EXHIBIT 10.27
NOTE AND WARRANT PURCHASE AGREEMENT
This NOTE AND WARRANT PURCHASE AGREEMENT is dated as of April 1, 2002
(this "AGREEMENT") by and between Telenetics Corporation, a California
corporation (the "COMPANY"), and the entity or entities listed on EXHIBIT A
hereto (each a "PURCHASER" and collectively, the "PURCHASERS").
The parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF NOTES AND WARRANTS
Section 1.1 PURCHASE AND SALE OF NOTES AND WARRANTS. Upon the following
terms and conditions, the Company shall issue and sell to the Purchasers, and
the Purchasers shall purchase from the Company, secured convertible promissory
notes in the aggregate principal amount of Two Million One Hundred Fifteen
Thousand Dollars ($2,115,000) bearing interest at the rate of six percent (6%)
per annum, convertible into shares of the Company's common stock, no par value
per share (the "COMMON STOCK"), in substantially the form attached hereto as
EXHIBIT B (the "NOTES"), and warrants to purchase shares of Common Stock, in
substantially the form attached hereto as EXHIBIT C (the "WARRANTS"), set forth
with respect to such Purchaser on EXHIBIT A hereto. The Company and the
Purchasers are executing and delivering this Agreement in accordance with and in
reliance upon the exemption from securities registration afforded by Section
4(2) of the U.S. Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "SECURITIES ACT"), including Regulation
D ("REGULATION D"), and/or upon such other exemption from the registration
requirements of the Securities Act as may be available with respect to any or
all of the investments to be made hereunder.
Section 1.2 PURCHASE PRICE AND CLOSING. The Company agrees to issue and
sell to the Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers agree to purchase the Notes and Warrants for an aggregate
purchase price of Two Million One Hundred Fifteen Thousand Dollars ($2,115,000)
(the "PURCHASE PRICE"). The closing (the "CLOSING") of the execution and
delivery of this Agreement shall occur at the offices of Xxxxx & Xxxxxx, LLP,
000 Xxxxx Xxxxxxxxx, Xxxxx 0000, Xxxxx Xxxx, XX 00000 at 5:00 p.m. (California
time) upon the satisfaction or waiver of each of the conditions set forth in
ARTICLE IV hereof (the "CLOSING DATE").
Section 1.3 WARRANTS. At the Closing, the Company shall have issued to
the Purchasers Warrants to purchase an aggregate of 3,599,878 shares of Common
Stock. The Warrants shall be exercisable for five (5) years from the date of
issuance and shall have an exercise price equal to the Warrant Price (as defined
in the Warrants).
Section 1.4 CONVERSION SHARES / WARRANT SHARES. The Company has
authorized and has reserved and covenants to continue to reserve (subject to
Shareholder Approval (as defined in SECTION 3.17 hereof)), free of preemptive
rights and other similar contractual rights of stockholders, a number of its
authorized but unissued shares of Common Stock equal to at least 100% of the
aggregate number of shares of Common Stock issuable at a conversion price equal
to the Conversion Price Floor (as defined in the Notes). Any shares of Common
Stock issuable upon conversion of the Notes and exercise of the Warrants (and
such shares when issued) are herein referred to as the "CONVERSION SHARES" and
the "WARRANT SHARES," respectively. The Notes, the Warrants, the Conversion
Shares and the Warrant Shares are sometimes collectively referred to herein as
the "SECURITIES."
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. In order to
induce the Purchasers to enter into this Agreement and to purchase the Notes and
the Warrants, the Company hereby makes the following representations and
warranties to the Purchasers:
(a) ORGANIZATION, GOOD STANDING AND POWER. The Company is a
corporation duly incorporated, validly existing and in good standing
under the laws of the State of California and has the requisite
corporate power to own, lease and operate its properties and assets and
to conduct its business as it is now being conducted. The Company does
not have any Subsidiaries (as defined in SECTION 2.1(g)) or own
securities of any kind in any other entity except as set forth on
SCHEDULE 2.1(g) hereto. The Company and each such Subsidiary is duly
qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary
except for any jurisdiction(s) (alone or in the aggregate) in which the
failure to be so qualified will not have a Material Adverse Effect. For
the purposes of this Agreement, "MATERIAL ADVERSE EFFECT" means any
adverse effect on the business, operations, properties, prospects or
financial condition of the Company or its Subsidiaries and which is
material to such entity or other entities controlling or controlled by
such entity or which is likely to materially hinder the performance by
the Company of its obligations hereunder and under the other
Transaction Documents (as defined in SECTION 2.1(b) hereof).
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and, subject to Shareholder
Approval, perform this Agreement, the Registration Rights Agreement,
the Security Agreement, the Notes, the Warrants and the Irrevocable
Transfer Agent Instructions (as defined in SECTION 3.12) (collectively,
the "TRANSACTION DOCUMENTS") and to issue and sell the Securities in
accordance with the terms hereof and the Notes and the Warrants, as
applicable. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly and validly authorized by all
necessary corporate action, and, subject to Shareholder Approval, no
further consent or authorization of the Company or its Board of
Directors or stockholders is required. This Agreement has been duly
executed and delivered by the Company. The other Transaction Documents
will have been duly executed and delivered by the Company at the
Closing. Each of the Transaction Documents constitutes, or shall
constitute when executed and delivered, a valid and binding obligation
of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by applicable
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bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor's rights and remedies or by
other equitable principles of general application.
(c) CAPITALIZATION. The authorized capital stock of the
Company and the shares thereof currently issued and outstanding as of
April 1, 2002 are set forth on SCHEDULE 2.1(c) hereto. All of the
outstanding shares of the Company's Common Stock and any other security
of the Company have been duly and validly authorized. Except as set
forth in this Agreement or on SCHEDULE 2.1(c) hereto, no shares of
Common Stock or any other security of the Company are entitled to
preemptive rights or registration rights and there are no outstanding
options, warrants, scrip, rights to subscribe to, call or commitments
of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company.
Furthermore, except as set forth in this Agreement or on SCHEDULE
2.1(c) hereto, there are no contracts, commitments, understandings, or
arrangements by which the Company is or may become bound to issue
additional shares of the capital stock of the Company or options,
securities or rights convertible into shares of capital stock of the
Company. Except for customary transfer restrictions contained in
agreements entered into by the Company in order to sell restricted
securities or as provided on SCHEDULE 2.1(c) hereto, the Company is not
a party to or bound by any agreement or understanding granting
registration or anti-dilution rights to any person with respect to any
of its equity or debt securities. Except as set forth on SCHEDULE
2.1(c), the Company is not a party to, and it has no knowledge of, any
agreement or understanding restricting the voting or transfer of any
shares of the capital stock of the Company. Except as set forth on
SCHEDULE 2.1(c) hereto, the offer and sale of all capital stock,
convertible securities, rights, warrants, or options of the Company
issued prior to the Closing complied with all applicable federal and
state securities laws, and no holder of such securities has a right of
rescission or claim for damages with respect thereto which could have a
Material Adverse Effect. The Company has furnished or made available to
the Purchasers true and correct copies of the Company's Articles of
Incorporation as in effect on the date hereof (the "ARTICLES"), and the
Company's Bylaws as in effect on the date hereof (the "BYLAWS").
(d) ISSUANCE OF SECURITIES. The Notes and the Warrants to be
issued at the Closing have been duly authorized by all necessary
corporate action and, when paid for and issued in accordance with the
terms hereof, the Notes shall be validly issued and outstanding, free
and clear of all liens, encumbrances and rights of refusal of any kind
(other than federal and state securities law restrictions). When the
Conversion Shares and Warrant Shares are issued and paid for in
accordance with the terms of this Agreement and as set forth in the
Notes and Warrants, such shares will be duly authorized by all
necessary corporate action and validly issued and outstanding, fully
paid and nonassessable, free and clear of all liens, encumbrances and
rights of refusal of any kind (other than federal and state securities
law restrictions) and the holders shall be entitled to all rights
accorded to a holder of Common Stock.
