Exhibit 4.1
SECURITYHOLDERS AGREEMENT
dated as of November 1, 1996
among
XX. XXXXXX XXXX,
ECONOPHONE, INC.
and
PRINCES GATE INVESTORS II, L.P.
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
............................................................................ 1
SECTION 1.1. Definitions............................................... 1
ARTICLE II
RIGHTS AND OBLIGATIONS WITH
RESPECT TO TRANSFER
............................................................................ 5
SECTION 2.1. Restrictive Legend........................................ 5
ARTICLE III
REGISTRATION RIGHTS
............................................................................ 6
SECTION 3.1. Demand Registration Rights................................ 6
SECTION 3.2. Piggy-Back Registration................................... 7
SECTION 3.3. Reduction of Offering..................................... 7
SECTION 3.4. Registration Procedures................................... 8
SECTION 3.5. Registration Expenses..................................... 11
SECTION 3.6. Indemnification by the Issuer............................. 11
SECTION 3.7. Indemnification by Selling Holders........................ 12
SECTION 3.8. Conduct of Indemnification Proceedings.................... 12
SECTION 3.9. Contribution.............................................. 13
SECTION 3.10. Participation in Underwritten Registrations.............. 14
SECTION 3.11. Rule 144 and Rule 144A................................... 15
SECTION 3.12. Holdback Agreements...................................... 15
ARTICLE IV
COVENANTS
............................................................................ 16
SECTION 4.1. Information............................................... 16
SECTION 4.2. Right to Participate in Certain Dispositions.............. 17
SECTION 4.3. Drag-Along................................................ 19
SECTION 4.4. Employment Agreements..................................... 19
SECTION 4.5. E-Gram.................................................... 20
SECTION 4.6. Carrier Contracts......................................... 20
i
ARTICLE V
WARRANTS
............................................................................ 20
SECTION 5.1. Issuance of Warrants...................................... 20
ARTICLE VI
MISCELLANEOUS
............................................................................ 22
SECTION 6.1. Holders not Signatories Hereto............................ 22
SECTION 6.2. Headings.................................................. 22
SECTION 6.3. No Inconsistent Agreements................................ 22
SECTION 6.4. Parent Entities........................................... 22
SECTION 6.5. Entire Agreement.......................................... 22
SECTION 6.6. Notices................................................... 22
SECTION 6.7. Applicable Law............................................ 23
SECTION 6.8. Severability.............................................. 23
SECTION 6.9. Termination............................................... 23
SECTION 6.10. Successors, Assigns, Transferees......................... 23
SECTION 6.11. Amendments; Waivers...................................... 23
SECTION 6.12. Counterparts; Effectiveness.............................. 24
SECTION 6.13. Recapitalization, etc.................................... 24
SECTION 6.14. Remedies................................................. 24
SECTION 6.16. Subsidiary Offerings..................................... 24
EXHIBIT A - Form of Management Reporting Package
ii
SECURITYHOLDERS AGREEMENT
SECURITYHOLDERS AGREEMENT dated as of November 1, 1996 (the "Series A
Preferred Issue Date") among Xx. Xxxxxx Xxxx ("Xx. Xxxx"), Econophone, Inc., a
New York corporation ("Issuer"), and Princes Gate Investors II, L.P.
("Purchaser").
WHEREAS, the Issuer and the Purchaser have entered into the Securities
Purchase Agreement (as defined below) pursuant to which the Purchaser has agreed
to purchase shares of Series A Preferred (as defined below) in accordance with
the terms thereof.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS. (a) The following terms, as used herein,
have the following meanings:
"Board of Directors" means the Board of Directors of the Issuer.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized or required
by law to close.
"Certificate of Amendment" means the certificate of amendment to the
Company's certificate of incorporation relating to, among other things, the
Series A Preferred, and filed with the Secretary of State of the State of
New York on the date hereof.
"Charter" means the Certificate of Incorporation of the Issuer, as in
effect as of the Closing Date, in the form attached as Exhibit D to the
Securities Purchase Agreement.
"Closing Date" means the date of the closing of the purchase of
Series A Preferred pursuant to the Securities Purchase Agreement.
"Commission" means the Securities and Exchange Commission and any
successor agency having similar powers.
"Common Stock" means the Common Stock of the Issuer.
"Conversion Shares" means the shares of common stock of the Issuer
issuable or issued upon the conversion of the Series A Preferred.
"Equity Securities" means the Series A Preferred, the Conversion
Shares, the Warrants and the Warrant Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Holder" means any registered holder of shares of Series A Preferred
or Registrable Securities, or any registered holder of Warrants.
"Initial Public Offering" means the initial public offering of Common
Stock of the Issuer generating gross proceeds of at least $25 million and
registered with the Commission on Form S-1 or such other form as may then
be available; the shares of Common Stock sold in such initial public
offering and generating such $25 million of gross proceeds may be sold by
the Issuer, any securityholder of the Issuer (including, without
limitation, the Holders) or any combination of the Issuer and its
securityholders.
"Issuer" has the meaning set forth in the first paragraph of this
Agreement.
"Person" means an individual, partnership, corporation, trust, joint
stock company, association, joint venture, or any other entity or
organization, including, without limitation, a government or political
subdivision or an agency or instrumentality thereof.
"Piggy-Back Registration" means any registration of any shares of
Common Stock with respect to which any Holder elects to include Registrable
Securities pursuant to Section 3.2 hereof.
"Purchaser" has the meaning set forth in the first paragraph of this
Agreement.
"Registrable Securities" means the Conversion Shares and the Warrant
Shares; PROVIDED, in any event, that such securities shall cease to be
Registrable Securities when (x) a registration statement relating to such
securities shall have been declared effective by the Commission and such
securities shall have been disposed of pursuant to such effective
registration statement, (y) such securities may be disposed of pursuant to
Rule 144(k) or (z) such securities are no longer outstanding. Solely for
purposes of determining the Holders entitled to exercise registration
rights hereunder, "Registrable Securities" shall be deemed to include
Conversion Shares and Warrant Shares that would be issued upon conversion
or exercise of the Series A Preferred and the Warrants, as applicable.
"Registration Expenses" means, to the extent applicable, all
(i) registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws (including, without limitation, reasonable fees
and disbursements of a qualified independent underwriter, if any, counsel
in connection therewith and the reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), (iii) printing expenses, (iv) internal expenses of the Issuer
(including, without limitation, all salaries and expenses of officers and
employees performing legal or accounting duties), (v) reasonable fees and
disbursements of counsel for the Issuer, (vi) customary fees and expenses
for independent certified public accountants retained by the Issuer
(including, without limitation, the expenses of any comfort letters or
costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters), (vii) reasonable fees
and expenses of any special experts retained by the Issuer in connection
with such registration, (viii) reasonable fees and expenses of one counsel
for the Holders, (ix) fees and expenses of listing the Registrable
Securities on a securities exchange or on the NASDAQ National Market
System, (x) rating agency fees, (xi) the costs and expenses of the Issuer
relating to investor presentations on the "road show" undertaken in
connection with the marketing of Registrable Securities, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with
the road show presentations with the prior approval of the Issuer, travel
and lodging expense of the representatives and officers of the Issuer and
any such consultants, and the cost of any transportation utilized in
connection with the road show, and (xii) all other costs or expenses
incident to the performance of the obligations of the Issuer with respect
to Article III. Nothing in this definition shall oblige the Issuer to pay
any underwriting or placement agent fees or discounts or any securities
transfer taxes.
