EXHIBIT 4.1
SECURITIES PURCHASE AGREEMENT
dated as of
July 18, 2000
by and between
American International Petroleum Corporation
as the Issuer,
and
GCA Strategic Investment Fund Limited
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS.............................................................................2
Section 1.1 Definitions...................................................................2
Section 1.2 Accounting Terms and Determinations..........................................10
ARTICLE II. PURCHASE AND SALE OF SECURITIES........................................................10
Section 2.1 Purchase and Sale of Series A Preferred Shares...............................10
Section 2.2 Purchase Price...............................................................10
Section 2.3 Closing and Mechanics of Payment.............................................10
Section 2.4 Terms of Commitment and Subsequent Takedowns.................................10
ARTICLE III. CERTAIN OBLIGATIONS OF THE COMPANY...................................................12
Section 3.1 Mandatory Payments...........................................................12
Section 3.2 Payment of Certain Amounts...................................................13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES........................................................14
Section 4.1 Organization and Qualification...............................................14
Section 4.2 Authorization and Execution..................................................14
Section 4.3 Capitalization ..............................................................15
Section 4.4 Governmental Authorization...................................................15
Section 4.5 Issuance of Shares...........................................................16
Section 4.6 No Conflicts.................................................................16
Section 4.7 Financial Information........................................................16
Section 4.8 Litigation...................................................................17
Section 4.9 Compliance with ERISA and other Benefit Plans................................17
Section 4.10 Environmental Matters.......................................................18
Section 4.11 Taxes.......................................................................18
Section 4.12 Investments, Joint Ventures.................................................18
Section 4.13 Not an Investment Company...................................................18
Section 4.14 Full Disclosure.............................................................18
Section 4.15 No Solicitation; No Integration with Other Offerings........................18
Section 4.16 Permits.....................................................................19
Section 4.17 Leases......................................................................19
Section 4.18 Absence of Any Undisclosed Liabilities or Capital Calls.....................19
Section 4.19 Public Utility Holding Company..............................................19
Section 4.20 Intellectual Property Rights................................................19
Section 4.21 Insurance...................................................................19
Section 4.22 Title to Properties.........................................................20
Section 4.23 Internal Accounting Controls................................................20
Section 4.24 Year 2000 Compliance........................................................20
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Section 4.25 Foreign Practices...........................................................21
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................21
Section 5.1 Purchaser....................................................................21
ARTICLE VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES........................................22
Section 6.1 Conditions Precedent to Purchaser's Obligations to Purchase..................22
Section 6.2 Conditions to the Company's Obligations......................................24
ARTICLE VII. AFFIRMATIVE COVENANTS................................................................25
Section 7.1 Information..................................................................25
Section 7.2 Payment of Obligations.......................................................26
Section 7.3 Maintenance of Property; Insurance...........................................26
Section 7.4 Maintenance of Existence.....................................................26
Section 7.5 Compliance with Laws.........................................................26
Section 7.6 Inspection of Property, Books and Records....................................26
Section 7.7 Investment Company Act.......................................................26
Section 7.8 Use of Proceeds..............................................................27
Section 7.9 Compliance with Terms and Conditions of Material Contracts...................27
Section 7.10 Reserved Shares and Listings.................................................27
Section 7.11 Transfer Agent Instructions..................................................28
Section 7.12 Maintenance of Reporting Status; Supplemental Information....................28
Section 7.13 Form D; Blue Sky Laws........................................................28
Section 7.14 Purchaser Acknowledgment.....................................................28
ARTICLE VIII. NEGATIVE COVENANTS..................................................................29
Section 8.1 Reserved.....................................................................29
Section 8.2 Transactions with Affiliates.................................................29
Section 8.3 Merger or Consolidation......................................................29
Section 8.4 Limitation on Asset Sales....................................................29
Section 8.5 Restrictions on Certain Amendments...........................................30
Section 8.6 Prohibition on Discounted Equity Offerings; Registration Rights..............30
Section 8.7 Limitation on Stock Repurchases..............................................31
Section 8.8 Limitations on Financings Until Closing......................................31
Section 8.9 Short Sales..................................................................31
ARTICLE IX. RESTRICTIVE LEGENDS...................................................................31
Section 9.1 Restrictions on Transfer.....................................................31
Section 9.2 Notice of Proposed Transfers.................................................31
ARTICLE X. ADDITIONAL AGREEMENTS AMONG THE PARTIES................................................32
Section 10.1 Reserved.....................................................................32
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Section 10.2 Reserved....................................................................32
Section 10.3 Reserved....................................................................32
Section 10.4 Registration Rights.........................................................32
Section 10.5 Restriction on Issuance of Securities.......................................33
ARTICLE XI. CONVERSION PRICE ADJUSTMENTS..........................................................34
Section 11.1 Preferred Shares............................................................34
Section 11.2 Warrants....................................................................34
ARTICLE XII. MISCELLANEOUS........................................................................34
Section 12.1 Notices.....................................................................34
Section 12.2 No Waivers; Amendments......................................................34
Section 12.3 Indemnification.............................................................35
Section 12.4 Expenses: Documentary Taxes................................................37
Section 12.5 Payment.....................................................................37
Section 12.6 Successors and Assigns......................................................37
Section 12.7 Brokers.....................................................................37
Section 12.8 New York Law; Submission to Jurisdiction; Waiver of Jury Trial;
Appointment of Agent............................................................37
Section 12.9 Entire Agreement............................................................38
Section 12.10 Survival; Severability......................................................38
Section 12.11 Title and Subtitles.........................................................38
Section 12.12 Reporting Entity for the Common Stock.......................................38
Section 12.13 Publicity...................................................................38
Section 12.14 Powers and Remedies Cumulative..............................................39
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LIST OF SCHEDULES
Schedule 4.3 Capitalization
Schedule 4.7 Financial Information
Schedule 4.8 Litigation
Schedule 4.12 Investments, Joint Ventures
Schedule 7.8 Use of Proceeds
Schedule 8.2 Transactions with Affiliates
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LIST OF EXHIBITS
Exhibit A Certificate of Designations
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Solvency Certificate
Exhibit D Form of Officer's Certificate
Exhibit E Form of Escrow Agreement
Exhibit F Form of Opinion
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SECURITIES PURCHASE AGREEMENT
AGREEMENT, dated as of July 18, 2000, between American International
Petroleum Corporation (the "Company") and GCA Strategic Investment Fund Limited
("Purchaser").
R E C I T A L S:
WHEREAS, the Company desires to sell and issue to Purchaser, and Purchaser
desires to purchase from the Company, up to the greater of (i) shares of the
Company's Series A Convertible Preferred Stock, .01 par value per share (the
"Series A Preferred Stock") equal in value to $10,000,000.00, (the "Dollar
Commitment Amount") or (ii) the number of Series A Preferred Shares into which
the total number of registered common hares represented in the Company's shelf
registration statement relating to the Company's Series A Preferred Stock
required to be filed pursuant to this Agreement are convertible (the "Commitment
Amount"), with terms and conditions as set forth in the form of Certificate of
Designations for the Series A Preferred Stock attached hereto as Exhibit A;
WHEREAS, the Series A Preferred Stock will be convertible into shares of
the Company's common stock, $.08 par value per share (the "Common Stock");
WHEREAS, Purchaser will have certain registration rights with respect to
such shares of Common Stock issuable upon conversion of the Series A Preferred
Stock issued pursuant to this Agreement (the "Preferred Conversion Shares") as
set forth in the Registration Rights Agreement in the form attached hereto as
Exhibit B;
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I. DEFINITIONS
Section 1.1 Definitions. The following terms, as used herein, have the
following meanings:
"Affiliate" means, with respect to any Person (the "Subject Person"), (i)
any other Person (a "Controlling Person") that directly, or indirectly through
one or more intermediaries, Controls the Subject Person or (ii) any other Person
(other than the Subject Person or a Consolidated Subsidiary of the Subject
Person) which is Controlled by or is under common Control with a Controlling
Person.
"Agreement" means this Securities Purchase Agreement, as amended,
supplemented or otherwise modified from time to time in accordance with its
terms.
"Asset Sale" has the meaning set forth in Section 8.4.
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"Balance Sheet Date" has the meaning set forth in Section 4.7.
"Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by the Company.
"Benefit Plans" has the meaning set forth in Section 4.9(b).
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized or required by law
to close.
"Change in Control" means (i) after the date of this Agreement, any person
or group of persons (within the meaning of Sections 13 and 14 of the Exchange
Act and the rules and regulations of the Commission relating to such sections)
other than Purchaser shall have acquired beneficial ownership (within the
meaning of Rules 13d-3 and 13d-5 promulgated by the Commission pursuant to the
Exchange Act) of 331/3% or more of the outstanding shares of Common Stock of the
Company; (ii) any sale or other disposition (other than by reason of death or
disability) to any Person by any executive officers and/or employee directors of
the Company within ten Trading Days following the Closing or any Subsequent
Takedown Closing; (iii) individuals constituting the Board of Directors of the
Company on the date hereof (together with any new Directors whose election by
such Board of Directors or whose nomination for election by the shareholders of
the Company was approved by a vote of at least 50.1% of the Directors still in
office who are either Directors as of the date hereof or whose election or
nomination for election was previously so approved), cease for any reason to
constitute at least two-thirds of the Board of Directors of the Company then in
office.
"Closing Bid Price" shall mean for any security as of any date, the lowest
closing bid price as reported by Bloomberg, L.P. ("Bloomberg") on the principal
securities exchange or trading market where such security is listed or traded
or, if the foregoing does not apply, the lowest closing bid price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no lowest trading price is
reported for such security by Bloomberg, then the average of the bid prices of
any market makers for such securities as reported in the "Pink Sheets" by the
National Quotation Bureau, Inc. If the lowest closing bid price cannot be
calculated for such security on such date on any of the foregoing bases, the
lowest closing bid price of such security on such date shall be the fair market
value as mutually determined by Purchaser and the Company for which the
calculation of the closing bid price requires, and in the absence of such mutual
determination, as determined by the Board of Directors of the Company in good
faith.
"Closing Date" means the date on which all of the conditions set forth in
Sections 6.1 and 6.2 shall have been satisfied and 1,250 shares of Series A
Preferred Stock and the Commitment Warrant are issued by the Company to
Purchaser.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Commission" means the Securities and Exchange Commission or any entity
succeeding to all of its material functions.
"Commitment Warrant" shall have the meaning set forth in Section 2.1.
"Common Stock" means common stock, $.08 par value per share, of the
Company.
"Company" means American International Petroleum Corporation, a Nevada
corporation, and its successors.
"Company Corporate Documents" means the articles of incorporation and
bylaws of the Company.
"Consolidated Net Worth" means at any date the total shareholder's equity
which would appear on a consolidated balance sheet of the Company prepared as of
such date.
"Consolidated Subsidiary" means at any date with respect to any Person or
Subsidiary or other entity, the accounts of which would be consolidated with
those of such Person in its consolidated financial statements if such statements
were prepared as of such date.
"Control" (including, with correlative meanings, the terms "Controlling,"
"Controlled by" and under "common Control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of that Person, whether
through the ownership of voting securities, by contract or otherwise.
