PATH 1 NETWORK TECHNOLOGIES INC.
SECURITIES PURCHASE AGREEMENT
November 7, 2002
TABLE OF CONTENTS
Page
1. AGREEMENT TO SELL AND PURCHASE..............................................1
2. FEES AND WARRANT............................................................1
3. CLOSING, DELIVERY AND PAYMENT...............................................2
3.1 Closing......................................................2
3.2 Delivery.....................................................2
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................3
4.1 Organization, Good Standing and Qualification................3
4.2 Subsidiaries.................................................3
4.3 Capitalization; Voting Rights................................3
4.4 Authorization; Binding Obligations...........................4
4.5 Liabilities..................................................4
4.6 Agreements; Action...........................................4
4.7 Obligations to Related Parties...............................5
4.8 Changes......................................................5
4.9 Title to Properties and Assets; Liens, Etc...................7
4.10 Intellectual Property........................................7
4.11 Compliance with Other Instruments............................7
4.12 Litigation...................................................8
4.13 Tax Returns and Payments.....................................8
4.14 Employees....................................................8
4.15 Registration Rights and Voting Rights........................8
4.16 Compliance with Laws; Permits................................9
4.17 Environmental and Safety Laws................................9
4.18 Valid Offering...............................................9
4.19 Full Disclosure..............................................9
4.20 Insurance...................................................10
4.21 SEC Reports.................................................10
4.22 No Market Manipulation......................................10
4.23 Listing.....................................................10
4.24 No Integrated Offering......................................10
4.25 Stop Transfer...............................................10
4.26 Dilution....................................................11
5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS...........................11
5.1 Requisite Power and Authority...............................11
5.2 Investment Representations..................................11
5.3 Purchaser Bears Economic Risk...............................11
5.4 Acquisition for Own Account.................................11
5.5 Purchaser Can Protect Its Interest..........................11
5.6 Accredited Investor.........................................12
5.7 Legends.....................................................12
5.8 No Shorting.................................................12
5.9 Distribution of Registered Shares...........................12
6. COVENANTS OF THE COMPANY...................................................13
6.1 Stop-Orders.................................................13
6.2 Listing.....................................................13
6.3 Market Regulations..........................................13
6.4 Reporting Requirements......................................13
6.5 Use of Funds................................................14
6.6 Access to Facilities........................................14
6.7 Taxes.......................................................14
6.8 Insurance...................................................14
6.9 Intellectual Property.......................................14
6.10 Properties..................................................14
6.11 Confidentiality.............................................15
6.12 Required Approvals..........................................15
6.13 Reissuance of Securities....................................15
6.14 Opinion.....................................................16
7. COVENANTS OF THE COMPANY AND PURCHASERS REGARDING INDEMNIFICATION..........16
7.1 Company Indemnification.....................................16
7.2 Purchaser's Indemnification.................................16
7.3 Procedures..................................................16
8. CONVERSION OF CONVERTIBLE NOTE.............................................16
8.1 Mechanics of Conversion.....................................17
8.2 Mandatory Redemption........................................18
8.3 Maximum Conversion..........................................18
8.4 Injunction - Posting of Bond................................18
8.5 Buy-In......................................................19
8.6 Optional Redemption.........................................19
9. REGISTRATION RIGHTS........................................................20
9.1 Registration Rights Granted.................................20
9.2 Registration Procedures.....................................21
9.3 Provision of Documents......................................22
9.4 Non-Registration Events.....................................23
9.5 Expenses....................................................24
9.6 Indemnification and Contribution............................24
10. OFFERING RESTRICTIONS.....................................................26
11. SECURITY INTEREST.........................................................26
12. MISCELLANEOUS.............................................................26
12.1 Governing Law...............................................26
12.2 Survival....................................................27
12.3 Successors and Assigns......................................27
12.4 Entire Agreement............................................27
12.5 Severability................................................27
12.6 Amendment and Waiver........................................27
12.7 Delays or Omissions.........................................27
12.8 Notices.....................................................28
12.9 Attorneys' Fees.............................................28
12.10 Titles and Subtitles........................................28
12.11 Counterparts................................................28
12.12 Broker's Fees...............................................28
12.13 Indemnification.............................................28
12.14 Construction................................................28
PATH 1 NETWORK TECHNOLOGIES INC.
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of November 7th, 2002, by and among Path 1 Network Technologies Inc., a
Delaware corporation (the "Company"), and Laurus Master Fund, Ltd. a Cayman
Islands company (the "Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale of a 12% Convertible Note in
an aggregate principal amount of $300,000 (the "Note"), convertible into shares
of the Company's common stock, $0.001 par value per share (the "Common Stock");
WHEREAS, the Company wishes to issue a warrant (the "Warrant") to the
Purchaser to purchase shares of the Company's Common Stock in connection with
Purchaser's purchase of the Note;
WHEREAS, Purchaser desires to purchase the Note and Warrant on the terms
and conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Note and Warrant to
Purchaser on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE. Pursuant to the terms and conditions set
forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to
purchase from the Company a Note in the amount of $300,000 convertible in
accordance with the terms thereof into shares of the Company's Common Stock. The
Note purchased on the Closing Date shall be known as the "Offering." The form of
Note is annexed hereto as Exhibit A. The Note will have a Maturity Date (as
defined in the Note) eighteen months from the date of issuance. Collectively,
the Note and Warrant (as defined in Section 2) and Common Stock issuable in
payment of the Note upon conversion of the Note and upon exercise of the Warrant
are referred to as the "Securities."
2. FEES AND WARRANT.
(a) The Company will issue and deliver to the Purchaser a Warrant to
purchase 75,000 shares of Common Stock in connection with the Offering (the
"Warrant") pursuant to Section 1 hereof. The Warrant must be delivered on the
Closing Date. A form of Warrant is annexed hereto as Exhibit B. The per share
"Purchase Price" of Common Stock as defined in the Warrant shall be equal to $
..85, subject to adjustment as described therein. All the representations,
covenants, warranties, undertakings, and indemnification, and other rights made
or granted to or for the benefit of the Purchaser by the Company are hereby also
made and granted in respect of the Warrant and shares of the Company's Common
Stock issuable upon exercise of the Warrant (the "Warrant Shares").
(b) The Company shall reimburse the Purchaser for its reasonable legal fees
for services rendered to the Purchaser in preparation of this Agreement and the
Related Agreements, and expenses in connection with the Purchaser's due
diligence review of the Company and relevant matters. Amounts required to be
paid hereunder will be paid at the Closing and shall not exceed $2,500.
(c) The Company will pay a cash fee in the amount of ten percent (10%) of
the aggregate gross purchase price to be paid to the Company from the sale of
Note in the Offering (the "Fund Management Fee") to Laurus Capital Management,
L.L.C., a Delaware limited liability company. The Fund Management Fee must be
paid on the Closing Date. The aforementioned Fund Management Fee and legal fees
will be payable at the Closing out of funds held pursuant to a Funds Escrow
Agreement to be entered into by the Company, Purchaser and an Escrow Agent.