"Rule 144" means Rule 144 under the Securities Act, as such rule may
be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act, as such rule may
be amended from time to time.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Securities Purchase Agreement" means the Securities Purchase
Agreement dated as of the date hereof by and between the Issuer and the
Purchaser.
"Selling Holder" means a Holder who proposes to Transfer Registrable
Securities pursuant to Article III.
"Series A Preferred" means the Redeemable Convertible Preferred Stock,
Series A, of the Issuer, having the rights and privileges set forth in the
Charter.
"Series A Preferred Issue Date" has the meaning set forth in the first
paragraph of this Agreement.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which Voting Securities representing more than 50% of the
voting power of such corporation's or entity's Voting Securities are at the
time directly or indirectly owned by such Person.
"Transfer" means any transfer, in whole or in part, by sale, pledge,
assignment, grant or other means.
"Underwriter" means a securities dealer who purchases any Registrable
Securities as a principal in connection with a distribution of such
Registrable Securities and not as part of such dealer's market-making
activities.
"Voting Securities" of any Person means stock or other ownership
interests of such Person entitled to vote for the board of directors of
such Person or other entity performing similar functions.
"Warrant Shares" means the shares of common stock of the Issuer
issuable or issued upon exercise of the Warrants.
(b) Each of the following terms is defined in the Section opposite
such term:
TERM SECTION
Demand Registration 3.1
Effective Date 6.12
Indemnified Party 3.8
Indemnifying Party 3.8
IPO Demand 3.1
Notice of Interest 4.2
Notice Period 4.2
Offer 4.2
Offer Notice 4.2
Offered Shares 4.2
Pro Rata Portion 4.2
Registration Demand 3.1
Related Party 4.2
Requesting Holders 3.1
Shares 4.2
Warrants 5.1
ARTICLE II
RIGHTS AND OBLIGATIONS WITH
RESPECT TO TRANSFER
SECTION 2.1. RESTRICTIVE LEGEND. (a) For so long as this Agreement
remains in effect, each certificate representing an Equity Security owned by any
holder or a subsequent transferee shall (unless otherwise permitted by the
provisions of Section 2.1(b)) include a legend in substantially the following
form:
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT
BE SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT, THE RULES
AND REGULATIONS PROMULGATED THEREUNDER AND ANY APPLICABLE STATE
SECURITIES LAWS.
THE SECURITY REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A
SECURITYHOLDERS AGREEMENT DATED AS OF NOVEMBER 1, 1996 THAT FIXES
CERTAIN RIGHTS AND OBLIGATIONS OF THE ISSUER AND THE HOLDER OF THIS
SECURITY. A COPY OF THE AGREEMENT IS ON FILE AT THE ISSUER'S
PRINCIPAL OFFICE.
(b) Any holder of an Equity Security may, upon providing evidence
reasonably satisfactory to the Issuer (including, if so requested by the Issuer,
an opinion of counsel to such Holder) that such Equity Security may be sold
pursuant to Rule 144(k), exchange the certificate representing such Equity
Security for a new certificate that does not bear the legend set forth in
Section 2.1(a).
ARTICLE III
REGISTRATION RIGHTS
SECTION 3.1. DEMAND REGISTRATION RIGHTS. (a) IPO DEMAND. From and
after the date of the third anniversary of the Series A Preferred Issue Date
until the consummation of the Initial Public Offering, holders of at least 50%
of the outstanding Registrable Securities (determined on a fully diluted basis
assuming the conversion of all Series A Preferred and Warrants then outstanding)
may make a written request (the "IPO Demand") that the Issuer consummate the
Initial Public Offering and, upon receipt of such IPO Demand, the Issuer shall
be obligated to promptly use its best efforts to proceed to consummate the
Initial Public Offering as provided for in Section 3.4 hereof.
(b) SUBSEQUENT DEMAND. At any time after the consummation of the
Initial Public Offering, the Holders of at least 25% of the outstanding
Registrable Securities (determined on a fully diluted basis assuming the
conversion of all Series A Preferred and Warrants then outstanding) may make a
written request (the "Registration Demand") for registration (a "Demand
Registration") under the Securities Act of Registrable Securities; PROVIDED that
upon the request of the lead Underwriter in the Initial Public Offering, the
Holders shall not make a Registration Demand during such period as the lead
Underwriter may reasonably request (but in no event longer than 180 days)
beginning on the date of the final prospectus with respect to the Initial Public
Offering. The Registration Demand will specify the number of Registrable
Securities proposed to be sold and will also specify the intended method of
disposition thereof. The Holders shall not be entitled to make more than two
Registration Demands and the Issuer shall not be obligated to effect more than
one Demand Registration in any twelve-month period. Any Registration Demand
shall be for the sale of Registerable Securities with an anticipated sale price
of at least $10,000,000; PROVIDED, that the holders of Registerable Securities
may, in their discretion, make a Registration Demand for securities involving
the sale of Registerable Securities with an anticipated sale price of less than
$10,000,000, in which case the holders of the Registerable Securities shall not
be entitled to request any additional Registration Demands hereunder. The
Holder or Holders (as applicable) making such request are referred to herein
collectively as the "Requesting Holders."
(c) EFFECTIVE REGISTRATION. A registration requested pursuant to
this Section 3.1 shall be deemed not to have been effected (i) if a registration
statement with respect thereto shall not have become effective, (ii) if after it
has become effective, such registration is interfered with for any reason by any
stop order, injunction or other order or requirement of the Commission or any
other governmental agency or any court, and the result of such interference is
to prevent the Selling Holders from disposing of the Registrable Securities to
be sold thereunder in accordance with the intended methods of disposition or
(iii) f the conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with any underwritten
registration shall not be satisfied or waived with the consent of the Issuer,
the Selling Holders or the Underwriter, as applicable.
(d) UNDERWRITING. If the Requesting Holders so elect, the offering
of Registrable Securities pursuant to a Demand Registration shall be in the form
of an underwritten offering. The Issuer shall select the book-running lead
Underwriter and any additional investment bankers and managers in connection
with the offering, each of which shall be reasonably satisfactory to the
Requesting Holders of a majority of the Registrable Securities to be registered.
