Exhibit 10.1
PREFERRED STOCK PURCHASE AGREEMENT
BETWEEN
FAMILY HOME HEALTH SERVICES INC.
AND
XXXXXX PARTNERS LP
MADE EFFECTIVE
MAY 18, 2006
PREFERRED STOCK PURCHASE AGREEMENT
This PREFERRED STOCK PURCHASE AGREEMENT (the "AGREEMENT") is made and
entered into as of the 18th day of May 2006 between FAMILY HOME HEALTH SERVICES
INC., a corporation organized and existing under the laws of the State of Nevada
("FYHH" or the "Company") and XXXXXX PARTNERS LP, a Delaware limited partnership
("INVESTOR").
PRELIMINARY STATEMENT:
WHEREAS, the Investor wishes to purchase from the Company, upon the
terms and subject to the conditions of this Agreement, Four Million, Three
Hundred And Seventy Five Thousand (4,375,000) shares of preferred stock of the
Company, with such preferred stock being as described in the Certificate of
Designations, Rights and Preferences (the "CERTIFICATE OF DESIGNATIONS") in
substantially the form attached hereto as EXHIBIT A (the "PREFERRED STOCK") for
the Purchase Price set forth in Section 1.3.13 hereof. Subject to the
limitations set forth herein and in the Certificate of Designations, the
Preferred Stock shall be initially have a conversion value of Forty Cents
($0.40) per share (the "CONVERSION VALUE"). In addition, the Company will issue
to the Investor three Common Stock Purchase Warrants (the "WARRANTS") to
purchase up to an additional Eleven Million, Five Hundred Thousand (11,500,000)
shares of common stock of the Company at exercise prices as stated in the
Warrants; and
WHEREAS, the parties intend to memorialize the purchase and sale of
such Preferred Stock and the Warrants.
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby conclusively acknowledged, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
INCORPORATION BY REFERENCE, SUPERSEDER AND DEFINITIONS
1.1 INCORPORATION BY REFERENCE. The foregoing recitals and the Exhibits and
Schedules attached hereto and referred to herein, are hereby acknowledged to be
true and accurate, and are incorporated herein by this reference.
1.2 SUPERSEDER. This Agreement, to the extent that it is inconsistent with any
other instrument or understanding among the parties governing the affairs of the
Company, shall supersede such instrument or understanding to the fullest extent
permitted by law. A copy of this Agreement shall be filed at the Company's
principal office.
1.3 CERTAIN DEFINITIONS. For purposes of this Agreement, the following
capitalized terms shall have the following meanings (all capitalized terms used
in this Agreement that are not defined in this Article 1 shall have the meanings
set forth elsewhere in this Agreement):
1.3.1 "1933 ACT" means the Securities Act of 1933, as amended.
1.3.2 "1934 ACT" means the Securities Exchange Act of 1934, as amended.
1.3.3 "AFFILIATE" means a Person or Persons directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with the Person(s) in question. The term "control," as used in the
immediately preceding sentence, means, with respect to a Person that is a
corporation, the right to the exercise, directly or indirectly, of more than 50
percent of the voting rights attributable to the shares of such controlled
corporation and, with respect to a Person that is not a corporation, the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such controlled Person.
1.3.4 "ARTICLES" means the Articles of Incorporation of the Company, as
the same may be amended from time to time.
1.3.5 "CLOSING" shall mean the closing of the transactions contemplated
by this Agreement on the Closing Date.
1.3.6 "CLOSING DATE" means the date on which the payment of the
Purchase Price (as defined herein) by the Investor to the Company is completed
pursuant to this Agreement to purchase the Preferred Stock and Warrants, which
shall occur on or before May 25, 2006.
1.3.7 "COMMON STOCK" means shares of common stock of the Company, par
value $0.001 per share.
1.3.8 [Intentionally left blank].
1.3.9 "EXEMPT ISSUANCE" means the issuance of (a) shares of Common
Stock or options to employees, officers, or directors of the Company pursuant to
any stock or option plan duly adopted or ratified by a majority of the
non-employee members of the Board of Directors of the Company or a majority of
the members of a committee of non-employee directors established for such
purpose, (b) securities upon the exercise of or conversion of any securities
issued hereunder, and of any convertible securities, options or warrants issued
and outstanding on the date of this Agreement, provided that such securities
have not been amended since the date of this Agreement to increase the number of
such securities, (c) securities issued pursuant to acquisitions or strategic
transactions, provided any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities; and, (d) 736,917 shares of Common Stock issued in lieu of cash to
repay certain loans.
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1.3.10 "MATERIAL ADVERSE EFFECT" shall mean any adverse effect on the
business, operations, properties or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole and/or any condition, circumstance, or situation that would prohibit
or otherwise materially interfere with the ability of the Company to perform any
of its material obligations under this Agreement or the Registration Rights
Agreement or to perform its obligations under any other material agreement.
1.3.11 [Intentionally left blank].
1.3.12 "PERSON" means an individual, partnership, firm, limited
liability company, trust, joint venture, association, corporation, or any other
legal entity.
1.3.13 "PURCHASE PRICE" means the One Million, Seven Hundred And Fifty
Thousand ($1,750,000) paid by the Investor to the Company for the Preferred
Stock and the Warrants.
1.3.14 "REGISTRATION RIGHTS AGREEMENT" shall mean the registration
rights agreement between the Investor and the Company attached hereto as Exhibit
B.
1.3.15 "REGISTRATION STATEMENT" shall mean the registration statement
under the 1933 Act to be filed with the Securities and Exchange Commission for
the registration of the Shares pursuant to the Registration Rights Agreement.
1.3.16 "SEC" means the Securities and Exchange Commission.
1.3.17 "SEC DOCUMENTS" shall mean the Company's latest Form 10-K or
10-KSB as of the time in question, all Forms 10-Q or 10-QSB and 8-K filed
thereafter, and the Proxy Statement for its latest fiscal year as of the time in
question until such time as the Company no longer has an obligation to maintain
the effectiveness of a Registration Statement as set forth in the Registration
Rights Agreement.
1.3.18 "SHARES" shall mean, collectively, the shares of Common Stock of
the Company issued upon conversion of the Preferred Stock subscribed for
hereunder and those shares of Common Stock issuable to the Investor upon
exercise of the Warrants.
1.3.19 "SUBSEQUENT FINANCING" shall mean any offer and sale subsequent
to the Closing Date of shares of preferred stock or debt that is initially
convertible into shares of Common Stock or otherwise senior or superior to the
Preferred Stock.
1.3.20 "TRANSACTION DOCUMENTS" shall mean this Agreement, all Schedules
and Exhibits attached hereto and all other documents and instruments to be
executed and delivered by the parties in order to consummate the transactions
contemplated hereby, including, but not limited to the documents listed in
Sections 3.2 and 3.3 hereof.
1.3.21 "WARRANTS" shall mean the Common Stock Purchase Warrants in the
form attached hereto Exhibit C.
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ARTICLE II
SALE AND PURCHASE OF PREFERRED STOCK AND WARRANTS;
PURCHASE PRICE
2.1 SALE OF PREFERRED STOCK AND ISSUANCE OF WARRANTS.
(a) Upon the terms and subject to the conditions set forth herein, and
in accordance with applicable law, the Company agrees to sell to the Investor,
and the Investor agrees to purchase from the Company, on the Closing Date Four
Million, Three Hundred And Seventy Five Thousand (4,375,000) shares of Preferred
Stock and the Warrants for the Purchase Price, provided Investor acknowledges
that the Company is not currently authorized to issue shares of preferred stock
and that all representations herein with respect to the Preferred Stock shall be
deemed to be effective as of the date the Company is authorized to issue the
Preferred Stock, as provided for in this Agreement. The Purchase Price shall be
paid by the Investor to the Company on the Closing Date by a wire transfer or
check of the Purchase Price. The Company shall cause Warrants to be issued to
the Investor within three (3) business days following the Closing and the
Preferred Stock to be issued to the Investor within thirty-five (35) calendar
days following the Closing. If such shares are not issued within the 35 day
period the Company shall pay the Investor a 5% penalty in shares of Preferred
Stock for every month until the earlier of: (a) 24 months have lapsed; or, (b)
the date upon which such Preferred Stock certificate is delivered to the
Investor. The Company shall register the shares of Common Stock into which the
Preferred Stock is convertible pursuant to the terms and conditions of the
Registration Rights Agreement attached hereto as EXHIBIT B.
(b) Each share of Preferred Stock shall initially be convertible by the
Investor into One (1) share of Common Stock (subject to adjustment as provided
in Section 6.16, the "CONVERSION RATIO"); provided, however, that the Investor
shall not be entitled to convert the Preferred Stock into shares of Common Stock
that would result in beneficial ownership by the Investor and its affiliates of
more than 4.9% of the then outstanding number of shares of Common Stock on such
date. For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the 1934 Act
as amended, and Regulation 13d-3 thereunder.
(c) Upon execution and delivery of this Agreement and the Company's
receipt of the Purchase Price, the Company shall issue to the Investor Warrants
to purchase an aggregate of Eleven Million, Five Hundred Thousand (11,500,000)
shares of Common Stock at exercise prices as stated in the Warrants, all
pursuant to the terms and conditions of the form of Warrants attached hereto as
EXHIBIT C; provided, however, that the Investor shall not be entitled to
exercise the Warrants and receive shares of Common Stock that would result in
beneficial ownership by the Investor and its affiliates of more than 4.9% of the
then outstanding number of shares of Common Stock on such date. For the purposes
of the immediately preceding sentence, beneficial ownership shall be determined
in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3
thereunder.
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2.2 PURCHASE PRICE. The Purchase Price shall be delivered by the Investor in the
form of a check or wire transfer made payable to the Company in United States
Dollars on the Closing Date.
ARTICLE III
CLOSING DATE AND DELIVERIES AT CLOSING AND POST-CLOSING
3.1 CLOSING DATE. The Closing, unless expressly otherwise determined, shall be
held at the offices of the Company, at 5:00 P.M. local time, on the Closing Date
or on such other date and at such other place as may be mutually agreed by the
parties, including closing by facsimile with originals to follow.