3. CLOSING, DELIVERY AND PAYMENT.
3.1 Closing. Subject to the terms and conditions herein, the closing of the
transactions contemplated hereby (the "Closing"), which closing is comprised of
Purchaser's purchase of Note in the aggregate principal amount of $300,000,
shall take place on the date hereof, at the offices of ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.,
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, or at such other time
or place as the Company and Purchaser may mutually agree (such date is
hereinafter referred to as the "Closing Date").
3.2 Delivery. At the Closing, subject to the terms and conditions hereof,
the Company will deliver to the Purchaser a Note in the form attached as Exhibit
A representing the principal amount of $300,000 and a Common Stock Purchase
Warrant in the form attached as Exhibit B in the Purchaser's name representing
75,000 Warrant Shares and the Purchaser will deliver to the Company $300,000,
less fees and expenses by certified funds or wire transfer made payable to the
order of the Company, cancellation of indebtedness or any combination of the
foregoing.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to the Purchaser as of the date
of this Agreement as set forth below.
4.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has the corporate power and authority to
own and operate its properties and assets, to execute and deliver this
Agreement, the Warrant to be issued in connection with this Agreement, the Funds
Escrow Agreement, the Security Agreement and all other agreements referred to
herein (collectively, the "Related Agreements"), to issue and sell the Note and
the shares of Common Stock issuable upon conversion of the Note (the "Conversion
Shares"), to issue and sell the Warrant and the Warrant Shares, and to carry out
the provisions of this Agreement and the Related Agreements and to carry on its
business as presently conducted. The Company is duly qualified and is authorized
to do business and is in good standing as a foreign corporation in all
jurisdictions in which the nature of its activities and of its properties (both
owned and leased) makes such qualification necessary, except for those
jurisdictions in which failure to do so would not have a material adverse effect
on the Company or its business.
4.2 Subsidiaries. Except as disclosed on Schedule 4.2, the Company does not
own or control any equity security or other interest of any other corporation,
limited partnership or other business entity. If any entity is listed on
Schedule 4.2 and the Company owns a controlling interest in such entity, each of
the representations and warranties set forth in this Section 4 are being hereby
restated with respect to such entity (modified as appropriate to the nature of
such entity.)
4.3 Capitalization; Voting Rights.
(a) The authorized capital stock of the Company, immediately prior to the
Closing, consists of (i) 10,000,000 shares of Common Stock, par value $0.001 per
share and (ii) 20,000,000 shares of Class B Common Stock, par value $0.001 per
share, [8,440,275] shares of Common Stock of which are issued and outstanding.
(b) Other than (i) the shares reserved for issuance under the Company's
stock option plans; and (ii) shares which may be granted pursuant to this
Agreement and the Related Agreements, there are no outstanding options,
warrants, rights (including conversion or preemptive rights and rights of first
refusal), proxy or stockholder agreements, or arrangements or agreements of any
kind for the purchase or acquisition from the Company of any of its securities.
Neither the offer, issuance or sale of any of the Note or Warrant, or the
issuance of any of the Conversion Shares or Warrant Shares, nor the consummation
of any transaction contemplated hereby will result in a change in the price or
number of any securities of the Company outstanding, under anti-dilution or
other similar provisions contained in or affecting any such securities.
(c) All issued and outstanding shares of the Company's Common Stock (i)
have been duly authorized and validly issued and are fully paid and
nonassessable and (ii) were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) The rights, preferences, privileges and restrictions of the shares of
the Common Stock are as stated in the Certificate of Incorporation (the
"Charter"). The Conversion Shares and Warrant Shares have been duly and validly
reserved for issuance. When issued in compliance with the provisions of this
Agreement and the Company's Charter, the Securities will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Securities may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein or as
otherwise required by such laws at the time a transfer is proposed.
4.4 Authorization; Binding Obligations. All corporate action on the part of
the Company, its officers, directors and stockholders necessary for the
authorization of this Agreement and the Related Agreements, the performance of
all obligations of the Company hereunder at the Closing and the authorization,
sale, issuance and delivery of the Securities pursuant hereto and the Related
Agreements has been taken or will be taken prior to the Closing. The Agreement
and the Related Agreements, when executed and delivered, will be valid and
binding obligations of the Company enforceable in accordance with their terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights, and (b) general principles of equity that restrict the
availability of equitable remedies. The sale of the Note and the subsequent
conversion of the Note into Conversion Shares are not and will not be subject to
any preemptive rights or rights of first refusal that have not been properly
waived or complied with. The sale of the Warrant and the subsequent exercise of
the Warrant for Warrant Shares are not and will not be subject to any preemptive
rights or rights of first refusal that have not been properly waived or complied
with. The Note and the Warrant, when executed and delivered in accordance with
the terms of this Agreement, will be valid and binding obligations of the
Company, enforceable in accordance with their respective terms.
4.5 Liabilities. The Company has no material liabilities and, to the best
of its knowledge, knows of no material contingent liabilities, except current
liabilities incurred in the ordinary course of business which have not been,
either in any individual case or in the aggregate, material.
4.6 Agreements; Action.
(a) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or to its knowledge by which it is bound which may involve (i)
obligations (contingent or otherwise) of, or payments to, the Company in excess
of $50,000 (other than obligations of, or payments to, the Company arising from
purchase or sale agreements entered into in the ordinary course of business), or
(ii) the transfer or license of any patent, copyright, trade secret or other
proprietary right to or from the Company (other than licenses arising from the
purchase of "off the shelf" or other standard products), or (iii) provisions
restricting the development, manufacture or distribution of the Company's
products or services, or (iv) indemnification by the Company with respect to
infringements of proprietary rights, or (v) the Company's default judgment
against a foreign individual, for $3.5 million and related costs, issued by a
court in San Diego in October 2002.
(b) The Company has not (i) declared or paid any dividends, or authorized
or made any distribution upon or with respect to any class or series of its
capital stock, (ii) incurred any indebtedness for money borrowed or any other
liabilities individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of $100,000 in the
aggregate (other than trade payables in the ordinary course of business), (iii)
made any loans or advances to any person, other than ordinary advances for
travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary course of
business.
(c) For the purposes of subsections (a) and (b) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
the Company has reason to believe are affiliated therewith) shall be aggregated
for the purpose of meeting the individual minimum dollar amounts of such
subsections.
