EXHIBIT 10.2
CONVERTIBLE NOTE PURCHASE AGREEMENT
NETCO COMMUNICATIONS CORPORATION
and
WORLDCOM INC.
SEPTEMBER 12, 1996
CONVERTIBLE NOTE PURCHASE AGREEMENT
Agreement made this 12th day of September 1996, by and between NETCO
COMMUNICATIONS CORPORATION, a Minnesota corporation, having its principal place
of business at 000 Xxxxx Xxxxx, 000 Xxxxx Xxxxxxxxxx Avenue. Xxxxxxxxxxx,
Xxxxxxxxx 00000 ("NETCO") and WORLDCOM INC., a Georgia corporation, having its
principal place of business at 000 Xxxx Xxxxx Xxxxxx, Xxxxxxx, Xxxxxxxxxxx 00000
("WCOM").
WITNESSETH:
Whereas, NETCO is engaged in the development and implementation of a
high speed, digital data transportation delivery and ancillary data storage and
remote proofing services addressed initially to the printing and prepress
industries, and requires significant permanent financing to accomplish such
development and implementation; and
Whereas, WCOM is engaged in the sale and marketing of voice and data
transmission over its multinational communications infrastructure; and
Whereas, NETCO and WCOM are considering a strategic association,
including a possible acquisition by WCOM of a majority ownership of NETCO, to
finance and facilitate the deployment and implementation of NETCO's services
over WCOM's communications infrastructure; and
Whereas, NETCO is alternatively considering other sources of permanent
financing, including a possible public offering of its common stock to finance
the deployment and implementation of its services; and
Whereas, NETCO currently requires financing to continue its
development and deployment activities pending the receipt of additional
permanent financing; and
Whereas, WCOM is agreeable to lending NETCO the sum
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of Five Million Dollars ($5,000,000) in consideration of NETCO's issuance to
WCOM of NETCO's Convertible Subordinated Note upon the terms and conditions,
and for the additional consideration, provided herein;
NOW THEREFORE, in consideration of the foregoing premises, and of the
consideration provided herein, the parties agree as follows:
1. Purchase and Sale of the Note. (a) Subject to the terms and conditions
-----------------------------
set forth in this Agreement, WCOM hereby purchases from NETCO, and NETCO hereby
sells to WCOM for the principal amount of Five Million Dollars ($5,000,000)
NETCO's 10% Convertible Promissory Note (the "Note") of equivalent principal
amount in form appended to this Agreement as Exhibit 1.
(b) Delivery of the Note shall be made against receipt of payment
("Closing") to occur no later than September 20, 1996, failing which payment,
this Agreement shall be null and void and of no further force and effect.
2. Representation, Warranties and Covenants of NETCO. NETCO hereby
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represents, warrants and covenants to WCOM that:
(a) Corporate Organization and Power; Qualification. NETCO is duly
-----------------------------------------------
organized, validly existing and in good standing as a corporation under the laws
of its state of incorporation, has all corporate power and authority to own its
properties and to carry on its businesses as now being and hereafter proposed
to be conducted and is duly qualified and in good standing as a foreign
corporation, and is authorized to do business, in all jurisdictions in which the
character of its properties or the nature of its businesses requires such
qualification or authorization, except for qualifications and authorizations the
lack of which, singly or in the aggregate, has not had and will not have a
materially adverse effect on NETCO.
(b) Subsidiaries. NETCO does not own, directly or indirectly, any
------------
capital stock or other equity securities of any corporation nor does NETCO have
any direct or
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indirect ownership interest, including interests in partnerships and joint
ventures, in any other entity or business, with the sole exceptions of WAMNET,
Inc., a Minnesota corporation and Netco Communications Corporation of Canada,
Inc., a Canadian corporation that are each a wholly owned subsidiary of NETCO.
(c) Authorization; Enforceability. NETCO has the power, and has
-----------------------------
taken, or will take prior to closing, all necessary action (including any
necessary stockholder action) to authorize it, to execute, deliver and perform
in accordance with their respective terms this Agreement and the Convertible
Subordinated Note ("Note") in the form appended to this Agreement as Exhibit 1.
This Agreement has been, and the Note contemplated hereby to which NETCO is a
party when delivered to WCOM will have been, duly executed and delivered by
NETCO and is, or when so delivered will be, a legal, valid and binding
obligation of NETCO, enforceable against NETCO in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally.
(d) No Violations; Consent. The execution, delivery and performance
----------------------
in accordance with their respective terms by NETCO of this Agreement and of the
Note, do not and will not as of closing or thereafter (a) require any
Governmental Approval or any other consent or approval, including any consent or
approval of the stockholders of NETCO, other than Governmental Approvals and
other consents and approvals that have been obtained, are final and not subject
to review on appeal or to collateral attack, are in full force and effect or
(b) violate, conflict with, result in a breach of, constitute a default under,
or result in or require the creation of any lien upon any assets of NETCO under,
any contract to which NETCO is a party or by which NETCO or any of its
properties may be bound.
