EXHIBIT 10.1
FORM OF SECURITIES PURCHASE AGREEMENT DATED AS OF
SEPTEMBER 24, 2003 BETWEEN GALAXY ENERGY CORPORATION AND THE
PURCHASER NAMED THEREIN
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is dated as of
September 24, 2003, among Galaxy Energy Corporation, a Colorado corporation (the
"COMPANY"), and the purchasers identified on the signature pages hereto (each,
including its successors and assigns, a "PURCHASER" and collectively the
"PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "SECURITIES ACT") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agrees
as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:
"AGENT" shall have the meaning ascribed to such term in Section
4.1 hereof.
"AFFILIATE" means any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and
construed under Rule 144 under the Securities Act.
"CAPITAL SHARES" means the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of
the Company.
"CAPITAL SHARES EQUIVALENTS" means any securities, rights or
obligations that are convertible into or exchangeable for or give any
right to subscribe for or purchase, directly or indirectly, any Capital
Shares of the Company or any warrants, options or other rights to
subscribe for or purchase, directly or indirectly, Capital Shares or
any such convertible or exchangeable securities.
"CLOSING" means the closing of the purchase and sale of the
Securities pursuant to SECTION 2.2.
"CLOSING DATE" shall have the meaning ascribed to such term in
Section 2.4 hereof.
"CLOSING PRICE" shall mean $0.59 [the lesser of $.68 or 90% of
the average of the VWAPs for the 30 consecutive Trading Days prior to
the Closing Date].
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, par value
$.001 per share, and any securities into which such common stock shall
hereinafter have been reclassified into.
"COMPANY COUNSEL" means ▇▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇,
P.C., with offices at ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇
▇▇▇▇▇.
"DEBENTURES" means, the 7% Secured Convertible Debentures due 24
months from their date of issuance, issued by the Company to the
Purchasers hereunder, in the form of EXHIBIT A.
"DISCLOSURE SCHEDULES" shall have the meaning ascribed to such
term in Section 3.1 hereof.
"EFFECTIVE DATE" means the date that the initial Registration
Statement filed by the Company pursuant to Section 5.13 hereof is first
declared effective by the Commission.
"EFFECTIVENESS DATE" means, with respect to the initial
Registration Statement required hereunder, the 165th calendar day
following the Closing Date (195th calendar day following the Closing
Date in the event of a "full review" of the Registration Statement by
the Commission) and, with respect to any additional Registration
Statements which may be required pursuant to Section 5.13(c)(iii), the
90th calendar day following the date on which the Company first knows,
or reasonably should have known, that such additional Registration
Statement is required hereunder; PROVIDED, HOWEVER, in the event the
Company is notified by the Commission that one of the above
Registration Statements will not be reviewed or is no longer subject to
further review and comments, the Effectiveness Date as to such
Registration Statement shall be the fifth Trading Day following the
date on which the Company is so notified if such date precedes the
dates required above.
"ESCROW AGENT" shall have the meaning set forth in the Escrow
Agreement.
"ESCROW AGREEMENT" shall mean the Escrow Agreement in
substantially the form of EXHIBIT C hereto executed and delivered
contemporaneously with this Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FILING DATE" means, with respect to the initial Registration
Statement required hereunder, the 60th day following the Closing Date
and, with respect to any additional
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Registration Statements which may be required pursuant to Section 3(c),
the 15th day following the date on which the Company first knows, or
reasonably should have known that such additional Registration
Statement is required hereunder.
"FW" means ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP with offices at ▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇.
"GAAP" shall have the meaning ascribed to such term in Section
3.1(h) hereof.
"HOLDER" or "HOLDERS" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"LIENS" shall have the meaning ascribed to such term in Section
3.1(a) hereof.
"LOSSES" means any and all losses, claims, damages, liabilities,
settlement costs and expenses, including without limitation costs of
preparation and reasonable attorneys' fees.
"MATERIAL ADVERSE EFFECT" shall have the meaning assigned to
such term in Section 3.1(b) hereof.
"OBLIGATIONS" means all of the Company's obligations under this
Agreement, the Debentures, the Warrants, and any other agreements or
obligations undertaken by the Company to the Purchasers.
"PERSON" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
"PLEDGED COLLATERAL" means the collateral in which the
Purchasers are granted a security interest pursuant to Section 4.1 of
this Agreement.
"PRINCIPAL MARKET" means initially the Over the Counter Bulletin
Board and shall also include the American Stock Exchange, New York
Stock Exchange, the NASDAQ Small-Cap Market or the NASDAQ National
Market, whichever is at the time the principal trading exchange or
market for the Common Stock, based upon share volume.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"REGISTRABLE SECURITIES" means (i) all of the shares of Common
Stock issuable upon conversion in full of the Debentures, (ii) all
shares issuable as interest on the Debentures assuming all interest
payments are made in shares of Common Stock and the Debentures are held
until maturity, (iii) all Warrant Shares, (iv) any securities issued or
issuable upon any stock split, dividend or other distribution
recapitalization or similar
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event with respect to the foregoing and (v) any additional shares
issuable in connection with any anti-dilution provisions in the
Debentures.
"REGISTRATION STATEMENT" means the registration statement to be
filed by the Company pursuant to Section 5.13 hereof.
"REQUIRED APPROVALS" shall have the meaning ascribed to such
term in Section 3.1(e) hereof.
"REQUIRED MINIMUM" means, as of any date, the maximum aggregate
number of shares of Common Stock then issued or potentially issuable in
the future pursuant to the Transaction Documents, including any
Underlying Shares issuable upon exercise or conversion in full of all
Warrants and Debentures, ignoring any conversion or exercise limits set
forth therein, and assuming that the Set Price is at all times on and
after the date of determination the lesser of the Set Price and 75% of
the VWAP on the Trading Day immediately prior to the date of
determination.
"RULE 144" means Rule 144 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission
having substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission
having substantially the same purpose and effect as such Rule.
"SEC REPORTS" shall have the meaning ascribed to such term in
Section 3.1(h) hereof.
"SECURITIES" means the Debentures, the Warrants and the
Underlying Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SET PRICE" shall have the meaning ascribed to such term in the
Debentures.
"SUBSCRIPTION AMOUNT" means, as to each Purchaser, the amount to
be paid for Debentures purchased hereunder as specified below such
Purchaser's name on the signature page of this Agreement and next to
the heading "Subscription Amount", in United States Dollars and in
immediately available funds.
"SUBSIDIARY" means any subsidiary of the Company as set forth on
Schedule 3.1(a) attached hereto.
"TRADING DAY" means any day during which the Principal Market
shall be open for business.
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"TRANSACTION DOCUMENTS" means this Agreement, the Escrow
Agreement, the Debentures, the Warrants, and any other documents or
agreements executed in connection with the transactions contemplated
hereunder.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of the Debentures and upon exercise of the Warrants and
issued and issuable in lieu of the cash payment of interest on the
Debentures.
"UNDERLYING SHARES REGISTRATION STATEMENT" OR "REGISTRATION
STATEMENT" means a registration statement meeting the requirements set
forth in Section 5.13 hereof and covering the resale of the Underlying
Shares by each Purchaser as provided for in such section.
"VWAP" means, for any date, the price determined by the first of
the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a trading day
from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then quoted on the OTC Bulletin Board,
the volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the OTC Bulletin Board; (c) if the
Common Stock is not then listed or quoted on the OTC Bulletin Board and
if prices for the Common Stock are then reported in the "Pink Sheets"
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so
reported; or (d) in all other cases, the fair market value of a share
of Common Stock as determined by an independent appraiser selected in
good faith by the Purchasers and reasonably acceptable to the Company.
"WARRANTS" means collectively the Common Stock purchase
warrants, in the form of EXHIBIT B delivered to the Purchasers at the
Closing in accordance with Section 2.2 hereof, with a term of exercise
of 5 years.
"WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE II
PURCHASE AND SALE
2.1 ESCROW. The Company and the Escrow Agent shall execute an Escrow
Agreement to implement the terms of this Article II.
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2.2 CLOSING.