"Conversion Date" shall mean the date of delivery (including delivery via
telecopy) of a Notice of Conversion for all or a portion of the shares of Series
A Preferred Stock by the holder thereof to the Company.
"Conversion Price" has the meaning set forth in the terms of the Series A
Preferred Stock.
"Conversion Shares" means the Preferred Conversion Shares and the Warrant
Shares, collectively.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments
issued by such Person, (iii) all obligations of such Person as lessee which (y)
are capitalized in accordance with GAAP or (z) arise pursuant to sale-leaseback
transactions, (iv) all reimbursement obligations of such Person in respect of
letters of credit or other similar instruments, (v) all Debt of others secured
by a Lien on any asset of such Person, whether or not such Debt is otherwise an
obligation of such Person and (vi) all Debt of others Guaranteed by such Person.
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"Default" means any event or condition which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Default Fee" has the meaning set forth in Section 10.4.
"Derivative Securities" has the meaning set forth in Section 8.6.
"Discounted Equity Offerings" has the meaning set forth in Section 8.6.
"Directors" means the individuals then serving on the Board of Directors or
similar such management council of the Company.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the cleanup or other
remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Company and each Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Company or any
Subsidiary, are treated as a single employer under the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expense Reimbursement Fee" has the meaning set forth in Section 13.4.
"Financing" means a public or private financing consummated (meaning
closing and funding) through the issuance of debt or equity securities (or
securities convertible into or exchangeable for debt or equity securities) of
the Company, other than Permitted Financings.
"GAAP" has the meaning set forth in Section 1.2.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing (whether by virtue of
partnership arrangements, by agreement to
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keep well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain a minimum net worth, financial ratio or similar requirements, or
otherwise) any Debt of any other Person and, without limiting the generality of
the foregoing, any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Debt or (ii) entered into for the purpose of assuring in any
other manner the holder of such Debt of the payment thereof or to protect such
holder against loss in respect thereof (in whole or in part); provided that the
term Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term Guarantee used as a verb has a
corresponding meaning.
"Hazardous Materials" means any hazardous materials, hazardous wastes,
hazardous constituents, hazardous or toxic substances or petroleum products
(including crude oil or any derivative or fraction thereof), defined or
regulated as such in or under any Environmental Laws.
"Intellectual Property" has the meaning set forth in Section 4.20.
"Investment" means any investment in any Person, whether by means of share
purchase, partnership interest, capital contribution, loan, time deposit or
otherwise.
"Lien" means any lien, mechanic's lien, materialmen's lien, lease,
easement, charge, encumbrance, mortgage, conditional sale agreement, title
retention agreement, agreement to sell or convey, option, claim, title
imperfection, encroachment or other survey defect, pledge, restriction, security
interest or other adverse claim, whether arising by contract or under law or
otherwise (including, without limitation, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).
"Listing Applications" has the meaning set forth in Section 4.4.
"LKB Warrants" the aggregate number of warrants issuable to LKB Financial,
LLC pursuant to Section 12.7 of this Agreement.
"Majority Holders" means (i) as of the Closing Date, Purchaser and (ii) at
any time thereafter, the holders of more than 50% of the outstanding Series A
Preferred Stock at such time.
"Market Price" shall mean the Closing Bid Price of the Common Stock
preceding the date of determination.
"Maximum Number of Shares" shall mean that percentage of the then issued
and outstanding shares of Common Stock of the Company as of the applicable date
of determination that the Company may issue without shareholder approval under
the applicable rules of the National Market or equivalent entity, or such
greater number of shares as the shareholders of the Company may have previously
approved.
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"NASD" has the meaning set forth in Section 7.10.
"Nasdaq Stock Market" means the Nasdaq Stock Market's National Market
System.
"National Market" means the Nasdaq Stock Market, the Nasdaq Small Cap
Market, the New York Stock Exchange, Inc. or the American Stock Exchange, Inc..
"Net Cash Proceeds" means, with respect to any transaction, the total
amount of cash proceeds received by the Company or any Subsidiary less (i)
reasonable underwriters' fees, brokerage commissions, reasonable professional
fees and other customary out-of-pocket expenses payable in connection with such
transaction, and (ii) in the case of dispositions of assets, (A) actual transfer
taxes (but not income taxes) payable with respect to such dispositions, and (B)
the amount of Debt, if any, secured by a Lien on the asset or assets disposed of
and required to be, and actually repaid by the Company or any Subsidiary in
connection therewith, and any trade payables specifically relating to such asset
or assets sold by the Company or any Subsidiary that are not assumed by the
purchaser of such asset or assets.
"Notice of Conversion" means the notice to be delivered by a holder of
Series A Preferred Shares upon conversion of all or a portion thereof to the
Company.
"Notice of Exercise" means the notice to be delivered by a holder of the
LKB Warrants upon exercise of all or a portion thereof to the Company.
"Officer's Certificate" shall mean a certificate executed by the President,
chief executive officer or chief financial officer of the Company in the form of
Exhibit D attached hereto.
"OTC Bulletin Board" means the over-the-counter bulletin board operated by
the NASD.
"Other Taxes" has the meaning set forth in Section 3.6(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permits" means all domestic and foreign licenses, franchises, grants,
authorizations, permits, easements, variances, exemptions, consents,
certificates, orders and approvals necessary to own, lease and operate the
properties of, and to carry on the business of the Company and the Subsidiaries.
"Permitted Financings" has the meaning set forth in Section 10.5.
"Person" means an individual, corporation, partnership, trust, incorporated
or unincorporated association, joint venture, joint stock Company, government
(or any agency or political subdivision thereof) or other entity of any kind.
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"Plan" means at any time an employee pension benefit plan which is covered
by Title IV of ERISA or subject to the minimum funding standards under the Code
and either (i) is maintained, or contributed to, by any member of the ERISA
group for employees of any member of the ERISA group or (ii) has at any time
within the preceding five years been maintained, or contributed to, by any
Person which was at such time a member of the ERISA group for employees of the
Person which was at such time a member of the ERISA Group.
"Purchase Price" means the purchase price for the Securities set forth in
Section 2.2 hereof.
"Purchaser" means the entity listed on the signature page hereto and its
successors and assigns, including holders from time to time of the Series A
Preferred Shares.
"Recourse Financing" means Debt of the Company or any Subsidiary which, by
its terms, does not bar the lender thereof from action against the Company or
any Subsidiary, as borrower or guarantor, if the security value of the project
or asset pledged in respect thereof falls below the amount required to repay
such Debt.
"Registrable Securities" has the meaning set forth in Section 10.4(a).
"Registration Default" has the meaning set forth in Section 10.4(d).
"Registration Statement" has the meaning set forth in Section 10.4(b).
"Registration Rights Agreement" means the agreement between the Company and
Purchaser dated the date hereof substantially in the form set forth in Exhibit B
attached hereto.
"Required Effectiveness Date" has the meaning set forth in Section 10.4(b).
"Reserved Amount" has the meaning set forth in Section 7.10(a).
"Restricted Payment" means, with respect to any Person, (i) any dividend or
other distribution on any shares of capital stock of such Person (except
dividends payable solely in shares of capital stock of the same or junior class
of such Person and dividends from a wholly-owned direct or indirect Subsidiary
of the Company to its parent corporation), (ii) any payment on account of the
purchase, redemption, retirement or acquisition of (a) any shares of such
Person's capital stock or (b) any option, warrant or other right to acquire
shares of such Person's capital stock or (iii) any loan, or advance or capital
contribution to any Person (a "Stockholder") owning any capital stock of such
Person other than relocation, travel or like advances to officers and employees
in the ordinary course of business, and other than reasonable compensation as
determined by the Board of Directors.
"SEC Reports" has the meaning set forth in Section 7.1(a).
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"Securities" means the Series A Preferred Shares, the Commitment Warrant,
the LKB Warrants, the Preferred Conversion Shares and the Warrant Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the Company's Series A Preferred Stock
issuable pursuant to this Agreement.
"Solvency Certificate" shall mean a certificate executed by the treasurer
of the Company as to the solvency of the Company, the adequacy of its capital
and its ability to pay its debts, all after giving effect to the issuance and
sale of the Series A Preferred Shares and the completion of the offering
(including without limitation the payment of any fees or expenses in connection
therewith), which such Solvency Certificate shall be in the form of Exhibit C
attached hereto.
"Subsequent Takedown Closing" has the meaning set forth in Section 3.1.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which (x) a majority of the capital stock or other ownership interests
having ordinary voting power to elect a majority of the Board of Directors or
other persons performing similar functions are at the time directly or
indirectly owned by such Person or (y) the results of operations, the assets and
the liabilities of which are consolidated with such Person under GAAP.
"Subsidiary Corporate Documents" means the certificates of incorporation
and bylaws of each Subsidiary.
"Taxes" has the meaning set forth in Section 3.2.
"Trading Day" shall mean any Business Day in which the OTC Bulletin Board,
National Market or other automated quotation system or exchange on which the
Common Stock is then traded is open for trading for at least four (4) hours.
"Transaction Agreements" means this Agreement, the Certificate of
Designations, the Registration Rights Agreement, and the other agreements
contemplated by this Agreement.
"Transfer" means any disposition of Securities that would constitute a sale
thereof under the Securities Act.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the present value of all benefits under Plan
exceeds (ii) the fair market value of all Plan assets allocable to such benefits
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
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Section 1.2 Accounting Terms and Determinations. Unless otherwise specified
herein, all accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements required to
be delivered hereunder shall be prepared, in accordance with generally accepted
accounting principles as in effect from time to time, applied on a consistent
basis (except for changes concurred in by the Company's independent public
accountants) ("GAAP"). All references to "dollars," "Dollars" or "$" are to
United States dollars unless otherwise indicated.
ARTICLE II. PURCHASE AND SALE OF SECURITIES
Section 2.1 Purchase and Sale of Series A Preferred Shares.
(a) Subject to the terms and conditions set forth herein, the Company
agrees to issue and sell to Purchaser, and Purchaser agrees to purchase
from the Company, Series A Preferred Shares up to the aggregate Commitment
Amount.
(b) Purchaser shall acquire Series A Preferred Shares on the Closing
Date equal in value to One Million Two Hundred and Fifty Thousand Dollars
($1,250,000.00).
(c) As an inducement to Purchaser for purchasing the Commitment Amount
of the Company's Series A Preferred Shares, the Company shall issue to
Purchaser, on the Closing Date, a warrant to purchase 200,000 shares of the
Company's Common Stock (the "Commitment Warrant"). The Commitment Warrant
shall have a five year term and an exercise price equal to 105% of the
Closing Bid Price of the Common Stock on the Closing Date.
Section 2.2 Purchase Price. The purchase price for the Series A Preferred
Shares on the Closing Date and at any Subsequent Takedown (as defined herein)
shall be $1,000.00 per share of Series A Preferred Stock. Therefore, the
aggregate consideration payable by Purchaser to the Company for the Series A
Preferred Shares on the Closing Date shall be One Million Two Hundred and Fifty
Thousand Dollars ($1,250,000.00) (the "Purchase Price") in exchange for the
issuance of 1,250 shares of Series A Preferred Stock.
Section 2.3 Closing and Mechanics of Payment.