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(e) NO CONFLICTS. Except as disclosed on SCHEDULE 2.1(e), the
execution, delivery and performance of the Transaction Documents by the
Company and the consummation by the Company of the transactions
contemplated hereby and thereby do not and will not (i) violate any
provision of the Company's Articles or Bylaws or any Subsidiary's
comparable charter documents, (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would
become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage,
deed of trust, indenture, note, bond, license, lease agreement,
instrument or obligation to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries' respective properties or assets are bound (other than as
expressly contemplated by the Transaction Documents), (iii) create or
impose a lien, mortgage, security interest, charge or encumbrance of
any nature on any property or asset of the Company or any of its
Subsidiaries under any agreement or any commitment to which the Company
or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound or by which any of their respective
properties or assets are bound, or (iv) result in a violation of any
federal, state, local or foreign statute, rule, regulation, order,
judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries
are bound or affected, except, in all cases other than violations
pursuant to clauses (i) or (iv) above, for such conflicts, defaults,
terminations, amendments, acceleration, cancellations and violations as
would not, individually or in the aggregate, have a Material Adverse
Effect. The business of the Company and its Subsidiaries is not being
conducted in violation of any laws, ordinances or regulations of any
governmental entity, except for possible violations which singularly or
in the aggregate do not and will not have a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is required under
federal, state, foreign or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration
with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under the Transaction
Documents or issue and sell the Notes, the Warrants, the Conversion
Shares and the Warrant Shares in accordance with the terms hereof or
thereof (other than any filings which may be required to be made by the
Company with the Commission, the OTCBB prior to or subsequent to the
Closing, or state securities administrators subsequent to the Closing,
or any registration statement which may be filed pursuant hereto).
(f) COMMISSION DOCUMENTS, FINANCIAL STATEMENTS. The Common
Stock of the Company is registered pursuant to Section 12(b) or 12(g)
of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), and, except as disclosed on SCHEDULE 2.1(f) hereto, the Company
has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Commission pursuant to
the reporting requirements of the Exchange Act, including material
filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of
the foregoing including filings incorporated by reference therein being
referred to herein as the "COMMISSION DOCUMENTS"). The Company has
delivered or made available to the Purchasers true and complete copies
of the Commission Documents filed with the Commission since September
30, 2001. The Company has not provided to the Purchasers any material
non-public information or other information which, according to
applicable law, rule or regulation, should have been disclosed publicly
by the Company but which has not been so disclosed, other than with
respect to the transactions contemplated by this Agreement. At the time
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of its filing, the Form 10-QSB for the fiscal quarter ended September
30, 2001 (the "FORM 10-QSB") complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder and other federal, state and local
laws, rules and regulations applicable to such documents, and the Form
10-QSB did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading. As of their respective
dates, the financial statements of the Company included in the
Commission Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and
regulations of the Commission or other applicable rules and regulations
with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes
thereto or (ii) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed or summary
statements), and fairly present in all material respects the financial
position of the Company and its Subsidiaries as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) SUBSIDIARIES. SCHEDULE 2.1(g) hereto sets forth each
Subsidiary of the Company, showing the jurisdiction of its
incorporation or organization and showing the percentage of each
person's ownership of the outstanding stock or other interests of such
Subsidiary. For the purposes of this Agreement, "SUBSIDIARY" shall mean
any corporation or other entity of which at least a majority of the
securities or other ownership interest having ordinary voting power
(absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other Subsidiaries. All of
the outstanding shares of capital stock of each Subsidiary have been
duly authorized and validly issued, and are fully paid and
nonassessable. There are no outstanding preemptive, conversion or other
rights, options, warrants or agreements granted or issued by or binding
upon any Subsidiary for the purchase or acquisition of any shares of
capital stock of any Subsidiary or any other securities convertible
into, exchangeable for or evidencing the rights to subscribe for any
shares of such capital stock. Neither the Company nor any Subsidiary is
subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of the capital stock of any
Subsidiary or any convertible securities, rights, warrants or options
of the type described in the preceding sentence except as set forth on
SCHEDULE 2.1(g) hereto. Neither the Company nor any Subsidiary is party
to, nor has any knowledge of, any agreement restricting the voting or
transfer of any shares of the capital stock of any Subsidiary.
(h) NO MATERIAL ADVERSE CHANGE. Since September 30, 2001, the
Company has not experienced or suffered any Material Adverse Effect,
except as disclosed on SCHEDULE 2.1(h) hereto.
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(i) NO UNDISCLOSED LIABILITIES. Except as disclosed in the
Commission Documents, neither the Company nor any of its Subsidiaries
has any liabilities, obligations, claims or losses (whether liquidated
or unliquidated, secured or unsecured, absolute, accrued, contingent or
otherwise) other than those incurred in the ordinary course of the
Company's or its Subsidiaries respective businesses since September 30,
2001 and which, individually or in the aggregate, do not or would not
have a Material Adverse Effect on the Company or its Subsidiaries.
(j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September
30, 2001, except as disclosed on SCHEDULE 2.1(j) hereto, no event or
circumstance has occurred or exists with respect to the Company or its
Subsidiaries or their respective businesses, properties, prospects,
operations or financial condition, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company
but which has not been so publicly announced or disclosed.
(k) INDEBTEDNESS. SCHEDULE 2.1(k) hereto sets forth as of the
date hereof all outstanding secured and unsecured Indebtedness of the
Company or any Subsidiary, or for which the Company or any Subsidiary
has commitments. For the purposes of this Agreement, "INDEBTEDNESS"
shall mean (a) any liabilities for borrowed money or amounts owed in
excess of $25,000 (other than trade accounts payable incurred in the
ordinary course of business), (b) all guaranties, endorsements and
other contingent obligations in respect of Indebtedness of others,
whether or not the same are or should be reflected in the Company's
balance sheet (or the notes thereto), except guaranties by endorsement
of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $25,000 due under leases
required to be capitalized in accordance with GAAP. Except as disclosed
on SCHEDULE 2.1(k), neither the Company nor any Subsidiary is in
default with respect to any Indebtedness.
(l) TITLE TO ASSETS. Each of the Company and the Subsidiaries
has good and marketable title to all of its real and personal property,
free and clear of any mortgages, pledges, charges, liens, security
interests or other encumbrances of any nature whatsoever, except for
those indicated on SCHEDULE 2.1(l) hereto or such that, individually or
in the aggregate, would not have a Material Adverse Effect as of the
Closing Date. All said leases of the Company and each of its
Subsidiaries are valid and subsisting and in full force and effect.
(m) ACTIONS PENDING. There is no action, suit, claim,
investigation, arbitration, alternative dispute resolution proceeding
or other proceeding pending or, to the knowledge of the Company,
threatened against the Company or any Subsidiary which questions the
validity of this Agreement or any of the other Transaction Documents or
any of the transactions contemplated hereby or thereby or any action
taken or to be taken pursuant hereto or thereto. Except as set forth on
SCHEDULE 2.1(m) hereto, there is no action, suit, claim, investigation,
arbitration, alternative dispute resolution proceeding or other
proceeding pending or, to the knowledge of the Company, threatened,
against or involving the Company, any Subsidiary or any of their
respective properties or assets, which individually or in the
aggregate, would have a Material Adverse Effect as of the Closing Date.
There are no outstanding orders, judgments, injunctions, awards or
decrees of any court, arbitrator or governmental or regulatory body
against the Company or any Subsidiary or any officers or directors of
the Company or Subsidiary in their capacities as such, which
individually or in the aggregate, would have a Material Adverse Effect
as of the Closing Date.
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(n) COMPLIANCE WITH LAW. The business of the Company and the
Subsidiaries has been and is presently being conducted in accordance
with all applicable federal, state and local governmental laws, rules,
regulations and ordinances, except as set forth on SCHEDULE 2.1(n)
hereto or such that, individually or in the aggregate, the
noncompliance therewith would not have a Material Adverse Effect. The
Company and each of its Subsidiaries have all franchises, permits,
licenses, consents and other governmental or regulatory authorizations
and approvals necessary for the conduct of its business as now being
conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations
and approvals, individually or in the aggregate, could not reasonably
be expected to have a Material Adverse Effect.
