THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO eLEC COMMUNICATIONS CORP. THAT SUCH
REGISTRATION IS NOT REQUIRED.
Right to Purchase up to 3,359,856 Shares of Common Stock of
eLEC Communications Corp.
-------------------------
(subject to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. _________________ Issue Date: May 31, 2006
eLEC COMMUNICATIONS CORP., a corporation organized under the laws of
the State of New York ("ELEC"), hereby certifies that, for value received,
LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company (as defined herein) from and
after the first anniversary of the Issue Date of this Warrant and at any time or
from time to time before 5:00 p.m., New York time, through the close of business
on May 31, 2020 (the "Expiration Date"), subject to Section 7 hereof, up to
3,359,856 fully paid and nonassessable shares of Common Stock (as hereinafter
defined), at the applicable Exercise Price (as defined below) per share. The
number and character of such shares of Common Stock and the applicable Exercise
Price per share are subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Company" shall include ELEC and any corporation
which shall succeed, or assume the obligations of, ELEC hereunder.
(b) The term "Common Stock" includes (i) the Company's Common
Stock, par value $0.10 per share; and (ii) any other securities into
which or for which any of the securities described in the preceding
clause (i) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other
person (corporate or otherwise) which the Holder of this Warrant at any
time shall be entitled to receive, or shall have received, on the
exercise of the Warrant, in lieu of or in addition to Common Stock, or
which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities
pursuant to Section 4 or otherwise.
(d) The "Exercise Price" applicable under this Warrant shall
be a price of $0.10 per share acquired hereunder.
1. Exercise of Warrant.
-------------------
1.1 Number of Shares Issuable upon Exercise. From and after the
-----------------------------------------
first anniversary of the date hereof through and including the
Expiration Date, the Holder shall be entitled to receive, upon
exercise of this Warrant in whole or in part, by delivery of
an original or fax copy of an exercise notice in the form
attached hereto as Exhibit A (the "Exercise Notice"), subject
to Section 7 hereof, up to 3,359,856 shares of Common Stock of
the Company, subject to adjustment pursuant to Section 4.
1.2 Fair Market Value. For purposes hereof, the "Fair Market
------------------
Value" of a share of Common Stock as of a particular date (the
"Determination Date") shall mean:
(a) If the Company's Common Stock is traded on the American
Stock Exchange or another national exchange or is quoted on the
National or SmallCap Market of The Nasdaq Stock Market, Inc.
("Nasdaq"), then the closing or last sale price, respectively, reported
for the last business day immediately preceding the Determination Date.
(b) If the Company's Common Stock is not traded on the
American Stock Exchange or another national exchange or on the Nasdaq
but is traded on the NASD OTC Bulletin Board, then the mean of the
average of the closing bid and asked prices reported for the last
business day immediately preceding the Determination Date.
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company
agree or in the absence of agreement by arbitration in accordance with
the rules then in effect of the American Arbitration Association,
before a single arbitrator to be chosen from a panel of persons
qualified by education and training to pass on the matter to be
decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation,
dissolution or winding up pursuant to the Company's charter, then all
amounts to be payable per share to holders of the Common Stock pursuant
to the charter in the event of such liquidation, dissolution or winding
up, plus all other amounts to be payable per share in respect of the
Common Stock in liquidation under the charter, assuming for the
purposes of this clause (d) that all of the shares of Common Stock then
issuable upon exercise of the Warrant are outstanding at the
Determination Date.
1.3 Company Acknowledgment. The Company will, at the time of the
-----------------------
exercise of this Warrant, upon the request of the Holder
hereof acknowledge in writing its continuing obligation to
afford to such Holder any rights to which such holder
2
shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the Holder
shall fail to make any such request, such failure shall not
affect the continuing obligation of the Company to afford to
such Holder any such rights.
1.4 Trustee for Warrant Holders. In the event that a bank or trust
---------------------------
company shall have been appointed as trustee for the Holder of
this Warrant pursuant to Subsection 3.2, such bank or trust
company shall have all the powers and duties of a warrant
agent (as hereinafter described) and shall accept, in its own
name for the account of the Company or such successor person
as may be entitled thereto, all amounts otherwise payable to
the Company or such successor, as the case may be, on exercise
of this Warrant pursuant to this Section 1.