(a) The Purchase Price shall be paid on the Closing Date by wire
transfer of immediately available funds on or before 5:00 p.m. (EST).
(b) The Series A Preferred Shares, the Commitment Warrant and LKB
Warrants issued on the Closing Date shall be dated the Closing Date.
Section 2.4 Terms of Commitment and Subsequent Takedowns.
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(a) Commitment Term. Purchaser's commitment to purchase the Commitment
Amount of Series A Preferred Stock from the Company, subject to the terms
and conditions set forth herein, shall expire on the first anniversary of
the Closing Date (the "Commitment Term"); provided, however, the Company
shall have the option to extend the term of the commitment for an
additional 12 months by giving written notice to Purchaser of its intention
to exercise such option not less than 60 days prior to the expiration of
the Commitment Term. Upon the exercise of such option, the Commitment
Amount for such additional twelve-month period shall be equal to the
greater of (i) shares of the Company's Series A Preferred stock equal in
value to $8,000,000.00 ( the "Renewed Dollar Commitment Amount") or (ii)
the number of shares of Series A Preferred Stock into which the total
number of registered common shares represented in the Company's shelf
registration statement required to be filed and effective pursuant to this
Agreement are convertible (the "Renewed Commitment Amount"). The Company
may, at its option, terminate the Commitment, including the Renewed
Commitment Amount at any time; provided, however, the Company shall issue
to Purchaser upon termination a warrant to purchase such number of shares
of Common Stock equal to (x) .015 multiplied by (y) the Dollar Commitment
Amount plus the Renewed Dollar Commitment Amount, if applicable, less the
sum of the Initial Takedown Amount plus all Subsequent Takedown Amounts
paid by Purchaser prior to the date of such termination, as applicable on
the date of termination, divided by $1.00 (the "Termination Warrants"). The
Termination Warrants shall have a five year term and an exercise price
equal to 105% of the Closing Bid Price of the Common Stock on the date of
such termination.
(b) Subsequent Takedown Period. Until the Commitment Term expires,
following the earlier of (i) the 20th Trading Day after the effective date
of the Registration Statement (in the case of the first draw on the
Commitment Amount by the Company following the Closing Date (a "Takedown")
and the 20th Trading Day after the immediately preceding Takedown (in the
case of all Subsequent Takedowns, together known as "Subsequent Takedowns")
or (ii) conversion by Purchaser of the Series A Preferred Shares purchased
in the immediately preceding Takedown, the Company, at its sole option, may
request Purchaser to purchase additional amounts of the unused Commitment
Amount.
(c) Subsequent Takedown Amounts.
(i) The minimum amount the Company may request in any Subsequent
Takedown shall be a dollar amount equal to the product of the formula
of:
Subsequent Takedown Amount = [(V multiplied by P) multiplied by 2.5%].
Where V is equal to the weighted average trading volume of the Common Stock for
(A) the total of the 20 Trading Days or (B) the total number of Trading Days
elapsed between Subsequent Takedowns, as applicable, and P is equal to the
weighted average sale price of the Common Stock for (x) the 20 Trading Day
period or (y) the number of Trading Days elapsed between Takedowns, as
applicable (the "Minimum Subsequent Takedown Amount").
11
(ii) The maximum amount the Company may request in any Subsequent
Takedown is $1,250,000, unless the Company and Purchaser agree in
writing to increase such amount (the "Maximum Subsequent Takedown
Amount").
(iii) The Company shall provide Purchaser a minimum of 20
business days prior written notice of its intention to effect a
Takedown.
(e) Additional Takedown Limits.
(i) In no event shall the Purchaser (or any "group" as such term
is defined in Rule 13d-3 of the Exchange Act of which Purchaser may be
deemed as a member) receive Conversion Shares, upon the issuance of
any Common Stock as a result of a Takedown, if, immediately after
giving effect to such issuance, the Purchaser (or group) would
beneficially own in excess of 4.99% of the Common Stock then
outstanding. This provision will not be effective following an Event
of Default which remains uncured for a period of 10 days.
(ii) In no event shall a Subsequent Takedown be effected if the
issuance of the Series A Preferred Shares pursuant to such Subsequent
Takedown will cause the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Shares or issued pursuant to this
Agreement in the aggregate, to exceed 19.9% of the number of
outstanding shares of Common Stock on such date, unless the issuances
have been approved by the shareholders of the Company.
(f) Subsequent Takedown Fees. In the event: a Subsequent Takedown is
not consummated within 33 calendar days following the immediately preceding
Subsequent Takedown, the Company shall pay a fee to the Purchaser equal to
two percent (2%) of the Maximum Subsequent Takedown Amount ("Subsequent
Takedown Fee"). The Company shall pay additional Subsequent Takedown Fees
equal to the sum of the immediately preceding Subsequent Takedown Fee plus
$30,000 ("Additional Takedown Fee") for each additional 30 calendar day
period a Subsequent Takedown Closing does not occur. Notwithstanding the
foregoing, the Company shall not be obligated to pay any Subsequent
Takedown Fee upon the occurrence of any events limiting the Company's
ability to consummate a Subsequent Takedown as described in Section
2.4(e)(ii) hereof.
ARTICLE III. CERTAIN OBLIGATIONS OF THE COMPANY
Section 3.1 Mandatory Payments. Upon the Closing and at each Subsequent
Takedown closing (a "Subsequent Takedown Closing"), the Company shall pay to
Purchaser an amount equal to 25% of the Takedown Amount, which payment shall
constitute a payment on the Company's $3,000,000 Principal Amount 7% Bridge Note
due November 28, 2000 held by Purchaser (the "7% Note"), until all outstanding
amounts of principal and accrued interest on the 7% Note have been paid by the
Company.
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Section 3.2 Payment of Certain Amounts.
(a) Any and all payments by the Company hereunder or under the Series
A Preferred Shares to Purchaser and each "qualified assignee" thereof shall
be made free and clear of and without deduction or withholding for any and
all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto (all such taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes") unless such Taxes are required by law
or the administration thereof to be deducted or withheld. If the Company
shall be required by law or the administration thereof to deduct or
withhold any Taxes from or in respect of any sum payable under the Series A
Preferred Shares (i) the holders of the Series A Preferred Shares subject
to such Taxes shall have the right, but not the obligation, for a period of
thirty (30) days commencing upon the day it shall have received written
notice from the Company that it is required to withhold Taxes to transfer
all or any portion of the Series A Preferred Shares to a qualified assignee
to the extent such transfer can be effected in accordance with the other
provisions of this Agreement and applicable law; (ii) the Company shall
make such deductions or withholdings; (iii) the sum payable shall be
increased as may be necessary so that after making all required deductions
or withholdings (including deductions or withholdings applicable to
additional amounts paid under this Section 3.6) Purchaser receives an
amount equal to the sum it would have received if no such deduction or
withholding had been made; and (iv) the Company shall forthwith pay the
full amount deducted or withheld to the relevant taxation or other
authority in accordance with applicable. A "qualified assignee" of a
Purchaser is a Person that is organized under the laws of (i) the United
States or (II) any jurisdiction other than the United States or any
political subdivision thereof and that (y) represents and warrants to the
Company that payments of the Company to such assignee under the laws in
existence on the date of this Agreement would not be subject to any Taxes
and (z) from time to time, as and when requested by the Company, executes
and delivers to the Company and the Internal Revenue Service forms, and
provides the Company with any information necessary to establish such
assignee's continued exemption from Taxes under applicable law.
(b) The Company shall forthwith pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies (all such taxes, charges and levies hereinafter referred to as
"Other Taxes") which arise from any payment made under any of the
Transaction Agreements or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement other than Taxes payable
solely as a result of the transfer from Purchaser to a Person of any
Security.
(c) The Company shall indemnify Purchaser, or qualified assignee, for
the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed by any jurisdiction on amounts payable under
this Section 3.2) paid by Purchaser, or qualified assignee, and any
liability (including penalties, interest and expenses) arising therefrom or
with respect thereto, whether or not such Taxes or Other Taxes were
correctly
13
or legally asserted. Payment under this indemnification shall be made
within 30 days from the date Purchaser or assignee makes written demand
therefor. A certificate as to the amount of such Taxes or Other Taxes
submitted to the Company by Purchaser or assignee shall be conclusive
evidence of the amount due from the Company to such party.
(d) Within 30 days after the date of any payment of Taxes, the Company
will furnish to Purchaser the original or a certified copy of a receipt
evidencing payment thereof.
(e) Purchaser shall provide to the Company a form W-8, stating that it
is a non- U.S. person, together with any additional tax forms which may be
required under the Code, as amended after the date hereof, to allow
interest payments to be made to it without deduction.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to Purchaser, as of the Closing Date
and again at the closing of each Subsequent Takedown, the following:
Section 4.1 Organization and Qualification. The Company and each Subsidiary
is a corporation (or other legal entity) duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation, with full
power and authority to own, lease, use and operate its properties and to carry
on its business as and where now owned, leased, used, operated and conducted.
The Company is qualified to conduct business as a foreign corporation and is in
good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary, except where such failure
would not have a Material Adverse Effect. A "Material Adverse Effect" means any
material adverse effect on the operations, results of operations, properties,
assets or condition (financial or otherwise) of the Company or the Company and
its Subsidiaries, taken as a whole, or on the transactions contemplated hereby
or by the agreements or instruments to be entered into in connection herewith.
Section 4.2 Authorization and Execution.
(a) The Company has all requisite corporate power and authority
to enter into and perform each Transaction Agreement and to consummate
the transactions contemplated hereby and thereby and to issue the
Securities in accordance with the terms hereof and thereof.
(b) The execution, delivery and performance by the Company of
each Transaction Agreement and the issuance by the Company of the
Securities have been duly and validly authorized and no further
consent or authorization of the Company, its Board of Directors or its
shareholders is required, except pursuant to the limitations set forth
in Section 2.4(e)(ii).
14
(c) This Agreement has been duly executed and delivered by the
Company.
(d) This Agreement constitutes, and upon execution and delivery
thereof by the Company, each of the Transaction Agreements will
constitute, a valid and binding agreement of the Company, in each case
enforceable against the Company in accordance with its respective
terms.
