SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is dated as of
August 17, 2004 among Composite Technology Corporation, a Nevada corporation
(the "COMPANY"), and each purchaser identified on the signature pages hereto
(each, including its successors and assigns, a "PURCHASER" and collectively the
"PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"SECURITIES ACT") and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agrees
as follows:
ARTICLE I.
DEFINITIONS
1.1 DEFINITIONS. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:
"ACTION" shall have the meaning ascribed to such term in Section
3.1(j).
"AFFILIATE" means any Person that, directly or indirectly through
one or more intermediaries, controls or is controlled by or is under
common control with a Person, as such terms are used in and construed
under Rule 144 under the Securities Act. With respect to a Purchaser, any
investment fund or managed account that is managed on a discretionary
basis by the same investment manager as such Purchaser will be deemed to
be an Affiliate of such Purchaser.
"CLOSING" means the closing of the purchase and sale of the
Debentures and Warrants pursuant to SECTION 2.1.
"CLOSING DATE" means the Trading Day when all of the Transaction
Documents have been executed and delivered by the applicable parties
thereto, and all conditions precedent to (i) the Purchasers' obligations
to pay the Subscription Amount and (ii) the Company's obligations to
deliver the Debentures and Warrants have been satisfied or waived.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, par value
$0.001 per share, and any securities into which such common stock shall
hereinafter have been reclassified into.
"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.
"COMPANY COUNSEL" means Xxxxxxxxxx & Xxxxx, LLP.
"CONVERSION PRICE" shall have the meaning ascribed to such term in
the Debentures.
"CUSTODIAL AGENT" shall have the meaning set forth in the Custodial
Agreement.
"CUSTODIAL AGREEMENT" means the Custodial and Security Agreement in
substantially the form of EXHIBIT E hereto executed and delivered
contemporaneously with this Agreement.
"DEBENTURES" means, the 6% Convertible Debentures due, subject to
the terms therein, three years from their date of issuance, issued by the
Company to the Purchasers hereunder, in the form of EXHIBIT A.
"DISCLOSURE SCHEDULES" shall have the meaning ascribed to such term
in Section 3.1 hereof.
"EFFECTIVE DATE" means the date that the initial Registration
Statement filed by the Company pursuant to the Registration Rights
Agreement is first 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 by the Board of Directors of the
Company, (b) securities upon the exercise of or conversion of any
securities issued hereunder, 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, (d) up
to 1,500,000 shares of Common Stock issued to non-affiliates of the
Company in connection with services rendered to or to be rendered to the
Company, (e) up to 6,896,552 shares of Common Stock issued to Stagecoach
LLC or its affiliates in connection with an investment in the Company or
its Subsidiaries without registration rights and (f) up to 250,000 shares
of Common Stock in the aggregate in any 12 month period issued to any
lender of the Company and its Subsidiaries in connection with a settlement
of any debt instrument or lawsuit, or a waiver of a default under any debt
instrument.
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"FW" means Xxxxxxx Xxxxxxxxx LLP with offices at 000 Xxxxxxxxx
Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000-0000.
"GAAP" shall have the meaning ascribed to such term in Section
3.1(h) hereof.
"LIENS" means a lien, charge, security interest, encumbrance or
other restriction.
"MARKET PRICE" shall mean $1.52.
"MATERIAL ADVERSE EFFECT" shall have the meaning assigned to such
term in Section 3.1(b) hereof.
"MATERIAL PERMITS" shall have the meaning ascribed to such term in
Section 3.1(m).
"PERSON" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated the date hereof, among the Company and the Purchasers, in
the form of EXHIBIT B attached hereto.
"REGISTRATION STATEMENT" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering
the resale of the Underlying Shares by each Purchaser as provided for in
the Registration Rights Agreement.
"REQUIRED APPROVALS" shall have the meaning ascribed to such term in
Section 3.1(e).
"REQUIRED MINIMUM" means, as of any date, the maximum aggregate
number of shares of Common Stock then issued or potentially issuable in
the future pursuant to the Transaction Documents, including any Underlying
Shares issuable upon exercise or conversion in full of all Warrants and
Debentures (including Underlying Shares issuable as payment of interest),
ignoring any conversion or exercise limits set forth therein, and assuming
that the Conversion Price is at all times on and after the date of
determination 75% of the then Conversion Price on the Trading Day
immediately prior to the date of determination.
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"RULE 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SEC REPORTS" shall have the meaning ascribed to such term in
Section 3.1(h) hereof.
"SECURITIES" means the Debentures, the Warrants, the Warrant Shares
and the Underlying Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SUBSCRIPTION AMOUNT" means, as to each Purchaser, the aggregate
amount to be paid for Debentures and Warrants purchased hereunder as
specified below such Purchaser's name on the signature page of this
Agreement and next to the heading "Subscription Amount", in United States
Dollars and in immediately available funds.
"SUBSIDIARY" means any subsidiary of the Company as set forth on
SCHEDULE 3.1(A).
"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 SmallCap Market, the American Stock Exchange, the New York
Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.
"TRANSACTION DOCUMENTS" means this Agreement, the Debentures, the
Warrants, the Registration Rights Agreement, the Custodial Agreement and
any other documents or agreements executed in connection with the
transactions contemplated hereunder.
"UNDERLYING SHARES" means the shares of Common Stock issuable upon
conversion of the Debentures and upon exercise of the Warrants and issued
and issuable in lieu of the cash payment of interest on the Debentures.
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"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, 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 the
Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices),
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 Purchasers holding a majority of the principal amount of
Debentures then outstanding.
"WARRANTS" means collectively the Common Stock purchase warrants, in
the form of EXHIBIT C delivered to the Purchasers at the Closing in
accordance with Sections 2.2(a)(iii)-(iv) hereof, which Warrants shall be
exercisable immediately and have a term of exercise equal to 4 years.
"WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1 CLOSING. On the Closing Date, upon the terms and subject to the
conditions set forth herein, concurrent with the execution and delivery of this
Agreement by the parties hereto, the Company agrees to sell, and each Purchaser
agrees to purchase in the aggregate, severally and not jointly, up to
$15,000,000 principal amount of the Debentures. Each Purchaser shall deliver to
the Company via wire transfer or a certified check immediately available funds
equal to their Subscription Amount and the Company shall deliver to each
Purchaser their respective Debenture and Warrants as determined pursuant to
Sections 2.2(a)(iii) - (iv) and the other items set forth in Section 2.2
issuable at the Closing. Upon satisfaction of the conditions set forth in
Section 2.2, the Closing shall occur at the offices of the Custodial Agent, or
such other location as the parties shall mutually agree.
2.2 DELIVERIES.
a) On the Closing Date, the Company shall deliver or cause to be
delivered to the Custodial Agent for the benefit of each
Purchaser the following:
(i) this Agreement duly executed by the Company;
(ii) a Debenture with a principal amount equal to such
Purchaser's Subscription Amount, registered in the name
of such Purchaser;
(iii) a Warrant registered in the name of such Purchaser to
purchase up to a number of shares of Common Stock equal
to 17.5% of such Purchaser's Subscription Amount divided
by the Market Price immediately prior to the date
hereof, with an exercise price equal to $1.75;
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(iv) a Warrant registered in the name of such Purchaser to
purchase up to a number of shares of Common Stock equal
to 17.5% of such Purchaser's Subscription Amount divided
by the Market Price immediately prior to the date
hereof, with an exercise price equal to $1.82;
(v) the Registration Rights Agreement duly executed by the
Company;
(vi) the Custodial Agreement duly executed by the Company;
and
(vii) a legal opinion of Company Counsel, in the form of
EXHIBIT D attached hereto.
(b) On the Closing Date, each Purchaser shall deliver or cause to
be delivered to the Custodial Agent the following:
(i) this Agreement duly executed by such Purchaser;
(ii) such Purchaser's Subscription Amount by wire transfer to
the account as specified in writing by the Company;
(iii) the Registration Rights Agreement duly executed by such
Purchaser; and
(iv) the Custodial Agreement duly executed by such Purchaser.
2.3 CLOSING CONDITIONS.
a) The obligations of the Company hereunder in connection with
the Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on
the Closing Date of the representations and warranties
of the Purchasers contained herein;
(ii) all obligations, covenants and agreements of the
Purchasers required to be performed at or prior to the
Closing Date shall have been performed; and
(iii) the delivery by the Purchasers of the items set forth in
Section 2.2(b) of this Agreement.
b) The respective obligations of the Purchasers hereunder in
connection with the Closing are subject to the following
conditions being met:
(i) the accuracy in all material respects on the Closing
Date of the representations and warranties of the
Company contained herein;
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(ii) all obligations, covenants and agreements of the Company
required to be performed at or prior to the Closing Date
shall have been performed;
(iii) the delivery by the Company of the items set forth in
Section 2.2(a) of this Agreement;
(iv) there shall have been no Material Adverse Effect with
respect to the Company since the date hereof; and
(v) From the date hereof to the Closing Date, trading in the
Common Stock shall not have been suspended by the
Commission (except for any suspension of trading of
limited duration agreed to by the Company, which
suspension shall be terminated prior to the Closing),
and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg Financial
Markets shall not have been suspended or limited, or
minimum prices shall not have been established on
securities whose trades are reported by such service, or
on any Trading Market, nor shall a banking moratorium
have been declared either by the United States or New
York State authorities nor shall there have occurred any
material outbreak or escalation of hostilities or other
national or international calamity of such magnitude in
its effect on, or any material adverse change in, any
financial market which, in each case, in the reasonable
judgment of each Purchaser, makes it impracticable or
inadvisable to purchase the Debentures at the Closing.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "DISCLOSURE SCHEDULES") which Disclosure
Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.
(a) SUBSIDIARIES. All of the direct and indirect subsidiaries of the
Company are set forth on SCHEDULE 3.1(A). The Company owns, directly or
indirectly, all of the capital stock or other equity interests of each
Subsidiary free and clear of any Liens, and all the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and are
fully paid, non-assessable and free of preemptive and similar rights to
subscribe for or purchase securities. If the Company has no subsidiaries,
then references in the Transaction Documents to the Subsidiaries will be
disregarded.
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(b) ORGANIZATION AND QUALIFICATION. Each of the Company and the
Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction
of its incorporation or organization (as applicable), with the requisite
power and authority to own and use its properties and assets and to carry
on its business as currently conducted. Neither the Company nor any
Subsidiary is in violation or default of any of the provisions of its
respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. Each of the Company and the
Subsidiaries is duly qualified to conduct business and is in good standing
as a foreign corporation or other entity in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in
good standing, as the case may be, could not have or reasonably be
expected to result in (i) a material adverse effect on the legality,
validity or enforceability of any Transaction Document, (ii) a material
adverse effect on the results of operations, assets, business, prospects
or financial condition of the Company and the Subsidiaries, taken as a
whole, or (iii) a material adverse effect on the Company's ability to
perform in any material respect on a timely basis its obligations under
any Transaction Document (any of (i), (ii) or (iii), a "MATERIAL ADVERSE
EFFECT") and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail
such power and authority or qualification.
(c) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations thereunder. The execution and
delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly
authorized by all necessary action on the part of the Company and no
further action is required by the Company in connection therewith other
than in connection with the Required Approvals. Each Transaction Document
has been (or upon delivery will have been) duly executed by the Company
and, when delivered in accordance with the terms hereof, will constitute
the valid and binding obligation of the Company enforceable against the
Company in accordance with its terms except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally
and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
(d) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company
of the other transactions contemplated thereby do not and will not: (i)
conflict with or violate any provision of the Company's or any
Subsidiary's certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute
a default (or an event that with notice or lapse of time or both would
become a default) under, result in the creation of any Lien upon any of
the properties or assets of the Company or any Subsidiary, or give to
others any rights of termination, amendment, acceleration or cancellation
(with or without notice, lapse of time or both) of, any agreement, credit
facility, debt or other instrument (evidencing a Company or Subsidiary
debt or otherwise) or other understanding to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) subject to the Required
Approvals, conflict with or result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company or a Subsidiary
is subject (including federal and state securities laws and regulations),
or by which any property or asset of the Company or a Subsidiary is bound
or affected; except in the case of each of clauses (ii) and (iii), such as
could not have or reasonably be expected to result in a Material Adverse
Effect.
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(e) FILINGS, CONSENTS AND APPROVALS. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to,
or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other Person in connection
with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) filings required pursuant to Section
4.6, (ii) the filing with the Commission of the Registration Statement,
(iii) the notice and/or application(s) to each applicable Trading Market
for the issuance and sale of the Debentures and Warrants and the listing
of the Underlying Shares for trading thereon in the time and manner
required thereby and (iv) the filing of Form D with the Commission and
such filings as are required to be made under applicable state securities
laws (collectively, the "REQUIRED APPROVALS").
(f) ISSUANCE OF THE SECURITIES. The Debentures and Warrants are duly
authorized and, when issued and paid for in accordance with the applicable
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company other
than restrictions on transfer provided for in the Transaction Documents.
The Underlying Shares, when issued in accordance with the terms of the
Transaction Documents, will be validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company. The
Company has reserved from its duly authorized capital stock a number of
shares of Common Stock for issuance of the Underlying Shares at least
equal to the Required Minimum on the date hereof. The Company has not, and
to the knowledge of the Company, no Affiliate of the Company has sold,
offered for sale or solicited offers to buy or otherwise negotiated in
respect of any security (as defined in Section 2 of the Securities Act)
that would be integrated with the offer or sale of the Debentures and
Warrants in a manner that would require the registration under the
Securities Act of the sale of the Debentures and Warrants to the
Purchasers, or that would be integrated with the offer or sale of the
Debentures and Warrants for purposes of the rules and regulations of any
Trading Market.
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(g) CAPITALIZATION. The capitalization of the Company is as
described in the Company's most recent periodic report filed with the
Commission. The Company has not issued any capital stock since such filing
other than pursuant to the exercise of employee stock options under the
Company's stock option plans, the issuance of shares of Common Stock to
employees pursuant to the Company's employee stock purchase plan and
pursuant to the conversion or exercise of outstanding Common Stock
Equivalents. No Person has any right of first refusal, preemptive right,
right of participation, or any similar right to participate in the
transactions contemplated by the Transaction Documents. Except as a result
of the purchase and sale of the Debentures and Warrants, there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights
or obligations convertible into or exchangeable for, or giving any Person
any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional
shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. The issuance and sale of the
Debentures and Warrants will not obligate the Company to issue shares of
Common Stock or other securities to any Person (other than the Purchasers)
and will not result in a right of any holder of Company securities to
adjust the exercise, conversion, exchange or reset price under such
securities. All of the outstanding shares of capital stock of the Company
are validly issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities. No further
approval or authorization of any stockholder, the Board of Directors of
the Company or others is required for the issuance and sale of the
Securities. Except as disclosed in the SEC Reports, there are no
stockholders agreements, voting agreements or other similar agreements
with respect to the Company's capital stock to which the Company is a
party or, to the knowledge of the Company, between or among any of the
Company's stockholders.
(h) SEC REPORTS; FINANCIAL STATEMENTS. The Company has filed all
reports required to be filed by it under the Securities Act and the
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (or such shorter period as the
Company was required by law to file such material) (the foregoing
materials, including the exhibits thereto, being collectively referred to
herein as the "SEC REPORTS") on a timely basis or has received a valid
extension of such time of filing and has filed any such SEC Reports prior
to the expiration of any such extension. As of their respective dates, the
SEC Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, when
filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company
included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis
during the periods involved ("GAAP"), except as may be otherwise specified
in such financial statements or the notes thereto and except that
unaudited financial statements may not contain all footnotes required by
GAAP, and fairly present in all material respects the financial position
of the Company and its consolidated subsidiaries as of and for the dates
thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.
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(i) MATERIAL CHANGES. Since June 30, 2004, except as specifically
disclosed in the SEC Reports, (i) there has been no event, occurrence or
development that has had or that could reasonably be expected to result in
a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent
with past practice and (B) liabilities not required to be reflected in the
Company's financial statements pursuant to GAAP or required to be
disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting, (iv) the Company has not declared or
made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock and (v) the Company has not issued
any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans. The Company does not have
pending before the Commission any request for confidential treatment of
information.
(j) LITIGATION. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or
any of their respective properties before or by any court, arbitrator,
governmental or administrative agency or regulatory authority (federal,
state, county, local or foreign) (collectively, an "ACTION") which (i)
adversely affects or challenges the legality, validity or enforceability
of any of the Transaction Documents or the Securities or (ii) could, if
there were an unfavorable decision, have or reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the
subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty.
There has not been, and to the knowledge of the Company, there is not
pending or contemplated, any investigation by the Commission involving the
Company or any current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act.
(k) LABOR RELATIONS. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees
of the Company which could reasonably be expected to result in a Material
Adverse Effect.
(l) COMPLIANCE. Neither the Company nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or
any Subsidiary received notice of a claim that it is in default under or
that it is in violation of, any indenture, loan or credit agreement or any
other agreement or instrument to which it is a party or by which it or any
of its properties is bound (whether or not such default or violation has
been waived), (ii) is in violation of any order of any court, arbitrator
or governmental body, or (iii) is or has been in violation of any statute,
rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its
business except in each case as could not have a Material Adverse Effect.
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(m) REGULATORY PERMITS. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to
conduct their respective businesses as described in the SEC Reports,
except where the failure to possess such permits could not have or
reasonably be expected to result in a Material Adverse Effect ("MATERIAL
PERMITS"), and neither the Company nor any Subsidiary has received any
notice of proceedings relating to the revocation or modification of any
Material Permit.
(n) TITLE TO ASSETS. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material
to the business of the Company and the Subsidiaries, in each case free and
clear of all Liens, except for Liens 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 the Subsidiaries
and Liens for the payment of federal, state or other taxes, the payment of
which is neither delinquent nor subject to penalties. Any real property
and facilities held under lease by the Company and the Subsidiaries are
held by them under valid, subsisting and enforceable leases of which the
Company and the Subsidiaries are in compliance.
(o) PATENTS AND TRADEMARKS. The Company and the Subsidiaries have,
or have rights to use, all patents, patent applications, trademarks,
trademark applications, service marks, trade names, copyrights, licenses
and other similar rights necessary or material for use in connection with
their respective businesses as described in the SEC Reports and which the
failure to so have could have a Material Adverse Effect (collectively, the
"INTELLECTUAL PROPERTY RIGHTS"). Neither the Company nor any Subsidiary
has received a written notice that the Intellectual Property Rights used
by the Company or any Subsidiary violates or infringes upon the rights of
any Person. To the knowledge of the Company, all such Intellectual
Property Rights are enforceable.
(p) INSURANCE. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses
in which the Company and the Subsidiaries are engaged. To the best of
Company's knowledge, such insurance contracts and policies are accurate
and complete. Neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.
12
(q) TRANSACTIONS WITH AFFILIATES AND EMPLOYEES. Except as set forth
in the SEC Reports, none of the officers or directors of the Company and,
to the knowledge of the Company, none of the employees of the Company is
presently a party to any transaction with the Company or any Subsidiary
(other than for services as employees, officers and directors), including
any contract, agreement or other arrangement providing for the furnishing
of services to or by, providing for rental of real or personal property to
or from, or otherwise requiring payments to or from any officer, director
or such employee or, to the knowledge of the Company, any entity in which
any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of
$60,000 other than (i) for payment of salary or consulting fees for
services rendered, (ii) reimbursement for expenses incurred on behalf of
the Company and (iii) for other employee benefits, including stock option
agreements under any stock option plan of the Company.
(r) XXXXXXXX-XXXXX; INTERNAL ACCOUNTING CONTROLS. The Company is in
material compliance with all provisions of the Xxxxxxxx-Xxxxx Act of 2002
which are applicable to it as of the Closing Date. The Company and the
Subsidiaries maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences. The
Company has established disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed
such disclosure controls and procedures to ensure that material
information relating to the Company, including its subsidiaries, is made
known to the certifying officers by others within those entities,
particularly during the period in which the Company's most recently filed
periodic report under the Exchange Act, as the case may be, is being
prepared. The Company's certifying officers have evaluated the
effectiveness of the Company's controls and procedures as of the date
prior to the filing date of the most recently filed periodic report under
the Exchange Act (such date, the "EVALUATION DATE"). The Company presented
in its most recently filed periodic report under the Exchange Act the
conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in the Company's internal controls (as such term is defined in
Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company's
knowledge, in other factors that could significantly affect the Company's
internal controls.
(s) CERTAIN FEES. No brokerage or finder's fees or commissions are
or will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other
Person with respect to the transactions contemplated by this Agreement.
The Purchasers shall have no obligation with respect to any fees or with
respect to any claims made by or on behalf of other Persons for fees of a
type contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement.
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(t) PRIVATE PLACEMENT. Assuming the accuracy of the Purchasers
representations and warranties set forth in Section 3.2, no registration
under the Securities Act is required for the offer and sale of the
Debentures and Warrants by the Company to the Purchasers as contemplated
hereby. The issuance and sale of the Securities hereunder does not
contravene the rules and regulations of the Trading Market.
(u) INVESTMENT COMPANY. The Company is not, and is not an Affiliate
of, and immediately after receipt of payment for the Debentures and
Warrants, will not be or be an Affiliate of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended. The
Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(v) REGISTRATION RIGHTS. Except as disclosed in the Registration
Rights Agreement, no Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the
Company.