4.7 Obligations to Related Parties. There are no obligations of the Company
to officers, directors, stockholders or employees of the Company other than (a)
for payment of salary for services rendered, (b) reimbursement for reasonable
expenses incurred on behalf of the Company, (c) for other standard employee
benefits made generally available to all employees (including stock option
agreements outstanding under any stock option plan approved by the Board of
Directors of the Company) and (d) obligations listed in the Company's financial
statements. None of the officers, directors or stockholders of the Company, or
any members of their immediate families, are indebted to the Company. Except as
described above, none of the officers, directors or, to the best of the
Company's knowledge, key employees or stockholders of the Company or any members
of their immediate families, are indebted to the Company or have any direct or
indirect ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company, other than passive investments in
publicly traded companies (representing less than 1% of such company) which may
compete with the Company. Except as described above, no officer, director or
stockholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company and no
agreements, understandings or proposed transactions are contemplated between the
Company and any such person. The Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
4.8 Changes. Since June 30, 2002, there has not been:
(a) Any change in the assets, liabilities, financial condition, prospects
or operations of the Company, other than changes in the ordinary course of
business, none of which individually or in the aggregate has had or is
reasonably expected to have a material adverse effect on such assets,
liabilities, financial condition, prospects or operations of the Company;
(b) Any resignation or termination of any officer, key employee or group of
employees of the Company, except for two officers who are voluntarily leaving
the Company;
(c) Any material adverse change, except in the ordinary course of business,
in the contingent obligations of the Company by way of guaranty, endorsement,
indemnity, warranty or otherwise;
(d) Any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the properties, business or prospects or
financial condition of the Company;
(e) Any waiver by the Company of a valuable right or of a material debt
owed to it;
(f) Any direct or indirect loans made by the Company to any stockholder,
employee, officer or director of the Company, other than advances made in the
ordinary course of business;
(g) Any material adverse change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(h) Any declaration or payment of any dividend or other distribution of the
assets of the Company;
(i) Any labor organization activity related to the Company;
(j) Any debt, obligation or liability incurred, assumed or guaranteed by
the Company, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;
(k) Any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(l) Any change in any material agreement to which the Company is a party or
by which it is bound which may have a material adverse change on the business,
assets, liabilities, financial condition, operations or prospects of the
Company;
(m) Any other event or condition of any character that, either individually
or cumulatively, has or may materially and adversely affect the business,
assets, liabilities, financial condition, prospects or operations of the
Company; or
(n) Any arrangement or commitment by the Company to do any of the acts
described in subsection (a) through (m) above.
4.9 Title to Properties and Assets; Liens, Etc. The Company has good and
marketable title to its properties and assets, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than (a) those resulting from taxes which have not yet become
delinquent, (b) minor liens and encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the
operations of the Company, and (c) those that have otherwise arisen in the
ordinary course of business. All facilities, machinery, equipment, fixtures,
vehicles and other properties owned, leased or used by the Company are in good
operating condition and repair and are reasonably fit and usable for the
purposes for which they are being used. The Company is in compliance with all
material terms of each lease to which it is a party or is otherwise bound.
4.10 Intellectual Property.
(a) The Company owns or possesses sufficient legal rights to all patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes necessary for its
business as now conducted and to the Company's knowledge as presently proposed
to be conducted (the "Intellectual Property"), without any known infringement of
the rights of others. There are no outstanding options, licenses or agreements
of any kind relating to the foregoing proprietary rights, nor is the Company
bound by or a party to any options, licenses or agreements of any kind with
respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and other proprietary rights and processes
of any other person or entity other than such licenses or agreements arising
from the purchase of "off the shelf" or standard products.
(b) The Company has not received any communications alleging that the
Company has violated any of the patents, trademarks, service marks, trade names,
copyrights or trade secrets or other proprietary rights of any other person or
entity, nor is the Company aware of any basis therefor.
(c) The Company does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by the Company, except for inventions, trade
secrets or proprietary information that have been rightfully assigned to the
Company.
4.11 Compliance with Other Instruments. The Company is not in any known
violation or default of any term of the Charter or Bylaws, or of any provision
of any mortgage, indenture, contract, agreement, instrument or contract to which
it is party or by which it is bound or of any judgment, decree, order or writ.
The execution, delivery and performance of and compliance with this Agreement
and the Related Agreements, and the issuance and sale of Securities pursuant
hereto, will not, with or without the passage of time or giving of notice,
result in any such known material violation, or be in conflict with or
constitute a default under any such term or provision, or result in the creation
of any mortgage, pledge, lien, encumbrance or charge upon any of the properties
or assets of the Company or the suspension, revocation, impairment, forfeiture
or nonrenewal of any permit, license, authorization or approval applicable to
the Company, its business or operations or any of its assets or properties.
4.12 Litigation. There is no action, suit, proceeding or investigation
pending or, to the Company's knowledge, currently threatened against the Company
that questions the validity of this Agreement or the Related Agreements or the
right of the Company to enter into any of such agreements, or to consummate the
transactions contemplated hereby or thereby, or which might result, either
individually or in the aggregate, in any material adverse change in the assets,
condition, affairs or prospects of the Company, financially or otherwise, or any
change in the current equity ownership of the Company, nor is the Company aware
that there is any basis for any of the foregoing. The Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate, other than the Company's $3.5 million default
judgment awarded to it against a foreign defendant.
4.13 Tax Returns and Payments. The Company has timely filed all tax returns
(federal, state and local) required to be filed by it. All taxes shown to be due
and payable on such returns, any assessments imposed, and to the Company's
knowledge all other taxes due and payable by the Company on or before the
Closing, have been paid or will be paid prior to the time they become
delinquent. The Company has not been advised (a) that any of its returns,
federal, state or other, have been or are being audited as of the date hereof,
or (b) of any deficiency in assessment or proposed judgment to its federal,
state or other taxes. The Company has no knowledge of any liability of any tax
to be imposed upon its properties or assets as of the date of this Agreement
that is not adequately provided for.
4.14 Employees. The Company has no collective bargaining agreements with
any of its employees. There is no labor union organizing activity pending or, to
the Company's knowledge, threatened with respect to the Company. The Company is
not a party to or bound by any currently effective employment contract, deferred
compensation arrangement, bonus plan, incentive plan, profit sharing plan,
retirement agreement or other employee compensation plan or agreement. To the
Company's knowledge, no employee of the Company, nor any consultant with whom
the Company has contracted, is in violation of any term of any employment
contract, proprietary information agreement or any other agreement relating to
the right of any such individual to be employed by, or to contract with, the
Company because of the nature of the business to be conducted by the Company;
and to the Company's knowledge the continued employment by the Company of its
present employees, and the performance of the Company's contracts with its
independent contractors, will not result in any such violation. The Company is
not aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with their duties to the Company. The Company has not received
any notice alleging that any such violation has occurred. No employee of the
Company has been granted the right to continued employment by the Company or to
any material compensation following termination of employment with the Company.
The Company is not aware that any officer, key employee or group of employees
intends to terminate his, her or their employment with the Company, nor does the
Company have a present intention to terminate the employment of any officer, key
employee or group of employees, other than its chief accounting officer and
executive director of operations.
4.15 Registration Rights and Voting Rights. The Company is presently not
under any obligation, and has not granted any rights, to register any of the
Company's presently outstanding securities or any of its securities that may
hereafter be issued. To the Company's knowledge, no stockholder of the Company
has entered into any agreement with respect to the voting of equity securities
of the Company.