(a) Upon the terms and subject to the conditions set forth
herein, concurrent with the execution and delivery of this Agreement by
the parties hereto, the Company agrees to sell, and the Purchasers
agree to purchase in the aggregate, severally and not jointly, up to
$7,000,000 principal amount of the Debentures. Each Purchaser shall
deliver to the Escrow Agent via wire transfer or a certified check
immediately available funds equal to such Purchaser's Subscription
Amount and shall simultaneously deliver or cause to be delivered this
Agreement to the offices of Company Counsel, duly executed by such
Purchaser.
(b) The Company, within two Business Days after being advised
by the Escrow Agent that the Escrow Agent has received the Subscription
Amounts for the Closing, shall deliver to each Purchaser the following
via overnight delivery service:
(i) a Debenture with a principal amount equal to
such Purchaser's Subscription Amount, registered in the name of
such Purchaser;
(ii) (A) a Warrant registered in the name of such
Purchaser to purchase up to a number of shares of Common Stock
equal to 30% of such Purchaser's Subscription Amount divided by
the Closing Price and an exercise price per Warrant Share equal
to 120% of Closing Price, subject to adjustment therein and (B)
a Warrant to purchase up to a number of shares of Common Stock
equal to 30% of such Purchaser's Subscription Amount divided by
the Closing Price and an exercise price per Warrant Share equal
to 140% of the Closing Price, subject to adjustment therein;
(iii) the legal opinion of Company Counsel, in the form
of EXHIBIT D attached hereto, addressed to the Purchasers; and
(iv) this Agreement, duly executed by the Company.
2.3 CONDITIONS TO CLOSING. Upon satisfaction or waiver by the party
sought to be benefited thereby of the conditions set forth in this Section 2.3,
the Closing shall occur at the offices of Company Counsel.
(a) All representations and warranties of the other party
contained herein shall remain true and correct as of the Closing Date
and all covenants of the other party shall have been performed if due
prior to such date.
(b) There shall have been no Material Adverse Effect (as defined
in Section 3.1(b)) with respect to the Company since the date hereof.
(c) From the date hereof to the Closing Date, trading in the
Common Stock shall not have been suspended by the Commission (except
for any suspension of trading of limited duration agreed to by the
Company, which suspension shall be terminated prior to the Closing),
and, at any time prior to the Closing Date, trading in securities
generally
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as reported by Bloomberg Financial Markets shall not have been
suspended or limited, or minimum prices shall not have been established
on securities whose trades are reported by such service, or on the
Principal Market, nor shall a banking moratorium have been declared
either by the United States or New York State authorities, nor shall
there have occurred any material outbreak or escalation of
hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any
financial market which, in each case, in the reasonable judgment of the
Purchasers, makes it impracticable or inadvisable to purchase the
Debentures at the Closing.
(d) The aggregate Subscription Amount in escrow shall be at
least $500,000 on or before September 9, 2003, which date may be
unilaterally extended by the Company for up to an additional ten (10)
Trading Days (the "OFFERING TERMINATION DATE").
(e) The Purchasers shall have received from each of ▇▇▇▇ ▇.
▇▇▇▇▇▇, Resource Venture Management, ▇▇▇▇▇▇ Group LLP, ▇▇▇▇ ▇. ▇▇▇▇▇▇,
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ Fails, ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, a "lockup letter" in the form of Exhibit E hereto, agreeing
not to sell or otherwise dispose of any of such shares prior to one
year from the Closing Date.
2.4 PARTICIPATION BY CRESTVIEW CAPITAL FUNDS. Crestview Capital Fund
II, LP and/or other Crestview Capital Funds (collectively, "Crestview") agree to
purchase at least $1,500,000 of Securities if at least $3,500,000 is raised
(including Crestview's purchase) on or before the Offering Termination Date. If
the Company then elects for any reason not to close the transactions
contemplated hereby, then the Company shall pay Crestview a break-up fee of
$75,000 within five (5) Trading Days from the Offering Termination Date. The
Closing for Crestview shall occur pursuant to procedures to be determined by the
Company and Crestview in good faith.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "DISCLOSURE Schedules") which Disclosure
Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.
(a) SUBSIDIARIES. Except as set forth in the SEC Reports, the
Company has no direct or indirect subsidiaries. The Company owns,
directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any lien, charge,
security interest, encumbrance, right of first refusal or other
restriction (collectively, "LIENS"), and all the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and are
fully paid, non-assessable and free of preemptive
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and similar rights. Schedule 3.1(a) lists each Subsidiary by name,
place of organization, and indicates the entity or entities which own
the capital stock of such Subsidiary.
(b) ORGANIZATION AND QUALIFICATION. Each of the Company and the
Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with
the requisite power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Neither the
Company nor any Subsidiary is in violation of any of the provisions of
its respective certificate or articles of incorporation, bylaws or
other organizational or charter documents. Each of the Company and the
Subsidiaries is duly qualified to do business and is in good standing
as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or
in good standing, as the case may be, could not, individually or in the
aggregate: (i) adversely affect the legality, validity or
enforceability of any Transaction Document, (ii) have or result in or
be reasonably likely to have or result in a material adverse effect on
the results of operations, assets, prospects, business or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or (iii) adversely impair the Company's ability to perform
fully on a timely basis its obligations under any of the Transaction
Documents (any of (i), (ii) or (iii), a "MATERIAL ADVERSE Effect").
(c) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations hereunder or thereunder. The
execution and delivery of each of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated
hereby or thereby have been duly authorized by all necessary action on
the part of the Company and no further consent or action is required by
the Company other than Required Approvals. Each of the Transaction
Documents has been (or upon delivery will be) duly executed by the
Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies
generally and general principles of equity. Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective
certificate or articles of incorporation, by-laws or other
organizational or charter documents.
(d) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated thereby do not and will not:
(i) conflict with or violate any provision of the Company's or any
Subsidiary's certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) subject to obtaining the
Required Approvals, conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or
both) of, any
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agreement, credit facility, debt or other instrument (evidencing a
Company or Subsidiary debt or otherwise) or other understanding to
which the Company or any Subsidiary is a party or by which any property
or asset of the Company or any Subsidiary is bound or affected, or
(iii) result, in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by
which any property or asset of the Company or a Subsidiary is bound or
affected; except in the case of each of clauses (ii) and (iii), such
as could not, individually or in the aggregate, have or result in a
Material Adverse Effect.
(e) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or
order of, give any notice to, or make any filing or registration with,
any court or other federal, state, local or other governmental
authority or other Person in connection with the execution, delivery
and performance by the Company of the Transaction Documents, other than
(i) the filings required under Section 5.7, (ii) the filing with the
Commission of the Underlying Shares Registration Statement, (iii) the
notice and/or application(s) to each applicable Principal Market for
the issuance and sale of the Debentures and Warrants and the listing of
the Underlying Shares for trading thereon in the time and manner
required thereby, and (iv) the filing of Form D with the Commission and
applicable Blue Sky filings (collectively, the "REQUIRED APPROVALS").
(f) ISSUANCE OF THE SECURITIES. The Securities are duly
authorized and, when issued and paid for in accordance with the
applicable Transaction Documents, will be duly and validly issued,
fully paid and non-assessable, free and clear of all Liens. The Company
has reserved from its duly authorized capital stock a number of shares
of Common Stock for issuance of the Underlying Shares at least equal to
the Required Minimum on the date hereof. The Company has not, and to
the knowledge of the Company, no Affiliate of the Company has sold,
offered for sale or solicited offers to buy or otherwise negotiated in
respect of any security (as defined in Section 2 of the Securities Act)
that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of
the sale of the Securities to the Purchasers, or that would be
integrated with the offer or sale of the Securities for purposes of the
rules and regulations of any Principal Market.
(g) CAPITALIZATION. The number of shares and type of all
authorized, issued and outstanding capital stock of the Company is set
forth in the Schedule 3.1(g) attached hereto. No securities of the
Company are entitled to preemptive or similar rights, and no Person has
any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by
the Transaction Documents. Except as set forth in Schedule 3.1(g) and
as a result of the purchase and sale of the Securities, there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities,
rights or obligations convertible into or exchangeable for, or giving
any Person any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings or arrangements by
which the Company or any Subsidiary is or may
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become bound to issue additional shares of Common Stock, or securities
or rights convertible or exchangeable into shares of Common Stock. The
issuance and sale of the Securities will not obligate the Company to
issue shares of Common Stock or other securities to any Person (other
than the Purchasers) and will not result in a right of any holder of
Company securities to adjust the exercise, conversion, exchange or
reset price under such securities.
