Exhibit 10.13
CONVERTIBLE DEBENTURES
AND
WARRANTS PURCHASE AGREEMENT
Between
Data Race, Inc.
and
the Investors Signatory Hereto
CONVERTIBLE DEBENTURES AND WARRANTS PURCHASE AGREEMENT dated as of June 12,
2001 (the "Agreement"), between the Investors signatory hereto (each an
"Investor" and together the "Investors"), and Data Race, Inc., a corporation
organized and existing under the laws of the State of Texas (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase, in the aggregate, (i) $1,000,000 principal
amount of the Convertible Debentures, and (ii) the Warrants; and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and/or 4(6) ("Section 4(6)") of the United States
Securities Act of 1933, as amended (the "Securities Act") and/or Regulation D
("Regulation D") and the other rules and regulations promulgated thereunder,
and/or upon such other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of the investments
in securities to be made hereunder.
NOW, THEREFORE, in consideration of the foregoing premises, and the
promises and covenants herein contained, the receipt and sufficiency of which
are hereby acknowledged by the parties hereto, the parties, intending to be
legally bound, hereby agree as follows:
ARTICLE I
Purchase and Sale of Convertible Debentures and Warrants
Section 1.1. Investment.
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(a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investors agree to purchase the Convertible
Debentures together with the Warrants at the Purchase Price on each Closing Date
as follows:
(i) First Closing. Upon execution and delivery of this
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Agreement, the Investors shall purchase, severally and not
jointly, in the aggregate, $500,000 principal amount of
Convertible Debentures. Each Investor shall deliver to the
Escrow Agent immediately available funds in their
proportionate amount of the aggregate Purchase Price, as
set forth on the signature pages hereto, and the Company
shall deliver the Convertible Debentures evidencing said
principal sum and the Warrants to the Escrow Agent, in
each case to be held by the Escrow Agent pursuant to the
Escrow Agreement.
(ii) Second Closing. Within five (5) Trading Days of written
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notice from the Company to the Investors that the
Registration Statement has been filed, the Investors shall
purchase, severally and not jointly, in the aggregate,
$500,000 principal amount of Convertible Debenture. Each
Investor shall deliver to the Escrow Agent immediately
available funds in their proportionate amount of the
Purchase Price, as set forth on the signature pages
hereto, and the Company shall deliver the Convertible
Debentures evidencing said principal sum to the Escrow
Agent, to be held by the Escrow Agent pursuant to the
Escrow Agreement.
(iii) Each Closing. Upon satisfaction of the conditions set
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forth in Section 1.1(b), each Closing shall occur at the
offices of the Escrow Agent at which time the Escrow Agent
(x) shall release the applicable Convertible Debenture and
the Warrants to the Investors and (y) shall release the
Purchase Price (after all fees have been paid as set forth
in the Escrow Agreement), pursuant to the terms of the
Escrow Agreement.
(b) Each Closing is subject to the satisfaction or waiver by the party to
be benefited thereby of the following conditions:
(i) acceptance and execution by the Company and by the
Investors, of this Agreement and all Exhibits hereto;
(ii) delivery into escrow by each Investor of immediately
available funds in the applicable amount of the Purchase
Price as indicated and set forth on the signature pages
hereto;
(iii) all representations and warranties of the Investors
contained herein shall remain true and correct as of each
Closing Date;
(iv) all representations and warranties of the Company
contained herein shall remain true and correct as of each
Closing Date;
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(v) the Company shall have obtained all permits and
qualifications required by any state for the offer and
sale of the Convertible Debentures and the Warrants, or
shall have the availability of exemptions therefrom;
(vi) the sale and issuance of the Convertible Debentures and
the Warrants hereunder, and the proposed issuance by the
Company to the Investors of the Common Stock underlying
the Convertible Debentures and the Warrants upon the
conversion or exercise thereof shall be legally permitted
by all laws and regulations to which the Investors and the
Company are subject and there shall be no ruling, judgment
or writ of any court prohibiting the transactions
contemplated by this Agreement;
(vii) delivery of the applicable original fully executed
Convertible Debentures (as to each applicable Closing) and
Warrants certificates to the Escrow Agent (as to the first
Closing);
(viii) delivery to the Escrow Agent of an opinion of Xxxxxxx
Xxxxxx L.L.P., counsel to the Company, in the form of
Exhibit D hereto (as to the first
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Closing);
(ix) delivery to the Escrow Agent of the Irrevocable
Instructions to Transfer Agent in the form attached hereto
as Exhibit F (as to the first Closing); and
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(x) delivery to the Escrow Agent of the Registration Rights
Agreement (as to the first Closing);
(xi) delivery to the Escrow Agent of the written agreements of
the Chairman of the Board and each other executive officer
of the Company addressed to the Investors, agreeing to
vote all shares of Common Stock over which they have
voting control in favor of a shareholder proposal
permitting the issuance of a number of Conversion Shares
in excess of 19.9% of the number of shares of Common Stock
issued and outstanding on the first Closing Date (as to
the first Closing);
(xi) there shall have been no Material Adverse Effect with
respect to the Company since the date of the first Closing
and the average daily trading volume of the Common Stock
on the Principal Market for the ten consecutive Trading
Days ending on the filing date of the Registration
Statement shall have been at least 100,000 shares (as to
the second Closing); and
(xii) the Company shall have filed with the SEC the Registration
Statement registering 200% of the Conversion Shares
issuable upon conversion of the Convertible Debentures to
be purchased hereunder and 100% of the Warrant Shares
shall have been filed under the Securities Act with the
SEC (as to the second Closing).
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Section 1.2. Warrants. At the first Closing, the Company shall issue to the
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Investors Warrants to purchase up to 1,000,000 shares of Common Stock, in the
aggregate. The Company shall issue the Warrants to the Investors pro rata among
all Investors in proportion to their respective initial purchases of the
Convertible Debentures pursuant to this Agreement. The exercise price of the
Warrants shall be equal to the Bid Price of the Common Stock on the Trading Day
immediately prior to the first Closing Date. The Warrants shall be exercisable
for a period of three (3) years beginning on the first Closing Date. The shares
of Common Stock underlying the Warrants shall be registered for resale on the
Registration Statement for resale by the Investors pursuant to the Registration
Rights Agreement.
Section 1.3. Liquidated Damages. The parties hereto acknowledge that with
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respect to the delivery of the Conversion Shares, time is of the essence and the
Company shall be liable for the liquidated damages set forth in the Convertible
Debentures. Additionally, the parties hereto acknowledge and agree that the sums
payable pursuant to this Agreement, the Registration Rights Agreement and the
Convertible Debentures shall constitute liquidated damages and not penalties.