(o) TAXES. Except as set forth on SCHEDULE 2.1(o) hereto, the
Company and each of the Subsidiaries has accurately prepared and filed
all federal, state and other tax returns required by law to be filed by
it, has paid or made provisions for the payment of all taxes shown to
be due and all additional assessments, and adequate provisions have
been and are reflected in the financial statements of the Company and
the Subsidiaries for all current taxes and other charges to which the
Company or any Subsidiary is subject and which are not currently due
and payable. Except as disclosed on SCHEDULE 2.1(o) hereto, none of the
federal income tax returns of the Company or any Subsidiary have been
audited by the Internal Revenue Service. The Company has no knowledge
of any additional assessments, adjustments or contingent tax liability
(whether federal or state) of any nature whatsoever, whether pending or
threatened against the Company or any Subsidiary for any period, nor of
any basis for any such assessment, adjustment or contingency.
(p) CERTAIN FEES. Except as set forth on SCHEDULE 2.1(p)
hereto, the Company has not employed any broker or finder or incurred
any liability for any brokerage or investment banking fees,
commissions, finders' structuring fees, financial advisory fees or
other similar fees in connection with the Transaction Documents.
(q) DISCLOSURE. To the best of the Company's knowledge,
neither this Agreement or the Schedules hereto nor any other documents,
certificates or instruments furnished to the Purchasers by or on behalf
of the Company or any Subsidiary in connection with the transactions
contemplated by this Agreement contain any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements made herein or therein, in the light of the
circumstances under which they were made herein or therein, not
misleading.
(r) OPERATION OF BUSINESS. Except as disclosed on SCHEDULE
2.1(r), the Company and each of the Subsidiaries owns or possesses all
patents, trademarks, domain names (whether or not registered) and any
patentable improvements or copyrightable derivative works thereof,
websites and intellectual property rights relating thereto, service
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marks, trade names, copyrights, licenses and authorizations, including,
but not limited to, those listed on SCHEDULE 2.1(R) hereto, and all
rights with respect to the foregoing, which are necessary for the
conduct of its business as now conducted without any conflict with the
rights of others.
(s) ENVIRONMENTAL COMPLIANCE. Except as disclosed on SCHEDULE
2.1(s) hereto, the Company and each of its Subsidiaries have obtained
all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all
governmental authorities, or from any other person, that are required
under any Environmental Laws. SCHEDULE 2.1(s) hereto sets forth all
material permits, licenses and other authorizations issued under any
Environmental Laws to the Company or its Subsidiaries. "ENVIRONMENTAL
LAWS" shall mean all applicable laws relating to the protection of the
environment including, without limitation, all requirements pertaining
to reporting, licensing, permitting, controlling, investigating or
remediating emissions, discharges, releases or threatened releases of
hazardous substances, chemical substances, pollutants, contaminants or
toxic substances, materials or wastes, whether solid, liquid or gaseous
in nature, into the air, surface water, groundwater or land, or
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of hazardous substances,
chemical substances, pollutants, contaminants or toxic substances,
material or wastes, whether solid, liquid or gaseous in nature. Except
as set forth on SCHEDULE 2.1(s) hereto, the Company has all necessary
governmental approvals required under all Environmental Laws and used
in its business or in the business of any of its Subsidiaries. The
Company and each of its Subsidiaries are also in compliance with all
other limitations, restrictions, conditions, standards, requirements,
schedules and timetables required or imposed under all Environmental
Laws. Except for such instances as would not individually or in the
aggregate have a Material Adverse Effect, there are no past or present
events, conditions, circumstances, incidents, actions or omissions
relating to or in any way affecting the Company or its Subsidiaries
that violate or may violate any Environmental Law after the Closing or
that may give rise to any environmental liability, or otherwise form
the basis of any claim, action, demand, suit, proceeding, hearing,
study or investigation (i) under any Environmental Law, or (ii) based
on or related to the manufacture, processing, distribution, use,
treatment, storage (including, without limitation, underground storage
tanks), disposal, transport or handling, or the emission, discharge,
release or threatened release of any hazardous substance.
"ENVIRONMENTAL LIABILITIES" means all liabilities of a person (whether
such liabilities are owed by such person to governmental authorities,
third parties or otherwise) whether currently in existence or arising
hereafter which arise under or relate to any Environmental Law.
(t) BOOKS AND RECORDS; INTERNAL ACCOUNTING CONTROLS. The
records and documents of the Company and its Subsidiaries accurately
reflect in all material respects the information relating to the
business of the Company and the Subsidiaries, the location and
collection of their assets, and the nature of all transactions giving
rise to the obligations or accounts receivable of the Company or any
Subsidiary. The Company and each of its Subsidiaries maintain a system
of internal accounting controls sufficient, in the judgment of the
Company's board of directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with
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management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate actions are taken with respect to
any differences.
(u) MATERIAL AGREEMENTS. Except for the Transaction Documents
and as set forth on SCHEDULE 2.1(u) hereto, neither the Company nor any
Subsidiary is a party to any written or oral contract, instrument,
agreement, commitment, obligation, plan or arrangement, a copy of which
would be required to be filed with the Commission (collectively,
"MATERIAL AGREEMENTS") if the Company or any Subsidiary were
registering securities under the Securities Act. Except as disclosed on
SCHEDULED 2.1(u), to the best of the Company's knowledge neither the
Company nor any subsidiary is in default under any Material Agreement
now in effect, the result of which could cause a Material Adverse
Effect. Except as disclosed on SCHEDULE 2.1(u), no written or oral
contract, instrument, agreement, commitment, obligation, plan or
arrangement of the Company or of any Subsidiary limits or shall limit
the payment of interest on the Notes, or dividends on its Common Stock.
(v) TRANSACTIONS WITH AFFILIATES. Except as set forth on
SCHEDULE 2.1(v) hereto, there are no loans, leases, agreements,
contracts, royalty agreements, management contracts or arrangements or
other continuing transactions exceeding $50,000 individually or in the
aggregate between (a) the Company, any Subsidiary or any of their
respective customers or suppliers on the one hand, and (b) on the other
hand, any officer, employee, consultant or director of the Company, or
any of its Subsidiaries, or any person owning any capital stock of the
Company or any Subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any
corporation or other entity controlled by such officer, employee,
consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder.
(w) SECURITIES ACT OF 1933. The Company has complied and will
comply with all applicable federal and state securities laws in
connection with the offer, issuance and sale of the Notes, the
Warrants, the Conversion Shares and the Warrant Shares hereunder.
Neither the Company nor anyone acting on its behalf, directly or
indirectly, has or will sell, offer to sell or solicit offers to buy
any of the Securities, or similar securities to, or solicit offers with
respect thereto from, or enter into any preliminary conversations or
negotiations relating thereto with, any person, or has taken or will
take any action so as to bring the issuance and sale of any of the
Securities under the registration provisions of the Securities Act and
applicable state securities laws. Neither the Company nor any of its
affiliates, nor any person acting on its or their behalf, has engaged
in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act) in connection with
the offer or sale of any of the Securities.
(x) GOVERNMENTAL APPROVALS. Except as set forth on SCHEDULE
2.1(x) hereto, and except for the filing of any notice prior or
subsequent to the Closing that may be required under applicable state
and/or federal securities laws (which if required, shall be filed on a
timely basis), no authorization, consent, approval, license, exemption
of, filing or registration with any court or governmental department,
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commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with, the
execution or delivery of the Notes and the Warrants, or for the
performance by the Company of its obligations under the Transaction
Documents.
(y) EMPLOYEES. Neither the Company nor any Subsidiary has any
collective bargaining arrangements or agreements covering any of its
employees. Except as set forth on SCHEDULE 2.1(y) hereto, neither the
Company nor any Subsidiary has any employment contract, agreement
regarding proprietary information, non-competition agreement,
non-solicitation agreement, confidentiality agreement, or any other
similar contract or restrictive covenant, relating to the right of any
officer, employee or consultant to be employed or engaged by the
Company or such Subsidiary. Since September 30, 2001, no officer,
consultant or key employee of the Company or any Subsidiary whose
termination, either individually or in the aggregate, could have a
Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment
or engagement with the Company or any Subsidiary.