Section 4.3 Capitalization . As of the date hereof, the authorized, issued
and outstanding capital stock of the Company is as set forth on Schedule 4.3
hereto and except as set forth on Schedule 4.3 no other shares of capital stock
of the Company will be outstanding as of the Closing Date. All of such
outstanding shares of capital stock are, or upon issuance will be, duly
authorized, validly issued, fully paid and nonassessable. No shares of capital
stock of the Company are subject to preemptive rights or similar rights of the
shareholders of the Company or any liens or encumbrances imposed through the
actions or failure to act of the Company. Other than as set forth on Schedule
4.3 hereto, as of the date hereof, (i) there are no outstanding options,
warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any
character whatsoever relating to, or securities or rights convertible into or
exchangeable for any shares of capital stock of the Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its Subsidiaries, and (ii) there are no agreements or arrangements
under which the Company or any of its Subsidiaries are obligated to register the
sale of any of its or their securities under the Securities Act (except pursuant
to the Registration Rights Agreement) and (iii) there are no anti-dilution or
price adjustment provisions contained in any security issued by the Company (or
in any agreement providing rights to security holders) that will be triggered by
the issuance of the Series A Preferred Shares or Conversion Shares. The Company
has furnished to Purchaser true and correct copies of the Company's Corporate
Documents, and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
Section 4.4 Governmental Authorization. The execution and delivery by the
Company of the Transaction Agreements does not and will not, the issuance and
sale by the Company of the Securities does not and will not, and the
consummation of the transactions contemplated hereby and by the other
Transaction Agreements will not, require any action by or in respect of, or
filing with, any governmental body, agency or governmental official except (a)
such actions or filings that have been undertaken or made prior to the date
hereof and that will be in full force and effect (or as to which all applicable
waiting periods have expired) on and as of the date hereof or which are not
required to be filed on or prior to the Closing Date, (b) such actions or
filings that, if not obtained, would not result in a Material Adverse Effect,
(c) listing applications ("Listing Applications") to be filed with the OTC
Bulletin Board or the National Market relating to the Conversion Shares of
Common Stock issuable upon conversion of the Series A Preferred Shares and upon
exercise of the LKB Warrants and Commitment Warrant, and (d) the filing of a
"Form D" as described in Section 7.13 below.
15
Section 4.5 Issuance of Shares. Upon conversion in accordance with the
terms of the Series A Preferred Shares and exercise of the Commitment Warrant
and the LKB Warrants, the Conversion Shares shall be duly and validly issued and
outstanding, fully paid and nonassessable, free and clear of any Taxes, Liens
and charges with respect to issuance and shall not be subject to preemptive
rights or similar rights of any other shareholders of the Company. Assuming the
representations and warranties of Purchaser herein are true and correct in all
material respects, each of the Securities will have been issued in material
compliance with all applicable U.S. federal and state securities laws. The
Company understands and acknowledges that, in certain circumstances, the
issuance of Conversion Shares could dilute the ownership interests of other
shareholders of the Company. The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Series A Preferred
Shares and exercise of the Commitment Warrant and the LKB Warrants is absolute
and unconditional regardless of the dilutive effect that such issuance may have
on the ownership interests of other shareholders of the Company, except pursuant
to the limitation in Section 2.4(e)(ii).
Section 4.6 No Conflicts. The execution and delivery by the Company of the
Transaction Agreements to which it is a party did not and will not, the issuance
and sale by the Company of the Securities did not and will not and the
consummation of the transactions contemplated hereby and by the other
Transaction Agreements will not, contravene or constitute a default under or
violation of (i) any provision of applicable law or regulation, (ii) the Company
Corporate Documents, (iii) any agreement, judgment, injunction, order, decree or
other instrument binding upon the Company or any Subsidiary or any of their
respective assets, or result in the creation or imposition of any Lien on any
asset of the Company or any Subsidiary. The Company and each Subsidiary is in
compliance with and conforms to all statutes, laws, ordinances, rules,
regulations, orders, restrictions and all other legal requirements of any
domestic or foreign government or any instrumentality thereof having
jurisdiction over the conduct of its businesses or the ownership of its
properties, except where such failure would not have a Material Adverse Effect.
Section 4.7 Financial Information. Since March 31, 2000 (the "Balance Sheet
Date"), there has been (x) no material adverse change in the assets or
liabilities, or in the business or condition, financial or otherwise, or in the
results of operations or prospects, of the Company and its Subsidiaries, whether
as a result of any legislative or regulatory change, revocation of any license
or rights to do business, fire, explosion, accident, casualty, labor trouble,
flood, drought, riot, storm, condemnation, act of God, public force or otherwise
and (y) no material adverse change in the assets or liabilities, or in the
business or condition, financial or otherwise, or in the results of operations
or prospects, of the Company and its subsidiaries except in the ordinary course
of business; and no fact or condition exists or is contemplated or threatened
which might cause such a change in the future. The audited and unaudited
consolidated balance sheets of the Company and its Subsidiaries for the periods
ending December 31, 1999, and March 31, 2000, respectively, and the related
consolidated statements of income, changes in shareholders' equity and changes
in cash flows for the periods then ended, including the footnotes thereto,
except as indicated therein, (i) complied in all material respects with
applicable accounting requirements and (ii) have been prepared in accordance
with GAAP consistently applied throughout the periods indicated, except that the
16
unaudited financial statements do not contain notes and may be subject to normal
audit adjustments and normal annual adjustments. Such financial statements
fairly present the financial condition of the Company and its Subsidiaries at
the dates indicated and the consolidated results of their operations and cash
flows for the periods then ended and, except as indicated therein, reflect all
claims against and all Debts and liabilities of the Company and its
Subsidiaries, fixed or contingent.
Section 4.8 Litigation. Except as set forth in the SEC Reports, there is no
action, suit or proceeding pending or, to the knowledge of the Company,
threatened against the Company or any Subsidiary, before any court or arbitrator
or any governmental body, agency or official in which there is a reasonable
possibility of an adverse decision which could materially adversely affect the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company or which challenges the validity of any
Transaction Agreements.
Section 4.9 Compliance with ERISA and other Benefit Plans.
(a) Each member of the ERISA Group has fulfilled its obligations under the
minimum funding standards of ERISA and the Code with respect to each Plan and is
in compliance in all material respects with the presently applicable provisions
of ERISA and the Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Code in respect of any Plan, (ii) failed to make any required contribution or
payment to any Plan or Multiemployer Plan or in respect of any Benefit
Arrangement, or made any amendment to any Plan or Benefit Arrangement, which as
resulted or could result in the imposition of a Lien or the posting of a bond or
other security under ERISA or the Code or (iii) incurred any liability under
Title IV of ERISA other than a liability to the PBGC for premiums under Section
4007 of ERISA.
(b) The benefit plans not covered under clause (a) above (including profit
sharing, deferred compensation, stock option, employee stock purchase, bonus,
retirement, health or insurance plans, collectively the "Benefit Plans")
relating to the employees of the Company are duly registered where required by,
and are in good standing in all material respects under, all applicable laws.
All required employer and employee contributions and premiums under the Benefit
Plans to the date hereof have been made, the respective fund or funds
established under the Benefit Plans are funded in accordance with applicable
laws, and no past service funding liabilities exist thereunder.
(c) No Benefit Plans have any unfunded liabilities, either on a "going
concern" or "winding up" basis and determined in accordance with all applicable
laws and actuarial practices and using actuarial assumptions and methods that
are reasonable in the circumstances. No event has occurred and no condition
exists with respect to any Benefit Plans that has resulted or could reasonably
be expected to result in any pension plan having its registration revoked or
wound up (in whole or in part) or refused for the purposes of any applicable
laws or being placed under the administration of any relevant pension benefits
regulatory authority or being required to pay any taxes or penalties (in any
material amounts) under any applicable laws.
17
Section 4.10 Environmental Matters. The costs and liabilities associated
with Environmental Laws (including the cost of compliance therewith) are
unlikely to have a material adverse effect on the business, condition (financial
or otherwise), operations, performance, properties or prospects of the Company
or any Subsidiary. Each of the Company and the Subsidiaries conducts its
businesses in compliance in all material respects with all applicable
Environmental Laws.
Section 4.11 Taxes. All United States federal, state, county, municipality,
local or foreign income tax returns and all other material tax returns
(including foreign tax returns) which are required to be filed by or on behalf
of the Company and each Subsidiary have been filed and all material taxes due
pursuant to such returns or pursuant to any assessment received by the Company
and each Subsidiary have been paid except those being disputed in good faith and
for which adequate reserves have been established. The charges, accruals and
reserves on the books of the Company and each Subsidiary in respect of taxes and
other governmental charges have been established in accordance with GAAP.
Section 4.12 Investments, Joint Ventures. Other than as set forth in
Schedule 4.12, the Company has no Subsidiaries or other direct or indirect
Investment in any Person, and the Company is not a party to any partnership,
management, shareholders' or joint venture or similar agreement.
Section 4.13 Not an Investment Company. Neither the Company nor any
Subsidiary is an "Investment Company" within the meaning of Investment Company
Act of 1940, as amended.
Section 4.14 Full Disclosure. The information heretofore furnished by the
Company to Purchaser for purposes of or in connection with this Agreement or any
transaction contemplated hereby does not, and all such information hereafter
furnished by the Company or any Subsidiary to Purchaser will not (in each case
taken together and on the date as of which such information is furnished),
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein, in the light of the
circumstances under which they are made, not misleading.
Section 4.15 No Solicitation; No Integration with Other Offerings. No form
of general solicitation or general advertising was used by the Company or, to
the best of its actual knowledge, any other Person acting on behalf of the
Company, in connection with the offer and sale of the Securities. Neither the
Company, nor, to its knowledge, any Person acting on behalf of the Company, has,
either directly or indirectly, sold or offered for sale to any Person (other
than Purchaser and the Halifax Fund, which has a contractual right of first
refusal with respect to the Series A Preferred Stock and which has not exercised
such right) any of the Securities or, within the six months prior to the date
hereof, any other similar security of the Company except as contemplated by this
Agreement, and the Company represents that neither itself nor any Person
authorized to act on its behalf (except that the Company makes no representation
as to Purchaser and their Affiliates) will sell or offer for sale any such
security to, or solicit any offers to buy any such security from, or otherwise
approach or negotiate in respect thereof with, any Person or Persons so
18
as thereby to cause the issuance or sale of any of the Securities to be in
violation of any of the provisions of Section 5 of the Securities Act.
Section 4.16 Permits. (a) Each of the Company and its Subsidiaries has all
material Permits; (b) all such Permits are in full force and effect, and each of
the Company and its Subsidiaries has fulfilled and performed all material
obligations with respect to such Permits; (c) no event has occurred which
allows, or after notice of lapse of time would allow, revocation or termination
by the issuer thereof or which results in any other material impairment of the
rights of the holder of any such Permit; and (d) the Company has no reason to
believe that any governmental body or agency is considering limiting, suspending
or revoking any such Permit.
Section 4.17 Leases. Neither the Company nor any Subsidiary is a party to
any capital lease obligation with a value greater than $250,000 or to any
operating lease with an aggregate annual rental greater than $250,000 during the
life of such lease.
Section 4.18 Absence of Any Undisclosed Liabilities or Capital Calls. There
are no liabilities of the Company or any Subsidiary of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or otherwise,
and there is no existing condition, situation or set of circumstances which
would reasonably be expected to result in such a liability, other than (i) those
liabilities provided for in the financial statements delivered pursuant to
Section 4.7 and (ii) other undisclosed liabilities which, individually or in the
aggregate, would not have a Material Adverse Effect.
Section 4.19 Public Utility Holding Company. Neither the Company nor any
Subsidiary is, or will be upon issuance and sale of the Securities and the use
of the proceeds described herein, subject to regulation under the Public Utility
Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate
Commerce Act or to any federal or state statute or regulation limiting its
ability to issue and perform its obligations under any Transaction Agreement.