The parties further acknowledge that a breach by either party of this Agreement
or exhibits hereto, (a) the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, (b) the amounts specified in
such agreements bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred by the Investors in
connection with the failure of the Company to timely cause the registration of
the Registrable Securities or to deliver stock certificates upon any conversion,
and (c) the parties are sophisticated businesses and have been represented by
sophisticated and able legal and financial counsel and negotiated this Agreement
at arm's length.
ARTICLE II
Representations and Warranties of Each Investor
Each Investor, severally and not jointly, represents and warrants to the Company
that:
Section 2.1. Organization. The Investor is duly organized, validly existing
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and in good standing under the laws of its jurisdiction of organization.
Section 2.2. Intent. The Investor is entering into this Agreement for its own
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account and not with a view to or for sale in connection with any distribution
of the Common Stock. The Investor has no present arrangement (whether or not
legally binding) at any time to sell the Convertible Debenture, and the Warrants
or any Conversion Shares or Warrant Shares to or through any person or entity;
provided, however, that by making the representations herein, the Investor does
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not agree to hold such securities for any minimum or other specific term and
reserves the right to dispose of the Conversion Shares and Warrant Shares at any
time in accordance with federal and state securities laws applicable to such
disposition.
Section 2.3. Sophisticated Investor. The Investor is a sophisticated investor
----------------------
(as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it has the
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capacity to protect its own interests in connection with this transaction and is
capable of evaluating the merits and risks of an investment in the Convertible
Debentures, the Warrants and the underlying Common Stock. The Investor has been
represented by counsel of its choice. The Investor acknowledges that an
investment in the Convertible Debentures and the Warrants and the underlying
Common Stock is speculative and involves a high degree of risk.
Section 2.4. Authority. This Agreement and each agreement attached as an
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Exhibit hereto which is required to be executed by the Investor has been duly
authorized and validly executed and delivered by the Investor and is a valid and
binding agreement of the Investor enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and remedies or
by other equitable principles of general application.
Section 2.5. Not an Affiliate. The Investor is not an officer, director or
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"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 2.6. Absence of Conflicts. The execution and delivery of this
--------------------
Agreement and each agreement which is attached as an Exhibit hereto and executed
by the Investor in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
thereof by the Investor, will not violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on the Investor or (a)
violate any provision of any indenture, instrument or agreement to which the
Investor is a party or is subject, or by which the Investor or any of its assets
is bound; (b) conflict with or constitute a material default thereunder; (c)
result in the creation or imposition of any lien pursuant to the terms of any
such indenture, instrument or agreement, or constitute a breach of any fiduciary
duty owed by the Investor to any third party; or (d) require the approval of any
third-party (which has not been obtained) pursuant to any material contract,
agreement, instrument, relationship or legal obligation to which the Investor is
subject or to which any of its assets, operations or management may be subject.
Section 2.7. Disclosure; Access to Information. The Investor has received all
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documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed copies of all SEC Documents deemed relevant
by Investor.
Section 2.8. Manner of Sale. At no time was Investor presented with or
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solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE III
Representations and Warranties of the Company
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The Company represents and warrants to the Investors that, except as set forth
on the SEC Documents or on the Disclosure Schedule prepared by the Company and
attached hereto:
Section 3.1. Organization of the Company. The Company is a corporation duly
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incorporated and existing in good standing under the laws of the State of Texas
and has all requisite corporate authority to own its properties and to carry on
its business as now being conducted. The Company is duly qualified and is in
good standing as a foreign corporation to do business in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect.
Section 3.2. Authority. (a) The Company has the requisite corporate power and
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corporate authority to conduct its business as now conducted, to enter into and
perform its obligations under this Agreement, the Registration Rights Agreement,
the Escrow Agreement and the Warrants, and to issue the Convertible Debentures,
the Conversion Shares, the Warrants and the Warrant Shares pursuant to their
respective terms, (b) the execution, issuance and delivery of this Agreement,
the Registration Rights Agreement, the Escrow Agreement, the Convertible
Debentures and the Warrants by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required, and (c) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Warrants and the
Convertible Debentures have been duly executed and delivered by the Company and
at the Closing shall constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws relating to, or affecting generally the enforcement of, creditors' rights
and remedies or by other equitable principles of general application. The
Company has duly and validly authorized and reserved for issuance shares of
Common Stock sufficient in number for the conversion of the Convertible
Debentures and the exercise of the Warrants. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock of the issuance
of the Conversion Shares and Warrant Shares. The Company further acknowledges
that its obligation to issue Conversion Shares and Warrant Shares upon
conversion of the Convertible Debentures and Warrant Shares upon exercise of the
Warrants in accordance with this Agreement and the Convertible Debentures is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company and
notwithstanding the commencement of any case under 11 U.S.C. (S) 101 et seq.
(the "Bankruptcy Code"). The Company shall not seek judicial relief from its
obligations hereunder except pursuant to the Bankruptcy Code. In the event the
Company is a debtor under the Bankruptcy Code, the Company hereby waives to the
fullest extent permitted any rights to relief it may have under 11 U.S.C. (S)
362 in respect of the conversion of the Convertible Debentures and the exercise
of the Warrants. The Company agrees, without cost or expense to the Investors,
to take or consent to any and all action necessary to effectuate relief under 11
U.S.C. (S) 362.
Section 3.3. Capitalization. The authorized capital stock of the Company
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consists of 70,000,000 shares of Common Stock of which 29,986,153 shares are
issued and outstanding, and no shares of preferred stock are issued and
outstanding. There are no outstanding Capital Shares
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Equivalents nor any agreements or understandings pursuant to which any Capital
Shares Equivalents may become outstanding. The Company is not a party to any
agreement granting registration or anti-dilution rights to any person with
respect to any of its equity or debt securities. All of the outstanding shares
of Common Stock of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable and have been issued pursuant to valid
exemptions from registration under the Securities Act and all applicable state
"blue sky" laws.
Section 3.4. Common Stock. The Company has registered its Common Stock
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pursuant to Section 12(b) or (g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company is in
compliance with all requirements for the continued listing or quotation of its
Common Stock, and such Common Stock is currently listed or quoted on the
Principal Market. As of the date hereof, the Company has not received any notice
regarding, and to its knowledge there is no threat, of the termination or
discontinuance of the eligibility of the Common Stock for on the Principal
Market.