(h) SEC REPORTS; FINANCIAL STATEMENTS. The Company has filed all
reports required to be filed by it under the Exchange Act, including
pursuant to Section 13(a) or 15(d) thereof, for the two years preceding
the date hereof (or such shorter period as the Company was required by
law to file such material) (the foregoing materials being collectively
referred to herein as the "SEC REPORTS") on a timely basis or has
received a valid extension of such time of filing and has filed any
such SEC Reports prior to the expiration of any such extension. The
Company has identified and made available to the Purchasers a copy of
all SEC Reports filed within the 10 days preceding the date hereof. As
of their respective dates, the SEC Reports complied in all material
respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Reports, when filed, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included
in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission
with respect thereto as in effect at the time of filing. Such financial
statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved ("GAAP"), except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all
material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.
(i) MATERIAL CHANGES. Since the date of the latest audited
financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports: (i) there has been no event,
occurrence or development that has had or that could result in a
Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent
with past practice and (B) liabilities not required to be reflected in
the Company's financial statements pursuant to GAAP or required to be
disclosed in filings made with the Commission, (iii) the Company has
not altered its method of accounting or the identity of its auditors,
(iv) the Company has not declared or made any dividend or distribution
of cash or other property to its stockholders or purchased, redeemed or
made any agreements to purchase or redeem any shares of its capital
stock, and (v) the Company has not issued any equity securities to any
officer, director or Affiliate, except pursuant to existing Company
stock option or similar plans.
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(j) LITIGATION. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of
the Company, threatened against or affecting the Company, any
Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) (collectively, an
"ACTION") which: (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
Securities or (ii) could, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the
subject of any Action involving a claim of violation of or liability
under federal or state securities laws or a claim of breach of
fiduciary duty. The Company does not have pending before the Commission
any request for confidential treatment of information. There has not
been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company
or any current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act.
(k) COMPLIANCE. Neither the Company nor any Subsidiary: (i) is
in default under or in violation of (and no event has occurred that has
not been waived that, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under), nor has
the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or
credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not
such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has
been in violation of any statute, rule or regulation of any
governmental authority, except in each case as could not, individually
or in the aggregate, have or result in a Material Adverse Effect.
(l) LABOR RELATIONS. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the
employees of the Company.
(m) REGULATORY PERMITS. The Company and the Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to
conduct their respective businesses as described in the SEC Reports,
except where the failure to possess such permits could not,
individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect ("MATERIAL PERMITS"), and neither
the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.
(n) TITLE TO ASSETS. The Company and the Subsidiaries have good
and marketable title in fee simple to all real property owned by them
that is material to the business of the Company and the Subsidiaries
and good and marketable title in all
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personal property owned by them that is material to the business of the
Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed
to be made of such property by the Company and the Subsidiaries. Any
real property and facilities held under lease by the Company and the
Subsidiaries are held under valid, subsisting and enforceable leases
of which the Company and the Subsidiaries are in compliance.
(o) INSURANCE. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which the Company and the Subsidiaries are engaged. To
the best of Company's knowledge, such insurance contracts and policies
are accurate and complete. Neither the Company nor any Subsidiary has
any reason to believe it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business without a significant increase in cost.
(p) TRANSACTIONS WITH AFFILIATES AND EMPLOYEES. Except as
required to be set forth in the SEC Reports, none of the officers or
directors of the Company and, to the knowledge of the Company, none of
the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any entity in which any
officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
(q) INTERNAL ACCOUNTING CONTROLS. The Company and the
Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with 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. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Company and designed such disclosures controls and
procedures to ensure that material information relating to the Company,
including its subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which
the Company's Form 10-K or 10-Q, as the case may be, is being prepared.
The Company's certifying officers have evaluated the effectiveness of
the Company's controls and procedures as of a date within 90 days prior
to the filing date of the Form 10-Q for the quarter ended May 31, 2003
(such date, the "EVALUATION DATE"). The Company presented in the Form
10-Q for the quarter ended May 31, 2003 the conclusions of the
certifying officers about the
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effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date,
there have been no significant changes in the Company's internal
controls (as such term is defined in Item 307(b) of Regulation S-K
under the Exchange Act) or, the Company's knowledge, in other factors
that could significantly affect the Company's internal controls.
(r) SOLVENCY/INDEBTEDNESS. Based on the financial condition of
the Company as of the Closing Date: (i) the fair saleable value of the
Company's assets exceeds the amount that will be required to be paid on
or in respect of the Company's existing debts and other liabilities
(including known contingent liabilities) as they mature; and (ii) the
current cash flow of the Company, together with the proceeds the
Company would receive, were it to liquidate all of its assets, after
taking into account all anticipated uses of the cash, would be
sufficient to pay all amounts on or in respect of its debt when such
amounts are required to be paid. The Company does not intend to incur
debts beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be payable on or in respect
of its debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for
reorganization or liquidation under the bankruptcy or reorganization
laws of any jurisdiction within one year from the Closing Date. The SEC
Reports set forth as of the dates thereof all outstanding secured and
unsecured Indebtedness of the Company or any Subsidiary, or for which
the Company or any Subsidiary has commitments. For the purposes of this
Agreement, "INDEBTEDNESS" shall mean (a) any liabilities for borrowed
money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all
guaranties and endorsements, whether or not the same are or should be
reflected in the Company's balance sheet or the notes thereto, except
guaranties by endorsement of negotiable instruments for deposit or
collection in the ordinary course of business, and (c) the present
value of any lease payments in excess of $50,000 due under leases
required to be capitalized in accordance with GAAP. Neither the Company
nor any Subsidiary is in default with respect to any Indebtedness.
(s) CERTAIN FEES. Except as set forth in Schedule 5.9, no
brokerage or finder's fees or commissions are or will be payable by the
Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, bank or other Person with respect
to the transactions contemplated by this Agreement, and the Company has
not taken any action that would cause any Purchaser to be liable for
any such fees or commissions. The Company agrees that the Purchasers
shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of any Person for fees of the type
contemplated by this Section with the transactions contemplated by this
Agreement.
(t) PRIVATE PLACEMENT. Assuming the accuracy of the
representations and warranties of the Purchasers set forth in Sections
3.2(b)-(f), the offer, issuance and sale of the Securities to the
Purchasers as contemplated hereby are exempt from the registration
requirements of the Securities Act. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of
the Principal Market.
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(u) LISTING AND MAINTENANCE REQUIREMENTS. The Company has not,
in the 12 months preceding the date hereof, received notice from any
Principal Market on which the Common Stock is or has been listed or
quoted to the effect that the Company is not in compliance with the
listing or maintenance requirements of such Principal Market. The
Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing
and maintenance requirements.
(v) REGISTRATION RIGHTS. The Company has not granted or agreed
to grant to any Person any rights (including "piggy-back" registration
rights) to have any securities of the Company registered with the
Commission or any other governmental authority that have not been
satisfied, except for those rights granted to the purchasers in the
Company's private placement of common shares at $1.00 per share.
(w) APPLICATION OF TAKEOVER PROTECTIONS. The Company and its
Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company's
Certificate of Incorporation (or similar charter documents) or the laws
of its state of incorporation that is or could become applicable to the
Purchasers as a result of the Purchasers and the Company fulfilling
their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company's
issuance of the Securities and the Purchasers' ownership of the
Securities.
(x) SENIORITY. As of the Closing Date, no indebtedness of the
Company is senior to the Debentures in right of payment, whether with
respect to interest or upon liquidation or dissolution, or otherwise,
other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and
capital lease obligations (which is senior only as to the property
covered thereby).