(w) LISTING AND MAINTENANCE REQUIREMENTS. The Company's Common Stock
is registered pursuant to Section 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge is
likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act nor has the Company received any notification
that the Commission is contemplating terminating such registration. The
Company has not, in the 12 months preceding the date hereof, received
notice from any Trading Market on which the Common Stock is or has been
listed or quoted to the effect that the Company is not in compliance with
the listing or maintenance requirements of such Trading Market. The
Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.
(x) APPLICATION OF TAKEOVER PROTECTIONS. The Company and its Board
of Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other
similar anti-takeover provision under the Company's Certificate of
Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Purchasers as a
result of the Purchasers and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents, including without
limitation as a result of the Company's issuance of the Securities and the
Purchasers' ownership of the Securities.
(y) DISCLOSURE. The Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Purchasers or their
agents or counsel with any information that constitutes or might
constitute material, nonpublic information. The Company understands and
confirms that the Purchasers will rely on the foregoing representations
and covenants in effecting transactions in securities of the Company. All
disclosure provided to the Purchasers regarding the Company, its business
and the transactions contemplated hereby, including the Disclosure
Schedules to this Agreement, furnished by or on behalf of the Company with
respect to the representations and warranties made herein are true and
correct with respect to such representations and warranties and do not
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. The
Company acknowledges and agrees that no Purchaser makes or has made any
representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section 3.2
hereof.
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(z) NO INTEGRATED OFFERING. Assuming the accuracy of the Purchasers'
representations and warranties set forth in Section 3.2, neither the
Company, nor any of its affiliates, nor any Person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances
that would cause this offering of the Debentures and Warrants to be
integrated with prior offerings by the Company for purposes of the
Securities Act or any applicable shareholder approval provisions,
including, without limitation, under the rules and regulations of any
exchange or automated quotation system on which any of the securities of
the Company are listed or designated.
(aa) SOLVENCY. Based on the financial condition of the Company as of
the Closing Date after giving effect to the receipt by the Company of the
proceeds from the sale of the Debentures and Warrants hereunder, (i) the
Company's fair saleable value of its assets exceeds the amount that will
be required to be paid on or in respect of the Company's existing debts
and other liabilities (including known contingent liabilities) as they
mature; (ii) the Company's assets do not constitute unreasonably small
capital to carry on its business for the current fiscal year as now
conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business
conducted by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate
all of its assets, after taking into account all anticipated uses of the
cash, would be sufficient to pay all amounts on or in respect of its debt
when such amounts are required to be paid. The Company does not intend to
incur debts beyond its ability to pay such debts as they mature (taking
into account the timing and amounts of cash to be payable on or in respect
of its debt).
(bb) FORM S-3 ELIGIBILITY. The Company is eligible to register the
resale of the Underlying Shares for resale by the Purchaser on Form S-3
promulgated under the Securities Act.
(cc) TAX STATUS. Except for matters that would not, individually or
in the aggregate, have or reasonably be expected to result in a Material
Adverse Effect, the Company and each Subsidiary has filed all necessary
federal, state and foreign income and franchise tax returns and has paid
or accrued all taxes shown as due thereon, and the Company has no
knowledge of a tax deficiency which has been asserted or threatened
against the Company or any Subsidiary.
15
(dd) NO GENERAL SOLICITATION. Neither the Company nor any person
acting on behalf of the Company has offered or sold any of the Debentures
and Warrants by any form of general solicitation or general advertising.
The Company has offered the Debentures and Warrants for sale only to the
Purchasers and certain other "accredited investors" within the meaning of
Rule 501 under the Securities Act.
(ee) FOREIGN CORRUPT PRACTICES. Neither the Company, nor to the
knowledge of the Company, any agent or other person acting on behalf of
the Company, has (i) directly or indirectly, used any corrupt funds for
unlawful contributions, gifts, entertainment or other unlawful expenses
related to foreign or domestic political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to any
foreign or domestic political parties or campaigns from corporate funds,
(iii) failed to disclose fully any contribution made by the Company (or
made by any person acting on its behalf of which the Company is aware)
which is in violation of law, or (iv) violated in any material respect any
provision of the Foreign Corrupt Practices Act of 1977, as amended
(ff) ACCOUNTANTS. The Company's accountants are set forth on
SCHEDULE 3.1(FF) of the Disclosure Schedule. To the Company's knowledge,
such accountants, who the Company expects will express their opinion with
respect to the financial statements to be included in the Company's Annual
Report on Form 10-KSB for the year ending September 30, 2004 are
independent accountants as required by the Securities Act.
(gg) SENIORITY. As of the Closing Date, no indebtedness of the
Company is senior to the Debentures in right of payment, whether with
respect to interest or upon liquidation or dissolution, or otherwise,
other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and capital
lease obligations (which is senior only as to the property covered
thereby).
(hh) NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS. There are no
disagreements of any kind presently existing, or reasonably anticipated by
the Company to arise, between the accountants and lawyers formerly or
presently employed by the Company and the Company is current with respect
to any fees owed to its accountants and lawyers.
(ii) ACKNOWLEDGMENT REGARDING PURCHASERS' PURCHASE OF SECURITIES.
The Company acknowledges and agrees that each of the Purchasers is acting
solely in the capacity of an arm's length purchaser with respect to the
Transaction Documents and the transactions contemplated hereby. The
Company further acknowledges that no Purchaser is acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement and the transactions contemplated hereby and any
advice given by any Purchaser or any of their respective representatives
or agents in connection with this Agreement and the transactions
contemplated hereby is merely incidental to the Purchasers' purchase of
the Debentures and Warrants. The Company further represents to each
Purchaser that the Company's decision to enter into this Agreement has
been based solely on the independent evaluation of the transactions
contemplated hereby by the Company and its representatives.
16
3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement have been
duly authorized by all necessary corporate or similar action on the part
of such Purchaser. Each Transaction Document to which it is a party has
been duly executed by such Purchaser, and when delivered by such Purchaser
in accordance with the terms hereof, will constitute the valid and legally
binding obligation of such Purchaser, enforceable against it in accordance
with its terms, except (i) as limited by general equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and
(iii) insofar as indemnification and contribution provisions may be
limited by applicable law.
(b) PURCHASER REPRESENTATION. Such Purchaser understands that the
Securities are "restricted securities" and have not been registered under
the Securities Act or any applicable state securities law and is acquiring
the Securities as principal for its own account and not with a view to or
for distributing or reselling such Securities or any part thereof, has no
present intention of distributing any of such Securities and has no
arrangement or understanding with any other persons regarding the
distribution of such Securities (this representation and warranty not
limiting such Purchaser's right to sell the Securities pursuant to the
Registration Statement or otherwise in compliance with applicable federal
and state securities laws). Such Purchaser is acquiring the Debentures and
Warrants hereunder in the ordinary course of its business. Such Purchaser
does not have any agreement or understanding, directly or indirectly, with
any Person to distribute any of the Securities.
(c) PURCHASER STATUS. At the time such Purchaser was offered the
Debentures and Warrants, it was, and at the date hereof it is, and on each
date on which it exercises any Warrants or converts any Debentures it will
be either: (i) an "accredited investor" as defined in Rule 501(a)(1),
(a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a
"qualified institutional buyer" as defined in Rule 144A(a) under the
Securities Act. Such Purchaser is not required to be registered as a
broker-dealer under Section 15 of the Exchange Act.
17
(d) EXPERIENCE OF SUCH PURCHASER. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Debentures and Warrants, and has so evaluated the merits and risks of such
investment. Such Purchaser is able to bear the economic risk of an
investment in the Debentures and Warrants and, at the present time, is
able to afford a complete loss of such investment.
(e) GENERAL SOLICITATION. Such Purchaser is not purchasing the
Debentures and Warrants as a result of any advertisement, article, notice
or other communication regarding the Debentures and Warrants published in
any newspaper, magazine or similar media or broadcast over television or
radio or presented at any seminar or any other general solicitation or
general advertisement.
(f) SHORT SALES. Each Purchaser represents that prior to execution
of this Agreement, neither it nor any Person over which the Purchaser has
direct control, have made any net short sales of, or granted any option
for the purchase of or entered into any hedging or similar transaction
with the same economic effect as a net short sale, in the Common Stock.
(g) DISCLOSURE OF INFORMATION. Such Purchaser believes it has
received all the information it considers necessary or appropriate for
deciding whether to purchase the Debentures and Warrants. Such Purchaser
further represents that it has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the
offering of the Debentures and Warrants and the business, properties,
prospects and financial condition of the Company. Such Purchaser has
reviewed the Company's Annual Report on Form 10K-SB for the fiscal year
ended September 30, 2003 (the "10K-SB"), including, without limitation,
all of the Risk Factors set forth therein and in the Company's Form SB-2
filed February 13, 2004, as amended (the "RISK FACTORS"). Each such
Purchaser understands and accepts all of the Risk Factors in connection
with such Purchaser's investment in the Debentures and Warrants. In
addition, each Purchaser has reviewed and is aware of the information set
forth in all SEC Reports filed with the SEC since the filing of the
10K-SB. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 3 of this
Agreement or the right of the Purchasers to rely thereon.
The Company acknowledges and agrees that each Purchaser does not
make or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth
in this Section 3.2.
18
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 TRANSFER RESTRICTIONS.
(a) The Securities may only be disposed of in compliance with state
and federal securities laws. In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144, to
the Company or to an Affiliate of a Purchaser or in connection with a
pledge as contemplated in Section 4.1(b), the Company may require the
transferor thereof to provide to the Company an opinion of counsel
selected by the transferor and reasonably acceptable to the Company, the
form and substance of which opinion shall be reasonably satisfactory to
the Company, to the effect that such transfer does not require
registration of such transferred Securities under the Securities Act. As a
condition of transfer, any such transferee shall agree in writing to be
bound by the terms of this Agreement and shall have the rights of a
Purchaser under this Agreement and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required
by this Section 4.1(b), of a legend on any of the Securities in the
following form:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR REASONABLY
ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE
REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES
ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
19
The Company acknowledges and agrees that a Purchaser may from time
to time pledge pursuant to a bona fide margin agreement with a registered
broker-dealer or grant a security interest in some or all of the
Securities to a financial institution that is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and who agrees to be bound
by the provisions of this Agreement and the Registration Rights Agreement
and, if required under the terms of such arrangement, such Purchaser may
transfer pledged or secured Securities to the pledgees or secured parties.
Such a pledge or transfer would not be subject to approval of the Company
and no legal opinion of legal counsel of the pledgee, secured party or
pledgor shall be required in connection therewith. Further, no notice
shall be required of such pledge. At the appropriate Purchaser's expense,
the Company will execute and deliver such reasonable documentation as a
pledgee or secured party of Securities may reasonably request in
connection with a pledge or transfer of the Securities, including, if the
Securities are subject to registration pursuant to the Registration Rights
Agreement, the preparation and filing of any required prospectus
supplement under Rule 424(b)(3) under the Securities Act or other
applicable provision of the Securities Act to appropriately amend the list
of Selling Stockholders thereunder.
(c) Certificates evidencing the Underlying Shares shall not contain
any legend (including the legend set forth in Section 4.1(b) hereof): (i)
while a registration statement (including the Registration Statement)
covering the resale of such security is effective under the Securities
Act, or (ii) following any sale of such Underlying Shares pursuant to Rule
144, or (iii) if such Underlying Shares are eligible for sale under Rule
144(k), or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission); PROVIDED, HOWEVER,
in connection with the issuance of the Underlying Shares, each Purchaser,
severally and not jointly with the other Purchasers, hereby agrees to
adhere to and abide by all prospectus delivery requirements under the
Securities Act and rules and regulations of the Commission. The Company
shall cause its counsel to issue a legal opinion to the Company's transfer
agent promptly after the Effective Date if required by the Company's
transfer agent to effect the removal of the legend hereunder. If all or
any portion of a Debenture or Warrant is converted or exercised (as
applicable) at a time when there is an effective registration statement to
cover the resale of the Underlying Shares, or if such Underlying Shares
may be sold under Rule 144(k) or if such legend is not otherwise required
under applicable requirements of the Securities Act (including judicial
interpretations thereof) then such Underlying Shares shall be issued free
of all legends. The Company agrees that following the Effective Date or at
such time as such legend is no longer required under this Section 4.1(c),
it will, no later than three Trading Days following the delivery by a
Purchaser to the Company or the Company's transfer agent of a certificate
representing Underlying Shares, as applicable, issued with a restrictive
legend (such third Trading Day, the "LEGEND REMOVAL DATE"), deliver or
cause to be delivered to such Purchaser a certificate representing such
shares that is free from all restrictive and other legends. The Company
may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer
set forth in this Section.
(d) Subject to Section 4.10 of this Agreement, in addition to such
Purchaser's other available remedies, the Company shall pay to a
Purchaser, in cash, as partial liquidated damages and not as a penalty,
for each $1,000 of Underlying Shares (based on the VWAP of the Common
Stock on the date such Securities are submitted to the Company's transfer
agent) delivered for removal of the restrictive legend and subject to
Section 4.1(c), $10 per Trading Day for each Trading Day after the Legend
Removal Date until such certificate is delivered without a legend. Nothing
herein shall limit such Purchaser's right to pursue actual damages for the
Company's failure to deliver certificates representing any Securities as
required by the Transaction Documents, and such Purchaser shall have the
right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.
20
(e) Each Purchaser, severally and not jointly with the other
Purchasers, agrees that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company's reliance that the Purchaser will sell any
Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements,
or an exemption therefrom.
4.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the issuance
of the Securities may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions. The
Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
4.3 FURNISHING OF INFORMATION. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule 144. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, all to the extent required from time to time
to enable such Person to sell such Securities without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144.
4.4 INTEGRATION. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Debentures and Warrants in a manner that would require the registration
under the Securities Act of the sale of the Debentures and Warrants to the
Purchasers or that would be integrated with the offer or sale of the Debentures
and Warrants for purposes of the rules and regulations of any Trading Market.
4.5 CONVERSION AND EXERCISE PROCEDURES. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.
21
4.6 SECURITIES LAWS DISCLOSURE; PUBLICITY. The Company shall, by 8:30 a.m.
Eastern time on the Trading Day following the date hereof, issue a press release
or file a Current Report on Form 8-K, in each case reasonably acceptable to each
Purchaser disclosing the material terms of the transactions contemplated hereby.
The Company and each Purchaser shall consult with each other in issuing any
other press releases with respect to the transactions contemplated hereby, and
neither the Company nor any Purchaser shall issue any such press release or
otherwise make any such public statement without the prior consent of the
Company, with respect to any press release of any Purchaser, or without the
prior consent of each Purchaser, with respect to any press release of the
Company, which consent shall not unreasonably be withheld, except if such
disclosure is required by law, in which case the disclosing party shall promptly
provide the other party with prior notice of such public statement or
communication. Notwithstanding the foregoing, the Company shall not publicly
disclose the name of any Purchaser, or include the name of any Purchaser in any
filing with the Commission or any regulatory agency or Trading Market, without
the prior written consent of such Purchaser, except (i) as required by federal
securities law in connection with the registration statement contemplated by the
Registration Rights Agreement and (ii) to the extent such disclosure is required
by law or Trading Market regulations, in which case the Company shall provide
the Purchasers with prior notice of such disclosure permitted under subclause
(i) or (ii).
4.7 SHAREHOLDERS RIGHTS PLAN. No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any Purchaser
is an "Acquiring Person" under any shareholders rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that any Purchaser
could be deemed to trigger the provisions of any such plan or arrangement, by
virtue of receiving Securities under the Transaction Documents or under any
other agreement between the Company and the Purchasers. The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.
4.8 NON-PUBLIC INFORMATION. The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information. The Company understands and confirms that each Purchaser shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.
4.9 USE OF PROCEEDS. Except as set forth on SCHEDULE 4.9 attached hereto,
the Company shall use the net proceeds from the sale of the Debentures and
Warrant Shares for (a) working capital purposes, (b) for the Company's CTC Cable
Corporation Subsidiary, (c) general Company corporate overhead and (d) the
maintenance and development of the Company's intellectual property rights and
not for the satisfaction of any portion of the Company's or any other
Subsidiary's debt (other than payment of trade payables in the ordinary course
of the Company's business and prior practices), further investment in any other
Subsidiary, to redeem any Company equity or equity-equivalent securities or to
settle any outstanding litigation.
4.10 TOLLING OF LIQUIDATED DAMAGES. Each Purchaser acknowledges and agrees
that with respect to amounts that may become payable to such Purchaser under
Section 4.1(d) of this Agreement, Section 2(e)(v) of the Warrant and Sections
4(d)(iv) and (v) of the Debenture, such Purchaser shall not seek payment from
the Company, and the Company shall not be required to make any such payments,
until such time as the amounts accrued under such sections exceeds $20,000 in
the aggregate at which point all accrued but unpaid amounts shall become
immediately due and payable.
22
4.11 INDEMNIFICATION. Each party to this Agreement ("INDEMNIFYING PARTY")
will indemnify and hold the other parties and their directors, officers,
shareholders, partners, employees and agents (each, an "INDEMNIFIED PARTY")
harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys' fees and costs of
investigation that any such Indemnified Party may suffer or incur as a result of
or relating to (a) any misrepresentation, breach or inaccuracy, of any of the
representations, warranties, covenants or agreements made by the Indemnifying
Party in this Agreement or in the other Transaction Documents or (b) for the
benefit of each Indemnified Parties relating to the Purchaser only, any action
instituted against a Purchaser, or any of them or their respective Affiliates,
by any stockholder of the Company who is not an Affiliate of such Purchaser,
with respect to any of the transactions contemplated by the Transaction
Documents (unless such action is based upon a breach of such Purchaser's
representation, warranties or covenants under the Transaction Documents or any
agreements or understandings such Purchaser may have with any such stockholder
or any violations by the Purchaser of state or federal securities laws or any
conduct by such Purchaser which constitutes fraud, gross negligence, willful
misconduct or malfeasance). If any action shall be brought against any
Indemnified Party in respect of which indemnity may be sought pursuant to this
Agreement, such Indemnified Party shall promptly notify the Indemnifying Party
in writing, and the Indemnifying Party shall have the right to assume the
defense thereof with counsel of its own choosing. Any Indemnified Party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party except to the extent that the employment
thereof has been specifically authorized by the Indemnifying Party in writing,
the Indemnifying Party has failed after a reasonable period of time to assume
such defense and to employ counsel or in such action there is, in the reasonable
opinion of such separate counsel, a material conflict on any material issue
between the position of the Indemnifying Party and the position of such
Indemnified Party. The Indemnifying Party will not be liable to any Indemnified
Party under this Section 4.11 for any settlement by an Indemnified Party
effected without the Indemnifying Party's prior written consent, which shall not
be unreasonably withheld or delayed; or to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to any Indemnified
Party's breach of any of the representations, warranties, covenants or
agreements made by the Purchasers in this Agreement or in the other Transaction
Documents. In no event shall the liability of any Purchaser be greater in amount
than the dollar amount of the net proceeds received by such Purchaser upon the
sale of the Underlying Shares and in no event shall the liability of the Company
be greater in amount than the dollar amount of the net proceeds received by the
Company from the Sale of the Debenture and Warrant to the Purchasers.
4.12 RESERVATION AND LISTING OF SECURITIES.
(a) The Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction Documents
in such amount as may be required to fulfill its obligations in full under
the Transaction Documents.
23
(b) If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required
Minimum on such date, then the Board of Directors of the Company shall use
commercially reasonable efforts to amend the Company's certificate or
articles of incorporation to increase the number of authorized but
unissued shares of Common Stock to at least the Required Minimum at such
time, as soon as possible and in any event not later than the 75th day
after such date.
(c) The Company shall, if applicable: (i) in the time and manner
required by the Trading Market, prepare and file with such Trading Market
an additional shares listing application covering a number of shares of
Common Stock at least equal to the Required Minimum on the date of such
application, (ii) take all steps necessary to cause such shares of Common
Stock to be approved for listing on the Trading Market as soon as possible
thereafter, (iii) provide to the Purchasers evidence of such listing, and
(iv) maintain the listing of such Common Stock on any date at least equal
to the Required Minimum on such date on such Trading Market or another
Trading Market.
4.13 INTENTIONALLY OMITTED.
4.14 SUBSEQUENT EQUITY SALES. From the date hereof until the Effective
Date, neither the Company nor any Subsidiary shall issue shares of Common Stock
or Common Stock Equivalents; provided, however, this period shall be extended
for the number of Trading Days during such period in which (y) trading in the
Common Stock is suspended by any Trading Market, or (z) following the Effective
Date, the Registration Statement is not effective or the prospectus included in
the Registration Statement may not be used by the Purchasers for the resale of
the Underlying Shares. Notwithstanding the foregoing, this Section 4.14 shall
not apply in respect of an Exempt Issuance. In addition to the limitations set
forth herein, from the date hereof until such time as no Purchaser holds any of
the Debentures or Warrants, the Company shall be prohibited from effecting or
entering into an agreement to effect any financing by the Company or any of its
Subsidiaries of Common Stock or Common Stock Equivalents 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 for the purpose of circumventing the anti-dilution rights of the
Purchasers.