(e) Litigation. There are not, in any court or before any arbitrator
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of any kind or before or by any governmental or non-governmental body, any
actions, suits or proceedings pending or threatened (nor, to the knowledge of
NETCO, is there any basis therefor) against or in any other way relating to or
affecting (a) NETCO or (b) any of its businesses or properties.
(f) Taxes. NETCO has filed (or obtained extensions of the time by
-----
which it is required to file)
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all United States federal, state and local income tax returns and all other
material tax returns required to be filed by it and has paid all taxes shown due
on the returns so filed as well as the other taxes, assessments and governmental
charges which have become due, except such taxes, if any, as are being contested
in good faith and as to which adequate reserves have been provided. NETCO will
continue to make all such filings in a timely manner and pay all such taxes,
assessments and other governmental charges required of it.
(g) Capitalization. (i) As of the date hereof, the authorized capital
--------------
stock of NETCO consists of 10,000,000 shares of which 5,000,000 are Common
Shares and 5,000,000 are undesignated shares, and of which 1,295,971 Common
Shares are issued and outstanding. NETCO does not hold any of its shares in
treasury.
(ii) All such issued and outstanding shares of capital stock of
NETCO have been validly issued and are fully paid and nonassessable and are not
subject to preemptive rights.
(iii) Except as contemplated by this Agreement and as disclosed
on Schedule 1, there are no outstanding subscriptions, options, warrants or
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other rights of any kind to acquire any additional shares of capital stock of
NETCO, or securities convertible into or exchangeable for, or which otherwise
confer on the holder thereof any right to acquire, any such additional shares,
nor is NETCO committed to issue any such option, warrant, right or security.
(iv) There are no agreements relating to voting, purchase or
sale of capital stock between NETCO and any of its stockholders or affiliates,
and to the best of NETCO's knowledge, among any of its stockholders.
(h) (i) NETCO has delivered to WCOM copies of its financial
statements (including balance sheets, income statements, changes in stockholders
equity and statements of cash flow) for the period from inception [September
1994] through December 31, 1995, and for the six month period ended June 30,
1996. Such financial statements (i) fairly present the financial condition,
assets and liabilities of NETCO at their respective dates and the results of its
operations and changes in its cash flows for the periods covered thereby, (ii)
were prepared in accordance with generally accepted
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accounting principles except as may be noted therein, and (iii) were prepared
from the books and records of NETCO, which books and records are complete and
correct and fairly reflect all material transactions of NETCO's business.
(ii) Within 30 days following the end of each of its first three
fiscal quarters and within 75 days following the end of its fourth fiscal
quarter during the term of the Note, NETCO will furnish WCOM with a copy of its
financial statements, (including balance sheets, income statements, changes in
stockholders equity and statements of cash flow) for each of such quarters and
fiscal year, respectively. In addition, NETCO will furnish WCOM with such
additional financial and business information, including monthly or other
periodic financial statements as NETCO may prepare from time to time, upon the
reasonable request of WCOM.
(i) NETCO shall use the loan proceeds of for reasonable and
necessary capital expenditures and operating expenses in accordance with its
usual and past practices, except as may be approved by WCOM.
(j) NETCO has provided WCOM access to full and complete information
regarding NETCO and shall continue to provide such information as WCOM may
reasonably request.
3. Representation and Warranties of WCOM. WCOM hereby represents
-------------------------------------
and warrants to NETCO that:
(a) WCOM has been given access to full and complete information
regarding the Company and has utilized such access to his or her satisfaction
for the purpose of obtaining information WCOM desires or deems relevant to the
decision to purchase the Note; and particularly, WCOM has had the opportunity
to ask questions of, and receive answers from, representatives of the Company
concerning the terms and conditions of the Note and to obtain any additional
information WCOM desires or deems relevant; and
(b) WCOM is aware that the Company is a development stage
company; that the success of the Company is dependent upon the Company's ability
to secure appropriate employees, switching equipment, telephone carriage,
integrating software; also upon the Company's ability to provide adequate
installation and
5
maintenance services; and upon the Company's ability to successfully market its
data transportation technology and services to appropriate customers; and that
the Company can give no assurances that it will be able to successfully
obtain, provide or accomplish any such matters.
(c) WCOM has obtained, to the extent it has deemed necessary,
professional advice with respect to the risks inherent in the investment in the
Note; and
(d) WCOM, being a corporation with total assets in excess of
$5,000,000 that was not formed for the purpose of acquiring the Note, is an
"accredited investor" within the meaning of Rule 501(a) of the General Rules and
Regulations under the Securities Act of 1933.
4. Future Negotiations. (a) NETCO hereby agrees that it will defer
-------------------
filing, but not the preparation of, a registration statement in connection with
a contemplated public offering of NETCO's common stock for a period of thirty
days from the date of Closing. During such period, NETCO and WCOM will negotiate
in good faith for purposes of ascertaining whether a mutually agreeable
arrangement contemplating WCOM's acquisition of majority ownership of NETCO may
be concluded between NETCO and WCOM. NETCO and WCOM agree that, upon conclusion
of that initial 30 day period, they will negotiate in good faith for a period
not exceeding 10 days regarding the terms and conditions that might be mutually
agreeable for an extension of time during which to continue negotiations for the
purpose of ascertaining whether a mutually agreeable arrangement contemplating
WCOM's acquisition of majority ownership of NETCO may be concluded between
NETCO and WCOM.