(y) DISCLOSURE. To the best knowledge of the Company, neither it
nor any other Person acting on its behalf has provided any of the
Purchasers or their agents or counsel with any information that
constitutes or might constitute material, nonpublic information. The
Company understands and confirms that the Purchasers will rely on the
foregoing representations in effecting transactions in securities of
the Company. All disclosure provided to the Purchasers regarding the
Company, its business and the transactions contemplated hereby,
including the Schedules to this Agreement, furnished by or on behalf of
the Company with respect to the representations and warranties made
herein are true and correct with respect to such representations and
warranties and do not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading. The Company acknowledges and agrees that no
Purchaser makes or has made any representations or warranties with
respect to the transactions contemplated hereby other than those
specifically set forth in Section 3.2 hereof.
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(z) TAX STATUS. The Company and each of its Subsidiaries has
made or filed all federal, state and foreign income and all other tax
returns, reports and declarations required by any jurisdiction to which
it is subject (unless and only to the extent that the Company and each
of its Subsidiaries has set aside on its books provisions reasonably
adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which
such returns, reports or declarations apply. There are no unpaid taxes
in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any
such claim. The Company has not executed a waiver with respect to the
statute of limitations relating to the assessment or collection of any
foreign, federal, statue or local tax. None of the Company's tax
returns is presently being audited by any taxing authority.
(aa) ACKNOWLEDGMENT REGARDING PURCHASERS' PURCHASE OF
SECURITIES. The Company acknowledges and agrees that the Purchasers are
acting solely in the capacity of arm's length purchasers with respect
to this Agreement and the transactions contemplated hereby. The Company
further acknowledges that any statement made by any Purchaser or any of
their respective representatives or agents in connection with this
Agreement and the transactions contemplated hereby is not advice or a
recommendation and is merely incidental to the Purchasers' purchase of
the Securities. The Company further represents to each Purchaser that
the Company's decision to enter into this Agreement has been based
solely on the independent evaluation of the Company and its
representatives.
(bb) NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor, to the knowledge of the Company,
any of its directors or officers (i) has conducted or will conduct any
general solicitation (as that term is used in Rule 502(c) of Regulation
D) or general advertising with respect to the sale of the Debentures or
the Warrants, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that
would require registration of the Debentures, the Underlying Shares or
the Warrants under the Securities Act or made any "directed selling
efforts" as defined in Rule 902 of Regulation S.
(cc) NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS. There are no
disagreements of any kind presently existing, or reasonably anticipated
by the Company to arise, between the accountants and lawyers formerly
or presently employed by the Company and the Company is current with
respect to any fees owed to its accountants and lawyers.
3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:
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(a) ORGANIZATION; AUTHORITY. Such Purchaser, if not an
individual, is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization with
the requisite corporate or partnership power and authority to enter
into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations thereunder. The
purchase by such Purchaser of the Securities hereunder has been duly
authorized by all necessary action on the part of such Purchaser. This
Agreement has been duly executed by such Purchaser, and when delivered
by such Purchaser in accordance with the terms hereof, will constitute
the valid and legally binding obligation of such Purchaser, enforceable
against it in accordance with its terms.
(b) INVESTMENT INTENT. Such Purchaser is acquiring the
Securities as principal for its own account for investment purposes
only and not with a view to or for distributing or reselling such
Securities or any part thereof, without prejudice, however, to such
Purchaser's right, subject to the provisions of this Agreement, at all
times to sell or otherwise dispose of all or any part of such
Securities pursuant to an effective registration statement under the
Securities Act or under an exemption from such registration and in
compliance with applicable federal and state securities laws. Nothing
contained herein shall be deemed a representation or warranty by such
Purchaser to hold Securities for any period of time. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its
business. Such Purchaser does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the
Securities.
(c) PURCHASER STATUS. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on
which it exercises any Warrants or converts any Debentures it will be,
an "accredited investor" as defined in Rule 501(a) under the Securities
Act, and has completed an Accredited Investor Questionnaire in the form
attached hereto as EXHIBIT E. Such Purchaser has not been formed solely
for the purpose of acquiring the Securities. Such Purchaser is not a
registered broker-dealer under Section 15 of the Exchange Act.
(d) EXPERIENCE OF SUCH PURCHASER. Such Purchaser, either alone
or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the prospective
investment in the Securities, and has so evaluated the merits and risks
of such investment. Such Purchaser is able to bear the economic risk of
an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
(e) GENERAL SOLICITATION. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or
presented at any seminar or any other general solicitation or general
advertisement.
(f) OPEN SHORT POSITION. From the date of this Agreement until
the filing of the Form 8-K described in SECTION 5.7, such Purchaser
represents and warrants that it
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shall not engage in short sales of the Company's Common Stock, as that
term is defined in applicable Commission and NASD rules.
(g) DISCLOSURE OF INFORMATION; INDEPENDENT Investigation. Such
Purchaser has received, read, carefully considered, and fully
understands this Agreement and all documents related to the Company and
its operations required by and furnished to such Purchaser. In making
its decision to invest in the Securities, such Purchaser has relied
upon the independent investigations made by such Purchaser and by such
Purchaser's own professional advisors. Such Purchaser and its advisors,
if any, have been given the opportunity to obtain information and to
examine this Agreement and certain other information regarding the
Company and to ask questions of, and to receive answers from the
Company or any Person acting on the Company's behalf concerning the
Securities, the Company, and terms and conditions of this investment,
and to obtain any additional information to verify the accuracy of any
information previously furnished. All such questions have been answered
to such Purchaser's full satisfaction.
ARTICLE IV
SECURITY INTEREST AND COVENANTS OF THE COMPANY
4.1 SECURITY INTEREST. Subject to the provisions hereof, the Company
agrees to grant an agent as defined in 4.2 below (the "Agent") on behalf of all
the holders of Debentures a security interest in any and all oil and/or natural
gas ▇▇▇▇▇ which are completed, as well as any and all oil and/or natural gas
leases obtained, while this Article IV is in effect and in which the Company
owns any working interest. The security interest granted will be satisfactory in
form to the Agent as defined in Section 4.2 below and will be subject to a
subordination agreement as provided in Section 4.3 below. The Company agrees to
file all necessary financing statements and other security filings to implement
the provisions of this Section on a timely basis to perfect the holders'
security interest as a first priority lien in the Company's interest in each
such asset, subject only to the provisions of the Subordination Agreement
referred to in Section 4.3. For clarity, any breach of this covenant by the
Company shall be a material breach of a material covenant pursuant to Section 3
of the Debentures.
4.2 DESIGNATION OF AGENT. Each Purchaser and the Company by execution
of this Agreement hereby designate Crestview Capital Fund II, LP as agent (the
"Agent") for the Purchaser to act as specified in this Agreement and in Annex A
hereto. If Crestview should not be a Purchaser, then the Agent shall be such
other Person confirmed by the holders of the Debentures representing at least
sixty percent (60%) of the value thereof.
4.3 SUBORDINATION. Purchaser agrees to enter upon request of the
Company into a subordination agreement, to be in a customary form, between and
among the Company, the Purchasers and a senior bank lender in a form acceptable
to the holders of a majority of interest of the Debentures then-outstanding,
subordinating the holders' right to payments of principal or interest on the
Debentures to such senior lender's rights upon any event of default by the
Company to such senior lender.
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4.4 RESTRICTION ON BORROWING. Other than as provided herein, neither
the Company nor any Subsidiary shall borrow under any structure or arrangement
more than $5,000,000 in the aggregate unless the Company has obtained the prior
written approval the then holders of the Debentures representing at least sixty
percent (60%) of the value thereof, including specifically the approval of the
Agent, provided the Agent is still a holder of Debentures.