Section 3.5. SEC Documents. The Company has made available to the Investors
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true and complete copies of the SEC Documents. The Company has not provided to
the Investors 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. As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
Exchange 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. The financial statements of the Company included
in the SEC Documents complied in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto at the time of such
inclusion. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (a) as may be otherwise indicated in such financial
statements or the notes thereto or (b) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company nor any
of its subsidiaries has any material indebtedness, obligations or liabilities of
any kind (whether accrued, absolute, contingent or otherwise, and whether due or
to become due) that would have been required to be reflected in, reserved
against or otherwise described in the financial statements or in the notes
thereto in accordance with GAAP, which was not fully reflected in, reserved
against or otherwise described in the financial statements or the notes thereto
included in the SEC Documents or was not incurred in the ordinary course of
business consistent with the Company's past practices since the last date of
such financial statements.
Section 3.6. Exemption from Registration; Valid Issuances. Subject to the
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accuracy of the Investors' representations in Article II, the sale of the
Convertible Debentures and the
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Conversion Shares, the Warrants and Warrant Shares will not require registration
under the Securities Act and/or any applicable state securities law. When
validly converted in accordance with the terms of the Convertible Debentures,
the Conversion Shares, the Warrants and Warrant Shares will be duly and validly
issued, fully paid, and non-assessable. Neither the sales of the Convertible
Debentures, the Conversion Shares, the Warrants and Warrant Shares pursuant to,
nor the Company's performance of its obligations under, this Agreement, the
Registration Rights Agreement, the Escrow Agreement or the Convertible
Debentures and the Warrants will (a) result in the creation or imposition by the
Company of any liens, charges, claims or other encumbrances upon the Convertible
Debentures, the Warrants or the Conversion Shares and Warrant Shares or, except
as contemplated herein, any of the assets of the Company, or (b) entitle the
holders of Outstanding Capital Shares to preemptive or other rights to subscribe
for or acquire the Capital Shares or other securities of the Company. The
Convertible Debentures, the Warrants and the Conversion Shares and Warrant
Shares, shall not subject the Investors to personal liability to the Company or
its creditors by reason of the possession thereof.
Section 3.7. No General Solicitation or Advertising in Regard to this
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Transaction. Neither the Company nor any of its affiliates nor, to the knowledge
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of the Company, any person acting on its or their behalf (a) has conducted or
will conduct any general solicitation (as that term is used in Rule 502(c) of
Regulation D) or general advertising with respect to the sale of the Convertible
Debentures or the Warrants, or (b) 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 Convertible Debentures or the Conversion Shares and
the Warrants and Warrant Shares, under the Securities Act.
Section 3.8. No Conflicts. The execution, delivery and performance of this
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Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of and payment of
interest upon the Convertible Debentures, Warrants and the Conversion Shares and
Warrant Shares, do not and will not (a) result in a violation of the Company's
Articles of Incorporation or By-Laws or (b) conflict with, or constitute a
material default (or an event that 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 material agreement, indenture or
instrument, or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state or local law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or by which any material property or asset of the Company is bound or
affected, nor is the Company otherwise in violation of, conflict with or default
under any of the foregoing (except in each case for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not have, individually or in the aggregate, a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a Material
Adverse Effect. The Company is not required under any federal, state or local
law, rule or regulation to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Convertible Debentures or the Warrants in
accordance with the terms hereof (other than any SEC or state securities
8
filings that may be required to be made by the Company subsequent to each
Closing, any registration statement that may be filed pursuant hereto); provided
that, for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Investors herein.
Section 3.9. No Material Adverse Change. Since the date of the financial
--------------------------
statement contained in the Company's most recently filed Form 10-Q (or Form
10-QSB) or Form 10-K (or Form 10-KSB), no Material Adverse Effect has occurred
or exists with respect to the Company. No material supplier has given notice,
oral or written, that it intends to cease or reduce the volume of its business
with the Company from historical levels.
Section 3.10. No Undisclosed Events or Circumstances. Since the date of the
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financial statement contained in the Company's most recently filed Form 10-Q (or
Form 10-QSB) or Form 10-K (or Form 10-KSB), 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 Investors.
Section 3.11. No Integrated Offering. Except as set forth in the SEC Documents,
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and other than pursuant to an effective registration statement under the
Securities Act, or pursuant to the issuance or exercise of employee stock
options or in connection with certain acquisitions, or pursuant to its
discussion with the Investors in connection with the transactions contemplated
hereby, the Company has not issued, offered or sold the Convertible Debentures,
the Warrants or any shares of Common Stock (including for this purpose any
securities of the same or a similar class as the Convertible Debentures,
Warrants or Common Stock, or any securities convertible into a exchangeable or
exercisable for the Convertible Debentures or Common Stock or any such other
securities) within the six-month period next preceding the date hereof, and the
Company shall not permit any of its directors, officers or affiliates directly
or indirectly to take, any action (including, without limitation, any offering
or sale to any Person of the Convertible Debentures or shares of Common Stock),
so as to make unavailable the exemption from Securities Act registration being
relied upon by the Company for the offer and sale to Investors of the
Convertible Debentures (and the Conversion Shares) and the Warrants (and the
Warrant Shares) as contemplated by this Agreement.
Section 3.12. Litigation and Other Proceedings. There are no lawsuits or
--------------------------------
proceedings pending or, to the knowledge of the Company, threatened, against the
Company or any subsidiary, nor has the Company received any written or oral
notice of any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. No judgment, order,
writ, injunction or decree or award has been issued by or, to the knowledge of
the Company, requested of any court, arbitrator or governmental agency which
could result in a Material Adverse Effect.
Section 3.13. No Misleading or Untrue Communication. The Company and, to the
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knowledge of the Company, any person representing the Company, or any other
person selling or offering to
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sell the Convertible Debentures or the Warrants in connection with the
transaction contemplated by this Agreement, have not made, at any time, any oral
communication in connection with the offer or sale of the same which contained
any untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading.
Section 3.14. Material Non-Public Information. The Company has not disclosed
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to the Investors any material non-public information that (a) if disclosed,
would reasonably be expected to have a material effect on the price of the
Common Stock, or (b) 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.
Section 3.15. Insurance. The Company and each subsidiary maintains property
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and casualty, general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance, as necessary to conduct
its business, with financially sound and reputable insurers that is adequate,
consistent with industry standards and the Company's historical claims
experience. The Company has not received notice from, and has no knowledge of
any threat by, any insurer (that has issued any insurance policy to the Company)
that such insurer intends to deny coverage under or cancel, discontinue or not
renew any insurance policy presently in force.
Section 3.16. Tax Matters.
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(a) The Company and each subsidiary has filed all Tax Returns,
which it is required to file under applicable laws; all such Tax Returns
are true and accurate and have been prepared in compliance with all
applicable laws except as could not reasonably be expected to have a
Material Adverse Effect; the Company has paid all Taxes due and owing by it
or any subsidiary (whether or not such Taxes are required to be shown on a
Tax Return) and have withheld and paid over to the appropriate taxing
authorities all Taxes which it is required to withhold from amounts paid or
owing to any employee, stockholder, creditor or other third parties; and
since December 31, 2000, the charges, accruals and reserves for Taxes with
respect to the Company (including any provisions for deferred income taxes)
reflected on the books of the Company are adequate to cover any Tax
liabilities of the Company if its current tax year were treated as ending
on the date hereof.