(b) NETCO shall not, during the time(s) provided in subparagraph 4(a)
of this Agreement for negotiations with WCOM, directly or indirectly, solicit,
entertain or encourage inquiries or proposals to enter into an agreement or
negotiate with any other party, to invest in or purchase, or enter into any
merger or consolidation with respect to the business, securities or assets of,
NETCO, and will not engage in any transaction not in the ordinary course of
business which could adversely affect the value of such business or assets,
excepting only (i) negotiations ancillary to the preparation of a registration
statement for a public offering, or (ii) negotiations with current holders of
promissory notes aggregating $5,600,000 for the exchange
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of such notes for NETCO stock.
5. WCOM Consent. During the term of the Note, WCOM shall have a
------------
right of prior approval over the following corporate actions which could affect
the status of the Common Stock into which the Note is convertible:
a. changes in NETCO's articles or bylaws, with the exception of an
amendment to NETCO's articles of incorporation increasing its
authorized capital stock to 20,000,000 shares of which
15,000,000 will be Common Shares and 5,000,000 will be
undesignated shares.
b. changes in the rights granted to the Common Stock and
undesignated shares, except the designation of undesignated
shares as common stock having the same rights as currently
authorized Common Stock.
c. the authorization, offering, incurring or issuance of
indebtedness (other than conventional bank or other institutional
indebtedness incurred in the ordinary course of business with
the approval of a majority of the members of the Board of
Directors of NETCO), additional common stock, preferred stock,
convertible securities, shares of any other class of stock,
other securities or options, warrants, or rights with respect
thereto, except the prior approval of WCOM shall not be required
for (i) stock options granted to officers, directors, employees
or consultants of NETCO in aggregate amount not to exceed options
for 2,000,000 shares or (ii) shares which may be offered to the
public in a registered public offering.
d. acts involving a substantial sale of assets, merger,
consolidation, reorganization, recapitalization, liquidation, or
dissolution of NETCO.
e. the declaration or payment of dividends on, or making other
distributions with respect to, any securities, excluding (i)
interest on indebtedness to banks or other institutional
indebtedness incurred in the ordinary course of business with the
approval of a majority of
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the members of the Board of Directors, (ii) interest on
indebtedness incurred in connection with the leasing of capital
equipment, and (iii) interest on currently owed debt,
f. increasing or decreasing the number of Directors constituting the
Board of Directors.
g. engaging in any other business other than the business currently
engaged in or under development by NETCO.
h. the appointment of an Executive Committee or committee performing
similar functions; and
i. entering into any contracts or transactions with NETCO's
officers, Directors, shareholders or their affiliates, excepting
the prior approval of WCOM shall not be required for (i) stock
options granted to officers, directors, employees or consultants
of NETCO in aggregate amount not to exceed options for 2,000,000
shares or (ii) the exchange of shares for existing indebtedness
owed to holders of notes in aggregate principal amount of
$5,600,000 in anticipation a registered public offering.
6. WCOM's Right to Nominate a Director.
-----------------------------------
During (i) the term of the Note, and for so long as any amount of
principal or interest remains unpaid thereunder and/or (ii) the period of three
(3) years following WCOM's conversion of at least fifty percent (50%) of the
initial principal balance of the Note into NETCO Common Stock, WCOM shall have
the right to nominate a representative to serve on NETCO's Board of Directors,
and NETCO shall use its best efforts to secure the prompt appointment or
election of such representative to its Board of Directors.
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IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day
and year first above written.
"NETCO"
NETCO COMMUNICATIONS CORPORATION
By: /s/ Xxxxxx X. Xxxxxxxx, III
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Xxxxxx X Xxxxxxxx, III
Its: Pesident and Secretary
"WCOM"
WORLDCOM INC.
By: /s/ K. Xxxxxxx Xxxxxx, Xx
---------------------------
K. Xxxxxxx Xxxxxx, Xx
Its: Vice President
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Netco Communications Corporation
Common Stock & CSE listing
(Schedule 1)
Common Stock O/S
----------------
# of shares
Common Stock: 1,295,791
Options Analysis
----------------
Employment Contracts: Price # of options
Options at $ 2.25 76,500
Options at $ 5.00 18,000
Options at $ 7.50 90,280
Options at $ 10.00 89,000
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Cat. Total 273,780
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Board of Directors: Price # of options
Options at $ 2.25 62,000
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Cat. Total 62,000
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Officers: Price # of options
Options at 2.25 75,500
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Cat. Total 75,500
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Warrant & Convertible Debt Analysis
-----------------------------------
Bridge Financing: Price # of warrants
Warrants at $ 5.00 220,000
Warrants at $ 7.50 1,012,000
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Cat. Total 1,232,000
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Convertible Debt: Price # of warrants
$125,000 at $ 1.90 65,789
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Cat. Total 65,789
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Other: Price # of warrants
Warrants at $ 3.00 113,333
Warrants at $ 10.00 9,000
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Cat. Total 122,333
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Total Common Stock & Equivalents 3,127,193
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EXHIBIT 1
Registered Holder: WorldCom Inc.