24
4.15 EQUAL TREATMENT OF PURCHASERS. No consideration shall be offered or
paid to any person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal or interest on the Debentures in
amounts which are disproportionate to the respective principal amounts
outstanding on the Debentures at any applicable time. For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended to
treat for the Company the Debenture holders as a class and shall not in any way
be construed as the Purchasers acting in concert or as a group with respect to
the purchase, disposition or voting of Securities or otherwise.
ARTICLE V.
MISCELLANEOUS
5.1 TERMINATION. This Agreement may be terminated by any Purchaser, by
written notice to the other parties, if the Closing has not been consummated on
or before August 17, 2004; provided that no such termination will affect the
right of any party to xxx for any breach by the other party (or parties).
5.2 FEES AND EXPENSES. At the Closing, the Company has agreed to reimburse
Midsummer Capital, LLC ("MIDSUMMER") up to $40,000, for its actual, reasonable,
out-of-pocket legal fees and expenses, of which the Company paid $20,000 prior
to the Closing. The Company shall deliver, prior to the Closing, a completed and
executed copy of the Closing Statement, attached hereto as ANNEX A. Except as
expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Company shall pay all transfer agent fees, stamp taxes and other taxes and
duties levied in connection with the issuance of any Securities.
5.3 ENTIRE AGREEMENT. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
5.4 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the second Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.
25
5.5 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and Purchasers holding at least 66% of the Underlying Shares (on a
converted and unconverted basis) or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right.
5.6 CONSTRUCTION. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
5.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser. Any Purchaser may assign
any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the "Purchasers".
5.8 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.
5.9 GOVERNING LAW. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. The parties hereby waive all
rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.
26
5.10 SURVIVAL. The representations and warranties contained herein shall
survive the Closing and the delivery, exercise and/or conversion of the
Debentures and Warrants, as applicable for the applicable statue of limitations.
5.11 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
5.12 SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
5.13 RESCISSION AND WITHDRAWAL RIGHT. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights; PROVIDED,
HOWEVER, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such rescinded conversion or exercise notice.
5.14 REPLACEMENT OF SECURITIES. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
27
5.15 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.
5.16 PAYMENT SET ASIDE. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
5.17 USURY. To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner whatsoever claim, and will resist
any and all efforts to be compelled to take the benefit or advantage of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document. Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the "MAXIMUM RATE"),
and, without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Company to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Company, the manner of handling such excess
to be at such Purchaser's election.
28
5.18 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW. FW does not represent all of
the Purchasers but only Midsummer. The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.
5.19 LIQUIDATED DAMAGES. The Company's obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.
(Signature Pages Follow)
29
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
COMPOSITE TECHNOLOGY CORPORATION ADDRESS FOR NOTICE:
-------------------
By:_____________________________
Name:
Title:
With a copy to (which shall not constitute notice):
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
30
[PURCHASER SIGNATURE PAGES TO CPTC SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
Name of Investing Entity: ______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Email Address of Authorized Entity:_____________________________________________
Address for Notice of Investing Entity:
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount:
Warrant Shares:
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
[SIGNATURE PAGES CONTINUE]
31
ANNEX A
CLOSING STATEMENT
Pursuant to the attached Securities Purchase Agreement, dated as of the date
hereto, the purchasers shall purchase up to $15,000,000 of Debentures and
Warrants from Composite Technology Corporation, a Nevada corporation (the
"COMPANY"). All funds will be wired into a trust account maintained by
____________, counsel to the Company. All funds will be disbursed in accordance
with this Closing Statement.
DISBURSEMENT DATE: August ___, 2004
--------------------------------------------------------------------------------
I. PURCHASE PRICE
GROSS PROCEEDS TO BE RECEIVED IN TRUST $
II. DISBURSEMENTS
$
$
$
$
$
TOTAL AMOUNT DISBURSED: $
WIRE INSTRUCTIONS:
To: _____________________________________
To: _____________________________________
32
EXHIBIT A
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
Original Issue Date: August 17, 2004
Original Conversion Price (subject to adjustment herein): $1.67
$---------------
6% SECURED CONVERTIBLE DEBENTURE
DUE AUGUST 17, 2007
THIS DEBENTURE is one of a series of duly authorized and issued 6% Secured
Convertible Debentures of Composite Technology Corporation, a Nevada
corporation, having a principal place of business at 0000 XxXxx Xxx., Xxxxxx, XX
00000 (the "COMPANY"), designated as its 6% Secured Convertible Debenture, due
August 17, 2007 (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "HOLDER"), the principal
sum of $_______________ on August ___, 2007 or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the
"MATURITY DATE"), and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Debenture in accordance with the
provisions hereof. This Debenture is subject to the following additional
provisions:
SECTION 1.DEFINITIONS. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined
herein have the meanings given to such terms in the Purchase Agreement, and (b)
the following terms shall have the following meanings:
1
"ALTERNATE CONSIDERATION" shall have the meaning set forth in
Section 5(e)(iii).
"BUSINESS DAY" means any day except Saturday, Sunday and any day
which shall be a federal legal holiday in the United States or a day on
which banking institutions in the State of New York are authorized or
required by law or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence after the date
hereof of any of (i) an acquisition after the date hereof by an individual
or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated
under the Exchange Act) of effective control (whether through legal or
beneficial ownership of capital stock of the Company, by contract or
otherwise) of in excess of 51% of the voting securities of the Company, or
(ii) a replacement at one time or within a three year period of more than
one-half of the members of the Company's board of directors which is not
approved by a majority of those individuals who are members of the board
of directors on the date hereof (or by those individuals who are serving
as members of the board of directors on any date whose nomination to the
board of directors was approved by a majority of the members of the board
of directors who are members on the date hereof), or (iii) the execution
by the Company of an agreement to which the Company is a party or by which
it is bound, providing for any of the events set forth above in (i) or
(ii).
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock, par value $0.001 per share,
of the Company and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"CONVERSION DATE" shall have the meaning set forth in Section 4(a)
hereof.
"CONVERSION PRICE" shall have the meaning set forth in Section 4(b).
"CONVERSION SHARES" means the shares of Common Stock issuable upon
conversion of Debentures or as payment of interest in accordance with the
terms hereof.
"DTC" shall have the meaning as set forth in Section 6(b)(iv)
hereof.
"DWAC" shall have the meaning as set forth in Section 6(b)(iv)
hereof.
"DAILY CONVERSION PRICE" shall have the meaning set forth in Section
6(b)(ii) hereof.
"DAILY REDEMPTION AMOUNT" means the Monthly Redemption Amount
divided by 18 Trading Days.
2
"DAILY REDEMPTION MAXIMUM" means the greater of (i) $27,778 and (ii)
the product of (a) 25% and (b) the trading volume on the applicable Daily
Redemption Date and (c) the VWAP on the applicable Daily Redemption Date.
"DAILY REDEMPTION PERIOD" means the 18 Trading Day period during
which the Company may elect to pursue a daily redemption.
"DILUTIVE ISSUANCE" shall have the meaning set forth in Section 5(b)
hereof.
"EFFECTIVENESS PERIOD" shall have the meaning given to such term in
the Registration Rights Agreement.
"EQUITY CONDITIONS" shall mean, during the period in question, (i)
the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Conversion
Notices, if any, (ii) all liquidated damages and other amounts owing in
respect of the Debentures shall have been paid; (iii) there is an
effective Registration Statement pursuant to which the Holder is permitted
to utilize the prospectus thereunder to resell all of the shares issuable
pursuant to the Transaction Documents (and the Company believes, in good
faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on the Trading
Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company
believes, in good faith, that trading of the Common Stock on a Trading
Market will continue uninterrupted for the foreseeable future), (v) there
is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the shares issuable
pursuant to the Transaction Documents, (vi) there is then existing no
Event of Default or event which, with the passage of time or the giving of
notice, would constitute an Event of Default, (vii) all of the shares
issued or issuable pursuant to the transaction documents in full, ignoring
for such purposes any conversion or exercise limitation therein, would not
violate the limitation set forth in Section 4(c)(ii), and (viii) no public
announcement of a pending or proposed Fundamental Transaction or
acquisition transaction has occurred that has not been consummated.
"EVENT OF DEFAULT" shall have the meaning set forth in Section 8.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FUNDAMENTAL TRANSACTION" shall have the meaning set forth in
Section 5(e)(iii) hereof.
"FORCED CONVERSION NOTICE" shall have the meaning set forth in
Section 6(c).
"FORCE CONVERSION NOTICE DATE" shall have the meaning set forth in
Section 6(c).
"INTEREST CONVERSION RATE" means 93% of the average of the 20 VWAPs
immediately prior to the applicable Interest Payment Date.
3
"LATE FEES" shall have the meaning set forth in section 2(d).
"MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal the sum
of (i) the greater of: (A) 110% of the principal amount of Debentures to
be prepaid, plus all accrued and unpaid interest thereon, or (B) the
principal amount of Debentures to be prepaid, plus all other accrued and
unpaid interest hereon, divided by the Conversion Price on (x) the date
the Mandatory Prepayment Amount is demanded or otherwise due or (y) the
date the Mandatory Prepayment Amount is paid in full, whichever is less,
multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount is
demanded or otherwise due or (y) the date the Mandatory Prepayment Amount
is paid in full, whichever is greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect of such Debentures.
"MONTHLY REDEMPTION" shall mean the redemption of the Debenture
pursuant to Section 6(b) hereof.
"MONTHLY REDEMPTION AMOUNT" shall mean, as to a Monthly Redemption,
the dollar amount specified in the Company's Redemption Notice, in the
aggregate among all Holders.
"MONTHLY REDEMPTION PERIOD" shall mean the 18 Trading Days
immediately following a Redemption Date.
"OPTIONAL REDEMPTION" shall have the meaning set forth in Section
6(a).
"OPTIONAL REDEMPTION NOTICE" shall have the meaning set forth in
Section 6(a).
"OPTIONAL REDEMPTION AMOUNT" shall mean the sum of (i) 130% of the
principal amount of the Debenture then outstanding and (ii) accrued but
unpaid interest.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of
the Debentures regardless of the number of transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence
such Debenture.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement, dated
as of August __, 2004, to which the Company and the original Holder are
parties, as amended, modified or supplemented from time to time in
accordance with its terms.
4
"REDEMPTION DATE" means the 1st Trading Day of each month,
commencing on the first calendar month after the Effective Date and ending
on the earlier of (i) the 20 month anniversary of such date, (ii) the full
redemption or conversion of this Debenture or (iii) the release of all of
the Collateral.
"REDEMPTION NOTICE" shall mean the notice from the Company to the
Holder of its option to exercise a Monthly Redemption, via facsimile
transmission in accordance with Section 5.4 of the Purchase Agreement as
to the Monthly Redemption Amount.
"REDEMPTION PERIOD" means the period commencing on the first Trading
Day of the first calendar month after the Effective Date and ending on the
earlier of (i) the 20 month anniversary of such date, (ii) the full
redemption of this Debenture or (iii) the release of all of the
Collateral.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"REGISTRATION STATEMENT" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement, covering
among other things the resale of the Conversion Shares and naming the
Holder as a "selling stockholder" thereunder.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"SETTLEMENT DATE" shall have the meaning as set forth in Section
6(b) hereof.
"SETTLEMENT PERIOD" shall have the meaning as set forth in Section
6(b)(iv) hereof.
"SETTLEMENT STATEMENT" shall have the meaning as set forth in
Section 6(b) hereof.
"SUBSIDIARY" shall have the meaning given to such term in the
Purchase Agreement.
"THRESHOLD PERIOD" shall have the meaning given to such term in
Section 6(c).
"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 SmallCap Market, the American Stock Exchange, the New York
Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.
"TRANSACTION DOCUMENTS" shall have the meaning set forth in the
Purchase Agreement.
5
"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, 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 the
Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices),
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 Purchasers holding a majority of the principal amount of
Debentures then outstanding.
SECTION 2.INTEREST.
a) PAYMENT OF INTEREST IN CASH OR COMMON STOCK. The Company shall
pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 6% per
annum, payable quarterly on March 31, June 30, September 30 and December
31, beginning on the first such date after the Original Issue Date and on
each Conversion Date (as to that principal amount then being converted),
on each Redemption Date (as to that principal amount then being redeemed)
and on the Maturity Date (except that, if any such date is not a Business
Day, then such payment shall be due on the next succeeding Business Day)
(each such date, an "INTEREST PAYMENT DATE"), in cash or shares of Common
Stock at the Interest Conversion Rate, or a combination thereof; PROVIDED,
HOWEVER, payment in shares of Common Stock may only occur if during the 20
Trading Days immediately prior to the applicable Interest Payment Date all
of the Equity Conditions have been met and the Company shall have given
the Holder notice in accordance with the notice requirements set forth
below.
b) COMPANY'S ELECTION TO PAY INTEREST IN COMMON STOCK. Subject to
the terms and conditions herein, the decision whether to pay interest
hereunder in shares of Common Stock or cash shall be at the discretion of
the Company. Not less than 20 Trading Days prior to each Interest Payment
Date, the Company shall provide the Holder with written notice of its
election to pay interest hereunder either in cash or shares of Common
Stock (the Company may indicate in such notice that the election contained
in such notice shall continue for later periods until revised). Within 20
Trading Days prior to an Interest Payment Date, the Company's election
(whether specific to an Interest Payment Date or continuous) shall be
irrevocable as to such Interest Payment Date. Subject to the
aforementioned conditions, failure to timely provide such written notice
shall be deemed an election by the Company to pay the interest on such
Interest Payment Date in cash.
6
c) INTEREST CALCULATIONS. Interest shall be calculated on the basis
of a 360-day year and shall accrue daily commencing on the Original Issue
Date until payment in full of the principal sum, together with all accrued
and unpaid interest and other amounts which may become due hereunder, has
been made. Payment of interest in shares of Common Stock shall otherwise
occur pursuant to Section 4(d)(ii) and only for purposes of the payment of
interest in shares, the Interest Payment Date shall be deemed the
Conversion Date. Interest shall cease to accrue with respect to any
principal amount converted, provided that the Company in fact delivers the
Conversion Shares within the time period required by Section 4(d)(ii).
Interest hereunder will be paid to the Person in whose name this Debenture
is registered on the records of the Company regarding registration and
transfers of Debentures (the "DEBENTURE REGISTER"). Except as otherwise
provided herein, if at any time the Company pays interest partially in
cash and partially in shares of Common Stock, then such payment shall be
distributed ratably among the Holders based upon the principal amount of
Debentures held by each Holder.
d) LATE FEE. All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at the rate of 18% per annum (or such
lower maximum amount of interest permitted to be charged under applicable
law) ("LATE FEE") which will accrue daily, from the date such interest is
due hereunder through and including the date of payment. Notwithstanding
anything to the contrary contained herein, if on any Interest Payment Date
the Company has elected to pay interest in Common Stock and is not able to
pay accrued interest in the form of Common Stock because it does not then
satisfy the conditions for payment in the form of Common Stock set forth
above, then, at the option of the Holder, the Company, in lieu of
delivering either shares of Common Stock pursuant to this Section 2 or
paying the regularly scheduled cash interest payment, shall deliver,
within three Trading Days of each applicable Interest Payment Date, an
amount in cash equal to the product of the number of shares of Common
Stock otherwise deliverable to the Holder in connection with the payment
of interest due on such Interest Payment Date and the highest VWAP during
the period commencing on the Interest Payment Date and ending on the
Trading Day prior to the date such payment is made.
e) PREPAYMENT. Except as otherwise set forth in this Debenture,
including, without limitation, Section 5(b), the Company may not prepay
any portion of the principal amount of this Debenture without the prior
written consent of the Holder.
SECTION 3. REGISTRATION OF TRANSFERS AND EXCHANGES.
a) DIFFERENT DENOMINATIONS. This Debenture is exchangeable for an
equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same. No
service charge will be made for such registration of transfer or exchange.
b) INVESTMENT REPRESENTATIONS. This Debenture has been issued
subject to certain investment representations of the original Holder set
forth in the Purchase Agreement and may be transferred or exchanged only
in compliance with the Purchase Agreement and applicable federal and state
securities laws and regulations.
7
c) RELIANCE ON DEBENTURE REGISTER. Prior to due presentment to the
Company for transfer of this Debenture, the Company and any agent of the
Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose
of receiving payment as herein provided and for all other purposes,
whether or not this Debenture is overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.
SECTION 4. CONVERSION.
a) VOLUNTARY CONVERSION. At any time after the Original Issue Date
until this Debenture is no longer outstanding, this Debenture shall be
convertible into shares of Common Stock at the option of the Holder, in
whole or in part at any time and from time to time (subject to the
limitations on conversion set forth in Section 4(c)(i) hereof). The Holder
shall effect conversions by delivering to the Company the form of Notice
of Conversion attached hereto as ANNEX A (a "NOTICE OF CONVERSION"),
specifying therein the principal amount of Debentures to be converted and
the date on which such conversion is to be effected (a "CONVERSION DATE").
If no Conversion Date is specified in a Notice of Conversion, the
Conversion Date shall be the date that such Notice of Conversion is
provided hereunder. To effect conversions hereunder, the Holder shall not
be required to physically surrender Debentures to the Company unless the
entire principal amount of this Debenture plus all accrued and unpaid
interest thereon has been so converted. Conversions hereunder shall have
the effect of lowering the outstanding principal amount of this Debenture
in an amount equal to the applicable conversion. The Holder and the
Company shall maintain records showing the principal amount converted and
the date of such conversions. The Company shall deliver any objection to
any Notice of Conversion within 1 Business Day of receipt of such notice.
In the event of any dispute or discrepancy, the records of the Holder
shall be controlling and determinative in the absence of manifest error.
The Holder and any assignee, by acceptance of this Debenture, acknowledge
and agree that, by reason of the provisions of this paragraph, following
conversion of a portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture may be less than the amount stated on
the face hereof.
b) CONVERSION PRICE. The conversion price in effect on any
Conversion Date shall be equal to $1.67 (subject to adjustment herein)(the
"CONVERSION PRICE").
8
c) CONVERSION LIMITATIONS.
i. HOLDER'S RESTRICTION ON CONVERSION. Other than in
connection with conversions occurring upon and in connection with
the Company's exercise of its rights pursuant to Sections 6(b) and
6(c), the Company shall not effect any conversion of this Debenture,
and the Holder shall not have the right to convert any portion of
this Debenture, pursuant to Section 4(a) or otherwise, 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 4.99% 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 this Debenture 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 portion of this
Debenture beneficially owned by the Holder or any of its affiliates
and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Company (including, without
limitation, any other Debentures or 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. Except as set forth in the preceding sentence, for
purposes of this Section 4(c)(i), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act. To
the extent that the limitation contained in this section applies,
the determination of whether this Debenture is convertible (in
relation to other securities owned by the Holder) and of which a
portion of this Debenture is convertible shall be in the sole
discretion of such Holder. To ensure compliance with this
restriction, the Holder will be deemed to represent to the Company
each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this
paragraph and the Company shall have no obligation to verify or
confirm the accuracy of such determination. For purposes of this
Section 4(c)(i), 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 (x) the Company's most recent
Form 10-QSB or Form 10-KSB, as the case may be, (y) a more recent
public announcement by the Company or (z) any other 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 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
this Debenture, by the Holder or its affiliates since the date as of
which such number of outstanding shares of Common Stock was
reported.
9
ii. HOLDER'S RESTRICTION ON CONVERSION. The Company shall not
effect any conversion of this Debenture, and the Holder shall not
have the right to convert any portion of this Debenture, pursuant to
Section 4(a) or otherwise, 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 9.99% 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 this Debenture 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 portion of this Debenture
beneficially owned by the Holder or any of its affiliates and (B)
exercise or conversion of the unexercised or nonconverted portion of
any other securities of the Company (including, without limitation,
any other Debentures or 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. Except as
set forth in the preceding sentence, for purposes of this Section
4(c)(ii), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Exchange Act. To the extent that the
limitation contained in this section applies, the determination of
whether this Debenture is convertible (in relation to other
securities owned by the Holder) and of which a portion of this
Debenture is convertible shall be in the sole discretion of such
Holder. To ensure compliance with this restriction, the Holder will
be deemed to represent to the Company each time it delivers a Notice
of Conversion that such Notice of Conversion has not violated the
restrictions set forth in this paragraph and the Company shall have
no obligation to verify or confirm the accuracy of such
determination. For purposes of this Section 4(c)(ii), 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 (x) the Company's most recent Form 10-QSB or Form
10-KSB, as the case may be, (y) a more recent public announcement by
the Company or (z) any other 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 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 this Debenture, by the Holder
or its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported.
d) MECHANICS OF CONVERSION
i. CONVERSION SHARES ISSUABLE UPON CONVERSION OF PRINCIPAL
AMOUNT. The number of shares of Common Stock issuable upon a
conversion hereunder shall be determined by the quotient obtained by
dividing (x) the outstanding principal amount of this Debenture to
be converted by (y) the Conversion Price.
ii. DELIVERY OF CERTIFICATE UPON CONVERSION. Not later than
five Trading Days after any Conversion Date, the Company will
deliver to the Holder (A) a certificate or certificates representing
the Conversion Shares which 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 Debentures (including, if so timely
elected by the Company, shares of Common Stock representing the
payment of accrued interest) and (B) a bank check in the amount of
accrued and unpaid interest (if the Company is required to pay
accrued interest in cash). The Company shall deliver any certificate
or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation or
another established clearing corporation performing similar
functions.