Section 4.20 Intellectual Property Rights. Each of the Company and its
Subsidiaries owns, or is licensed under, and has the rights to use, all material
patents, trademarks, trade names, copyrights, technology, know-how and processes
(collectively, "Intellectual Property") used in, or necessary for the conduct of
its business; no claims have been asserted by any Person to the use of any such
Intellectual Property or challenging or questioning the validity or
effectiveness of any license or agreement related thereto. To the best of
Company's and its Subsidiaries' knowledge, there is no valid basis for any such
claim and the use of such Intellectual Property by the Company and its
Subsidiaries will not infringe upon the rights of any Person.
Section 4.21 Insurance. The Company and its Subsidiaries maintain, with
financially sound and reputable insurance companies, insurance in at least such
amounts and against such risks such that any uninsured loss would not have a
Material Adverse Effect. All insurance coverages of the Company and its
Subsidiaries are in full force and effect and there are no past due premiums in
respect of any such insurance.
19
Section 4.22 Title to Properties. The Company and its Subsidiaries have
good and marketable title to all their respective properties reflected on the
financial statements referred to in Section 4.7, free and clear of all Liens.
Section 4.23 Internal Accounting Controls. 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 managements'
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
Section 4.24 Year 2000 Compliance.
(a) Computer and Other Systems. (i) All software programs and computer
hardware that are owned, leased or licensed by the Company and each Subsidiary,
or used by third parties on behalf of the Company and each Subsidiary ("Computer
Systems"), are designated to be used prior to, during and after the calendar
year 2000 A.D., including leap years; (ii) all other operational systems that
use software or equipment that are owned, leased, or licensed by the Company and
each Subsidiary, or used by third parties on behalf of the Company and each
Subsidiary ("Other Systems"), are designated to be used prior to, during or
after the calendar year 2000 A.D., including leap years; (iii) the Computer
systems and Other Systems will properly operate during each such period without
error or degradation of performance caused by a lack of Year 2000 Capabilities;
and (iv) the Computer Systems and Other Systems will properly operate during
each such period without requiring intervention or modification to Date Data.
(b) Capabilities of Suppliers, Vendors and Landlords. To the best of the
Company's knowledge after specific inquiry of all of its material suppliers,
vendors and landlords, the Company and each Subsidiary will not suffer a loss
from interruption or cessation of business operations, in whole or in part, as a
result of such suppliers, vendors or landlords failing to provide materials,
labor, supplies or access to leased space for the operation of the Company and
each Subsidiary as a result of such suppliers or vendors not having Year 2000
Capabilities.
(c) Capabilities. For purposes of this Agreement, (x) "Year 2000
Capabilities" means the ability to: (i) manage and manipulate data involving
dates, including single century formulas and multi-century formulas, in a manner
that will not cause an abnormally ending scenario or generate incorrect values
or invalid results involving such dates; (ii) include the indication of proper
century dates in all date-related user interface functions and date fields; and
(iii) operate with proper century dates in date-related software or hardware
interface functions; and (y) "Date Data" means any existing data or input of
date which includes an indication of or reference to date.
20
Section 4.25 Foreign Practices. Neither the Company nor any of its
Subsidiaries nor, to the Company's knowledge, any employee or agent of the
Company or any Subsidiary has made any payments of funds of the Company or
Subsidiary, or received or retained any funds, in each case in violation of any
law, rule or regulation.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Section 5.1 Purchaser. Purchaser hereby represents and warrants to the
Company that:
(a) Purchaser is an "accredited investor" within the meaning of Rule
501(a) under the Securities Act and the Securities to be acquired by it
pursuant to this Agreement are being acquired for its own account and, as
of the date hereof, not with a view toward, or for sale in connection with,
any distribution thereof except in compliance with applicable United States
federal and state securities law; provided that the disposition of
Purchaser's property shall at all times be and remain within its control;
(b) the execution, delivery and performance of this Agreement and the
purchase of the Securities pursuant thereto are within Purchaser's
corporate or partnership powers, as applicable, and have been duly and
validly authorized by all requisite corporate or partnership action;
(c) this Agreement has been duly executed and delivered by Purchaser;
(d) the execution and delivery by Purchaser of the Transaction
Agreements to which it is a party does not, and the consummation of the
transactions contemplated hereby and thereby will not, contravene or
constitute a default under or violation of (i) any provision of applicable
law or regulation, or (ii) any agreement, judgment, injunction, order,
decree or other instrument binding upon Purchaser;
(e) Purchaser understands that the Securities have not been registered
under the Securities Act and may not be transferred or sold except as
specified in this Agreement or the remaining Transaction Agreements;
(f) this Agreement constitutes a valid and binding agreement of
Purchaser enforceable in accordance with its terms, subject to (i)
applicable bankruptcy, insolvency or similar laws affecting the
enforceability of creditors rights generally and (ii) equitable principles
of general applicability;
(g) Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of
its investment in the Securities and Purchaser is capable of bearing the
economic risks of such investment;
21
(h) Purchaser is knowledgeable, sophisticated and experienced in
business and financial matters; Purchaser has previously invested in
securities similar to the Securities and fully understands the limitations
on transfer described herein; Purchaser has been afforded access to
information about the Company and the financial condition, results of
operations, property, management and prospects of the Company sufficient to
enable it to evaluate its investment in the Securities; Purchaser has been
afforded the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning
the terms and conditions of the offering of the Securities and the merits
and the risks of investing in the Securities; and Purchaser has been
afforded the opportunity to obtain such additional information which the
Company possesses or can acquire that is necessary to verify the accuracy
and completeness of the information given to Purchaser concerning the
Company. The foregoing does not in any way relieve the Company of its
representations and other undertakings hereunder, and shall not limit
Purchaser's ability to rely thereon;
(i) no part of the source of funds used by Purchaser to acquire the
Securities constitutes assets allocated to any separate account maintained
by Purchaser in which any employee benefit plan (or its related trust) has
any interest; and
(j) Purchaser is a corporation organized under the laws of Bermuda.
ARTICLE VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES
Section 6.1 Conditions Precedent to Purchaser's Obligations to Purchase.
The obligation of Purchaser hereunder to purchase the Series A Preferred Shares
at the Closing and at each Subsequent Takedown Closing is subject to the
satisfaction, on or before the Closing Date and the date of each Subsequent
Takedown Closing (each a "Subsequent Takedown Closing Date"), of each of the
following conditions, provided that these conditions are for Purchaser's sole
benefit and may be waived by Purchaser at any time in its sole discretion:
(a) The Company shall have duly executed this Agreement, the
Commitment Warrant (upon the Closing Date only), the LKB Warrant, the
Registration Rights Agreement, and delivered the same to Purchaser;
(b) The Company shall have delivered to Purchaser duly executed
certificates representing the Series A Preferred Shares in accordance with
Section 2.3 hereof and the Commitment Warrant (upon the Closing Date only);
(c) The Company shall have delivered the Solvency Certificate;
(d) The representations and warranties of the Company contained in
each Transaction Agreement shall be true and correct in all material
respects as of the date when
22
made and as of the Closing Date and each Subsequent Takedown Closing Date
as though made at such time (except for representations and warranties that
speak as of a specified date) and the Company shall have performed,
satisfied and complied with all covenants, agreements and conditions
required by such Transaction Agreements to be performed, satisfied or
complied with by it at or prior to the Closing Date and each Subsequent
Takedown Closing Date. Purchaser shall have received an Officer's
Certificate executed by the chief executive officer of the Company, dated
as of the Closing Date and each Subsequent Takedown Closing Date, to the
foregoing effect, including but not limited to certificates with respect to
the Company Corporate Documents, resolutions relating to the transactions
contemplated hereby and the incumbencies of certain officers and Directors
of the Company. The form of such certificate is attached hereto as Exhibit
D;
(e) The Company shall have received all governmental, Board of
Directors, shareholders and third party consents and approvals necessary or
desirable in connection with the issuance and sale of the Securities and
the consummation of the transactions contemplated by the Transaction
Agreements;
(f) All applicable waiting periods in respect to the issuance and sale
of the Securities shall have expired without any action having been taken
by any competent authority that could restrain, prevent or impose any
materially adverse conditions thereon or that could seek or threaten any of
the foregoing;
(g) No law or regulation shall have been imposed or enacted that could
adversely affect the transactions set forth herein or in the other
Transaction Agreements, and no law or regulation shall have been proposed
could reasonably have any such effect;
(h) Purchaser shall have received an opinion, dated the Closing Date
and each Subsequent Takedown Closing Date, of counsel to the Company, in
substantially the form of Exhibit F;
(i) All fees and expenses due and payable by the Company on or prior
to the Closing Date and each Subsequent Takedown Closing Date shall have
been paid;
(j) The Company Corporate Documents and the Subsidiary Corporate
Documents, if any, shall be in full force and effect and no term or
condition thereof shall have been amended, waived or otherwise modified
without the prior written consent of Purchaser and the Company shall have
delivered to Purchaser the Certificate of Designations of the Series A
Preferred Stock certified by the Secretary of State of Nevada;
(k) There shall have occurred no material adverse change in the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company or any Subsidiary since March 31,
2000;
23
(l) There shall exist no action, suit, investigation, litigation or
proceeding pending or threatened in any court or before any arbitrator or
governmental instrumentality that challenges the validity of this Agreement
or any other Transaction Agreement, or other transaction contemplated
hereby or thereby or that could reasonably be expected to have a Material
Adverse Effect, or any material adverse effect on the enforceability of the
Transaction Agreements or the Securities or the rights of the holders of
the Securities or Purchaser hereunder;
(m) The Registration Statement relating to the Commitment Amount or
the Renewed Commitment Amount, as applicable, shall have been declared
effective by the Commission;
(n) There shall not have occurred any disruption or adverse change in
the financial or capital markets generally, which Purchaser reasonably
deems material in connection with the purchase of the Securities;
(o) LKB shall have confirmed receipt of the LKB Warrant;
(p) Receipt of an accountant's "comfort letter" or "agreed upon
procedures letter" if applicable;
(q) Purchaser shall have received all other opinions, resolutions,
certificates, instruments, agreements or other documents as required by the
Transaction Agreements;
(r) An Escrow Agreement, substantially in the form of Exhibit E, by
and between the Company and Purchaser, and accepted by the Law Offices of
▇▇▇ ▇. ▇▇▇▇▇▇▇▇ as escrow agent (the "Escrow Agent"), shall have been duly
executed by the said parties.
(s) Company shall have delivered to Purchaser the Use of Proceeds
Schedule 7.8.
(t) The Company's Common Stock shall be listed and traded on a
National Market or the OTC Bulletin Board.
Section 6.2 Conditions to the Company's Obligations. The obligations of the
Company to issue and sell the Securities to Purchaser pursuant to this Agreement
are subject to the satisfaction, at or prior to the Closing Date and at each
Subsequent Takedown Closing Date, of the following conditions:
(a) The representations and warranties of Purchaser contained herein
shall be true and correct in all material respects on the Closing Date and
Purchaser shall have performed and complied in all material respects with
all agreements required by this Agreement to be performed or complied with
by Purchaser at or prior to the Closing Date;
24
(b) The issue and sale of the Securities by the Company shall not be
prohibited by any applicable law, court order or governmental regulation;
(c) Upon the Closing Date only, receipt by the Company of duly
executed counterparts of this Agreement and the Registration Rights
Agreement signed by Purchaser;
(d) The Company shall have received payment of Purchase Price, less
the Expense Reimbursement Fee.