SECTION 3.2. PIGGY-BACK REGISTRATION. If the Issuer proposes to file
a registration statement under the Securities Act with respect to an offering of
common stock (i) for its own account (other than a registration statement on
Form S-4 or S-8 (or any substitute form that may be adopted by the Commission))
or (ii) for the account of any Holders (other than the holders of Registrable
Securities) then the Issuer shall give written notice of such proposed filing to
the holders of Registrable Securities as soon as practicable (but in any event
not less than 15 days before the filing date), and such notice shall offer each
of the holders of Registrable Securities the opportunity to register any of its
Registrable Securities. Notwithstanding anything herein to the contrary, the
Issuer shall be entitled to terminate any Piggy-Back Registration at any time.
SECTION 3.3. REDUCTION OF OFFERING. Notwithstanding anything
contained in any other Section herein, if the lead Underwriter of an offering
described in Section 3.1 or 3.2 delivers a written statement to the Issuer that
the success of such offering would, in its opinion, be materially and adversely
affected by inclusion of all the securities requested to be included, then the
Issuer may, upon written notice to the Holders, reduce (if and to the extent
stated by such Underwriter to be necessary to eliminate such effect) the number
of the securities required to be registered so that the resultant aggregate
number of the securities requested to be registered that will be included in
such registration shall be equal to the numbers of the securities referred to in
the preceding parenthetical; PROVIDED, HOWEVER, that priority in such
registration shall be (A) in the case of an Initial Public Offering resulting
from the giving of an IPO Demand, (i) first, securities offered for the account
of the Issuer, (ii) second, securities offered for the account of the holders of
Registrable Securities and (iii) third, among any other securityholders entitled
to registration rights pursuant to any contractual right of registration, in
accordance therewith, and (B) in the case of any other initial public offering,
(i) first, securities for the account of the Issuer and (ii) second, among any
other securityholders of the Issuer entitled to registration rights pursuant to
any contractual right of registration, in accordance therewith, (C) in the case
of any Registration Demand by holders of Registrable Securities, first,
securities offered for the account of such holders, (ii) second, pro rata among
any other securityholders of the Issuer entitled to register securities pursuant
to a contractual right of registration in accordance therewith and (iii) third,
securities offered for the account of the Issuer and (D) in any case where any
securityholder other than a holder of Registrable Securities has requested
registration pursuant to a contractual right of registration (i) first to
securities offered for the account of any such holders, in accordance therewith,
(ii) second, pro rata among any securities of the holders or Registrable
Securities to the extent requested to be registered pursuant to Section 3.2 and
(iii) third, securities offered for the account of the Issuer.
SECTION 3.4. REGISTRATION PROCEDURES. Whenever the Issuer receives
an IPO Demand or a Registration Demand or any holder of Registrable Securities
elects to participate in a Piggy-Back Registration pursuant to Section 3.2
hereof, the Issuer will use its best efforts, (i) in the case of the IPO Demand,
to consummate the Initial Public Offering, and (ii) in the case of a
Registration Demand or election to participate in a Piggy-Back Registration, to
effect the registration and the sale of the relevant Registrable Securities in
accordance with the intended method of disposition thereof, in each case as
promptly as practicable, and in connection therewith:
(a) The Issuer will promptly (or in the case of a registration
pursuant to Section 3.2, on such time frame as shall be properly specified
by the securityholders requesting such registration) prepare and file with
the Commission a registration statement on any form for which the Issuer
then qualifies or which counsel for the Issuer shall deem appropriate and
which form shall be available for the sale of the Registrable Securities to
be registered thereunder in accordance with the intended method of
distribution thereof (which form shall be a Form S-1 in the case of the
Initial Public Offering, or a successor form thereto), and use its best
efforts to cause such filed registration statement to become effective as
soon as practicable (or, in the case of a registration pursuant to
Section 3.2, on such time frame as shall be properly specified by the
securityholders requesting such registration) and remain effective for a
period of not less than 180 days or such shorter period which will
terminate when all of the Registrable Securities covered by such
registration statement have been sold (but not before the expiration of the
40 or 90 day period referred to in Section 4(3) of the Securities Act and
Rule 174 thereunder, to the extent applicable); PROVIDED that if the Issuer
shall furnish to the Requesting Holders a certificate signed by either its
Chairman, President, or Vice-President stating that in his good faith
judgment it would materially adversely affect the Issuer or its
shareholders for such a registration statement to be filed promptly, the
Issuer may delay by 90 days any IPO Demand or Registration Demand made in
accordance with Section 3.1.
(b) The Issuer will, concurrently with filing a registration
statement or prospectus or any amendment or supplement thereto, furnish to
the Requesting Holders, if any, and each Underwriter, if any, such number
of copies of such registration statement, each amendment and supplement
thereto (and, in each case one copy of all exhibits thereto and documents
incorporated by reference therein if so requested), the prospectus included
in such registration statement (including each preliminary prospectus) and
such other documents as the Requesting Holders or such Underwriter may
reasonably request in order to facilitate the sale of the Registrable
Securities.
(c) After the filing of the registration statement, the Issuer will
promptly notify the Selling Holders of any stop order issued or threatened
by the Commission and use its best efforts to prevent the entry of such
stop order or to remove it if entered.
(d) The Issuer will use its best efforts to (i) register or qualify
the Registrable Securities under such other securities or blue sky laws of
such U.S. jurisdictions as the Selling Holders request, keep such
registration or qualification in effect for so long as such registration
statement under the Securities Act remains in effect, and take any other
action which may be reasonably necessary to enable the Selling Holders to
consummate the disposition in such jurisdictions of the securities owned by
the Selling Holders and (ii) use its best efforts to cause such Registrable
Securities to be registered with or approved by such other governmental
agencies or authorities as may be necessary or advisable, by virtue of the
business and operations of the Issuer and/or its Subsidiaries, to enable
the Selling Holders to consummate the disposition of such Registrable
Securities; PROVIDED, that the Issuer will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise
be required to qualify but for this paragraph (d), (ii) subject itself to
taxation in any such jurisdiction other than taxation arising with respect
to the registration of securities or (iii) consent to general service of
process in any such jurisdiction.
(e) At any time when a prospectus relating to the sale of Registrable
Securities is required to be delivered under the Securities Act, the Issuer
will immediately notify the Selling Holders of the occurrence of an event
requiring the preparation of a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain an 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 the light of the
circumstances under which they were made, not misleading and promptly make
available to the Selling Holders and the Underwriters any such supplement
or amendment. The Selling Holders agree that, upon receipt of any notice
from the Issuer of the happening of any event of the kind described in the
preceding sentence, the Selling Holders will forthwith discontinue the
offer and sale of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until receipt of the copies
of such supplemented or amended prospectus and, if so directed by the
Issuer, the Selling Holders will deliver to the Issuer all copies, other
than permanent file copies then in the possession of the Selling Holders,
of the most recent prospectus covering such Registrable Securities at the
time of receipt of such notice. In the event the Issuer shall give such
notice, the Issuer shall extend the period during which such registration
statement shall be maintained effective as provided in Section 3.4(a)
hereof by the number of days during the period from and including the date
of the giving of such notice to the date when the Issuer shall make
available to the Selling Holders such supplemented or amended prospectus.