3.2 DELIVERIES BY THE COMPANY. In addition to and without limiting any other
provision of this Agreement, the Company agrees to deliver, or cause to be
delivered, to the Investor, at or prior to Closing, the following:
(a) An executed Agreement with all exhibits and schedules attached
hereto;
(b) Executed Warrants in the name of the Investor in the form
attached hereto as Exhibit C;
(c) The executed Registration Rights Agreement;
(d) Certifications in form and substance acceptable to the Company
and the Investor from any and all brokers or agents involved
in the transactions contemplated hereby as to the amount of
commission or compensation payable to such broker or agent as
a result of the consummation of the transactions contemplated
hereby and from the Company or Investor, as appropriate, to
the effect that reasonable reserves for any other commissions
or compensation that may be claimed by any broker or agent
have been set aside;
(e) Management letter from the accountants;
(f) Evidence of approval of the Board of Directors of the Company
of the Transaction Documents and the transactions contemplated
hereby;
(g) Signed agreements from the majority shareholders stating that
they have voted in favor of the authorization of the Preferred
Stock;
(h) Evidence of the written consent in lieu of a meeting of the
holders of a majority of the voting power of the Company's
Common Stock that such majority of shareholders have voted in
favor of approving an amendment to the Company's Articles of
Incorporation to increase the Company's authorized capital
stock to 100,000,000 shares of Common Stock and 10,000,000
shares of Preferred Stock (the "AMENDMENT");
(i) Certificate of the President and the Secretary of the Company
that the Certificate of Designations will be filed
concurrently with or immediately following the effectiveness
of the Amendment;
(j) Certificates of Existence or Authority to Transact Business of
the Company issued by each of the Secretaries of State for
Michigan and Florida;
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(k) An opinion from the Company's counsel concerning the
Transaction Documents and the transactions contemplated hereby
in form and substance reasonably acceptable to Investor;
(l) Copies of all executive employment agreements, all past and
present financing documentation or other documentation where
stock could potentially be issued or issued as payment, all
past and present litigation documents and historical
financials; and
(m) Such other documents or certificates as shall be reasonably
requested by Investor or its counsel.
3.3 DELIVERIES BY INVESTOR. In addition to and without limiting any other
provision of this Agreement, the Investor agrees to deliver, or cause to be
delivered, to the Company, at or prior to Closing, the following:
(a) A deposit in the amount of the Purchase Price;
(b) The executed Agreement with all Exhibits and Schedules attached hereto;
(c) The executed Registration Rights Agreement; and
(d) Such other documents or certificates as shall be reasonably requested
by the Company or its counsel.
In the event any document provided to the other party in Paragraphs 3.2 and 3.3
herein are provided by facsimile, the party shall forward an original document
to the other party within seven (7) business days.
3.4 POST-CLOSING DELIVERIES BY COMPANY. As soon as practicable following the
Closing Date, the Company shall file an Information Statement on Form 14C with
the SEC informing the holders of its Common Stock of the action taken by written
consent with respect to the Amendment, and shall comply with the mailing and
filing requirements of the 1934 Act with respect to such Form 14C. As soon as
practicable once the requisite time frame has passed after the filing and
mailing of the Definitive 14C to effect such actions, the Company shall file
with the Secretary of State of the State of Nevada (i) the Amendment, and (ii)
the Certificate of Designations duly adopted by the President and the Secretary
of the Company. Immediately following such filings with the Secretary of State
of the State of Nevada, and in any event by no later than thirty-five (35) days
following the Closing Date, the Company shall deliver to the Investor a
certificate representing the 4,375,000 shares of Preferred Stock purchased by
the Investor pursuant to this Agreement. If such shares are not issued within
the 35 day period the Company shall pay the Investor a 5% penalty in shares of
Preferred Stock for every month until the Preferred Stock certificate is
delivered to the Investor.
3.5 FURTHER ASSURANCES. The Company and the Investor shall, upon request, on or
after the Closing Date, cooperate with each other (specifically, the Company
shall cooperate with the Investor, and the Investor shall cooperate with the
Company) by furnishing any additional information, executing and delivering any
additional documents and/or other instruments and doing any and all such things
as may be reasonably required by the parties or their counsel to consummate or
otherwise implement the transactions contemplated by this Agreement.
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3.6 WAIVER. The Investor may waive any of the requirements of Section 3.2 of
this Agreement, and the Company at its discretion may waive any of the
provisions of Section 3.3 of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
FAMILY HOME HEALTH SERVICES INC.
The Company represents and warrants to the Investor as of the date
hereof and as of Closing (which warranties and representations shall survive the
Closing regardless of what examinations, inspections, audits and other
investigations the Investor has heretofore made or may hereinafter make with
respect to such warranties and representations) as follows:
4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada, and
has the requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted and is duly
qualified to do business in any other jurisdiction by virtue of the nature of
the businesses conducted by it or the ownership or leasing of its properties,
except where the failure to be so qualified will not, when taken together with
all other such failures, have a Material Adverse Effect on the business,
operations, properties, assets, financial condition or results of operation of
the Company and its subsidiaries taken as a whole.
4.2 ARTICLES OF INCORPORATION AND BY-LAWS. The complete and correct copies of
the Company's Articles and By-Laws, as amended or restated to date which have
been filed with the Securities and Exchange Commission are a complete and
correct copy of such document as in effect on the date hereof and as of the
Closing Date.
4.3 CAPITALIZATION.
4.3.1 The authorized and outstanding capital stock of the
Company is set forth in The Company's Quarterly Report on Form 10-QSB, filed on
November 15, 2005 with the Securities and Exchange Commission and updated on all
subsequent SEC Documents. All shares of capital stock have been duly authorized
and are validly issued, and are fully paid and nonassessable, and free of
preemptive rights.
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4.3.2 As of the date of this Agreement and as of the Closing
Date, the authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock ($.001 par value), of which approximately 26,667,254 shares of
common Stock are issued and outstanding and the stock option holders will hold
options to purchase an aggregate of 650,000 shares of Common Stock. As of a date
no later than thirty-five (35) days following the Closing Date, the authorized
capital stock of the Company will consist of 100,000,000 shares of Common Stock
($.001 par value) and 10,000,000 shares of preferred stock ($.001 par value), of
which 4,812,500 shares of Preferred Stock will be issued and outstanding
pursuant to the terms of this Agreement (as further described at Schedule 4.3.2
attached hereto). All outstanding shares of capital stock have been duly
authorized and are validly issued, and are fully paid and nonassessable and free
of preemptive rights. All shares of capital stock described above to be issued
have been duly authorized and when issued, will be validly issued, fully paid
and nonassessable and free of preemptive rights. Schedule 4.3.2 hereby contains
all shares and derivatives currently outstanding or issuable under currently
outstanding derivative securities. The Company hereby represents that any and
all shares and current potentially dilutive events have been included in
Schedule 4.3.2, including employment agreements, acquisition, consulting
agreements, debts, payments, financing or business relationships that could be
paid in equity, derivatives or resulting in additional equity issuances that
could potentially occur based on agreements or understandings in place as of the
Closing Date.
4.3.3 Except pursuant to this Agreement and as set forth in
Schedule 4.3.2 hereto, and as set forth in the SEC Documents, filed with the
SEC, as of the date hereof and as of the Closing Date, there are not now
outstanding options, warrants, rights to subscribe for, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into
or exchangeable for, shares of any class of capital stock of the Company, or
agreements, understandings or arrangements to which the Company is a party, or
by which the Company is or may be bound, to issue additional shares of its
capital stock or options, warrants, scrip or rights to subscribe for, calls or
commitment of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of any class of its capital
stock. The Company agrees to inform the Investors in writing of any additional
warrants granted prior to the Closing Date.
4.3.4 The Company on the Closing Date (i) will have full
right, power, and authority to sell, assign, transfer, and deliver, by reason of
record and beneficial ownership, to the Investor, the Preferred Stock and the
Warrants hereunder, free and clear of all liens, charges, claims, options,
pledges, restrictions (other than customary restrictions under the 1933 Act),
and encumbrances whatsoever; and (ii) upon conversion of the Preferred Stock or
exercise of the Warrants, the Investor will acquire good and marketable title to
such Shares, free and clear of all liens, charges, claims, options, pledges,
restrictions, and encumbrances whatsoever, except as otherwise provided in this
Agreement as to customary restrictions under the 1933 Act and the limitation on
amount beneficially owned of such Shares in certain circumstances.
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4.4 AUTHORITY. The Company has all requisite corporate power and authority to
execute and deliver this Agreement, the Preferred Stock, and the Warrants, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement by the Company and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action and no other
corporate proceedings on the part of the Company are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby except as
disclosed in this Agreement. This Agreement has been duly executed and delivered
by the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
4.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and delivery of
this Agreement by the Company does not, and the performance by the Company of
its obligations hereunder will not: (i) conflict with or violate the Articles or
By-Laws of the Company; (ii) conflict with, breach or violate any federal,
state, foreign or local law, statute, ordinance, rule, regulation, order,
judgment or decree (collectively, "LAWS") in effect as of the date of this
Agreement and applicable to the Company; or (iii) result in any breach of,
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, give to any other entity any right of
termination, amendment, acceleration or cancellation of, require payment under,
or result in the creation of a lien or encumbrance on any of the properties or
assets of the Company pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company is a party or by the Company or any of its
properties or assets is bound. Excluded from the foregoing are such violations,
conflicts, breaches, defaults, terminations, accelerations, creations of liens,
or incumbency that would not, in the aggregate, have a Material Adverse Effect.
4.6 REPORT AND FINANCIAL STATEMENTS. The Company's Annual Report on Form 10-KSB,
to be filed no later than May 22, 2006 with the SEC, contains the audited
financial statements of the Company as of December 31, 2005. The Company has
previously provided to the Investor the unaudited financial statements of the
Company for the three-, six-, nine-, and twelve-month periods ended December 31,
2005 and for the three month period ended March 31, 2006 (collectively, the
"FINANCIAL STATEMENTS"). Each of the balance sheets contained in or incorporated
by reference into any such Financial Statements (including the related notes and
schedules thereto) fairly presented the financial position of the Company, as of
its date, and each of the statements of income and changes in stockholders'
equity and cash flows or equivalent statements in such Financial Statements
(including any related notes and schedules thereto) fairly presents, changes in
stockholders' equity and changes in cash flows, as the case may be, of the
Company, for the periods to which they relate, in each case in accordance with
United States generally accepted accounting principles ("U.S. GAAP")
consistently applied during the periods involved, except in each case as may be
noted therein, subject to normal year-end audit adjustments in the case of
unaudited statements. The books and records of the Company have been, and are
being, maintained in all material respects in accordance with U.S. GAAP and any
other applicable legal and accounting requirements and reflect only actual
transactions.
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4.7 COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed in Schedule 4.7, the
Company is not in violation of, or, to the knowledge of the Company is under
investigation with respect to or has been given notice or has been charged with
the violation of any Law of a governmental agency, except for violations which
individually or in the aggregate do not have a Material Adverse Effect.
4.8 BROKERS. Except as set forth on Schedule 4.8, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
Commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company.
4.9 SEC DOCUMENTS. The Company acknowledges that the Company is a publicly held
company and has made available to the Investor after demand true and complete
copies of any requested SEC Documents. The Company has registered its Common
Stock pursuant to Section 12(g) of the 1934 Act, and the Common Stock is quoted
and traded on the OTC "Pink Sheets" The Company has received no notice, either
oral or written, with respect to the continued quotation or trading of the
Common Stock on the Pink Sheets. The Company has not provided to the Investor
any information that, according to applicable law, rule or regulation, should
have been disclosed publicly prior to the date hereof by the Company, but which
has not been so disclosed, other than the unaudited financial statements for the
three-month period ended March 31, 2006. Except as disclosed in Schedule 4.7, as
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the 1934 Act, and rules and regulations of the SEC
promulgated thereunder and the SEC Documents did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
4.10 LITIGATION. To the knowledge of the Company, no litigation, claim, or other
proceeding before any court or governmental agency is pending or to the
knowledge of the Company, threatened against the Company, the prosecution or
outcome of which may have a Material Adverse Effect.