(b) No claim has been made by a taxing authority in a
jurisdiction where the Company does not file tax returns that the Company
or any subsidiary is or may be subject to taxation by that jurisdiction.
There are, to the Company's knowledge, no foreign, federal, state or local
tax audits or administrative or judicial proceedings pending or being
conducted with respect to the Company or any subsidiary; no information
related to Tax matters has been requested by any foreign, federal, state or
local taxing authority; and, except as disclosed above, no written notice
indicating an intent to open an audit or other review has been received by
the Company or any subsidiary from any foreign, federal, state or local
taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (ii) has not executed
or entered into a closing agreement pursuant to (S) 7121 of the Internal
Revenue
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Code or any predecessor provision thereof or any similar provision of
state, local or foreign law; or (ii) has not agreed to or is required to
make any adjustments pursuant to (S) 481 (a) of the Internal Revenue Code
or any similar provision of state, local or foreign law by reason of a
change in accounting method initiated by the Company or any of its
subsidiaries or has any knowledge that the IRS has proposed any such
adjustment or change in accounting method, or has any application pending
with any taxing authority requesting permission for any changes in
accounting methods that relate to the business or operations of the
Company. The Company has not been a United States real property holding
corporation within the meaning of (S) 897(c)(2) of the Internal Revenue
Code during the applicable period specified in (S) 897(c)(1)(A)(ii) of the
Internal Revenue Code.
(c) The Company has not made an election under (S) 341(f) of the
Internal Revenue Code. The Company is not liable for the Taxes of another
person that is not a subsidiary of the Company under (i) Treas. Reg. (S)
1.1502-6 (or comparable provisions of state, local or foreign law), (ii) as
a transferee or successor, (iii) by contract or indemnity or (iv)
otherwise. The Company is not a party to any tax sharing agreement. The
Company has not made any payments, is not obligated to make payments nor is
it a party to an agreement that could obligate it to make any payments that
would not be deductible under (S) 280G of the Internal Revenue Code.
(d) For purposes of this Section 3.16:
"IRS" means the United States Internal Revenue Service.
---
"Tax" or "Taxes" means federal, state, county, local,
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foreign, or other income, gross receipts, ad valorem,
franchise, profits, sales or use, transfer, registration,
excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or
other withholding, employment, social security, severance,
stamp, occupation, alternative or add-on minimum, estimated
and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and
interest attributable thereto) whether disputed or not.
"Tax Return" means any return, information report or filing
----------
with respect to Taxes, including any schedules attached
thereto and including any amendment thereof.
Section 3.17. Property. Neither the Company nor any of its subsidiaries owns
--------
any real property. Each of the Company and its subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects except such as do not materially affect the
value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and to the Company's
knowledge any real property and buildings held under lease by the Company as
tenant are held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
intended to be made of such property and buildings by the Company. The Company's
present facilities are adequate for the Company's reasonably foreseeable needs.
11
Section 3.18. Intellectual Property. Each of the Company and its subsidiaries
---------------------
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, neither the Company
nor any of its subsidiaries is infringing upon or in conflict with any right of
any other person with respect to any Intangibles. No adverse claims have been
asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.
Section 3.19. Internal Controls and Procedures. The Company maintains books
--------------------------------
and records and internal accounting controls which provide reasonable assurance
that (a) 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;
(b) the recorded accounting of the Company's consolidated assets is compared
with existing assets at regular intervals; (c) access to the Company's
consolidated assets is permitted only in accordance with management's
authorization; and (d) 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.
Section 3.20. Payments and Contributions. Neither the Company, any subsidiary,
--------------------------
nor any of its directors, officers or, to its knowledge, other employees has (a)
used any Company funds for any unlawful contribution, endorsement, gift,
entertainment or other unlawful expense relating to political activity; (b) made
any direct or indirect unlawful payment of Company funds to any foreign or
domestic government official or employee; (c) violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977, as amended; or (d) made
any bribe, rebate, payoff, influence payment, kickback or other similar payment
to any person with respect to Company matters.
Section 3.21. Permits and Licenses. The Company holds all necessary permits
--------------------
and licenses to conduct its business as presently conducted. All of such permits
and licenses are in full force and effect and the Company is not in material
violation of any thereof.
Section 3.22. No Misrepresentation. The representations and warranties of the
--------------------
Company contained in this Agreement, any schedule, annex or exhibit hereto and
any agreement, instrument or certificate furnished by the Company to the
Investors pursuant to this Agreement, do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 3.23. Related Party Transactions. The Company is not a party to any
--------------------------
agreement or transaction with any of its officers, directors, greater than 5%
shareholders or any "Affiliate" (as defined in SEC Rule 405) of any of said
persons that would require disclosure under Item 404 of Regulation S-B that will
not be disclosed in the next Form 10-K (or Form 10-KSB), as amended.
12
ARTICLE IV
Covenants of the Investors
Each Investor, severally and not jointly, covenants with the Company that:
Section 4.1. Compliance with Law. The Investor's trading activities with
-------------------
respect to the Conversion Shares and Warrant Shares will be in compliance with
all applicable state and federal securities laws, rules and regulations and
rules and regulations of the Principal Market on which the Company's Common
Stock is listed.
ARTICLE V
Covenants of the Company
Section 5.1. Registration Rights. The Company shall cause the Registration
-------------------
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.
Section 5.2. Reservation of Common Stock. On any date hereafter, in the event
---------------------------
the number of Shares reserved, as to any Investor, is less than 200% of the
Conversion Shares necessary to convert all of such Investor's Convertible
Debenture, based on the then Conversion Price, and Warrant Shares to exercise
all of such Investor's Warrant (the "Trigger Amount"), then the Company shall
have seven (7) calendar days from such date to increase the number of shares
reserved as to such Investor above the Trigger Amount, unless to do so the
Company must authorize additional shares, in which case the Company shall have
sixty (60) calendar days from such date to increase the number of shares
authorized and reserved as to such Investor above the Trigger Amount. The
Company agrees to present a proposal for shareholder approval to permit the
Company to issue a number of Conversion Shares and Warrant Shares which is in
excess of 19.9% of the number of the Company's issued and outstanding shares of
Common Stock on the first Closing Date ("NASD Limit"), at the earlier of (i) the
next annual meeting of shareholders, or (ii) a special meeting of the
shareholders to be held within 60 calendar days of the date the number of
Conversion Shares the Investors may convert into at the then Conversion Price
(notwithstanding any limitations herein or in the Convertible Debenture) becomes
greater than 85% of the NASD Limit, with the recommendation of the Board of
Directors that such proposal be approved, unless at the date of such meeting,
less than 1% of the principal amount of the Preferred Stock remain issued and
outstanding, in which event the Company may withdraw such proposal from a vote
by the shareholders. Unless the Company obtains a waiver from all of the
Investors, if such proposal is required to be voted on and is not approved at
the next annual meeting of the shareholders or if such special meeting is not
held within the required time period and such proposal is not approved at the
special meeting, the Company shall either, at the election of a majority in
interest of the Investors, (i) voluntarily de-list its Common Stock from
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any Principal Market which requires such approval, or (ii) redeem the
Convertible Debentures in accordance with Section 5 of the Convertible
Debentures.