(f) The Issuer will enter into customary agreements (including,
without limitation, an underwriting agreement in customary form) and take
such other actions, including, without limitation, engaging in a road show
and preparing and rehearsing therefor, as are customary in order to
expedite or facilitate the disposition of such Registrable Securities in
the manner in which they are intended to be disposed of.
(g) The Issuer will furnish to the Selling Holders and to each
Underwriter, if any, a signed counterpart, addressed to the Selling Holders
or such Underwriter, of (i) an opinion or opinions of counsel to the Issuer
and (ii) a comfort letter or comfort letters from the Issuer's independent
public accountants, each in customary form and covering such matters as are
customarily covered by opinions and comfort letters with respect to
companies such as the Issuer (including, without limitation, regulatory
compliance opinions), as the Selling Holders or the lead Underwriter
therefor reasonably requests.
(h) The Issuer will otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its securityholders, as soon as reasonably practicable, an earnings
statement covering a period of 12 months, beginning within three months
after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities
Act.
(i) The Issuer will provide and cause to be maintained a transfer
agent and registrar of national standing for all Registrable Securities
covered by such registration statement from and after a date not later than
the effective date of such registration statement.
(j) The Issuer will use its best efforts (i) to cause all such
Registrable Securities covered by such registration statement to be listed
on any national securities exchange (if such Registrable Securities are not
already listed), and on each other securities exchange on which similar
securities issued by the Issuer are then listed, if the listing of such
Registrable Securities is then permitted under the rules of such exchange;
or (ii) prior to the sale of the Registrable Securities, to secure the
designation of all such Registrable Securities covered by such registration
statement as a NASDAQ "national market system security" within the meaning
of Rule 11Aa2-1 of the Commission or, failing that, to secure NASDAQ
authorization for such Registrable Securities, in each case if the
Registrable Securities so qualify, and, without limiting the generality of
the foregoing, to arrange for at least two market makers to register as
such with respect to such Registrable Securities with the National
Association of Securities Dealers, in the case of each action referred to
in this clause (ii) if requested by the Holder or by the lead Underwriter.
Notwithstanding anything to the contrary in this Section 3.4, nothing
contained herein shall be deemed to limit the last sentence of Section 3.02 or
to impose on the Issuer in connection with any registration pursuant to
Section 3.2 hereof any obligation in excess of that required to be performed by
the Issuer for the benefit of or at the request of the securityholders
requesting such registration and the Underwriters, if any, retained in
connection therewith.
SECTION 3.5. REGISTRATION EXPENSES. Registration Expenses incurred
in connection with any registration made or requested to be made pursuant to
this Article III will be borne by the Issuer, whether or not any such
registration statement becomes effective, to the extent permitted by applicable
law; provided that the Issuer shall not be responsible for Registration Expenses
that relate to a registration triggered by an IPO Demand or Registration Demand
if such registration is cancelled solely (i) as a result of a request from the
Selling Holders or (ii) as a result of acts or omissions on the part of any
Selling Holder.
SECTION 3.6. INDEMNIFICATION BY THE ISSUER. To the extent permitted
by applicable law, the Issuer agrees to indemnify and hold harmless each Selling
Holder, its officers, directors and agents, and each person, if any, who
controls each such Selling Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, liabilities and expenses caused by any untrue statement
or alleged untrue statement of a material fact contained in any registration
statement or prospectus relating to the Registrable Securities (as amended or
supplemented if the Issuer shall have furnished any amendments or supplements
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of any prospectus or
preliminary prospectus, in the light of the circumstances under which they were
made) not misleading, except insofar as such losses, claims, damages,
liabilities or expenses are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information furnished in writing
to the Issuer by or on behalf of any such Selling Holder expressly for use
therein. The Issuer also agrees, to the extent permitted by applicable law, to
indemnify any Underwriters of the Registrable Securities, their officers and
directors and each Person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Selling Holders provided in
this Section 3.6. Notwithstanding the foregoing, the Issuer shall not be
required to indemnify and hold harmless any Selling Holder with respect to any
losses, claims, damages, liabilities and expenses caused solely by such Holder's
failure to comply with the penultimate sentence of Section 3.4(e).
SECTION 3.7. INDEMNIFICATION BY SELLING HOLDERS. To the extent
permitted by applicable law, each Selling Holder agrees, severally but not
jointly, to indemnify and hold harmless the Issuer, its officers, directors and
agents and each person, if any, who controls the Issuer within the meaning of
either Section 15 of the Securities Act of Section 20 of the Exchange Act, to
the same extent as the foregoing indemnity from the Issuer to such Selling
Holder, but only with reference to (i) information related to such Selling
Holder furnished in writing by or on behalf of such Selling Holder expressly for
use in any registration statement or prospectus relating to the Registrable
Securities, or any amendment or supplement thereto, or any preliminary
prospectus, (ii) such Selling Holder's failure to comply with the penultimate
sentence of Section 3.4(e) and (iii) if the Issuer shall have provided such
Selling Holder with an appropriate prospectus, such Selling Holder's failure to
deliver such prospectus to the purchaser from such Selling Holder. Each Selling
Holder also agrees, to the extent permitted by applicable law, to indemnify and
hold harmless Underwriters of the Registrable Securities, their officers and
directors and each Person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Issuer provided for in this
Section 3.7.
SECTION 3.8. CONDUCT OF INDEMNIFICATION PROCEEDINGS. In case any
proceeding (including, without limitation, any governmental investigation) shall
be instituted involving any Person in respect of which indemnity may be sought
pursuant to Section 3.6 or 3.7, such Person (the "Indemnified Party") shall
promptly notify the Person against whom such indemnity may be sought (the
"Indemnifying Party") in writing and the Indemnifying Party upon request of the
Indemnified Party shall retain counsel reasonably satisfactory to the
Indemnified Party to represent the Indemnified Party and shall pay the
reasonable fees and disbursements of such counsel related to the proceeding. In
any such proceeding, any Indemnified Party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party,unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnified Party and the Indemnifying Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the Indemnifying Party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Indemnified Parties, and that all such fees and expenses shall be
reimbursed as they are incurred (subject to the receipt of reasonably
satisfactory documentation of such fees and expenses). In the case of any such
separate firm for the Indemnified Parties, such firm shall be designated in
writing by the Indemnified Parties; provided, that such firm shall be reasonably
satisfactory to the Indemnifying Party. The Indemnifying Party shall not be
liable for any settlement of any proceeding effected without its consent, but if
settled with such consent, or if there be a final nonappealable judgment for the
plaintiff, the Indemnifying Party shall indemnify and hold harmless such
Indemnified Parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an Indemnified Party shall have requested an
Indemnifying Party to reimburse the Indemnified Party for reasonable fees and
expenses of counsel as contemplated by the third sentence of this paragraph, the
Indemnifying Party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 Business Days after receipt by such Indemnifying Party
of the aforesaid request and (ii) such Indemnifying Party shall not have
reimbursed the Indemnified Party in accordance with such request prior to the
date of such settlement, unless the Indemnifying Party has contested such
reimbursement obligation and provides reasonable assurances that payment of such
reimbursement obligation can be made upon resolution of such dispute (which
shall not necessarily require the posting of a bond or a deposit into escrow).