4.5 RESTRICTIONS ON DISPOSITION. Other than as provided herein, neither
the Company nor any Subsidiary will transfer, sell, hypothecate or assign any of
its rights, title or interests under any of the following agreements: (A) that
certain Lease Acquisitions and Drilling Agreement dated September 30, 2002
between Pioneer Oil and Dolphin Energy Corporation ("Dolphin"), (B) that certain
Lease Option and Acquisition Agreement dated August 5, 2003 between Quaneco,
L.L.C. and Dolphin, (C) that certain Coal Bed Methane Participation Agreement
dated October 1, 2002, and all amendments and addendums thereto, between Horizon
Exploitation, Inc. and Dolphin and (D) all agreements, amendments and other
documents executed in connection with (A) - (C)
4.6 RELEASE OF COVENANTS. Notwithstanding any other provision hereof,
the Company's obligations and covenants under this Article IV shall be of no
further force and effect upon the occurrence of any of the following: (A) the
Debentures plus interest is either repaid or converted; (B) the Company has
obtained financing of at least $5,000,000 from any third party on terms more
favorable than the terms of this Agreement to acquire acreage and/or drill ▇▇▇▇▇
directly or indirectly; or (C) the Company has met all of its obligations to
make payments to acquire acreage, to drill ▇▇▇▇▇ and pay cash calls for the
drilling of ▇▇▇▇▇ through September 1, 2004. Upon the satisfaction of one or
more of the foregoing events, as certified in writing by the Company's Chief
Executive Officer, the Agent agrees to execute such UCC-3 and other termination
or release of lien documents as the Company shall request, within five Business
Days of its receipt of the Company's request therefor.
ARTICLE V
OTHER AGREEMENTS OF THE PARTIES
5.1 TRANSFER RESTRICTIONS.
(a) The Securities may only be disposed of in compliance with
state and federal securities laws. In connection with any transfer of
Securities other than pursuant to an effective registration statement,
to the Company or to an Affiliate of a Purchaser, the Company may
require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor and reasonably acceptable to the
Company, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not
require registration of such transferred Securities under the
Securities Act. As a condition of transfer, any such transferee shall
agree in writing to be bound by the terms of this Agreement and shall
have the rights of a Purchaser under this Agreement.
(b) Each Purchaser agrees to the imprinting, so long as is
required by this SECTION 5.1(b), of the following legend on any
certificate evidencing Securities:
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[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH
EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF
THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from
time to time pledge pursuant to a bona fide margin agreement or grant a
security interest in some or all of the Securities and, if required
under the terms of such arrangement, such Purchaser may transfer
pledged or secured Securities to the pledgees or secured parties. If
required by the Company's transfer agent in order to effect a pledge,
the Company shall cause its counsel, at no cost to the Purchasers, to
issue an opinion of counsel to the Company's transfer agent. Further,
no notice shall be required of such pledge. At the appropriate
Purchaser's expense, the Company will execute and deliver such
reasonable documentation as a pledgee or secured party of Securities
may reasonably request in connection with a pledge or transfer of the
Securities, including the preparation and filing of any required
prospectus supplement under Rule 424(b)(3) of the Securities Act or
other applicable provision of the Securities Act to appropriately amend
the list of Selling Stockholders thereunder.
(c) Certificates evidencing Underlying Shares shall not contain
any legend (including the legend set forth in Section 5.1(b) hereof):
(i) while a registration statement (including the Underlying Shares
Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying
Shares are eligible for sale under Rule 144(k), or (iv) if such legend
is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the
staff of the Commission); PROVIDED, HOWEVER, in connection with the
issuance of the Underlying Shares, each Purchaser, severally and not
jointly with the other Purchasers, hereby agrees to adhere to and abide
by all prospectus delivery requirements under the Securities Act and
rules and regulations of the Commission. If all or any portion of a
Debenture or Warrant is converted or exercised (as applicable) at a
time when there is an effective registration statement to cover the
resale of the Underlying Shares, or if such Underlying Shares may be
sold under Rule 144(k) or if
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such legend is not otherwise required under applicable requirements of
the Securities Act (including judicial interpretations thereof) then
such Underlying Shares shall be issued free of all legends. The Company
agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 5.1(c), it will, no later than
five Trading Days following the delivery by a Purchaser to the Company
or the Company's transfer agent of a certificate representing
Underlying Shares issued with a restrictive legend (such fifth Trading
Day, the "LEGEND REMOVAL DATE"), deliver or cause to be delivered to
such Purchaser a certificate representing such shares that is free
from all restrictive and other legends. The Company may not make any
notation on its records or give instructions to any transfer agent of
the Company that enlarge the restrictions on transfer set forth in this
Section.
(d) In addition to such Purchaser's other available remedies,
the Company shall pay to a Purchaser, in cash, as liquidated damages
and not as a penalty, for each $5,000 of Underlying Shares (based on
the VWAP of the Common Stock on the date such Securities are submitted
to the Company's transfer agent) delivered for removal of the
restrictive legend and subject to this Section 5.1(c), $50 per Trading
Day (increasing to $100 per Trading Day five Trading Days after such
damages have begun to accrue) for each Trading Day after the Legend
Removal Date until such certificate is delivered without a legend.
5.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
5.3 FURNISHING OF INFORMATION. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. Upon the request of any Purchaser, the Company shall deliver to
such Purchaser a written certification of a duly authorized officer as to
whether it has complied with the preceding sentence. As long as any Purchaser
owns Securities, if the Company is not required to file reports pursuant to such
laws, it will prepare and furnish to the Purchasers and make publicly available
in accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities under Rule 144. The Company further covenants
that it will take such further action as any holder of Securities may reasonably
request, all to the extent required from time to time to enable such Person to
sell such Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144.
5.4 INTEGRATION. The Company shall not, and shall use its best efforts
to ensure that no Affiliate of the Company shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate
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in respect of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities in a manner that
would require the registration under the Securities Act of the sale of the
Securities to the Purchasers, or that would be integrated with the offer or sale
of the Securities for purposes of the rules and regulations of any Principal
Market.
5.5 RESERVATION AND LISTING OF SECURITIES.
(a) The Company shall maintain a reserve from its duly
authorized shares of Common Stock for issuance pursuant to the
Transaction Documents in such amount as may be required to fulfill its
obligations in full under the Transaction Documents.
(b) If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required
Minimum on such date, then the Board of Directors of the Company shall
use commercially reasonable efforts to amend the Company's certificate
or articles of incorporation to increase the number of authorized but
unissued shares of Common Stock to at least the Required Minimum at
such time, as soon as possible and in any event not later than the 75th
day after such date.
(c) The Company shall, if applicable: (i) in the time and manner
required by the Principal Market, prepare and file with such Principal
Market an additional shares listing application covering a number of
shares of Common Stock at least equal to the Required Minimum on the
date of such application, (ii) take all steps necessary to cause such
shares of Common Stock to be approved for listing on the Principal
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) maintain the listing of such Common
Stock on any date at least equal to the Required Minimum on such date
on such Principal Market or another Principal Market.
(d) The Company shall not undertake a reverse or forward stock
split or reclassification of the Common Stock without the prior written
consent of the Purchasers holding a majority in interest of the
Debentures.
5.6 CONVERSION AND EXERCISE PROCEDURES. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.
5.7 SECURITIES LAWS DISCLOSURE; PUBLICITY. The Company shall, by 8:30
a.m. Eastern time on the Trading Day following the Closing Date, issue a press
release or file a Current Report on Form 8-K disclosing all material terms of
the transactions contemplated hereby. The Company and the Purchasers shall
consult with each other in issuing any press releases with respect to the
transactions contemplated hereby. Notwithstanding the foregoing, other than in
any registration statement filed pursuant to Section 5.13 hereof and filings
related thereto, the Company shall not publicly disclose the name of any
Purchaser, or include the name of any
-21-
Purchaser in any filing with the Commission or any regulatory agency or
Principal Market, without the prior written consent of such Purchaser, except to
the extent such disclosure is required by law or Principal Market regulations.
5.8 NON-PUBLIC INFORMATION. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and use of
such information. The Company understands and confirms that each Purchaser shall
be relying on the foregoing representations in effecting transactions in
securities of the Company.
5.9 USE OF PROCEEDS. The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes as set forth on
Schedule 5.9 attached hereto.