10
iii. FAILURE TO DELIVER CERTIFICATES. 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 fifth
Trading Day after a Conversion Date, the Holder shall be entitled 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 principal amount of Debentures
tendered for conversion.
iv. PARTIAL LIQUIDATED DAMAGES. Subject to Section 4.10 of the
Purchase Agreement, if the Company fails for any reason to deliver
to the Holder such certificate or certificates pursuant to Section
4(d)(ii) by the fifth Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and
not as a penalty, for each $1000 of principal amount being
converted, $10 per Trading Day for each Trading Day after such fifth
Trading Day until such certificates are delivered. The Company's
obligations to issue and deliver the Conversion Shares upon
conversion of this Debenture 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; PROVIDED, HOWEVER, such delivery shall not
operate as a waiver by the Company of any such action the Company
may have against the Holder. In the event a Holder of this Debenture
shall elect to convert any or all of the outstanding principal
amount hereof, the Company may not refuse conversion based on any
claim that the 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
Debenture 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 principal amount of this Debenture 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. Nothing herein shall limit a Holder's
right to pursue actual damages or declare an Event of Default
pursuant to Section 8 herein for the Company's failure to deliver
Conversion Shares within the period specified herein and such Holder
shall have the right to pursue all remedies available to it at law
or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such
rights shall not prohibit the Holders from seeking to enforce
damages pursuant to any other Section hereof or under applicable
law.
11
v. FAILURE TO TIMELY DELIVER CERTIFICATES UPON CONVERSION.
Subject to Section 4.10 of the Purchase Agreement, in addition to
any other rights available to the Holder, if the Company fails for
any reason to deliver to the Holder such certificate or certificates
pursuant to Section 4(d)(ii) by the seventh Trading Day after the
Conversion Date, and if after such seventh Trading Day the Holder is
required by its brokerage firm to purchase (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
anticipated receiving upon such conversion (a "BUY-IN"), then the
Company shall (A) pay in cash to the Holder (in addition to any
remedies available to or elected by 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 anticipated receiving from the conversion at issue
multiplied by (2) the actual sale price of the Common Stock at the
time of the sale (including brokerage commissions, if any) giving
rise to such purchase obligation and (B) at the option of the
Holder, either reissue Debentures in principal amount equal to the
principal amount of the attempted conversion or deliver to the
Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its delivery
requirements under Section 4(d)(ii). 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 Debentures
with respect to which the actual sale price of the Conversion Shares
at the time of the sale (including brokerage commissions, if any)
giving rise to such purchase obligation was a total of $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. Notwithstanding anything contained herein
to the contrary, if a Holder requires the Company to make payment in
respect of a Buy-In for the failure to timely deliver certificates
hereunder and the Company timely pays in full such payment, the
Company shall not be required to pay such Holder liquidated damages
under Section 4(d)(iv) in respect of the certificates resulting in
such Buy-In.
vi. 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 Debentures
and payment of interest on the Debenture, 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 4(d)) upon the
conversion of the outstanding principal amount of the Debentures and
payment of interest hereunder. 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 Registration Statement is then effective under the Securities
Act, registered for public sale in accordance with such Registration
Statement.
12
vii. FRACTIONAL SHARES. Upon a conversion hereunder the
Company shall not be required to issue stock certificates
representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the VWAP at such time. If the Company
elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
viii. TRANSFER TAXES. The issuance of certificates for shares
of the Common Stock on conversion of the Debentures 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 Debentures 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 5.CERTAIN ADJUSTMENTS.
a) STOCK DIVIDENDS AND STOCK SPLITS. If the Company, at any time
while the Debentures are 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
Debenture, including as interest thereon), (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 Price 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.
13
b) SUBSEQUENT EQUITY SALES. If the Company or any Subsidiary
thereof, as applicable, at any time while Debentures are outstanding,
shall offer, sell, grant any option to purchase or offer, sell or grant
any right to reprice its securities, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any
Person to acquire shares of Common Stock, at an effective price per share
less than the then Conversion Price ("DILUTIVE ISSUANCE"), as adjusted
hereunder (if the holder of the Common Stock or Common Stock Equivalents
so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange
prices or otherwise, or due to warrants, options or rights per share which
is issued in connection with such issuance, be entitled to receive shares
of Common Stock at an effective price per share which is less than the
Conversion Price, such issuance shall be deemed to have occurred for less
than the Conversion Price), then from the Original Issue Date until the 12
month anniversary of the Effective Date, the Conversion Price shall be
reduced to equal the effective conversion, exchange or purchase price for
such Common Stock or Common Stock Equivalents (including any reset
provisions thereof) at issue and from the 12 month anniversary of the
Effective Date until this Debenture is no longer outstanding, the
Conversion Price shall be adjusted downward, but never upward, by
multiplying the Conversion Price by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately prior to the
Dilutive Issuance plus the number of shares of Common Stock which the
offering price for such Dilutive Issuance would purchase at the Conversion
Price, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to the Dilutive
Issuance plus the number of shares of Common Stock so issued or issuable
in connection with the Dilutive Issuance; PROVIDED, HOWEVER, from the 31
month anniversary of the Original Issue Date until the 36 month
anniversary of the Original Issue Date, if the Company uses all of the
proceeds from a Dilutive Issuance to redeem the entire remaining
outstanding principal amount of the Debentures, then the Holder of this
Debenture shall not receive an adjustment to the Conversion Price as
provided in this Section. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. The Company shall
notify the Holder in writing, no later than the business day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
section, indicating therein the applicable issuance price, or of
applicable reset price, exchange price, conversion price and other pricing
terms.
14
c) PRO RATA DISTRIBUTIONS. If the Company, at any time while
Debentures are outstanding, shall distribute to all holders of Common
Stock (and not to Holders) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security, then in each
such case the Conversion Price shall be determined by multiplying such
Conversion Price 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.
d) CALCULATIONS. All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 5, the number of shares of Common Stock
outstanding as of a given date shall be the sum of the number of shares of
Common Stock (excluding treasury shares, if any) outstanding.
e) NOTICE TO HOLDERS.
i. ADJUSTMENT TO CONVERSION PRICE. Whenever the Conversion
Price is adjusted pursuant to any of this Section 5, the Company
shall promptly mail to each Holder a notice setting forth the
Conversion Price 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).
15
ii. NOTICE TO ALLOW CONVERSION BY HOLDER. If (A) the Company
shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or 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, any consolidation or merger to
which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory
share exchange whereby the Common Stock is converted into other
securities, cash or property; (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 Debentures, and shall cause to be
mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 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,
consolidation, merger, sale, transfer or share exchange 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, consolidation, merger, sale, transfer or share
exchange; 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. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of
the event triggering such notice.
iii. FUNDAMENTAL TRANSACTION. If, at any time while this
Debenture 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 (not including a reverse or forward stock split) 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 Debenture, 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
Debenture 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 issue to the Holder a new debenture consistent with the
foregoing provisions and evidencing the Holder's right to convert
such debenture into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity
to comply with the provisions of this paragraph (c) and insuring
that this Debenture (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a
Fundamental Transaction. In the event of a Fundamental Transaction,
then at the request of the Holder delivered before the 90th day
after such Fundamental Transaction, the Company (or any such
successor or surviving entity) will purchase the outstanding
principal amount of this Debenture from the Holder for a purchase
price, payable in cash within five Trading Days after such request
(or, if later, on the effective date of the Fundamental
Transaction), equal to the principal amount of the Debenture then
outstanding plus any accrued but unpaid interest and other fees
owing thereon on such date.
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iv. EXEMPT ISSUANCE. Notwithstanding the foregoing, no
adjustment will be made under this Section 5 in respect of an Exempt
Issuance.
SECTION 6. REDEMPTION AND FORCED CONVERSION.
a) OPTIONAL REDEMPTION AT ELECTION OF COMPANY. Subject to the
provisions of this Section 6, the Company may deliver a notice to the
Holders (an "OPTIONAL REDEMPTION NOTICE" and the date such notice is
deemed delivered hereunder, the "OPTIONAL REDEMPTION NOTICE DATE") of its
irrevocable election to redeem all of the then outstanding Debentures, for
an amount, in cash, equal to the Optional Redemption Amount on the 30th
Trading Day following the Optional Redemption Notice Date (such date, the
"OPTIONAL REDEMPTION DATE" and such redemption, the "OPTIONAL
REDEMPTION"). The Optional Redemption Amount is due in full on the
Optional Redemption Date. The Company may only effect an optional
redemption if during the period commencing on the Optional Redemption
Notice Date through to the Optional Redemption Date, each of the Equity
Conditions shall have been met. If any of the Equity Conditions shall
cease to be satisfied at any time during the required period, then the
Holder may elect to nullify the Optional Redemption Notice in which case
the Optional Redemption Notice shall be null and void, AB INITIO. The
Company covenants and agrees that it will honor all Conversion Notices
tendered from the time of delivery of the Optional Redemption Notice
through the date all amounts owing thereon are due and paid in full. The
payment of cash pursuant to an Optional Redemption shall be made on the
Optional Redemption Date. If any portion of the cash payment for an
Optional Redemption shall not be paid by the Company by the respective due
date, interest shall accrue thereon at the rate of 18% per annum (or the
maximum rate permitted by applicable law, whichever is less) until the
payment of the Optional Redemption Amount plus all amounts owing thereon
is paid in full. Alternatively, if any portion of the Optional Redemption
Amount remains unpaid after such date, the Holders subject to such
redemption may elect, by written notice to the Company given at any time
thereafter, to invalidate AB INITIO such redemption, notwithstanding
anything herein contained to the contrary, and, with respect the failure
to honor an Optional Redemption only, the Company shall have no further
right to exercise such Optional Redemption Right. Notwithstanding anything
to the contrary in this Section 6, the Company's determination to redeem
in cash or shares of Common Stock shall be applied ratably among the
Holders based upon the principal amount of Debentures then outstanding and
held by such Holders.
17
b) MONTHLY REDEMPTION.
i. So long as any Collateral (as defined in the Custodial
Agreement) remains in the possession of the Custodian (as defined in
the Custodial Agreement), at any time during the Redemption Period,
on each Redemption Date, the Company may give each Holder notice of
its intention to redeem each Holder's Pro Rata Portion of the
Monthly Redemption Amount stated in such Redemption Notice plus
accrued but unpaid interest, the sum of all liquidated damages and
any other amounts then owing to such Holder in respect of the
Debenture; PROVIDED, HOWEVER, the aggregate of the Monthly
Redemption Amounts shall not exceed $10,000,000 for the Redemption
Period and any given Monthly Redemption Amount shall not exceed the
remaining amount of Collateral; PROVIDED, FURTHER, the Monthly
Redemption Amount shall be divided by 18 to produce the Daily
Redemption Amount and it is this Daily Redemption Amount that the
Company will pay to the Holder. For purposes of this subsection
only, "PRO RATA PORTION" is the ratio of (x) the Secured Proceeds
then attributable to such Purchaser pursuant to, and held in, the
Custodial Agreement and (y) the sum of all Secured Proceeds then
held by the Custodian.
ii. The Monthly Redemption Amount shall only be paid in shares
of Common Stock. The Conversion Shares issued pursuant to a
Redemption Notice shall have a conversion price equal to 93% of the
VWAP for each Trading Day during the Redemption Period (the "DAILY
CONVERSION PRICE"). The number of Conversion Shares issued in
connection with a Redemption Notice, subject to adjustment for any
stock dividend, stock split, stock combination or other similar
event affecting the Common Stock during such Monthly Redemption
Period, shall be the sum of the quotients of (a) the Daily
Redemption Amount for each Trading Day during the Monthly Redemption
Period divided by (b) the Daily Conversion Price for such Trading
Day, with the first such Trading Day occurring on the first Trading
Day after the receipt of the Redemption Notice.
iii. Notwithstanding anything herein to the contrary, each
Daily Redemption Amount shall not be greater than the Daily
Redemption Maximum, and if such Daily Redemption Amount is greater
than the Daily Redemption Maximum, then such Daily Redemption Amount
shall equal the Daily Redemption Maximum (aggregated among all
Holders).
18
iv. Each Monthly Redemption shall be settled as between the
Company and the Holder on every third Trading Day of a Monthly
Redemption Period beginning on the fourth Trading Day of such
Monthly Redemption Period (each such date a "SETTLEMENT DATE" and
the 3 Trading Days immediately prior to the Settlement Date,
"SETTLEMENT PERIOD"). On each Settlement Date, the Company and the
Holder shall execute a settlement statement (the "SETTLEMENT
Statement") setting forth the number of Conversion Shares issuable
in connection with the Trading Days during the Settlement Period and
each of the Daily Conversion Prices as to such Settlement Period.
Notwithstanding anything to the contrary hereunder, unless waived by
the Holder, partial settlement of a Monthly Redemption shall not
occur on the applicable Settlement Date if during the Settlement
Period and on the Settlement Date the Equity Conditions (other than
clause (viii) therein) have not been met. Promptly upon execution of
the Settlement Statement (but in no event more than 1 Trading day
after the execution of such Settlement Statement), the Conversion
Shares purchased pursuant to such Settlement Statement (that is, the
sum of the quotients calculated pursuant to clause (ii) above for
the Trading Days during such Settlement Period) shall be delivered
to the Depository Trust Company ("DTC") account of the Holder, or
its designees, as designated by the Holder in the Settlement
Statement, via DTC's Deposit Withdrawal Agent Commission system
("DWAC"). Upon the Company electronically delivering such Conversion
Shares to the DTC account of the Holder, or its designees, the
Holder shall, on the same day direct to the Custodian to wire
transfer immediately available funds to the Company's bank account,
as designated by the Company in the Settlement Statement, for the
portion of the aggregate Monthly Redemption Amount of such
Conversion Shares settled on such Settlement Date. The provisions of
Section 4(d) shall apply to any shares of Common Stock to be issued
on any Settlement Date in connection with a Monthly Redemption.
v. Any principal amount of Debenture voluntarily converted
pursuant to Section 4(a) during any Settlement Period until the
Settlement Date shall be first applied to the principal amount
subject to the Daily Redemption Amounts calculated during such
Settlement Period. The Holder shall indicate in its Notice of
Conversion, in its sole discretion, the specific Daily Redemption
Amounts during such Settlement Period to be reduced by virtue of
such conversions. Unless otherwise indicated in the Notice of
Conversion by the Holder, any principal amount of this Debenture
voluntarily converted during any Settlement Period which is in
excess of the Holder's Pro Rata Portion of the sum of the Daily
Redemption Amounts calculated during such Settlement Period shall be
applied against that portion of the principal amount which is not
collateralized by the Custodial Account (i.e. one-third of the
original principal amount). If no un-collateralized principal is
outstanding at a time when the Holder converts more than the sum of
the Daily Redemption Amounts during a pending Settlement Period,
such excess amount shall be applied to the end of the Redemption
Period, unless otherwise indicated in the Notice of Conversion by
the Holder. For purposes of clarification, so long as Collateral is
held by the Custodian on account of the Holder pursuant to Section
1(g) therein, a voluntary conversion during a Settlement Period
shall not reduce the amount of Collateral released by the Custodian
to the Company as a result of a Monthly Redemption.
19
vi. The payment of Common Stock pursuant to a Monthly
Redemption shall be made on the applicable Settlement Date.
c) FORCED CONVERSION. Notwithstanding anything herein to the
contrary, if after the Effective Date each of the VWAPs for any 20
consecutive Trading Days (such period commencing only after the Effective
Date, such period the "THRESHOLD PERIOD")) exceeds the then Conversion
Price by at least 150% (subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the Original Issue
Date), the Company may, within 2 Trading Days of the end of any such
period, deliver a notice to the Holder (a "FORCED CONVERSION NOTICE" and
the date such notice is received by the Holder, the "FORCED CONVERSION
NOTICE DATE") to cause the Holder to immediately convert all or part of
the then outstanding principal amount of Debentures pursuant to Section
4(a). The Company may only effect a Forced Conversion Notice if all of the
Equity Conditions are met through the applicable Threshold Period until
the date of the applicable Forced Conversion. Any Forced Conversion shall
be applied ratably to all Holders based on their initial purchases of
Debentures pursuant to the Purchase Agreement.
SECTION 7.NEGATIVE COVENANTS. So long as any portion of this Debenture is
outstanding, the Company will not and will not permit any of its Subsidiaries to
directly or indirectly amend its certificate of incorporation, bylaws or to her
charter documents so as to adversely affect any rights of the Holder.
SECTION 0.XXXXXX OF DEFAULT.
a) "EVENT OF DEFAULT", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court, or any order, rule or regulation of any
administrative or governmental body) that is not cured within 10 Trading
Days after receipt of notice from a Purchaser:
i. any default in the payment of (A) the principal of amount
of any Debenture, or (B) interest (including Late Fees) on, or
liquidated damages in respect of, any Debenture, in each case free
of any claim of subordination, as and when the same shall become due
and payable (whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default, solely in the case of an
interest payment or other default under clause (B) above, is not
cured, within 5 Trading Days;
20
ii. the Company shall fail to observe or perform any other
covenant or agreement contained in this Debenture or any of the
other Transaction Documents (other than a breach by the Company of
its obligations to deliver shares of Common Stock to the Holder upon
conversion which breach is addressed in clause (xii) below) which
failure is not cured, if possible to cure, within 5 Trading Days
after notice of such default sent by the Holder or by any other
Holder;
iii. a default or event of default (subject to any grace or
cure period provided for in the applicable agreement, document or
instrument) shall occur under (A) any of the Transaction Documents
other than the Debentures, or (B) any other material agreement,
lease, document or instrument to which the Company or any Subsidiary
is bound;
iv. any representation or warranty made herein, in any other
Transaction Document, in any written statement pursuant hereto or
thereto, or in any other report, financial statement or certificate
made or delivered to the Holder or any other holder of Debentures
shall be untrue or incorrect in any material respect as of the date
when made or deemed made;
v. (i) the Company or any of its Subsidiaries shall commence,
or there shall be commenced against the Company or any such
Subsidiary, a case under any applicable bankruptcy or insolvency
laws as now or hereafter in effect or any successor thereto, or the
Company or any Subsidiary commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the
Company or any Subsidiary thereof or (ii) there is commenced against
the Company or any Subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for a
period of 60 days; or (iii) the Company or any Subsidiary thereof is
adjudicated by a court of competent jurisdiction insolvent or
bankrupt; or any order of relief or other order approving any such
case or proceeding is entered; or (iv) the Company or any Subsidiary
thereof suffers any appointment of any custodian or the like for it
or any substantial part of its property which continues undischarged
or unstayed for a period of 60 days; or (v) the Company or any
Subsidiary thereof makes a general assignment for the benefit of
creditors; or (vi) the Company shall fail to pay, or shall state
that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or (vii) the Company or any Subsidiary
thereof shall call a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts;
or (viii) the Company or any Subsidiary thereof shall by any act or
failure to act expressly indicate its consent to, approval of or
acquiescence in any of the foregoing; or (ix) any corporate or other
action is taken by the Company or any Subsidiary thereof for the
purpose of effecting any of the foregoing;
21
vi. the Company or any Subsidiary shall default in any of its
obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under
which there may be issued, or by which there may be secured or
evidenced any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement of the Company in an
amount exceeding $500,000 and which default shall have a Material
Adverse Effect on the Company, whether such indebtedness now exists
or shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise become due and payable;
vii. the Common Stock shall not be eligible for quotation on
or quoted for trading on a Trading Market and shall not again be
eligible for and quoted or listed for trading thereon within five
Trading Days;
viii. the Company shall be a party to any Change of Control
Transaction, shall agree to sell or dispose of all or in excess of
51% of its assets in one or more transactions (whether or not such
sale would constitute a Change of Control Transaction) or shall
redeem or repurchase more than a de minimis number of its
outstanding shares of Common Stock or other equity securities of the
Company (other than redemptions of Conversion Shares and repurchases
of shares of Common Stock or other equity securities of departing
officers and directors of the Company; provided such repurchases
shall exceed $100,000, in the aggregate, for all officers and
directors during the term of this Debenture);
ix. a Registration Statement shall not have been declared
effective by the Commission on or prior to the Effectiveness Date
(as defined in the Registration Rights Agreement);
x. if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), the effectiveness of the
Registration Statement lapses for any reason or the Holder shall not
be permitted to resell Registrable Securities (as defined in the
Registration Rights Agreement) under the Registration Statement, in
either case, for more than 30 consecutive Trading Days or 60
non-consecutive Trading Days during any 12 month period; provided,
HOWEVER, that in the event that the Company is negotiating a merger,
consolidation, acquisition or sale of all or substantially all of
its assets or a similar transaction and in the written opinion of
counsel to the Company, the Registration Statement, would be
required to be amended to include information concerning such
transactions or the parties thereto that is not available or may not
be publicly disclosed at the time, the Company shall be permitted an
additional 10 consecutive Trading during any 12 month period
relating to such an event;
22
xi. an Event (as defined in the Registration Rights Agreement)
shall not have been cured to the satisfaction of the Holder prior to
the expiration of thirty days from the Event Date (as defined in the
Registration Rights Agreement) relating thereto (other than an Event
resulting from a failure of an Registration Statement to be declared
effective by the Commission on or prior to the Effectiveness Date
(as defined in the Registration Rights Agreement), which shall be
covered by Section 8(a)(ix);
xii. the Company shall fail for any reason to deliver
certificates to a Holder prior to the fifth Trading Day after a
Conversion Date pursuant to and in accordance with Section 4(d) or
the Company shall provide notice to the Holder, including by way of
public announcement, at any time, of its intention not to comply
with requests for conversions of any Debentures in accordance with
the terms hereof;
xiii. the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In (as defined herein) within five
Trading Days after notice thereof is delivered hereunder; or
xiv. the Company shall fail to have available a sufficient
number of authorized and unreserved shares of Common Stock to issue
to such Holder upon a conversion hereunder.
b) REMEDIES UPON EVENT OF DEFAULT. If any Event of Default occurs,
the full principal amount of this Debenture, together with interest and
other amounts owing in respect thereof, to the date of acceleration shall
become, at the Holder's election, immediately due and payable in cash. The
aggregate amount payable upon an Event of Default shall be equal to the
Mandatory Prepayment Amount. Commencing 5 days after the occurrence of any
Event of Default that results in the eventual acceleration of this
Debenture, the interest rate on this Debenture shall accrue at the rate of
18% per annum, or such lower maximum amount of interest permitted to be
charged under applicable law. All Debentures for which the full Mandatory
Prepayment Amount hereunder shall have been paid in accordance herewith
shall promptly be surrendered to or as directed by the Company. The Holder
need not provide and the Company hereby waives any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and
without expiration of any grace period enforce any and all of its rights
and remedies hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by Holder
at any time prior to payment hereunder and the Holder shall have all
rights as a Debenture holder until such time, if any, as the full payment
under this Section shall have been received by it. No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon.