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending or threatened proceeding
in respect of which any Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless
such settlement (x) includes an unconditional release of such Indemnified Party
from all liability arising out of such proceeding and (y) provides that such
Indemnified Party does not admit any fault or guilt with respect to the subject
matter of such proceeding.
SECTION 3.9. CONTRIBUTION. (a) If the indemnification provided for
herein is for any reason unavailable to the Indemnified Parties in respect of
any losses, claims, damages or liabilities referred to herein, then each such
Indemnifying Party, to the extent permitted by applicable law, 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, claims, damages or
liabilities (i) as between the Issuer and any Selling Holder on the one hand and
the Underwriters on the other, in such proportion as is appropriate to reflect
the relative benefits received by the Issuer and such Selling Holder on the one
hand and the Underwriters on the other from the offering of the securities, or
if such allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits but also the relative
fault of the Issuer and such Selling Holder on the one hand and of the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations, and (ii) as between the Issuer on the one
hand and any Selling Holder on the other, in such proportion as is appropriate
to reflect the relative fault of the Issuer and of such Selling Holder in
connection with such statements or omissions, as well as any other relevant
equitable considerations. The relative benefits received by the Issuer and any
Selling Holder on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Issuer and such Selling Holder bear to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the prospectus. The relative fault of the Issuer and
any Selling Holder on the one hand and of the Underwriters on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Issuer and such Selling
Holder or by the Underwriters. The relative fault of the Issuer on the one hand
and any Selling Holder on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(b) The Issuer and each Selling Holder agree that it would not be
just and equitable if contribution pursuant to this Section 3.9 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages or liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 3.9, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and no Selling Holder
shall be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities of such Selling Holder were
offered to the public (less Underwriters' discounts and commissions) exceeds the
amount of any damages which such Selling Holder has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
SECTION 3.10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person
(including any Selling Holder) may participate in any underwritten registration
hereunder unless such Person (a) agrees to sell such Person's securities on the
basis provided in any underwriting arrangements approved by the Persons entitled
hereunder or otherwise to approve such arrangements and (b) completes, executes
and provides all questionnaires, powers of attorney, indemnities, underwriting
agreements, legal opinions and other documents reasonably required under the
terms of such underwriting arrangements and these registration rights.
SECTION 3.11. RULE 144 AND RULE 144A. The Issuer covenants that it
will file any reports required to be filed by it under the Securities Act and
the Exchange Act and will take such further action as any Selling Holder shall
reasonably request, all to the extent required from time to time to enable
Selling Holders to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
and Rule 144A under the Securities Act, as such Rules may be amended from time
to time, or (b) any similar rule or regulation hereafter adopted by the
Commission; PROVIDED, that, notwithstanding the foregoing, the Issuer shall not
be required by virtue of this Section 3.11 to file an application with PORTAL
with respect to any of the Registrable Securities or the Series A Preferred.
Upon the request of any holder of Registrable Securities, the Issuer will
deliver to such holder a written statement as to whether it has complied with
such requirements.
SECTION 3.12. HOLDBACK AGREEMENTS. (a) RESTRICTIONS ON PUBLIC SALE
BY HOLDER OF REGISTRABLE SECURITIES. If and to the extent requested by the
Issuer, in the case of a non-underwritten public offering, and if and to the
extent requested by the lead Underwriter or Underwriters, in the case of an
underwritten public offering, the Holders agree not to effect, except as part of
such registration, any public sale or distribution of the securities being
registered or a similar security of the Issuer, or any securities convertible
into or exchangeable or exercisable for such securities, including, without
limitation, a sale pursuant to Rule 144 or Rule 144A, during the 10 days prior
to, and during such period that the Issuer (in the case of a non-underwritten
public offering) or the lead Underwriter (in the case of an underwritten public
offering) may reasonably request, but in no event longer than 180 days,
beginning on the effective date of such registration statement.
(b) RESTRICTIONS ON PUBLIC SALE BY THE ISSUER. The Issuer agrees
(i) not to effect any public sale or distribution of any securities similar to
those being registered in accordance with Section 3.1, or any securities
convertible into or exchangeable or exercisable for such securities, during the
7 days prior to, and during such period as the lead Underwriter may reasonably
request, but in no event longer than 180 days, beginning on, the effective date
of any registration statement or the commencement of a public distribution of
Registrable Securities (except as part of such registration statement and except
pursuant to registrations on Form S-4 or S-8 or any successor or similar form
thereto or pursuant to an unregistered offering to employees of the Issuer or
its Subsidiaries pursuant to an employee benefit plan as defined in Rule 405 of
Regulation C of the Securities Act); and (ii) that, during such time as
Registerable Securities are outstanding, any agreement entered into after the
date of this Agreement pursuant to which the Issuer issues or agrees to issue
any privately placed Equity Securities (other than a stock option agreement
under an incentive plan of the Issuer) shall contain a provision under which
holders of such securities agree not to effect any public sale or distribution
of any such securities during the periods described in Section 3.12(a) above, in
each case including, without limitation, a sale pursuant to Rule 144 or Rule
144A (except as part of any such registration, if permitted); PROVIDED, however,
that the provisions of this paragraph (b) shall not prevent the exercise,
conversion or exchange of any securities pursuant to their terms into or for
other securities.