(z) ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth on
SCHEDULE 2.1(z) hereto, since September 30, 2001, neither the Company
nor any Subsidiary has:
(i) issued any stock, bonds or other corporate
securities or any rights, options or warrants with respect
thereto;
(ii) borrowed any amount or incurred or become
subject to any liabilities (absolute or contingent) except
current liabilities incurred in the ordinary course of
business which are comparable in nature and amount to the
current liabilities incurred in the ordinary course of
business during the comparable portion of its prior fiscal
year, as adjusted to reflect the current nature and volume of
the Company's or such Subsidiary's business;
(iii) discharged or satisfied any lien or encumbrance
or paid any obligation or liability (absolute or contingent),
other than current liabilities paid in the ordinary course of
business;
(iv) declared or made any payment or distribution of
cash or other property to stockholders with respect to its
stock, or purchased or redeemed, or made any agreements so to
purchase or redeem, any shares of its capital stock;
(v) sold, assigned or transferred any other tangible
assets, or canceled any debts or claims, except in the
ordinary course of business;
(vi) sold, assigned or transferred any patent rights,
trademarks, trade names, copyrights, trade secrets or other
intangible assets or intellectual property rights, or
disclosed any proprietary confidential information to any
person except in the ordinary course of business or to the
Purchasers or its representatives;
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(vii) suffered any substantial losses or waived any
rights of material value, whether or not in the ordinary
course of business, or suffered the loss of any material
amount of prospective business;
(viii) made any changes in employee compensation
except in the ordinary course of business and consistent with
past practices;
(ix) made capital expenditures or commitments
therefor that aggregate in excess of $25,000;
(x) entered into any other transaction other than in
the ordinary course of business, or entered into any other
material transaction, whether or not in the ordinary course of
business;
(xi) made charitable contributions or pledges in
excess of $25,000;
(xii) suffered any material damage, destruction or
casualty loss, whether or not covered by insurance;
(xiii) experienced any material problems with labor
or management in connection with the terms and conditions of
their employment;
(xiv) effected any two or more events of the
foregoing kind which in the aggregate would cause a Material
Adverse Effect; or
(xv) entered into an agreement, written or otherwise
(other than the Transaction Documents), to take any of the
foregoing actions.
(aa) USE OF PROCEEDS. The proceeds from the sale of the Notes
and the Warrant Shares will be used by the Company for working capital
purposes and shall not be used to prepay any outstanding Indebtedness
or make any loans to any officer, director, affiliate or insider of the
Company.
(bb) PUBLIC UTILITY HOLDING COMPANY ACT AND INVESTMENT COMPANY
ACT STATUS. The Company is not a "HOLDING COMPANY" or a "PUBLIC UTILITY
COMPANY" as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended. The Company is not, and as a result of
and immediately upon Closing will not be, an "INVESTMENT COMPANY" or a
company "CONTROLLED" by an "INVESTMENT COMPANY," within the meaning of
the Investment Company Act of 1940, as amended.
(cc) ERISA. No liability to the Pension Benefit Guaranty
Corporation has been incurred with respect to any Plan by the Company
or any of its Subsidiaries which is or would cause a Material Adverse
Effect. The execution and delivery of this Agreement and the issue and
sale of the Notes, the Conversion Shares and the Warrant Shares will
not involve any transaction which is subject to the prohibitions of
Section 406 of ERISA or in connection with which a tax could be imposed
pursuant to Section 4975 of the Internal Revenue Code of 1986, as
amended, provided that, if any Purchaser, or any person or entity that
owns a beneficial interest in any Purchaser, is an "EMPLOYEE PENSION
BENEFIT PLAN" (within the meaning of Section 3(2) of ERISA) with
respect to which the Company is a "PARTY IN INTEREST" (within the
meaning of Section 3(14) of ERISA), the requirements of Sections
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407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in this
SECTION 2.1(cc), the term "PLAN" shall mean an "EMPLOYEE PENSION
BENEFIT PLAN" (as defined in Section 3 of ERISA) which is or has been
established or maintained, or to which contributions are or have been
made, by the Company or any Subsidiary or by any trade or business,
whether or not incorporated, which, together with the Company or any
Subsidiary, is under common control, as described in Section 414(b) or
(c) of the Code.
(dd) DILUTIVE EFFECT. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the
Notes and the Warrant Shares issuable upon exercise of the Warrants
will increase in certain circumstances. The Company further
acknowledges that its obligation to issue Conversion Shares upon
conversion of the Notes in accordance with this Agreement and its
obligations to issue the Warrant Shares upon the exercise of the
Warrants in accordance with this Agreement and the Warrants, is, in
each case, absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interest of other
stockholders of the Company.
Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of
the Purchasers hereby makes the following representations and warranties to the
Company with respect solely to itself and not with respect to any other
Purchaser:
(a) ORGANIZATION AND STANDING OF THE PURCHASERS. If the
Purchaser is an entity, such Purchaser is a corporation, limited
liability company or partnership duly incorporated or organized,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.
(b) AUTHORIZATION AND POWER. Each Purchaser has the requisite
power and authority to enter into and perform the Transaction Documents
and to purchase the Notes and Warrants being sold to it hereunder. The
execution, delivery and performance of the Transaction Documents by
each Purchaser and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary
corporate or partnership action, and no further consent or
authorization of such Purchaser or its Board of Directors,
stockholders, or partners, as the case may be, is required. This
Agreement has been duly authorized, executed and delivered by each
Purchaser. The other Transaction Documents constitute, or shall
constitute when executed and delivered, a valid and binding obligations
of each Purchaser enforceable against such Purchaser in accordance with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor's rights and remedies or by
other equitable principles of general application.
(c) ACQUISITION FOR INVESTMENT. Each Purchaser is purchasing
the Notes and acquiring the Warrants solely for its own account for the
purpose of investment and not with a view to or for sale in connection
with a distribution. Each Purchaser does not have a present intention
to sell any of the Securities, nor a present arrangement (whether or
not legally binding) or intention to effect any distribution of any of
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the Securities to or through any person or entity; provided, however,
that by making the representations herein and subject to SECTION 2.2(e)
below, each Purchaser does not agree to hold any of the Securities for
any minimum or other specific term and reserves the right to dispose of
any of the Securities at any time in accordance with federal and state
securities laws applicable to such disposition. Each Purchaser
acknowledges that it (i) has such knowledge and experience in financial
and business matters such that Purchaser is capable of evaluating the
merits and risks of Purchaser's investment in the Company and is (ii)
able to bear the financial risks associated with an investment in the
Securities and (iii) that it has been given full access to such records
of the Company and the Subsidiaries and to the officers of the Company
and the Subsidiaries as it has deemed necessary or appropriate to
conduct its due diligence investigation.
(d) RULE 144. Each Purchaser understands that the Securities
must be held indefinitely unless such Securities are registered under
the Securities Act or an exemption from registration is available. Each
Purchaser acknowledges that such person is familiar with Rule 144 of
the rules and regulations of the Commission, as amended, promulgated
pursuant to the Securities Act ("RULE 144"), and that such Purchaser
has been advised that Rule 144 permits resales only under certain
circumstances. Each Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any
Securities without either registration under the Securities Act or the
existence of another exemption from such registration requirement.
(e) GENERAL. Each Purchaser understands that the Securities
are being offered and sold in reliance on a transactional exemption
from the registration requirements of federal and state securities laws
and the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of such Purchaser set forth herein in order to determine
the applicability of such exemptions and the suitability of such
Purchaser to acquire the Securities. Each Purchaser understands that no
United States federal or state agency or any government or governmental
agency has passed upon or made any recommendation or endorsement of the
Securities.
(f) OPPORTUNITIES FOR ADDITIONAL INFORMATION. Each Purchaser
acknowledges that such Purchaser has had the opportunity to ask
questions of and receive answers from, or obtain additional information
from, the executive officers of the Company concerning the financial
and other affairs of the Company, and to the extent deemed necessary in
light of such Purchaser's personal knowledge of the Company's affairs,
such Purchaser has asked such questions and received answers to the
full satisfaction of such Purchaser, and such Purchaser desires to
invest in the Company.
(g) NO GENERAL SOLICITATION. Each Purchaser acknowledges that
the Securities were not offered to such Purchaser by means of any form
of general or public solicitation or general advertising, or publicly
disseminated advertisements or sales literature, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media, or broadcast over television or
radio, or (ii) any seminar or meeting to which such Purchaser was
invited by any of the foregoing means of communications.