$5,000,000
NETCO COMMUNICATIONS CORPORATION
000 XXXXX XXXXX
000 XXXXX XXXXXXXXXX XXXXXX
XXXXXXXXXXX, XXXXXXXXX 00000
10% Convertible Subordinated Note
Due September 30, 1999
For Value Received, NETCO COMMUNICATIONS CORPORATION, a Minnesota
corporation, (hereinafter called the "Issuer") hereby promises to pay to the
order of WorldCom Inc., or the registered holder (hereinafter referred to as the
"Holder") principal amount of Five Million Dollars ($5,000,000), upon
presentation of this certificate, in legal tender of the United States of
America at the time of payment hereof, to the account of holder according to
Holder's written instructions, on September 30, 1999, or sooner as hereinafter
provided.
The Issuer further agrees to pay interest on the principal amount
remaining unpaid from time to time thereon from the date hereof at the rate of
ten percent (10%) per annum. Interest shall accrue from the date of purchase of
this Convertible Subordinated Note (hereinafter, the "Note"), and be payable on
March 30 and September 30 of each year, commencing with the first interest
payment on March 30, 1997. The Issuer shall, upon request of the registered
Holder, mail a check or draft representing such interest to the registered
holder at the address designated by the registered holder and appearing on the
books of registration maintained by the Issuer. No interest shall accrue or be
paid on this Note after September 30, 1999.
If any payment due hereunder is not received by the Holder within 15
days from the date due, Issuer shall pay a late payment charge of Five Dollars
($5.00) or four percent (4%) of the amount of the delinquency, whichever is
greater.
The following terms, covenants, statements of Holders' rights and
conditions shall apply to this Convertible Subordinated Note.
ARTICLE 1
SUBORDINATION
1.1) The Issuer and the Holder of this Note, by acceptance hereof,
agree that the payment of the principal and interest on this Note is, to the
extent stated herein, expressly subordinated to the prior payment of the
principal and interest on all existing or future obligations of the Issuer for
money borrowed from a bank, trust, insurance, or other financial institution
engaged in the business of lending money, which is hereinafter referred to as
"Senior Indebtedness." In the event of any receivership, insolvency, assignment
for the benefit of creditors, bankruptcy, reorganization, or arrangement with
creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale
of all or substantially all of the assets, dissolution, liquidation, or any
other marshaling of the assets and liabilities of the Issuer, or in the event
the Note shall be declared due and payable upon the occurrence of an event of
default (as specified herein), (1) no amount shall be paid by the Issuer in
respect of the principal or interest on this Note at the time outstanding,
unless and until the principal of and interest on the Senior Indebtedness then
outstanding shall have been paid in full, and (2) no claim or proof of claim
shall be filed with the Issuer by or on behalf of the holder of this Note which
shall assert any right to receive any payments in respect of the principal of
and interest on this Note except subject to the payment in full of the principal
and interest of all of the Senior Indebtedness then outstanding.
ARTICLE 2
EVENT OF DEFAULT
2.1) Each of the following shall constitute an Event of Default:
(a) Failure to pay interest when due, continued for thirty (30) days;
(b) Failure to pay principal or premium when due;
2
(c) An assignment for the benefit of creditors of the Issuer,
adjudication of Issuer as a bankrupt, or petition for the reorganization of the
Issuer pursuant to Chapter X or XI of the United States Bankruptcy Act, as the
same may be amended.
2.2) Upon the occurrence of any Event of Default specified in (c)
above, the entire unpaid principal balance hereof, together with all accrued and
unpaid interest thereon and all other sums owing hereunder, shall become
immediately due and payable, without presentation, demand or further action of
any kind. Upon the occurrence of any Event of Default specified in (a) or (b)
above, the holder of this Note shall have the sole option of declaring the
unpaid principal balance hereof together with all other sums owing hereunder
immediately due and payable, without presentation, demand or further action of
any kind.
2.3) Upon the occurrence of any Event or Default and before and after
acceleration of the entire unpaid principal balance of this Note, interest shall
continue to accrue thereafter at a rate equal to two percent (2%) per annum in
excess of the then applicable rate of interest under this Note until this Note
is paid in full, including the period following entry of any judgment. Both
before and after any default, interest shall be calculated on the basis of a
360-day year but charged on the basis of actual number of days elapsed in any
calendar year of part thereof.
2.4) Holder may waive any default before of after the same has been
declared without impairing the Holder's right to declare a subsequent default
hereunder, this right being a continuing right.
2.5) Upon an Event of Default, Holder shall not be deemed, by any act
of omission or commission to have waived any of its rights or remedies unless
such waiver is in writing and signed by Holder, and then only to the extent
specifically set forth in the writing. A waiver as to one event shall not be
construed as continuing or as a bar to or waiver of any right or remedy as to a
subsequent event.