Section 5.3. Listing of Common Stock. The Company hereby agrees to maintain
-----------------------
the listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing to list the Conversion Shares and the Warrant
Shares on the Principal Market. The Company further agrees, if the Company
applies to have the Common Stock traded on any other Principal Market, it will
include in such application the Conversion Shares and the Warrant Shares, and
will take such other action as is necessary or desirable in the opinion of the
Investors to cause the Conversion Shares and Warrant Shares to be listed on such
other Principal Market as promptly as possible. The Company will take all action
to continue the listing and trading of its Common Stock on a Principal Market
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market and shall provide
Investors with copies of any correspondence to or from such Principal Market
which questions or threatens delisting of the Common Stock, within three (3)
Trading Days of the Company's receipt thereof, until the Investors have disposed
of all of their Registrable Securities.
Section 5.4. Exchange Act Registration. The Company will cause its Common
-------------------------
Stock to continue to be registered under Section 12(b) or (g) of the Exchange
Act, will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investors have
disposed of all of their Registrable Securities.
Section 5.5. Legends. The certificates evidencing the Securities shall be free
-------
of legends, except as set forth in Article VIII. If the Transfer Agent or the
Investor's broker-dealer requires an opinion of counsel from the Company's
counsel pursuant to the Instructions to Transfer Agent attached hereto to issue
new certificates free of a legend to an Investor and Company's counsel fails to
deliver such opinion to the Transfer Agent within two (2) Trading Days from
receipt by Company's counsel of such a request from the Transfer Agent or the
Investor's broker-dealer, then the Company will pay such Investor, pro rata on a
weekly basis, as liquidated damages for such failure and not as a penalty, ten
percent (10%) per week of the market value of the Common Stock which would be
issuable upon conversion of such Investor's Convertible Debenture upon on any
date of determination for each week until such opinion is provided,
notwithstanding the fact that the Company has instructed the Transfer Agent to
accept such an opinion from such Investor's counsel.
Section 5.6. 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.
14
Section 5.7. Consolidation; Merger. The Company shall not, without the prior
---------------------
written consent of the Investors, at any time after the date hereof, effect any
merger or consolidation of the Company with or into, or a transfer more than 50%
of the assets of the Company to, another entity (a "Consolidation Event").
Section 5.8. Issuance of Convertible Debentures and Warrants. The sale of the
-----------------------------------------------
Convertible Debentures, the Warrants and the issuance of the Conversion Shares
upon conversion and Warrant Shares upon the exercise of the Warrants of the
Convertible Debentures shall be made in accordance with the provisions and
requirements of Section 4(2), 4(6) or Regulation D and any applicable state
securities law. The Company shall make any necessary SEC and "blue sky" filings
as may be required to be made by the Company in connection with the sale of the
Securities to the Investors, and shall provide a copy thereof to the Investors
promptly after such filing.
Section 5.9. Future Financing. The Company agrees that it will enter into an
----------------
equity line of credit agreement arranged through Hadrian Investments Limited
within 10 calendar days from the date hereof (the "Equity Line"). At the
election of each Investor, the Company agrees to use 50% of the net proceeds
from any other sale for cash of its securities (including the Equity Line), to
redeem all of the Convertible Debentures held by the Investors pursuant to
Section 5 of the Convertible Debentures. The Company agrees that it will not
enter into any other sale of its securities or any Capital Shares Equivalents at
a discount to the then-current bid price (or a convertible or exchangeable
security without a floor price at or above the Set Price (as defined in the
Convertible Debenture) or a security that may be reset or adjusted without a
floor price at or above the Set Price) until the earlier to occur of (a) 180
days after the Effective Date, or (b) 3 years from second Closing Date.
Notwithstanding anything to the contrary herein, the Company shall be further
precluded from entering into any other such financing during a period that an
Investor has delivered a Conversion Notice and the Company has not delivered to
such Investor the Conversion Shares (without legend if possible) and is late in
such delivery. The foregoing shall not prevent or limit the Company from
engaging in any sale of securities (i) pursuant to the exercise of options
granted or to be granted under an option, restricted stock or other plan for
employees, directors, or consultants of the Company or any of its subsidiaries
which plan has been approved by the Company's Board of Directors, (ii) pursuant
to any compensatory plan for a full-time employee or key consultant, (iii) in
connection with a strategic partnership or other business transaction, the
principal purpose of which is not simply to raise money, (iv) pursuant to any
option, warrant or convertible security existing as of the date hereof, (v)
pursuant to a public offering underwritten by an established investment bank
(not including an equity line of credit type agreement), (vi) pursuant to
existing consulting or investment advisory agreements, the principal purpose of
which is not simply to raise money, (vii) pursuant to a stock split, or (viii)
with the prior written consent of a majority in interest of the Investors, or
their assigns as the case may be. Further, the Purchaser shall have a right of
first refusal to participate upon the same terms and conditions offered to any
third party in any subsequent financings entered into by the Company pursuant to
sub-section 5.9(viii) hereto from the date hereof until 180 calendar days after
the Effective Date. Such right of first refusal must be exercised in writing
within five (5) Trading Days of the Purchaser's receipt of notice of the
proposed terms of such financing or the right to participate in such financing
shall be waived.
15
Section 5.10. Pro-Rata Redemption. Upon any redemption of any of the
-------------------
Convertible Debentures, the Company shall offer such redemption pro-rata among
all Investors in proportion to their respective current holdings of such
securities pursuant to this Agreement.
ARTICLE VI
Survival; Indemnification
Section 6.1. Survival. The representations, warranties and covenants made by
--------
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive each
Closing and the consummation of the transactions contemplated hereby for a
period of 3 years beginning on the second Closing Date. In the event of a breach
or violation of any of such representations, warranties or covenants, the party
to whom such representations, warranties or covenants have been made shall have
all rights and remedies for such breach or violation available to it under the
provisions of this Agreement, irrespective of any investigation made by or on
behalf of such party on or prior to either Closing Date, unless such party had
actual knowledge of such breach or violation prior to such Closing Date.