ARTICLE IV
COVENANTS
SECTION 4.1. INFORMATION. So long as at least 35% of the shares of
the Series A Preferred issued on the Series A Preferred Issue Date (as adjusted
for stock splits, reverse stock splits and share reclassifications) remain
outstanding, the Issuer shall deliver to each of the holders of Series A
Preferred:
(a) within forty five (45) days after the end of the first three
fiscal quarters (or, in the case of the quarter ended September 30, 1996, by
January 1, 1997), consolidated balance sheets of the Issuer and its Subsidiaries
as at the end of such period and the related consolidated statements of income,
stockholders' equity and cash flow of the Issuer and its Subsidiaries for such
fiscal quarter, setting forth in each case in comparative form the consolidated
figures for the corresponding period of the previous fiscal year (to the extent
that the statements for the prior period already have been compiled in a
comparative form), all in reasonable detail and certified by the Issuer's Chief
Financial Officer that they fairly present the financial condition of the Issuer
and its Subsidiaries as at the dates indicated and the results of their
operations and changes in their financial position for the periods indicated,
subject to changes resulting from normal year-end adjustments;
(b) within one hundred twenty (120) days after the end of each fiscal
year of the Issuer commencing with the fiscal year ending December 31, 1996,
audited consolidated balance sheets of the Issuer and its Subsidiaries as at the
end of such year and the related audited consolidated statements of income,
stockholders' equity and cash flow of the Issuer and its Subsidiaries for such
fiscal year, setting forth in each case, in a form comparable to the
consolidated figures for the previous year, all in reasonable detail and
accompanied by a report thereon of independent certified public accountants of
recognized national standing selected by the Issuer, which report shall be
unqualified as to scope of audit and shall state that such consolidated
financial statements present fairly the financial position of the Issuer and its
Subsidiaries as at the dates indicated and the results of their operations and
changes in their financial position for the periods indicated in conformity with
generally accepted accounting principles applied on a basis consistent with
prior years (except as otherwise stated therein) and that the examination by
such accountants in connection with such consolidated financial statements has
been made in accordance with generally accepted auditing standards;
(c) as soon as practicable and in any event no later than thirty (30)
days after the end of each fiscal month of the Issuer beginning with the month
ended January 31, 1997, the Econophone, Inc. Management Reporting Package,
substantially in the form of and covering such items set forth in Exhibit A
hereto, for such month;
(d) promptly upon receipt thereof, copies of all reports submitted to
the Issuer by independent public accountants in connection with each annual,
interim or special audit of the Issuer's financial statements made by such
accountant, including, without limitation, the comment letter submitted by such
accountants to management in connection with their annual audit;
(e) promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent or made available
generally by the Issuer to its securityholders or by any Subsidiary of the
Issuer to its securityholders other than the Issuer or another Subsidiary, of
all regular and periodic reports and all registration statements and
prospectuses, if any, filed by the Issuer or any of its Subsidiaries with any
securities exchange or quotation system or with the Commission or any
governmental authority succeeding to any of its functions, and of all press
releases and other written statements made available generally by the Issuer or
any Subsidiary to the public concerning material developments in the business of
the Issuer and its Subsidiaries;
(f) from time to time such additional information regarding the
financial position or business of the Issuer and its Subsidiaries as any Holder
may reasonably request.
(g) The Issuer shall not be required to provide the information
required pursuant to Section 4.1(c), (d) or (f) to any Holder other than the
initial Holder.
SECTION 4.2. RIGHT TO PARTICIPATE IN CERTAIN DISPOSITIONS.
(a) Xx. Xxxx agrees that he shall not Transfer shares of stock of the Issuer
(except a Transfer to a trust or other entity or person for estate planning
purposes or otherwise to any relative or affiliate (any of the foregoing being a
"Related Party") that does not constitute a Change of Control (as defined in the
Certificate of Amendment)), unless the terms and conditions of such Transfer
shall include an offer to include in such Transfer (in accordance with the
provisions of paragraphs (a)-(d) of this Section 4.2), at the option of each of
the Holders, the Pro Rata Portion (as hereinafter defined) of the shares of
Common Stock then owned by each Holder, the Conversion Shares issuable upon
conversion of the shares of Series A Preferred then owned by such Holder and the
Warrant Shares issuable upon the exercise of any Warrants then owned by such
Holder (such shares of Common Stock, Conversion Shares and Warrant Shares being
referred to herein as such Holder's "Shares"), on the same terms and conditions
as the Transfer by Xx. Xxxx.
(b) If Xx. Xxxx or any Related Party receives from a third party or
parties (which shall exclude any Related Party) an offer or offers to purchase
or otherwise acquire (an "Offer") shares of Common Stock held by Xx. Xxxx or
such Related Party (the "Offered Shares"), and Xx. Xxxx or any Related Party
intends to pursue a Transfer of such Offered Shares to such third party or
parties, Xx. Xxxx shall provide written notice (the "Offer Notice") of such
Offer to each Holder not later than 30 days prior to the consummation of such
Transfer; provided, that the obligations of any Related Party contained in the
foregoing sentence shall not apply to shares owned by such Related Party on the
Series A Preferred Issue Date. The Offer Notice shall identify the Offered
Shares, the price offered for such Offered Shares, all other material terms and
conditions of the Offer and, in the case of an Offer in which the consideration
payable for the Offered Shares consists in whole or in part of consideration
other than cash, reasonably detailed information regarding such other
consideration. Each Holder shall have the right and option, for a period of not
less than 20 days after the date the Offer Notice is given to the Holder (the
"Notice Period"), to notify Xx. Xxxx or such Related Party (whichever is
specified in the Offer Notice) of its interest in Transferring up to the Pro
Rata Portion of such Holder's Shares pursuant to the Offer. Each Holder
desiring to exercise such option shall, prior to the expiration of the Notice
Period, provide Xx. Xxxx or such Related Party (whichever is specified in the
Offer Notice) with a written notice specifying the number of Shares which such
Holder has an interest in Transferring pursuant to the Offer (a "Notice of
Interest"). In addition, Xx. Xxxx shall make himself available to the Holders
and representatives thereof, at reasonable times and places, and shall respond
to reasonable inquiries with respect to the Offer, the terms and conditions
thereof and all other matters with respect thereto.
(c) If, at the end of the Notice Period, any Holder shall not have
given a Notice of Interest with respect to some or all of the Pro Rata Portion
of such Holder's Shares contemplated by the Offer, such Holder will be deemed to
have waived all its rights under this Section 4.2 with respect to the Transfer
pursuant to the Offer of the portion of the Pro Rata Portion of the Shares owned
by such Holder with respect to which a Notice of Interest shall not have been
given.
(d) "Pro Rata Portion" means, with respect to each Holder, (A) in the
case of a Transfer in connection with a Change of Control, the total number of
Shares owned by such Holder, and (B) in all other cases, a number equal to the
product of (i) the total number of Shares then owned by such Holder (calculated
on an as converted basis), times (ii) a fraction, the numerator of which shall
be the total number of shares of Common Stock proposed to be Transferred by Xx.
Xxxx or such Related Party (together with the number of shares of Common Stock
issuable upon the exercise of any derivative security proposed to be Transferred
by Xx. Xxxx or such Related Party), and the denominator of which shall be the
total number of shares of Common Stock (together with the number of shares of
Common Stock issuable upon the exercise of any derivative security) owned by
Xx. Xxxx and such Related Parties (including such shares and derivative
securities so proposed to be Transferred, but excluding any Shares owned by any
Related Parties on the Series A Preferred Issue Date). If Xx. Xxxx shall
Transfer any other shares of stock of the Issuer, each Holder shall have the
right to include with such Transfer its pro rata portion of the equity value of
the Issuer.
(e) Xx. Xxxx and any Related Party shall not Transfer any shares of
Common Stock to any Related Party unless such transferee Related Party shall
agree in writing, in a form reasonably satisfactory to the holders of a majority
of the shares of the Series A Preferred, to be subject to and abide by the
provisions of this Section 4.2. This Section 4.2 shall not be binding on any
third party transferee (except any Related Party and Xx. Xxxx) of Xx. Xxxx or
any Related Party.
SECTION 4.3. DRAG-ALONG. If Xx. Xxxx proposes to Transfer
substantially all of the shares of capital stock of the Issuer beneficially
owned (as defined in Rule 13d-3 under the Exchange Act) by him to Persons other
than Related Parties, and if Xx. Xxxx so requests, the Holders shall Transfer
the securities held by them acquired pursuant to this Agreement (or any
securities into which such securities are convertible or exchangeable or for
which they are exercisable) on the same terms as the Transfer by Xx. Xxxx.
