford a complete loss thereof. The information
set forth on the signature page hereto regarding the Subscriber is accurate. The
Subscriber is not required to be registered as a broker-dealer under Section 15
of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the
Subscriber is not a broker-dealer.
(f) Purchase of Notes and Warrants. On the
Closing Date, the Subscriber will purchase the Notes and Warrants as principal
for its own account for investment only and not with a view toward, or for
resale in connection with, the public sale or any distribution thereof.
(g) Compliance with Securities Act. The
Subscriber understands and agrees that the Securities have not been registered
under the 1933 Act or any applicable state securities laws, by reason of their
issuance in a transaction that does not require registration under the 1933 Act
(based in part on the accuracy of the representations and warranties of
Subscriber contained herein), and that such Securities must be held indefinitely
unless a subsequent disposition is registered under the 1933 Act or any
applicable state securities laws or is exempt from such registration. In any
event, and subject to compliance with applicable securities laws, the Subscriber
may enter into lawful hedging transactions with third parties, which may in turn
engage in short sales of the Securities in the course of hedging the position
they assume and the Subscriber may also enter into short positions or other
derivative transactions relating to the Securities, or interests in the
Securities, and deliver the Securities, or interests in the Securities, to
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close out their short or other positions or otherwise settle short
sales or other transactions, or loan or pledge the Securities, or interests in
the Securities, to third parties that in turn may dispose of these Securities.
(h) Shares Legend. The Shares and the Warrant
Shares shall bear the following or similar legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO DYNECO CORPORATION THAT SUCH REGISTRATION IS
NOT REQUIRED."
(i) Warrants Legend. The Warrants shall bear the
following or similar legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO DYNECO CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED."
(j) Note Legend. The Note shall bear the
following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO DYNECO
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED."
(k) Communication of Offer. The offer to sell
the Securities was directly communicated to the Subscriber by the Company. At no
time was the Subscriber presented with or solicited by any leaflet, newspaper or
magazine article, radio or television advertisement, or any other form of
general advertising or solicited or invited to attend a promotional meeting.
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(l) Authority; Enforceability. This Agreement
and other agreements delivered together with this Agreement or in connection
herewith have been duly authorized, executed and delivered by the Subscriber and
are valid and binding agreements enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity; and Subscriber
has full corporate power and authority necessary to enter into this Agreement
and such other agreements and to perform its obligations hereunder and under all
other agreements entered into by the Subscriber relating hereto.
(m) Restricted Securities. Subscriber
understands that the Securities have not been registered under the 1933 Act and
such Subscriber will not sell, offer to sell, assign, pledge, hypothecate or
otherwise transfer any of the Securities unless pursuant to an effective
registration statement under the 1933 Act or unless an exemption from such
registration is available. Notwithstanding anything to the contrary contained in
this Agreement, such Subscriber may transfer (without restriction and without
the need for an opinion of counsel) the Securities to its Affiliates (as defined
below) provided that each such Affiliate is an "accredited investor" under
Regulation D and such Affiliate agrees to be bound by the terms and conditions
of this Agreement. For the purposes of this Agreement, an "AFFILIATE" of any
person or entity means any other person or entity directly or indirectly
controlling, controlled by or under direct or indirect common control with such
person or entity. For purposes of this definition, "CONTROL" means the power to
direct the management and policies of such person or firm, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.
(n) No Governmental Review. Each Subscriber
understands that no United States federal or state agency or any other
governmental or state agency has passed on or made recommendations or
endorsement of the Securities or the suitability of the investment in the
Securities nor have such authorities passed upon or endorsed the merits of the
offering of the Securities.
(m) No Market Manipulation. No Subscriber has
taken, and will not take, directly or indirectly, any action designed to, or
that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Securities or affect the price at which the Securities may be issued or
resold.
(n) No Group Participation. No Subscriber is a
member of any group, nor is any Subscriber acting in concert with any other
person, including any other Subscriber, with respect to its acquisition of the
Securities.
(o) Correctness of Representations. Each
Subscriber represents as to such Subscriber that the foregoing representations
and warranties are true and correct as of the date hereof and, unless a
Subscriber otherwise notifies the Company prior to each Closing Date shall be
true and correct as of each Closing Date.
(p) Survival. The foregoing representations and
warranties shall survive the Closing Date for a period of three years.
5. Company Representations and Warranties. Except as set
forth in the DISCLOSURE Schedule (attached hereto as ATTACHMENT 1) and the
Reports, the Company represents and warrants to and agrees with each Subscriber
that:
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(a) Due Incorporation. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite corporate power
to own its properties and to carry on its business as disclosed in the Reports.
The Company is duly qualified as a foreign corporation to do business and is in
good standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect. For purpose of this Agreement, a "MATERIAL ADVERSE EFFECT" shall
mean a material adverse effect on the financial condition, results of
operations, properties or business of the Company taken as a whole.
(b) Outstanding Stock. All issued and
outstanding shares of capital stock of the Company has been duly authorized and
validly issued and are fully paid and nonassessable.
(c) Authority; Enforceability. This Agreement,
the Note, the Warrants, the Escrow Agreement, Security Agreement and Collateral
Agent Agreement, and any other agreements delivered together with this Agreement
or in connection herewith (collectively "TRANSACTION DOCUMENTS") have been duly
authorized, executed and delivered by the Company and are valid and binding
agreements enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights generally and
to general principles of equity. The Company has full corporate power and
authority necessary to enter into and deliver the Transaction Documents and to
perform its obligations thereunder.
(d) Additional Issuances. There are no
outstanding agreements or preemptive or similar rights affecting the Company's
common stock or equity and no outstanding rights, warrants or options to
acquire, or instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of any shares of common
stock or equity of the Company or other equity interest in any of the
Subsidiaries of the Company except as described on SCHEDULE 5(D).
(e) Consents. No consent, approval,
authorization or order of any court, governmental agency or body or arbitrator
having jurisdiction over the Company, or any of its Affiliates, the Bulletin
Board nor the Company's shareholders is required for the execution by the
Company of the Transaction Documents and compliance and performance by the
Company of its obligations under the Transaction Documents, including, without
limitation, the issuance and sale of the Securities.
(f) No Violation or Conflict. Assuming the
representations and warranties of the
Subscribers in Section 4 are true and correct, neither the issuance and sale of
the Securities nor the performance of the Company's obligations under this
Agreement and all other agreements entered into by the Company relating thereto
by the Company will:
(i) violate, conflict with, result in a
breach of, or constitute a default (or an event which with the giving of notice
or the lapse of time or both would be reasonably likely to constitute a default)
under (A) the articles or certificate of incorporation, charter or bylaws of the
Company, (B) to the Company's knowledge, any decree, judgment, order, law,
treaty, rule, regulation or determination applicable to the Company of any
court, governmental agency or body, or arbitrator having jurisdiction over the
Company or over the properties or assets of the Company or any of its
Affiliates, (C) the terms of any bond, debenture, note or any other evidence of
indebtedness, or any agreement, stock option or other similar plan, indenture,
lease, mortgage, deed of trust or other instrument to which the Company or any
of its Affiliates is a party, by which the Company or any of its Affiliates is
bound, or to
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which any of the properties of the Company or any of its Affiliates is
subject, or (D) the terms of any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company, or any of its Affiliates
is a party except, in each case, the violation, conflict, breach, or default of
which would not have a Material Adverse Effect; or
(ii) except as contemplated hereby,
result in the creation or imposition of any lien, charge or encumbrance upon the
Securities or any of the assets of the Company or any of its Affiliates; or
(iii) result in the activation of any
anti-dilution rights or a reset or repricing of any debt or security instrument
of any other creditor or equity holder of the Company, nor result in the
acceleration of the due date of any obligation of the Company; or
(iv) result in the activation of any
piggy-back registration rights of any person or entity holding securities of the
Company or having the right to receive securities of the Company.
(g) The Securities. The Securities upon
issuance:
(i) are, or will be, free and clear of
any security interests, liens, claims or other encumbrances, subject to
restrictions upon transfer under the 1933 Act and any applicable state
securities laws;
(ii) have been, or will be, duly and
validly authorized and on the date of issuance of the Shares and upon conversion
or payment of the Note, and exercise of the Warrants, the Shares and Warrant
Shares will be duly and validly issued, fully paid and nonassessable or if
registered pursuant to the 1933 Act, and resold pursuant to an effective
registration statement will be free trading and unrestricted);
(iii) will not have been issued or sold
in violation of any preemptive or other similar rights of the holders of any
securities of the Company;
(iv) will not subject the holders
thereof to personal liability by reason of being such holders; and
(v) will not result in a violation of
Section 5 under the 1933 Act.
(h) Litigation. There is no pending or, to the
best knowledge of the Company, threatened action, suit, proceeding or
investigation before any court, governmental agency or body, or arbitrator
having jurisdiction over the Company, or any of its Affiliates that would affect
the execution by the Company or the performance by the Company of its
obligations under the Transaction Documents. Except as disclosed on the
Disclosure Schedule or in the Reports, there is no pending or, to the best
knowledge of the Company, basis for or threatened action, suit, proceeding or
investigation before any court, governmental agency or body, or arbitrator
having jurisdiction over the Company, or any of its Affiliates which litigation
if adversely determined would have a Material Adverse Effect.