23
SECTION 9. 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 set forth above,
facsimile number (000) 000-0000, ATTN: XXXXXX X. XXXXXXXX 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 Debenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of,
interest and liquidated damages (if any) on, this Debenture at the time,
place, and rate, and in the coin or currency, herein prescribed. This
Debenture ranks PARI PASSU with all other Debentures now or hereafter
issued under the terms set forth herein.
c) SECURITY INTEREST. This Debenture is a direct debt obligation of
the Company and, pursuant to the Custodial Agreement is secured by a first
priority perfected security interest in the Secured Proceeds (as defined
by the Custodial Agreement) held by the Custodian pursuant to the
Custodial Agreement for the benefit of the Holders.
d) LOST OR MUTILATED DEBENTURE. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute and
deliver, in exchange and substitution for and upon cancellation of a
mutilated Debenture, or in lieu of or in substitution for a lost, stolen
or destroyed Debenture, a new Debenture for the principal amount of this
Debenture so mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such Debenture, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory
to the Company.
24
e) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall be
governed by and construed and enforced in accordance with the internal
laws of the State of New York, without regard to the principles of
conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether
brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the
state and federal courts sitting in the City of New York, Borough of
Manhattan (the "NEW YORK Courts"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served in
any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under
this Debenture and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any
manner permitted by law. Each party hereto hereby irrevocably waives, to
the fullest extent permitted by applicable law, any and all right to trial
by jury in any legal proceeding arising out of or relating to this
Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this
Debenture, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys fees and other costs and
expenses incurred with the investigation, preparation and prosecution of
such action or proceeding.
f) WAIVER. Any waiver by the Company or the Holder of a breach of
any provision of this Debenture shall not operate as or be construed to be
a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the
Holder to insist upon strict adherence to any term of this Debenture on
one or more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that term
or any other term of this Debenture. Any waiver must be in writing.
25
g) SEVERABILITY. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other persons
and circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates applicable laws governing usury,
the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum permitted rate of interest. The Company
covenants (to the extent that it may lawfully do so) that it shall not at
any time insist upon, plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay, extension or usury law or other law
which would prohibit or forgive the Company from paying all or any portion
of the principal of or interest on this Debenture as contemplated herein,
wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this indenture, and the Company
(to the extent it may lawfully do so) hereby expressly waives all benefits
or advantage of any such law, and covenants that it will not, by resort to
any such law, hinder, delay or impeded the execution of any power herein
granted to the Holder, but will suffer and permit the execution of every
such as though no such law has been enacted.
h) 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.
i) HEADINGS. The headings contained herein are for convenience only,
do not constitute a part of this Debenture and shall not be deemed to
limit or affect any of the provisions hereof.
*********************
26
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
COMPOSITE TECHNOLOGY CORPORATION
By:__________________________________________
Name:
Title:
27
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 6% Secured
Convertible Debenture of Composite Technology Corporation, a Nevada corporation
(the "COMPANY"), due on August ___, 2007, into shares of common stock, par value
$0.001 per share (the "COMMON STOCK"), of 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 the 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.
By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its ownership of the Company's Common Stock
does not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery requirements
under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account
of Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
28
SCHEDULE 1
CONVERSION SCHEDULE
The 6% Secured Convertible Debentures due on August ___, 2007, in the aggregate
principal amount of $____________ issued by Composite Technology Corporation
This Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.
Dated:
==================================== ------------------------------ ========================== ------------------------------------
Aggregate Principal
Date of Conversion Amount Remaining
(or for first entry, Original Subsequent to Conversion
Issue Date) Amount of Conversion (or original Principal Company Attest
Amount)
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
------------------------------------ ------------------------------ -------------------------- ------------------------------------
==================================== ============================== ========================== ------------------------------------
29
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and entered
into as of August 17, 2004 among Composite Technology Corporation, a Nevada
corporation (the "COMPANY"), and the purchasers signatory hereto (each such
purchaser is a "PURCHASER" and all such purchasers are, collectively, the
"PURCHASERS").
This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Purchasers (the "PURCHASE
AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS
CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE DEFINED
IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN THE
PURCHASE AGREEMENT. As used in this Agreement, the following terms shall have
the following meanings:
"ADVICE" shall have the meaning set forth in Section 6(d).
"EFFECTIVENESS DATE" means, with respect to the initial Registration
Statement required to be filed hereunder, the 90th calendar day following
the Filing Date (the 150th calendar day in the case of a review by the
Commission) and, with respect to any additional Registration Statements
which may be required pursuant to Section 3(c), the 90th calendar day
following the applicable Filing Date (the 150th calendar day in the case
of a review of the Registration Statement by the Commission); PROVIDED,
HOWEVER, in the event the Company is notified by the Commission that one
of the above Registration Statements will not be reviewed or is no longer
subject to further review and comments, the Effectiveness Date as to such
Registration Statement shall be the fifth Trading Day following the date
on which the Company is so notified if such date precedes the dates
required above.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in Section
2(a).
"EVENT" shall have the meaning set forth in Section 2(b).
"EVENT DATE" shall have the meaning set forth in Section 2(b).
"FILING DATE" means, with respect to the initial Registration
Statement required hereunder, the 30th calendar day following the date
hereof and, with respect to any additional Registration Statements which
may be required pursuant to Section 3(c), the 30th day following the date
on which the Company first knows, or reasonably should have known that
such additional Registration Statement is required hereunder.
1
"HOLDER" or "HOLDERS" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section
5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in Section
5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of
the Registrable Securities covered by a Registration Statement, and all
other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or
deemed to be incorporated by reference in such Prospectus.
"REGISTRABLE SECURITIES" means (i) all of the shares of Common Stock
issuable upon conversion in full of the Debentures, (ii) all shares
issuable as interest on the Debentures assuming all interest payments are
made in shares of Common Stock and the Debentures are held until maturity,
(iii) all Warrant Shares, (iv) any securities issued or issuable upon any
stock split, dividend or other distribution recapitalization or similar
event with respect to the foregoing and (v) any additional shares issuable
in connection with any anti-dilution provisions in the Debentures.
"REGISTRATION STATEMENT" means the registration statements required
to be filed hereunder and any additional registration statements
contemplated by Section 3(c), including (in each case) the Prospectus,
amendments and supplements to such registration statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and
all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
"RULE 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same purpose and effect as such Rule.
"RULE 424" means Rule 424 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same purpose and effect as such Rule.
2
2. SHELF REGISTRATION
(a) On or prior to each Filing Date, the Company shall prepare and file
with the Commission a "Shelf" Registration Statement covering the resale of 150%
of the Registrable Securities on such Filing Date for an offering to be made on
a continuous basis pursuant to Rule 415. The Registration Statement shall be on
Form S-3 (except if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be on
another appropriate form in accordance herewith) and shall contain (unless
otherwise directed by the Holders) substantially the "Plan of Distribution"
attached hereto as ANNEX A. Subject to the terms of this Agreement, the Company
shall use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as possible after the filing
thereof, but in any event prior to the applicable Effectiveness Date, and shall
use its best efforts to keep such Registration Statement continuously effective
under the Securities Act until all Registrable Securities covered by such
Registration Statement have been sold or may be sold without volume restrictions
pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to
a written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent and the affected Holders (the "EFFECTIVENESS PERIOD").
The Company shall immediately notify the Holders of the effectiveness of the
Registration Statement on the same day that the Company receives notification of
the effectiveness from the Commission. Failure to so notify the Holder within 1
Trading Day of such notification shall be deemed an Event under Section 2(b).
(b) If: (i) a Registration Statement is not filed on or prior to its
Filing Date (if the Company files a Registration Statement without affording the
Holders the opportunity to review and comment on the same as required by Section
3(a), the Company shall not be deemed to have satisfied this clause (i)), or
(ii) the Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be "reviewed," or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 15 Trading Days after the receipt of comments
by or notice from the Commission that such amendment is required in order for a
Registration Statement to be declared effective, or (iv) a Registration
Statement filed or required to be filed hereunder is not declared effective by
the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously effective as
to all Registrable Securities for which it is required to be effective, or the
Holders are not permitted to utilize the Prospectus therein to resell such
Registrable Securities for 10 consecutive Trading Days but no more than an
aggregate of 15 Trading Days during any 12-month period (which need not be
consecutive Trading Days) (any such failure or breach being referred to as an
"EVENT", and for purposes of clause (i) or (iv) the date on which such Event
occurs, or for purposes of clause (ii) the date on which such five Trading Day
period is exceeded, or for purposes of clause (iii) the date which such 10
Trading Day period is exceeded, or for purposes of clause (v) the date on which
such 10 or 15 Trading Day period, as applicable, is exceeded being referred to
as "EVENT DATE"), then in addition to any other rights the Holders may have
hereunder or under applicable law, on each such Event Date and on each monthly
anniversary of each such Event Date (if the applicable Event shall not have been
cured by such date) until the applicable Event is cured, the Company shall pay
to each Holder an amount in cash, as partial liquidated damages and not as a
penalty, equal to 2.0% of the aggregate purchase price paid by such Holder
pursuant to the Purchase Agreement for any Registrable Securities then held by
such Holder. If the Company fails to pay any partial liquidated damages pursuant
to this Section in full within seven days after the date payable, the Company
will pay interest thereon at a rate of 18% per annum (or such lesser maximum
amount that is permitted to be paid by applicable law) to the Holder, accruing
daily from the date such partial liquidated damages are due until such amounts,
plus all such interest thereon, are paid in full. The partial liquidated damages
pursuant to the terms hereof shall apply on a daily pro-rata basis for any
portion of a month prior to the cure of an Event.
3
3. REGISTRATION PROCEDURES
In connection with the Company's registration obligations hereunder, the
Company shall:
(a) Not less than five Trading Days prior to the filing of each
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall, (i) furnish to each
Holder copies of all such documents proposed to be filed, which documents (other
than those incorporated or deemed to be incorporated by reference) will be
subject to the review of such Holders, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities shall reasonably object in good faith,
provided that, the Company is notified of such objection in writing no later
than 5 Trading Days after the Holders have been so furnished copies of such
documents. Each Holder agrees to furnish to the Company a completed
Questionnaire in the form attached to this Agreement as Annex B (a "SELLING
HOLDER QUESTIONNAIRE") not less than two Trading Days prior to the Filing Date
or by the end of the fourth Trading Day following the date on which such Holder
receives draft materials in accordance with this Section.
(b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to a Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep a Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and as so supplemented or amended to be filed pursuant
to Rule 424; (iii) respond as promptly as reasonably possible to any comments
received from the Commission with respect to a Registration Statement or any
amendment thereto and as promptly as reasonably possible provide the Holders
true and complete copies of all correspondence from and to the Commission
relating to a Registration Statement; and (iv) comply in all material respects
with the provisions of the Securities Act and the Exchange Act with respect to
the disposition of all Registrable Securities covered by a Registration
Statement during the applicable period in accordance (subject to the terms of
this Agreement) with the intended methods of disposition by the Holders thereof
set forth in such Registration Statement as so amended or in such Prospectus as
so supplemented.
4
(c) If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 90% of the number of shares of Common Stock then
registered in a Registration Statement, then the Company shall file as soon as
reasonably practicable but in any case prior to the applicable Filing Date, an
additional Registration Statement covering the resale by the Holders of not less
than 125% of the number of such Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold (which notice
shall, pursuant to clauses (ii) through (vi) hereof, be accompanied by an
instruction to suspend the use of the Prospectus until the requisite changes
have been made) as promptly as reasonably possible (and, in the case of (i)(A)
below, not less than five Trading Days prior to such filing) and (if requested
by any such Person) confirm such notice in writing no later than one Trading Day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to a Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders); and (C) with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to a
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission or any other federal or state governmental authority
of any stop order suspending the effectiveness of a Registration Statement
covering any or all of the Registrable Securities or the initiation of any
Proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; (v) of the occurrence of any event or passage of time that makes the
financial statements included in a Registration Statement ineligible for
inclusion therein or any statement made in a Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to a
Registration Statement, Prospectus or other documents so that, in the case of a
Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; and
(vi) the occurrence or existence of any pending corporate development with
respect to the Company that the Company believes may be material and that, in
the determination of the Company, makes it not in the best interest of the
Company to allow continued availability of the Registration Statement or
Prospectus; provided that any and all of such information shall remain
confidential to each Holder until such information otherwise becomes public,
unless disclosure by a Holder is required by law; PROVIDED, FURTHER,
notwithstanding each Holder's agreement to keep such information confidential,
the Holders make no acknowledgement that any such information is material,
non-public information.
5
(e) Use its commercially reasonable efforts to avoid the issuance of, or,
if issued, obtain the withdrawal of (i) any order suspending the effectiveness
of a Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(f) Furnish to each Holder, without charge, at least one conformed copy of
each such Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference to the extent requested by such Person, and
all exhibits to the extent requested by such Person (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.
(g) Promptly deliver to each Holder, without charge, as many copies of the
Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request in
connection with resales by the Holder of Registrable Securities. Subject to the
terms of this Agreement, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto, except after
the giving on any notice pursuant to Section 3(d).
(h) Prior to any resale of Registrable Securities by a Holder, use its
commercially reasonable efforts to register or qualify or cooperate with the
selling Holders in connection with the registration or qualification (or
exemption from the Registration or qualification) of such Registrable Securities
for the resale by the Holder under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder reasonably requests in
writing, to keep each registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and to do any and all other acts or
things reasonably necessary to enable the disposition in such jurisdictions of
the Registrable Securities covered by each Registration Statement; provided,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified, subject the Company to any
material tax in any such jurisdiction where it is not then so subject or file a
general consent to service of process in any such jurisdiction.
(i) If requested by the Holders, cooperate with the Holders to facilitate
the timely preparation and delivery of certificates representing Registrable
Securities to be delivered to a transferee pursuant to a Registration Statement,
which certificates shall be free, to the extent permitted by the Purchase
Agreement, of all restrictive legends, and to enable such Registrable Securities
to be in such denominations and registered in such names as any such Holders may
request.
6
(j) Upon the occurrence of any event contemplated by this Section 3, as
promptly as reasonably possible under the circumstances taking into account the
Company's good faith assessment of any adverse consequences to the Company and
its stockholders of the premature disclosure of such event, prepare a supplement
or amendment, including a post-effective amendment, to a Registration Statement
or a supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither a Registration Statement nor such
Prospectus will contain an 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. If the Company notifies the Holders in accordance with clauses
(ii) through (v) of Section 3(d) above to suspend the use of any Prospectus
until the requisite changes to such Prospectus have been made, then the Holders
shall suspend use of such Prospectus. The Company will use its commercially
reasonable efforts to ensure that the use of the Prospectus may be resumed as
promptly as is practicable. The Company shall be entitled to exercise its right
under this Section 3(j) to suspend the availability of a Registration Statement
and Prospectus, subject to the payment of partial liquidated damages pursuant to
Section 2(b), for a period not to exceed 60 days (which need not be consecutive
days) in any 12 month period.
(k) Comply with all applicable rules and regulations of the Commission.
(l) The Company may require each selling Holder to furnish to the Company
a certified statement as to the number of shares of Common Stock beneficially
owned by such Holder and, if required by the Commission, the person thereof that
has voting and dispositive control over the Shares. During any periods that the
Company is unable to meet its obligations hereunder with respect to the
registration of the Registrable Securities solely because any Holder fails to
furnish such information within three Trading Days of the Company's request, any
liquidated damages that are accruing at such time as to such Holder only shall
be tolled and any Event that may otherwise occur solely because of such delay
shall be suspended as to such Holder only, until such information is delivered
to the Company.
4. REGISTRATION EXPENSES. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Trading Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities or
Blue Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as requested by the Holders), (ii) printing
expenses (including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the
Registrable Securities included in a Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company, (v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder. In no event shall the Company be
responsible for any broker or similar commissions or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.
7
5. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents, brokers (including brokers who offer and sell
Registrable Securities as principal as a result of a pledge or any failure to
perform under a margin call of Common Stock), investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
reasonable attorneys' fees) and expenses (collectively, "LOSSES"), as incurred,
arising out of or relating to any untrue or alleged untrue statement of a
material fact contained in a Registration Statement, any Prospectus or any form
of prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (i) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in a
Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto (it being understood that the Holder has
approved Annex A hereto for this purpose) or (ii) in the case of an occurrence
of an event of the type specified in Section 3(d)(ii)-(vi), the use by such
Holder of an outdated or defective Prospectus after the Company has notified
such Holder in writing that the Prospectus is outdated or defective and prior to
the receipt by such Holder of the Advice contemplated in Section 6(d). The
Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding arising from or in connection with the transactions
contemplated by this Agreement of which the Company is aware.
8
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, to the extent arising out of or based solely upon: (x) such Holder's
failure to comply with the prospectus delivery requirements of the Securities
Act or (y) any untrue or alleged untrue statement of a material fact contained
in any Registration Statement, any Prospectus, or any form of prospectus, or in
any amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (i) to the extent, but only to the extent, that such untrue statement
or omission is contained in any information so furnished in writing by such
Holder to the Company specifically for inclusion in such Registration Statement
or such Prospectus or (ii) to the extent that (1) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement (it being understood that the Holder has approved Annex A hereto for
this purpose), such Prospectus or such form of Prospectus or in any amendment or
supplement thereto or (2) in the case of an occurrence of an event of the type
specified in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or
defective Prospectus after the Company has notified such Holder in writing that
the Prospectus is outdated or defective and prior to the receipt by such Holder
of the Advice contemplated in Section 6(e). In no event shall the liability of
any selling Holder hereunder be greater in amount than the dollar amount of the
net proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"INDEMNIFIED PArty"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the
Indemnifying Party shall have the right to assume the defense thereof, including
the employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all fees and expenses incurred in connection with defense
thereof; provided, that the failure of any Indemnified Party to give such notice
shall not relieve the Indemnifying Party of its obligations or liabilities
pursuant to this Agreement, except (and only) to the extent that it shall be
finally determined by a court of competent jurisdiction (which determination is
not subject to appeal or further review) that such failure shall have prejudiced
the Indemnifying Party.
9
An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall reasonably believe that a material conflict of interest is likely to exist
if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and the reasonable fees and expenses of one
separate counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
Subject to the terms of this Agreement, all reasonable fees and expenses
of the Indemnified Party (including reasonable fees and expenses to the extent
incurred in connection with investigating or preparing to defend such Proceeding
in a manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice thereof to the
Indemnifying Party; provided, that the Indemnified Party shall promptly
reimburse the Indemnifying Party for that portion of such fees and expenses
applicable to such actions for which such Indemnified Party is not entitled to
indemnification hereunder, determined based upon the relative faults of the
parties.
(d) CONTRIBUTION. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in this Agreement, any reasonable attorneys' or
other reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, except in the case of fraud by
such Holder.
10
The indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Company or by a Holder, of
any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) NO PIGGYBACK ON REGISTRATIONS. Except as set forth on SCHEDULE 6(B)
attached hereto, neither the Company nor any of its security holders (other than
the Holders in such capacity pursuant hereto) may include securities of the
Company in the Registration Statement other than the Registrable Securities. The
Company shall not file any other registration statements until the initial
Registration Statement required hereunder is declared effective by the
Commission, provided that this SECTION 6(B) shall not prohibit the Company from
filing amendments to registration statements already filed.