5.10 REIMBURSEMENT. If any Purchaser becomes involved in any capacity
in any Proceeding by or against any Person who is a stockholder of the Company,
solely as a result of such Purchaser's acquisition of the Securities under this
Agreement and without causation by any other activity, obligation, condition or
liability on the part of, or pertaining to such Purchaser and not to the
purchase of Securities pursuant to this Agreement, the Company will reimburse
such Purchaser, to the extent such reimbursement is not provided for in Section
5.11, for its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred. The reimbursement
obligations (and limitations thereon) of the Company under this paragraph shall
be in addition to any liability which the Company may otherwise have, shall
extend upon the same terms and conditions to any Affiliates of the Purchasers
who are actually named in such action, proceeding or investigation, and
partners, directors, agents, employees and controlling persons (if any), as the
case may be, of the Purchasers and any such Affiliate, and shall be binding upon
and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement except to the extent any covenant or warranty owing to the
Company is breached.
5.11 INDEMNIFICATION OF PURCHASERS. Subject to the provisions of this
Section 5.11, each party (the "INDEMNIFYING PARTY") will indemnify and hold the
other parties and their directors, officers, shareholders, partners, employees
and agents (each, an "INDEMNIFIED PARTY") harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation that any such Indemnified Party may
suffer or incur as a result of or relating to any breach of any of the
representations, warranties, covenants or agreements made by the Indemnifying
Party in this Agreement or in the other Transaction Documents. If any action
shall be brought against any Indemnified Party in respect of which indemnity may
be sought pursuant to this Agreement, such Indemnified Party shall promptly
notify the Indemnifying Party in writing, and the Indemnifying Party shall have
the right to
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assume the defense thereof with counsel of its own choosing. Any Indemnified
Party shall have the right to employ separate counsel in any 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 except to the extent that (i)
the employment thereof has been specifically authorized by the Indemnifying
Party in writing, (ii) the Indemnifying Party has failed after a reasonable
period of time to assume such defense and to employ counsel or (iii) in such
action there is, in the reasonable opinion of such separate counsel, a material
conflict on any material issue between the position of the Indemnifying Party
and the position of such Indemnified Party. The Indemnifying Party will not be
liable to any Indemnified Party under this Agreement (i) for any settlement by
an Indemnified Party effected without the Indemnifying Party's prior written
consent, which shall not be unreasonably withheld or delayed; or (ii) to the
extent, but only to the extent that a loss, claim, damage or liability is
attributable to any Indemnified Party's breach of any of the representations,
warranties, covenants or agreements made by the Purchasers in this Agreement or
in the other Transaction Documents. In no event shall the liability of any
Purchaser hereunder be greater in amount than the dollar amount of the net
proceeds received by such Purchaser upon the sale of the Securities.
5.12 SHAREHOLDERS RIGHTS PLAN. In the event that a shareholders rights
plan is adopted by the Company, no claim will be made or enforced by the Company
or any other Person that any Purchaser is an "Acquiring Person" under the plan
or in any way could be deemed to trigger the provisions of such plan by virtue
of receiving Securities under the Transaction Documents.
5.13 REGISTRATION RIGHTS.
(a) On or prior to each Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering
the resale of 130% of the Registrable Securities on such Filing Date
for an offering to be made on a continuous basis pursuant to Rule 415.
The Registration Statement shall be on Form S-3 (unless the Company is
not then eligible to register for resale the Registrable Securities on
Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith) and shall contain (unless
otherwise directed by the Holders) substantially the "Plan of
Distribution" attached hereto as ANNEX B. Subject to the terms of this
Agreement, the Company shall use its best efforts to cause the
Registration Statement to be declared effective under the Securities
Act as promptly as possible after the filing thereof, but in any event
prior to the applicable Effectiveness Date, and shall use its best
efforts to keep such Registration Statement continuously effective
under the Securities Act until all Registrable Securities covered by
such Registration Statement have been sold or may be sold without
volume restrictions pursuant to Rule 144(k) as determined by the
counsel to the Company pursuant to a written opinion letter to such
effect, addressed and acceptable to the Company's transfer agent and
the affected Holders (the "EFFECTIVENESS PERIOD"). The Company shall
immediately notify the Holders via facsimile of the effectiveness of
the Registration Statement on the same day that the Company receives
notification of the effectiveness from the Commission.
(b) If: (i) a Registration Statement is not filed on or prior to
its Filing Date (if the Company files a Registration Statement without
affording the Holders the opportunity
-23-
to review and comment on the same as required by Section 5.13(c), the
Company shall not be deemed to have satisfied clause (i)), or (ii)
the Company fails to file with the Commission a request for
acceleration in accordance with Rule 461 promulgated under the
Securities Act, within five Trading Days of the date that the Company
is notified (orally or in writing, whichever is earlier) by the
Commission that a Registration Statement will not be "reviewed," or
not subject to further review, or (iii) prior to its Effectiveness
Date, the Company fails to file a pre-effective amendment and otherwise
respond in writing to comments made by the Commission in respect of
such Registration Statement within 10 Trading Days after the receipt of
comments by or notice from the Commission that such amendment is
required in order for a Registration Statement to be declared
effective, or (iv) a Registration Statement filed or required to be
filed hereunder is not declared effective by the Commission by its
Effectiveness Date, or (v) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously
effective as to all Registrable Securities for which it is required to
be effective, or the Holders are not permitted to utilize the
Prospectus therein to resell such Registrable Securities for 15
consecutive Trading Days or an aggregate of 25 Trading Days during any
12-month period (which need not be consecutive Trading Days) (any such
failure or breach being referred to as an "EVENT", and for purposes of
clause (i) or (iv) the date on which such Event occurs, or for purposes
of clause (ii) the date on which such five Trading Day period is
exceeded, or for purposes of clause (iii) the date which such 10
Trading Day period is exceeded, or for purposes of clause (v) the date
on which such 15 or 25 Trading Day period, as applicable, is exceeded
being referred to as "EVENT DATE"), then, on each such Event Date and
every weekly anniversary thereof until the applicable Event is cured,
the Company shall pay to Crestview on behalf of each Holder an amount
in cash, as liquidated damages and not as a penalty, equal to $2,000
per day, retroactive to the Closing Date in the case of clauses (i)
through (iv) and daily during the continuance of such Event, but not
retroactively, in the case of clause (v), payable on a weekly basis. If
the Company fails to pay any liquidated damages pursuant to this
Section in full within seven days after the date payable, the Company
will pay interest thereon at a rate of 18% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to the
Holder, accruing daily from the date such liquidated damages are due
until such amounts, plus all such interest thereon, are paid in full.
(c) REGISTRATION PROCEDURES. In connection with the Company's
registration obligations hereunder, the Company shall:
(i) Not less than five Trading Days prior to the filing
of each Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that
would be incorporated or deemed to be incorporated therein by
reference), the Company shall, (i) furnish to each Holder copies
of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by
reference) will be subject to the review of such Holders, and
(ii) cause its officers and directors, counsel and independent
certified public accountants to respond to such inquiries as
shall be necessary, in the reasonable opinion of respective
counsel to conduct a reasonable
-24-
investigation within the meaning of the Securities Act. The
Company shall not file the Registration Statement or any such
Prospectus or any amendments or supplements thereto to which the
Holders of a majority of the Registrable Securities shall
reasonably and in good faith object, provided, the Company
is notified of such objection in writing no later than 3 Trading
Days after the Holders have been so furnished copies of such
documents.
(ii) (i) Prepare and file with the Commission such
amendments, including post-effective amendments, to a
Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep a Registration Statement
continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file
with the Commission such additional Registration Statements in
order to register for resale under the Securities Act all of the
Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement
(subject to the terms of this Agreement), and as so supplemented
or amended to be filed pursuant to Rule 424; (iii) respond as
promptly as reasonably possible, and in any event within 10
Trading Days, to any comments received from the Commission with
respect to a Registration Statement or any amendment thereto and
as promptly as reasonably possible provide the Holders true and
complete copies of all correspondence from and to the Commission
relating to a Registration Statement; and (iv) comply in all
material respects with the provisions of the Securities Act and
the Exchange Act with respect to the disposition of all
Registrable Securities covered by a Registration Statement
during the applicable period in accordance (subject to the terms
of this Agreement) with the intended methods of disposition by
the Holders thereof set forth in such Registration Statement as
so amended or in such Prospectus as so supplemented.