(i) Reporting Company. The Company is a
publicly-held company that files periodic and other reports required by Section
15(d) of the 1934 Act. Pursuant to the provisions of the 1934 Act, the Company
has timely filed all reports and other materials required to be filed thereunder
with the Commission during the preceding twelve months.
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(j) No Market Manipulation. The Company and its
Affiliates have not taken, and will not take, directly or indirectly, any action
designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Securities or affect the price at which the Securities may
be issued or resold.
(k) Information Concerning Company. The Reports
contain all material information relating to the Company and its operations and
financial condition as of their respective dates which information is required
to be disclosed therein. Since the date of the financial statements included in
the Reports, and except as modified in the Other Written Information or in the
Schedules hereto, there has been no Material Adverse Event relating to the
Company's business, financial condition or affairs not disclosed in the Reports.
The Reports do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances when made.
(l) Stop Transfer. The Company will not issue
any stop transfer order or other order impeding the sale, resale or delivery of
any of the Securities, except as may be required by any applicable federal or
state securities laws and unless contemporaneous notice of such instruction is
given to the Subscriber.
(m) Defaults. The Company is not in violation of
its articles of incorporation or bylaws. The Company is (i) not in default under
or in violation of any other material agreement or instrument to which it is a
party or by which it or any of its properties are bound or affected, which
default or violation would have a Material Adverse Effect, (ii) not in default
with respect to any order of any court, arbitrator or governmental body or
subject to or party to any order of any court or governmental authority arising
out of any action, suit or proceeding under any statute or other law respecting
antitrust, monopoly, restraint of trade, unfair competition or similar matters,
or (iii) to the Company's knowledge not in violation of any statute, rule or
regulation of any governmental authority which violation would have a Material
Adverse Effect.
(n) No Integrated Offering. Neither the Company,
nor any of its Affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would cause the offer of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
the Bulletin Board. Nor will the Company or any of its Affiliates take any
action or steps that would cause the offer or issuance of the Securities to be
integrated with other offerings. The Company will not conduct any offering other
than the transactions contemplated hereby that will be integrated with the offer
or issuance of the Securities.
(o) No General Solicitation. Neither the
Company, nor any of its Affiliates, nor to its knowledge, any person acting on
its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the 0000 Xxx) in
connection with the offer or sale of the Securities.
(p) Listing. The Company's common stock is
quoted on the Bulletin Board. The Company has not received any oral or written
notice that its common stock is not eligible nor will become ineligible for
quotation on the Bulletin Board nor that its common stock does not meet all
requirements for the continuation of such quotation and the Company satisfies
all the requirements for the continued quotation of its common stock on the
Bulletin Board.
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(q) No Undisclosed Liabilities. The Company has
no liabilities or obligations which are material, individually or in the
aggregate, which are not disclosed in the Reports and Other Written Information,
other than those incurred in the ordinary course of the Company's businesses
since September 30, 2004 and which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect, except as disclosed on
SCHEDULE 5(Q).
(r) No Undisclosed Events or Circumstances.
Since September 30, 2004, no event or circumstance has occurred or exists with
respect to the Company or its businesses, properties, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in the Reports.
(s) Capitalization. The authorized and
outstanding capital stock of the Company as of the date of this Agreement and
the Closing Date (not including the Securities) are set forth on SCHEDULE 5(D).
Except as set forth on SCHEDULE 5(D), there are no options, warrants, or rights
to subscribe to, securities, rights or obligations convertible into or
exchangeable for or giving any right to subscribe for any shares of capital
stock of the Company or any of its Subsidiaries. All of the outstanding shares
of Common Stock of the Company have been duly and validly authorized and issued
and are fully paid and nonassessable.
(t) Dilution. The Company's executive officers
and directors understand the nature of the Securities being sold hereby and
recognize that the issuance of the Securities will have a potential dilutive
effect on the equity holdings of other holders of the Company's equity or rights
to receive equity of the Company. The board of directors of the Company has
concluded, in its good faith business judgment that the issuance of the
Securities is in the best interests of the Company. The Company specifically
acknowledges that its obligation to issue the Shares upon conversion of the
Notes, and the Warrant Shares upon exercise of the Warrants is binding upon the
Company and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company or parties entitled to
receive equity of the Company.
(u) No Disagreements with Accountants and
Lawyers. There are no disagreements of any kind presently existing, or
reasonably anticipated by the Company to arise, between the Company and the
accountants and lawyers formerly or presently employed by the Company, including
but not limited to disputes or conflicts over payment owed to such accountants
and lawyers.
(v) DTC Status. The Company's transfer agent is
a participant in and the Common Stock is eligible for transfer pursuant to the
Depository Trust Company Automated Securities Transfer Program.
(w) Investment Company. Neither the Company nor
any Affiliate is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(x) Subsidiary Representations. The Company
makes each of the representations contained in Sections 5(a), (b), (d), (f),
(h), (k), (m), (q) through (s), (u) and (w) of this Agreement, as same relate to
each Subsidiary of the Company. For purposes of this Agreement, "Subsidiary"
means, with respect to any entity at any date, any corporation, limited or
general partnership, limited liability company, trust, estate, association,
joint venture or other business entity) of which more than 50% of (i) the
outstanding capital stock having (in the absence of contingencies) ordinary
voting power to elect a majority of the board of directors or other managing
body of such entity, (ii) in the case of a partnership or limited liability
company, the interest in the capital or profits of such partnership or limited
9
liability company or (iii) in the case of a trust, estate, association,
joint venture or other entity, the beneficial interest in such trust, estate,
association or other entity business is, at the time of determination, owned or
controlled directly or indirectly through one or more intermediaries, by such
entity. All the Company's Subsidiaries as of the Closing Date are set forth on
SCHEDULE 5(X) hereto
(y) Company Predecessor. All representations
made by or relating to the Company of a historical or prospective nature and all
undertaking described in Sections 9.1(g) through 9.1(l) shall relate and refer
to the Company, its predecessors, and the Subsidiaries.
(z) Correctness of Representations. The Company
represents that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects, and, unless the Company
otherwise notifies the Subscribers prior to the Closing Date, shall be true and
correct in all material respects as of each Closing Date.
(AA) Survival. The foregoing representations and
warranties shall survive the Closing Date for a period of three years.
6. Regulation D Offering. The offer and issuance of the
Securities to the Subscribers is being made pursuant to the exemption from the
registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6)
of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion reasonably acceptable to
Subscriber from the Company's legal counsel opining on the availability of an
exemption from registration under the 1933 Act as it relates to the offer and
issuance of the Securities and other matters reasonably requested by
Subscribers. A form of the legal opinion is annexed hereto as EXHIBIT E. The
Company will provide, at the Company's expense, such other legal opinions in the
future as are reasonably necessary for the issuance and resale of the Common
Stock issuable upon conversion of the Notes and exercise of the Warrants
pursuant to an effective registration statement.
7.1. Conversion of Note.
(a) Upon the conversion of a Note or part
thereof, the Company shall, at its own cost and expense, take all necessary
action, including obtaining and delivering, an opinion of counsel to assure that
the Company's transfer agent shall issue stock certificates in the name of
Subscriber (or its nominee) or such other persons as designated by Subscriber
and in such denominations to be specified at conversion representing the number
of shares of Common Stock issuable upon such conversion. The Company warrants
that no instructions other than these instructions have been or will be given to
the transfer agent of the Company's Common Stock and that, unless waived by the
Subscriber, the Shares will be free-trading, and freely transferable, and will
not contain a legend restricting the resale or transferability of the Shares
provided the Shares are being sold pursuant to an effective registration
statement covering the Shares or are otherwise exempt from registration.
(b) Subscriber will give notice of its decision
to exercise its right to convert the Note, interest, any sum due to the
Subscriber under the Transaction Documents including Liquidated Damages, or part
thereof by telecopying an executed and completed Notice of Conversion (a form of
which is annexed as EXHIBIT A to the Note) to the Company via confirmed
telecopier transmission or otherwise pursuant to Section 13(a) of this
Agreement. The Subscriber will not be required to surrender the Note until the
Note has been fully converted or satisfied. Each date on which a Notice of
Conversion is telecopied to the Company in accordance with the provisions hereof
shall be deemed a CONVERSION DATE. The Company will itself or cause the
Company's transfer agent to transmit the Company's Common Stock certificates
representing the Shares issuable upon conversion of the Note to the Subscriber
via express
10
courier for receipt by such Subscriber within three (3) business days
after receipt by the Company of the Notice of Conversion (such third day being
the "DELIVERY DATE"). In the event the Shares are electronically transferable,
then delivery of the Shares must be made by electronic transfer provided request
for such electronic transfer has been made by the Subscriber and the Subscriber
has complied with all applicable securities laws in connection with the sale of
the Common Stock, including, without limitation, the prospectus delivery
requirements. A Note representing the balance of the Note not so converted will
be provided by the Company to the Subscriber if requested by Subscriber,
provided the Subscriber delivers the original Note to the Company. In the event
that a Subscriber elects not to surrender a Note for reissuance upon partial
payment or conversion, the Subscriber hereby indemnifies the Company against any
and all loss or damage attributable to a third-party claim in an amount in
excess of the actual amount then due under the Note.