2. Procedure for Exercise.
----------------------
2.1 Delivery of Stock Certificates, Etc., on Exercise. The Company
-----------------------------------------------------
agrees that the shares of Common Stock purchased upon exercise of this Warrant
shall be deemed to be issued to the Holder as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares in accordance herewith. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within three (3) business days thereafter, the Company at its expense
(including the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the Holder, or as such Holder (upon
payment by such Holder of any applicable transfer taxes) may direct in
compliance with applicable securities laws, a certificate or certificates for
the number of duly and validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on
such exercise, plus, in lieu of any fractional share to which such Holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
2.2 Exercise. Notwithstanding any provisions herein to the contrary, in
--------
the event there is no effective registration statement with respect to the
shares issuable upon exercise of this Warrant or an Event of Default (as such
term is defined in the Security Agreement) has occurred and is continuing at the
time of exercise, if the Fair Market Value of one share of Common Stock is
greater than the Exercise Price (at the date of calculation as set forth below),
in lieu of exercising this Warrant for cash, the Holder may elect to receive
shares equal to the value (as determined below) of this Warrant (or the portion
thereof being exercised) by surrender of this Warrant at the principal office of
the Company together with the properly endorsed Exercise Notice in which event
the Company shall issue to the Holder a number of shares of Common Stock
computed using the following formula:
X=Y (A-B)
A
Where X = the number of shares of Common Stock to be issued to
the Holder
3
Y = the number of shares of Common Stock purchasable
under this Warrant or, if only a portion of this
Warrant is being exercised, the portion of this
Warrant being exercised (at the date of such
calculation)
A = the Fair Market Value of one share of the Company's
Common Stock (at the date of such calculation)
B = Exercise Price (as adjusted to the date of such
calculation
2.3 Restrictions. Notwithstanding anything to the contrary contained
------------
herein, the Holder hereby agrees that the Holder shall not, on any trading day,
sell any Common Stock issued upon exercise of this Warrant in excess of ten
percent (10%) of the aggregate number of shares of the Common Stock traded on
such trading day.
3. Effect of Reorganization, Etc.; Adjustment of Exercise Price.
------------------------------------------------------------
3.1 Reorganization, Consolidation, Merger, Etc. In case at any
---------------------------------------------
time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other
person, or (c) transfer all or substantially all of its
properties or assets to any other person under any plan or
arrangement contemplating the dissolution of the Company,
then, in each such case, as a condition to the consummation of
such a transaction, proper and adequate provision shall be
made by the Company whereby the Holder of this Warrant, on the
exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger
or the effective date of such dissolution, as the case may be,
shall receive, in lieu of the Common Stock (or Other
Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other
securities and property (including cash) to which such Holder
would have been entitled upon such consummation or in
connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior
thereto, all subject to further adjustment thereafter as
provided in Section 4.
3.2 Dissolution. In the event of any dissolution of the Company
-----------
following the transfer of all or substantially all of its
properties or assets, the Company, concurrently with any
distributions made to holders of its Common Stock, shall at
its expense deliver or cause to be delivered to the Holder the
stock and other securities and property (including cash, where
applicable) receivable by the Holder of this Warrant pursuant
to Section 3.1, or, if the Holder shall so instruct the
Company, to a bank or trust company specified by the Holder
and having its principal office in New York, NY as trustee for
the Holder of this Warrant (the "Trustee").
3.3 Continuation of Terms. Upon any reorganization, consolidation,
---------------------
merger or transfer (and any dissolution following any
transfer) referred to in this Section 3, this Warrant shall
continue in full force and effect and the terms hereof shall
be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger
or the effective date of dissolution following any such
4
transfer, as the case may be, and shall be binding upon the
issuer of any such stock or other securities, including, in
the case of any such transfer, the person acquiring all or
substantially all of the properties or assets of the Company,
whether or not such person shall have expressly assumed the
terms of this Warrant as provided in Section 4. In the event
this Warrant does not continue in full force and effect after
the consummation of the transactions described in this Section
3, then the Company's securities and property (including cash,
where applicable) receivable by the Holders of the Warrant
will be delivered to Holder or the Trustee as contemplated by
Section 3.2.