ARTICLE VII. AFFIRMATIVE COVENANTS
The Company and Purchaser, as applicable, hereby agree that, from and after
the date hereof for so long as any Series A Preferred Shares remain outstanding
and for the benefit of each other;
Section 7.1 Information. The Company will deliver to each holder of the
Series A Preferred Shares:
(a) promptly upon the filing thereof, copies of (i) all registration
statements (other than the exhibits thereto and any registration statements
on Form S-8 or its equivalent), and (ii) all reports of Forms 10-K, 10-Q
and 8-K (or other equivalents) which the Company or any Subsidiary has
filed with the Commission (collectively, "SEC Reports");
(b) promptly upon the mailing thereof to the shareholders of the
Company generally, copies of all financial statements, reports and proxy
statements so mailed and any other document generally distributed to
shareholders;
(c) at least two (2) Business Days prior to the consummation of any
Financing or other event requiring a repayment of the Series A Preferred
Shares under Section 3.4, notice thereof together with a summary of all
material terms thereof and copies of all documents and instruments
associated therewith;
(d) notice promptly upon the occurrence of any event by which the
Reserved Amount becomes less than the number of Conversion Shares to be
registered pursuant to the Registration Statement relating to the
Commitment Amount or the Renewed Commitment Amount, as applicable;
(e) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to which
the Company or any Subsidiary is a party in which the amount involved is
$250,000 or more and not covered by insurance or in which injunctive or
similar relief is sought.
25
Section 7.2 Payment of Obligations. The Company will, and will cause each
Subsidiary to, pay and discharge, at or before maturity, all their respective
material obligations, including, without limitation, tax liabilities, except
where the same may be contested in good faith by appropriate proceedings and
will maintain, in accordance with GAAP, appropriate reserves for the accrual of
any of the same.
Section 7.3 Maintenance of Property; Insurance. The Company will, and will
cause each Subsidiary to, keep all property useful and necessary in its business
in good working order and condition, ordinary wear and tear excepted. In
addition, the Company and each Subsidiary will maintain insurance in at least
such amounts and against such risks as it has insured against as of the Closing
Date.
Section 7.4 Maintenance of Existence. The Company will, and will cause each
Subsidiary to, continue to engage in business of the same general type as now
conducted by the Company and such Subsidiaries, and will preserve, renew and
keep in full force and effect its respective corporate existence and their
respective material rights, privileges and franchises necessary or desirable in
the normal conduct of business.
Section 7.5 Compliance with Laws. The Company will, and will cause each
Subsidiary to, comply, in all material respects, with all federal, state,
municipal, local or foreign applicable laws, ordinances, rules, regulations,
municipal by-laws, codes and requirements of governmental authorities
(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except (i) where compliance therewith is contested in
good faith by appropriate proceedings or (ii) where non-compliance therewith
could not reasonably be expected, in the aggregate, to have a material adverse
effect on the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Company or such Subsidiary.
Section 7.6 Inspection of Property, Books and Records. The Company will,
and will cause each Subsidiary to, keep proper books of record and account in
which full, true and correct entries shall be made of all dealings and
transactions in relation to their respective businesses and activities; and will
permit, during normal business hours, Purchaser' Representative or an affiliate
thereof, as representatives of Purchaser, to visit and inspect any of their
respective properties, upon reasonable prior notice, to examine and make
abstracts from any of their respective books and records and to discuss their
respective affairs, finances and accounts with their respective executive
officers and independent public accountants (and by this provision the Company
authorizes its independent public accountants to disclose and discuss with
Purchaser the affairs, finances and accounts of the Company and its Subsidiaries
in the presence of a representative of the Company; provided, however, that such
discussions will not result in any unreasonable expense to the Company, without
Company consent), all at such reasonable times.
Section 7.7 Investment Company Act. The Company will not be or become an
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
26
Section 7.8 Use of Proceeds. The proceeds from the issuance and sale of the
Series A Preferred Shares by the Company shall be used in accordance with
Schedule 7.8 attached hereto. None of the proceeds from the issuance and sale of
the Series A Preferred Shares by the Company pursuant to this Agreement will be
used directly or indirectly for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any "margin stock" within the meaning of
Regulation G of the Board of Governors of the Federal Reserve System.
Section 7.9 Compliance with Terms and Conditions of Material Contracts. The
Company will, and will cause each Subsidiary to, comply, in all respects, with
all terms and conditions of all material contracts to which it is subject.
Section 7.10 Reserved Shares and Listings.
(a) The Company shall at all times have authorized, and reserved for the
purpose of issuance, a sufficient number of shares of Common Stock to provide
for the full conversion of the outstanding Series A Preferred Shares and
exercise of the Commitment Warrant and the LKB Warrants (based on the conversion
price of the Series A Preferred Shares in effect from time to time and the
exercise price of the Commitment Warrant and the LKB Warrants, respectively) and
the Company shall reserve for issuance the number of shares to be registered on
the Registration Statement relating to the Conversion Shares issuable upon
conversion of the Commitment Amount and the Renewed Commitment Amount (the
"Reserved Amount"). The Company shall not reduce the Reserved Amount without the
prior written consent of Purchaser. If at any time the number of shares of
Common Stock authorized and reserved for issuance is below the number of
Conversion Shares issued or issuable upon conversion of the Series A Preferred
Shares and exercise of the Commitment Warrant and the LKB Warrants, the Company
will promptly take all corporate action necessary to authorize and reserve a
sufficient number of shares, including, without limitation, either (x) calling a
special meeting of shareholders to authorize additional shares, in the case of
an insufficient number of authorized shares or (y) in lieu thereof, consummating
the immediate redemption of the Series A Preferred Shares and the Commitment
Warrant and the LKB Warrants in accordance with each such security's terms.
(b) The Company shall promptly file the Listing Applications and secure the
listing of the Conversion Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares from time to time issuable upon conversion of the Series A
Preferred Shares and exercise of the Commitment Warrant and the LKB Warrants
(the "Warrant Shares"), respectively. The Company will maintain the listing and
trading of its Common Stock on a National Market or the OTC Bulletin Board. The
Company will comply in all respects with the Company's reporting, filing and
other obligations under the bylaws or rules of the National Association of
Securities Dealers, Inc. (the "NASD") and such exchanges, as applicable. The
Company shall promptly provide to Purchaser copies of any notices it receives
regarding the continued eligibility of the Common Stock for listing on any
National Market or the OTC Bulletin Board.
27
Section 7.11 Transfer Agent Instructions. Upon receipt of a Notice of
Conversion or Notice of Exercise, as applicable, the Company shall immediately
direct the Company's transfer agent to issue certificates, registered in the
name of Purchaser or its nominee, for the Conversion Shares, in such amounts as
specified from time to time by Purchaser to the Company upon proper conversion
of the Series A Preferred Shares or exercise of the Commitment Warrant and the
LKB Warrants. Upon conversion of any Series A Preferred Shares in accordance
with their terms and/or exercise of any Commitment Warrant or LKB Warrants in
accordance with their terms, the Company will, and will use its best lawful
efforts to cause its transfer agent to, issue one or more certificates
representing shares of Common Stock in such name or names and in such
denominations specified by a Purchaser in a Notice of Conversion or Notice of
Exercise, as the case may be. As long as the Registration Statement contemplated
by the Registration Rights Agreement shall remain effective, the shares of
Common Stock issuable upon conversion of any Series A Preferred Shares or
exercise of the Commitment Warrant and the LKB Warrants shall be issued to any
transferee of such shares from Purchaser without any restrictive legend upon
appropriate evidence of transfer in compliance with the Securities Act and the
rules and regulations of the Commission; provided that for so long as the
Registration Statement is effective, no opinion of counsel will be required to
effect any such transfer. The Company further warrants and agrees that no
instructions other than these instructions have been or will be given to its
transfer agent. Nothing in this Section 7.11 shall affect in any way a
Purchaser's obligation to comply with all securities laws applicable to
Purchaser upon resale of such shares of Common Stock, including any prospectus
delivery requirements.
Section 7.12 Maintenance of Reporting Status; Supplemental Information. So
long as any of the Securities are outstanding, the Company shall timely file all
reports required to be filed with the Commission pursuant to the Exchange Act.
The Company shall not terminate its status as an issuer required to file reports
under the Exchange Act, even if the Exchange Act or the rules and regulations
thereunder would permit such termination. If at anytime the Company is not
subject to the requirements of Section 13 or 15(d) of the Exchange Act, the
Company will promptly furnish at its expense, upon request, for the benefit of
the holders from time to time of Securities, and prospective purchasers of
Securities, information satisfying the information requirements of Rule 144
under the Securities Act.
Section 7.13 Form D; Blue Sky Laws. The Company agrees to file a "Form D"
with respect to the Securities as required under Regulation D of the Securities
Act and to provide a copy thereof to Purchaser promptly after such filing. The
Company shall, on or before the Closing Date, take such action as the Company
shall reasonably determine is necessary to qualify the Securities for sale to
Purchaser at the Closing pursuant to this Agreement under applicable securities
or "blue sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to Purchaser on or prior to the Closing Date.
Section 7.14 Purchaser Acknowledgment. Purchaser hereby acknowledges that
it will be named as a statutory underwriter in the Registration Statement as
required by the Commission.
28
ARTICLE VIII. NEGATIVE COVENANTS
The Company hereby agrees that after the date hereof for so long as any
Series A Preferred Shares remain outstanding (or such shorter period time as set
forth below) and for the benefit of Purchaser:
Section 8.1 Reserved.
Section 8.2 Transactions with Affiliates. The Company and each Subsidiary
will not, directly or indirectly, pay any funds to or for the account of, make
any investment (whether by acquisition or stock or indebtedness, by loan,
advance, transfer of property, guarantee or other agreement to pay, purchase or
service, directly or indirectly, and Debt, or otherwise) in, lease, sell,
transfer or otherwise dispose of any assets, tangible or intangible, to, or
participate in, or effect any transaction in connection with any joint
enterprise or other joint arrangement with, any Affiliate, except, (1) pursuant
to those agreements specifically identified on Schedule 8.2 attached hereto
(with a copy of such agreements annexed to such Schedule 8.2) and (2) on terms
to the Company or such Subsidiary no less favorable than terms that could be
obtained by the Company or such Subsidiary from a Person that is not an
Affiliate of the Company upon negotiation at arms' length, as determined in good
faith by the Board of Directors of the Company; provided that no determination
of the Board of Directors shall be required with respect to any such
transactions entered into in the ordinary course of business.
Section 8.3 Merger or Consolidation. The Company will not, in a single
transaction or a series of related transactions (i) consolidate with or merge
with or into any other Person, or (ii) permit any other Person to consolidate
with or merge into it, unless the Company shall be the survivor of such merger
or consolidation and (x) immediately before and immediately after given effect
to such transaction (including any indebtedness incurred or anticipated to be
incurred in connection with the transaction), no Default or Event of Default
shall have occurred and be continuing; and (y) the Company has delivered to
Purchaser an Officer's Certificate stating that such consolidation, merger or
transfer complies with this Agreement, and that all conditions precedent in this
Agreement relating to such transaction have been satisfied.