(c) The Company understands that a delay in the
delivery of the Shares in the form required pursuant to Section 7.1 hereof, or
the Mandatory Redemption Amount described in Section 7.2 hereof, respectively
after the Delivery Date or the Mandatory Redemption Payment Date (as hereinafter
defined) could result in economic loss to the Subscriber. As compensation to the
Subscriber for such loss, the Company agrees to pay (as liquidated damages and
not as a penalty) to the Subscriber for late issuance of Shares in the form
required pursuant to Section 7.1 hereof upon Conversion of the Note in the
amount of $100 per business day after the Delivery Date for each $10,000 of Note
principal amount being converted of the corresponding Shares which are not
timely delivered. The Company shall pay any payments incurred under this Section
in immediately available funds upon demand. Furthermore, in addition to any
other remedies which may be available to the Subscriber, in the event that the
Company fails for any reason to effect delivery of the Shares by the Delivery
Date or make payment by the Mandatory Redemption Payment Date, the Subscriber
will be entitled to revoke all or part of the relevant Notice of Conversion or
rescind all or part of the notice of Mandatory Redemption by delivery of a
notice to such effect to the Company whereupon the Company and the Subscriber
shall each be restored to their respective positions immediately prior to the
delivery of such notice, except that the liquidated damages described above
shall be payable through the date notice of revocation or rescission is given to
the Company.
(d) Nothing contained herein or in any document
referred to herein or delivered in connection herewith shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest or dividends required to be paid or other charges hereunder exceed the
maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Subscriber and thus refunded
to the Company.
7.2. Mandatory Redemption at Subscriber's Election. In the
event the Company is prohibited from issuing Shares, or fails to timely deliver
Shares on a Delivery Date, or upon the occurrence of any other Event of Default
(as defined in the Note or in this Agreement) or for any reason other than
pursuant to the limitations set forth in Section 7.3 hereof, then at the
Subscriber's election, the Company must pay to the Subscriber ten (10) business
days after request by the Subscriber, at the Subscriber's election, a sum of
money determined by (i) multiplying up to the outstanding principal amount of
the Note designated by the Subscriber by 120%, or (ii) multiplying the number of
Shares otherwise deliverable upon conversion of an amount of Note principal
and/or interest designated by the Subscriber (with the date of giving of such
designation being a "DEEMED CONVERSION DATE") at the then Conversion Price that
would be in effect on the Deemed Conversion Date by the highest closing price of
the Common Stock on the principal market for the period commencing on the Deemed
Conversion Date until the day prior to the receipt of the Mandatory Redemption
Payment, whichever is greater, together with accrued but unpaid interest thereon
("MANDATORY REDEMPTION PAYMENT"). The Mandatory Redemption Payment must be
11
received by the Subscriber on the same date as the Company Shares
otherwise deliverable or within ten (10) business days after request, whichever
is sooner ("MANDATORY REDEMPTION PAYMENT DATE"). Upon receipt of the Mandatory
Redemption Payment, the corresponding Note principal and interest will be deemed
paid and no longer outstanding. Liquidated damages calculated pursuant to
Section 7.1(c) hereof, that have been paid or accrued for the twenty day period
prior to the actual receipt of the Mandatory Redemption Payment by the
Subscriber shall be credited against the Mandatory Redemption Payment.
7.3. Maximum Conversion. The Subscriber shall not be
entitled to convert on a Conversion Date that amount of the Note in connection
with that number of shares of Common Stock which would be in excess of the sum
of (i) the number of shares of common stock beneficially owned by the Subscriber
and its Affiliates on a Conversion Date, and (ii) the number of shares of Common
Stock issuable upon the conversion of the Note with respect to which the
determination of this provision is being made on a Conversion Date, which would
result in beneficial ownership by the Subscriber and its Affiliates of more than
4.99% of the outstanding shares of common stock of the Company on such
Conversion Date. For the purposes of the provision to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3
thereunder. Subject to the foregoing, the Subscriber shall not be limited to
aggregate conversions of only 4.99% and aggregate conversions by the Subscriber
may exceed 4.99%. The Subscriber may void the conversion limitation described in
this Section 7.3 upon and effective after 61 days prior written notice to the
Company. The Subscriber may allocate which of the equity of the Company deemed
beneficially owned by the Subscriber shall be included in the 4.99% amount
described above and which shall be allocated to the excess above 4.99%.
7.4. Injunction Posting of Bond. In the event a Subscriber
shall elect to convert a Note or part thereof or exercise the Warrant in whole
or in part, the Company may not refuse conversion or exercise based on any claim
that such Subscriber or any one associated or affiliated with such Subscriber
has been engaged in any violation of law, or for any other reason, unless, an
injunction from a court, on notice, restraining and or enjoining conversion of
all or part of such Note or exercise of all or part of such Warrant shall have
been sought and obtained by the Company and the Company has posted a surety bond
for the benefit of such Subscriber in the amount of 120% of the amount of the
Note, or aggregate purchase price of the Warrant Shares which are sought to be
subject to the injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Subscriber to the extent Subscriber obtains judgment.
7.5. Buy-In. In addition to any other rights available to
the Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after seven (7)
business days after the Delivery Date the Subscriber purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Subscriber of the Common Stock which the
Subscriber was entitled to receive upon such conversion (a "BUY-IN"), then the
Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (B) the aggregate principal
and/or interest amount of the Note for which such conversion was not timely
honored, together with interest thereon at a rate of 15% per annum, accruing
until such amount and any accrued interest thereon is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). For example, if the
Subscriber purchases shares of Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of
note principal and/or interest, the Company shall be required to pay the
Subscriber $1,000, plus interest. The Subscriber shall provide the Company
written notice indicating the amounts payable to the Subscriber in respect of
the Buy-In.
12
7.6 Adjustments. The Conversion Price, Warrant exercise
price and amount of Shares issuable upon conversion of the Notes and exercise of
the Warrants shall be adjusted as described in this Agreement, the Notes and
Warrants.
7.7. Redemption. The Note and Warrants shall not be
redeemable or callable except as described in the Note.
8. Finder/Legal Fees.
(a) Finder's Fee. The Company on the one hand,
and each Subscriber (for himself only) on the other hand, agree to indemnify the
other against and hold the other harmless from any and all liabilities to any
persons claiming brokerage commissions or finder's fees other than the finders
identified on SCHEDULE 8 hereto (each a "Finder") on account of services
purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby and
arising out of such party's actions. The Company agrees that it will pay the
Finders, in the aggregate, on the Closing Date a finder's fee of nine percent
(9%) of the Purchase Price ("Finder's Fees") as described on SCHEDULE 8 hereto.
The Finder's Fee will be paid by delivery of one or more Notes similar to and
carrying the same rights as the Notes issuable to the Subscribers ("FINDER'S
NOTES"). The Company represents that there are no other parties entitled to
receive fees, commissions, or similar payments in connection with the Offering
except the Finders.
(b) Finder's Warrants. On the Closing Date, the
Company will issue to the Finders Warrants similar to and carrying the same
rights as the A Warrants issuable to the Subscribers ("FINDER'S Warrants"). The
Finders will receive, in the aggregate, nine Finder's Warrants for each one
hundred (100) Shares issuable to the Subscribers on the Closing Date, assuming
the full conversion of the Notes at the Conversion Price in effect on the
Closing Date. All the representations, covenants, warranties, undertakings,
remedies, liquidated damages, indemnification, and other rights including but
not limited to reservation requirements and registration rights made or granted
to or for the benefit of the Subscribers are hereby also made and granted to the
Finders in respect of the Finder's Warrants.
(c) Legal Fees. The Company shall pay to Grushko &
Xxxxxxx, P.C., a fee of
$10,000 ("LEGAL FEES") (of which $5,000 has been paid) as reimbursement for
services rendered to the Subscribers in connection with this Agreement and the
purchase and sale of the Notes and Warrants (the "OFFERING") and acting as
Escrow Agent for the Offering. The Legal Fees will be payable out of funds held
pursuant to the Escrow Agreement.
9.1. Covenants of the Company. The Company covenants and
agrees with the Subscribers as follows:
(a) Stop Orders. The Company will advise the
Subscribers, promptly after it receives notice of issuance by the Commission,
any state securities commission or any other regulatory authority of any stop
order or of any order preventing or suspending any offering of any securities of
the Company, or of the suspension of the qualification of the Common Stock of
the Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) Listing. The Company shall promptly secure
the listing Shares and the Warrant Shares upon each national securities
exchange, or electronic or automated quotation system upon which they are or
become eligible for listing and shall maintain such listing so long as any Notes
or Warrants are outstanding. The Company will maintain the listing of its Common
Stock on the American Stock Exchange, Nasdaq SmallCap Market, Nasdaq National
Market System, Bulletin Board, or New
13
York Stock Exchange (whichever of the foregoing is at the time the
principal trading exchange or market for the Common Stock (the "PRINCIPAL
MARKET")), and will comply in all respects with the Company's reporting, filing
and other obligations under the bylaws or rules of the Principal Market, as
applicable. The Company will provide the Subscribers copies of all notices it
receives notifying the Company of the threatened and actual delisting of the
Common Stock from any Principal Market. As of the date of this Agreement and the
Closing Date, the Bulletin Board is and will be the Principal Market.