4.16 Compliance with Laws; Permits. To its knowledge, the Company is not in
violation of any applicable statute, rule, regulation, order or restriction of
any domestic or foreign government or any instrumentality or agency thereof in
respect of the conduct of its business or the ownership of its properties which
violation would materially and adversely affect the business, assets,
liabilities, financial condition, operations or prospects of the Company. No
governmental orders, permissions, consents, approvals or authorizations are
required to be obtained and no registrations or declarations are required to be
filed in connection with the execution and delivery of this Agreement and the
issuance of any of the Securities, except such as has been duly and validly
obtained or filed, or with respect to any filings that must be made after the
Closing, as will be filed in a timely manner. The Company has all franchises,
permits, licenses and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could materially and
adversely affect the business, properties, prospects or financial condition of
the Company.
4.17 Environmental and Safety Laws. The Company is not in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety, and to its knowledge, no material expenditures
are or will be required in order to comply with any such existing statute, law
or regulation. No Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by the Company or, to the Company's knowledge, by
any other person or entity on any property owned, leased or used by the Company.
For the purposes of the preceding sentence, "Hazardous Materials" shall mean (a)
materials which are listed or otherwise defined as "hazardous" or "toxic" under
any applicable local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property, the protection
of the environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials, or (b)
any petroleum products or nuclear materials.
4.18 Valid Offering. Assuming the accuracy of the representations and
warranties of the Purchaser contained in this Agreement, the offer, sale and
issuance of the Securities will be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and will have
been registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws. Neither the Company nor any agent on its behalf has
solicited or will solicit any offers to sell or has offered to sell or will
offer to sell all or any part of the Securities to any person or persons so as
to bring the sale of such Securities by the Company within the registration
provisions of the Securities Act or any state securities laws.
4.19 Full Disclosure. The Company has provided the Purchaser with all
information requested by the Purchaser in connection with its decision to
purchase the Note and Warrant, including all information the Company believes is
reasonably necessary to make such investment decision. Neither this Agreement,
the exhibits and schedules hereto, the Related Agreements nor any other document
delivered by the Company to Purchaser or its attorneys or agents in connection
herewith or therewith or with the transactions contemplated hereby or thereby,
contain any known untrue statement of a material fact nor omit to state a known
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances in which they are made, not misleading.
Any financial projections and other estimates provided to the Purchaser by the
Company were based on the Company's experience in the industry and on
assumptions of fact and opinion as to future events which the Company, at the
date of the issuance of such projections or estimates, believed to be
reasonable. As of the date hereof no facts have come to the attention of the
Company that would, in its opinion, require the Company to revise or amplify in
any material respect the assumptions underlying such projections and other
estimates or the conclusions derived therefrom.
4.20 Insurance. The Company has general commercial, product liability, fire
and casualty insurance policies with coverage customary for companies similarly
situated to the Company.
4.21 SEC Reports. The Company has filed all proxy statements, reports and
other documents required to be filed by it under the Exchange Act including (i)
its Annual Report on Form 10-K for the fiscal year ended December 31, 2001, (ii)
its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 30, 2002
and June 30, 2002 and (iii) its Proxy Statement dated May 7, 2002 (collectively,
the "SEC Reports"). Each SEC Report was in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as of
their respective dates, contained any known untrue statement of a material fact
or omitted 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.
4.22 No Market Manipulation. The Company has not taken, and will not take,
directly or indirectly, any action designed to, or that might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
the Common Stock of the Company to facilitate the sale or resale of any of the
Securities being offered hereby or affect the price at which any of the
Securities being offered hereby may be issued.
4.23 Listing. The Company's Common Stock is listed for trading on the OTC
Bulletin Board and satisfies all requirements for the continuation of such
listing. The Company has not received any notice that its Common Stock will be
delisted from the OTC Bulletin Board or that the Common Stock does not meet all
requirements for the continuation of such listing.
4.24 No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the Securities Act which would prevent the Company
from selling the Securities pursuant to Rule 506 under the Securities Act, or
any applicable exchange-related stockholder approval provisions. Nor will the
Company or any of its affiliates or subsidiaries take any action or steps that
would cause the offering of the Securities to be integrated with other
offerings.
4.25 Stop Transfer. The Securities are restricted securities as of the date
of this Agreement. The Company will not issue any stop transfer order or other
order impeding the sale and delivery of any of the Securities at such time as
the Securities are registered for public sale or an exemption from registration
is available, except as required by federal securities laws.
4.26 Dilution. The number of shares of Common Stock issuable upon
conversion of the Note and exercise of the Warrant may increase substantially in
certain circumstances, including, but not necessarily limited to, the
circumstance wherein the trading price of the Common Stock declines prior to
conversion or exercise of such securities. The Company's executive officers and
directors have studied and fully understand the nature of the Securities being
sold hereby and recognize that they have a potential dilutive effect. The Board
of Directors of the Company has concluded, in its good faith business judgment,
that such issuance is in the best interests of the Company. The Company
specifically acknowledges that its obligation to issue the shares of Common
Stock upon conversion of the Note and exercise of the Warrant is binding upon
the Company and enforceable regardless of the dilution such issuance may have on
the ownership interests of other shareholders of the Company.
5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser hereby represents and warrants to the Company with respect to
itself or himself as follows (such representations and warranties do not lessen
or obviate the representations and warranties of the Company set forth in this
Agreement):
5.1 Requisite Power and Authority. Purchaser has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Related Agreements and to carry out their provisions. All
action on Purchaser's part required for the lawful execution and delivery of
this Agreement and the Related Agreements have been or will be effectively taken
prior to the Closing. Upon their execution and delivery, this Agreement and the
Related Agreements will be valid and binding obligations of Purchaser,
enforceable in accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, and (b) as limited by
general principles of equity that restrict the availability of equitable
remedies.
5.2 Investment Representations. Purchaser understands that the Securities
are being offered and sold pursuant to an exemption from registration contained
in the Securities Act based in part upon Purchaser's representations contained
in the Agreement.
5.3 Purchaser Bears Economic Risk. Purchaser has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Company so that it is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect its
own interests. Purchaser must bear the economic risk of this investment until
the Securities are registered pursuant to the Securities Act, or an exemption
from registration is available.
5.4 Acquisition for Own Account. Purchaser is acquiring the Note for
Purchaser's own account for investment only, and not with a view towards their
distribution.
5.5 Purchaser Can Protect Its Interest. Purchaser represents that by reason
of its, or of its management's, business or financial experience, Purchaser has
the capacity to protect its own interests in connection with the transactions
contemplated in this Agreement, and the Related Agreements. Further, Purchaser
is aware of no publication of any advertisement in connection with the
transactions contemplated in the Agreement.