4.11 EXEMPTION FROM REGISTRATION. Subject to the accuracy of the Investor's
representations in Article V, except as required pursuant to the Registration
Rights Agreement, the sale of the Preferred Stock and Warrants by the Company to
the Investor will not require registration under the 1933 Act, but may require
registration under New York state securities law if applicable to the Investor.
When validly converted in accordance with the terms of the Preferred Stock, and
upon exercise of the Warrants in accordance with their terms, the Shares
underlying the Preferred Stock and the Warrants will be duly and validly issued,
fully paid, and non-assessable. The Company is issuing the Preferred Stock and
the Warrants in accordance with and in reliance upon the exemption from
securities registration afforded, inter alia, by Rule 506 under Regulation D as
promulgated by the SEC under the 1933 Act, and/or Section 4(2) of the 1933 Act;
provided, however, that certain filings and registrations may be required under
state securities "blue sky" laws depending upon the residency of the Investor.
4.12 NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS TRANSACTION.
Neither the Company nor any of its Affiliates nor, to the knowledge of the
Company, any Person acting on
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its or their behalf (i) has conducted or will conduct any general solicitation
(as that term is used in Rule 502(c) of Regulation D as promulgated by the SEC
under the 0000 Xxx) or general advertising with respect to the sale of the
Preferred Stock or Warrants, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that would
require registration of the Preferred Stock or Warrants, under the 1933 Act,
except as required herein.
4.13 NO MATERIAL ADVERSE EFFECT. Except as set forth in the SEC Documents, since
January 17, 2005 no event or circumstance resulting in a Material Adverse Effect
has occurred or exists with respect to the Company. No material supplier or
customer has given notice, oral or written, that it intends to cease or reduce
the volume of its business with the Company from historical levels. Since
January 17, 2005 no event or circumstance has occurred or exists with respect to
the Company or its businesses, properties, prospects, operations or financial
condition, that, under any 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 writing to the Investor.
4.14 MATERIAL NON-PUBLIC INFORMATION. The Company has not, without agreement
against further disclosure, disclosed to the Investor any material non-public
information that (i) if disclosed, would reasonably be expected to have a
material effect on the price of the Common Stock or (ii) according to applicable
law, rule or regulation, should have been disclosed publicly by the Company
prior to the date hereof but which has not been so disclosed, except with
respect to the unaudited financial statements for the three-month period ended
March 31, 2006.
4.15 INTERNAL CONTROLS AND PROCEDURES. The Company maintains books and records
and internal accounting controls which, except as set forth in the SEC
Documents, provide reasonable assurance that (i) all transactions to which the
Company or any subsidiary is a party or by which its properties are bound are
executed with management's authorization; (ii) the recorded accounting of the
Company's consolidated assets is compared with existing assets at regular
intervals; (iii) access to the Company's consolidated assets is permitted only
in accordance with management's authorization; and (iv) all transactions to
which the Company or any subsidiary is a party or by which its properties are
bound are recorded as necessary to permit preparation of the financial
statements of the Company in accordance with U.S. generally accepted accounting
principles.
4.16 FULL DISCLOSURE. No representation or warranty made by the Company in this
Agreement and no certificate or document furnished or to be furnished to the
Investor pursuant to this Agreement contains or will contain any untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make the statements contained herein or therein not misleading.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
The Investor represents and warrants to the Company that:
5.1 ORGANIZATION AND STANDING OF THE INVESTOR. The Investor is a limited
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware. The state in which any offer to purchase shares hereunder
was made or accepted by such Investor is the state shown as such Investor's
address. The Investor was not formed for the purpose of investing solely in the
Preferred Stock, the Warrants or the shares of Common Stock which are the
subject of this Agreement.
5.2 AUTHORIZATION AND POWER. The Investor has the requisite power and authority
to enter into and perform this Agreement and to purchase the securities being
sold to it hereunder. The execution, delivery and performance of this Agreement
by the Investor and the consummation by the Investor of the transactions
contemplated hereby have been duly authorized by all necessary partnership
action where appropriate. This Agreement and the Registration Rights Agreement
have been duly executed and delivered by the Investor and at the Closing shall
constitute valid and binding obligations of the Investor enforceable against the
Investor in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
5.3 NO CONFLICTS. The execution, delivery and performance of this Agreement and
the consummation by the Investor of the transactions contemplated hereby or
relating hereto do not and will not (i) result in a violation of such Investor's
charter documents or bylaws where appropriate or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any agreement, indenture or
instrument to which the Investor is a party, 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 the Investor 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 Investor). The Investor 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 such Investor's obligations under this Agreement or to
purchase the securities from the Company in accordance with the terms hereof,
provided that for purposes of the representation made in this sentence, the
Investor is assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein.
5.4 FINANCIAL RISKS. The Investor acknowledges that such Investor is able to
bear the financial risks associated with an investment in the securities being
purchased by the Investor from the Company and that it has been given full
access to such records of the Company and the subsidiaries and to the officers
of the Company and the subsidiaries as it has deemed necessary or appropriate to
conduct its due diligence investigation. The Investor is capable of evaluating
12
the risks and merits of an investment in the securities being purchased by the
Investor from the Company by virtue of its experience as an investor and its
knowledge, experience, and sophistication in financial and business matters and
the Investor is capable of bearing the entire loss of its investment in the
securities being purchased by the Investor from the Company.
5.5 ACCREDITED INVESTOR. The Investor is (i) an "accredited investor" as that
term is defined in Rule 501 of Regulation D promulgated under the 1933 Act by
reason of Rule 501(a)(3) and (6), (ii) experienced in making investments of the
kind described in this Agreement and the related documents, (iii) able, by
reason of the business and financial experience of its officers (if an entity)
and professional advisors (who are not affiliated with or compensated in any way
by the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the securities being purchased by the Investor from the Company.
5.6 BROKERS. Except as set forth in Schedule 4.8, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Investor.
5.7 KNOWLEDGE OF COMPANY. The Investor and such Investor's advisors, if any,
have been, upon request, furnished with all materials relating to the business,
finances and operations of the Company and materials relating to the offer and
sale of the securities being purchased by the Investor from the Company. The
Investor and such Investor's advisors, if any, have been afforded the
opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries.
5.8 RISK FACTORS. The Investor understands that such Investor's investment in
the securities being purchased by the Investor from the Company involves a high
degree of risk. The Investor understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the securities being purchased by the Investor
from the Company. The Investor warrants that such Investor is able to bear the
complete loss of such Investor's investment in the securities being purchased by
the Investor from the Company.
5.9 FULL DISCLOSURE. No representation or warranty made by the Investor in this
Agreement and no certificate or document furnished or to be furnished to the
Company pursuant to this Agreement contains or will contain any untrue statement
of a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein or therein not misleading. Except as set
forth or referred to in this Agreement, Investor does not have any agreement or
understanding with any person relating to acquiring, holding, voting or
disposing of any equity securities of the Company.
5.10 PAYMENT OF DUE DILIGENCE EXPENSES. At Closing the Company shall disburse to
the Investor Fifty Thousand Dollars ($50,000.00) for due diligence expenses.
13
ARTICLE VI
COVENANTS OF THE COMPANY
6.1 REGISTRATION RIGHTS. The Company shall cause the Registration Rights
Agreement to remain in full force and effect according to the provisions of the
Registration Rights Agreement and the Company shall comply in all material
respects with the terms thereof.
6.2 RESERVATION OF COMMON STOCK. As of the date hereof, the Company has reserved
and the Company shall continue to reserve and keep available at all times, free
of preemptive rights, shares of Common Stock for the purpose of enabling the
Company to issue the shares of Common Stock underlying the Preferred Stock and
Warrants.
6.3 COMPLIANCE WITH LAWS. The Company hereby agrees to comply in all respects
with the Company's reporting, filing and other obligations under the Laws,
provided with respect to the timing of filing obligations the Company under the
1934 Act such filings shall be on a "best efforts" basis.
6.4 EXCHANGE ACT REGISTRATION. The Company (a) will continue its obligation to
report to the SEC under Section 12(g) of the 1934 Act and will use its best
efforts to comply in all respects with its reporting and filing obligations
under the 1934 Act, and will not take any action or file any document (whether
or not permitted by the 1934 Act or the rules thereunder) to terminate or
suspend any such registration or to terminate or suspend its reporting and
filing obligations under the 1934 Act unless fewer than Two Hundred and Fifty
Thousand (250,000) shares of Preferred Stock are outstanding.
6.5 CORPORATE EXISTENCE; CONFLICTING AGREEMENTS. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company. The
Company shall not enter into any agreement, the terms of which agreement would
restrict or impair the right or ability of the Company to perform any of its
obligations under this Agreement or any of the other agreements attached as
exhibits hereto.
6.6 LISTING, 1934 ACT AND RULE 144 REQUIREMENTS. The Company is required to
cause to be filed a listing or quotation on a higher exchange or trading market
within sixty days from the Closing Date and to maintain its status as a Company
regulated by the 1934 Act and make available at all times after Closing adequate
current public information in accordance with Rule 144(c). If (i) for any time
post Closing the Company is no longer regulated by the 1934 Act or (ii) within
sixty days from the Closing Date the Company has not caused to be filed the
necessary paperwork to move to the over-the-counter bulletin board or higher
exchange, then the Company shall pay to the Investor as liquidated damages and
not as a penalty, Five Percent (5%) per month of the Purchase Price in cash or
shares of Preferred Stock at the option of the Investor (provided that the
Company shall not be required to issue any fractional shares and provided if the
Investor elects payment in Preferred Stock and there are not enough authorized
shares of Preferred Stock to pay such damages the Investor shall provide consent
to the Company to increase the authorized shares of Preferred Stock). Such
damages shall cease at the time the Company begins complying with the standards
as mentioned above in this Section 6.6.
14
6.7 PREFERRED STOCK. On or prior to the Closing Date, the Company will cause to
be cancelled all preferred stock in the Company with the exceptions of Preferred
Stock issued to the Investor. For a period of twenty four (24) months from the
Closing Date or until the Investor no longer holds at least ten percent of the
Preferred Stock initially purchased by Investor, the Company will not issue any
preferred stock of the Company (with the exception of Preferred Stock issued to
the Investor, or as liquated damages and/or as otherwise set forth in this
Agreement).
6.8 CONVERTIBLE DEBT. On or prior to the Closing Date, the Company will cause to
be cancelled all convertible debt in the Company. For a period of twenty four
(24) months from the Closing Date or until the Investor no longer holds at least
ten percent of the Preferred Stock initially purchased by Investor, the Company
will not issue any convertible debt.
6.9 DEBT LIMITATION. The Company agrees for twenty four (24) months from the
Closing or until the Investor no longer holds at least ten percent of the
Preferred Stock initially purchased by Investor not to enter into any new
borrowings of more than twice as much as the sum of the EBITDA from recurring
operations over the past four quarters.