Section 8.4 Limitation on Asset Sales. Neither the Company nor any
Subsidiary will consummate an Asset Sale of material assets of the Company or
any Subsidiary without the prior written consent of Purchaser, which consent
shall not be unreasonably withheld. As used herein, "Asset Sale" means any sale,
lease, transfer or other disposition (or series of related sales, leases,
transfers or dispositions) or sales of capital stock of a Subsidiary (other than
directors' qualifying shares), property or other assets (each referred to for
the purpose of this definition as a "disposition"), including any disposition by
means of a merger, consolidation or similar transaction other than a disposition
of property or assets at fair market value in the ordinary course of business;
provided, however, Asset Sale shall not include the sale of a portion of the
Company's ownership interest in License 1551 or License 953 relating to the
development of certain oil and gas fields in
29
Kazakstan and the sale of any oil or gas resulting from the development of such
property under License 1551 or License 953 owned by the Company.
Section 8.5 Restrictions on Certain Amendments. Neither the Company nor any
Subsidiary will waive any provision of, amend, or suffer to be amended, any
provision of such entity's existing Debt, except for the Company's 5% Secured
Convertible Debentures due February 18, 2004, any material contract or agreement
previously or hereafter filed by the Company with the Commission as part of its
SEC Reports, any Company Corporate Document or Subsidiary Corporate Document if
such amendment, in the Company's reasonable judgment, would materially adversely
affect Purchaser or the holders of the Securities without the prior written
consent of Purchaser.
Section 8.6 Prohibition on Discounted Equity Offerings; Registration
Rights.
(a) Except with respect to equity securities that may be issuable upon
the exercise or conversion of Derivative Securities (as defined below)
outstanding as of the date hereof, until such time as all of the Series A
Preferred Shares have been either redeemed or converted into Conversion
Shares in full, the Company agrees that it will not issue any of its equity
securities (or securities convertible into or exchangeable or exercisable
for equity securities (the "Derivative Securities")) on terms that allow a
holder thereof to acquire such equity securities (or Derivative Securities)
at a discount to the Market Price of the Common Stock at the time of
issuance or, in the case of Derivative Securities at a conversion price
based on any formula (other than standard anti- dilution provisions) based
on the Market Price on a date later than the date of issuance which
conversion price is not below the Market Price on the date of issuance
(each such event, a "Discounted Equity Offering"). As used herein,
"discount" shall include, but not be limited to, (i) any warrant, right or
other security granted or offered in connection with such issuance which,
on the applicable date of grant, is offered with an exercise or conversion
price, as the case may be, at less than the then current Market Price of
the Common Stock or, if such security has an exercise or conversion price
based on any formula (other than standard anti-dilution provisions) based
on the Market Price on a date later than the date of issuance, then at a
price below the Market Price on such date of exercise or conversion, as the
case may be, or (ii) any commissions, fees or other allowances paid in
connection with such issuances (other than customary underwriter or
placement agent commissions, fees or allowances). For the purposes of
determining the Market Price at which Common Stock is acquired under this
Section, normal underwriting commissions and placement fees (including
underwriters' warrants) shall be excluded.
(b) Except with respect to equity securities that may be issuable upon
the exercise or conversion of Derivative Securities outstanding as of the
date hereof, until such time as all of the Series A Preferred Shares have
been either redeemed or converted into Conversion Shares in full, the
Company agrees it will not issue any of its equity securities (or
Derivative Securities), unless such securities are junior in ranking to the
Series A Preferred Stock and any shares of Common Stock issued or issuable
in connection therewith are "restricted securities." As used herein
"restricted securities" shall mean securities which may not be sold prior
to twelve (12) months following the date of issuance of such securities.
30
(c) The restrictions contained in this Section 8.6 shall not apply to
the issuance by the Company of (or the agreement to issue) Common Stock or
Derivative Securities in connection with (i) the acquisition (including by
merger) of a business or of assets otherwise permitted under this
Agreement, or (ii) stock option or other compensatory plans.
Section 8.7 Limitation on Stock Repurchases. Except as otherwise set forth
in the Series A Preferred Shares, the Commitment Warrant and the LKB Warrants,
the Company shall not, without the written consent of the Majority Holders,
redeem, repurchase or otherwise acquire (whether for cash or in exchange for
property or other securities or otherwise) any shares of capital stock of the
Company or any warrants, rights or options to purchase or acquire any such
shares.
Section 8.8 Limitations on Financings Until Closing. Notwithstanding any
provision of this Article 8 to the contrary, the Company and each Subsidiary
shall not, until the Closing, consummate any equity or debt financing except for
financings pursuant to existing credit facilities or conventional debt
financings.
Section 8.9 Short Sales. Purchaser shall not effect or cause any affiliate
of Purchaser to effect a short sale of Common Stock of the Company so long as
Purchaser owns any shares of Series A Preferred Stock.
ARTICLE IX. RESTRICTIVE LEGENDS
Section 9.1 Restrictions on Transfer. From and after their respective dates
of issuance, none of the Securities shall be transferable except upon the
conditions specified in this Article IX, which conditions are intended to ensure
compliance with the provisions of the Securities Act in respect of the Transfer
of any of such Securities or any interest therein. Each Purchaser will use its
best efforts to cause any proposed transferee of any Securities held by it to
agree to take and hold such Securities subject to the provisions and upon the
conditions specified in this Article IX and Section 8.9 of this Agreement.
Section 9.2 Notice of Proposed Transfers. Prior to any proposed Transfer of
the Securities (other than a Transfer (i) registered or exempt from registration
under the Securities Act, (ii) to an affiliate of a Purchaser which is an
"accredited investor" within the meaning of Rule 501(a) under the Securities
Act, provided that any such transferee shall agree to be bound by the terms of
this Agreement and the Registration Rights Agreement, or (iii) to be made in
reliance on Rule 144 under the Securities Act), the holder thereof shall give
written notice to the Company of such holder's intention to effect such
Transfer, setting forth the manner and circumstances of the proposed Transfer,
which shall be accompanied by (a) an opinion of counsel reasonably acceptable to
the Company, confirming that such transfer does not give rise to a violation of
the Securities Act, (B) representation letters in form and substance reasonably
satisfactory to the Company to ensure compliance with the provisions of the
Securities Act and (C) letters in form and substance reasonably satisfactory to
the Company from each such transferee stating such transferee's agreement to be
bound by the terms of this Agreement and the Registration Rights Agreement. Such
proposed
31
Transfer may be effected only if the Company shall have received such notice of
transfer, opinion of counsel, representation letters and other letters referred
to in the immediately preceding sentence, whereupon the holder of such
Securities shall be entitled to Transfer such Securities in accordance with the
terms of the notice delivered by the holder to the Company.
ARTICLE X. ADDITIONAL AGREEMENTS AMONG THE PARTIES
Section 10.1 Reserved.
Section 10.2 Reserved.
Section 10.3 Reserved.
Section 10.4 Registration Rights.
(a) The Company shall grant Purchaser registration rights covering the
Conversion Shares (the "Registrable Securities") on the terms set forth in
the Registration Rights Agreement and herein.
(b) If the registration statement required to be filed in accordance
with the Registration Rights Agreement relating to the Conversion Shares
issuable upon conversion of the Commitment Amount or the Renewed Commitment
Amount, as applicable (each a "Registration Statement") is not filed by the
30th day following the date hereof or the 30th day following the exercise
of the Company's option to renew the Commitment Amount, respectively, the
Company will pay to the Purchaser liquidated damages in the amount of one
percent of the aggregate Purchase Price of the Series A Preferred Shares to
be purchased by Purchaser on the Initial Takedown Closing Date. If the
Registration Statement is not declared effective by the Commission by the
60th day following the date of filing the applicable Registration Statement
with the Commission (each a "Filing Date") (the "Required Effectiveness
Date"), the Company shall pay to Purchaser, as liquidated damages and not
as a penalty, an amount equal to two percent of the aggregate Purchase
Price for the Series A Preferred Stock to be purchased by Purchaser on the
Initial Takedown Closing Date, prorated, for each 30 day period the
Registration Statement is not declared effective by the Commission, which
percentage will be increased to three percent in the event that the
Registration Statement is not declared effective by the Commission within
90 days of the applicable Filing Date. In addition, commencing 120 days
following the applicable Filing Date, the Conversion Price of the Series A
Preferred Shares will decrease by 1% for each 30- day period in which the
Registration Statement is not declared effective. Additionally, the Company
will grant to Purchaser first priority piggyback registration rights in the
event the Company proposes to effect a registered offering of Common Stock
or warrants or both prior to the filing of the Registration Statement
referenced above.
32
(c) Any such liquidated damages shall be paid in cash by the Company
to Purchaser by wire transfer in immediately available funds on the last
day of each calendar week following the event requiring its payment.
(d) If, following the declaration of effectiveness of a Registration
Statement, such registration statement (or any prospectus or supplemental
prospectus contained therein) shall cease to be effective for any reason
(including but not limited to the occurrence of any event that results in
any prospectus or supplemental prospectus containing an untrue statement of
a material fact or omitting a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading), the Company
fails to file required amendments to such registration statement in order
to allow the Purchaser to exercise its rights to receive unrestricted,
unlegended, freely tradeable shares of Common Stock, or if for any reason
there are insufficient shares of such shares of Common Stock registered
under the then current registration statement to effect full conversion of
the Series A Preferred Shares or exercise of the LKB Warrants (a
"Registration Default"), the Company shall immediately take all necessary
steps to cause such registration statement to be amended or supplemented so
as to cure such Registration Default. Failure to cure a Registration
Default within five (5) business days shall result in the Company paying to
Purchaser liquidated damages at the rate of $1,000 per day from the date of
such Registration Default until the Registration Default is cured.
Section 10.5 Restriction on Issuance of Securities. Except with respect to
equity securities issuable upon the exercise of or upon conversion of Derivative
Securities outstanding on the date hereof, for a period of 90 days following the
date the Commitment expires, is fully drawn upon or is terminated in full, the
Company will not sell, or offer to sell, any securities (including credit
facilities which are convertible into securities which may be issued at a
discount to the then current Market Price) other than borrowings under
conventional credit facilities existing as of the date hereof, stock issued or
credit facilities to be established in connection with acquisitions, employee
and director stock options of the Company, existing rights and warrants of the
Company and securities issued under the Series A Preferred Shares or LKB
Warrants. In addition, the Company shall not issue any securities in connection
with a strategic alliance entered into by the Company unless such securities are
the subject of a one year statutory or contractual hold period or, if not
subject to such a hold period, unless the Purchaser has fully converted all
outstanding Series A Preferred Shares and all LKB Warrants have been exercised.
Notwithstanding the foregoing, the Company may enter into the following types of
transactions (collectively referred to as "Permitted Financings"): (1)
"permanent financing" transactions, which would include any form of debt or
equity financing (other than an underwritten offering), which is followed by a
reduction of the said financing commitment to zero and payment of all related
fees and expenses; (2) "project financing" which provide for the issuance of
recourse debt instruments in connection with the operation of the Company's
business as presently conducted or as proposed to be conducted; (3) an
underwritten offering of Common Stock, provided that all Conversion Shares
issuable pursuant to this Agreement
33
have been registered by the Company on the Registration Statement; and (4) other
financing transactions specifically consented to in writing by the Purchaser.