Section 6.2. Indemnity.
---------
(a) The Company hereby agrees to indemnify and hold harmless
the Investors, their respective Affiliates and their respective officers,
directors, partners and members (collectively, the "Investor Indemnitees"),
from and against any and all Damages, and agrees to reimburse the Investor
Indemnitees for all reasonable out-of-pocket expenses (including the
reasonable fees and expenses of legal counsel), in each case promptly as
incurred by the Investor Indemnitees and to the extent arising out of or in
connection with:
(i) any misrepresentation, omission of fact or breach of any
of the Company's representations or warranties contained
in this Agreement, the annexes, schedules or exhibits
hereto or any instrument, agreement or certificate entered
into or delivered by the Company pursuant to this
Agreement; or
(ii) any failure by the Company to perform in any material
respect any of its material covenants, agreements,
undertakings or obligations set forth in this Agreement,
the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or
delivered by the Company pursuant to this Agreement; or
(iii) any action instituted against the Investors, or any of
them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of an Investor, with
respect to any of the transactions contemplated by this
Agreement.
16
(b) Each Investor, severally and not jointly, hereby agrees to
indemnify and hold harmless the Company, its Affiliates and their
respective officers, directors, partners and members (collectively, the
"Company Indemnitees"), from and against any and all Damages, and agrees to
reimburse the Company Indemnitees for all reasonable out-of-pocket expenses
(including the reasonable fees and expenses of legal counsel), in each case
promptly as incurred by the Company Indemnitees and to the extent arising
out of or in connection with any misrepresentation, omission of fact, or
breach of any of the Investor's representations or warranties contained in
this Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by the
Investor pursuant to this Agreement. Notwithstanding anything to the
contrary herein, the Investors shall be liable under this Section 6.2(b)
for only that amount as does not exceed the net proceeds to such Investors
as a result of the sale of Registrable Securities pursuant to the
Registration Statement.
Section 6.3. Notice. Promptly after receipt by any party hereto seeking
------
indemnification pursuant to Section 6.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party from whom indemnification pursuant to Section
6.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced by such omission or
delay. In connection with any Claim as to which both the Indemnifying Party and
the Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (a) the Indemnifying Party shall have agreed to pay such fees, out-of-
pocket costs and expenses, (b) the Indemnified Party reasonably shall have
concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (c) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in
clauses (a), (b) or (c) above, the fees, costs and expenses of such legal
counsel shall be borne exclusively by the Indemnified Party. Except as provided
above, the Indemnifying Party shall not, in connection with any Claim in the
same jurisdiction, be liable for the fees and expenses of more than one firm of
legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
17
All fees and expenses of the Indemnified Party (including reasonable costs
of defense and investigation in a manner not inconsistent with this Section and
all reasonable attorneys' fees and expenses) shall be paid to the Indemnified
Party, as incurred, within ten (10) Trading Days of written notice thereof to
the Indemnifying Party (regardless of whether it is ultimately determined that
an indemnified party is not entitled to indemnification hereunder; provided,
that the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
Section 6.4. Direct Claims. In the event one party hereunder should have a
-------------
claim for indemnification that does not involve a claim or demand being asserted
by a third party, the Indemnified Party promptly shall deliver notice of such
claim to the Indemnifying Party. If the Indemnifying Party disputes the claim,
such dispute shall be resolved by mutual agreement of the Indemnified Party and
the Indemnifying Party or in accordance with Article IX. Judgment upon any award
rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
ARTICLE VII
Due Diligence Review
Section 7.1. Due Diligence Review. Subject to Section 7.2, the Company shall
--------------------
make available for inspection and review by the Investors, advisors to and
representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, Nasdaq or other
filing, all SEC Documents and other proposed filings with the SEC, and all other
publicly available corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such publicly available
information reasonably requested by the Investors or any such representative,
advisor or underwriter in connection with such Registration Statement
(including, without limitation, in response to all questions and other inquiries
reasonably made or submitted by any of them), prior to and from time to time
after the filing and effectiveness of the Registration Statement for the sole
purpose of enabling the Investors and such representatives, advisors and
underwriters and their respective accountants and attorneys to conduct initial
and ongoing due diligence with respect to the Company and the accuracy of the
Registration Statement.
Section 7.2. Non-Disclosure of Non-Public Information.
----------------------------------------
(a) From and after the filing of the Registration Statement, the
Company shall not disclose material non-public information to the
Investors, advisors to or representatives of the Investors unless prior to
disclosure of such information the Company identifies such information as
being non-public information and provides the
18
Investors, such advisors and representatives with the opportunity to accept
or refuse to accept such non-public information for review. Other than
disclosure of any comment letters received from the SEC staff with respect
to the Registration Statement, the Company may, as a condition to
disclosing any non-public information hereunder, require the Investors'
advisors and representatives to enter into a confidentiality agreement in
form and content reasonably satisfactory to the Company and the Investors.
(b) The Company will promptly notify the advisors and
representatives of the Investors and, if any, underwriters, of any event or
the existence of any circumstance (without any obligation to disclose the
specific event or circumstance) of which it becomes aware, constituting
material non-public information (whether or not requested of the Company
specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in
the Registration Statement, would cause such prospectus to include a
material misstatement or to omit a material fact required to be stated
therein in order to make the statements, therein in light of the
circumstances in which they were made, not misleading. Nothing contained in
this Section 7.2 shall be construed to mean that such persons or entities
other than the Investors (without the written consent of the Investors
prior to disclosure of such information as set forth in Section 7.2(a)) may
not obtain non-public information in the course of conducting due diligence
in accordance with the terms of this Agreement and nothing herein shall
prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that
the Registration Statement contains an untrue statement of a material fact
or omits a material fact required to be stated in the Registration
Statement or necessary to make the statements contained therein, in light
of the circumstances in which they were made, not misleading.
ARTICLE VIII
Legends; Transfer Agent Instructions
Section 8.1. Legends. Unless otherwise provided below, each certificate
-------
representing Registrable Securities will bear the following legend or equivalent
(the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
19
PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION.
Section 8.2. Transfer Agent Instructions. Upon the execution and delivery
---------------------------
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions substantially in the form of Exhibit F hereto. Such instructions
---------
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be. After the Effective Date, in lieu of delivering physical
certificates representing the Common Stock issuable upon the conversion of, or
in lieu of interest payments on, the Convertible Debentures, the Company shall
cause its transfer agent to electronically transmit the Conversion Shares by
crediting the account of the Investor's prime broker with the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program through its Deposit
Withdrawal Agent Commission ("DWAC") system no later than the applicable date of
delivery.