6.10 RESET EQUITY DEALS. On or prior to the Closing Date, the Company will cause
to be cancelled any and all reset features related to any shares outstanding
that could result in additional shares being issued. For thirty six (36) months
from the Closing or until the Investor no longer holds at least five percent of
the Preferred Stock initially purchased by Investor, the Company will not enter
into any transactions that have any reset features that could result in
additional shares being issued.
6.11 INDEPENDENT DIRECTORS. Within 90 days of Closing the Company shall have
caused the appointment of the majority of the board of directors to be qualified
independent directors, as defined by the NASD. If at any time after 90 days of
Closing the board shall not be composed in the majority of qualified independent
directors, the Company shall pay to the Investors, pro rata, as liquidated
damages and not as a penalty, an amount equal to eighteen (18) percent of the
Purchase Price per annum, payable monthly in cash or shares of Preferred Stock
at the option of the Investor (provided that the Company shall not be required
to issue any fractional shares). The parties agree that the only damages payable
for a violation of the terms of this Agreement with respect to which liquidated
damages are expressly provided shall be such liquidated damages. Nothing shall
preclude the Investor from pursuing or obtaining specific performance or other
equitable relief with respect to this Agreement. The parties hereto agree that
the liquidated damages provided for in this Section 6.11 constitute a reasonable
estimate of the damages that may be incurred by the Investor by reason of the
failure of the Company to appoint at least two independent directors in
accordance with the provision hereof.
6.12 INDEPENDENT DIRECTORS BECOME MAJORITY OF AUDIT AND COMPENSATION COMMITTEES.
The Company will cause the appointment of a majority of outside directors to the
audit and compensation committees of the board of directors within 90 days of
Closing. If at any time after 90 days of Closing such independent directors do
not compose the majority of the audit and compensation committees, the Company
shall pay to the Investors, pro rata, as liquidated damages and not as a
penalty, an amount equal to eighteen (18) percent of the Purchase Price per
annum, payable monthly in cash or shares of Preferred Stock at the Investor's
option (provided
15
that the Company shall not be required to issue any fractional shares). The
parties agree that the only damages payable for a violation of the terms of this
Agreement with respect to which liquidated damages are expressly provided shall
be such liquidated damages. Nothing shall preclude the Investor from pursuing
other remedies or obtaining specific performance or other equitable relief with
respect to this Agreement.
6.13 USE OF PROCEEDS. The Company will use the proceeds from the sale of the
Preferred Stock and the Warrants (excluding amounts paid by the Company for
legal, investment banking and administrative fees in connection with the sale of
such securities) for working capital and acquisitions; provided that the Company
may also: (a) purchase up to Five Hundred Thousand Dollars ($500,000) worth of
common stock from Xxxxx Xxxxxxxxxx at a price not to exceed Forty Cents ($0.40)
per share; (b) lend up to Two Hundred And Fifty Thousand Dollars ($250,000) to
Xxxxx Xxxxxxxxxx on terms reasonably acceptable to the Company; and/or, (c)
reduce the Company's bank debt by up to One Million Dollars ($1,000,000).
6.14 RIGHT OF FIRST REFUSAL. Each Investor shall have the right to participate
in any subsequent private funding by the Company on a pro rata basis at eighty
percent (80%) of the offering price.
6.15 PRICE ADJUSTMENT. From the date hereof until 24 months following the
Closing Date, except for any Exempt Issuances, if the Company closes on the sale
of a note or notes, shares of Common Stock, or shares of any class of preferred
stock at a price per share of Common Stock, or with a conversion right to
acquire Common Stock at a price per share of Common Stock, that is less than the
Conversion Value (as adjusted to the capitalization per share as of the Closing
Date, following any stock splits, stock dividends, or the like) (collectively,
the "Subsequent Conversion Value"), the Company shall make a post-Closing
adjustment in the Conversion Value so that the effective price per share paid by
the Investor is reduced to being equivalent to such lower conversion price after
taking into account any prior conversions of the Preferred Stock and/or
exercises of the Warrant. The issuance or reissuance of any shares of Common
Stock (whether treasury shares or newly issued shares) pursuant to a dividend or
distribution on, or subdivision, combination or reclassification of, the
outstanding shares of Common Stock requiring an adjustment in the Conversion
Ratio pursuant to clause (i) of this Section 6.15 shall not be deemed to
constitute an issuance of Common Stock by the Company to which this clause (ii)
applies.
6.16 PRICE ADJUSTMENT BASED ON EARNINGS PER SHARE. In the event the Company has
income of between $0.098 and $0.059 (40% Decline) per share (where such income
in this paragraph shall always be defined as operating income on a fully diluted
basis (fully-diluted includes all potentially dilutive securities and
derivatives, such as warrants, options, convertible preferred, convertible debt,
common shares, etc. outstanding (in or out of the money) as of the date of the
end of the reported period) as reported for the audited fiscal year ended
December 31st, 2006 from continuing operations before any non-recurring items)
then the then current Conversion Value at the time the audited numbers are
reported to the SEC shall be decreased proportionately by 0% if the income is
$0.098 per share or greater and by 40% if the income is $0.059 per share (40%
decrease). For example if the income is $0.078 per share or less (20% Decline)
then the then current Conversion Value to the investor shall be reduced by 20%.
In the event the Company has income of any amount below $0.059 per share, then
the then current Conversion
16
Value shall be decreased by 40% and not more, and if the Company has no income
or negative income, then the then current Conversion Value shall be decreased by
70% and not more. Any adjustment pursuant to this section 6.16 shall be made
within five business days of the audited numbers being reported to the SEC.
6.17 INSIDER SELLING. Except as provided elsewhere in this Agreement and any
other agreement between the Company and the Investor, the earliest any
"Insiders" can start selling their shares shall be eighteen (18) months from
Closing. Insiders shall include all executive officers and directors of the
Company who hold such position as of the date of sale. Xxxxxx Xxxxxx Xxxxxx and
the Investor shall not be considered "Insiders".
6.18 EMPLOYMENT AND CONSULTING CONTRACTS. For twenty four (24) months after the
Closing the Company must have a unanimous opinion from the Compensation
Committee of the Board of Directors that any awards other than salary are usual,
appropriate and reasonable for any officer, director, employee or consultant
holding a similar position in other fully reporting public companies with
independent majority boards with similar market capitalizations in the same
industry with securities traded on the same market as the Company.
6.19 SUBSEQUENT EQUITY SALES. From the Closing until less than five percent (5)
percent of the Preferred Stock, initially purchased by Investor and/or received
by Investor as liquidated damages, is outstanding (adjusted for splits and other
events defined in this Agreement), the Company shall be prohibited from
effecting or entering into an agreement to effect any Subsequent Financing
involving a "Variable Rate Transaction" or an "MFN Transaction" (each as defined
below). The term "Variable Rate Transaction" shall mean a transaction in which
the Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time after
the initial issuance of such debt or equity securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such debt or equity security or upon
the occurrence of specified or contingent events directly or indirectly related
to the business of the Company or the market for the Common Stock. The term "MFN
Transaction" shall mean a transaction in which the Company issues or sells any
securities in a capital raising transaction or series of related transactions
which grants to an investor the right to receive additional shares based upon
future transactions of the Company on terms more favorable than those granted to
such investor in such offering. The Investor shall be entitled to obtain
injunctive relief against the Company to preclude any such issuance, which
remedy shall be in addition to any right to collect damages. Notwithstanding the
foregoing, this Section 6.19 shall not apply in respect of an Exempt Issuance,
except that no Variable Rate Transaction or MFN Transaction shall be an Exempt
Issuance.
6.20 AMENDMENT TO CERTIFICATE OF INCORPORATION. At or before the next annual
meeting of the stockholders of the Company, the Board of Directors shall propose
and submit to the holders of the Common Stock for approval, an amendment to the
Articles that provides substantially as follows:
17
"The terms and conditions of any rights, options and warrants approved by
the Board of Directors may provide that any or all of such terms and
conditions may be waived or amended only with the consent of the holders
of a designated percentage of a designated class or classes of capital
stock of the Corporation (or a designated group or groups of holders
within such class or classes, including but not limited to disinterested
holders), and the applicable terms and conditions of any such rights,
options or warrants so conditioned may not be waived or amended absent
such consent.".
6.21 STOCK SPLITS. All forward and reverse stock splits shall affect all equity
and derivative holders proportionately.
ARTICLE VII
COVENANTS OF THE INVESTOR
7.1 COMPLIANCE WITH LAW. The Investor's trading activities with respect to
shares of the Company's Common Stock will be in compliance with all applicable
state and federal securities laws, rules and regulations and rules and
regulations of any public market on which the Company's Common Stock is listed
or traded.
7.2 TRANSFER RESTRICTIONS. The Investor acknowledges that (1) the Preferred
Stock, Warrants and shares underlying the Preferred Stock and Warrants have not
been registered under the provisions of the 1933 Act, and may not be transferred
unless (A) subsequently registered thereunder or (B) the Investor shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the Preferred Stock,
Warrants and shares underlying the Notes and Warrants to be sold or transferred
may be sold or transferred pursuant to an exemption from such registration; and
(2) any sale of the Preferred Stock, Warrants and shares underlying the
Preferred Stock and Warrants made in reliance on Rule 144 promulgated under the
1933 Act may be made only in accordance with the terms of said Rule and further,
if said Rule is not applicable, any resale of such securities under
circumstances in which the seller, or the person through whom the sale is made,
may be deemed to be an underwriter, as that term is used in the 1933 Act, may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder.
7.3 RESTRICTIVE LEGEND. The Investor acknowledges and agrees that until such
time as the Shares have been registered under the 1933 Act and sold in
accordance with an effective Registration Statement, certificates and other
instruments representing any of the Preferred Stock, Warrants and Shares, shall
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of any such securities):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SHARES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE
00
XXXXX XXXXXXXXXX XXXX, XX (2) IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S, OR (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT."
7.4 AMENDMENT TO CERTIFICATE OF INCORPORATION. Investor hereby agrees to vote
any shares of capital stock that it may own directly or beneficially, for the
amendment to the Certificate of Incorporation referenced in Section 6.20.
Pending adoption of such amendment, Investor hereby agrees for itself and its
successors and assigns that neither this Section 7.4 or Section 6.20 above, or
any restriction on exercise of the Warrant shall be amended, modified or waived
without the consent of the holders of a majority of the shares of Common Stock
held by Persons who are not Affiliates of the Company, or the Investor or
Affiliates of the Investor.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to consummate the transactions
contemplated hereby shall be subject to the fulfillment, on or prior to Closing
Date, of the following conditions:
8.1 NO TERMINATION. This Agreement shall not have been terminated pursuant to
Article X hereof.
8.2 REPRESENTATIONS TRUE AND CORRECT. The representations and warranties of the
Investor contained in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same force and effect as if made
on as of the Closing Date.
8.3 COMPLIANCE WITH COVENANTS. The Investor shall have performed and complied in
all material respects with all covenants, agreements, and conditions required by
this Agreement to be performed or complied by it prior to or at the Closing
Date.
8.4 NO ADVERSE PROCEEDINGS. On the Closing Date, no action or proceeding shall
be pending by any public authority or individual or entity before any court or
administrative body to restrain, enjoin, or otherwise prevent the consummation
of this Agreement or the transactions contemplated hereby or to recover any
damages or obtain other relief as a result of the transactions proposed hereby.