ARTICLE 3
REDEMPTION BY ISSUER
3.1) This Note is redeemable at any time commencing January 1, 1998,
in whole or in part, prior to maturity at the option of the Issuer, on
3
sixty days' written notice by registered mail by the Issuer to the Holder, upon
payment of all, or such lesser portion of the principal amount as specified in
the notice, together with interest accrued to the date fixed for redemption. If
the Holder hereof fails or neglects to present this Note for payment at the time
and place specified in such notice, this Note shall cease to bear interest
unless payment hereof is refused upon the presentation of the same at or after
the time specified in such notice.
ARTICLE 4
CONVERSION OF NOTE TO COMMON STOCK
4.1) The holder of this Note shall have the right, at its option, at
any time between the date hereof and September 30, 1999, to convert the then
outstanding principal amount of this Note, or any portion thereof into shares of
Common Stock, par value $.01, of the Issuer ("Common Stock") at a price per
share determined as hereinafter described (such price hereinafter referred to as
the "Conversion Price"), upon surrender of this Note at the principal office of
the Issuer, together with written notice (hereinafter referred to as the
"Conversion Notice"), in form appended hereto, of the election executed by the
Holder and specifying the name or names in which the shares of stock deliverable
upon such conversion shall be registered, along with the addresses of the
persons so named and, if required by the Issuer, accompanied by a written
instrument of transfer in form satisfactory to the Issuer duly executed by the
Holder; provided, however, that if this Note shall be called for redemption
according to the terms of Article 3, the right of the Holder to convert this
Note shall terminate on the date fixed for redemption.
4.2) Common Stock issued on conversion of this Note shall be delivered
as follows:
(a) Within fifteen days after the surrender of this Note for
conversion and the receipt of the Conversion Notice, the Issuer
shall deliver to the Holder, or to such person or persons so
designated by the Holder in the Conversion Notice, a certificate
or certificates representing the number of fully paid and non-
assessable shares of Common Stock into which this Note or portion
thereof is to be converted in such name or names as are specified
in the Conversion Notice, together with any cash payable in
respect of a fractional share and all interest accrued through
the date of conversion. Such
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conversion shall be deemed to have been effected at the close of
business on the date when this Note shall have been surrendered
for conversion together with the Conversion Notice, so that the
person entitled to receive the shares of Common Stock upon
conversion shall be treated for all purposes as having become the
record holder of such shares of Common Stock at such time and the
conversion shall be at the Conversion Price in effect at time.
(b) In the event less than the entire outstanding principal balance
of this Note shall be converted hereunder this Note shall not be
surrendered for cancellation but shall have the fact and amount
of conversion recorded on the face of this Note by writing
acknowledged by the holder and the Issuer.
4.3) Subject to adjustment as hereinafter provided, the Conversion
Price per share of Common Stock shall be Five Dollars ($5.00) (the "Conversion
Price").
4.4) The per share Conversion Price and the number of Shares
deliverable hereunder shall be adjusted as hereinafter set forth; however, no
adjustment shall be made under this Article 4.4 as a result of the exercise of
any options or the conversions of any convertible securities outstanding on the
date hereof:
(a) If after the date hereof, the Issuer shall:
(1) take a record of the holders of its Common Stock for the purposes
of entitling them to receive a dividend payable in, or other
distribution of, Common Stock; or
(2) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock; or
(3) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock; or
(4) issue by reclassification of its shares of Common Stock any other
shares of common stock;
then the Conversion Price shall be adjusted to that price determined by
multiplying the Conversion Price in effect immediately prior to such event by a
fraction (i) the numerator of which shall be the total number of
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outstanding shares of Common Stock of the Issuer immediately prior to such
event, and (ii) the denominator of which shall be the total number of
outstanding shares of Common Stock of the Issuer immediately after such event.
4.5) In the case of any consolidation or merger of the Issuer with
another corporation, or the sale of all or substantially all of its assets to
another person, or any reorganization or reclassification of the capital stock
of the Issuer (except a split-up or combination provision for which is made in
Article 4.4):
(a) as a condition of such consolidation, merger, sale,
reorganization or reclassification, lawful and adequate provision shall be made
whereby the Holder shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of the
Common Stock immediately theretofore subject to acquisition hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
so subject to acquisition hereunder had such consolidation, merger, sale,
reorganization or reclassification not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the Holder to the end that the provisions hereof (including, without limitation,
provisions for adjustments of the Conversion Price) shall thereafter be
applicable as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise of the conversion option.
The Issuer shall not effect any such consolidation, merger or sale, unless prior
to or simultaneously with the consummation thereof, the successor person or
persons purchasing such assets or succeeding or resulting from such
consolidation, merger, reorganization or reclassification shall assume by
written instrument executed and mailed or delivered to the Holder, the
obligation to deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the Holder may be entitled to
receive.