Section 8.3. No Other Legend or Stock Transfer Restrictions. No legend other
----------------------------------------------
than the one specified in Section 8.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article VIII.
Section 8.4. Investors' Compliance. Nothing in this Article shall affect in
---------------------
any way each Investor's obligations to comply with all applicable securities
laws upon resale of the Common Stock.
Section 8.5. Rule 144. Subject to the applicable securities laws, the Company
--------
acknowledges and agrees that, for the purpose of calculating the holding period
of the Shares under Rule 144, the Conversion Shares shall be deemed to have been
acquired on the applicable Closing Date.
ARTICLE IX
Choice of Law
Section 9.1. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York applicable to contracts
made in New York by persons domiciled in New York City and without regard to its
principles of conflicts of laws. The Company and each of the Investors agree to
submit themselves to the in personam jurisdiction of the state and federal
courts situated within the Southern District of the State of New York with
regard to any controversy arising out of or relating to this Agreement. The non-
prevailing party to any dispute hereunder shall pay the expenses of the
prevailing party, including reasonable attorneys' fees, in connection with any
such dispute.
20
Section 9.2. Specific Enforcement. The Company acknowledges and agrees that
--------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement or any of the exhibits hereto were not performed in accordance with
their specific terms or were otherwise breached, notwithstanding any reasons the
Company may have to the contrary in the future, including claims of solvency or
that the Investor is not put at risk absent performance by the Company. It is
accordingly agreed that the Investors shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof or thereof, this being
in addition to any other remedy to which any of them may be entitled by law or
equity. The prevailing party in such injunctive action shall be entitled to its
reasonable attorneys' fees in connection with any such specific performance.
ARTICLE X
Assignment
Section 10.1. Assignment. Neither this Agreement nor any rights of the Company
----------
hereunder may be assigned by the Company to any other person. The provisions of
this Agreement shall inure to the benefit of, and be enforceable by, any
permitted transferee of any of the Convertible Debentures and Warrants purchased
or acquired by any Investor hereunder with respect to the Convertible Debentures
and Warrants held by such person.
ARTICLE XI
Notices
Section 11.1. Notices. All notices, demands, requests, consents, approvals, and
-------
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (a) hand delivered, (b) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(c) delivered by reputable air courier service with charges prepaid, or (d)
transmitted by facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the first business day
following the date of sending by reputable courier service, fully prepaid,
addressed to such address, or (c) upon actual receipt of such mailing, if
mailed. The addresses for such communications shall be:
If to the Company: 0000 Xxxxxxxxx, Xxxxx 000
Xxxxx, Xxxxx 00000
21
Attn: Xxxxxxx XxXxxxxxx
Tel: (000) 000-0000
Fax: (000) 000-0000
With copies to: Xxxxxxx Xxxxxx L.L.P.
(which shall not constitute 000 Xxxx Xxxxxx, Xxxxx 0000
notice) Xxxxxx, Xxxxx 00000
Attn: Xxxxx X. Xxxx, III
Tel: (000) 000-0000
Fax: (000) 000-0000
if to the Investors: As set forth on the signature pages hereto
with a copy to: Xxxxxx Xxxxxxx, Esq.
(which shall not constitute Xxxxxxx Xxxxxx & Green, P.C.
notice) 000 Xxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx
Tel.: (000) 000-0000
Fax: (000) 000-0000
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 11.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 11.1.
ARTICLE XII
Miscellaneous
Section 12.1. Counterparts/ Facsimile/ Amendments. This Agreement may be
-----------------------------------
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except for the
Convertible Debentures or Warrants or as otherwise stated herein, in lieu of the
original documents, a facsimile transmission or copy of the original documents
shall be as effective and enforceable as the original. This Agreement may be
amended only by a writing executed by all parties.
Section 12.2. Entire Agreement. This Agreement, the agreements attached as
----------------
Exhibits hereto, which include, but are not limited to the Convertible
Debentures, and Warrants the Escrow Agreement, and the Registration Rights
Agreement, set forth the entire agreement and understanding of the parties
relating to the subject matter hereof and supersedes all prior and
contemporaneous agreements, negotiations and understandings between the parties,
both oral and written relating to the subject matter hereof. The terms and
conditions of all Exhibits to this Agreement are incorporated herein by this
reference and shall constitute part of this Agreement as is fully set forth
herein.
22
Section 12.3. Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.
Section 12.4. Headings. The headings used in this Agreement are used for
--------
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 12.5. Number and Gender. There may be one or more Investors parties to
-----------------
this Agreement, which Investors may be natural persons or entities. All
references to plural Investors shall apply equally to a single Investor if there
is only one Investor, and all references to an Investor as "it" shall apply
equally to a natural person.
Section 12.6. Reporting Entity for the Common Stock. The reporting entity
-------------------------------------
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg Financial, L.P. or any successor thereto. The written mutual
consent of the Investors and the Company shall be required to employ any other
reporting entity.
Section 12.7. Replacement of Certificates. Upon (a) receipt of evidence
---------------------------
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Convertible Debentures or any
Conversion Shares or Warrants or any Warrant Shares and (b) in the case of any
such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form to the Company
or as may be required by the Company's Transfer Agent or (c) in the case of any
such mutilation, on surrender and cancellation of such certificate, the Company
at its expense will execute and deliver, in lieu thereof, a new certificate of
like tenor.
Section 12.8. Fees and Expenses. Each of the Company and the Investors agrees
-----------------
to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of the Investors as set forth in the Escrow Agreement.
Section 12.9. Finder's and Broker's Fees. Each of the parties hereto represents
--------------------------
that it has had no dealings in connection with this transaction with any finder
or broker who will demand payment of any fee or commission from the other party
except as set forth in the Escrow Agreement. The Company on the one hand, and
the Investors, on the other hand, agree to indemnify the other against and hold
the other harmless from any and all liabilities to any person claiming brokerage
commissions or finder's fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby.
Section 12.10. Publicity. The Company agrees that it will not issue any press
---------
release or other public announcement, except as required by law, of the
transactions contemplated by this Agreement without the prior consent of the
Investors, which shall not be unreasonably withheld nor delayed by more than two
(2) Trading Days from their receipt of such proposed release. No release shall
name the Investors or any of their respective affiliates, representatives,
members,
23
agents, associates, employees, consultants, companies, subsidiaries, businesses
and/or entities or agents without their express consent.