5.6 Accredited Investor. Purchaser represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
5.7 Legends.
(a) The Note shall bear the following legend until the Note and Conversion
Shares are covered by an effective registration statement filed with the SEC:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF
APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PATH 1 NETWORK
TECHNOLOGIES INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) The Conversion Shares and the Warrant Shares shall bear a legend which
shall be in substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE, STATE SECURITIES
LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PATH 1 NETWORK TECHNOLOGIES INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(c) The Warrant shall bear the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER
SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PATH 1 NETWORK TECHNOLOGIES INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
5.8 No Shorting. The Purchaser will not and will not cause any person or
entity to engage in "short sales" of the Company's Common Stock.
5.9 Distribution of Registered Shares. The Purchaser agrees not to sell on
a monthly basis more than 20% of the volume of the shares of the Common Stock
traded during such month on the Principal Market on which the shares of Common
Stock are listed for trading. Notwithstanding the foregoing, if the Purchaser
has not used its 20% allotment in a given month, it may carry forward such
allotment for up to 5 trading days of the following month.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Purchaser as follows:
6.1 Stop-Orders. The Company will advise the Purchaser, promptly after it
receives notice of issuance by the Securities and Exchange Commission (the
"SEC"), any state securities commission or any other regulatory authority of any
stop order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of the qualification of the
Common Stock of the Company for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purpose.
6.2 Listing. The Company shall promptly secure the listing of the shares of
Common Stock issuable upon conversion of the Note and upon the exercise of the
Warrant upon the Principal Market upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain such listing
so long as any other shares of Common Stock shall be so listed. The Company will
maintain the listing of its Common Stock on a Principal Market, and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the National Association of Securities Dealers ("NASD")
and such exchanges, as applicable. The Company will provide the Purchaser copies
of all notices it receives notifying the Company of the threatened and actual
delisting of the Common Stock from any Principal Market.
6.3 Market Regulations. The Company shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to Purchaser
and promptly provide copies thereof to Purchaser.
6.4 Reporting Requirements. The Company will timely file with the SEC all
reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination. In addition, within 15 days after the end of each
calendar month, the Company will provide to the Purchaser a monthly cash flow
statement for the immediately preceding month.
6.5 Use of Funds. The Company agrees that it will use the proceeds of the
sale of the Note and Warrant for general corporate purposes only, in the
ordinary course of its business and consistent with past practice and, without
limiting the generality of the foregoing, shall not use such proceeds to make a
loan to any employee, officer, director or stockholder of the Company, to repay
any loan or other obligation of the Company or to repurchase or pay a dividend
on shares of Common Stock or other securities of the Company (in any such case,
regardless of whether such loan or payment was authorized by the Company's Board
of Directors prior to the date hereof), other than any such repurchase or
payment explicitly required, permitted or contemplated by the terms of this
Agreement or the other Related Agreements.
6.6 Access to Facilities. The Company will permit any representatives
designated by the Purchaser (or any transferee of the Purchaser), so long as
such person holds any Securities upon reasonable notice and during normal
business hours, at such person's expense and accompanied by a representative of
the Company, to (a) visit and inspect any of the properties of the Company, (b)
examine the corporate and financial records of the Company (unless such
examination is not permitted by federal, state or local law or by contract) and
make copies thereof or extracts therefrom and (c) discuss the affairs, finances
and accounts of any such corporations with the directors, officers and
independent accountants of the Company.
6.7 Taxes. The Company will promptly pay and discharge, or cause to be paid
and discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, property or
business of the Company; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books adequate reserves with respect thereto, and provided,
further, that the Company will pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefor.
6.8 Insurance. The Company will keep its assets which are of an insurable
character insured by financially sound and reputable insurers against loss or
damage by fire, explosion and other risks customarily insured against by
companies in the Company's line of business, in amounts sufficient to prevent
the Company from becoming a co-insurer and not in any event less than 100% of
the insurable value of the property insured; and the Company will maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated and to the
extent available on commercially reasonable terms.
6.9 Intellectual Property. The Company shall maintain in full force and
effect its corporate existence, rights and franchises and all licenses and other
rights to use Intellectual Property owned or possessed by it and reasonably
deemed to be necessary to the conduct of its business.
6.10 Properties. The Company will keep its properties in good repair,
working order and condition, reasonable wear and tear excepted, and from time to
time make all needful and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have a
material adverse effect.
6.11 Confidentiality. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Purchaser, unless
expressly agreed to by the Purchaser or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.
6.12 Required Approvals. For so long as at least 40% of the principal
amount of the Note is outstanding, the Company, without the prior written
consent of the Purchaser, shall not:
(a) directly or indirectly declare or pay any dividends or make any
distributions upon any of its capital stock or other equity securities (or any
securities directly or indirectly convertible into or exercisable or
exchangeable for equity securities);
(b) liquidate, dissolve or effect a recapitalization, reclassification or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other
non-corporate entity which is treated as a partnership for federal income tax
purposes or a stock split or "reverse" stock split of the Common Stock);
(c) create, incur, assume or suffer to exist indebtedness exceeding an
aggregate principal amount of $750,000 outstanding at any time;
(d) become subject to (including, without limitation, by way of amendment
to or modification of) any agreement or instrument which by its terms would
(under any circumstances) restrict the Company's right to perform the provisions
of this Agreement or any of the agreements contemplated thereby;
(e) consent to or implement any termination, amendment, modification,
supplement or waiver of (a) the certificate or articles of incorporation,
bylaws, regulations or other constitutional documents of the Company or any
subsidiary or (b) any material contract to which it is a party; provided,
however, that such documents may be amended or modified if and to the extent
that such amendment or modification is not substantive or material and could not
be adverse to the Company or the Purchaser; or
(f) change the business of the Company from a network communications
technology company.
6.13 Reissuance of Securities. The Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 5.7 above
at such time as (a) the holder thereof is permitted to dispose of such
Securities pursuant to Rule 144(k) under the Securities Act, or (b) upon resale
subject to an effective registration statement after such Securities are
registered under the Securities Act. The Company agrees to cooperate with the
Purchaser in connection with all resales pursuant to Rule 144(d) and Rule 144(k)
and provide legal opinions necessary to allow such resales provided the Company
and its counsel receive reasonably requested representations from the selling
Purchaser and broker, if any.
6.14 Opinion. On the Closing Date, the Company will deliver to the
Purchaser an opinion acceptable to the Purchaser from the Company's legal
counsel in the form annexed hereto as Exhibit D. The Company will provide, at
the Company's expense, such other legal opinions in the future as are reasonably
necessary for the conversion of the Note and exercise of the Warrant.
7. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION.
7.1 Company Indemnification. The Company agrees to indemnify, hold
harmless, reimburse and defend Purchaser, each of Purchaser's officers,
directors, agents, affiliates, control persons, and principal shareholders,
against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser which results, arises out of or is based upon (i) any
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any exhibits or schedules attached hereto or any Related
Agreement, or (ii) any breach or default in performance by Company of any
covenant or undertaking to be performed by Company hereunder, or any other
agreement entered into by the Company and Purchaser relating hereto.