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(h) ACCREDITED INVESTOR. Each Purchaser is an accredited
investor (as defined in Rule 501 of Regulation D), and such Purchaser
has such experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in the
Securities. Each Purchaser acknowledges that an investment in the
Securities is speculative and involves a high degree of risk.
(i) LIMITATIONS ON SHORT SALES. So long as no Event of Default
(as defined in the Notes) has occurred and is continuing, neither the
Purchasers nor their affiliates will undertake any special selling
activities with respect to the Common Stock, which includes, without
limitation, any short sale.
ARTICLE III
COVENANTS
The Company covenants with each Purchaser as follows, which covenants
are for the benefit of each Purchaser and their respective permitted assignees:
Section 3.1 SECURITIES COMPLIANCE. The Company shall notify the
Commission in accordance with their rules and regulations, of the transactions
contemplated by any of the Transaction Documents and shall take all other
necessary action and proceedings as may be required and permitted by applicable
law, rule and regulation, for the legal and valid issuance of the Securities to
the Purchasers, or their respective subsequent holders.
Section 3.2 REGISTRATION AND LISTING. The Company will cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to this Agreement, and will not take any action or file
any document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act, except as permitted herein. The Company shall take all action
necessary to continue the listing or trading of its Common Stock on the OTCBB or
any successor market. The Company will promptly file the "LISTING APPLICATION,"
if required, for, or in connection with, the issuance and delivery of the
Conversion Shares and the Warrant Shares.
Section 3.3 INSPECTION RIGHTS. Subject to SECTION 3.15 hereof, the
Company shall permit, during normal business hours and upon reasonable request
and reasonable notice, a Purchaser or any employees, agents or representatives
thereof, so long as a Purchaser shall be obligated hereunder to purchase the
Notes or shall beneficially own the Notes, or shall own Conversion Shares,
Warrant Shares or the Warrants to purchase Warrant Shares which, in the
aggregate, represent more than two percent (2%) of the total combined voting
power of all voting securities then outstanding, to examine and make reasonable
copies of and extracts from the records and books of account of, and visit and
inspect, during the term of the Notes and Warrants, the properties, assets,
operations and business of the Company and any Subsidiary, and to discuss the
affairs, finances and accounts of the Company and any Subsidiary with any of its
officers, consultants, directors, and key employees.
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Section 3.4 COMPLIANCE WITH LAWS. The Company shall comply, and cause
each Subsidiary to comply, with all applicable laws, rules, regulations and
orders, noncompliance with which the Company reasonably expects would have a
Material Adverse Effect.
Section 3.5 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company shall
keep and cause each Subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
Subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
Section 3.6 REPORTING REQUIREMENTS. The Company shall furnish three (3)
copies of the following to the Purchasers in a timely manner so long as the
Purchasers shall be obligated hereunder to purchase the Notes or shall
beneficially own the Notes or Warrants, or shall own Conversion Shares or
Warrant Shares which, in the aggregate, represent more than one percent (1%) of
the total combined voting power of all voting securities then outstanding:
(a) Quarterly Reports filed with the Commission on Form 10-QSB
as soon as available, and in any event within fifty-one (51) days after
the end of each of the first three (3) fiscal quarters of the Company;
(b) Annual Reports filed with the Commission on Form 10-KSB as
soon as available, and in any event within one hundred six (106) days
after the end of each fiscal year of the Company; and
(c) Copies of all notices and information, including without
limitation notices and proxy statements in connection with any
meetings, that are provided to holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to
such holders of Common Stock.
Section 3.7 AMENDMENTS. The Company shall not amend or waive any
provision of the Articles or Bylaws of the Company in any way that would
adversely affect the exercise rights, voting rights, prepayment rights or
redemption rights of the holder of the Notes or the Warrants; provided, however,
that the Company shall not be prohibited from amending its Articles to increase
its authorized capital stock.
Section 3.8 OTHER AGREEMENTS. The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any Subsidiary under any
Transaction Document.
Section 3.9 DISTRIBUTIONS. Except as set forth on SCHEDULE 3.9 hereto,
so long as any Notes remain outstanding, the Company agrees that it shall not,
without the prior written consent of the holders of a majority of the principal
amount of the Notes outstanding at the time consent is required, which consent
may be granted or denied in the sole discretion of the Purchasers (i) declare or
pay any dividends (other than a stock dividend or stock split) or make any
distributions to any holder(s) of Common Stock or (ii) purchase or otherwise
acquire for value, directly or indirectly, any Common Stock or other equity
security of the Company.
-15-
Section 3.10 SUBSEQUENT FINANCINGS. (a) During the period commencing on
the Closing Date and ending on the earlier of (i) the two hundred seventieth
(270th) day after the Effectiveness Date or (ii) the date all of the Notes are
no longer outstanding, the Company covenants and agrees that it will not,
without the prior written consent of the holders of a majority of the principal
amount of the Notes outstanding at the time consent is required, enter into any
subsequent offer or sale to, or exchange with (or other type of distribution
to), any third party, of Common Stock or any securities convertible, exercisable
or exchangeable into Common Stock, including convertible and non-convertible
debt securities (collectively, the "Financing Securities"), the primary purpose
of which would be to obtain financing for the Company (a "Subsequent
Financing"). For purposes of this Agreement, a Permitted Financing (as defined
hereinafter) shall not be considered a Subsequent Financing. A "Permitted
Financing" shall mean (1) shares of Common Stock to be issued to strategic
partners and/or in connection with a strategic merger or acquisition; (2) shares
of Common Stock or the issuance of options to purchase shares of Common Stock to
employees, officers, directors, consultants and vendors in accordance with the
Company's equity incentive policies; (3) the issuance of securities pursuant to
the conversion or exercise of convertible or exercisable securities issued or
outstanding on or prior to the Closing Date; (4) the issuance of securities in a
public offering; (5) the issuance of up to 100,000 warrants or options to
purchase shares of Common Stock in connection with debt financing for the
Company; and (6) the issuance of securities in which the proceeds received by
the Company in connection with such issuance would be used to prepay the
outstanding principal balance of the Notes and all accrued interest thereon.
(b) For a period of two (2) years following the Closing Date, if the
Company enters into any Subsequent Financing on terms more favorable than the
terms governing the Notes and Warrants, then, subject to applicable securities
laws, the Purchasers in their sole discretion may exchange the Notes and
Warrants together with accrued but unpaid interest (which interest shall be
payable, at the sole option of the Purchasers, in cash or in the form of the new
securities to be issued in the Subsequent Financing) for the securities issued
or to be issued in the Subsequent Financing. The Company covenants and agrees to
promptly notify in writing the Purchasers of the terms and conditions of any
such proposed Subsequent Financing.
Section 3.11 RESERVATION OF SHARES. So long as the Notes or Warrants
remain outstanding, the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance (subject to
Shareholder Approval), 100% of the aggregate number of shares of Common Stock
issuable at a conversion price equal to the Conversion Price Floor (as defined
in the Notes). If at any time the number of shares of Common Stock authorized
and reserved for issuance is below 100% of the Conversion Price Floor (as
defined in the Notes), the Company will promptly take all corporate action
necessary to authorize and reserve a sufficient number of shares, including
without limitation, calling a special meeting of shareholders to authorize
additional shares to meet the Company's obligations under this SECTION 3.11, in
the case of an insufficient number of authorized shares, and using its best
efforts to obtain shareholders approval of an increase in such authorized number
of shares.
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Section 3.12 TRANSFER AGENT INSTRUCTIONS. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of the Purchasers or their
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by the Purchasers to the Company upon
conversion of the Notes or exercise of the Warrants, in the form of EXHIBIT D
attached hereto (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to
registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in SECTION 5.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this SECTION 3.12 will be given by the Company to its transfer agent other
than as contemplated by the Irrevocable Transfer Agent Instructions and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement. Nothing in this
SECTION 3.12 shall affect in any way the Purchasers' obligations and agreements
set forth in SECTION 5.1 to comply with all applicable prospectus delivery
requirements, if any, upon the resale of the Conversion Shares and the Warrant
Shares. If a Purchaser provides the Company with an opinion of counsel, in form,
substance and scope generally acceptable to the Company, to the effect that a
public sale, assignment or transfer of the Securities may be made without
registration under the Securities Act or the Purchasers provide the Company with
reasonable assurances that the Securities can be sold pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the
transfer, and, in the case of the Conversion Shares and the Warrant Shares,
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by the Purchasers and without any
restrictive legend. The Company acknowledges that a breach by it of its
obligations under this SECTION 3.12 will cause irreparable harm to the
Purchasers by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this SECTION 3.12 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this SECTION 3.12, that the Purchasers shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.