(b) In the event that the Issuer shall make any distribution of its
assets upon or with respect to its Common Stock, as a liquidating or partial
liquidation dividend, or other than as a dividend payable out of earnings or any
surplus legally available for dividends under the laws of the State of
Minnesota, the Holder shall, upon the exercise of its right to convert after
the record date for such distribution or, in the absence of a
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record date, after the date of such distribution, receive in addition to the
shares subscribed for, the amount of such assets (or, at the option of the
Issuer, a sum equal to the value thereof at the time of distribution as
determined in good faith by the Board of Directors in its sole discretion) which
would have been distributed to the Holder if it had exercised its rights to
convert immediately prior to the record date for such distribution or, in the
absence of a record date, immediately prior to the date of such distribution.
4.6) Fractional shares shall not be issued upon the exercise of any
conversion option but in any case where the Holder would, except for the
provisions of this Article, be entitled under the terms hereof to receive a
fractional share, the Issuer shall, upon the exercise of any conversion option
for the largest number of whole shares then called for, pay a sum in cash equal
to the sum of (a) the excess, if any, of the fair market value of such
fractional share, as determined in good faith by the Issuer's board of
directors, over the proportional part of the per share Conversion Price
represented by such fractional share plus (b) the proportional part of the per
share Conversion Price represented by such fractional share.
ARTICLE 5
REGISTRATION RIGHT
5.1) (a) If, commencing one (1) year after the date hereof, the
Issuer proposes to claim an exemption under Section 3(b) for a public
offering of any of its securities or to register under the Securities Act of
1933 (except by a claim of exemption or registration statement on a form that
does not permit the inclusion of shares by its security holders) any of its
securities, it will give written notice to the registered Holder of this Note,
and all registered Holders of shares of common stock acquired upon the
conversion of this Note, of its intention to do so and, on the written request
of any such registered holders given within twenty (20) days after receipt of
any such notice (which request must be made within five (5) years from the date
of this Note and which notice shall specify the shares of common stock intended
to be sold or disposed of by such registered holder and describe the nature of
any proposed sale or other disposition thereof), the Issuer will use its best
efforts to cause all such shares, the registered holders of which shall have
requested the registration or qualification thereof, to be included in such
notification or registration statement proposed to be filed by the Issuer;
provided, however, that nothing herein shall prevent the Issuer from, at any
time, abandoning or
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delaying any such registration initiated by it. If any such registration shall
be underwritten in whole or in part, the Issuer may require that the shares
requested for inclusion pursuant to this section be included in the underwriting
on the same terms and conditions as the securities otherwise being sold through
the underwriters. If in the good faith judgment, as expressed in writing
delivered to the registered holder(s), of the managing underwriter of such
public offering the inclusion of all of the shares originally covered by a
request for registration would reduce the number of shares to be offered by the
Issuer or interfere with the successful marketing of the shares of stock offered
by the Issuer, the number of shares otherwise to be included pursuant to this
Section in the underwritten public offering may be reduced; provided, however,
that any such required reduction shall be pro rata among all persons (other than
the Issuer) who are participating in such offering. Those shares which are thus
excluded from the underwritten public offering shall be withheld from the
market for a period, not to exceed 90 days, which the managing underwriter
reasonably determines is necessary in order to effect the underwritten public
offering. All expenses of such offering, except the fees of special counsel to
such holders and brokers' commissions or underwriting discounts payable by such
holders, shall be borne by the Issuer.
(b) Further, on one occasion only, commencing one (1) year after the
date hereof, upon request by the holder of the Note and/or the holders of shares
issued upon the conversion of the Note who collectively have the right to
purchase at least 500,000 shares or hold directly at least 500,000 shares
purchased hereunder or have the right to purchase and hold directly an aggregate
of at least 500,000 shares purchasable or purchased hereunder, the Issuer will
promptly use its reasonable best efforts to register or qualify the Note or such
shares under Section 3(b) or Section 5 of the Securities Act of 1933 (and, upon
the request of such holders, under Rule 415 thereunder) and such state laws as
such holders may reasonably request; provided that (i) such request must be made
within five (5) years from the date of this Note; and (ii) the Issuer may delay
the filing of any registration statement requested pursuant to this section to a
date not more than ninety (90) days following the date of such request if in the
opinion of the Issuer's principal investment banker at the time of such request
such a delay is necessary in order not to adversely affect financing efforts
then underway at the Issuer or if in the opinion of the Issuer such a delay is
necessary or advisable to avoid disclosure of material nonpublic information.
The costs and expenses directly related to any registration requested pursuant
to this section, including but not limited to legal fees of the Issuer's
counsel, audit fees,
8
printing expense, filing fees and fees and expenses relating to qualifications
under state securities or blue sky laws incurred by the Issuer shall be borne
entirely by the Issuer; provided, however, that the persons for whose account
the securities covered by such registration are sold shall bear the expenses of
underwriting commissions applicable to their shares and fees of their legal
counsel. If the holder of Note and the holders of shares of Common Stock
underlying the Note are the only persons whose shares are included in the
registration pursuant to this section, such holders shall bear the expense of
inclusion of audited financial statements in the registration statement which
are not dated as of the Issuer's normal fiscal year or are not otherwise
prepared by the Issuer for its own business purposes. The Issuer shall keep
effective and maintain any registration, qualification, notification or approval
specified in this paragraph for such period as may be necessary for the holders
of the Note and such common stock to dispose thereof, and from time to time
shall amend or supplement, at the holder's expense, the prospectus or offering
circular used in connection therewith to the extent necessary in order to comply
with applicable law; provided, that the Issuer shall not be obligated to
maintain any registration for a period of more than nine (9) months.