19
ARTICLE IX
CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS
The obligation of the Investor to consummate the transactions
contemplated hereby shall be subject to the fulfillment, on or prior to Closing
Date unless specified otherwise, of the following conditions:
9.1 NO TERMINATION. This Agreement shall not have been terminated pursuant to
Article X hereof.
9.2 REPRESENTATIONS TRUE AND CORRECT. The representations and warranties of the
Company contained in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same force and effect as if made
on as of the Closing Date.
9.3 COMPLIANCE WITH COVENANTS. The Company shall have performed and complied in
all material respects with all covenants, agreements, and conditions required by
this Agreement to be performed or complied by it prior to or at the Closing
Date.
9.4 NO ADVERSE PROCEEDINGS. On the Closing Date, no action or proceeding shall
be pending by any public authority or individual or entity before any court or
administrative body to restrain, enjoin, or otherwise prevent the consummation
of this Agreement or the transactions contemplated hereby or to recover any
damages or obtain other relief as a result of the transactions proposed hereby.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 TERMINATION. This Agreement may be terminated at any time prior to the
Closing Date
10.1.1 by mutual written consent of the Investor and the Company; or
10.1.2 by the Company upon a material breach of any representation,
warranty, covenant or agreement on the part of the Investor set forth in this
Agreement, or the Investor upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company set forth in this
Agreement, or if any representation or warranty of the Company or the Investor,
respectively, shall have become untrue, in either case such that any of the
conditions set forth in Article VIII or Article IX hereof would not be satisfied
(a "TERMINATING BREACH"), and such breach shall, if capable of cure, not have
been cured within five (5) business days after receipt by the party in breach of
a notice from the non-breaching party setting forth in detail the nature of such
breach.
10.2 EFFECT OF TERMINATION. Except as otherwise provided herein, in the event of
the termination of this Agreement pursuant to Section 10.1 hereof, there shall
be no liability on the
20
part of the Company or the Investor or any of their respective officers,
directors, agents or other representatives and all rights and obligations of any
party hereto shall cease; provided that in the event of a Terminating Breach,
the breaching party shall be liable to the non-breaching party for all costs and
expenses incurred by the non-breaching party not to exceed $50,000.00.
10.3 AMENDMENT. This Agreement may be amended by the parties hereto any time
prior to the Closing Date by an instrument in writing signed by the parties
hereto.
10.4 WAIVER. At any time prior to the Closing Date, the Company or the Investor,
as appropriate, may: (a) extend the time for the performance of any of the
obligations or other acts of other party; or (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto which have been made to it or them; or (c) waive compliance with
any of the agreements or conditions contained herein for its or their benefit.
Any such extension or waiver shall be valid only if set forth in an instrument
in writing signed by the party or parties to be bound hereby.
ARTICLE XI
GENERAL PROVISIONS
11.1 TRANSACTION COSTS. Except as otherwise provided herein, each of the parties
shall pay all of his or its costs and expenses (including attorney fees and
other legal costs and expenses and accountants' fees and other accounting costs
and expenses) incurred by that party in connection with this Agreement;
provided, the Company shall pay Investor such due diligence expenses as
described in section 5.10.
11.2 INDEMNIFICATION. Following the Closing Date, the Investor agrees to
indemnify, defend and hold the Company and its officers and directors harmless
against and in respect of any and all claims, demands, losses, costs, expenses,
obligations, liabilities or damages, including interest, penalties and
reasonable attorney's fees, that it shall incur or suffer, which arise out of or
result from any breach of any of its representations, warranties or covenants
contained in this Agreement by such Investor or failure by such Investor to
perform with respect to any of its representations, warranties or covenants
contained in this Agreement or in any exhibit or other instrument furnished or
to be furnished under this Agreement. The Company agrees to indemnify, defend
and hold the Investor harmless against and in respect of any and all claims,
demands, losses, costs, expenses, obligations, liabilities or damages, including
interest, penalties and reasonable attorney's fees, that it shall incur or
suffer, which arise out of, result from or relate to any breach of any of its
representations, warranties or covenants contained in this Agreement or failure
by the Company to perform with respect to any of its representations, warranties
or covenants contained in this Agreement or in any exhibit or other instrument
furnished or to be furnished under this Agreement. In no event shall the Company
or the Investors be entitled to recover consequential or punitive damages
resulting from a breach or violation of this Agreement nor shall any party have
any liability hereunder in the event of gross negligence or willful misconduct
of the indemnified party. In the event of a breach of this
21
Agreement by the Company, the Investor shall be entitled to pursue a remedy of
specific performance upon tender into an appropriate court of competent
jurisdiction an amount equal to the Purchase Price hereunder. The
indemnification by the Investor shall be limited to $50,000.00.
11.3 HEADINGS. The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.4 ENTIRE AGREEMENT. This Agreement (together with the Schedule, Exhibits,
Warrants and documents referred to herein) constitute the entire agreement of
the parties and supersede all prior agreements and undertakings, both written
and oral, between the parties, or any of them, with respect to the subject
matter hereof.
11.5 NOTICES. All notices and other communications hereunder shall be in writing
and shall be deemed to have been given (i) on the date they are delivered if
delivered in person; (ii) on the date initially received if delivered by
facsimile transmission followed by registered or certified mail confirmation;
(iii) on the date delivered by an overnight courier service; or (iv) on the
third business day after it is mailed by registered or certified mail, return
receipt requested with postage and other fees prepaid as follows:
If to the Company:
-----------------
Family Home Health Services Inc.
000 Xxxx Xxx Xxxxx Xxxxx
Xxxxx 000
Xxxxxxxx, XX 00000
Attention: President and Chief Executive Officer
With a copy to:
--------------
Butzel Long
000 X. Xxxxxxxxx Xxx., Xxxxx 000
Xxxxxxx, XX 00000-0000
Facsimile No.: (000) 000-0000
Attn: Xxxxxx X. Xxxxxx, Esq.
If to the Investor:
------------------
Xxxxxx Partners L.P.
c/x Xxxxxx Capital Advisors, LLC
000 Xxxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attn: Xxxxxx Xxxxxx Xxxxxx
22
11.6 SEVERABILITY. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any such term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled to the extent
possible.
11.7 BINDING EFFECT. All the terms and provisions of this Agreement whether so
expressed or not, shall be binding upon, inure to the benefit of, and be
enforceable by the parties and their respective administrators, executors, legal
representatives, heirs, successors and assignees.
11.8 PREPARATION OF AGREEMENT. This Agreement shall not be construed more
strongly against any party regardless of who is responsible for its preparation.
The parties acknowledge each contributed and is equally responsible for its
preparation.
11.9 GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
applicable principles of conflicts of law.
11.10 JURISDICTION. This Agreement shall be exclusively governed by and
construed in accordance with the laws of the State of New York. If any action is
brought among the parties with respect to this Agreement or otherwise, by way of
a claim or counterclaim, the parties agree that in any such action, and on all
issues, the parties irrevocably waive their right to a trial by jury. Exclusive
jurisdiction and venue for any such action shall be the Federal Courts serving
the Southern District of the State of New York. In the event suit or action is
brought by any party under this Agreement to enforce any of its terms, or in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
11.11 PREPARATION AND FILING OF SECURITIES AND EXCHANGE COMMISSION FILINGS. The
Investor shall reasonably assist and cooperate with the Company in the
preparation of all filings with the SEC that relate to the Investor due after
the Closing Date.
11.12 FURTHER ASSURANCES, COOPERATION. Each party shall, upon reasonable request
by the other party, execute and deliver any additional documents necessary or
desirable to complete the transactions herein pursuant to and in the manner
contemplated by this Agreement. The parties hereto agree to cooperate and use
their respective best efforts to consummate the transactions contemplated by
this Agreement.
11.13 SURVIVAL. The representations, warranties, covenants and agreements made
herein shall survive the Closing of the transaction contemplated hereby.
11.14 THIRD PARTIES. Except as disclosed in this Agreement, nothing in this
Agreement, whether express or implied, is intended to confer any rights or
remedies under or by reason of this Agreement on any persons other than the
parties hereto and their respective administrators,
23
executors, legal representatives, heirs, successors and assignees. Nothing in
this Agreement is intended to relieve or discharge the obligation or liability
of any third persons to any party to this Agreement, nor shall any provision
give any third persons any right of subrogation or action over or against any
party to this Agreement.
11.15 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay
on the part of any party hereto in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty, covenant or agreement herein, nor shall
nay single or partial exercise of any such right preclude other or further
exercise thereof or of any other right. All rights and remedies existing under
this Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
11.16 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
and by the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement. A facsimile transmission of this
signed Agreement shall be legal and binding on all parties hereto.
[SIGNATURES ON FOLLOWING PAGE]
24
IN WITNESS WHEREOF, the Investor and the Company have as of the date
first written above executed this Agreement.
THE COMPANY:
FAMILY HOME HEALTH SERVICES INC.
----------------------
By: Xxxxx X. Xxxxx
Title: CEO and President
INVESTOR:
XXXXXX PARTNERS LP
By: Xxxxxx Capital Advisors, LLC, its General Partner
----------------------
Xxxxxx Xxxxxx Xxxxxx
President
000 Xxxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx XX 00000
25
SCHEDULE A
NUMBER OF SHARES
OF COMMON STOCK NUMBER OF SHARES
AMOUNT OF INTO WHICH PREFERRED UNDERLYING
NAME AND ADDRESS INVESTMENT STOCK IS CONVERTIBLE WARRANTS
---------------- ---------- -------------------- --------------------------
Xxxxxx Partners LP
000 Xxxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000 $1,750,000 4,375,000 11,500,000
Attn: Xxxxxx Xxxxxx Xxxxxx (4,000,000 Class A,
1,750,000 Class B, and
5,750,000 Class C)
26
SCHEDULE 4.3.2 -- CAPITALIZATION
26,667,254 shares of Common Stock outstanding
Options to purchase 650,000 shares of Common Stock issued to Xxxxx Xxxxx
An aggregate of 736,917 shares of Common Stock to be issued to employees and an
outside director pursuant to the Company's 2006 Stock Plan promptly following
the Closing in discharge of loans made to the Company by those persons.
An aggregate of 350,000 Preferred Shares issued to Westminster or its designees
in connection with a certain Placement Agent Agreement dated January 25, 2006.
An aggregate of 320,000 "A" Warrants issued to Westminster or its designees in
connection with a certain Placement Agent Agreement dated January 25, 2006.
An aggregate of 140,000 "B" Warrants issued to Westminster or its designees in
connection with a certain Placement Agent Agreement dated January 25, 2006.
An aggregate of 460,000 "C" Warrants issued to Westminster or its designees in
connection with a certain Placement Agent Agreement dated January 25, 2006.
An aggregate of 87,500 Preferred Shares issued to Park Financial Group in
connection with certain verbal agreements with the Company.
An aggregate of 80,000 "A" Warrants issued to Park Financial Group in connection
with certain agreements with the Company.
An aggregate of 35,000 "B" Warrants issued to Park Financial Group in connection
with certain agreements with the Company.