Section 3.13 DISPOSITION OF ASSETS. So long as the Notes remain
outstanding, neither the Company nor any Subsidiary shall sell, transfer or
otherwise dispose of any material amount of its properties, assets and rights
including, without limitation, its software and intellectual property, to any
person except for sales to customers in the ordinary course of business, sales
of inventory to subcontractors, sales or assignments of accounts receivable to
the Company's contract manufacturers or their lenders, without the prior written
consent of the holders of a majority of the principal amount of the Notes then
outstanding.
Section 3.14 REPAYMENT OF OTHER INDEBTEDNESS. So long as the Notes
remain outstanding, the Company shall not prepay any Indebtedness for borrowed
money owed by the Company to any officer, director, affiliate or insider of the
Company.
Section 3.15 NON-PUBLIC INFORMATION. Neither the Company nor any of its
officers or agents shall disclose any material non-public information about the
Company to the Purchasers and neither the Purchasers nor any of their
affiliates, officers or agents will solicit any material non-public information
from the Company.
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Section 3.16 ANNUAL REPORT ON FORM 10-KSB. The Company shall file its
Annual Report on Form 10-KSB for the year ended December 31, 2001 (including
audited financial statements) with the Commission no later than April 16, 2002.
Section
Section 3.17 SHAREHOLDER APPROVAL. The Company shall obtain the vote of
its shareholders no later than May 20, 2002 to approve an amendment to the
Articles to increase the authorized capital stock of the Company to permit the
Company to reserve at least 100% of the aggregate number of shares of Common
Stock to effect the conversion of the Notes and exercise of the Warrants (the
"SHAREHOLDER APPROVAL").
Section 3.18 INTENTIONALLY OMITTED.
ARTICLE IV
CONDITIONS
Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
CLOSE AND TO SELL THE NOTES AND WARRANTS. The obligation hereunder of the
Company to close and issue and sell the Notes and the Warrants to the Purchasers
at the Closing Date is subject to the satisfaction or waiver, at or before the
Closing of the conditions set forth below. These conditions are for the
Company's sole benefit and may be waived by the Company in writing at any time
in its sole discretion.
(a) ACCURACY OF THE PURCHASERS' REPRESENTATIONS AND
WARRANTIES. The representations and warranties of each Purchaser shall
be true and correct in all material respects as of the date when made
and as of the Closing Date as though made at that time, except for
representations and warranties that are expressly made as of a
particular date, which shall be true and correct in all material
respects as of such date.
(b) PERFORMANCE BY THE PURCHASERS. Each Purchaser shall have
performed, satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Purchasers at or prior to the Closing
Date.
(c) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of
competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement.
(d) DELIVERY OF PURCHASE PRICE. The Purchase Price for the
Notes and Warrants has been delivered to the Company at the Closing
Date.
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(e) DELIVERY OF TRANSACTION DOCUMENTS. The Transaction
Documents have been duly executed and delivered by the Purchasers to
the Company, and the Company shall have received such other
certificates and documents as the Company or its counsel shall
reasonably require incident to the Closing.
Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO
CLOSE AND TO PURCHASE THE NOTES AND WARRANTS. The obligation hereunder of the
Purchasers to purchase the Notes and Warrants and consummate the transactions
contemplated by this Agreement is subject to the satisfaction or waiver, at or
before the Closing Date, of each of the conditions set forth below. These
conditions are for the Purchasers' sole benefit and may be waived by the
Purchasers at any time in their sole discretion.
(a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES.
Each of the representations and warranties of the Company in this
Agreement, the Registration Rights Agreement, the Security Agreement
and the Notes shall be true and correct in all material respects as of
the Closing Date, except for representations and warranties that speak
as of a particular date, which shall be true and correct in all
material respects as of such date.
(b) PERFORMANCE BY THE COMPANY. The Company shall have
performed, satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Company at or prior to the Closing
Date.
(c) NO SUSPENSION, ETC. Trading in the Company's Common Stock
shall not have been suspended by the Commission (except for any
suspension of trading of limited duration agreed to by the Company,
which suspension shall be terminated prior to the Closing), and, at any
time prior to the Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets ("BLOOMBERG") shall not have
been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on
the New York Stock Exchange, nor shall a banking moratorium have been
declared either by the United States or New York State authorities, nor
shall there have occurred any national or international calamity or
crisis of such magnitude in its effect on any financial market which,
in each case, in the reasonable judgment of the Purchasers, makes it
impracticable or inadvisable to purchase the Notes.
(d) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of
competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement.
(e) NO PROCEEDINGS OR LITIGATION. No action, suit or
proceeding before any arbitrator or any governmental authority shall
have been commenced, and no investigation by any governmental authority
shall have been threatened, against the Company or any Subsidiary, or
any of the officers, directors or affiliates of the Company or any
Subsidiary seeking to restrain, prevent or change the transactions
contemplated by this Agreement, or seeking damages in connection with
such transactions.
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(f) OPINION OF COUNSEL, ETC. The Purchasers shall have
received an opinion of counsel to the Company, dated the Closing Date,
in the form of EXHIBIT E hereto and such other certificates and
documents as the Purchasers or their counsel shall reasonably require
incident to the Closing.
(g) WARRANTS AND NOTES. The Company shall have delivered the
originally executed Warrants (in such denominations as each Purchaser
may request) to the Purchasers and shall have delivered the originally
executed Notes (in such denominations as each Purchaser may request) to
the Purchasers that are being acquired by the Purchasers at the
Closing.
(h) RESOLUTIONS. The Board of Directors of the Company shall
have adopted resolutions consistent with SECTION 2.1(b) hereof in a
form reasonably acceptable to the Purchasers (the "RESOLUTIONS").
(i) RESERVATION OF SHARES. As of the Closing Date, the Company
shall have reserved out of its authorized and unissued shares of Common
Stock, subject to Shareholder Approval, solely for the purpose of
effecting the conversion of the Notes and the exercise of the Warrants,
a number of shares of Common Stock equal to at least 100% of the
aggregate number of shares of Common Stock issuable at a conversion
price equal to the Conversion Price Floor (as defined in the Notes).
(j) TRANSFER AGENT INSTRUCTIONS. The Irrevocable Transfer
Agent Instructions, in the form of EXHIBIT D attached hereto, shall
have been delivered to and acknowledged in writing by the Company's
transfer agent.
(k) SECRETARY'S CERTIFICATE. The Company shall have delivered
to the Purchasers a secretary's certificate, dated as of the Closing
Date, as to (i) the Resolutions, (ii) the Articles, (iii) the Bylaws,
each as in effect at the Closing, and (iv) the authority and incumbency
of the officers of the Company executing the Transaction Documents and
any other documents required to be executed or delivered in connection
therewith.
(l) OFFICER'S CERTIFICATE. On the Closing Date, the Company
shall have delivered to the Purchasers a certificate of an executive
officer of the Company, dated as of the Closing Date, confirming the
accuracy of the Company's representations, warranties and covenants as
of the Closing Date and confirming the compliance by the Company with
the conditions precedent set forth in this SECTION 4.2 as of the
Closing Date.
(m) SECURITY AGREEMENT. As of the Closing Date, the parties
shall have entered into the security agreement in the form of EXHIBIT F
attached hereto.
(n) UCC-1 FINANCING STATEMENTS. The Company shall have filed
all UCC-1 financing statements in form and substance satisfactory to
the Purchasers at the appropriate offices to create a valid and
perfected security interest in the Collateral (as defined in the
Security Agreement).
(o) JUDGMENT, LIEN AND UCC SEARCH. A judgment, lien and UCC
financing statement search shall have been completed by the Purchasers.
-20-
(p) FEES AND EXPENSES. As of the Closing Date, all fees and
expenses required to be paid by the Company shall have been or
authorized to be paid by the Company as of the Closing Date.