If, at the time any written request for registration is received by the
Issuer pursuant to this Section 5.1(b) the Issuer has determined to proceed with
the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its securities by it or any of its security holders, such written request shall
be deemed to have been given pursuant to Section 5.1(a) rather than to this
Section 5.1(b), and the rights of the holders of the Note and/or shares issued
upon the conversion of the Note covered by such written request shall be
governed by Section 5.1 (a) hereof.
(c) If and whenever the Issuer is required by the provisions of Sections
5.1(a) or 5.1(b) hereof to effect the registration of shares issued upon the
exercise of the Note under the Securities Act, the Issuer will:
(i) Prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities, not to
exceed nine (9) months;
(ii) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus
9
contained therein as may be necessary to keep such registration statement
effective for such period as may be reasonably necessary to effect the sale of
such securities, not to exceed nine (9) months;
(iii) furnish to the security holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities;
(iv) use its best efforts to register or qualify the securities covered
by such registration statement under such state securities or blue sky laws of
such jurisdictions as such participating holders may reasonably request in
writing within 30 days following the original filing of such registration
statement, except that the Issuer shall not for any purpose be required to
execute a general consent to service of process or to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so qualified;
(v) notify the security holders participating in such registration,
promptly after it shall receive notice thereof, of the time when such
registration statement has become effective or a supplement to any prospectus
forming a part of such registration statement has been filed;
(vi) notify such holders promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus or
for additional information;
(vii) prepare and file with the Commission, promptly upon the request of
any such holders, any amendments or supplements to such registration statement
or prospectus which, in the opinion of counsel for such holders (and concurred
in by counsel for the Issuer), is required under the Securities Act or the
rules and regulations thereunder in connection with the distribution of the Note
or shares by such holder;
(viii) prepare and promptly file with the Commission and promptly notify
such holders of the filing of such amendment or supplement to such registration
statement or prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to such securities is
required to be
10
delivered under the Securities Act, any event shall have occurred as the result
of which any such prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the circumstances
in which they were made, not misleading;
(ix) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued;
(x) not file any amendment or supplement to such registration statement
or prospectus to which a majority in interest of such holders shall have
reasonably objected on the grounds that such amendment or supplement does not
comply in all material respects with the requirements of the Securities Act or
the rules and regulations thereunder, after having been furnished with a copy
thereof at least five business days prior to the filing thereof, unless in the
opinion of counsel for the Issuer the filing of such amendment or supplement is
reasonably necessary to protect the Issuer from any liabilities under any
applicable federal or state law and such filing will not violate applicable law;
and
(xi) at the request of any such holder, furnish on the effective date of
the registration statement and, if such registration includes an underwritten
public offering, at the closing provided for in the underwriting agreement: (i)
opinions, dated such respective dates, of the counsel representing the Issuer
for the purposes of such registration, addressed to the underwriters, if any,
and to the holder or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request; and (ii) letters,
dated such respective dates, from the independent certified public accountants
of the Issuer, addressed to the underwriters, if any, and to the holder or
holders making such request, covering such matters as such underwriters and
holder or holders may reasonably request, in which letter such accountants shall
state (without limiting the generality of the foregoing) that they are
independent certified public accountants within the meaning of the Securities
Act and that in the opinion of such accountants the
11
financial statements and other financial data of the Issuer included in the
registration statement or the prospectus or any amendment or supplement
thereto comply in all material respects with the applicable accounting
requirements of the Securities Act.
(d) The Issuer hereby indemnifies the holder of this Note and of any
common stock issued or issuable hereunder, its officers, directors, employees
and agents, and any person who controls such Note holder or such holder of
common stock within the meaning of Section 15 of the Securities Act of 1933,
against all losses, claims, damages and liabilities caused by any untrue
statement of a material fact contained in any registration statement,
prospectus, notification or offering circular (and as amended or supplemented if
the Issuer shall have furnished any amendments or supplements thereto) or any
preliminary prospectus or caused by any omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or omission contained in information furnished in
writing to the Issuer by such Note holder or such holder of common stock
expressly for use therein, and each such holder by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Issuer and each
of its officers who signs such registration statement and each of its directors
and each person, if any, who controls the Issuer within the meaning of Section
15 of the Securities Act of 1933 with respect to losses, claims, damages or
liabilities which are caused by any untrue statement or omission contained in
information furnished in writing to the Issuer by such holder expressly for use
therein.