4. Extraordinary Events Regarding Common Stock. In the event that the
-----------------------------------------------
Company shall (a) issue additional shares of the Common Stock as a
dividend or other distribution on outstanding Common Stock, (b)
subdivide its outstanding shares of Common Stock, or (c) combine its
outstanding shares of the Common Stock into a smaller number of shares
of the Common Stock, then, in each such event, the Exercise Price
shall, simultaneously with the happening of such event, be adjusted by
multiplying the then Exercise Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be
the number of shares of Common Stock outstanding immediately after such
event, and the product so obtained shall thereafter be the Exercise
Price then in effect. The Exercise Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive
event or events described herein in this Section 4. The number of
shares of Common Stock that the Holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be
entitled to receive shall be adjusted to a number determined by
multiplying the number of shares of Common Stock that would otherwise
(but for the provisions of this Section 4) be issuable on such exercise
by a fraction of which (a) the numerator is the Exercise Price that
would otherwise (but for the provisions of this Section 4) be in
effect, and (b) the denominator is the Exercise Price in effect on the
date of such exercise. Notwithstanding the foregoing provisions of this
Section 4, in no event shall the exercise price of this Warrant be
reduced below the par value of the Common Stock.
5. Certificate as to Adjustments. In each case of any adjustment or
-------------------------------
readjustment in the shares of Common Stock (or Other Securities)
issuable on the exercise of this Warrant, the Company at its expense
will promptly cause its Chief Financial Officer or other appropriate
designee to compute such adjustment or readjustment in accordance with
the terms of this Warrant and prepare a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (a)
the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold
or deemed to have been issued or sold, (b) the number of shares of
Common Stock (or Other Securities) outstanding or deemed to be
outstanding, and (c) the Exercise Price and the number of shares of
Common Stock to be received upon exercise of this Warrant, in effect
immediately prior to such adjustment or readjustment and as adjusted or
readjusted as provided in this Warrant. The Company will forthwith mail
a copy of each such certificate to the Holder of this Warrant and any
Warrant agent of the Company (appointed pursuant to Section 12 hereof).
5
6. Reservation of Stock, Etc., Issuable on Exercise of Warrant. The
-----------------------------------------------------------------
Company will at all times reserve and keep available, solely for
issuance and delivery on the exercise of this Warrant, shares of Common
Stock (or Other Securities) from time to time issuable on the exercise
of this Warrant.
7. Company Repurchase Option. If the Company's obligations to the Holder
--------------------------
under the Secured Term Note dated May 31, 2006 issued on the date
hereof have been irrevocably repaid in full prior to May 31, 2007, upon
ten (10) business days prior notice to Holder, the Company shall have
the right to reduce the number of shares originally subject to this
Warrant by 1,175,950 shares, such that the maximum number of shares
that may be purchased upon exercise of this Warrant shall be reduced to
2,183,906 shares, in each case subject to adjustment pursuant to
Section 4 hereof, by payment to the Holder of an amount equal to
$100,000.
8. Assignment; Exchange of Warrant. Subject to compliance with applicable
--------------------------------
securities laws, this Warrant, and the rights evidenced hereby, may be
transferred by any registered holder hereof (a "Transferor") in whole
or in part. On the surrender for exchange of this Warrant, with the
Transferor's endorsement in the form of Exhibit B attached hereto (the
"Transferor Endorsement Form") and together with evidence reasonably
satisfactory to the Company demonstrating compliance with applicable
securities laws, which shall include, without limitation, if requested
in writing by the Company, the provision of a legal opinion from the
Transferor's counsel (at the Company's expense) that such transfer is
exempt from the registration requirements of applicable securities
laws, and with payment by the Transferor of any applicable transfer
taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form
(each a "Transferee"), calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face
or faces of the Warrant so surrendered by the Transferor.
9. Replacement of Warrant. On receipt of evidence reasonably satisfactory
----------------------
to the Company of the loss, theft, destruction or mutilation of this
Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of this Warrant, the
Company at its expense will execute and deliver, in lieu thereof, a new
Warrant of like tenor.
10. Registration Rights. The Holder of this Warrant has not been granted
--------------------
registration rights by the Company.
11. Maximum Exercise. The Holder shall not be entitled to exercise this
-----------------
Warrant on an exercise date, in connection with that number of shares
of Common Stock which would be in excess of the sum of (i) the number
of shares of Common Stock beneficially owned by the Holder and its
affiliates on such exercise date, and (ii) the number of shares of
Common Stock issuable upon the exercise of this Warrant with respect to
which the determination of this proviso is being made on such exercise
date, which would result in beneficial ownership by the Holder and its
affiliates of more than 4.99% of the
6
outstanding shares of Common Stock of the Company on such date. For the
purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder. The limitation described in this Section
11 shall automatically become null and void following notice to the
Company upon the occurrence and during the continuance of an Event of
Default under the Note made by the Company to the Holder dated the date
hereof (as amended, modified or supplemented from time to time, the
"Note"), upon 75 days prior notice to the Company, or upon receipt by
the Holder of a Notice of Redemption (as defined in the Note).