(iii) If during the Effectiveness Period, the number of
Registrable Securities at any time exceeds 85% of the number of
shares of Common Stock then registered in a Registration
Statement, then the Company shall file as soon as reasonably
practicable but in any case prior to the applicable Filing Date,
an additional Registration Statement covering the resale by the
Holders of not less than 130% of the number of such Registrable
Securities.
(iv) Notify the Holders of Registrable Securities to be
sold (which notice shall, pursuant to clauses (ii) through (vi)
of this Section 5.13(c)(iv), shall be accompanied by an
instruction to suspend the use of the Prospectus until the
requisite changes have been made) as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five
Trading Days prior to such filing) and (if requested by any such
Person) confirm such notice in writing no later than one Trading
Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to a Registration
Statement is proposed to be filed; (B) when the Commission
notifies the Company whether there will be a "review" of such
Registration Statement and whenever the Commission comments in
writing on such Registration Statement (the Company shall
provide
-25-
true and complete copies thereof and all written responses
thereto to each of the Holders); and (C) with respect to a
Registration Statement or any post-effective amendment, when
the same has become effective; (ii) of any request by the
Commission or any other Federal or state governmental authority
for amendments or supplements to a Registration Statement or
Prospectus or for additional information; (iii) of the issuance
by the Commission of any stop order suspending the effectiveness
of a Registration Statement covering any or all of the
Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; (v) of the
occurrence of any event or passage of time that makes the
financial statements included in a Registration Statement
ineligible for inclusion therein or any statement made in a
Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires any revisions to
a Registration Statement, Prospectus or other documents so that,
in the case of a Registration Statement or the Prospectus, as
the case may be, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading; and (vi) the occurrence or existence of any pending
corporate development with respect to the Company that the
Company believes may be material and that, in the determination
of the Company, makes it not in the best interest of the Company
to allow continued availability or the Registration Statement or
Prospectus; provided that any and all of such information shall
remain confidential to each Holder until such information
otherwise becomes public, unless disclosure by a Holder is
required by law; PROVIDED, FURTHER, notwithstanding each
Holder's agreement to keep such information confidential, the
Holders make no acknowledgement that any such information is
material, non-public information.
(v) Promptly deliver to each Holder, without charge, as
many copies of the Prospectus or Prospectuses (including each
form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request. Subject to the terms of
this Agreement, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of
the selling Holders in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any
amendment or supplement thereto.
(vi) Use commercially reasonable efforts to register or
qualify the resale of such Registrable Securities as required
under applicable securities or Blue Sky laws of each State
within the United States as any Holder requests in writing, to
keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period; provided,
that the Company shall not be required to qualify generally to
do business in any jurisdiction where it is not then so
qualified or subject the Company to any material tax in any such
jurisdiction
-26-
where it is not then so subject.
(vii) Cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant
to a Registration Statement, which certificates shall be free,
to the extent permitted by the Purchase Agreement, of all
restrictive legends, and to enable such Registrable Securities
to be in such denominations and registered in such names as any
such Holders may request.
(viii) Upon the occurrence of any event contemplated by
this Section 5.13(c), as promptly as reasonably possible under
the circumstances taking into account the Company's good faith
assessment of any adverse consequences to the Company and its
stockholders of the premature disclosure of such event, prepare
a supplement or amendment, including a post-effective amendment,
to a Registration Statement or a supplement to the related
Prospectus or any document incorporated or deemed to be
incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither a
Registration Statement nor such Prospectus will contain an
untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading. If the Company notifies the
Holders in accordance with clauses (ii) through (vi) of Section
5.13(c)(iv) above to suspend the use of the use of any
Prospectus until the requisite changes to such Prospectus have
been made, or the Company otherwise notifies the Holders of its
election to suspend the availability of a Registration Statement
and Prospectus pursuant to clause (vi) of Section 5.13(c)(iv),
then the Holders shall suspend use of such Prospectus. The
Company will use its best efforts to ensure that the use of the
Prospectus may be resumed as promptly as is practicable, except
that in the case of suspension of the availability of a
Registration Statement and Prospectus pursuant to clause (vi) of
Section 5.13(c)(iv), the Company shall not be required to take
such action until such time as it shall determine that the
continued availability of the Registration Statement and
Prospectus is no longer not in the best interest of the Company.
Notwithstanding the Company's right to suspend the use of the
prospectus hereunder, the Company shall remain liable to the
Holders pursuant to Section 5.13(b) for any suspensions of the
Registration Statement hereunder which otherwise require payment
thereunder.
(ix) Comply with all applicable rules and regulations of
the Commission.
(x) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the
effectiveness of a Registration Statement, or (ii) any
suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
-27-
(xi) The Company may require, at any time prior to the
third Trading Day prior to the Filing Date, each Holder to
furnish to the Company a statement as to the number of shares of
Common Stock beneficially owned by such Holder and, if requested
by the Commission, the controlling person thereof, within three
Trading days of the Company's request. During any periods that
the Company is unable to meet its obligations hereunder with
respect to the registration of the Registrable Securities solely
because any Holder fails to furnish such information within
three Trading Days of the Company's request, any liquidated
damages that are accruing at such time shall be tolled and any
Event that may otherwise occur solely because of such delay
shall be suspended, until such information is delivered to the
Company.
(d) REGISTRATION EXPENSES. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall
be borne by the Company whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses
referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to
be made with the Principal Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state
securities or Blue Sky laws reasonably agreed to by the Company in
writing (including, without limitation, fees and disbursements of
counsel for the Company in connection with Blue Sky qualifications or
exemptions of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws
of such jurisdictions as requested by the Holders), (ii) printing
expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses
requested by the Holders), (iii) messenger, telephone and delivery
expenses, (iv) fees and disbursements of counsel for the Company, and
(v) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all
of its internal expenses incurred in connection with the consummation
of the transactions contemplated by this Agreement (including, without
limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit
and the fees and expenses incurred in connection with the listing of
the Registrable Securities on any securities exchange as required
hereunder. In no event shall the Company be responsible for any broker
or similar commissions or, except to the extent provided for in the
Transaction Documents, any legal fees or other costs of the Holders.
(e) INDEMNIFICATION
(i) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and
hold harmless each Holder, the officers, directors, agents,
brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure
to perform under a margin call of Common Stock), investment
advisors and employees of each of them, each Person who controls
any such Holder (within the
-28-
meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act) and the officers, directors, agents
and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and
all losses, claims, damages, liabilities, costs (including,
without limitation, costs of preparation and reasonable
attorneys' fees) and expenses (collectively, "LOSSES"), as
incurred, arising out of or relating to any untrue or alleged
untrue statement of a material fact contained in a Registration
Statement, any prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or
alleged omission of a material fact required to be stated
therein or necessary to make the statements therein (in the case
of any prospectus or form of prospectus or supplement thereto,
in light of the circumstances under which they were made) not
misleading, except to the extent, but only to the extent, that
(1) such untrue statements or omissions or alleged untrue
statements or omissions are based upon information regarding
such Holder furnished in writing to the Company by such Holder
expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder
expressly for use in a Registration Statement, such prospectus
or such form of prospectus or in any amendment or supplement
thereto or (2) in the case of the use by such Holder of an
outdated or defective prospectus after the Company has
notified such Holder in writing that the prospectus is outdated
or defective and prior to the receipt by such Holder of written
notice thereof from the Company. The Company shall notify the
Holders promptly of the institution, threat or assertion of any
action, claim, suit, investigation, or proceeding, whether
threatened or commenced (a "PROCEEDING") arising from or in
connection with the transactions contemplated by this Agreement
of which the Company is aware.