(e) If the indemnification provided for in this Article 5 is unavailable
to an indemnified party as provided herein in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then the Issuer, 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,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the Issuer on the one hand and the holder of this Note on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses as well as any other relevant
equitable considerations. The relative fault of the Issuer on the one hand and
of the holder of this Note of the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statements of a
material fact of the omission or alleged omission to state a material fact
relates to information supplied by the Issuer or by the holder of this Note
12
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, without limitation, any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim.
The Issuer and the holder of this Note agree that it would not be just and
equitable if contribution pursuant to this Section 5(e) were determined by a pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(e), the holder of
this Note shall not be required to contribute any amount in excess of the amount
by which the total price which such holder's registerable securities were sold
to the public. No person guilty of fraudulent misrepresentations (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.
ARTICLE 6
REGISTRY
6.1) Books for the registry hereof are kept at the office of the Issuer. No
transfer hereof shall be valid unless made on the Issuer's books at the office
of the Issuer, by the Holder, in person, or by attorney duly authorized in
writing, similarly noted hereon.
ARTICLE 7
PAYMENT
7.1) Payment to the Holder of principal and interest shall be a complete
discharge of the Issuer's liability with respect to such payment, but the Issuer
may, at any time, require the presentation hereof as a condition precedent to
such payment.
7.2) No recourse shall be had for the payment of the principal, or
interest, or for any claim based thereof, or otherwise, against any
incorporator, shareholder, officer, director, or agent, past, present, or
13
future, of the Issuer, whether by virtue of any constitution, statute, rule of
law, enforcement of any assessment, or penalty, or by reason of any matter prior
to delivery of this Note, or otherwise. All such liability, by the acceptance
hereof, is a part of the consideration to the Issuer hereof, and is expressly
waived.
ARTICLE 8
DIVIDENDS
8.1) Until payment in full or conversion of this Note, the Issuer may
not declare any dividend payable in cash or property on its Common Stock, with
the sole exception of any stock split in the form of a dividend payable in share
of common stock to which the provisions of Article IV hereof apply.
ARTICLE 9
OWNERSHIP
9.1) The Issuer may treat the person(s) in whose name this Note is issued
as the absolute owner(s) hereof for all purposes, whether or not this Note is
overdue and the Issuer shall not be affected by any notice to the contrary.
ARTICLE 10
NOTICE
10.1) All notices, requests, demands and other communications under this
Note shall be writing and shall be deemed to have been given on the date of
service if served personally on the party to whom notice is to be given, or on
the third day after mailing if mailed to the party to whom notice is to be given
by first class mail, registered or certified, postage prepaid to the Issuer at
its address stated on the front page of this Note and to the Holder at its
address as listed in the register of the Issuer. Either party may change its
address for purposes of this Article 6.5 by giving the other party written
notice of the new address in the manner set forth above.
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ARTICLE 11
MISCELLANEOUS
11.1) All parties liable for the payment of this Note agree to pay on
demand, all costs of collection and to cure any default under this Note
including, but not limited to, reasonable attorneys' fees actually incurred.
11.2) The undersigned and all endorsers, sureties and guarantors of this
Note, jointly and severally waive notice of and consent to any and all
extensions of this Note or any part hereof without notice, and each hereby
waives presentment, demand for payment, protest and notice of dishonor, demand,
protest and nonpayment.
11.3) The remedies of Holder as provided herein shall be cumulative
and concurrent, and may be pursued singly, successively or together against
Issuer at the sole discretion of Holder, and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release of the
same.
11.4) Issuer's obligations hereunder shall extend to and bind Issuer's
successors and assigns. This Note may be amended only by an instrument in
writing signed by both Issuer and Holder.
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed by
its President and Secretary.
Dated: September 17, 1996 NETCO COMMUNICATIONS CORPORATION
By: /s/ Xxxxxx X. Xxxxxxxx, III
----------------------------
Xxxxxx X. Xxxxxxxx, III
President and Secretary
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CONVERSION NOTICE
To Netco Communications Corporation:
The undersigned holder of this Note hereby irrevocably exercises the option
to convert this Note into shares of Common Stock of Netco Communications
Corporation, in accordance with the terms of this Note, and directs that the
shares issuable and deliverable upon the conversion be issued and delivered to
the undersigned unless a different name has been indicated below. Additionally,
as a condition to such conversion privilege, the undersigned holder of this Note
agrees to execute a letter stating its investment intent is to hold the shares
issuable upon conversion for investment and not for resale, except in accordance
with the requirements of Rule 144 of the General Rules and Regulations under the
Securities Act of 1933, or any successor Rule together with applicable state
securities law, and agrees that the certificates representing the shares
issuable and deliverable upon conversion may be imprinted with a legend in
customary form reciting the restrictions on transfer mandated by such laws.
The undersigned holder elects to convert $____________ in principal of this
Note into shares of Common Stock of Netco Communications Corporation.
Dated: ___________________________ NOTE HOLDER:
_____________________________
Name (Please Print)
_____________________________
Address
_____________________________
City, State and Zip
_____________________________
Signature
If shares are to be issued otherwise than to owner please provide name
and address of person or persons to whom shares are to be issued:
_____________________________
Name (Please Print)
_____________________________
Address
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