(c) COMPLIANCE. Each Holder covenants and agrees that it will comply with
the prospectus delivery requirements of the Securities Act as applicable to it
in connection with sales of Registrable Securities pursuant to the Registration
Statement.
(d) DISCONTINUED DISPOSITION. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of any event of the kind described in Section 3(d), such Holder
will forthwith discontinue disposition of such Registrable Securities under a
Registration Statement until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement, or until it is
advised in writing (the "ADVICE") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company will use its best efforts to ensure that the use of the Prospectus may
be resumed as promptly as it practicable. The Company agrees and acknowledges
that any periods during which the Holder is required to discontinue the
disposition of the Registrable Securities hereunder shall be subject to the
provisions of Section 2(b).
(e) PIGGY-BACK REGISTRATIONS. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Holder a written notice of
such determination and, if within fifteen days after the date of such notice,
any such Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, that, the Company shall not be
required to register any Registrable Securities pursuant to this Section 6(e)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act or that are the subject of a then effective Registration
Statement.
11
(f) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and Holders
of at least 66% of the then outstanding Registrable Securities. Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of Holders and that
does not directly or indirectly affect the rights of other Holders may be given
by Holders of all of the Registrable Securities to which such waiver or consent
relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.
(g) NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be delivered as set forth
in the Purchase Agreement.
(h) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. The Company may not assign its
rights or obligations hereunder without the prior written consent of all of the
Holders of the then-outstanding Registrable Securities. Each Holder may assign
their respective rights hereunder in the manner and to the Persons as permitted
under the Purchase Agreement.
(i) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as set forth on Schedule 6(b),
neither the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person that have not been satisfied in full.
(j) EXECUTION AND COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
12
(k) GOVERNING LAW. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be determined with the
provisions of the Purchase Agreement.
(l) CUMULATIVE REMEDIES. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law.
(m) SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(n) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(o) INDEPENDENT NATURE OF HOLDERS' OBLIGATIONS AND RIGHTS. The obligations
of each Holder hereunder are several and not joint with the obligations of any
other Holder hereunder, and no Holder shall be responsible in any way for the
performance of the obligations of any other Holder hereunder. Nothing contained
herein or in any other agreement or document delivered at any closing, and no
action taken by any Holder pursuant hereto or thereto, shall be deemed to
constitute the Holders as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Holders are in any way
acting in concert with respect to such obligations or the transactions
contemplated by this Agreement. Each Holder shall be entitled to protect and
enforce its rights, including without limitation the rights arising out of this
Agreement, and it shall not be necessary for any other Holder to be joined as an
additional party in any proceeding for such purpose.
********************
13
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
COMPOSITE TECHNOLOGY CORPORATION
By:__________________________________________
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
14
[SIGNATURE PAGE OF HOLDERS TO CPTC RRA]
Name of Investing Entity: ______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
[SIGNATURE PAGES CONTINUE]
15
PLAN OF DISTRIBUTION
Each Selling Stockholder (the "SELLING STOCKHOLDERS") of the common stock
("COMMON STOCK") of Composite Technology Corporation, a Nevada corporation (the
"COMPANY") and any of their pledgees, assignees and successors-in-interest may,
from time to time, sell any or all of their shares of Common Stock on the
Trading Market or any other stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o broker-dealers may agree with the Selling Stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or
otherwise; or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), if available, rather
than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each Selling Stockholder does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
16
In connection with the sale of our common stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder has
informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.
The Company is required to pay certain fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
Selling Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
17
ANNEX B
COMPOSITE TECHNOLOGY CORPORATION
SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE
The undersigned beneficial owner of common stock, par value $0.001 per
share (the "COMMON STOCK"), of Composite Technology Corporation, a Nevada
corporation (the "COMPANY"), (the "REGISTRABLE SECURITIES") understands that the
Company has filed or intends to file with the Securities and Exchange Commission
(the "COMMISSION") a registration statement on Form SB-2 (the "REGISTRATION
STATEMENT") for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the "SECURITIES ACT"), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement, dated as of
August 17, 2004 (the "REGISTRATION RIGHTS AGREEMENT"), among the Company and the
Purchasers named therein. A copy of the Registration Rights Agreement is
available from the Company upon request at the address set forth below. All
capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Registration Rights Agreement.
Certain legal consequences arise from being named as a selling
securityholder in the Registration Statement and the related prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel regarding the consequences of being
named or not being named as a selling securityholder in the Registration
Statement and the related prospectus.
NOTICE
The undersigned beneficial owner (the "SELLING SECURITYHOLDER") of
Registrable Securities hereby elects to include the Registrable Securities owned
by it and listed below in Item 3 (unless otherwise specified under such Item 3)
in the Registration Statement.
18
The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:
QUESTIONNAIRE
1. NAME.
(a) Full Legal Name of Selling Securityholder
-----------------------------------------------------------
(b) Full Legal Name of Registered Holder (if not the same as (a) above)
through which Registrable Securities Listed in Item 3 below are
held:
-----------------------------------------------------------
(c) Full Legal Name of Natural Control Person (which means a natural
person who directly you indirectly alone or with others has power to
vote or dispose of the securities covered by the questionnaire):
-----------------------------------------------------------
2. ADDRESS FOR NOTICES TO SELLING SECURITYHOLDER:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Telephone:
----------------------------------------------------------------------
Fax:
--------------------------------------------------------------------------
Contact Person:
-----------------------------------------------------------------
3. BENEFICIAL OWNERSHIP OF REGISTRABLE SECURITIES:
(a) Type and Principal Amount of Registrable Securities beneficially
owned:
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
19
4. BROKER-DEALER STATUS:
(a) Are you a broker-dealer?
Yes [_] No [_]
Note: If yes, the Commission's staff has indicated that you should be
identified as an underwriter in the Registration Statement.
(b) Are you an affiliate of a broker-dealer?
Yes [_] No [_]
(c) If you are an affiliate of a broker-dealer, do you certify that you
bought the Registrable Securities in the ordinary course of
business, and at the time of the purchase of the Registrable
Securities to be resold, you had no agreements or understandings,
directly or indirectly, with any person to distribute the
Registrable Securities?
Yes [_] No [_]
Note: If no, the Commission's staff has indicated that you should be
identified as an underwriter in the Registration Statement.
5. BENEFICIAL OWNERSHIP OF OTHER SECURITIES OF THE COMPANY OWNED BY THE
SELLING SECURITYHOLDER.
Except as set forth below in this Item 5, the undersigned is not the
beneficial or registered owner of any securities of the Company other than
the Registrable Securities listed above in Item 3.
(a) Type and Amount of Other Securities beneficially owned by the
Selling Securityholder:
--------------------------------------------------------------------
--------------------------------------------------------------------
20
6. RELATIONSHIPS WITH THE COMPANY:
Except as set forth below, neither the undersigned nor any of its
affiliates, officers, directors or principal equity holders (owners of 5%
of more of the equity securities of the undersigned) has held any position
or office or has had any other material relationship with the Company (or
its predecessors or affiliates) during the past three years.
State any exceptions here:
---------------------------------------------------------------------
---------------------------------------------------------------------
The undersigned agrees to promptly notify the Company of any inaccuracies
or changes in the information provided herein that may occur subsequent to the
date hereof at any time while the Registration Statement remains effective.
By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to Items 1 through 6 and the
inclusion of such information in the Registration Statement and the related
prospectus. The undersigned understands that such information will be relied
upon by the Company in connection with the preparation or amendment of the
Registration Statement and the related prospectus.
IN WITNESS WHEREOF the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.
Dated: Beneficial Owner:
--------------------- -------------------------
By:
--------------------------------------
Name:
Title:
PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:
21
EXHIBIT C
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
COMMON STOCK PURCHASE WARRANT
To Purchase __________ Shares of Common Stock of
COMPOSITE TECHNOLOGY CORPORATION
THIS COMMON STOCK PURCHASE WARRANT (the "WARRANT") certifies that, for
value received, _____________ (the "Holder"), is entitled, upon the terms and
subject to the limitations on exercise and the conditions hereinafter set forth,
at any time on or after the date hereof (the "INITIAL EXERCISE DATE") and on or
prior to the close of business on the four year anniversary of the Initial
Exercise Date (the "TERMINATION DATE") but not thereafter, to subscribe for and
purchase from Composite Technology Corporation, a Nevada corporation (the
"COMPANY"), up to ______ shares (the "WARRANT SHARES") of Common Stock, par
value $0.001 per share, of the Company (the "COMMON STOCK"). The purchase price
of one share of Common Stock (the "EXERCISE PRICE") under this Warrant shall be
$____1, subject to adjustment hereunder.
SECTION 1.DEFINITIONS. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth in that certain Securities Purchase
Agreement (the "PURCHASE AGREEMENT"), dated August 17, 2004, among the Company
and the purchasers signatory thereto.
SECTION 2.EXERCISE.
a) EXERCISE OF WARRANT. Exercise of the purchase rights represented
by this Warrant may be made at any time or times on or after the Initial
Exercise Date and on or before the Termination Date by delivery to the
Company of a duly executed facsimile copy of the Notice of Exercise Form
annexed hereto (or such other office or agency of the Company as it may
designate by notice in writing to the registered Holder at the address of
such Holder appearing on the books of the Company); PROVIDED, HOWEVER,
within 5 Trading Days of the date said Notice of Exercise is delivered to
the Company, the Holder shall have surrendered this Warrant to the Company
and the Company shall have received payment of the aggregate Exercise
Price of the shares thereby purchased by wire transfer or cashier's check
drawn on a United States bank.
--------------
1 50% of the Warrants shall have an exercise price equal to $1.75 and 50% of the
Warrants shall have an exercise price equal to $1.82.
1
b) EXERCISE PRICE. The Exercise Price of each share of Common Stock
under this Warrant shall be $__________2, subject to adjustment hereunder.
c) CASHLESS EXERCISE. If at any time after one year from the date of
issuance of this Warrant there is no effective Registration Statement
registering the resale of the Warrant Shares by the Holder, then this
Warrant may also be exercised at such time by means of a "cashless
exercise" in which the Holder shall be entitled to receive a certificate
for the number of Warrant Shares equal to the quotient obtained by
dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day immediately preceding the date
of such election;
(B) = the Exercise Price of this Warrant, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise of this
Warrant in accordance with the terms of this Warrant by means
of a cash exercise rather than a cashless exercise.
d) EXERCISE LIMITATIONS.
i. HOLDER'S RESTRICTIONS. The Holder shall not have the
right to exercise any portion of this Warrant, pursuant to
Section 2(c) or otherwise, to the extent that after giving
effect to such issuance after exercise, the Holder (together
with the Holder's affiliates), as set forth on the applicable
Notice of Exercise, would beneficially own in excess of 4.99%
of the number of shares of the Common Stock outstanding
immediately after giving effect to such issuance. 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 exercise of this Warrant 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
--------------
2 50% of the Warrants shall have an exercise price equal to 115% of the Market
Price and 50% of the Warrants shall have an exercise price equal to 120% of the
Market Price.
2
issuable upon (A) exercise of the remaining, nonexercised
portion of this Warrant beneficially owned by the Holder or
any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any other
Debentures or 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.
Except as set forth in the preceding sentence, for purposes of
this Section 2(d), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act, it being
acknowledged by Holder that the Company is not representing to
Holder that such calculation is in compliance with Section
13(d) of the Exchange Act and Holder is solely responsible for
any schedules required to be filed in accordance therewith. To
the extent that the limitation contained in this Section 2(d)
applies, the determination of whether this Warrant is
exercisable (in relation to other securities owned by the
Holder) and of which a portion of this Warrant is exercisable
shall be in the sole discretion of such Holder, and the
submission of a Notice of Exercise shall be deemed to be such
Holder's determination of whether this Warrant is exercisable
(in relation to other securities owned by such Holder) and of
which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the
Company shall have no obligation to verify or confirm the
accuracy of such determination. For purposes of this Section
2(d), 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 (x) the Company's most
recent Form 10-Q or Form 10-K, as the case may be, (y) a more
recent public announcement by the Company or (z) any other
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 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 this Warrant,
by the Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was
reported.
ii. Intentionally Omitted.
e) MECHANICS OF EXERCISE.
i. AUTHORIZATION OF WARRANT SHARES. The Company
covenants that all Warrant Shares which may be issued upon the
exercise of the purchase rights represented by this Warrant
will, upon exercise of the purchase rights represented by this
Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges in
respect of the issue thereof (other than taxes in respect of
any transfer occurring contemporaneously with such issue). The
Company covenants that during the period the Warrant is
outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the
issuance of the Warrant Shares upon the exercise of any
purchase rights under this Warrant. The Company further
covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty
of executing stock certificates to execute and issue the
necessary certificates for the Warrant Shares upon the
exercise of the purchase rights under this Warrant. The
Company will take all such reasonable action as may be
necessary to assure that such Warrant Shares may be issued as
provided herein without violation of any applicable law or
regulation, or of any requirements of the Trading Market upon
which the Common Stock may be listed.
3
ii. DELIVERY OF CERTIFICATES UPON EXERCISE. Certificates
for shares purchased hereunder shall be delivered to the
Holder within 5 Trading Days from the delivery to the Company
of the Notice of Exercise Form, surrender of this Warrant and
payment of the aggregate Exercise Price as set forth above
("WARRANT SHARE DELIVERY DATE"). This Warrant shall be deemed
to have been exercised on the date the Exercise Price is
received by the Company. The Warrant Shares shall be deemed to
have been issued, and Holder or any other person so designated
to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the
Exercise Price and all taxes required to be paid by the
Holder, if any, pursuant to Section 2(e)(vii) prior to the
issuance of such shares, have been paid.
iii. DELIVERY OF NEW WARRANTS UPON EXERCISE. If this
Warrant shall have been exercised in part, the Company shall,
at the time of delivery of the certificate or certificates
representing Warrant Shares, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased
Warrant Shares called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.
iv. RESCISSION RIGHTS. If the Company fails to deliver
to the Holder a certificate or certificates representing the
Warrant Shares pursuant to this Section 2(e)(iv) by the
Warrant Share Delivery Date, then the Holder will have the
right to rescind such exercise
4
v. BUY-IN COMPENSATION. Subject to Section 4.10 of the
Purchase Agreement, in addition to any other rights available
to the Holder, if the Company fails to deliver to the Holder a
certificate or certificates representing the Warrant Shares
pursuant to an exercise on or before the 2nd Trading Day
following the Warrant Share Delivery Date, and if after such
date the Holder is required by its broker to purchase (in an
open market transaction or otherwise) shares of Common Stock
to deliver in satisfaction of a sale by the Holder of the
Warrant Shares which the Holder anticipated receiving upon
such exercise (a "BUY-IN"), then the Company shall (1) pay in
cash to the Holder the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (y) the amount
obtained by multiplying (A) the number of Warrant Shares that
the Company was required to deliver to the Holder in
connection with the exercise at issue times (B) the price at
which the sell order giving rise to such purchase obligation
was executed, and (2) at the option of the Holder, either
reinstate the portion of the Warrant and equivalent number of
Warrant Shares for which such exercise was not honored or
deliver to the Holder the number of shares of Common Stock
that would have been issued had the Company timely complied
with its exercise and delivery obligations hereunder. 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 exercise of shares of Common Stock with an aggregate
sale price giving rise to such purchase obligation of $10,000,
under clause (1) 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 exercise
of the Warrant as required pursuant to the terms hereof.
vi. NO FRACTIONAL SHARES OR SCRIP. No fractional shares
or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. As to any fraction of a share
which Holder would otherwise be entitled to purchase upon such
exercise, the Company shall pay a cash adjustment in respect
of such final fraction in an amount equal to such fraction
multiplied by the Exercise Price.
vii. CHARGES, TAXES AND EXPENSES. Issuance of
certificates for Warrant Shares shall be made without charge
to the Holder for any issue or transfer tax or other
incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name
of the Holder or in such name or names as may be directed by
the Holder; PROVIDED, however, that in the event certificates
for Warrant Shares are to be issued in a name other than the
name of the Holder, this Warrant when surrendered for exercise
shall be accompanied by the Assignment Form attached hereto
duly executed by the Holder; and the Company may require, as a
condition thereto, the payment of a sum sufficient to
reimburse it for any transfer tax incidental thereto.
5
viii. CLOSING OF BOOKS. The Company will not close its
stockholder books or records in any manner which prevents the
timely exercise of this Warrant, pursuant to the terms hereof.
SECTION 3. CERTAIN ADJUSTMENTS.
a) STOCK DIVIDENDS AND SPLITS. If the Company, at any time while
this Warrant is outstanding: (A) pays 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 Warrant), (B) subdivides
outstanding shares of Common Stock into a larger number of shares, (C)
combines (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issues by
reclassification of shares of the Common Stock any shares of capital stock
of the Company, then in each case the Exercise Price 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 3(a) 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. If the Company or any Subsidiary
thereof, as applicable, at any time while this Warrant is outstanding,
shall offer, sell, grant any option to purchase or offer, sell or grant
any right to reprice its securities, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any
Person to acquire shares of Common Stock, at an effective price per share
less than the then Exercise Price (such lower price, the "BASE SHARE
PRICE" and such issuances collectively, a "DILUTIVE ISSUANCE"), as
adjusted hereunder (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights per
share which is issued in connection with such issuance, be entitled to
receive shares of Common Stock at an effective price per share which is
less than the Exercise Price, such issuance shall be deemed to have
occurred for less than the Exercise Price), then, from the Initial
Exercise Date until the 12 month anniversary of the Effective Date, the
Exercise Price shall be reduced to equal the Base Share price and from the
12 month anniversary of the Effective Date until this Warrant is no longer
outstanding, the Exercise Price shall be reduced by multiplying the
Exercise Price by a fraction, the numerator of which is the number of
shares of Common Stock issued and outstanding immediately prior to the
Dilutive Issuance plus the number of shares of Common Stock which the
offering price for such Dilutive Issuance would purchase at the then
Exercise Price, and the denominator of which shall be the sum of the
number of shares of Common Stock issued and outstanding immediately prior
to the Dilutive Issuance plus the number of shares of Common Stock so
issued or issuable in connection with the Dilutive Issuance; provided,
HOWEVER, from the 31 month anniversary of the Initial Exercise Date until
the 36 month anniversary of the Initial Exercise Date, if the Company uses
all of the proceeds from a Dilutive Issuance to redeem the outstanding
principal amount of the Debentures, then the Holder of this Warrant shall
not receive an adjustment to the Exercise Price as provided in this
Section. Such adjustment shall be made whenever such Common Stock or
Common Stock Equivalents are issued. The Company shall notify the Holder
in writing, no later than the business day following the issuance of any
Common Stock or Common Stock Equivalents subject to this section,
indicating therein the applicable issuance price, or of applicable reset
price, exchange price, conversion price and other pricing terms.
6
c) PRO RATA DISTRIBUTIONS. If the Company, at any time prior to the
Termination Date, shall distribute to all holders of Common Stock (and not
to Holders of the Warrants) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security other than
the Common Stock (which shall be subject to Section 3(b)), then in each
such case the Exercise Price shall be adjusted by multiplying the Exercise
Price 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 per share 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.
d) CALCULATIONS. All calculations under this Section 3 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 3, the number of shares of Common Stock
outstanding as of a given date shall be the sum of the number of shares of
Common Stock (excluding treasury shares, if any) outstanding.
e) NOTICE TO HOLDERS.
i. ADJUSTMENT TO EXERCISE PRICE. Whenever the Exercise Price
is adjusted pursuant to this Section 3, the Company shall promptly
mail to each Holder a notice setting forth the Exercise Price 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.
7
ii. NOTICE TO ALLOW EXERCISE BY HOLDER. If (A) the Company
shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or 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, any consolidation or merger to
which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory
share exchange whereby the Common Stock is converted into other
securities, cash or property; (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 mailed to the Holder at its last addresses as it shall
appear upon the Warrant Register of the Company, at least 20
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, consolidation, merger, sale, transfer or
share exchange 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, consolidation, merger, sale, transfer or share
exchange; 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. The Holder is entitled to exercise this Warrant during the
20-day period commencing the date of such notice to the effective
date of the event triggering such notice
f) FUNDAMENTAL TRANSACTION. If, at any time while this Warrant 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
Warrant, the Holder shall have the right to receive, for each Warrant
Share that would have been issuable upon such exercise absent such
Fundamental Transaction, upon exercise of this Warrant, the number of
shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Alternate Consideration
receivable upon or as a result of such reorganization, reclassification,
merger, consolidation or disposition of assets by a Holder of the number
of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event (the "ALTERNATE CONSIDERATION"). For
purposes of any such exercise, the determination of the Exercise 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 Exercise 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 exercise of this
Warrant 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 issue to the Holder
a new warrant consistent with the foregoing provisions and evidencing the
Holder's right to exercise such warrant into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is
effected shall include terms requiring any such successor or surviving
entity to comply with the provisions of this paragraph (f) and insuring
that this Warrant (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.