(c) Market Regulations. The Company shall notify
the Commission, the Principal Market and applicable state authorities, in
accordance with their requirements, of the transactions contemplated by this
Agreement, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid issuance of the Securities to the Subscribers and promptly provide copies
thereof to Subscriber.
(d) Filing Requirements. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitation, the Company will (A) cause its Common
Stock to continue to be subject to the reporting obligations of Section 15(d),
12(b) or 12(g) of the 1934 Act, (B) comply in all respects with its reporting
and filing obligations under the 1934 Act, (C) comply with all reporting
requirements that are applicable to an issuer subject to Section 15(d) of the
1934 Act, or, if a class of its securities is registered under Section 12(b) or
12(g) of the 1934 Act, to all reporting requirements that are applicable to an
issuer with a class of shares registered pursuant to Section 12(b) or 12(g) of
the 1934 Act, as applicable, and (D) comply with all requirements related to any
registration statement filed pursuant to this Agreement. The Company will use
its best efforts not to take any action or file any document (whether or not
permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate
or suspend such registration or to terminate or suspend its reporting and filing
obligations under said acts until three (3) years after the Closing Date. Until
the earlier of the resale of the Common Stock and the Warrant Shares by each
Subscriber or three (3) years after the Warrants have been exercised, the
Company will use its best efforts to continue the listing or quotation of the
Common Stock on a Principal Market and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the Principal Market. The Company agrees to timely file a Form D with respect to
the Securities if required under Regulation D and to provide a copy thereof to
each Subscriber promptly after such filing.
(e) Use of Proceeds. The proceeds of the
Offering will be employed by the Company for general working capital purposes.
Except as set forth on SCHEDULE 9.1(E), the Purchase Price may not and will not
be used for accrued and unpaid officer and director salaries, payment of
financing related debt, redemption of outstanding notes or equity instruments of
the Company nor non-trade obligations outstanding on a Closing Date.
(f) Reservation. Prior to the Closing Date, the
Company undertakes to reserve, pro rata, on behalf of each holder of a Note or
Warrant, from its authorized but unissued common stock, a number of common
shares equal to 150% of the amount of Common Stock necessary to allow each
holder of a Note to be able to convert all such outstanding Notes and interest
and reserve the amount of Warrant Shares issuable upon exercise of the Warrants.
Failure to have sufficient shares reserved pursuant to this Section 9.1(f) for
three (3) consecutive business days or ten (10) days in the aggregate shall be a
material default of the Company's obligations under this Agreement and an Event
of Default under the Note.
(g) Taxes. From the date of this Agreement and
until the sooner of (i) three (3) years after the Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or
14
transferred by all the Subscribers pursuant to the Registration
Statement or pursuant to Rule 144, without regard to volume limitations, the
Company will promptly pay and discharge, or cause to be paid and discharged,
when due and payable, all lawful taxes, assessments and governmental charges or
levies imposed upon the income, profits, property or business of the Company;
provided, however, that any such tax, assessment, charge or levy need not be
paid if the validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company shall have set aside on its books
adequate reserves with respect thereto, and provided, further, that the Company
will pay all such taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may have attached as
security therefore.
(h) Insurance. From the date of this Agreement
and until the sooner of (i) three (3) years after the Closing Date, or (ii)
until all the Shares and Warrant Shares have been resold or transferred by all
the Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep its assets which are
of an insurable character insured by financially sound and reputable insurers
against loss or damage by fire, explosion and other risks customarily insured
against by companies in the Company's line of business, in amounts sufficient to
prevent the Company from becoming a co-insurer and not in any event less than
one hundred percent (100%) of the insurable value of the property insured; and
the Company will maintain, with financially sound and reputable insurers,
insurance against other hazards and risks and liability to persons and property
to the extent and in the manner customary for companies in similar businesses
similarly situated and to the extent available on commercially reasonable terms.
(i) Books and Records. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company will keep true records
and books of account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and affairs in accordance
with generally accepted accounting principles applied on a consistent basis.
(j) Governmental Authorities. From the date of
this Agreement and until the sooner of (i) three (3) years after the Closing
Date, or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company shall
duly observe and conform in all material respects to all valid requirements of
governmental authorities relating to the conduct of its business or to its
properties or assets.
(k) Intellectual Property. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company shall maintain in full
force and effect its corporate existence, rights and franchises and all licenses
and other rights to use intellectual property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.
(l) Properties. From the date of this Agreement
and until the sooner of (i) three (3) years after the Closing Date, or (ii)
until all the Shares and Warrant Shares have been resold or transferred by all
the Subscribers pursuant to the Registration Statement (as defined in Section
11.1(iv) hereof) or pursuant to Rule 144, without regard to volume limitations,
the Company will keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
necessary and proper repairs, renewals, replacements, additions and improvements
thereto; and the Company will at all times comply with each provision of all
leases to which it is a party or under which
15
it occupies property if the breach of such provision could reasonably
be expected to have a Material Adverse Effect.
(m) Confidentiality/Public Announcement. From
the date of this Agreement and until the sooner of (i) three (3) years after the
Closing Date, or (ii) until all the Shares and Warrant Shares have been resold
or transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company agrees
that except in connection with a Form 8-K or the Registration Statement, it will
not disclose publicly or privately the identity of the Subscribers unless
expressly agreed to in writing by a Subscriber or only to the extent required by
law and then only upon five days prior notice to Subscriber. In any event and
subject to the foregoing, the Company shall file a Form 8-K or make a public
announcement describing the Offering not later than the second business day
after the Closing Date. In the Form 8-K or public announcement, the Company will
specifically disclose the amount of common stock outstanding immediately after
the Closing. A form of the proposed Form 8-K or public announcement to be
employed in connection with the Offering is annexed hereto as EXHIBIT F.
(n) Further Registration Statements. Except for
a registration statement filed on behalf of the Subscribers pursuant to Section
11 of this Agreement the Company will not file any registration statements or
amend any already filed registration statement, including but not limited to
Form S-8, but excluding any post-effective amendment(s) required to be made to
its Form SB-2 registration statement (SEC File No. 333-112585), with the
Commission or with state regulatory authorities without the consent of the
Subscriber until the sooner of (i) the Registration Statement shall have been
current and available for use in connection with the public resale of the Shares
and Warrant Shares for 180 days or (ii) until all the Shares have been resold or
transferred by the Subscribers pursuant to the Registration Statement or Rule
144, without regard to volume limitations ("EXCLUSION PERIOD"). The Exclusion
Period will be tolled during the pendency of an Event of Default as defined in
the Note.
(o) Non-Public Information. The Company
covenants and agrees that neither it nor any other person acting on its behalf
will provide any Subscriber or its agents or counsel with any information that
the Company believes constitutes material non-public information, unless prior
thereto such Subscriber shall have agreed in writing to receive such
information. The Company understands and confirms that each Subscriber shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.
10. Covenants of the Company and Subscriber Regarding
Indemnification.
(a) The Company agrees to indemnify, hold
harmless, reimburse and defend the Subscribers, the Subscribers' officers,
directors, agents, Affiliates, control persons, and principal shareholders,
against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Subscriber or any such person which results, arises out of or is based upon (i)
any material misrepresentation by Company or breach of any warranty by Company
in this Agreement or in any Exhibits or Schedules attached hereto, or other
agreement delivered pursuant hereto; or (ii) after any applicable notice and/or
cure periods, any breach or default in performance by the Company of any
material covenant or undertaking to be performed by the Company hereunder, or
any other agreement entered into by the Company and Subscriber relating hereto.
(b) Each Subscriber agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company's officers,
directors, agents, Affiliates, control persons against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Company or any such person which
results, arises out of or is
16
based upon (i) any material misrepresentation by such Subscriber in
this Agreement or in any Exhibits or Schedules attached hereto, or other
agreement delivered pursuant hereto; or (ii) after any applicable notice and/or
cure periods, any breach or default in performance by such Subscriber of any
covenant or undertaking to be performed by such Subscriber hereunder, or any
other agreement entered into by the Company and Subscribers, relating hereto.
(c) In no event shall the liability of any
Subscriber or permitted successor hereunder or under any Transaction Document or
other agreement delivered in connection herewith be greater in amount than the
dollar amount of the net proceeds actually received by such Subscriber upon the
sale of Registrable Securities (as defined herein).
(d) The procedures set forth in Section 11.6
shall apply to the indemnification set forth in Sections 10(a) and 10(b) above.
11.1. Registration Rights. The Company hereby grants the
following registration rights to holders of the Securities.