Notwithstanding the first two sentences of this paragraph, any such Holder may
instead, contemporaneously with the Transfer contemplated above, require the
Issuer to redeem the securities of the Issuer otherwise subject to the first two
sentences of this Section 4.3 in accordance with Section 7(d) of the Certificate
of Amendment, as if a Change of Control (as defined in the Certificate of
Amendment) had occurred.
SECTION 4.4. EMPLOYMENT AGREEMENTS. (a) Within 30 days after the
Series A Preferred Issue Date, Xx. Xxxx shall enter into an employment agreement
with the Issuer in form and substance reasonably satisfactory to the initial
Holder, Xx. Xxxx and the Issuer, containing, among other things, a duration of
at least 3 years, a covenant by Xx. Xxxx not to compete with the Issuer or its
Subsidiaries (which shall automatically terminate if he is involuntarily
terminated other than for cause) for 1 year after the termination of his
employment, customary confidentiality obligations on the part of Xx. Xxxx and a
covenant by Xx. Xxxx to devote substantially all of his working time to the
business of the Issuer.
(b) The Issuer or one of its Restricted Subsidiaries shall use its
best efforts to, within 60 days after the Series A Preferred Issue Date, enter
into a sales agency agreement with Xxxxx Xxxxxxxx containing terms reasonably
acceptable to the PG Director, including a duration of one year (with a one year
renewal) and a provision under which Xx. Xxxxxxxx agrees to be an exclusive
sales agent for the Issuer or such Restricted Subsidiary during such period.
SECTION 4.5. E-GRAM. At such time as the services presently being
developed by E-Gram Inc. ("E-Gram") are commercially provided to third parties,
Xx. Xxxx shall cause E-Gram to issue to the Holders on a pro rata basis the
number of shares of the capital stock of E-Gram equal to 10% of the then
outstanding capital stock thereof; PROVIDED, that prior to the issuance of such
shares of capital stock to the Holders, E-Gram and the Holders shall agree to
terms substantially similar to Section 4.2, 4.3 and 6.10 hereof and reasonable
anti-dilution provisions. Xx. Xxxx represents that E-Gram is the legal entity
that owns the rights to the E-Gram product.
SECTION 4.6. CARRIER CONTRACTS. The Issuer shall use its best
efforts to, within 30 days after the Preferred Stock Issue Date, provide to
counsel for the initial Holder copies of contracts between it, each of its
Subsidiaries and each of their carriers, including signature pages executed by
such carriers and addendums or annexes specifying any minimum commitment to such
carriers.
ARTICLE V
WARRANTS
SECTION 5.1. ISSUANCE OF WARRANTS. (a) INITIAL GRANT. If, on the
date of the fourth anniversary of the Series A Preferred Issue Date, the Issuer
shall not have consummated the Initial Public Offering, the Issuer shall on such
date issue and deliver to the holders of Series A Preferred warrants, with an
exercise price of $.01 per share and a 10 year duration ("Warrants"), to
purchase shares of Common Stock representing, in the aggregate, 5% of the Common
Stock (calculated on a fully diluted basis, as of such fourth anniversary,
assuming that each then outstanding security exercisable for or convertible into
Common Stock, including the Series A Preferred, had been so exercised or
converted).
(b) SUBSEQUENT GRANTS. On the last day of each six month period
(commencing with the six month period beginning on the fourth anniversary of the
Series A Preferred Issue Date), if the Issuer shall not have consummated the
Initial Public Offering, the Issuer shall on such date issue and deliver to the
holders of the Series A Preferred Warrants to purchase shares of Common Stock
representing, in the aggregate, 5% of the Common Stock (calculated on a fully
diluted basis, as of the end of such six month period, assuming that each then
outstanding security exercisable for or convertible into Common Stock, including
the Series A Preferred, had been so exercised or converted). Notwithstanding
the foregoing, the Issuer shall not be required to issue or deliver any Warrants
pursuant to this Section 5.1 once the holders of the Series A Preferred own
Series A Preferred, Conversion Shares, Warrants and Warrant Shares representing,
in the aggregate, 25% of the Common Stock (i) including for purposes of this
calculation any such securities previously Transferred by the holders of Series
A Preferred to Persons other than Permitted Holders (as adjusted for stock
splits, reverse stock splits and reclassifications) and (ii) calculated on a
fully diluted basis assuming that each then outstanding security exercisable for
or convertible into Common Stock, including the Series A Preferred, had been so
exercised or converted.
(c) Warrants issued and delivered pursuant to this Section 5.1 shall
be issued and delivered to each holder of Series A Preferred pro rata, based on
the proportion that the Series A Preferred and Conversion Shares owned by such
holder bears to the total amount of Series A Preferred and Conversion Shares
owned by all such holders.
(d) At the time of the first issuance and delivery of Warrants
pursuant to this Section 5.1, the holders of the Series A Preferred and the
Issuer shall enter into a warrant agreement containing customary provisions,
reasonably acceptable to the holders of Warrants, relating to the Warrants,
including, without limitation, anti-dilution provisions. The percentages of
Common Stock that the holders of the Series A Preferred shall be entitled to
receive Warrants in respect of pursuant to Section 5.1(a) or (b) shall be
multiplied by a number equal to (i) one minus (ii) a fraction, the numerator of
which shall be equal to the number of the shares of the Series A Preferred
(determined on an as-converted basis) previously disposed of by the holders
Series A Preferred pursuant to Section 4.2 or 4.3 and the denominator of which
shall be the number of shares of the Series A Preferred (in each case,
determined on an as converted basis) issued to holders of Series A Preferred
pursuant hereto and pursuant to the Securities Purchase Agreement of even date
herewith.
(e) CHANGE OF CONTROL. If there shall occur a Change of Control (as
defined in the Certificate of Amendment) and the Issuer shall have complied with
its obligations under Section 7(d) of the Certificate of Amendment, then,
anything to the contrary herein notwithstanding, as of the date of such Change
of Control the right of the Holders to receive any Warrants pursuant to this
Section 5 shall cease.
(f) WARRANTS NOT ISSUABLE. Notwithstanding Section 5.1(a) or (b)
hereof, no Warrants shall be issuable hereunder to the extent that prior to any
scheduled issuance of Warrants the Issuer shall have merged into any other
Person and the Holders shall have received in connection therewith securities
registered under the Securities Act that are part of a class of publicly traded
securities.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. HOLDERS NOT SIGNATORIES HERETO. Each Holder, whether or
not a signatory hereto, agrees that by accepting a share of the Series A
Preferred, a Conversion Share, a Warrant Share or a Warrant that it shall be
subject to and bound by the provisions hereof.
SECTION 6.2. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning or
construction of any provisions hereof.