8
g) EXEMPT ISSUANCE. Notwithstanding the foregoing, no adjustments,
Alternate Consideration nor notices shall be made, paid or issued under
this Section 3 in respect of an Exempt Issuance.
h) VOLUNTARY ADJUSTMENT BY COMPANY. The Company may at any time
during the term of this Warrant reduce the then current Exercise Price to
any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
SECTION 4. TRANSFER OF WARRANT.
a) TRANSFERABILITY. Subject to compliance with any applicable
securities laws and the conditions set forth in Sections 5(a) and 4(d)
hereof and to the provisions of Section 4.1 of the Purchase Agreement,
this Warrant and all rights hereunder are transferable, in whole or in
part, upon surrender of this Warrant at the principal office of the
Company, together with a written assignment of this Warrant substantially
in the form attached hereto duly executed by the Holder or its agent or
attorney and funds sufficient to pay any transfer taxes payable upon the
making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees and in the denomination or
denominations specified in such instrument of assignment, and shall issue
to the assignor a new Warrant evidencing the portion of this Warrant not
so assigned, and this Warrant shall promptly be cancelled. A Warrant, if
properly assigned, may be exercised by a new holder for the purchase of
Warrant Shares without having a new Warrant issued.
9
b) NEW WARRANTS. This Warrant may be divided or combined with other
Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in
which new Warrants are to be issued, signed by the Holder or its agent or
attorney. Subject to compliance with Section 4(a), as to any transfer
which may be involved in such division or combination, the Company shall
execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such notice.
c) WARRANT REGISTER. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the "WARRANT
REGISTER"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, absent actual
notice to the contrary.
d) TRANSFER RESTRICTIONS. If, at the time of the surrender of this
Warrant in connection with any transfer of this Warrant, the transfer of
this Warrant shall not be registered pursuant to an effective registration
statement under the Securities Act and under applicable state securities
or blue sky laws, the Company may require, as a condition of allowing such
transfer (i) that the Holder or transferee of this Warrant, as the case
may be, furnish to the Company a written opinion of counsel (which opinion
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that such transfer may be made
without registration under the Securities Act and under applicable state
securities or blue sky laws, (ii) that the holder or transferee execute
and deliver to the Company an investment letter in form and substance
acceptable to the Company and (iii) that the transferee be an "accredited
investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8)
promulgated under the Securities Act or a qualified institutional buyer as
defined in Rule 144A(a) under the Securities Act.
SECTION 5. MISCELLANEOUS.
a) TITLE TO WARRANT. Prior to the Termination Date and subject to
compliance with applicable laws and Section 4 of this Warrant, this
Warrant and all rights hereunder are transferable, in whole or in part, at
the office or agency of the Company by the Holder in person or by duly
authorized attorney, upon surrender of this Warrant together with the
Assignment Form annexed hereto properly endorsed. The transferee shall
sign an investment letter in form and substance reasonably satisfactory to
the Company.
b) NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this
Warrant and the payment of the aggregate Exercise Price (or by means of a
cashless exercise), the Warrant Shares so purchased shall be and be deemed
to be issued to such Holder as the record owner of such shares as of the
close of business on the later of the date of such surrender or payment.
10
c) LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. The Company
covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant or any stock certificate relating to the Warrant Shares, and in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it (which, in the case of the Warrant, shall not include
the posting of any bond), and upon surrender and cancellation of such
Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of
such cancellation, in lieu of such Warrant or stock certificate.
d) SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day
for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday, Sunday or a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding
day not a Saturday, Sunday or legal holiday.
e) AUTHORIZED SHARES.
The Company covenants that during the period the Warrant is
outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of
the Warrant Shares upon the exercise of any purchase rights under
this Warrant. The Company further covenants that its issuance of
this Warrant shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to execute and
issue the necessary certificates for the Warrant Shares upon the
exercise of the purchase rights under this Warrant. The Company will
take all such reasonable action as may be necessary to assure that
such Warrant Shares may be issued as provided herein without
violation of any applicable law or regulation, or of any
requirements of the Trading Market upon which the Common Stock may
be listed.
Except and to the extent as waived or consented to by the
Holder, the Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any
of the terms of this Warrant, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of
all such actions as may be necessary or appropriate to protect the
rights of Holder as set forth in this Warrant against impairment.
Without limiting the generality of the foregoing, the Company will
(a) not increase the par value of any Warrant Shares above the
amount payable therefor upon such exercise immediately prior to such
increase in par value, (b) take all such action as may be necessary
or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Shares upon the exercise
of this Warrant, and (c) use commercially reasonable efforts to
obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under
this Warrant.
11
f) JURISDICTION. All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be
determined in accordance with the provisions of the Purchase Agreement.
g) RESTRICTIONS. The Holder acknowledges that the Warrant Shares
acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.
h) NONWAIVER AND EXPENSES. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall
operate as a waiver of such right or otherwise prejudice Holder's rights,
powers or remedies, notwithstanding all rights hereunder terminate on the
Termination Date. If the Company willfully and knowingly fails to comply
with any provision of this Warrant, which results in any material damages
to the Holder, the Company shall pay to Holder such amounts as shall be
sufficient to cover any costs and expenses including, but not limited to,
reasonable attorneys' fees, including those of appellate proceedings,
incurred by Holder in collecting any amounts due pursuant hereto or in
otherwise enforcing any of its rights, powers or remedies hereunder.
i) NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder by the Company shall be
delivered in accordance with the notice provisions of the Purchase
Agreement.
j) LIMITATION OF LIABILITY. No provision hereof, in the absence of
any affirmative action by Holder to exercise this Warrant or purchase
Warrant Shares, and no enumeration herein of the rights or privileges of
Holder, shall give rise to any liability of Holder for the purchase price
of any Common Stock or as a stockholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
k) REMEDIES. Holder, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees
that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Warrant and
hereby agrees to waive the defense in any action for specific performance
that a remedy at law would be adequate.
l) SUCCESSORS AND ASSIGNS. Subject to applicable securities laws,
this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and
the successors and permitted assigns of Holder. The provisions of this
Warrant are intended to be for the benefit of all Holders from time to
time of this Warrant and shall be enforceable by any such Holder or holder
of Warrant Shares.
m) AMENDMENT. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the
Holder.
n) SEVERABILITY. Wherever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provisions or the remaining provisions of this Warrant.
12
o) HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a
part of this Warrant.
********************
13
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officer thereunto duly authorized.
Dated: August 17, 2004
COMPOSITE TECHNOLOGY CORPORATION
By:_____________________________________
Name:
Title:
14
NOTICE OF EXERCISE
To: Composite Technology Corporation
(1) The undersigned hereby elects to purchase ________ Warrant Shares of
the Company pursuant to the terms of the attached Warrant (only if exercised in
full), and tenders herewith payment of the exercise price in full, together with
all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] the cancellation of such number of Warrant
Shares as is necessary, in accordance with the
formula set forth in subsection 3(d), to exercise
this Warrant with respect to the maximum number
of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in
subsection 3(d).
(3) Please issue a certificate or certificates representing said Warrant
Shares in the name of the undersigned or in such other name as is specified
below:
-----------------------------------------
The Warrant Shares shall be delivered to the following:
-----------------------------------------
-----------------------------------------
-----------------------------------------
(4) ACCREDITED INVESTOR. The undersigned is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act of 1933, as
amended.
[PURCHASER]
By: ______________________________
Name:
Title:
Dated: ________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
_______________________________________________ whose address is
---------------------------------------------------------------.
---------------------------------------------------------------
Dated: ______________, _______
Holder's Signature: ____________________________
Holder's Address: ____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
EXHIBIT E
CUSTODIAL AND SECURITY AGREEMENT
THIS CUSTODIAL AND SECURITY AGREEMENT (this "AGREEMENT") is made as of
August 17, 2004, by and among Composite Technology Corporation, a Nevada
corporation with an address at 0000 XxXxx Xxxxxx, Xxxxxx, XX 00000 (the
"COMPANY"), the purchasers signatory hereto (each individually, a "PURCHASER,"
and collectively, the "PURCHASERS"), and Xxxxxxx Xxxxxxxxx LLP, with an address
at 000 Xxxxxxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000 (the "CUSTODIAN").
CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH
IN THE SECURITIES PURCHASE AGREEMENT REFERRED TO IN THE FIRST RECITAL.
W I T N E S S E T H:
WHEREAS, the Company and each Purchaser has entered into the Securities
Purchase Agreement of even date herewith (the "PURCHASE AGREEMENT"), pursuant to
which the Purchasers are purchasing the Company's 6% Secured Convertible
Debentures due three years after their date of issuance (collectively, the
"SECURED DEBENTURES") and Warrants; and
WHEREAS, in order to induce the Purchasers to enter into the Purchase
Agreement and to purchase the Debentures, and as a condition precedent thereto,
the Company has agreed to secure the payment and performance of its obligations
under the Purchase Agreement, the Debentures, this Agreement and the other
Transaction Documents by granting to the Purchasers a first priority security
interest in certain of the cash proceeds from the sale of the Debentures; and
WHEREAS, the Company and the Purchasers have requested that the Custodian
hold two-thirds of the gross cash proceeds from the sale of the Debentures for
the benefit of the Purchasers, as secured parties, in accordance with the terms
hereof;
WHEREAS, the Purchasers wish to initially appoint Midsummer Capital LLC as
a representative of the Purchasers (the "PURCHASER REPRESENTATIVE") to act on
behalf of all of the Purchasers solely with respect to the release of funds
pursuant to this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. CLOSING.
(a) Upon the Custodian's receipt from the Purchasers of, in the
aggregate, $15,000,000 into its escrow account (the "ESCROW ACCOUNT"),
together with each Purchaser's executed counterparts of this Agreement,
the Purchase Agreement and the Registration Rights Agreement, the
Custodian shall telephonically advise the Company, or the Company's
designated attorney or agent, of its receipt of such funds and such
documents.
(b) Wire transfers to the Custodian shall be made as follows:
STERLING NATIONAL BANK
000 0XX XXXXXX
XXX XXXX, XX 00000
Account Name: Xxxxxxx Xxxxxxxxx LLP
ABA ROUTING NO: 000000000
ACCT NO: 0000000000
Remark: CPCT/[FUND NAME]
(c) The Company, upon receipt of the telephonic notice described in
Section 1(a) above, shall deliver to the Custodian the certificates
representing the Debentures and the Warrants to be issued to each
Purchaser at the Closing together with:
(i) a counterpart of the Registration Rights Agreement, duly
executed by the Company;
(ii) the executed legal opinion of Company Counsel;
(iii) a counterpart of the Purchase Agreement, duly executed
by the Company; and
(iv) a counterpart of this Agreement, duly executed by the
Company.
(d) In the event that the foregoing items have not been delivered to
the Custodian by the Company within five (5) Trading Days after the
Custodian has received all of the Subscription Amounts (net of any
permitted deductions pursuant to the Purchase Agreement), then each
Purchaser shall have an independent and separate right to demand and
receive the return of its Subscription Amount.
(e) Once the Custodian receives all of the items required to be
delivered hereunder, it shall wire the gross proceeds raised pursuant to
the Purchase Agreement per the written instructions of the Company less
the balance of $10,000,000 (the "SECURED PROCEEDS") which shall be
initially transferred into a separate non-interest bearing custodian
deposit account of the Custodian (the "CUSTODIAN ACCOUNT"). Thereafter,
the Custodian Account shall be maintained by the Custodian in accordance
with the terms of this Agreement and may be invested in an
interest-bearing government securities or commercial money market fund
made available by the Custodian's bank or as otherwise directed in a
writing executed by the Company and the Purchaser Representative. The
Custodian, by its execution and delivery of this Agreement, hereby agrees
to accept receipt of the Secured Proceeds and to hold such proceeds for
the benefit of the Purchasers, as secured parties.
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(f) After transferring the Secured Proceeds into the Custodian
Account, the Custodian shall then arrange to have originals or counterpart
originals of the Purchase Agreement, the Warrants, the Debentures, the
Registration Rights Agreement, this Agreement and the opinion of counsel
delivered to the appropriate parties.
(g) The Custodian shall hold the Secured Proceeds in the Custodian
Account, for the benefit of each Purchaser, and not release such proceeds
except as provided herein. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO
THE CONTRARY, AS TO ANY PURCHASER, THE CUSTODIAN SHALL ONLY RELEASE FUNDS
TO THE COMPANY OR A PURCHASER UNDER THIS AGREEMENT TO THE EXTENT ALL SUCH
RELEASES ON ACCOUNT OF SUCH PURCHASER, IN THE AGGREGATE, DO NOT EXCEED
66.66% OF THE ORIGINAL PRINCIPAL AMOUNT OF DEBENTURES PURCHASED BY SUCH
PURCHASER PURSUANT TO THE PURCHASE AGREEMENT PLUS ACCRUED INTEREST.
(h) The Purchasers hereby appoint the Purchaser Representative as
the representative of the Purchasers to act on behalf of all of the
Purchasers with respect to the release of funds pursuant to this
Agreement.
2. RELEASE OF SECURED PROCEEDS.
(a) RELEASE UPON VOLUNTARY CONVERSION OF DEBENTURES. Upon the
conversion by a Purchaser of all or part of the principal amount of the
Debenture(s) held by such Purchaser in excess of such Purchaser's Pro Rata
Amount of the sum of $5,000,000 ("PRO RATA AMOUNT" as defined in the
Debenture), (the "CONVERTED PRINCIPAL AMOUNT"), such Purchaser and the
Company shall promptly thereafter execute a joint certificate to the
Custodian certifying that such Converted Principal Amount has been
converted by the Purchaser (a "CONVERSION CERTIFICATE", such release upon
Conversion shall be a "CONVERSION RELEASE" and such date of a Conversion
Release shall be the "CONVERSION RELEASE DATE"). Promptly after its
receipt of a Conversion Certificate, the Custodian shall release out of
the Secured Proceeds, subject to the limitation set forth in Section 1(g),
to the account specified in the written instructions of the Company, an
amount equal to the Converted Principal Amount.
(b) RELEASE UPON THE VALUE OF COMMON STOCK.
(i) Upon written notice by the Company to the Purchaser
Representative and the Custodian that either (i) the VWAP on each
Trading Day for any 20 consecutive Trading Days commencing on the
Original Issue Date and until the Debentures are no longer
outstanding (the "RELEASE PERIOD") is greater than or equal to 150%
of the Conversion Price (as defined in the Debenture) and provided
that the Equity Conditions are satisfied during the 20 Trading Day
period preceding the Requested Release Notice or (ii) the VWAP on
each Trading Day during the Release Period is greater than or equal
to 175% of the Conversion Price (each, a "REQUESTED RELEASE NOTICE")
and provided that the Equity Conditions are satisfied during the 20
Trading Day period preceding the Requested Release Notice, the
Company may request a release of the Secured Proceeds such that the
Custodian shall release 50% of the Secured Proceeds pursuant to
Section 2(b)(i) (the "PARTIAL RELEASE") and 100% of the Secured
Proceeds pursuant to Section 2(b)(ii) (the "FULL RELEASE") (the date
of the Partial Release and the Full Release shall be the "PARTIAL
RELEASE DATE" and the "FULL RELEASE DATE", respectively) and the
Purchaser Representative shall join in such request. Prior to a
Partial Release and a Full Release, the Purchaser Representative and
the Company shall execute a joint certificate to the Custodian
certifying that such release is permissible; PROVIDED, HOWEVER, if
the Purchaser Representative does not execute a joint certificate to
the Custodian or does not object to the Company and the Custodian to
the execution of such joint certificate within 5 Trading Days after
written and confirmed notice to the Purchaser Representative from
the Company of such request for release pursuant to this Section
2(b)(i), then the Purchaser Representative shall be deemed to have
consented to such release.
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(ii) If the conditions set forth in Section 2(b)(i) for the
Partial Release or the Full Release are satisfied, then, subject to
the provisions of Sections 1(g) above, the Custodian shall release
that portion of the Secured Proceeds equal to the Partial Release or
Full Release, as applicable, on the Partial Release Date or Full
Release Date, as applicable.
(c) RELEASE UPON OPTIONAL REDEMPTION NOTICE. At any time after the
occurrence of an Optional Redemption Notice Date (as defined in Section
6(a) of the Debenture), the Company may, at its option, deliver a copy of
the Optional Redemption Notice to the Custodian. If, by the Option
Redemption Date (as defined in Section 6(a) of the Debenture), the
Custodian shall not have received written notice from a Purchaser named in
the Optional Redemption Notice that it disputes such Optional Redemption,
then the Custodian shall release out of the Secured Proceeds, subject to
the limitation set forth in Section 1(g), to each non-objecting Purchaser
named in the Optional Redemption Notice who has not previously converted
the Debentures an amount equal to the principal amount of Debentures being
redeemed by the Company. In the event that a Purchaser does deliver a
timely notice to the Custodian and the Company that it disputes such
Option Redemption, then such dispute shall be resolved between the Company
and the Purchaser by arbitration as conducted as provided in Section
2(e)(ii). The prevailing party in such hearing shall be reimbursed by the
other party for its attorneys' fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such arbitration
proceeding but shall not be paid out of the Secured Proceeds.
(d) RELEASE UPON CONSENT OF PURCHASERS. Upon receipt by the Company
of a written consent of a Purchaser to release any portion of the Secured
Proceeds, the Company and such Purchaser shall execute and deliver to the
Custodian a joint certificate (each, a "CONSENT CERTIFICATE") certifying
that consent to release such Secured Proceeds has been obtained, which
Consent Certificate shall include the amount of the Secured Proceeds to be
released, representations from such Purchaser as to the outstanding
principal amount of the Debentures held by it at the time such consent was
obtained, and a representation by the Company's chief executive officer as
to the aggregate principal amount of the Debentures outstanding at the
time consent was obtained. Any Purchaser may consent or withhold consent
to any such release of any of the Secured Proceeds in its sole and
absolute discretion. Upon receipt of the Consent Certificate, the
Custodian shall release, to the account of the Company designated in the
Consent Certificate, that Purchaser's Pro Rata Portion of the Secured
Proceeds specified in the Consent Certificate. If less than all of the
Secured Proceeds are released, the remaining amount, for purposes of
calculating each Purchaser's rights hereunder, shall be re-allocated
according to such Purchaser's Pro Rata Portion.
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(e) RELEASE UPON AN EVENT OF DEFAULT.
(i) If, on the maturity date of the Debentures, any Debentures
shall remain unpaid, then upon receipt by the Custodian of a written
notice from a Purchaser holding such Debentures certifying that such
Debentures remain unpaid, the Custodian shall release to such
Purchaser its Pro Rata Portion of the Secured Proceeds remaining in
the Custodian Account relating to such Purchaser (but not more than
the amount due under such Debentures then held by such Purchaser and
amounts due under the Purchase Agreement to such Purchaser), and
such Secured Proceeds shall be applied to reduce amounts due and
owing to such Purchaser with respect to the Debentures and the
Purchase Agreement as follows: first, to the payment of fees and
expenses including liquidated damages; second, to interest payable
in cash with respect to the Debentures; and third, to the
outstanding principal under the Debentures.
(ii) At any time after the occurrence of an Event of Default,
any Purchaser may, at its option, deliver a certificate to the
Custodian and the Company specifying the nature of the Event of
Default. If, within ten days after its receipt of such certificate,
the Custodian shall not have received written notice from the
Company that it disputes the occurrence of such Event of Default,
then the Custodian shall release to such Purchaser such Purchaser's
Pro Rata Portion of the Secured Proceeds remaining in the Custodian
Account. In the event that the Company does deliver a timely notice
to the Custodian and the Purchaser that it disputes such
determination, then such dispute shall be resolved between the
Company and the Purchaser by arbitration conducted as follows: the
arbitration shall be conducted in New York, New York, before an
arbitration panel of three arbitrators, one of whom shall be
selected by the Purchaser, one of whom shall be selected by the
Company, with the remaining arbitrator to be agreed upon by the
first two. The arbitration shall be conducted in accordance with the
commercial arbitration rules of the American Arbitration Association
then in effect. Any arbitration decision or award shall be final and
conclusive as to the parties to this Agreement and their successors
and assigns; judgment upon such decision or award may be entered in
any competent court. In the event that the arbitration shall be
decided in favor of the applicable Purchaser, then upon delivery of
a written copy of such decision by the Purchaser to the Custodian,
the Custodian shall promptly release the Purchaser's Pro Rata
Portion of the remaining Secured Proceeds to the Purchaser.
5
(f) RELEASE UPON MONTHLY REDEMPTION. Upon written notice by the
Company to the Purchaser Representative and the Custodian that a portion
of the Secured Proceeds has been converted pursuant to the Monthly
Redemption (the "MONTHLY REDEMPTION AMOUNT"), then, the Purchaser
Representative and the Company shall promptly thereafter execute a joint
certificate to the Custodian certifying that such Monthly Redemption
Amount has been converted (a "REDEMPTION CONVERSION CERTIFICATE");
PROVIDED, HOWEVER, if the Purchaser Representative does not execute a
Redemption Conversion Certificate to the Custodian within 3 Trading Days
after written and confirmed notice to the Purchaser Representative from
the Company of such request for release pursuant to this Section 2(f),
then the Purchaser Representative shall be deemed to have consented to
such release; PROVIDED, HOWEVER, that there shall not be a deemed consent
if the Purchaser Representative objects in good faith solely to the
calculations included in the Redemption Conversion Certificate within such
3 Trading Day period. Promptly after its receipt of a Redemption
Conversion Certificate, the Custodian shall release out of the Secured
Proceeds, subject to the limitation set forth in Section 1(g), to the
account specified in the written instructions of the Company, an amount
equal to the Monthly Redemption Amount.