ARTICLE XIII
Certain Definitions
Section 13.1. "Bid Price" shall mean the closing bid price (as reported by
---------
Bloomberg Financial L.P.) of the Common Stock on the Principal Market on the
date in question (and, if no closing bid price is reported, the closing price as
so reported, and if neither the closing bid price nor the closing price is so
reported, the last reported price of the Common Stock as determined by an
independent evaluator mutually agreed to by the parties).
Section 13.2. "Capital Shares" shall mean the Common Stock and any shares of
--------------
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 13.3. "Capital Shares Equivalents" shall mean any securities, rights,
--------------------------
or obligations that are convertible into or exchangeable for or give any right
to subscribe for any Capital Shares of the Company or any warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 13.4. "Closing" shall mean the closings of the purchase and sale of the
-------
Convertible Debentures and Warrants pursuant to Section 1.1.
Section 13.5. "Closing Dates" shall mean the dates on which all conditions to
-------------
the Closings have been satisfied (as defined in Section 1.1(b) hereto) and the
Closings shall have occurred.
Section 13.6. "Common Stock" shall mean the Company's common stock, no par
------------
value per share.
Section 13.7. "Conversion Shares" shall mean the shares of Common Stock
-----------------
issuable upon conversion of the Convertible Debentures and any shares issuable
as interest upon the Convertible Debentures.
Section 13.8. "Convertible Debenture(s)" shall mean the 6% Convertible
------------------------
Debenture(s) issued hereunder and due 3 years from their date of issuance, in
the form of Exhibit A hereto.
---------
Section 13.9. "Damages" shall mean any loss, claim, damage, judgment, penalty,
-------
deficiency, liability, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).
24
Section 13.10. "Effective Date" shall mean the date on which the SEC first
--------------
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.
Section 13.11. "Escrow Agent" shall have the meaning set forth in the Escrow
------------
Agreement.
Section 13.12. "Escrow Agreement" shall mean the Escrow Agreement in
----------------
substantially the form of Exhibit C hereto executed and delivered
---------
contemporaneously with this Agreement.
Section 13.13. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder.
Section 13.14. "Legend" shall mean the legend set forth in Section 8.1.
------
Section 13.15. "Material Adverse Effect" shall mean any effect on the business,
-----------------------
operations, properties, stock price or financial condition of the Company that
is material and adverse to the Company and its subsidiaries and affiliates,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement, the Registration Rights Agreement,
the Convertible Debentures, the Warrants or the Escrow Agreement in any material
respect.
Section 13.16. "Maturity Date" shall mean the date on which the outstanding
-------------
principle amount and any accrued but unpaid interest of the Convertible
Debentures are due and payable as set forth in the Convertible Debenture.
Section 13.17. "Outstanding" when used with reference to shares of Common Stock
-----------
or Capital Shares (collectively the "Shares"), shall mean, at any date as of
which the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not mean any such Shares then
-------- -------
directly or indirectly owned or held by or for the account of the Company.
Section 13.18. "Person" shall mean an individual, a corporation, a partnership,
------
a limited liability company, an association, a trust or other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
Section 13.19. "Principal Market" shall initially mean the NASDAQ National
----------------
Market and shall also include the American Stock Exchange, the New York Stock
Exchange, the NASDAQ Small-Cap Market and the OTC Bulletin Board, whichever is
at the time the principal trading exchange or market for the Common Stock, based
upon share volume.
Section 13.20. "Purchase Price" shall mean the face principal amount of the
--------------
Convertible Debentures.
25
Section 13.21. "Registrable Securities" shall mean 200% of the Conversion
----------------------
Shares and the Warrant Shares until the earlier of the date that (i) the
Registration Statement has been declared effective by the SEC, and all
Conversion Shares and Warrant Shares have been disposed of pursuant to the
Registration Statement, (ii) all Conversion Shares and Warrant Shares have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (iii) all Conversion Shares and Warrant Shares have been
otherwise transferred to holders who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive legend
or (iv) such time as, in the opinion of counsel to the Company, all Conversion
Shares and Warrant Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act.
Section 13.22. "Registration Rights Agreement" shall mean the agreement
-----------------------------
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investors, on
the date hereof in the form annexed hereto as Exhibit B.
---------
Section 13.23. "Registration Statement" shall mean a registration statement on
----------------------
Form S-3 (if use of such form is then available to the Company pursuant to the
rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate, and which form shall be available for the resale by the Investors
of the Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement and in
accordance with the intended method of distribution of such securities), for the
registration of the resale by the Investors of the Registrable Securities under
the Securities Act.
Section 13.24. "Regulation D" shall have the meaning set forth in the recitals
------------
of this Agreement.
Section 13.25. "SEC" shall mean the Securities and Exchange Commission.
---
Section 13.26. "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, all registration statements filed as of the time in question, 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.
Section 13.27. "Section 4(2)" and "Section 4(6)" shall have the meanings set
-------------------------------
forth in the recitals of this Agreement.
Section 13.28. "Securities Act" shall have the meaning as set forth in the
--------------
recitals of this Agreement.
Section 13.29. "Shares" shall have the meaning set forth in the definition of
------
"Outstanding" herein.
26
Section 13.30. "Trading Day" shall mean any day during which the Principal
-----------
Market shall be open for business.
Section 13.31. "Warrants" shall mean the Warrants set forth in Section 1.2,
--------
substantially in the form of Exhibit E hereto, to be issued to the Investors
pro-rata hereunder.
Section 13.32. "Warrant Shares" shall mean all shares of Common Stock or other
--------------
securities issued or issuable pursuant to exercise of the Warrants.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK.]
27
[SIGNATURE PAGE OF CONVERTIBLE DEBENTURES AND WARRANTS PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Purchase
Agreement to be executed by the undersigned, thereunto duly authorized, as this
__ day of June, 2001.
DATA RACE, INC.
By:
-----------------------------------
Xxxxxxx XxXxxxxxx, President & CEO
INVESTORS:
Address: ALPHA CAPITAL AG
Xxxxxxxxxxx 00
Xxxxxxxxxx 0000
Xxxxx, Xxxxxxxxxxxxx By:
Fax: 000-000 000 0000 ----------------------------------------
Xxxxxx Xxxxxxxxx, Authorized Signatory
Purchase Price:
--------------
First Closing: $_________ principal amount and ________ Warrant Shares
Second Closing: $_________ principal amount and ________ Warrant Shares
Address: XXXXXXXXXXX X.X.
C/o Canaccord Capital Corporation
000 Xxx Xxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxxxx, Xxxxxx By:
X0X 0X0 ----------------------------------------
Xxxxxxx Xxxxxxxxxxx, Authorized Signatory
Purchase Price:
First Closing: $_________ principal amount and ________ Warrant Shares
Second Closing: $_________ principal amount and ________ Warrant Shares
28