(i) On one occasion, for a period commencing
ninety-one (91) days after the Closing Date, but not later than two (2) years
after the Closing Date ("REQUEST DATE"), upon a written request therefor from
any record holder or holders of more than 50% of the Shares issued and issuable
upon conversion of the Notes and Warrant Shares actually issued upon exercise of
the Warrants, the Company shall prepare and file with the Commission a
registration statement under the 1933 Act registering the Shares and Warrant
Shares issuable upon exercise of the Warrants and Warrant Shares issuable upon
exercise of the Finder's Warrants (collectively "REGISTRABLE SECURITIES") which
are the subject of such request for unrestricted public resale by the holder
thereof. For purposes of Sections 11.1(i) and 11.1(ii), Registrable Securities
shall not include Securities (A) which are registered for resale in an effective
registration statement, (B) included for registration in a pending registration
statement, or (C) which have been issued without further transfer restrictions
after a sale or transfer pursuant to Rule 144 under the 1933 Act. Upon the
receipt of such request, the Company shall promptly give written notice to all
other record holders of the Registrable Securities that such registration
statement is to be filed and shall include in such registration statement
Registrable Securities for which it has received written requests within ten
(10) days after the Company gives such written notice. Such other requesting
record holders shall be deemed to have exercised their demand registration right
under this Section 11.1(i).
(ii) If the Company at any time proposes to
register any of its securities under the 1933 Act for sale to the public,
whether for its own account or for the account of other security holders or
both, except with respect to registration statements on Forms X-0, X-0 or
another form not available for registering the Registrable Securities for sale
to the public, provided the Registrable Securities are not otherwise registered
for resale by the Subscribers or Holder pursuant to an effective registration
statement, each such time it will give at least fifteen (15) days' prior written
notice to the record holder of the Registrable Securities of its intention so to
do. Upon the written request of the holder, received by the Company within ten
(10) days after the giving of any such notice by the Company, to register any of
the Registrable Securities not previously registered, the Company will cause
such Registrable Securities as to which registration shall have been so
requested to be included with the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent required to
permit the sale or other disposition of the Registrable Securities so registered
by the holder of such Registrable Securities (the "SELLER" or "SELLERS"). In the
event that any registration pursuant to this Section 11.1(ii) shall be, in whole
or in part, an underwritten public offering of common stock of the Company, the
number of shares of Registrable Securities to be included in such an
underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion
17
that such inclusion would adversely affect the marketing of the
securities to be sold by the Company therein; provided, however, that the
Company shall notify the Seller in writing of any such reduction.
Notwithstanding the foregoing provisions, or Section 11.4 hereof, the Company
may withdraw or delay or suffer a delay of any registration statement referred
to in this Section 11.1(ii) without thereby incurring any liability to the
Seller.
(iii) If, at the time any written request for
registration is received by the Company pursuant to Section 11.1(i), the Company
has determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the proposed offer
and sale for cash of any of its securities for the Company's own account and the
Company actually does file such other registration statement, such written
request shall be deemed to have been given pursuant to Section 11.1(ii) rather
than Section 11.1(i), and the rights of the holders of Registrable Securities
covered by such written request shall be governed by Section 11.1(ii).
(iv) The Company shall file with the Commission a
Form SB-2 registration statement (the "REGISTRATION STATEMENT") (or such other
form that it is eligible to use) in order to register the Registrable Securities
for resale and distribution under the 1933 Act not later than) April 30, 2005
(the "FILING DATE"), and cause to be declared effective not later than the
sooner of (A) July 29, 2005, or (B) ninety (90) days after the Filing Date (the
"EFFECTIVE DATE"). The Company will register not less than a number of shares of
common stock in the aforedescribed registration statement that is equal to 150%
of the Shares issuable upon conversion of the Notes and all of the Warrant
Shares issuable pursuant to this Agreement upon exercise of the Warrants. The
Registrable Securities shall be reserved and set aside exclusively for the
benefit of each Subscriber and Warrant holder, pro rata, and not issued,
employed or reserved for anyone other than each such Subscriber and Warrant
holder. The Registration Statement will immediately be amended or additional
registration statements will be immediately filed by the Company as necessary to
register additional shares of Common Stock to allow the public resale of all
Common Stock included in and issuable by virtue of the Registrable Securities.
Without the written consent of the Subscriber, no securities of the Company
other than the Registrable Securities will be included in the Registration
Statement. It shall be deemed a Non-Registration Event if at any time after the
date the Registration Statement is declared effective by the Commission ("ACTUAL
EFFECTIVE DATE") the Company has registered for unrestricted resale on behalf of
the Subscriber less than 125% of the amount of Common Shares issuable upon full
conversion of all sums due under the Notes for more than 45 days in any 365 day
period and 100% of the Warrant Shares issuable upon exercise of the Warrants.
11.2. Registration Procedures. If and whenever the Company
is required by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect
the registration of any Registrable Securities under the 1933 Act, the Company
will, as expeditiously as possible:
(a) subject to the timelines provided in this
Agreement, prepare and file with the Commission a registration statement
required by Section 11, with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for the
period of the distribution contemplated thereby (determined as herein provided),
promptly provide to the holders of the Registrable Securities copies of all
filings and Commission letters of comment and notify Subscribers (by telecopier
and by e-mail addresses provided by Subscribers) and Grushko & Xxxxxxx, P.C. (by
telecopier and by email to Xxxxxxxxx@xxx.xxx) on or before 6:00 PM EST on the
first business day following the day the Company receives notice that (i) the
Commission has no comments or no further comments on the Registration Statement,
and (ii) the registration statement has been declared effective (failure to
timely provide notice as required by this Section 11.2(a) shall be a material
breach of the Company's obligation and an Event of Default as defined in the
Notes and a Non-Registration Event as defined in Section 10.4 of this
Agreement);
18
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective until such registration statement has been effective for a
period of three (3) years, and comply with the provisions of the 1933 Act with
respect to the disposition of all of the Registrable Securities covered by such
registration statement in accordance with the Sellers' intended method of
disposition set forth in such registration statement for such period;
(c) furnish to the Sellers, at the Company's
expense, such number of copies of the registration statement and the prospectus
included therein (including each preliminary prospectus) as such persons
reasonably may request in order to facilitate the public sale or their
disposition of the securities covered by such registration statement;
(d) use its commercially reasonable best efforts
to register or qualify the Registrable Securities covered by such registration
statement under the securities or "blue sky" laws of New York and such
jurisdictions as the Sellers shall request in writing, provided, however, that
the Company shall not for any such purpose be required to qualify generally to
transact business as a foreign corporation in any jurisdiction where it is not
so qualified or to consent to general service of process in any such
jurisdiction;
(e) if applicable, list the Registrable
Securities covered by such registration statement with any securities exchange
on which the Common Stock of the Company is then listed;
(f) immediately notify the Sellers when a
prospectus relating thereto is required to be delivered under the 1933 Act, of
the happening of any event of which the Company has knowledge as a result of
which the prospectus contained in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing; and
(g) provided same would not be in violation of
the provision of Regulation FD under the 1934 Act, make available for inspection
by the Sellers, and any attorney, accountant or other agent retained by the
Seller or underwriter, all publicly available, non-confidential financial and
other records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
attorney, accountant or agent in connection with such registration statement.
11.3. Provision of Documents. In connection with each
registration described in this Section 11, each Seller will furnish to the
Company in writing such information and representation letters with respect to
itself and the proposed distribution by it as reasonably shall be necessary in
order to assure compliance with federal and applicable state securities laws.
11.4. Non-Registration Events. The Company and the
Subscribers agree that the Sellers will suffer damages if the Registration
Statement is not filed by the Filing Date and not declared effective by the
Commission by the Effective Date, and any registration statement required under
Section 11.1(i) or 11.1(ii) is not filed within 60 days after written request
and declared effective by the Commission within 120 days after such request, and
maintained in the manner and within the time periods contemplated by Section 11
hereof, and it would not be feasible to ascertain the extent of such damages
with precision. Accordingly, if (A) the Registration Statement is not filed on
or before the Filing Date, (B) is not declared effective on or before the
Effective Date, (C) the Registration Statement is not declared effective within
three (3) business days after receipt by the Company or its attorneys of a
written or oral communication from the Commission that the Registration
Statement will not be reviewed or that the Commission has no
19
further comments, (D) if the registration statement described in
Sections 11.1(i) or 11.1(ii) is not filed within 60 days after such written
request, or is not declared effective within 120 days after such written
request, or (E) any registration statement described in Sections 11.1(i),
11.1(ii) or 11.1(iv) is filed and declared effective but shall thereafter cease
to be effective (without being succeeded within fifteen (15) business days by an
effective replacement or amended registration statement) for a period of time
which shall exceed 30 days in the aggregate per year (defined as a period of 365
days commencing on the date the Registration Statement is declared effective) or
more than 20 consecutive days (each such event referred to in clauses A through
E of this Section 11.4 is referred to herein as a "Non-Registration Event"),
then the Company shall deliver to the holder of Registrable Securities, as
Liquidated Damages, an amount equal to two percent (2%) for each thirty (30)
days or part thereof, thereafter of the Purchase Price of the Notes remaining
unconverted and purchase price of Shares issued upon conversion of the Notes
owned of record by such holder which are subject to such Non-Registration Event.