(ii) INDEMNIFICATION BY HOLDERS. Each Holder shall,
severally and not jointly, indemnify and hold harmless the
Company, its directors, officers, agents and employees, each
Person who controls the Company (within the meaning of Section
15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such
controlling Persons, to the fullest extent permitted by
applicable law, from and against all Losses (as determined by a
court of competent jurisdiction in a final judgment not subject
to appeal or review) arising out of or based upon any untrue
statement of a material fact contained in any Registration
Statement, any prospectus, or any form of prospectus, or in any
amendment or supplement thereto, or arising solely out of or
based solely upon: (1) such Holder's failure to comply with the
prospectus delivery requirements of the Securities Act or (2)
any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading to the
extent, but only to the extent, such untrue statement or
omission is contained in any information so furnished in writing
by such Holder to the Company specifically for inclusion in such
Registration Statement or such Prospectus or to the extent that
(1) such untrue statements or omissions are based upon
information regarding such Holder furnished in writing to the
Company by
-29-
such Holder expressly for use therein, or to the extent such
information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such prospectus
or such form of prospectus or in any amendment or supplement
thereto or (2) in the case of an occurrence of an event of the
type specified in Sections 5.13(b)(iv) and 5.13(b)(v), the use
by such Holder of an outdated or defective prospectus after the
Company has notified such Holder in writing that the prospectus
is outdated or defective and prior to the receipt by such Holder
of written notice thereof from the Company. In no event shall
the liability of any selling Holder hereunder be greater in
amount than the dollar amount of the net proceeds received by
such Holder upon the sale of the Registrable Securities giving
rise to such indemnification obligation.
(iii) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any
Proceeding shall be brought or asserted against any Person
entitled to indemnity hereunder (an "INDEMNIFIED PArty"), such
Indemnified Party shall promptly notify the Person from whom
indemnity is sought (the "INDEMNIFYING PARTY") in writing, and
the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to
the Indemnified Party and the payment of all fees and expenses
incurred in connection with defense thereof; provided, that the
failure of any Indemnified Party to give such notice shall not
relieve the Indemnifying Party of its obligations or liabilities
pursuant to this Agreement, except (and only) to the extent that
such failure shall have prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ
separate counsel in any such Proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay
such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to
employ counsel reasonably satisfactory to such Indemnified Party
in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such
Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a
material conflict of interest is likely to exist if the same
counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party
notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying
Party, the Indemnifying Party shall not have the right to assume
the defense thereof and the expense of one such counsel for each
Holder shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any
such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying
Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any
-30-
Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such
Proceeding.
Subject to the terms of this Agreement, all fees and
expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating
or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice
thereof to the Indemnifying Party (regardless of whether it is
ultimately determined that an Indemnified Party is not entitled
to indemnification hereunder; provided, that the Indemnifying
Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally
judicially determined that such Indemnified Party is not
entitled to indemnification hereunder).
(iv) CONTRIBUTION. If a claim for indemnification under
Section 5.13(e)(i) or Section 5.13(e)(ii) is unavailable to an
Indemnified Party (by reason of public policy or otherwise),
then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such Losses, in
such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party and Indemnified Party in connection
with the actions, statements or omissions that resulted in such
Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified
Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or
relates to information supplied by, such Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a
party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in Section 5.13(e)(iii),
any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the
extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was
available to such party in accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5.13(e)(iv)
were determined by pro rata allocation or by any other method of
allocation that does not take into account the equitable
considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section
5.13(e)(iv), no Holder shall be required to contribute, in the
aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the
amount of any
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damages that such Holder has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission
or alleged omission.
The indemnity and contribution agreements contained in
this Section are in addition to any liability that the
Indemnifying Parties may have to the Indemnified Parties.
(f) NO PIGGYBACK ON REGISTRATIONS. Neither the Company nor any
of its security holders (other than the Holders in such capacity
pursuant hereto) may include securities of the Company in the
Registration Statement other than the Registrable Securities and the
securities covered by rights granted to the purchasers of the Company's
private placement of common shares at $1.00 per share (referenced in
Section 3.1(v) above), and the Company shall not after the date hereof
enter into any agreement providing any such right to any of its
security holders. The Company shall not file any other registration
statement on Form S-1 or S-3 until the initial Registration Statement
required hereunder is declared effective by the Commission, provided
that this Section shall not prohibit the Company from filing amendments
to registration statements already filed.
ARTICLE VI
MISCELLANEOUS
6.1 TERMINATION. This Agreement may be terminated by any Purchaser, by
written notice to the other parties, if the Closing has not been consummated on
or before September 9, 2003; provided that no such termination will affect the
right of any party to ▇▇▇ for any breach by the other party (or parties).
6.2 FEES AND EXPENSES. At the Closing, the Company has agreed to
reimburse Crestview Capital Fund II, LP ("Crestview") up to $35,000 for its
legal fees and expenses ($10,000 of which has been received). On the Closing
Date, the Company shall direct the Escrow Agent to wire $25,000 to Crestview as
payment of the remaining portion of the $35,000 referenced above. Except as
expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Company shall pay all transfer agent fees, stamp taxes and other taxes and
duties levied in connection with the issuance of any Securities.
6.3 ENTIRE AGREEMENT. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
6.4 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective
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on the earliest of (a) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number specified on the signature
page attached hereto prior to 5:30 p.m. (Miami time) on a Trading Day and an
electronic confirmation of delivery is received by the sender, (b) the next
Trading Day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number specified in this Section on a
day that is not a Trading Day or later than 5:30 p.m. (Miami time) on any
Trading Day, (c) three Trading Days following the date of mailing, if sent by
U.S. nationally recognized overnight courier service, or (d) upon actual
receipt by the party to whom such notice is required to be given. The addresses
for such notices and communications are those set forth on the signature
pages hereof, or such other address as may be designated in writing hereafter,
in the same manner, by such Person.
6.5 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and each of the Purchasers or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.
6.6 CONSTRUCTION. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
6.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Any Purchaser may assign
its rights under this Agreement to any Person to whom such Purchaser assigns or
transfers any Securities.
6.8 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Sections 4.11 and 4.12.
6.9 GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by and construed and enforced in accordance with the
internal laws of the State of Nevada, without regard to the principles of
conflicts of law thereof. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
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in any manner permitted by law. The parties hereby waive all rights to a trial
by jury. If either party shall commence an action or proceeding to enforce any
provisions of this Agreement, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.
6.10 SURVIVAL. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery, exercise
and/or conversion of the Securities, as applicable for the applicable statue of
limitations.
6.11 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
6.12 SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
6.13 RESCISSION AND WITHDRAWAL RIGHT. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights; PROVIDED,
HOWEVER, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such rescinded conversion or exercise notice.
6.14 REPLACEMENT OF SECURITIES. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
6.15 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be
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entitled to specific performance under the Transaction Documents. The parties
agree that monetary damages may not be adequate compensation for any loss
incurred by reason of any breach of obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.
6.16 PAYMENT SET ASIDE. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
6.17 USURY. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "MAXIMUM RATE"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.
6.18 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a
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group with respect to such obligations or the transactions contemplated by the
Transaction Document. Each Purchaser shall be entitled to independently
protect and enforce its rights, including without limitation the rights arising
out of this Agreement or out of the other Transaction Documents, and it shall
not be necessary for any other Purchaser to be joined as an additional party
in any proceeding for such purpose. Each Purchaser has been represented by its
own separate legal counsel in their review and negotiation of the Transaction
Documents. For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through FW. FW
does not represent all of the Purchasers but only Crestview. The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.
6.19 LIQUIDATED DAMAGES. The Company's obligations to pay any
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such liquidated damages or
other amounts are due and payable shall have been canceled.
***********************
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IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
GALAXY ENERGY CORPORATION
By:________________________________________
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: President
ADDRESS FOR NOTICE:
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇, President
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to:
(which shall not constitute notice) ▇▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇, P.C.
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
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PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
CRESTVIEW CAPITAL FUND II, LP
By:__________________________
Name:
Title:
SUBSCRIPTION AMOUNT: $
NUMBER OF WARRANTS:
ADDRESS FOR NOTICE:
Crestview Capital Funds
▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax: ▇▇▇-▇▇▇-▇▇▇▇
WITH A COPY TO:
(which shall not constitute notice) ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
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[PURCHASER'S SIGNATURE PAGE CONTINUED]
Purchaser Name:
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Signature:
----------------------------------------------------------
Name of Signatory:
----------------------------------------------------------
Title of Signatory:
----------------------------------------------------------
Subscription Amount: $
-----------------------------------
Number of Warrants:
-----------------------------------
Address for Notice:
----------------------------------------------------------
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Fax Number:
----------------------------------------------------------
With a copy to:
----------------------------------------------------------
(which shall not constitute notice)
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