(q) REGISTRATION RIGHTS AGREEMENT. As of the Closing Date, the
parties shall have entered into the Registration Rights Agreement in
the Form of EXHIBIT G attached hereto.
(r) MATERIAL ADVERSE EFFECT. No Material Adverse Effect shall
have occurred.
ARTICLE V
CERTIFICATE LEGEND
Section 5.1 LEGEND. Each certificate representing the Notes, the
Conversion Shares, the Warrants and the Warrant Shares shall be stamped or
otherwise imprinted with a legend substantially in the following form (in
addition to any legend required by applicable state securities or "BLUE SKY"
laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR TELENETICS
CORPORATION SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
The Company agrees to reissue certificates representing any of the
Securities, without the legend set forth above if at such time, prior to making
any transfer of any such Securities, such holder thereof shall give written
notice to the Company describing the manner and terms of such transfer and
removal as the Company may reasonably request. Such proposed transfer will not
be effected until: (a) the Company has notified such holder that either (i) in
the opinion of Company counsel, the registration of the Notes, Conversion
Shares, Warrants or Warrant Shares under the Securities Act is not required in
connection with such proposed transfer; or (ii) a registration statement under
the Securities Act covering such proposed disposition has been filed by the
Company with the Commission and has become effective under the Securities Act;
and (b) the Company has notified such holder that either: (i) in the opinion of
Company counsel, the registration or qualification under the securities or "BLUE
SKY" laws of any state is not required in connection with such proposed
disposition, or (ii) compliance with applicable state securities or "BLUE SKY"
laws has been effected. The Company will use its best efforts to respond to any
such notice from a holder within five (5) days. In the case of any proposed
transfer under this SECTION 5, the Company will use reasonable efforts to comply
with any such applicable state securities or "BLUE SKY" laws, but shall in no
event be required, in connection therewith, to qualify to do business in any
state where it is not then qualified or to take any action that would subject it
-21-
to tax or to the general service of process in any state where it is not then
subject. The restrictions on transfer contained in SECTION 5.1 shall be in
addition to, and not by way of limitation of, any other restrictions on transfer
contained in any other section of this Agreement.
ARTICLE VI
TERMINATION
Section 6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated at any time prior to the Closing Date by the mutual written consent
of the Company and the Purchasers.
Section 6.2 EFFECT OF TERMINATION. If this Agreement is terminated as
provided in SECTION 6.1 herein, this Agreement shall become void and of no
further force and effect, except for SECTIONS 8.1 AND 8.2, and ARTICLE VII
herein. Nothing in this SECTION 6.2 shall be deemed to release the Company or
any Purchaser from any liability for any breach under this Agreement, or to
impair the rights of the Company and such Purchaser to compel specific
performance by the other party of its obligations under this Agreement.
ARTICLE VII
INDEMNIFICATION
Section 7.1 GENERAL INDEMNITY. The Company agrees to indemnify and hold
harmless each Purchaser (and its respective directors, officers, affiliates,
agents, successors and assigns) from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys' fees, charges and disbursements) incurred by
each Purchaser as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein. The
Purchasers severally but not jointly agree to indemnify and hold harmless the
Company and its directors, officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys' fees, charges
and disbursements) incurred by the Company as result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Purchasers
herein.
Section 7.2 INDEMNIFICATION PROCEDURE. Any party entitled to
indemnification under this ARTICLE VII (an "INDEMNIFIED PARTY") will give
written notice to the indemnifying party of any matters giving rise to a claim
for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this ARTICLE VII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect to such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
-22-
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim. In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party's costs and expenses arising out of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder. The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the indemnified party which relates to such action or claim. The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. The indemnifying party shall not be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent. Notwithstanding anything in this ARTICLE VII to the
contrary, the indemnifying party shall not, without the indemnified party's
prior written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the indemnified party of a
release from all liability in respect of such claim. The indemnification
required by this ARTICLE VII shall be made by periodic payments of the amount
thereof during the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so long as the
indemnified party irrevocably agrees to refund such moneys if it is ultimately
determined by a court of competent jurisdiction that such party was not entitled
to indemnification. The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar rights of the indemnified party
against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 FEES AND EXPENSES. Each party shall pay the fees and
expenses of its advisors, counsel, accountants and other experts, if any, and
all other expenses, incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, provided,
however, that the Company shall pay such fees and expenses set forth on SCHEDULE
2.1(p) hereto. The Company shall pay all reasonable attorneys' fees,
disbursements and expenses incurred by the Purchasers to one attorney for the
Purchasers in connection with any amendments, modifications or waivers of this
Agreement or any of the other Transaction Documents or incurred in connection
with the enforcement of this Agreement and any of the other Transaction
Documents.
-23-
Section 8.2 SPECIFIC ENFORCEMENT; CONSENT TO JURISDICTION.
(a) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions
of this Agreement or the other Transaction Documents were not performed
in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions
of this Agreement or the other Transaction Documents and to enforce
specifically the terms and provisions hereof or thereof, this being in
addition to any other remedy to which any of them may be entitled by
law or equity.
(b) The Company and each Purchaser (i) hereby irrevocably
submit to the exclusive jurisdiction of the United States District
Court sitting in the Southern District of New York and the courts of
the State of New York located in New York county for the purposes of
any suit, action or proceeding arising out of or relating to this
Agreement or any of the other Transaction Documents or the transactions
contemplated hereby or thereby and (ii) hereby waive, and agree not to
assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. The Company and
each Purchaser consent to process being served in any such suit, action
or proceeding by mailing via certified mail, return receipt requested,
a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing in this
SECTION 8.2 shall affect or limit any right to serve process in any
other manner permitted by law.
Section 8.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
Transaction Documents contain the entire understanding and agreement of the
parties with respect to the matters covered hereby and, except as specifically
set forth herein or in the other Transaction Documents, neither the Company nor
any Purchaser make any representation, warranty, covenant or undertaking with
respect to such matters, and they supersede all prior understandings and
agreements with respect to said subject matter, all of which are merged herein.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and the holders of at least a majority of the
principal amount of the Notes then outstanding, and no provision hereof may be
waived other than by a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought. No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the Notes then outstanding. No consideration shall be offered or paid to any
person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration is also offered to
all of the parties to the Transaction Documents or holders of Notes, as the case
may be.
Section 8.4 NOTICES. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telecopy or facsimile at the
address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal
-24-
business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:
If to the Company: Telenetics Corporation
00000 Xxxxxx Xxxxx
Xxxx Xxxxxx, Xxxxxxxxxx 00000
Attention: President
Attention: Chief Financial Officer
Telecopier: (000) 000-0000
Telephone: (000) 000-0000
with a copy (which copy
shall not constitute notice
to the Company) to: Xxxxx X. Xxxxxxx, Esq.
Xxxxx & Xxxxxx, LLP
000 Xxxxx Xxxxxxxxx, Xxxxx 0000
Xxxxx Xxxx, Xxxxxxxxxx 00000
Telecopier: (000) 000-0000
Telephone: (000) 000-0000
If to any Purchaser: At the address of such Purchaser set
forth on EXHIBIT A to this Agreement.
Any party hereto may from time to time change its address for notices
by giving at least ten (10) days written notice of such changed address to the
other parties hereto.
Section 8.5 WAIVERS. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
Section 8.6 HEADINGS. The article, section and subsection headings in
this Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
Section 8.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and assigns.
After the Closing, the assignment by a party to this Agreement of any rights
hereunder shall not affect the obligations of such party under this Agreement.
Subject to applicable federal and state securities laws, the Purchasers may
assign the Notes, the Warrants and their rights under this Agreement and the
other Transaction Documents and any other rights hereto and thereto without the
consent of the Company; provided, however, that any assignee shall first provide
the Company with duly executed representations and warranties in the form
contained in SECTION 2.2 of this Agreement.
-25-
Section 8.8 NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 8.9 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to the choice of law provisions. This Agreement shall not be
interpreted or construed with any presumption against the party causing this
Agreement to be drafted.