The Company must pay the Liquidated Damages in cash. The Liquidated Damages must
be paid within ten (10) days after the end of each thirty (30) day period or
shorter part thereof for which Liquidated Damages are payable. In the event a
Registration Statement is filed by the Filing Date but is withdrawn prior to
being declared effective by the Commission, then such Registration Statement
will be deemed to have not been filed. All oral or written and accounting
comments received from the Commission relating to the Registration Statement
must be satisfactorily responded to within ten (10) business days after receipt
of comments from the Commission. Failure to timely respond to Commission
comments is a Non-Registration Event for which Liquidated Damages shall accrue
and be payable by the Company to the holders of Registrable Securities at the
same rate set forth above. Notwithstanding the foregoing, the Company shall not
be liable to the Subscriber under this Section 11.4 for any events or delays
occurring as a consequence of the acts or omissions of the Subscribers contrary
to the obligations undertaken by Subscribers in this Agreement. Liquidated
Damages will not accrue nor be payable pursuant to this Section 11.4 nor will a
Non-Registration Event be deemed to have occurred for times during which
Registrable Securities are transferable by the holder of Registrable Securities
pursuant to Rule 144(k) under the 1933 Act.
11.5. Expenses. All expenses incurred by the Company in
complying with Section 11, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of
insurance and fee of one counsel for all Sellers are called "REGISTRATION
EXPENSES." All underwriting discounts and selling commissions applicable to the
sale of Registrable Securities, including any fees and disbursements of one
counsel to the Seller, are called "SELLING EXPENSES." The Company will pay all
Registration Expenses in connection with the registration statement under
Section 11. Selling Expenses in connection with each registration statement
under Section 11 shall be borne by the Seller and may be apportioned among the
Sellers in proportion to the number of shares sold by the Seller relative to the
number of shares sold under such registration statement or as all Sellers
thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any
Registrable Securities under the 1933 Act pursuant to Section 11, the Company
will, to the extent permitted by law, indemnify and hold harmless the Seller,
each officer of the Seller, each director of the Seller, each underwriter of
such Registrable Securities thereunder and each other person, if any, who
controls such Seller or underwriter within the meaning of the 1933 Act, against
any losses, claims, damages or liabilities, joint or several, to which the
Seller, or such underwriter or controlling person may become subject under the
1933 Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration
20
statement under which such Registrable Securities was registered under
the 1933 Act pursuant to Section 11, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances when made, and will subject
to the provisions of Section 11.6(c) reimburse the Seller, each such underwriter
and each such controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable to the Seller to the extent that any such damages arise out of or
are based upon an untrue statement or omission made in any preliminary
prospectus if (i) the Seller failed to send or deliver a copy of the final
prospectus delivered by the Company to the Seller with or prior to the delivery
of written confirmation of the sale by the Seller to the person asserting the
claim from which such damages arise, (ii) the final prospectus would have
corrected such untrue statement or alleged untrue statement or such omission or
alleged omission, or (iii) to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by any such Seller, or any such controlling person in writing
specifically for use in such registration statement or prospectus.
(b) In the event of a registration of any of the
Registrable Securities under the 1933 Act pursuant to Section 11, each Seller
severally but not jointly will, to the extent permitted by law, indemnify and
hold harmless the Company, and each person, if any, who controls the Company
within the meaning of the 1933 Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the 1933 Act, against
all losses, claims, damages or liabilities, joint or several, to which the
Company or such officer, director, underwriter or controlling person may become
subject under the 1933 Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the registration statement under which such Registrable Securities were
registered under the 1933 Act pursuant to Section 11, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereof,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the net proceeds actually received by the Seller from the sale of Registrable
Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party hereunder, notify the indemnifying party in writing thereof, but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to such indemnified party other than under this
Section 11.6(c) and shall only relieve it from any liability which it may have
to such indemnified party under this Section 11.6(c), except and only if and to
the extent the indemnifying party is prejudiced by such omission. In case any
such action shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such indemnified
party, and, after notice from
21
the indemnifying party to such indemnified party of its election so to
assume and undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 11.6(c) for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected, provided, however, that, if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified parties, as a group, shall have the right to select one
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the reasonable expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable
contribution in the event of joint liability under the 1933 Act in any case in
which either (i) a Seller, or any controlling person of a Seller, makes a claim
for indemnification pursuant to this Section 11.6 but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 11.6 provides for indemnification in
such case, or (ii) contribution under the 1933 Act may be required on the part
of the Seller or controlling person of the Seller in circumstances for which
indemnification is not provided under this Section 11.6; then, and in each such
case, the Company and the Seller will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Seller is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (y) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities sold by it pursuant to such registration statement; and (z) no person
or entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 0000 Xxx) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
11.7. Delivery of Unlegended Shares.
(a) Within three (3) business days (such third
business day being the "UNLEGENDED SHARES DELIVERY DATE") after the business day
on which the Company has received (i) a notice that Shares or Warrant Shares
have been sold pursuant to the Registration Statement or Rule 144 under the 1933
Act, (ii) a representation that the prospectus delivery requirements, or the
requirements of Rule 144, as applicable and if required, have been satisfied,
and (iii) the original share certificates representing the shares of Common
Stock that have been sold, and (iv) in the case of sales under Rule 144,
customary representation letters of the Subscriber and/or Subscriber's broker
regarding compliance with the requirements of Rule 144, the Company at its
expense, (y) shall deliver, and shall cause legal counsel selected by the
Company to deliver to its transfer agent (with copies to Subscriber) an
appropriate instruction and opinion of such counsel, directing the delivery of
shares of Common Stock without any legends including the legend set forth in
Section 4(h) above, reissuable pursuant to any effective and current
Registration Statement described in Section 11 of this Agreement or pursuant to
Rule 144 under the 1933 Act (the "UNLEGENDED SHARES"); and (z) cause the
transmission of the certificates representing the Unlegended Shares together
with a legended certificate representing the balance of the submitted Shares
certificate, if any, to the Subscriber at the address specified in the notice of
sale, via express courier, by electronic transfer or otherwise on or before the
Unlegended Shares Delivery Date. Transfer fees shall be the responsibility of
the Seller.
22
(b) In lieu of delivering physical certificates
representing the Unlegended Shares, if the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, upon request of a Subscriber, so long as the certificates
therefor do not bear a legend and the Subscriber is not obligated to return such
certificate for the placement of a legend thereon, the Company shall cause its
transfer agent to electronically transmit the Unlegended Shares by crediting the
account of Subscriber's prime Broker with DTC through its Deposit Withdrawal
Agent Commission system. Such delivery must be made on or before the Unlegended
Shares Delivery Date.
(c) The Company understands that a delay in the
delivery of the Unlegended Shares pursuant to Section 11 hereof later than two
business days after the Unlegended Shares Delivery Date could result in economic
loss to a Subscriber. As compensation to a Subscriber for such loss, the Company
agrees to pay late payment fees (as liquidated damages and not as a penalty) to
the Subscriber for late delivery of Unlegended Shares in the amount of $100 per
business day after the Delivery Date for each $10,000 of purchase price of the
Unlegended Shares subject to the delivery default. If during any 360 day period,
the Company fails to deliver Unlegended Shares as required by this Section 11.7
for an aggregate of thirty (30) days, then each Subscriber or assignee holding
Securities subject to such default may, at its option, require the Company to
redeem all or any portion of the Shares and Warrant Shares subject to such
default at a price per share equal to 120% of the Purchase Price of such Common
Stock and Warrant Shares ("UNLEGENDED REDEMPTION AMOUNT"). The amount of the
aforedescribed liquidated damages that have accrued or been paid for the twenty
day period prior to the receipt by the Subscriber of the Unlegended Redemption
Amount shall be credited against the Unlegended Redemption Amount. The Company
shall pay any payments incurred under this Section in immediately available
funds upon demand.
(d) In addition to any other rights available to
a Subscriber, if the Company fails to deliver to a Subscriber Unlegended Shares
as required pursuant to this Agreement, within seven (7) business days after the
Unlegended Shares Delivery Date and the Subscriber purchases (in an open market
transaction or otherwise) shares of common stock to deliver in satisfaction of a
sale by such Subscriber of the shares of Common Stock which the Subscriber was
entitled to receive from the Company (a "BUY-IN"), then the Company shall pay in
cash to the Subscriber (in addition to any remedies available to or elected by
the Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of common stock so
purchased exceeds (B) the aggregate purchase price of the shares of Common Stock
delivered to the Company for reissuance as Unlegended Shares together with
interest thereon at a rate of 15% per annum, accruing until such amount and any
accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if a Subscriber purchases
shares of Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to $10,000 of purchase price of shares of Common Stock
delivered to the Company for reissuance as Unlegended Shares, the Company shall
be required to pay the Subscriber $1,000, plus interest. The Subscriber shall
provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.