An aggregate of 115,000 "C" Warrants issued to Park Financial Group in
connection with certain agreements with the Company.
27
SCHEDULE 4.7-- EXCEPTIONS TO COMPLIANCE
The Company has not yet filed the financial statements required by Rule 3-05 of
Regulation S-X to be filed by amendment within 75 days after the filing of its
Current Report on Form 8-K filed with the Securities and Exchange Commission on
July 8, 2005 (File No. 000-32887).
The Company has not filed its quarterly report on Form 10-QSB for the three
months ended March 31, 2006. The Company has filed an extension request which
allows it to file on or before March 22, 2006 in order to be deemed to have
filed on a timely basis. However, the Company cannot provide assurance that such
quarterly report will be filed on time.
28
SCHEDULE 4.8 -- LIST OF BROKERS
Westminster Securities Corporation (5% of gross proceeds as commission,
3% of gross proceeds in non-accountable expenses,
and securities as disclosed in Schedule 4.3.2)
Park Financial Services (securities as disclosed in Schedule 4.3.2)
MidTown Partners (2% of gross proceeds as commission)
29
EXHIBIT A
FORM OF CERTIFICATE OF DESIGNATIONS OF PREFERENCES, RIGHTS AND LIMITATIONS
30
FAMILY HOME HEALTH SERVICES INC.
CERTIFICATE OF DESIGNATIONS OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
The undersigned, Xxxxx X. Xxxxx and Xxxxx X. Xxxxx, do hereby certify
that:
1. They are the President and Secretary, respectively, of Family Home
Health Services Inc, a Nevada corporation (the "Company").
2. The Company is authorized to issue 10,000,000 shares of preferred
stock, none of which have been previously issued.
3. The following resolutions were duly adopted by the Board of
Directors:
WHEREAS, the Certificate of Incorporation of the Company provides for a
class of its authorized stock known as preferred stock, comprised of 10,000,000
shares, $0.001 par value per share, issuable from time to time in one or more
series;
WHEREAS, the Board of Directors of the Company is authorized to fix the
dividend rights, dividend rate, voting rights, conversion rights, rights and
terms of redemption and liquidation preferences of any wholly unissued series of
preferred stock and the number of shares constituting any series and the
designation thereof, of any of them; and
WHEREAS, it is the desire of the Board of Directors of the Company,
pursuant to its authority as aforesaid, to fix the rights, preferences,
restrictions and other matters relating to a series of the preferred stock,
which shall consist of up to 10,000,000 shares of the preferred stock which the
Company has the authority to issue:
WHEREAS, the Holders of a majority of the issued and outstanding shares
of Common Stock of the Company have approved the filing of this Certificate of
Designations by written consent pursuant to Section 78.1955 of the Nevada
Revised Statutes;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
provide for the issuance of a series of preferred stock for cash or exchange of
other securities, rights or property and does hereby fix and determine the
rights, preferences, restrictions and other matters relating to such series of
preferred stock as follows:
TERMS OF PREFERRED STOCK
Section 1. DEFINITIONS. Capitalized terms used and not otherwise
defined herein that are defined in the Purchase Agreement (as defined below)
shall have the meanings given such terms
31
in the Purchase Agreement. For the purposes hereof, the following terms shall
have the following meanings:
"Closing Date" means the date on which the payment of the
Purchase Price (as defined in the Purchase Agreement) by the Investor
to the Company is completed pursuant to the Purchase Agreement, which
shall occur on or before May 25th, 2006.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value
$0.001 per share, and stock of any other class into which such shares
may hereafter have been reclassified or changed.
"Common Stock Equivalents" means any securities of the Company
or the Subsidiaries which would entitle the holder thereof to acquire
at any time Common Stock, including without limitation, any debt,
preferred stock, rights, options, warrants or other instrument that is
at any time convertible into or exchangeable for, or otherwise entitles
the holder thereof to receive, Common Stock.
"Conversion Date" shall have the meaning set forth in Section
6(a).
"Conversion Ratio" shall have the meaning set forth in Section
6(a).
"Conversion Shares" means, collectively, the shares of Common
Stock into which the shares of Series A Preferred Stock are convertible
in accordance with the terms hereof.
"Conversion Shares Registration Statement" means a
registration statement that meets the requirements of the Registration
Rights Agreement and registers the resale of all Conversion Shares by
the Holder, who shall be named as a "selling stockholder" thereunder,
all as provided in the Registration Rights Agreement.
"Conversion Value" shall have the meaning set forth in Section
6(a).
"Company Valuation" means, with respect to any public offering
of Common Stock, the amount obtained by multiplying the total number of
shares of Common Stock outstanding immediately prior to such public
offering on a fully-diluted basis multiplied by the per share offering
price for such public offering
"Effective Date" means the date that the Conversion Shares
Registration Statement is declared effective by the Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exempt Issuance" means the issuance of (a) shares of Common
Stock or options to employees, officers or directors of the Company
pursuant to any stock or option plan duly adopted or ratified by a
majority of the non-employee members of the Board of Directors of the
Company or a majority of the members of a committee of non-employee
32
directors established for such purpose, (b) securities upon the
exercise of or conversion of any securities issued hereunder, and of
any convertible securities, options or warrants issued and outstanding
on the date of this Certificate of Designations, provided that such
securities have not been amended since the date of this Certificate of
Designations to increase the number of such securities, (c) 736,917
shares of Common Stock issuable to employees and directors in payment
of loans made to the Company; and (d) securities; and (d) securities
issued pursuant to acquisitions or strategic transactions, provided any
such issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating company in a business synergistic with the
business of the Company and in which the Company receives benefits in
addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for
the purpose of raising capital or to an entity whose primary business
is investing in securities.
"Fundamental Transaction" shall have the meaning set forth in
Section 7(h)(iv) hereof.
"Holder" shall have the meaning given such term in Section 2
hereof.
"Junior Securities" means the Common Stock and all other
equity or equity equivalent securities of the Company other than those
securities that are explicitly senior in rights or liquidation
preference to the Series A Preferred Stock.
"Original Issue Date" shall mean the date of the first
issuance of any shares of the Series A Preferred Stock regardless of
the number of transfers of any particular shares of Series A Preferred
Stock and regardless of the number of certificates which may be issued
to evidence such Series A Preferred Stock.
"Qualified Public Offering" means the sale of shares of the
Company's Common Stock in a bona fide, firm commitment or best efforts
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, resulting in at
least $10,000,000 of gross proceeds to the Corporation before deducting
underwriting discounts and commissions and offering expenses, and
reflecting a Company Valuation (as defined above) of at least
$100,000,000 (or such lesser amount as the holders of a majority of the
outstanding Common Stock and Series A Preferred Stock, each voting as
separate classes, otherwise agree).
"Person" means a Company, an association, a partnership, a
limited liability company, a business association, an individual, a
government or political subdivision thereof or a governmental agency.
"Purchase Agreement" means the
Preferred Stock Purchase
Agreement, dated as of May 18th, 2006 to which the Company and the
original Holders are parties, as amended, modified or supplemented from
time to time in accordance with its terms, a copy of which is on file
at the principal offices of the Company.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Closing Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from
time to time in accordance with its terms.
33
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Series A Preferred Stock" shall have the meaning set forth in
Section 2.
"Subsidiary" shall mean a Company, limited liability company,
partnership, joint venture or other business entity of which the
Company owns beneficially or of record more than 19% of the equity
interest.
"Trading Day" means a day on which the Common Stock is traded
on a Trading Market.
"Trading Market" means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq Capital Market, the American Stock Exchange, the
New York Stock Exchange, the Nasdaq National Market, the OTC Bulletin
Board, or the Pink Sheets.
"Transaction Documents" shall have the meaning set forth in
the Purchase Agreement.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market other than the Pink Sheets, the
daily volume weighted average price of the Common Stock for such date
(or the nearest preceding date) on the primary Trading Market on which
the Common Stock is then listed or quoted as reported by Bloomberg
Financial L.P. (based on a Trading Day from 9:30 a.m. EST to 4:02 p.m.
Eastern Time) using the VAP function; (b) if prices for the Common
Stock are then reported exclusively in the Pink Sheets, the most recent
bid price per share of the Common Stock so reported; or (c) in all
other cases, the fair market value of a share of Common Stock as
determined by a nationally recognized-independent appraiser selected in
good faith by Holders holding a majority of the principal amount of
Series A Preferred Stock then outstanding.
Section 2. DESIGNATION, AMOUNT AND PAR VALUE. The series of
preferred stock shall be designated as the Company's Series A Convertible
Preferred Stock (the "Series A Preferred Stock or "Preferred Stock") and shall
consist of 10,000,000 shares (which shall not be subject to increase without the
consent of all of the holders of the Series A Preferred Stock (each a "Holder"
and collectively, the "Holders"). Each share of Series A Preferred Stock shall
have a par value of $0.001 per share. Capitalized terms not otherwise defined
herein shall have the meaning given such terms in Section 1 hereof.
Section 3. DIVIDENDS AND OTHER DISTRIBUTIONS. No dividends shall be
payable with respect to the Series A Preferred Stock. No dividends shall be
payable with respect to the Common Stock while the Series A Preferred Stock is
outstanding. No shares of Common Stock shall be redeemed while the Series A
Preferred Stock is outstanding, except as provided for in the Purchase Agreement
with respect to shares held by Xxxxx X. Xxxxxxxxxx.
Section 4. VOTING RIGHTS. The Series A Preferred Stock shall have no
voting rights. However, so long as any shares of Series A Preferred Stock are
outstanding, the Company shall
34
not, without the affirmative approval of the Holders of the shares of the Series
A Preferred Stock then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Series A Preferred Stock or alter or amend
this Certificate of Designations, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation (as defined
in Section 5) senior to or otherwise pari passu with the Series A Preferred
Stock, or any preferred stock possessing greater voting rights or the right to
convert at a more favorable price than the Series A Preferred Stock, (c) amend
its certificate or articles of incorporation or other charter documents in
breach of any of the provisions hereof, (d) increase the authorized number of
shares of Series A Preferred Stock, or (e) enter into any agreement with respect
to the foregoing.
Section 5. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Series A Preferred
Stock an amount equal to $0.40 (the "Liquidation Value") before any distribution
or payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the Holders shall be distributed among
the Holders ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. At the
election of a Holder made by written notice delivered to the Company at least
two (2) business days prior to the effective date of the subject transaction, as
to the shares of Series A Preferred Stock held by such Holder, a Fundamental
Transaction (excluding for purposes of this Section 5 any Fundamental
Transaction described in Section 7(h)(iv)(A) or 7(h)(iv)(B)) or Change of
Control shall be treated as a Liquidation.