SECTION 6.3. NO INCONSISTENT AGREEMENTS. (a) The Issuer represents
that it is not a party to, and agrees that it will not hereafter enter into any
agreement with respect to, its securities which is inconsistent with, or
otherwise conflicts with or adversely affects, the rights granted to the Holders
under this Agreement.
SECTION 6.4. PARENT ENTITIES. Xx. Xxxx and the Issuer agree that no
parent entity for the Issuer shall be created without the consent of the Holders
of a majority of the Series A Preferred.
SECTION 6.5. ENTIRE AGREEMENT. This Agreement, the Securities
Purchase Agreement and the Certificate of Amendment, taken together, constitute
the entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein and therein, and there are no restrictions,
promises, representations, warranties, covenants, or undertakings with respect
to the subject matter hereof, other than those expressly set forth or referred
to herein or therein. This Agreement and such other agreements and instruments
supersede all prior agreements and understandings between the parties hereto
with respect to the subject matter hereof.
SECTION 6.6. NOTICES. Any notice, request, instruction or other
document to be given hereunder by any party hereto to another party hereto shall
be in writing (including, without limitation, telecopier or similar writing) and
shall be given to such party at its address or telecopier number set forth on
its signature page or to such other address as the party to whom notice is to be
given may provide in a written notice to the party giving such notice, a copy of
which written notice shall be on file with the Secretary of the Issuer. Each
such notice, request or other communication shall be effective (i) if given by
telecopy, which such telecopy is transmitted to the telecopy number specified in
its signature page and the appropriate answerback or confirmation, as the case
may be, is received, (ii) if given by mail, 72 hours after such communication is
deposited in the U.S. mail with first class
postage prepaid addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section 6.6.
SECTION 6.7. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6.8. SEVERABILITY. The invalidity or unenforceability of any
provisions of this Agreement in any jurisdiction shall not affect the validity,
legality or enforceability of the remainder of this Agreement in such
jurisdiction or the validity, legality or enforceability of this Agreement,
including any such provision, in any other jurisdiction, it being intended that
all rights and obligations of the parties hereunder shall be enforceable to the
fullest extent permitted by law.
SECTION 6.9. TERMINATION. This Agreement shall terminate and be of
no further force or effect with respect to a given Holder when such Holder no
longer owns any Equity Securities (except as to matters preceding the Holder's
disposition of Equity Securities); PROVIDED that the provisions of Sections 2.1,
3.5, 3.6, 3.7, 3.8, 3.9, 6.1, 6.2, 6.5, 6.6, 6.7, 6.8, 6.9, 6.11, 6.12, 6.14 and
6.15 shall survive any such termination. Notwithstanding anything to the
contrary herein, Section 4.2, 4.3 and 5.1 shall terminate upon the consummation
of the Initial Public Offering.
SECTION 6.10. SUCCESSORS, ASSIGNS, TRANSFEREES. Each Holder shall be
permitted to Transfer any Equity Securities to any person at any time, subject
only to the provisions of applicable securities laws and except that Equity
Securities may not be transferred to any direct or indirect competitor of the
Issuer or any of its Subsidiaries except pursuant to any distribution effected
in connection with a bona fide at the market public offering of such Equity
Securities. The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns, including any transferee of any Equity Security. Neither this
Agreement nor any provision hereof shall be construed so as to confer any right
or benefit upon any Person other than the parties to this Agreement and their
respective heirs, successors and assigns, including any transferee of any Equity
Security.
SECTION 6.11. AMENDMENTS; WAIVERS. (a) No failure or delay on the
part of any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law or
equity.
(b) Neither this Agreement nor any term or provision hereof may be
amended or waived except by an instrument in writing signed, in the case of an
amendment,
by the parties thereto or, in the case of a waiver, by the party against whom
the enforcement of such waiver is sought.
SECTION 6.12. COUNTERPARTS; EFFECTIVENESS. This Agreement may be
executed in any number of counterparts, each of which shall be an original with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received a counterpart hereof signed by the other party hereto, and the
closings under the Securities Purchase Agreement shall have occurred (the
"Effective Date").
SECTION 6.13. RECAPITALIZATION, ETC. If any capital stock or other
securities are issued in respect of, or in exchange or substitution for, any
Equity Securities by reason of any reorganization, recapitalization,
reclassification, merger, consolidation, spin-off, partial or complete
liquidation, stock dividend, split-up, sale of assets, distribution to
stockholders or combination of the shares of Common Stock or any other change in
capital structure of the Issuer, appropriate adjustments shall be made with
respect to the relevant provisions of this Agreement so as to fairly and
equitably preserve, as far as practicable, the original rights and obligations
of the parties hereto under this Agreement.
SECTION 6.14. REMEDIES. The parties hereby acknowledge that money
damages would not be adequate compensation for the damages that a party would
suffer by reason of a failure of any other party to perform any of the
obligations under this Agreement and therefore waive any defense to specific
performance that may relate to the adequacy of remedies at law.
SECTION 6.15. CONFIDENTIALITY. The Purchaser shall not disclose any
Confidential Information (as defined below) to (i) any third party other than
its legal counsel, (ii) affiliates to whom it may Transfer any Series A
Preferred, (iii) other Persons to whom it may contemplate the transfer of
Series A Preferred to the extent that any such Person agrees in advance to be
bound by confidentiality arrangements reasonably acceptable to the Issuer or
(iv) as required by law. Confidential Information means any of the Issuer's
information not known to the public, which the Issuer provides or makes
available to the Purchaser in the course of and/or for the purpose of the
Issuer's sale of Series A Preferred to the Purchaser or thereafter which is
reasonably designated as Confidential Information by the Issuer or which the
Purchaser otherwise believes to be Confidential Information.
SECTION 6.16. SUBSIDIARY OFFERINGS. The Issuer shall cause its
Subsidiaries not to Transfer any of their securities in connection with any
offering without the consent of the holders of a majority of the Series A
Preferred.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be duly executed and delivered as of the date first above written.
XX. XXXXXX XXXX(1)
(as an individual)
________________________________________
ECONOPHONE, INC.(2)
By: ____________________________________
Name:
Title:
PRINCES GATE INVESTORS II, L.P.(3)
By: ____________________________________
Name:
Title:
(1) Address: 0000 00xx Xxxxxx
Xxxxxxxx, XX 00000
Telecopier number: (000) 000-0000
(2) Address: 00 Xxxxxx Xxxxxx, Xxxx 000
Xxx Xxxx, XX 00000
Telecopier number: (000) 000-0000
(3) Address: 0000 Xxxxxxxx, 00xx Xxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxx X. Xxxxxx
Telecopier number: (000) 000-0000
EXHIBIT A
ECONOPHONE, INC. MANAGEMENT REPORTING PACKAGE
The Econophone, Inc. Management Reporting Package will provide divisional
revenues, divisional cost of services, divisional gross margins, and divisional
minutes; selling, general & administrative expenses, depreciation and
amortization, interest expenses, and other miscellaneous expenses.