(e) In the event a Subscriber shall request
delivery of Unlegended Shares as described in Section 11.7 and the Company is
required to deliver such Unlegended Shares pursuant to Section 11.7, the Company
may not refuse to deliver Unlegended Shares based on any claim that such
Subscriber or any one associated or affiliated with such Subscriber has been
engaged in any violation of law, or for any other reason, unless, an injunction
or temporary restraining order from a court, on notice, restraining and or
enjoining delivery of such Unlegended Shares or exercise of all or part of said
Warrant shall have been sought and obtained and the Company has posted a surety
bond for the benefit of such Subscriber in the amount of 120% of the amount of
the aggregate purchase price of the Common Stock and Warrant Shares which are
subject to the injunction or temporary restraining order, which bond shall
23
remain in effect until the completion of arbitration/litigation of the
dispute and the proceeds of which shall be payable to such Subscriber to the
extent Subscriber obtains judgment in Subscriber's favor.
12. (a) Right of First Refusal. Until the end of the
Exclusion Period, the Subscribers shall be given not less than seven (7)
business days prior written notice of any proposed sale by the Company of its
common stock, other equity securities, obligations convertible or exercisable
for equity securities or debt obligations, except in connection with (i) full or
partial consideration in connection with a strategic merger, consolidation or
purchase of substantially all of the securities or assets of a corporation or
other entity, and (ii) the Company's issuance of securities in connection with
strategic license agreements and other partnering arrangements so long as such
issuances are not for the purpose of raising capital, (iii) the Company's
issuance of Common Stock or the issuance or grants of options to purchase Common
Stock pursuant to the Company's stock option plans and employee stock purchase
plans as they now exist, copies of which plans have been delivered to the
Subscribers or are filed with the Reports (iv) as a result of the exercise of
options or warrants or conversion of convertible notes which are granted or
issued pursuant to this Agreement, (v) the payment of any interest on the Notes,
and (vi) as has been described in the Reports or Other Written Information filed
with the Commission or delivered to the Subscribers prior to the Closing Date
(collectively the foregoing are "EXCEPTED ISSUANCES"). The Subscribers who
exercise their rights pursuant to this Section 12(a) shall have the right during
the seven (7) business days following receipt of the notice to purchase such
offered common stock, debt or other securities in accordance with the terms and
conditions set forth in the notice of sale in the same proportion to each other
as their purchase of Notes in the Offering. In the event such terms and
conditions are modified during the notice period, the Subscribers shall be given
prompt notice of such modification and shall have the right during the seven (7)
business days following the notice of modification, whichever is longer, to
exercise such right.
(b) Offering Restrictions. Until the end of the
Exclusion Period, or during the pendency of an Event of Default, or when any
liquidated damages are accruing or are outstanding, other than Excepted
Issuances, the Company will not enter into an agreement to nor issue any equity,
convertible debt or other securities convertible into common stock or equity of
the Company nor modify any of the foregoing which may be outstanding at anytime,
without the prior written consent of the Subscriber, which consent may be
withheld for any reason. For so long as the Notes are outstanding the Company
will not enter into any equity line of credit or similar agreement, nor issue or
agree to issue any floating or variable priced equity linked instruments nor any
of the foregoing or equity with price reset rights.
(c) Favored Nations Provision. Other than the
Excepted Issuances, if at any time Notes or Warrants are outstanding the Company
shall offer, issue or agree to issue any common stock or securities convertible
into or exercisable for shares of common stock (or modify any of the foregoing
which may be outstanding) to any person or entity at a price per share or
conversion or exercise price per share which shall be less than the Conversion
Price in respect of the Shares, or if less than the Warrant exercise price in
respect of the Warrant Shares, without the consent of each Subscriber holding
Notes, Shares, Warrants, or Warrant Shares, then the Company shall issue, for
each such occasion, additional shares of Common Stock to each Subscriber so that
the average per share purchase price of the shares of Common Stock issued to the
Subscriber (of only the Common Stock or Warrant Shares still owned by the
Subscriber) is equal to such other lower price per share and the Conversion
Price and Warrant Exercise Price shall automatically be reduced to such other
lower price per share. The average Purchase Price of the Shares and average
exercise price in relation to the Warrant Shares shall be calculated separately
for the Shares and Warrant Shares. The foregoing calculation and issuance shall
be made separately for Shares received upon conversion and separately for
Warrant Shares. The delivery to the Subscriber of the additional shares of
Common Stock shall be not later than the closing date of the transaction giving
rise to
24
the requirement to issue additional shares of Common Stock. The
Subscriber is granted the registration rights described in Section 11 hereof in
relation to such additional shares of Common Stock except that the Filing Date
and Effective Date vis-a-vis such additional common shares shall be,
respectively, the forty-fifth (45th) and ninetieth (90th) date after the closing
date giving rise to the requirement to issue the additional shares of Common
Stock. For purposes of the issuance and adjustment described in this paragraph,
the issuance of any security of the Company carrying the right to convert such
security into shares of Common Stock or of any warrant, right or option to
purchase Common Stock shall result in the issuance of the additional shares of
Common Stock upon the sooner of the agreement to or actual issuance of such
convertible security, warrant, right or option and again at any time upon any
subsequent issuances of shares of Common Stock upon exercise of such conversion
or purchase rights if such issuance is at a price lower than the Conversion
Price or Warrant exercise price in effect upon such issuance. The rights of the
Subscriber set forth in this Section 12 are in addition to any other rights the
Subscriber has pursuant to this Agreement, the Note, any Transaction Document,
and any other agreement referred to or entered into in connection herewith.
(d) Option Plan Restrictions. The only officer,
director, employee and consultant stock option or stock incentive plan currently
in effect or contemplated by the Company has been submitted to the Subscribers
or filed with the Reports. No other plan will be adopted nor may any options or
equity not included in such plan be issued for so long as any sum is outstanding
under the Note.
(e) Maximum Exercise of Rights. In the event the
exercise of the rights described in Sections 12(a) and 12(c) would result in the
issuance of an amount of common stock of the Company that would exceed the
maximum amount that may be issued to a Subscriber calculated in the manner
described in Section 7.3 of this Agreement, then the issuance of such additional
shares of common stock of the Company to such Subscriber will be deferred in
whole or in part until such time as such Subscriber is able to beneficially own
such common stock without exceeding the maximum amount set forth calculated in
the manner described in Section 7.3 of this Agreement. The determination of when
such common stock may be issued shall be made by each Subscriber as to only such
Subscriber.
13. Miscellaneous.
(a) Notices. All notices, demands, requests,
consents, approvals, and other communications required or permitted hereunder
shall be in writing and, unless otherwise specified herein, shall be (i)
personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier
service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or
facsimile, addressed as set forth below or to such other address as such party
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be: (i) if to the
Company, to: Dyneco Corporation, 000 Xxxxxxxxxxxxx Xxxxx, Xxxxxxxxx, XX 00000,
Attn: Xx. Xxxxxx X. Xxxxxxx, President, telecopier number: (000) 000-0000, with
a copy by telecopier only to: Xxxxx Xxxxxxxxx, Esq., 0000 Xxxxxxxxx Xxxx., XX,
Xxxxx 000, Xxxx Xxxxx, XX 00000-0000, telecopier number: (000) 000-0000, and
(ii) if to the Subscribers, to: the one or more addresses and telecopier numbers
indicated on the signature pages hereto, with an additional copy by telecopier
only to: Grushko &
25
Xxxxxxx, P.C., 000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000,
telecopier number: (000) 000-0000.
(b) Closing. The consummation of the
transactions contemplated herein shall take place at the offices of Grushko &
Xxxxxxx, P.C., 000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, upon the
satisfaction of all conditions to Closing set forth in this Agreement ("CLOSING
DATE").
(c) Entire Agreement; Assignment. This Agreement
and other documents delivered in connection herewith represent the entire
agreement between the parties hereto with respect to the subject matter hereof
and may be amended only by a writing executed by both parties. Neither the
Company nor the Subscribers have relied on any representations not contained or
referred to in this Agreement and the documents delivered herewith. No right or
obligation of the Company shall be assigned without prior notice to and the
written consent of the Subscribers.
(d) Counterparts/Execution. This Agreement may
be executed in any number of counterparts and by the different signatories
hereto on separate counterparts, each of which, when so executed, shall be
deemed an original, but all such counterparts shall constitute but one and the
same instrument. This Agreement may be executed by facsimile signature and
delivered by facsimile transmission.
(e) Law Governing this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to conflicts of laws principles that would result in the
application of the substantive laws of another jurisdiction. Any action brought
by either party against the other concerning the transactions contemplated by
this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. THE PARTIES AND THE INDIVIDUALS
EXECUTING THIS AGREEMENT AND OTHER AGREEMENTS REFERRED TO HEREIN OR DELIVERED IN
CONNECTION HEREWITH ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION
OF SUCH COURTS AND WAIVE TRIAL BY JURY. The prevailing party shall be entitled
to recover from the other party its reasonable attorney's fees and costs. In the
event that any provision of this Agreement or any other agreement delivered in
connection herewith is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of any agreement.