(g) RELEASE UPON FORCED CONVERSION. Upon written notice by the
Company and the Purchaser Representative to the Custodian that the Company
has properly forced conversion of the Debentures, pursuant to Section 6(c)
of the Debentures, then, the Purchaser Representative and the Company
shall promptly thereafter execute a joint certificate to the Custodian
certifying that such amount under the Forced Conversion has been converted
(a "FORCED CONVERSION CERTIFICATE"); PROVIDED, HOWEVER, if the Purchaser
Representative does not execute a Forced Conversion Certificate to the
Custodian or does not object to the Company and the Custodian to the
execution of such Forced Conversion Certificate within 5 Trading Days
after written and confirmed notice to the Purchaser Representative from
the Company of such request for release pursuant to this Section 2(g),
then the Purchaser Representative shall be deemed to have consented to
such release. Promptly after its receipt of a Forced Conversion
Certificate, the Custodian shall release the Secured Proceeds to the
account specified in the written instructions of the Company, in an amount
equal to the ratio that the amount of principal amount of Debentures
subject to the Forced Conversion bears to the outstanding principal amount
of the Debentures.
(h) PROCEDURE FOR RELEASE. In the event that any Conversion Release
Date, Partial Release Date, Full Release Date (collectively, the "RELEASE"
and, the date of such Release, the "RELEASE DATE") is not a Business Day
(as defined herein), then such Release shall be deemed to be the next
Business Day. "BUSINESS DAY" shall mean any day that is not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in
the State of New York. In the event that any of the Secured Proceeds shall
have been paid in whole or in part on or prior to the applicable Release
Date, the Company shall provide immediate telephonic notice thereof to the
Purchasers and to the Custodian, promptly followed by written confirmation
to such parties, and the amount requested pursuant to such Release shall
be reduced by the aggregate amount of payments received by the Company in
satisfaction of such Release.
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3. SECURITY AGREEMENT.
(a) GRANT. The Company hereby unconditionally and irrevocably grants
to the Purchasers, to secure the payment and performance in full when due
of all of the Obligations (as said term is defined below), a continuing
first priority security interest in, and so pledges and assigns to the
Purchasers all of, the Secured Proceeds and any interest that accrues
thereon ("COLLATERAL"). "Obligations" means all present and future
indebtedness, obligations, covenants, duties and liabilities of any kind
or nature of the Company to the Purchasers (or any of them) under this
Agreement, the Debentures and the other Transaction Documents, in each
case whether now or hereafter existing, voluntary or involuntary, direct
or indirect, absolute or contingent, liquidated or unliquidated, whether
or not jointly owed with others. Without limiting the generality of the
foregoing, this Agreement secures the payment of all amounts that
constitute part of the Obligations and would be owed by the Company to the
Purchasers under the Transaction Documents but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Company or any of the
Company's Subsidiaries.
(b) FURTHER ASSURANCES. The Company agrees that at any time and from
time to time, at the expense of the Company, the Company shall promptly
execute and deliver all further instruments, documents and/or control
agreements and take all further action, that may be necessary or
desirable, or that the Purchasers may reasonably request, in order to
perfect and protect any security interest granted or purported to be
granted hereby or to enable any Purchaser to exercise and enforce its
rights and remedies hereunder with respect to any of the Collateral.
(c) RIGHTS AND REMEDIES. At any time after the occurrence of an
Event of Default, and without any other notice to or demand upon the
Company, the Purchasers shall have, in any jurisdiction in which
enforcement hereof is sought, in addition to all other rights and
remedies, the rights and remedies of a secured party under the Uniform
Commercial Code in effect from time to time in the State of New York (the
"UCC") and any additional rights and remedies which may be provided to a
secured party in any applicable jurisdiction.
(d) POWER OF ATTORNEY. The Company hereby irrevocably constitutes
and appoints the Purchasers, and each of them, and any officer, partner,
member or agent thereof, with full power of substitution, as its true and
lawful attorneys-in-fact with full irrevocable power and authority in the
name, place and stead of the Company or in their own names, for the
purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute any and all documents and instruments
that may be necessary or useful to accomplish the purposes of this
Agreement and, without limiting the generality of the foregoing, hereby
gives said attorneys the power and right, on behalf of the Company,
without notice to or assent by the Company, at any time after the
occurrence of an Event of Default, to sell, transfer, pledge, make any
agreement with respect to or otherwise dispose of or deal with any of the
Collateral in such manner as is consistent with the UCC and as fully and
completely as though the Purchasers were the absolute owners thereof for
all purposes, and to do, at the Company's expense, at any time or from
time to time, all acts and things which the Purchasers deem necessary or
useful to protect, preserve or realize upon the Collateral and the
security interest of the Purchasers therein, in order to effect the intent
of this Agreement, all at least as fully and effectively as the Company
might do.
7
(e) Intentionally Omitted.
(f) MARSHALLING. All rights and remedies of the Purchasers hereunder
and in respect of the Collateral and other assurances of payment shall be
cumulative and in addition to all other rights and remedies, however
existing or arising. To the extent that it lawfully may, the Company
hereby agrees that it will not invoke any law relating to the marshalling
of assets which might cause a delay in or impede the enforcement of the
rights and remedies of the Purchasers under this Agreement, the
Debentures, the other Transaction Documents or under any other instrument
creating or evidencing any of the Obligations or under which any of the
Obligations is outstanding or by which any of the Obligations is secured
or payment thereof is otherwise assured, and to the extent that it
lawfully may, the Company hereby irrevocably waives the benefits of all
such law.
(g) NO WAIVER, ETC. The Purchasers shall not be deemed to have
waived any of their rights or remedies in respect of the Obligations or
the Collateral unless such waiver shall be in writing and signed by the
Purchasers. No delay or omission on the part of the Purchasers in
exercising any right or remedy shall operate as a waiver of such right or
remedy or any other right or remedy. A waiver on any one occasion shall
not be construed as a bar to or waiver of any right or remedy on any
future occasion. All rights and remedies of the Purchasers with respect to
the Obligations or the Collateral, whether evidenced hereby or by any
other document or instrument, shall be cumulative and may be exercised
singularly, alternatively, successively or concurrently at such time or at
such times as the Purchasers deem expedient.
(h) CERTAIN DEFINED TERMS. Terms used in this Section 3 but not
otherwise defined in this Agreement that are defined in the UCC (as such
term is hereinafter defined) shall have the respective meanings given such
terms therein; PROVIDED, HOWEVER, that if a term is defined in Article 9
of the UCC differently than in another Article of the UCC, then such term
shall have the meaning specified in Article 9. "UCC" means the Uniform
Commercial Code in effect from time to time in the State of New York.
4. CONDITIONS TO CUSTODIAN'S DUTIES. The acceptance by the Custodian of
its duties as such under this Agreement is subject to the following terms and
conditions, which all of the parties to this Agreement hereby agree shall govern
and control with respect to the rights, duties, liabilities and immunities of
the Custodian:
(a) The Custodian is not a party to, nor is it bound by, any other
agreement by which the other parties hereto may be bound (whether or not
it has knowledge of such), other than as expressly herein set forth.
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(b) The Custodian shall be protected in acting upon any written
notice, request, waiver, consent, receipt or other document which the
Custodian, in good faith, believes to be genuine and what it purports to
be. No waiver or any breach of any covenant or provision herein contained
shall be deemed a waiver of any preceding or succeeding breach thereof, or
of any other covenant or provision herein contained. No extension of time
for performance of any obligation or act shall be deemed an extension of
the time for performance of any other obligation or act. If the Custodian
reasonably requires other or further instruments in connection with this
Agreement or obligations in respect hereto, the necessary parties hereto
shall join in furnishing such instruments.
(c) The Custodian shall be indemnified and held harmless by the
Company and the Purchasers, jointly and severally, from and against any
and all loss, expense, fees (including attorneys' fees) and damages that
may be incurred by the Custodian as a result of its agreeing to act in
such capacity and its performance of this Agreement. The Custodian shall
not be obligated to any party for any error in judgment or for any act
done or steps taken or omitted by it in good faith, or for any mistake of
fact or law, or for anything which it may do or refrain from doing in
connection therewith, except as a result of its own gross negligence or
willful misconduct. This indemnity includes the costs of enforcing the
indemnification (including attorneys' fees).
(d) The Custodian may consult with or retain legal counsel in
connection with any dispute or question as to the construction of any of
the provisions hereof or with regard to its duties and shall be held
harmless and protected by the Company and the Purchasers in acting in good
faith in accordance with the instructions of such counsel. Such counsel's
fees and expenses shall be paid as set forth in Section 4(f) hereof. The
Custodian may represent itself at its usual rates.
(e) The Custodian shall not be responsible or liable for the default
or misconduct of its agents, attorneys or employees, if they are selected
with reasonable care.
(f) The Company will pay the Custodian's fees (at the Custodian's
customary hourly rate for legal services) and out-of-pocket disbursements
for time spent in performing its duties under this Agreement, and if any
of Custodian's invoices are not paid in full within 30 days, the Custodian
is directed to pay itself directly from the Custodian Account; provided
that if fees are taken directly from the Custodian Account by the
Custodian, the Purchasers shall have no claim against the Custodian for
such funds but shall have a claim against the Company for reimbursement.
The Company shall promptly replenish any funds that are disbursed to the
Custodian from the Custodian Account.
(g) The Custodian shall have no obligation to seek to maximize the
rate of interest on the Secured Proceeds, and shall be without liability
to any person in respect thereof.
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(h) No modification of this Agreement shall, without the consent of
the Custodian and all other parties hereto, modify the provisions of this
Agreement relating to the duties, obligations or rights of the Custodian.
This Agreement is the final expression of, and contains the entire
agreement between, the parties with respect to the subject matter hereof
and supersedes all prior understandings with respect thereto.
5. CONFLICT WITH RESPECT TO COLLATERAL.
(a) In the event that the Custodian at any time receives or becomes
aware of conflicting demands or claims with respect to the Collateral,
this Agreement or its duties hereunder, the Custodian shall have the right
to discontinue and refrain from any and all activities on its part under
this Agreement or in connection herewith until such conflict is resolved
to its satisfaction.
(b) The Custodian shall have the further right to commence or defend
any action or proceedings for the determination of such conflict. The
Company and the Purchasers jointly and severally agree to pay all costs,
damages, judgments and expenses, including reasonable attorneys' fees,
suffered or incurred by the Custodian in connection with or arising out of
this Agreement and the transactions described herein in the event of bona
fide conflicting claims or demands, including, but without limiting the
generality of the foregoing, a suit in interpleader brought by the
Custodian. In the event that the Custodian files a suit in interpleader,
it shall thereupon be fully released and discharged from all further
obligations to perform any and all duties or obligations imposed upon it
by this Agreement (except it may not release the Collateral except as
designated by the court).
6. ACKNOWLEDGEMENT. ALL PARTIES HERETO AGREE THAT THE CUSTODIAN IS COUNSEL
FOR MIDSUMMER CAPITAL, LLC ("MIDSUMMER") AND SHALL BE ENTITLED TO REPRESENT
MIDSUMMER WITH RESPECT TO THE PURCHASE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREUNDER; AND THE COMPANY AND EACH OTHER PURCHASER HEREBY WAIVES
ANY RIGHT OR CLAIM TO OBJECT TO SUCH LEGAL REPRESENTATION BY CUSTODIAN OF
MIDSUMMER IN CONNECTION WITH THIS TRANSACTION.
7. RESIGNATION OF CUSTODIAN. The Custodian may at any time resign
hereunder by giving written notice of its resignation to the Company and the
Purchasers, at least ten (10) days prior to the date specified for such
resignation to take effect, and upon the effective date of such resignation, all
property then held by the Custodian hereunder shall be delivered by it to such
Person as may be designated by the Company and the Purchasers, in writing,
whereupon all the Custodian's obligations hereunder shall cease and terminate.
If no such Person shall have been designated by such date, all obligations of
the Custodian hereunder shall, nevertheless, cease and terminate. The
Custodian's sole responsibility thereafter shall be to keep safely all property
then held by it and to deliver the same to a Person designated by the parties
hereto or in accordance with the directions of a final order or judgment of a
court of competent jurisdiction, or to file a suit in interpleader as provided
in Section 5 above.
8. INTEREST ON SECURED PROCEEDS. EXCEPT AS OTHERWISE PROVIDED IN SECTION
1(E), the Custodian shall deposit the Secured Proceeds in a non-interest-bearing
account. In the absence of an Event of Default, all accrued interest, if any,
shall be payable to the Company or its assignees at the direction of the Company
when actual paid.
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9. SUCCESSORS AND ASSIGNS. The Purchasers may assign their rights
hereunder in connection with the transfer of Debentures. The Company may not
assign its rights under this Agreement. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
administrators, successors and permitted assigns.
10. GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, AND THE
PARTIES AGREE AND CONSENT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE
COURTS LOCATED IN NEW YORK COUNTY, NEW YORK IN ANY ACTION OR PROCEEDING
HEREUNDER, AND TO SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED
(WHICH SHALL CONSTITUTE "PERSONAL SERVICE"). THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT.
11. AMENDMENT. No provision of this Agreement may be amended or waived
without the prior written consent of the Company and all the Purchasers;
PROVIDED, HOWEVER, that any provision relating to the duties, obligations and
rights of the Custodian shall in addition require the approval of the Custodian,
as provided in Section 4 above.
12. NOTICES. All notices or other communications between the parties
contemplated under, or relating to, this Agreement shall be in writing, shall be
signed by each person giving such notice or communication, and shall be
delivered by hand, reputable overnight courier or by certified mail, return
receipt requested, to the parties at their respective addresses set forth above
or to such other address as to which the sending party has received written
notice in accordance with this Section 12.
13. THE PURCHASER REPRESENTATIVE.
(a) APPOINTMENT. The Purchasers, by their acceptance of the benefits
of the Agreement, hereby designate Midsummer Capital LLC as the Purchaser
Representative to act as specified herein. Each Purchaser shall be deemed
irrevocably to authorize the Purchaser Representative to take such action
on its behalf under the provisions of this Agreement and any other
instruments and agreements referred to herein or therein and to exercise
such powers and to perform such duties hereunder and thereunder as are
specifically delegated to or required of the Purchaser Representative by
the terms hereof and thereof and such other powers as are reasonably
incidental thereto. The Purchaser Representative may perform any of its
duties hereunder by or through its agents or employees.
(b) NATURE OF DUTIES. The Purchaser Representative shall have no
duties or responsibilities except those expressly set forth in this
Agreement. Neither the Purchaser Representative nor any of its partners,
members, shareholders, officers, directors, employees or agents shall be
liable for any action taken or omitted by it as such under the Agreement
or hereunder or in connection herewith or therewith, unless caused by its
or their gross negligence or willful conduct. The duties of the Purchaser
Representative shall be mechanical and administrative in nature; the
Purchaser Representative shall not have by reason of this Agreement a
fiduciary relationship in respect of the Company or any Purchaser; and
nothing in the Agreement, expressed or implied, is intended to or shall be
so construed as to impose upon the Purchaser Representative any
obligations in respect of this Agreement except as expressly set forth
herein and therein.
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(c) LACK OF RELIANCE ON THE PURCHASER REPRESENTATIVE. Independently
and without reliance upon the Purchaser Representative, each Purchaser, to
the extent it deems appropriate, has made and shall continue to make (i)
its own independent investigation of the financial condition and affairs
of the Company and its subsidiaries in connection with such Purchaser's
investment in the Company, the creation and continuance of the
Obligations, the transactions contemplated by the Transaction Documents,
and the taking or not taking of any action in connection therewith, and
(ii) its own appraisal of the creditworthiness of the Company and its
subsidiaries, and of the value of the Collateral from time to time, and
the Purchaser Representative shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Purchaser with any
credit, market or other information with respect thereto, whether coming
into its possession before any Obligations are incurred or at any time or
times thereafter. The Purchaser Representative shall not be responsible to
Company or any Purchaser for any recitals, statements, information,
representations or warranties herein or in any document, certificate or
other writing delivered in connection herewith, or for the execution,
effectiveness, genuineness, validity, enforceability, perfection,
collectibility, priority or sufficiency of this Agreement, or for the
financial condition of the Company or the value of any of the Collateral,
or be required to make any inquiry concerning either the performance or
observance of any of the terms, provisions or conditions of this
Agreement, or the financial condition of the Company, or the value of any
of the Collateral, or the existence or possible existence of any default
or Event of Default under this Agreement, the Debentures or any of the
other Transaction Documents.
(d) CERTAIN RIGHTS OF THE PURCHASER REPRESENTATIVE. The Purchaser
Representative shall have the right to take any action with respect to the
Collateral, on behalf of all of the Purchasers. To the extent practical,
the Purchaser Representative shall request instructions from the
Purchasers with respect to any material act or action (including failure
to act) in connection with this Agreement, and shall be entitled to act or
refrain from acting in accordance with the instructions of Purchasers
holding a majority in principal amount of Debentures; if such instructions
are not provided despite the Purchaser Representative's request therefor,
the Purchaser Representative shall be entitled to refrain from such act or
taking such action, and if such action is taken, shall be entitled to
appropriate indemnification from the Purchasers in respect of actions to
be taken by the Purchaser Representative; and the Purchaser Representative
shall not incur liability to any Person by reason of so refraining.
Without limiting the foregoing, no Purchaser shall have any right of
action whatsoever against the Purchaser Representative as a result of the
Purchaser Representative acting or refraining from acting hereunder in
accordance with the terms of the Agreement, and the Company shall have no
right to question or challenge the authority of, or the instructions given
to, the Purchaser Representative pursuant to the foregoing.
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(e) RELIANCE. The Purchaser Representative shall be entitled to
rely, and shall be fully protected in relying, upon any writing,
resolution, notice, statement, certificate, telex, teletype or telecopier
message, cablegram, radiogram, order or other document or telephone
message signed, sent or made by the proper person or entity, and, with
respect to all legal matters pertaining to this Agreement and its duties
thereunder, upon advice of counsel selected by it.
(f) INDEMNIFICATION. The Purchaser Representative shall be
indemnified and held harmless by the Company and the Purchasers, jointly
and severally, from and against any and all loss, expense, fees (including
attorneys' fees) and damages that may be incurred by the Purchaser
Representative as a result of its agreeing to act in such capacity and its
performance of this Agreement. The Purchaser Representative shall not be
obligated to any party for any error in judgment or for any act done or
steps taken or omitted by it in good faith, or for any mistake of fact or
law, or for anything which it may do or refrain from doing in connection
therewith, except as a result of its own gross negligence or willful
misconduct. This indemnity includes the costs of enforcing the
indemnification (including attorneys' fees). To the extent that the
Purchaser Representative is not reimbursed and indemnified by the Company
and/or its subsidiaries, the Purchasers will jointly and severally
reimburse and indemnify the Purchaser Representative, in proportion to
their initially purchased respective principal amounts of Debentures, from
and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of
any kind or nature whatsoever which may be imposed on, incurred by or
asserted against the Purchaser Representative in performing its duties
hereunder or under this Agreement, or in any way relating to or arising
out of this Agreement except for those determined by a final judgment (not
subject to further appeal) of a court of competent jurisdiction to have
resulted solely from the Purchaser Representative's own gross negligence
or willful misconduct.
(g) RESIGNATION BY THE PURCHASER REPRESENTATIVE.
(i) The Purchaser Representative may resign from the
performance of all its functions and duties under this Agreement at
any time by giving 30 days' prior written notice (as provided in the
Agreement) to the Company and the Purchasers. Such resignation shall
take effect upon the appointment of a successor Purchaser
Representative pursuant to clauses (b) and (c) below.
(ii) Upon any such notice of resignation, the Purchasers,
acting by a majority in interest, shall appoint a successor
Purchaser Representative hereunder.
(iii) If a successor Purchaser Representative shall not have
been so appointed within said 30-day period, the Purchaser
Representative shall then appoint a successor Purchaser
Representative who shall serve as Purchaser Representative until
such time, if any, as the Purchasers appoint a successor Purchaser
Representative as provided above. If a successor Purchaser
Representative has not been appointed within such 30-day period, the
Purchaser Representative may petition any court of competent
jurisdiction or may interplead the Company and the Purchasers in a
proceeding for the appointment of a successor Purchaser
Representative, and all fees, including, but not limited to,
extraordinary fees associated with the filing of interpleader and
expenses associated therewith, shall be payable by the Company on
demand.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.
COMPOSITE TECHNOLOGY CORPORATION
By:__________________________________________
Name:
Title:
CUSTODIAN:
XXXXXXX XXXXXXXXX LLP
By:__________________________________________
Name:
Title:
PURCHASER REPRESENTATIVE
MIDSUMMER CAPITAL LLC
By:___________________________________
Name:
Title:
[PURCHASERS' SIGNATURE PAGES TO FOLLOW]
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[PURCHASER'S SIGNATURE PAGE TO CPTC CUSTODIAL AGREEMENT]
Name of Investing Entity: ______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
[ADDITIONAL PURCHASERS' SIGNATURE PAGES TO FOLLOW]
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