Section 8.10 SURVIVAL. The representations and warranties of the
Company and the Purchasers contained in SECTIONS 2.1(o) AND 2.1(s) should
survive until the expiration of the applicable statutes of limitation, and those
contained in ARTICLE II, with the exception of SECTIONS 2.1(o) AND 2.1(s), shall
survive the execution and delivery hereof and the Closing until the date three
(3) years from the Closing Date, and the agreements and covenants set forth in
ARTICLES I, III, V, VII AND VIII of this Agreement shall survive the execution
and delivery hereof and the Closing hereunder.
Section 8.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart.
Section 8.12 PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the names of the Purchasers
without the consent of the Purchasers in accordance with SECTION 8.3, which
consent shall not be unreasonably withheld or delayed, or unless and until such
disclosure is required by law, rule or applicable regulation, and then only to
the extent of such requirement.
Section 8.13 SEVERABILITY. The provisions of this Agreement are
severable and, in the event that any court of competent jurisdiction shall
determine that any one or more of the provisions or part of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement and this Agreement shall be reformed and construed as if such
invalid or illegal or unenforceable provision, or part of such provision, had
never been contained herein, so that such provisions would be valid, legal and
enforceable to the maximum extent possible.
Section 8.14 FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of the Purchasers or the Company, the Company and
each Purchaser shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, the Notes,
the Warrants, the Security Agreement and the Registration Rights Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-26-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first above
written.
COMPANY: TELENETICS CORPORATION
By: /S/ Xxxxx Xxxxxxxx Xxxx
-----------------------------
Name: Xxxxx Xxxxxxxx Xxxx
Title: President
PURCHASERS: DOLPHIN OFFSHORE PARTNERS, L.P.
By: /S/ Xxxxx X. Xxxxx
-----------------------------
Name: Xxxxx X. Xxxxx
Title: General Partner
-27-
EXHIBIT A
LIST OF INVESTORS
---------------------------------- ----------------------------------- --------------------------------
NAMES AND ADDRESSES OF PURCHASERS NUMBER OF WARRANTS PURCHASED DOLLAR AMOUNT OF INVESTMENT
---------------------------------- ----------------------------------- --------------------------------
Dolphin Offshore Partners, L.P. 3,599,878 $2,115,000 cancellation of
000 Xxxx 00xx Xxxxxx indebtedness (comprising the
New York, N.Y. 10003 remaining balance of the 7.0%
Convertible Subordinated
Debenture due January 2, 2003)
---------------------------------- ----------------------------------- --------------------------------
EXHIBIT B
FORM OF NOTE
EXHIBIT C
FORM OF WARRANT
EXHIBIT D
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
TELENETICS CORPORATION
as of April 1, 2002
[NAME AND ADDRESS OF COMPANY'S TRANSFER AGENT]
Ladies and Gentlemen:
Reference is made to that certain Note and Warrant Purchase Agreement,
dated as of April 1, 2002, by and among Telenetics Corporation, a California
corporation (the "COMPANY"), and the purchasers named therein (the "PURCHASERS")
pursuant to which the Company is issuing to the Purchasers secured convertible
promissory notes, (the "NOTES") and warrants (the "WARRANTS") to purchase shares
of the Company's common stock, no par value per share (the "COMMON STOCK"). This
letter shall serve as our irrevocable authorization and direction to you
(provided that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Notes (the "CONVERSION SHARES")
and exercise of the Warrants (the "WARRANT SHARES") to or upon the order of a
Purchaser as of the date specified by the Purchaser from time to time upon (i)
surrender to you of a properly completed and duly executed Conversion Notice or
Exercise Notice, as the case may be, in the form attached hereto as Exhibit I
and Exhibit II, respectively, and (ii) in the case of the conversion of a Note,
a copy of the Note (with the originals delivered to the Company) or, in the case
of a Warrant being exercised, a copy of the Warrant (with the original Warrant
delivered to the Company) being exercised (or, in each case, an indemnification
undertaking with respect to such Note or the Warrants in the case of their loss,
theft or destruction). So long as you have previously received (x) written
confirmation from counsel to the Company that a registration statement covering
resales of the Conversion Shares or Warrant Shares, as applicable, has been
declared effective by the Securities and Exchange Commission (the "SEC") under
the Securities Act of 1933, as amended (the "1933 ACT"), and no subsequent
notice by the Company or its counsel of the suspension or termination of its
effectiveness and (y) a copy of such registration statement, and if the
Purchasers represent in writing that the Conversion Shares or the Warrant
Shares, as the case may be, were sold pursuant to the Registration Statement,
then certificates representing the Conversion Shares and the Warrant Shares, as
the case may be, shall not bear any legend restricting transfer of the
Conversion Shares and the Warrant Shares, as the case may be, and should not be
subject to any stop-transfer restriction. Provided, however, that if you have
not previously received (i) written confirmation from counsel to the Company
that a registration statement covering resales of the Conversion Shares or
Warrant Shares, as applicable, has been declared effective by the SEC under the
1933 Act, and (ii) a copy of such registration statement, then the certificates
for the Conversion Shares and the Warrant Shares shall bear the following
legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE SECURITIES ACT"), OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS, OR TELENETICS CORPORATION SHALL HAVE RECEIVED
AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED."
and, provided further, that the Company may from time to time notify you to
place transfer restrictions on the certificates for the Conversion Shares and
the Warrant Shares in the event a registration statement covering the Conversion
Shares and the Warrant Shares is subject to amendment for events then current.
A form of written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares and the Warrant
Shares has been declared effective by the SEC under the 1933 Act is attached
hereto as Exhibit III.
Please be advised that each Purchaser is relying upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, each Purchaser
is a third party beneficiary to these instructions.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at ___________.
Very truly yours,
TELENETICS CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
ACKNOWLEDGED AND AGREED:
[TRANSFER AGENT]
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
Date:
------------------------------------------------
cc: List of Purchasers
-2-
EXHIBIT I
---------
CONVERSION NOTICE
TELENETICS CORPORATION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ________________ of the
principal amount of the above Note No. ___ into shares of Common Stock of
TELENETICS CORPORATION (the "MAKER") according to the conditions hereof, as of
the date written below.
Date of Conversion
-------------------------------------------------------------
Applicable Conversion Price
----------------------------------------------------
Signature
----------------------------------------------------------------------
[NAME]
Address: -----------------------------------------------------------------------
-----------------------------------------------------------------------
EXHIBIT II
----------
FORM OF EXERCISE NOTICE
EXERCISE FORM
TELENETICS CORPORATION
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of Telenetics
Corporation covered by the within Warrant.
Dated: _________________ Signature
--------------------------
Address --------------------------
--------------------------
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature
--------------------------
Address --------------------------
--------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature
--------------------------
Address --------------------------
--------------------------
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-_____ canceled (or transferred or exchanged) this _____ day
of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of _______________.
EXHIBIT III
-----------
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[NAME AND ADDRESS OF COMPANY'S TRANSFER AGENT]
Re: TELENETICS CORPORATION
--- ----------------------
Ladies and Gentlemen:
We are counsel to Telenetics Corporation, a California corporation (the
"COMPANY"), and have represented the Company in connection with that certain
Note and Warrant Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of
April 1, 2002, by and among the Company and the purchasers named therein
(collectively, the "PURCHASERS") pursuant to which the Company issued to the
Purchasers secured convertible promissory notes (the "NOTES") and warrants (the
"WARRANTS") to purchase shares of the Company's common stock, no par value per
share (the "COMMON STOCK"). Pursuant to the Purchase Agreement, the Company has
also entered into a Registration Rights Agreement with the Purchasers (the
"REGISTRATION RIGHTS AGREEMENT"), dated as of April 1, 2002, pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of
Common Stock issuable upon conversion of the principal amount of the Notes and
exercise of the Warrants, under the Securities Act of 1933, as amended (the
"1933 ACT"). In connection with the Company's obligations under the Registration
Rights Agreement, on ________________, 2002, the Company filed a Registration
Statement on Form SB-2 (File No. 333-________) (the "REGISTRATION STATEMENT")
with the Securities and Exchange Commission (the "SEC") relating to the resale
of the Registrable Securities which names the Purchasers as selling stockholders
thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and accordingly, the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:
-----------------------------------
cc: [LIST NAME OF PURCHASERS]
EXHIBIT E
FORM OF OPINION
EXHIBIT F
FORM OF SECURITY AGREEMENT
EXHIBIT G
FORM OF REGISTRATION RIGHTS AGREEMENT