Notwithstanding anything contained herein to the contrary, the
provisions of this Section 10 are irrevocable and may not be waived by
the Holder or the Company.
12. Warrant Agent. The Company may, by written notice to the Holder of this
-------------
Warrant, appoint an agent for the purpose of issuing Common Stock (or
Other Securities) on the exercise of this Warrant pursuant to Section
1, exchanging this Warrant pursuant to Section 8, and replacing this
Warrant pursuant to Section 9, or any of the foregoing, and thereafter
any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
13. Transfer on the Company's Books. Until this Warrant is transferred on
--------------------------------
the books of the Company, the Company may treat the registered Holder
hereof as the absolute owner hereof for all purposes, notwithstanding
any notice to the contrary.
14. Notices, Etc. All notices and other communications from the Company to
-------------
the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been
furnished to the Company in writing by such Holder or, until any such
Holder furnishes to the Company an address, then to, and at the address
of, the last Holder of this Warrant who has so furnished an address to
the Company.
15. Miscellaneous. This Warrant and any term hereof may be changed, waived,
-------------
discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be governed by and construed
in accordance with the laws of State of New York without regard to
principles of conflicts of laws. Any action brought concerning the
transactions contemplated by this Warrant shall be brought only in the
state courts of New York or in the federal courts located in the state
of New York; provided, however, that the Holder may choose to waive
this provision and bring an action outside the State of New York. The
individuals executing this Warrant on behalf of the Company agree to
submit to the jurisdiction of such courts and waive trial by jury. The
prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision
of this Warrant is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative
to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall
not affect the validity or enforceability of any other provision of
this Warrant. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the
terms hereof. The invalidity or unenforceability of
7
any provision hereof shall in no way affect the validity or
enforceability of any other provision hereof. The Company acknowledges
that legal counsel participated in the preparation of this Warrant and,
therefore, stipulates that the rule of construction that ambiguities
are to be resolved against the drafting party shall not be applied in
the interpretation of this Warrant to favor any party against the other
party.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS.]
8
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first written above.
eLEC COMMUNICATIONS CORP.
WITNESS:
By: /s/ Xxxx X. Xxxx
---------------------------------
Name: Xxxx X. Xxxx
---------------------------------
/s/ Xxxxx Xxxxxxxx Title: Chief Executive Officer
-------------------------------- ---------------------------------
9
EXHIBIT A
FORM OF SUBSCRIPTION
(To Be Signed Only On Exercise Of Warrant)
TO: eLEC Communications Corp.
00 Xxxxx Xxxxxxxx, Xxxxx 000
Xxxxx Xxxxxx, Xxx Xxxx 00000
Attention: Chief Financial Officer
The undersigned, pursuant to the provisions set forth in the attached
Warrant (No.____), hereby irrevocably elects to purchase ________ shares of the
Common Stock covered by such Warrant.
The undersigned herewith makes payment of the full Exercise Price for
such shares at the price per share provided for in such Warrant, which is
$___________, in lawful money of the United States.
The undersigned requests that the certificates for such shares be
issued in the name of, and delivered to ____________________________ whose
address is _____________________________________________.
The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable upon exercise of the within Warrant
shall be made pursuant to registration of the Common Stock under the Securities
Act of 1933, as amended (the "Securities Act"), or pursuant to an exemption from
registration under the Securities Act.
Dated:
----------------------- --------------------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
Address:
------------------------------
------------------------------
A-1
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To Be Signed Only On Transfer Of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of eLEC Communications Corp. into which the within
Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred," respectively, opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the books
of eLEC Communications Corp. with full power of substitution in the premises.
Percentage Number
Transferees Address Transferred Transferred
----------- ------- ----------- -----------
-------------------------------------- ----------------------------------- ----------------- ----------------
-------------------------------------- ----------------------------------- ----------------- ----------------
-------------------------------------- ----------------------------------- ----------------- ----------------
-------------------------------------- ----------------------------------- ----------------- ----------------
Dated:
----------------------- --------------------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
Address:
------------------------------
------------------------------
SIGNED IN THE PRESENCE OF:
--------------------------------------------
(Name)
ACCEPTED AND AGREED:
[TRANSFEREE]
-----------------------------------
(Name)
B-1