Section 6. CONVERSION.
a) Conversions at Option of Holder. Each share of Series A Preferred
Stock shall be initially convertible (subject to the limitations set forth in
Section 6(c), into one (1) share of Common Stock (as adjusted as provided below,
the "Conversion Ratio") at the option of the Holders, at any time and from time
to time from and after the Original Issue Date. Holders shall effect conversions
by providing the Company with the form of conversion notice attached hereto as
Annex A (a "Notice of Conversion") as fully and originally executed by the
Holder, together with the delivery by the Holder to the Company of the stock
certificate(s) representing the number of shares of Series A Preferred Stock so
converted, with such stock certificates being duly endorsed in full for transfer
to the Company or with an applicable stock power duly executed by the Holder in
the manner and form as deemed reasonable by the transfer agent of the Common
Stock. Each Notice of Conversion shall specify the number of shares of Series A
Preferred Stock to be converted, the number of shares of Series A Preferred
Stock owned prior to the conversion at issue, the number of shares of Series A
Preferred Stock owned subsequent to the conversion at issue, the stock
certificate number and the shares of Series A Preferred Stock represented
thereby which are accompanying the Notice of Conversion, and the date on which
such conversion is to be effected, which date may not be prior to the date the
Holder delivers such Notice of Conversion and the applicable stock certificates
to the Company by overnight delivery service (the "Conversion Date"). If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the Trading Day immediately following the date that such Notice of
Conversion and applicable stock certificates are received by the Company. The
35
calculations and entries set forth in the Notice of Conversion shall control in
the absence of manifest or mathematical error. Shares of Series A Preferred
Stock converted into Common Stock in accordance with the terms hereof shall be
canceled and may not be reissued. The initial value of the Series A Preferred
Stock on the Conversion Date shall be equal to $0.40 per share (as adjusted
pursuant to Section 7 or otherwise as provided herein, the "Conversion Value").
If the initial Conversion Value is adjusted pursuant to Section 7 or as
otherwise provided herein, the Conversion Ratio shall likewise be adjusted and
the new Conversion Ratio shall equal the Liquidation Value divided by the new
Conversion Value. Thereafter, subject to any further adjustments in the
Conversion Value, each share of Series A Preferred Stock shall be initially
convertible into that number of shares of Common Stock equal to the new
Conversion Ratio.
b) Automatic Conversion Upon Certain Events.
i. Public Offering. Each share of the Series A
Preferred Stock shall automatically be converted into shares of Common Stock at
the Conversion Ratio at the time in effect for such series of Preferred Stock
immediately upon the earlier of (i) the Company's sale of its Common Stock in a
Qualified Public Offering or (ii) the date specified by written consent or
agreement of the holders of a majority of the then outstanding shares of
Preferred Stock (voting together as a single class and not as separate series,
and on an as-converted basis).
ii. Change of Control. Subject to Section 5, all of
the outstanding shares of Series A Preferred Stock shall be automatically
converted into the Conversion Shares upon the close of business on the business
day immediately preceding the date fixed for consummation of any transaction
resulting in a Change of Control of the Company (an "Automatic Conversion
Event"). A "Change in Control" means (A) the sale of all then outstanding shares
of common stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of the directors, in an amount sufficient to elect a majority of the
Company Board of Directors; (ii) the sale or transfer of stock sufficient to
create a new controlling interest in the Company; or (iii) the consummation of
the sale or other disposition of all or substantially all of the assets or
operations of the Company other than: (1) a sale of assets in a bankruptcy or
insolvency proceeding or (2) the commencement of a bankruptcy case by the
Company (or by another entity in the event of an involuntary filing) under 11
U.S.C. sections 301, 302, 303 and 304, or the emergence of the Company from
bankruptcy, a consolidation or merger of the Company with or into another
company or entity in which the Company is not the surviving entity or the sale
of all or substantially all of the assets of the Company to another company or
entity not controlled by the then existing stockholders of the Company in a
transaction or series of transactions.
Upon the conversion of the Series A Preferred Stock pursuant to this
Section 6(b), the Company shall promptly send written notice thereof, by hand
delivery or by overnight delivery, to the holder of record of all of the Series
A Preferred Stock at its address then shown on the records of the Company, which
notice shall state that certificates evidencing shares of Series A Preferred
Stock must be surrendered at the office of the Company (or of its transfer agent
for the Common Stock, if applicable).
c) Beneficial Ownership Limitation. Except as provided in Section 6(b)
above, the Company shall not effect any conversion of the Series A Preferred
Stock, and the
36
Holder shall not have the right to convert any portion of the Series A Preferred
Stock to the extent that after giving effect to such conversion, the Holder
(together with the Holder's affiliates), as set forth on the applicable Notice
of Conversion, would beneficially own in excess of 4.9% of the number of shares
of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock with respect to which the determination of such sentence is
being made, but shall exclude the number of shares of Common Stock which would
be issuable upon (A) conversion of the remaining, nonconverted shares of Series
A Preferred Stock beneficially owned by the Holder or any of its affiliates, so
long as such shares of Series A Preferred Stock are not convertible within sixty
(60) days from the date of such determination, and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the Company
(including the Warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the Holder or
any of its affiliates, so long as such other securities of the Company are not
exercisable nor convertible within sixty (60) days from the date of such
determination. For purposes of this Section 6(c), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in the most recent of the
following: (A) the Company's most recent quarterly reports, Form 10-Q, Form
10-QSB, Annual Reports, Form 10-K, or Form 10-KSB, as the case may be, as filed
with the Commission under the Exchange Act (B) a more recent public announcement
by the Company or (C) any other written notice by the Company or the Company's
transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written or oral request of the Holder, the Company shall within two (2)
Trading Days confirm orally and in writing to the Holder the number of shares of
Common Stock then outstanding. In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including the Series A Preferred Stock,
by the Holder or its affiliates since the date as of which such number of
outstanding shares of Common Stock was publicly reported by the Company. This
Section 6(c) may be waived or amended only with the consent of the Holders of
all of the Series A Preferred Stock and the consent of the holders of a majority
of the shares of outstanding Common Stock of the Company who are not Affiliates.
For the purpose of the immediately preceding sentence, the term "Affiliate"
shall mean any person: (a) that directly or indirectly, through one or more
intermediaries controls, or is controlled by, or is under common control with
the Company, or (b) who beneficially owns (i) any shares of Series A Preferred
Stock, or (ii) the Company's Common Stock Purchase Warrant(s) dated May 18th,
2006. For purposes of this Section 6(c), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act.
d) Mechanics of Conversion
i. Delivery of Certificate Upon Conversion. Except as
otherwise set forth herein, not later than three Trading Days after each
Conversion Date (the "Share Delivery Date"), the Company shall deliver to the
Holder a certificate or certificates which, after the Effective Date, shall be
free of restrictive legends and trading restrictions (other than those required
by the Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of shares of Series A Preferred Stock. After
the Effective Date, the Company shall, upon request of the Holder, deliver any
certificate or certificates required to be
37
delivered by the Company under this Section electronically through the
Depository Trust Company or another established clearing Company performing
similar functions. If in the case of any Notice of Conversion such certificate
or certificates are not delivered to or as directed by the applicable Holder by
the third Trading Day after the Conversion Date, the Holder shall be entitled to
elect by written notice to the Company at any time on or before its receipt of
such certificate or certificates thereafter, to rescind such conversion, in
which event the Company shall immediately return the certificates representing
the shares of Series A Preferred Stock tendered for conversion. The Company
shall not be obligated to issue certificates evidencing the Conversion Shares
unless certificates evidencing the shares of Series A Preferred Stock so
converted are either delivered to the Company or its transfer agent or the
holder notifies the Company or its transfer agent in writing that such
certificates have been lost, stolen, or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith.
ii. Obligation Absolute; Partial Liquidated Damages.
The Company's obligations to issue and deliver the Conversion Shares upon
conversion of Series A Preferred Stock in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by the Holder
to enforce the same, any waiver or consent with respect to any provision hereof,
the recovery of any judgment against any Person or any action to enforce the
same, or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any
other person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with the
issuance of such Conversion Shares. In the event a Holder shall elect to convert
any or all of its Series A Preferred Stock, the Company may not refuse
conversion based on any claim that such Holder or any one associated or
affiliated with the Holder of has been engaged in any violation of law,
agreement or for any other reason, unless, an injunction from a court, on
notice, restraining and or enjoining conversion of all or part of this Series A
Preferred Stock shall have been sought and obtained and the Company posts a
surety bond for the benefit of the Holder in the amount of 150% of the
Conversion Value of Series A Preferred Stock outstanding, which is 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 Holder to the extent it obtains judgment. In the absence of an
injunction precluding the same, the Company shall issue Conversion Shares or, if
applicable, cash, upon a properly noticed conversion. If the Company fails to
deliver to the Holder such certificate or certificates pursuant to Section
6(d)(i) within two Trading Days of the Share Delivery Date applicable to such
conversion, the Company shall pay to such Holder, in cash, as liquidated damages
and not as a penalty, for each $5,000 of Conversion Value of Series A Preferred
Stock being converted, $200 per Trading Day (increasing to $400 per Trading Day
after three (3) Trading Days and increasing to $800 per Trading Day six (6)
Trading Days after such damages begin to accrue) for each Trading Day after the
Share Delivery Date until such certificates are delivered. Nothing herein shall
limit a Holder's right to pursue actual damages for the Company's failure to
deliver certificates representing shares of Common Stock upon conversion within
the period specified herein and such Holder shall have the right to pursue all
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.
38
iii. Compensation for Buy-In on Failure to Timely
Deliver Certificates Upon Conversion. If the Company fails to deliver to the
Holder such certificate or certificates pursuant to Section 6(d)(i) by a Share
Delivery Date, and if after such Share Delivery Date the Holder purchases (in an
open market transaction or otherwise) Common Stock to deliver in satisfaction of
a sale by such Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a "Buy-In"),
then the Company shall pay in cash to the Holder the amount by which (x) the
Holder's total purchase price (including brokerage commissions, if any) for the
Common Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that such Holder was entitled to receive from the
conversion at issue multiplied by (2) the price at which the sell order giving
rise to such purchase obligation was executed. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of shares of Series A Preferred
Stock with respect to which the aggregate sale price giving rise to such
purchase obligation is $10,000, under clause (A) of the immediately preceding
sentence the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In, together with applicable confirmations and
other evidence reasonably requested by the Company. Nothing herein shall limit a
Holder's right to pursue any other remedies available to it hereunder, at law or
in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company's failure to timely deliver
certificates representing shares of Common Stock upon conversion of the shares
of Series A Preferred Stock as required pursuant to the terms hereof.
iv. Reservation of Shares Issuable Upon Conversion.