7.2 Purchaser's Indemnification. Purchaser agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company's officers,
directors, agents, affiliates, control persons and principal shareholders, at
all times against any claim, cost, expense, liability, obligation, loss or
damage (including reasonable legal fees) of any nature, incurred by or imposed
upon the Company which results, arises out of or is based upon (i) any
misrepresentation by Purchaser or breach of any warranty by Purchaser in this
Agreement or in any exhibits or schedules attached hereto or any Related
Agreement; or (ii) any breach or default in performance by Purchaser of any
covenant or undertaking to be performed by Purchaser hereunder, or any other
agreement entered into by the Company and Purchaser relating hereto.
7.3 Procedures. The procedures and limitations set forth in Section 9.6
shall apply to the indemnifications set forth in Sections 7.1 and 7.2 above.
8. CONVERSION OF CONVERTIBLE NOTE.
Subject to the provisions of Article III of the Note, the following
provisions shall apply:
8.1 Mechanics of Conversion.
(a) Provided the Purchaser has notified the Company of the Purchaser's
intention to sell the Conversion Shares and the Conversion Shares are included
in an effective registration statement or are otherwise exempt from registration
when sold: (i) Upon the conversion of the Note or part thereof, the Company
shall, at its own cost and expense, take all necessary action (including the
issuance of an opinion of counsel) to assure that the Company's transfer agent
shall issue stock certificates in the name of the Purchaser (or its nominee) or
such other persons as designated by the Purchaser and in such denominations to
be specified representing the number of Conversion Shares issuable upon such
conversion; and (ii) The Company warrants that no instructions other than these
instructions have been or will be given to the transfer agent of the Company's
Common Stock and that the Conversion Shares issued will be unlegended,
free-trading, and freely transferable, and will not contain a legend restricting
the resale or transferability of the Conversion Shares.
(b) Purchaser will give notice of its decision to exercise its right to
convert the Note or part thereof by telecopying or otherwise delivering an
executed and completed notice of the number of shares to be converted to the
Company (the "Notice of Conversion"). The Purchaser will not be required to
surrender the Note until the Purchaser receives a certificate or certificates,
as the case may be, representing the Conversion Shares or until the Note has
been fully satisfied. Each date on which a Notice of Conversion is telecopied or
delivered to the Company in accordance with the provisions hereof shall be
deemed a "Conversion Date." The Company will or will cause the transfer agent to
transmit the Company's Common Stock certificates representing the shares
issuable upon conversion of the Note (and a certificate representing the balance
of the Note not so converted, if requested by Purchaser) to the Purchaser via
express courier for receipt by such Purchaser within three business days after
receipt by the Company of the Notice of Conversion (the "Delivery Date"). In
lieu of delivering physical certificates, provided the Company's transfer agent
is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of the Holder, the Company shall use
commercially reasonably efforts to cause its transfer agent to electronically
transmit such shares to the Purchaser by crediting the account of the
Purchaser's prime broker with DTC through its Deposit Withdrawal Agent
Commission system.
(c) The Company understands that a delay in the delivery of the Conversion
Shares in the form required pursuant to Section 8 hereof, or the Mandatory
Redemption Payment described in Section 8.2 hereof, beyond the Delivery Date or
Mandatory Redemption Payment Date (as defined in Section 8.2) could result in
economic loss to the Purchaser. As compensation to the Purchaser for such loss,
the Company agrees to pay late payments to the Purchaser for late issuance of
the Conversion Shares in the form required pursuant to Section 8 hereof upon
conversion of the Note or late payment of the Mandatory Redemption Payment, in
the amount of $100 per business day after the Delivery Date or Mandatory
Redemption Payment Date, as the case may be, for each $10,000 Note principal
being converted or redeemed. The Company shall pay any payments incurred under
this Section in immediately available funds upon demand. Furthermore, in
addition to any other remedies which may be available to the Purchaser, in the
event that the Company fails for any reason to effect delivery of the Conversion
Shares by the Delivery Date or make payment by the Mandatory Redemption Payment
Date, the Purchaser will be entitled to revoke all or part of the relevant
Notice of Conversion or rescind all or part of the notice of Mandatory
Redemption by delivery of a notice to such effect to the Company whereupon the
Company and the Purchaser shall each be restored to their respective positions
immediately prior to the delivery of such notice, except that late payment
charges described above shall be payable through the date notice of revocation
or rescission is given to the Company.
(d) Nothing contained herein or in any document referred to herein or
delivered in connection herewith shall be deemed to establish or require the
payment of a rate of interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest or dividends
required to be paid or other charges hereunder exceed the maximum amount
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to a Purchaser and thus refunded to the
Company.
8.2 Mandatory Redemption. In the event the Company is unable to issue
Conversion Shares on a Delivery Date, or upon an Event of Default, as defined in
the Note, or at any time when a Note is convertible, for any reason, then at the
Purchaser's election, the Company must pay to the Purchaser five (5) business
days after request by the Purchaser or on the Delivery Date (if requested by the
Purchaser) a sum of money determined by multiplying the principal of the Note
required to be converted and not so converted (or otherwise not convertible, as
applicable) by 130%, together with accrued but unpaid interest thereon
("Mandatory Redemption Payment"). The Mandatory Redemption Payment must be
received by the Purchaser on the same date as the Conversion Shares are
otherwise deliverable or within five (5) business days after request, whichever
is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory
Redemption Payment, the corresponding Note principal and interest will be deemed
paid and no longer outstanding.
8.3 Maximum Conversion. The Purchaser shall not be entitled to convert on a
Conversion Date that amount of a Note in connection with that number of shares
of Common Stock which would be in excess of the sum of (i) the number of shares
of Common Stock beneficially owned by the Purchaser on a Conversion Date, and
(ii) the number of shares of Common Stock issuable upon the conversion of the
Note with respect to which the determination of this proviso is being made on a
Conversion Date, which would result in beneficial ownership by the Purchaser of
more than 4.99% of the outstanding shares of Common Stock of the Company on such
Conversion Date. For the purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and Regulation 13d-3 thereunder. Subject to the
foregoing, a Purchaser shall not be limited to aggregate conversions of only
4.99%. A Purchaser may void the conversion limitation described in this Section
8.3 upon 75 days prior notice to the Company. Upon an Event of Default under the
Note, the conversion limitation in this Section 8.3 shall automatically become
null and void.
8.4 Injunction - Posting of Bond. In the event a Purchaser shall elect to
convert a Note or part thereof, the Company may not refuse conversion for any
reason, unless an injunction from a court, on notice, restraining and or
enjoining conversion of all or part of said Note shall have been sought and
obtained and the Company posts a surety bond for the benefit of such Purchaser
in the amount of 130% of the amount of the Note, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Purchaser to the extent it obtains judgment.