ARTICLE XI. CONVERSION PRICE ADJUSTMENTS
Section 11.1 Preferred Shares. Except as set forth in Section 10.4(b), the
Conversion Price shall be adjusted as provided in the Certificate of
Designations attached hereto as Exhibit A.
Section 11.2 Warrants. The exercise price of the Commitment Warrant and the
LKB Warrants shall be adjusted under the same circumstances and in the same
manner as the Series A Preferred Stock pursuant to the terms and conditions set
forth in the Certificate of Designations attached as Exhibit A hereto.
ARTICLE XII. MISCELLANEOUS
Section 12.1 Notices. All notices, demands and other communications to any
party hereunder shall be in writing (including telecopier or similar writing)
and shall be given to such party at its address set forth on the signature pages
hereof, or such other address as such party may hereafter specify for the
purpose to the other parties. Each such notice, demand or other communication
shall be effective (i) if given by telecopy, when such telecopy is transmitted
to the telecopy number specified on the signature page hereof, (ii) if given by
mail, four days after such communication is deposited in the mail with first
class postage prepaid, addressed as aforesaid or (iii) if given by any other
means, when delivered at the address specified in or pursuant to this Section.
Section 12.2 No Waivers; Amendments.
(a) No failure or delay on the part of any party in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(b) Any provision of this Agreement may be amended, supplemented or
waived if, but only if, such amendment, supplement or waiver is in writing
and is signed by the Company and the Majority Holders. In determining
whether the holders of the requisite number of Series A Preferred Shares
have concurred in any direction, consent, or waiver as provided in any
Transaction Agreement, Series A Preferred Shares which are owned by the
Company or, or by any Person Controlling, Controlled by, or under common
Control with the Company, shall be disregarded and deemed not to be
outstanding for the purpose of any such determination; and provided further
that no such amendment, supplement or waiver which affects the rights of
Purchaser and their affiliates otherwise than solely in their
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capacities as holders of Series A Preferred Shares shall be effective with
respect to them without their prior written consent.
Section 12.3 Indemnification.
(a) The Company agrees to indemnify and hold harmless Purchaser, its
Affiliates, and each Person, if any, who controls Purchaser, or any of its
Affiliates, within the meaning of the Securities Act or the Exchange Act
(each, a "Controlling Person"), and the respective partners, agents,
employees, officers and Directors of Purchaser, their Affiliates and any
such Controlling Person (each an "Indemnified Party") and collectively, the
"Indemnified Parties"), from and against any and all losses, claims,
damages, liabilities and expenses (including, without limitation and as
incurred, reasonable costs of investigating, preparing or defending any
such claim or action, whether or not such Indemnified Party is a party
thereto, provided that the Company shall not be obligated to advance such
costs to any Indemnified Party other than Purchaser unless it has received
from such Indemnified Party an undertaking to repay to the Company the
costs so advanced if it should be determined by final judgment of a court
of competent jurisdiction that such Indemnified Party was not entitled to
indemnification hereunder with respect to such costs) which may be incurred
by such Indemnified Party in connection with any investigative,
administrative or judicial proceeding brought or threatened that relates to
or arises out of, or is in connection with any activities contemplated by
any Transaction Agreement or any other services rendered in connection
herewith; provided that the Company will not be responsible for any claims,
liabilities, losses, damages or expenses that are determined by final
judgment of a court of competent jurisdiction to result from such
Indemnified Party's gross negligence, willful misconduct or bad faith.
(b) If any action shall be brought against an Indemnified Party with
respect to which indemnity may be sought against the Company under this
Agreement, such Indemnified Party shall promptly notify the Company in
writing and the Company, at its option, may, assume the defense thereof,
including the employment of counsel reasonably satisfactory to such
Indemnified Party and payment of all reasonable fees and expenses. The
failure to so notify the Company shall not affect any obligations the
Company may have to such Indemnified Party under this Agreement or
otherwise unless the Company is materially adversely affected by such
failure. Such Indemnified Party shall have the right to employ separate
counsel in such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified
Party, unless (i) the Company has failed to assume the defense and employ
counsel or (ii) the named parties to any such action (including any
impleaded parties) include such Indemnified Party and the Company, and such
Indemnified Party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or
additional to those available to the Company, in which case, if such
Indemnified Party notifies the Company in writing that it elects to employ
separate counsel at the expense of the Company, the Company shall not have
the right to assume the defense of such action or proceeding on
35
behalf of such Indemnified Party, provided, however, that the Company shall
not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances,
be responsible hereunder for the reasonable fees and expenses of more than
one such firm of separate counsel, in addition to any local counsel, which
counsel shall be designated by Purchaser. The Company shall not be liable
for any settlement of any such action effected without the written consent
of the Company (which shall not be unreasonably withheld) and the Company
agrees to indemnify and hold harmless each Indemnified Party from and
against any loss or liability by reason of settlement of any action
effected with the consent of the Company. In addition, the Company will
not, without the prior written consent of Purchaser, settle or compromise
or consent to the entry of any judgment in or otherwise seek to terminate
any pending or threatened action, claim, suit or proceeding in respect to
which indemnification or contribution may be sought hereunder (whether or
not any Indemnified Party is a party thereto) unless such settlement,
compromise, consent or termination includes an express unconditional
release of Purchaser and the other Indemnified Parties, satisfactory in
form and substance to Purchaser, from all liability arising out of such
action, claim, suit or proceeding.
(c) If for any reason the foregoing indemnity is unavailable
(otherwise than pursuant to the express terms of such indemnity) to an
Indemnified Party or insufficient to hold an Indemnified Party harmless,
then in lieu of indemnifying such Indemnified Party, the Company shall
contribute to the amount paid or payable by such Indemnified Party as a
result of such claims, liabilities, losses, damages, or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and by Purchaser on the other from the
transactions contemplated by this Agreement or (ii) if the allocation
provided by clause (i) is not permitted under applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
received by the Company on the one hand and Purchaser on the other, but
also the relative fault of the Company and Purchaser as well as any other
relevant equitable considerations. Notwithstanding the provisions of this
Section 12.3, the aggregate contribution of all Indemnified Parties shall
not exceed the amount of interest and fees actually received by Purchaser
pursuant to this Agreement. It is hereby further agreed that the relative
benefits to the Company on the one hand and Purchaser on the other with
respect to the transactions contemplated hereby shall be determined by
reference to, among other things, whether any untrue or alleged untrue
statement of material fact or the omission or alleged omission to state a
material fact related to information supplied by the Company or by
Purchaser and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(d) The indemnification, contribution and expense reimbursement
obligations set forth in this Section 12.3 (i) shall be in addition to any
liability the Company may have to any
36
Indemnified Party at common law or otherwise; (ii) shall survive the
termination of this Agreement and the other Transaction Agreements and
the payment in full of the Series A Preferred Shares and (iii) shall
remain operative and in full force and effect regardless of any
investigation made by or on behalf of Purchaser or any other
Indemnified Party.
Section 12.4 Expenses: Documentary Taxes. The Company agrees to pay to
Purchaser a fee of $7,500.00 (the "Expense Reimbursement Fee") in full
satisfaction of all obligations of the Company to Purchaser and its agents in
connection with the negotiation and preparation of the Transaction Agreements,
relevant due diligence, and fees and disbursements of legal counsel. The Company
further agrees to pay to Purchaser all reasonable and actual out of pocket
expenses for legal fees and due diligence investigations incurred by the
Purchaser in the event the Company terminates this Agreement prior to the
Initial Takedown Closing Date. In addition, the Company agrees to pay any and
all stamp, transfer and other similar taxes, assessments or charges payable in
connection with the execution and delivery of any Transaction Agreement or the
issuance of the Securities to Purchaser, excluding their assigns.
Section 12.5 Payment. The Company agrees that, so long as Purchaser shall
own any Series A Preferred Shares purchased by it from the Company hereunder,
the Company will make payments to Purchaser of all amounts due hereunder by wire
transfer by 4:00 P.M. (E.S.T.).
Section 12.6 Successors and Assigns. This Agreement shall be binding upon
the Company and upon Purchaser and its respective successors and assigns;
provided that the Company shall not assign or otherwise transfer its rights or
obligations under this Agreement to any other Person without the prior written
consent of the Majority Holders. All provisions hereunder purporting to give
rights to Purchaser and its affiliates or to holders of Securities are for the
express benefit of such Persons and their successors and assigns.
Section 12.7 Brokers. Except for a fee payable to LKB Financial, LLC in the
form of (i) 5% of the aggregate proceeds received by the Company on the closing
of each Takedown, (ii) warrants to purchase 75,000 shares of Company Common
Stock on the closing of each Takedown, the Company represents and warrants that
it has not employed any broker, finder, financial advisor or investment banker
who would be entitled to any brokerage, finder's or other fee or commission
payable by the Company or Purchaser in connection with the sale of the
Securities.
Section 12.8 New York Law; Submission to Jurisdiction; Waiver of Jury
Trial; Appointment of Agent. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR
THE NORTHERN DISTRICT OF NEW YORK AND OF ANY FEDERAL DISTRICT COURT SITTING IN
NEW YORK, NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY
HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
37
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO
THIS AGREEMENT IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS SET FORTH HEREIN. NOTHING HEREIN
SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW. EACH PARTY WAIVES ITS RIGHT TO A TRIAL BY JURY.
Section 12.9 Entire Agreement. This Agreement, the Exhibits or Schedules
hereto, which include, but are not limited to the Certificate of Designations
and the Registration Rights Agreement, set forth the entire agreement and
understanding of the parties relating to the subject matter hereof and
supercedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits and Schedules to
this Agreement are incorporated herein by this reference and shall constitute
part of this Agreement as is fully set forth herein.
Section 12.10 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive the Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 12.11 Title and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 12.12 Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement and all
Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual
consent of the Purchaser and the Company shall be required to employ any other
reporting entity.
Section 12.13 Publicity. The Company and the Purchaser shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of Purchaser without the prior written consent of Purchaser, except to the
extent
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required by law, in which case the Company shall provide Purchaser with prior
written notice of such public disclosure.
Section 12.14 Powers and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to Purchaser is intended to be exclusive of any other
right or remedy, and every right and remedy shall, to the extent permitted by
law, be cumulative and in addition to every other right and remedy given
hereunder or now hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy. Every power and remedy given by the Series A Preferred Shares
or by law may be exercised from time to time, and as often as shall be deemed
expedient, by Purchaser.
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.
AMERICAN INTERNATIONAL
PETROLEUM CORPORATION
By: __________________________
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
Title: Chief Financial Officer
Address:_________________________
_________________________
Fax: ____________________
Tel.:____________________
GCA STRATEGIC INVESTMENT FUND LIMITED
By: __________________________
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: President
Address: c/o Prime Management Limited
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Mechanics ▇▇▇▇▇▇▇▇
▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇▇ ▇▇, ▇▇▇▇▇▇▇
Fax: ▇▇▇-▇▇▇-▇▇▇▇
Tel.: ▇▇▇-▇▇▇-▇▇▇▇
Securities Purchase Agreement
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