The Company covenants that it will at all times reserve and keep available out
of its authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of the Series A Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holders, not less than such number of shares of
the Common Stock as shall (subject to any additional requirements of the Company
as to reservation of such shares set forth in the Purchase Agreement) be
issuable (taking into account the adjustments and restrictions of Section 7)
upon the conversion of all outstanding shares of Series A Preferred Stock. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and, if the Conversion Shares Registration Statement is then
effective under the Securities Act, registered for public sale in accordance
with such Conversion Shares Registration Statement.
v. Fractional Shares. Upon a conversion hereunder,
the Company shall not be required to issue stock certificates representing
fractions of shares of the Common Stock.
vi. Transfer Taxes. The issuance of certificates for
shares of the Common Stock on conversion of the Series A Preferred Stock shall
be made without charge to the Holders thereof for any documentary stamp or
similar taxes that may be payable in respect of the issue or delivery of such
certificate, provided that the Company shall not be required to pay any tax that
may be payable in respect of any transfer involved in the issuance and delivery
of any such certificate upon conversion in a name other than that of the Holder
of such shares of
39
Series A Preferred Stock so converted and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
Section 7. CERTAIN ADJUSTMENTS.
a) Stock Dividends and Stock Splits. If the Company, at any
time while the Series A Preferred Stock is outstanding: (A) shall pay a
stock dividend or otherwise make a distribution or distributions on
shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by the
Company pursuant to this Series A Preferred Stock), (B) subdivide
outstanding shares of Common Stock into a larger number of shares, (C)
combine (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issue by
reclassification of shares of the Common Stock any shares of capital
stock of the Company, then the Conversion Value shall be multiplied by
a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before
such event and of which the denominator shall be the number of shares
of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
b) Subsequent Equity Sales. From the Closing until less than
five percent (5) percent of the Preferred Stock is outstanding
(adjusted for splits and other events defined in this Agreement), the
Company shall be prohibited from effecting or entering into an
agreement to effect any Subsequent Financing involving a "Variable Rate
Transaction" or an "MFN Transaction" (each as defined below). The term
"Variable Rate Transaction" shall mean a transaction in which the
Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right
to receive additional shares of Common Stock either (A) at a
conversion, exercise or exchange rate or other price that is based upon
and/or varies with the trading prices of or quotations for the shares
of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price
that is subject to being reset at some future date after the initial
issuance of such debt or equity security (other than pursuant to
customary antidilution provisions) or upon the occurrence of specified
or contingent events directly or indirectly related to the business of
the Company or the market for the Common Stock. The term "MFN
Transaction" shall mean a transaction in which the Company issues or
sells any securities in a capital raising transaction or series of
related transactions which grants to an investor the right to receive
additional shares based upon future transactions of the Company on
terms more favorable than those granted to such investor in such
offering. The Investor shall be entitled to obtain injunctive relief
against the Company to preclude any such issuance, which remedy shall
be in addition to any right to collect damages. Notwithstanding the
foregoing, this Section 7 b) shall not apply in respect of an Exempt
40
Issuance, except that no Variable Rate Transaction or MFN Transaction
shall be an Exempt Issuance.
c) Subsequent Rights Offerings. The Company, at any time while
the Series A Preferred Stock is outstanding, shall not issue rights,
options or warrants to holders of Common Stock entitling them to
subscribe for or purchase shares of Common Stock at a price per share
less than the Conversion Value.
d) Price Adjustment. From the date hereof until 24 months
following the Closing Date, except for any exempt issuances, the
Company closes on the sale of a note or notes, shares of Common Stock,
or shares of any class of Preferred Stock at a price per share of
Common Stock, or with a conversion right to acquire Common Stock at a
price per share of Common Stock, that is less than the Conversion Value
(as adjusted to the capitalization per share as of the Closing Date,
following any stock splits, stock dividends, or the like)
(collectively, the "Subsequent Conversion Value"), the Company shall
make a post Closing adjustment in the Conversion Price so that the
effective price per share paid by the Investor is reduced to being
equivalent to such lower conversion value after taking into account any
prior conversions of the Preferred Stock and/or exercises of the
Warrant. The issuance or reissuance of any shares of Common Stock
(whether treasury shares or newly issued shares) pursuant to a dividend
or distribution on, or subdivision, combination or reclassification of,
the outstanding shares of Common Stock requiring an adjustment in the
Conversion Ratio pursuant to clause 7(d) shall not be deemed to
constitute an issuance of Common Stock by the Company to which this
clause 7(d) applies.
The provisions of this Section 7(d) shall not apply to any
issuance of shares of Common Stock, or shares of any class of Preferred
Stock at a price per share of Common Stock, or with a conversion right
to acquire Common Stock at a price per share of Common Stock for which
an adjustment is provided under Section 7 (a), 7 (e) or, 7 (f).
(e) Price Adjustment Based on Earnings Per Share. In the event
the Company has income of between $0.098 and $0.059 (40% Decline) per
share (where such income in this paragraph shall always be defined as
operating income on a fully diluted basis as reported for the audited
fiscal year ended December 31st, 2006 from continuing operations before
any non-recurring items) then the then current Conversion Value at the
time the audited numbers are reported to the SEC shall be decreased
proportionately by 0% if the income is $0.098 per share or greater and
by 40% if the income is $0.059 per share (40% decrease). For example if
the income is $0.078 per share or less (20% Decline) then the then
current Conversion Value shall be reduced by 20%. In the event the
Company has income of any amount below $0.059 per share, then the then
current Conversion Value shall be decreased by 40% and not more, and if
the Company has no income or negative income, then the then current
Conversion Value shall be decreased by 70% and not more. Any adjustment
pursuant to this Section 7(e) shall be made within five business days
of the audited numbers being reported to the SEC.
(f) Pro Rata Distributions. If the Company, at any time while
Series A Preferred Stock is outstanding, shall distribute to all
holders of Common Stock (and not to Holders)
41
evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the
Conversion Value shall be determined by multiplying such Conversion
Value in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the VWAP determined as of
the record date mentioned above, and of which the numerator shall be
such VWAP on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of the Common Stock
as determined by the Board of Directors in good faith. In either case
the adjustments shall be described in a statement provided to the
Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
g) Calculations. All calculations under this Section 7 shall
be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account
of the Company, and the description of any such shares of Common Stock
shall be considered on issue or sale of Common Stock. For purposes of
this Section 7, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the
number of shares of Common Stock (excluding treasury shares, if any)
actually issued and outstanding.
h) Notice to Holders.
i. Adjustment to Conversion Price. Whenever the
Conversion Value is adjusted pursuant to any of this Section 7, the
Company shall promptly mail to each Holder a notice setting forth the
Conversion Value after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. If the Company issues
a variable rate security, despite the prohibition thereon in the
Purchase Agreement, the Company shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest possible conversion or
exercise price at which such securities may be converted or exercised
in the case of a Variable Rate Transaction (as defined in the Purchase
Agreement), or the lowest possible adjustment price in the case of an
MFN Transaction (as defined in the Purchase Agreement).
ii. Notices of Other Events. If (A) the Company shall
declare a dividend (or any other distribution) on the Common Stock; (B)
the Company shall declare a redemption of the Common Stock; (C) the
Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights; (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock or any Fundamental Transaction,
(E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company;
then in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of the Series A
Preferred Stock, and shall cause to be mailed to the Holders at their
last addresses as they shall appear upon the stock
42
books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of the Common
Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on
which such reclassification is expected to become effective or close,
and the date as of which it is expected that holders of the Common
Stock of record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property deliverable upon
such reclassification or Fundamental Transaction; provided, that the
failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required
to be specified in such notice.
iii. Exempt Issuance. Notwithstanding the foregoing,
no adjustment will be made under this Section 7 in respect of an Exempt
Issuance.
iv. Fundamental Transaction. If, at any time while
this Series A Preferred Stock is outstanding, (A) the Company effects
any merger or consolidation of the Company with or into another Person,
(B) the Company effects any sale of all or substantially all of its
assets in one or a series of related transactions, (C) any tender offer
or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or property,
or (D) the Company effects any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or
property (in any such case, a "Fundamental Transaction"), then upon any
subsequent conversion of this Series A Preferred Stock, the Holder
shall have the right to receive, for each Conversion Share that would
have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or property
as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such
Fundamental Transaction, the holder of one share of Common Stock (the
"Alternate Consideration"). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted
to apply to such Alternate Consideration based on the amount of
Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion
the Conversion Price among the Alternate Consideration in a reasonable
manner reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any conversion of
this Series A Preferred Stock following such Fundamental Transaction.
To the extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such Fundamental
Transaction shall file a new Certificate of Designations with the same
terms and conditions and issue to the Holder new preferred stock
consistent with the foregoing provisions and evidencing the Holder's
right to convert such preferred stock into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is
effected shall include terms requiring
43
any such successor or surviving entity to comply with the provisions of
this paragraph (f)(iv) and insuring that this Series A Preferred Stock
(or any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.
Section 8. Miscellaneous.
a) Notices. Any and all notices or other communications or
deliveries to be provided by the Holders hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight
courier service, addressed to the Company, at the address provided in
the Purchase Agreement, facsimile number (000) 000-0000, ATTN: XXXXX
XXXXX, PRESIDENT AND CEO or such other address or facsimile number as
the Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service addressed to each
Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business
of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile telephone number specified in this
Section prior to 5:30 p.m. (
New York City time), (ii) the date after
the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile telephone number specified in this
Section later than 5:30 p.m. (
New York City time) on any date and
earlier than 11:59 p.m. (
New York City time) on such date, (iii) the
second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. -
b) Absolute Obligation. Except as expressly provided herein,
no provision of this Certificate of Designation shall alter or impair
the obligation of the Company, which is absolute and unconditional, to
pay the liquidated damages (if any) on, the shares of Series A
Preferred Stock at the time, place, and rate, and in the coin or
currency, herein prescribed.
c) Lost or Mutilated Preferred Stock Certificate. If a
Holder's Series A Preferred Stock certificate shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange
and substitution for and upon cancellation of a mutilated certificate,
or in lieu of or in substitution for a lost, stolen or destroyed
certificate, a new certificate for the shares of Series A Preferred
Stock so mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such certificate, and of
the ownership thereof, and indemnity, if requested, all reasonably
satisfactory to the Company.
44
d) Next Business Day. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
e) Headings. The headings contained herein are for convenience
only, do not constitute a part of this Certificate of Designations and
shall not be deemed to limit or affect any of the provisions hereof.
RESOLVED, FURTHER, that the Chairman, the president or any
vice-president, and the secretary or any assistant secretary, of the Company be
and they hereby are authorized and directed to prepare and file a Certificate of
Designations of Preferences, Rights and Limitations in accordance with the
foregoing resolution and the provisions of Nevada law.
45
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
th day of .
----- ----------------------- -------
-------------------------------------------- ---------------------------------
Name: Xxxxx X. Xxxxx Name: Xxxxx X. Xxxxx
-------------- --------------
Title: President and Chief Executive Officer Title: Secretary
46
ANNEX A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES
OF SERIES A PREFERRED STOCK)
The undersigned hereby elects to convert the number of shares of Series A
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.001 per share (the "Common Stock"), of Family Health Services, Inc., a
Nevada Company (the "Company"), according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
Date to Effect Conversion: __________________________________________
Number of shares of Common Stock owned prior to Conversion:
__________________
Number of shares of Series A Preferred Stock to be Converted:
__________________
Value of shares of Series A Preferred Stock to be Converted:
____________________
Number of shares of Common Stock to be Issued:
___________________________
Certificate Number of Series A Preferred Stock attached hereto:
__________________
Number of Shares of Series A Preferred Stock represented by attached
certificate:________________
Number of shares of Series A Preferred Stock subsequent to Conversion:
________________
[HOLDER]
By:________________________________________
Name:_________________________________
Title:________________________________
47
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
48
EXHIBIT C
WARRANTS
49