8.5 Buy-In. In addition to any other rights available to the Purchaser, if
the Company fails to deliver to the Purchaser Conversion Shares by the Delivery
Date and if after the Delivery Date the Purchaser purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by such Purchaser of the Common Stock which the Purchaser anticipated
receiving upon such conversion (a "Buy-In"), then the Company shall pay in cash
to the Purchaser (in addition to any remedies available to or elected by such
Purchaser) the amount by which (A) the Purchaser's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the
Note, for which such conversion was not timely honored, together with interest
thereon at a rate of 15% per annum, accruing until such amount and any accrued
interest thereon is paid in full (which amount shall be paid as liquidated
damages and not as a penalty). For example, if the Purchaser purchases shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of $10,000 of Note principal and/or interest,
the Company shall be required to pay the Purchaser $1,000, plus interest. The
Purchaser shall provide the Company written notice indicating the amounts
payable to the Purchaser in respect of the Buy-In.
8.6 Optional Redemption. The Company will have the option of redeeming any
outstanding Note ("Optional Redemption") by paying to Purchaser a sum of money
as follows:
from the Closing Date through 90 days after the Closing Date - 120%
from 91 days through 135 days after the Closing Date - 135%
after 135 days following the Closing Date - 150%
of the principal amount of the Note together with accrued but unpaid interest
and any and all other sums due, accrued or payable to the Purchaser arising
under this Agreement, Note or any other document delivered herewith ("Redemption
Amount") outstanding on the day notice of redemption ("Notice of Redemption) is
given to a Purchaser ("Redemption Date"). A Notice of Redemption may not be
given in connection with any portion of Note for which notice of conversion has
been given by the Purchaser at any time before receipt of a Notice of
Redemption. The Purchaser may elect within five (5) business days after receipt
of a Notice of Redemption to give the Company Notice of Conversion in connection
with some or all of the Note principal and interest which was the subject of the
Notice of Redemption. A Notice of Redemption must be accompanied by a
certificate signed by the chief executive officer or chief financial officer of
the Company stating that the Company has on deposit and segregated ready funds
equal to the Redemption Amount. The Redemption Amount must be paid in good funds
to the Purchaser no later than the seventh (7th) business day after the
Redemption Date ("Optional Redemption Payment Date"). In the event the Company
fails to pay the Redemption Amount by the Optional Redemption Payment Date, then
the Redemption Notice will be null and void and the Company will thereafter have
no further right to effect an Optional Redemption, and at the Purchaser's
election, the Redemption Amount will be deemed a Mandatory Redemption Payment
and the Optional Redemption Payment Date will be deemed a Mandatory Redemption
Payment Date. Such failure will also be deemed an Event of Default under the
Note. Any Notice of Redemption must be given to all holders of Note issued in
connection with the Offering, in proportion to their holdings of Note principal
on a Redemption Date.
9. REGISTRATION RIGHTS.
9.1 Registration Rights Granted. The Company hereby grants the following
registration rights to the Purchaser.
(a) For a period commencing 90 days after the Closing Date, but not later
than four (4) years after the Closing Date (the "Request Date"), the Company,
upon a written request ("Request for Registration") therefore from the Purchaser
(the Conversion Shares and Warrant Shares issued or issuable upon conversion of
the Note or exercise of the Warrant issued hereunder, being, the "Registrable
Securities"), shall prepare and file with the SEC a registration statement under
the Securities Act covering the Registrable Securities which are the subject of
such request, unless the Company has given the Purchaser a Notice of
Registration and/or such Registrable Securities are the subject of an effective
registration statement. As a condition precedent to the Company's preparation
and filing of a registration statement, the Purchaser shall promptly provide the
Company with all such information as the Company reasonably requests. The
obligation of the Company under this Section 9.1 shall be limited to two
registration statements. Notwithstanding the foregoing, if the Note has been
fully converted or redeemed in full, then the Purchaser will not have the
registration rights with respect to the Warrant Shares set forth in this Section
9.1(a).
(b) If the Company at any time proposes to register any of its securities
under the Act for sale to the public, whether for its own account or for the
account of other security holders or both, except with respect to registration
statements on Forms ▇-▇, ▇-▇ or another form not available for registering the
Registrable Securities for sale to the public, provided the Registrable
Securities are not otherwise subject to an effective registration statement, the
Company will give the Purchaser written notice ("Notice of Registration") to
cause such Registrable Securities to be included with the securities to be
covered by the registration statement proposed to be filed by the Company. In
the event that any registration pursuant to this Section 9.1(b) shall be, in
whole or in part, an underwritten public offering of Common Stock of the
Company, the number of shares of Registrable Securities to be included in such
an underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the Company shall notify the
Purchaser in writing of any such reduction. Notwithstanding the forgoing
provisions, or Section 9.1(a) hereof, the Company may withdraw or delay or
suffer a delay of any registration statement referred to in Section 9.1(a) or
(b) without thereby incurring any liability to the Purchaser, so long as the
registration provisions are otherwise complied with by the Company.
(c) If, a Request for Registration is received by the Company pursuant to
Section 9.1(a) and the Company determines to proceed with the preparation and
filing of a registration statement under the Securities Act, such Request for
Registration shall be deemed to have been given pursuant to Section 9.1(b)
rather than Section 9.1(a), and the rights of the Purchaser pursuant to such
Request for Registration shall be governed by Section 9.1(b).
(d) The Company shall file a Form SB-2 registration statement (or such
other form that it is eligible to use) in order to register the Registrable
Securities for resale and distribution under the Securities Act with the SEC
within 30 days of written request from the Purchaser, but in no event shall such
request be made prior to the reduction of the principal amount of the Note,
dated May 16, 2002, to $200,000 (the "Filing Date"), and use its reasonable
commercial efforts to cause such registration statement to be declared effective
within 90 days of the Filing Date (the "Effective Date"). The Company will
register not less than a number of shares of Common Stock in the aforedescribed
registration statement that is equal to the Warrant Shares and 200% of the
Conversion Shares issuable at the Conversion Prices set forth in the Warrant and
Note, respectively, that would be in effect on the Closing Date or the date of
filing of such registration statement (employing the conversion price which
would result in the greater number of Shares), assuming the conversion of 100%
of the Note which are then outstanding or issuable hereunder, and at least one
share of common stock for each common share issuable upon exercise of the
Warrant which are then outstanding or issuable hereunder (employing the
Conversion Price that would result in the greater number of shares). The
Registrable Securities shall be reserved and set aside exclusively for the
benefit of the Purchaser and the holders of the Warrant, as the case may be, and
not issued, employed or reserved for anyone other than the Purchaser and the
holders of the Warrant. Such registration statement will be promptly amended or
additional registration statements will be promptly filed by the Company as
necessary to register additional Company Shares to allow the public resale of
all Common Stock included in and issuable by virtue of the Registrable
Securities. No securities of the Company other than the Registrable Securities
will be included in the registration statement described in this Section 9.1(d).