(f) Specific Enforcement, Consent to
Jurisdiction. The Company and Subscriber acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to one or
more preliminary and final injunctions to prevent or cure breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which any of
them may be entitled by law or equity. Subject to Section 13(e) hereof, each of
the Company, Subscriber and any signator hereto in his personal capacity hereby
waives, and agrees not to assert in any such suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction in New York of such
court, that the suit, action or proceeding is brought in an inconvenient forum
or that the venue of the suit, action or proceeding is improper. Nothing in this
Section shall affect or limit any right to serve process in any other manner
permitted by law.
26
(g) Independent Nature of Subscribers. The
Company acknowledges that the obligations of each Subscriber under the
Transaction Documents are several and not joint with the obligations of any
other Subscriber, and no Subscriber shall be responsible in any way for the
performance of the obligations of any other Subscriber under the Transaction
Documents. The Company acknowledges that each Subscriber has represented that
the decision of each Subscriber to purchase Securities has been made by such
Subscriber independently of any other Subscriber and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company which may have been made or
given by any other Subscriber or by any agent or employee of any other
Subscriber, and no Subscriber or any of its agents or employees shall have any
liability to any Subscriber (or any other person) relating to or arising from
any such information, materials, statements or opinions. The Company
acknowledges that nothing contained in any Transaction Document, and no action
taken by any Subscriber pursuant hereto or thereto (including, but not limited
to, the (i) inclusion of a Subscriber in the Registration Statement and (ii)
review by, and consent to, such Registration Statement by a Subscriber) shall be
deemed to constitute the Subscribers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the
Subscribers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. The
Company acknowledges that each Subscriber shall be entitled to independently
protect and enforce its rights, including without limitation, the rights arising
out of the Transaction Documents, and it shall not be necessary for any other
Subscriber to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that it has elected to provide all Subscribers
with the same terms and Transaction Documents for the convenience of the Company
and not because Company was required or requested to do so by the Subscribers.
The Company acknowledges that such procedure with respect to the Transaction
Documents in no way creates a presumption that the Subscribers are in any way
acting in concert or as a group with respect to the Transaction Documents or the
transactions contemplated thereby.
(h) Resales Absent Effective Registration
Statement. Each of the Subscribers understands and acknowledges that (i) the
Transaction Documents may require the Company to issue and deliver Shares and/or
Warrant Shares to the Subscriber, without legend restricting their
transferability under the 1933 Act, and (ii) it is aware that resales of the
Shares and/or Warrant Shares may not be made unless, at the time of resale,
there is an effective registration statement under the 1933 Act covering such
Subscriber's resale(s) or an applicable exemption from registration.
Accordingly, each Subscriber hereby covenants and agrees that, commencing from
the time it is advised by the Company that any registration statement
theretofore covering resale of the Shares and/or Warrant Shares is no longer
effective, until such time as the Company advises the Subscriber there is an
effective registration statement covering resale of the Shares and Warrant
Shares, Subscriber will not sell, assign, pledge, transfer or otherwise dispose
of any of the Shares or Warrant Shares without the prior written consent of the
Company unless an exemption from registration is available to the Subscriber.
[THIS SPACE INTENTIONALLY LEFT BLANK]
27
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
DYNECO CORPORATION
a Minnesota corporation
By: /s/ Xx. Xxxxxx X. Xxxxxxx
-------------------------
Name: Xx. Xxxxxx X. Xxxxxxx
Title: President
Dated: March 2, 2005
-------------------------------- ------------ ---------- ---------- ---------
SUBSCRIBER NOTE CLASS A CLASS B CLASS C
PRINCIPAL WARRANTS WARRANTS WARRANTS
-------------------------------- ------------ ---------- ---------- ---------
ALPHA CAPITAL AKTIENGESELLSCHAFT $200,000.00 2,000,000 1,000,000 2,000,000
Xxxxxxxxx 0
0000 Xxxxxxxxxxx
Xxxxx, Lichtenstein
Fax: 000-00-00000000
/s/ Xxxxxx Xxxxxxxxx
--------------------
(Signature)
By: Xxxxxx Xxxxxxxxx
-------------------------------- ------------ ---------- ---------- ---------
28
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
DYNECO CORPORATION
a Minnesota corporation
By: /s/ Xx. Xxxxxx X. Xxxxxxx
-------------------------
Name: Xx. Xxxxxx X. Xxxxxxx
Title: President
Dated: March 2, 2005
-------------------------------- ------------ ---------- ---------- ----------
SUBSCRIBER NOTE CLASS A CLASS B CLASS C
PRINCIPAL WARRANTS WARRANTS WARRANTS
-------------------------------- ------------ ---------- ---------- ----------
JM INVESTORS, LLC $100,000.00 1,000,000 500,000 1,000,000
000 Xxxx 0XX xxxxxx
Xxxxxxxx, XX 00000
Fax: (000) 000-0000
/s/ Xxxxxxx Xxxxx
-----------------
(Signature)
By: Xxxxxxx Xxxxx
-------------------------------- ----------- ----------- ---------- ----------
29
LIST OF EXHIBITS AND SCHEDULES
Attachment 1 Disclosure Schedule consisting of the following:
Exhibit A1 Form of Class A Warrant
Exhibit A2 Form of Class B Warrant
Exhibit A3 Form of Class C Warrant
Exhibit B Escrow Agreement
Exhibit C Security Agreement
Exhibit D Collateral Agent Agreement
Exhibit E Form of Legal Opinion
Exhibit F Form of Public Announcement or Form 8-K
Schedule 5(d) Additional Issuances / Capitalization
Schedule 5(q) Undisclosed Liabilities
Schedule 5(x) Subsidiaries
Schedule 8 Finders
Schedule 9.1(e) Use of Proceeds
30
SCHEDULE 5(D) TO SUBSCRIPTION AGREEMENT DATED MARCH 2, 2005
CAPITALIZATION
CAPITAL STOCK
-------------
------------------------------- ---------------------- ---------------------
CLASS NUMBER OF SHARES NUMBER OF SHARES
AUTHORIZED OUTSTANDING
------------------------------- ---------------------- ---------------------
Common Stock, $.01 par value 80,000,000 33,562,978
------------------------------- ---------------------- ---------------------
Undesignated Preferred Stock, 20,000,000 0
$.01 par value
------------------------------- ---------------------- ---------------------
OPTIONS
-------
---------------------- ------------------ ------------------ -------------------
SOURCE NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
AUTHORIZED AWARDED REMAINING AVAILABLE
---------------------- ------------------ ------------------ -------------------
2001 Equity Incentive 1,000,000 0 1,000,000
Plan
---------------------- ------------------ ------------------ -------------------
1993 Corporate Stock 750,000 143,333 606,667
Option Plan
---------------------- ------------------ ------------------ -------------------
1993 Advisors Stock 750,000 200,000 550,000
Option Plan
---------------------- ------------------ ------------------ -------------------
Other 4,370,036 4,370,036 0
---------------------- ------------------ ------------------ -------------------
COMMON STOCK PURCHASE WARRANTS
------------------------------
--------------------------- ------------------------ ---------------------
NUMBER OF SHARES ISSUABLE EXERCISE PRICE EXPIRATION DATE
--------------------------- ------------------------ ---------------------
11,885,120 $.18 June 30, 2006
--------------------------- ------------------------ ---------------------
4,000,000 $.18 November 30, 2006
--------------------------- ------------------------ ---------------------
225,000 $.15 December 31, 2006
--------------------------- ------------------------ ---------------------
31
SCHEDULE 5(X) TO SUBSCRIPTION AGREEMENT DATED MARCH 2, 2005
SUBSIDIARIES
---------------------------- ------------------------------ --------------------
NAME OF SUBSIDIARY JURISDICTION OF ORGANIZATION OWNERSHIP INTEREST
---------------------------- ------------------------------ --------------------
DynEco International, Inc. Minnesota 100%
---------------------------- ------------------------------ --------------------
32
SCHEDULE 9.1(C) TO SUBSCRIPTION AGREEMENT DATED MARCH 2, 2005
USE OF PROCEEDS
To the extent necessary, proceeds may be used to pay principal and/or interest
on the Note(s).
33
SCHEDULE 8
FINDERS
------------------------------------ ------------------- -------------
FINDER FINDER'S WARRANTS NOTE AMOUNT
------------------------------------ ------------------- -------------
LIBRA FINANCE, S.A. (1) 100,000 $10,000.00
X.X. Xxx 0000
Xxxxxx, Xxxxxxxxxxx
Fax: 000-000-000-0000
------------------------------------ ------------------- -------------
JM INVESTORS, LLC 135,000 $13,500.00
000 Xxxx 0XX xxxxxx
Xxxxxxxx, XX 00000
Fax: (000) 000-0000
------------------------------------ ------------------- -------------
XX XXXXXX CORP. 35,000 $3,500.00
0000 X. Xxxxxxx Xxxxxxx, Xxxxx 000
Xxxx Xxxxx, XX 00000
------------------------------------ ------------------- -------------
34