9.2 Registration Procedures. If and whenever the Company is required by the
provisions hereof to effect the registration of the Registrable Securities under
the Act, the Company will, as expeditiously as possible:
(a) prepare and file with the SEC a registration statement with respect to
such securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as herein provided), and promptly provide to the Purchaser
copies of all filings and SEC letters of comment;
(b) prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective until the later of: (i)
six months after the latest exercise period of the Warrant; (ii) twelve months
after the Maturity Date of the Note or (iii) four years after the Closing Date,
and comply with the provisions of the Securities Act with respect to the
disposition of all of the Registrable Securities covered by such registration
statement in accordance with the Purchaser's intended method of disposition set
forth in such registration statement for such period;
(c) furnish to the Purchaser, and to each underwriter if any, such number
of copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as the Purchaser reasonably may request
to facilitate the public sale or disposition of the securities covered by such
registration statement;
(d) use its best efforts to register or qualify the Purchaser's Registrable
Securities covered by such registration statement under the securities or "blue
sky" laws of such jurisdictions as the Purchaser and in the case of an
underwritten public offering, the managing underwriter shall reasonably request,
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) list the Registrable Securities covered by such registration statement
with any securities exchange on which the Common Stock of the Company is then
listed;
(f) immediately notify the Purchaser and each underwriter under such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
of which the Company has knowledge as a result of which the prospectus contained
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing; and
(g) make available for inspection by the Purchaser, any underwriter
participating in any distribution pursuant to such registration statement, and
any attorney, accountant or other agent retained by the Purchaser or
underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
9.3 Provision of Documents.
(a) In connection with each registration hereunder, the Purchaser will
furnish to the Company in writing such information and representation letters
with respect to itself and the proposed distribution by it as reasonably shall
be necessary in order to assure compliance with federal and applicable state
securities laws. In connection with each registration pursuant to Section 9
covering an underwritten public offering, the Company and the Purchaser agree to
enter into a written agreement with the managing underwriter in such form and
containing such provisions as are customary in the securities business for such
an arrangement between such underwriter and companies of the Company's size and
investment stature.
9.4 Non-Registration Events. The Company and the Purchaser agree that the
Purchaser will suffer damages if any registration statement required under
Section 9.1(a) above is not filed within 30 days after written request by the
holder and not declared effective by the SEC within 90 days after such request,
and maintained in the manner and within the time periods contemplated by Section
9 hereof, and it would not be feasible to ascertain the extent of such damages
with precision. Accordingly, if (i) the Registration Statement described in
Section 9.1(a) is not filed within 30 days of such written request, or is not
declared effective by the SEC on or prior to the date that is 90 days after such
request, or (ii) the registration statement on Form S-3 or such other form as
described in Section 9.1(d) is not filed on or before the Filing Date or not
declared effective on or before the sooner of the Effective Date, or within five
days of receipt by the Company of a communication from the SEC that the
registration statement described in Section 9.1(d) will not be reviewed, or
(iii) any registration statement described in Section 9.1(a) or (d) is filed and
declared effective but shall thereafter cease to be effective (without being
succeeded immediately by an additional registration statement filed and declared
effective) for a period of time which shall exceed 30 days in the aggregate per
year but not more than 20 consecutive calendar days (defined as a period of 365
days commencing on the date the Registration Statement is declared effective)
(each such event referred to in this Section 9.4 is referred to herein as a
"Non-Registration Event"), then, for so long as such Non-Registration Event
shall continue, the Company shall pay in cash as Liquidated Damages to each
holder of any Registrable Securities an amount equal to two percent (2%) per
month or part thereof during the pendency of such Non-Registration Event of the
initial principal amount of the Note issued in connection with the Offering,
whether or not converted, and whether or not redeemed. In the event a Mandatory
Redemption Payment is demanded from the Company by the holder pursuant to
Section 8.2 of this Agreement, then the Liquidated Damages described in this
Section 9.4 shall no longer accrue on the portion of the purchase price
underlying the Mandatory Redemption Payment, from and after the date the holder
receives the Mandatory Redemption Payment. It shall be deemed a Non-Registration
Event to the extent that all the Common Stock included in the Registrable
Securities and underlying the Securities is not included in an effective
registration statement as of and after the Effective Date at the conversion
prices in effect from and after the Effective Date.
9.5 Expenses. All expenses incurred by the Company in complying with
Section 9, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, fees and expenses (including reasonable counsel
fees) incurred in connection with complying with state securities or "blue sky"
laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars,
fees of, and disbursements incurred by, one counsel for the Purchaser, and costs
of insurance are called "Registration Expenses". All underwriting discounts and
selling commissions applicable to the sale of Registrable Securities, including
any fees and disbursements of any special counsel to the Purchaser beyond those
included in Registration Expenses, are called "Selling Expenses."
The Company will pay all Registration Expenses. All Selling Expenses in
connection with each registration statement under Section 9 shall be borne by
the Purchaser.
9.6 Indemnification and Contribution.
(a) In the event of a registration of any Registrable Securities under the
Securities Act pursuant to Section 9, the Company will indemnify and hold
harmless the Purchaser, and its officers, directors and each other person, if
any, who controls the Purchaser within the meaning of the Securities Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Purchaser, or such persons may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Securities were registered under the Securities Act
pursuant to Section 9, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Purchaser, and each such person for any reasonable legal
or other expenses incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by any the Purchaser or any such person in
writing specifically for use in any such document.
(b) In the event of a registration of the Registrable Securities under the
Securities Act pursuant to Section 9, the Purchaser will indemnify and hold
harmless the Company, and its officers, directors and each other person, if any,
who controls the Company within the meaning of the Securities Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement under
which such Registrable Securities were registered under the Securities Act
pursuant to Section 9, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Company and each such person for any reasonable legal or
other expenses incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action, provided, however, that the
Purchaser will be liable in any such case if and only to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished in writing to the Company by the Purchaser
specifically for use in any such document.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 9.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 9.6(c) if and to the extent the indemnifying party is prejudiced by
such omission. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9.6(c) for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the indemnifying
party or if the interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the indemnified parties
shall have the right to select one separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable expenses and fees of such separate counsel and other expenses related
to such participation to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in the event of
joint liability under the Securities Act in any case in which either (i) the
Purchaser, or any controlling person of the Purchaser, makes a claim for
indemnification pursuant to this Section 9.6 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 9.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Purchaser or controlling person of the Purchaser in circumstances for which
indemnification is provided under this Section 9.6; then, and in each such case,
the Company and the Purchaser will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that the Purchaser is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (A) the Purchaser will not be required to
contribute any amount in excess of the public offering price of all such
securities offered by it pursuant to such registration statement; and (B) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 10(f) of the Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
10. OFFERING RESTRICTIONS. Except as previously disclosed in the SEC
Reports or stock or stock options granted to employees or directors of the
Company; or equity or debt issued in connection with an acquisition of a
business or assets by the Company; or the issuance by the Company of stock in
connection with the establishment of a joint venture partnership or licensing
arrangement including, but not limited to, any investment by ▇▇▇▇▇▇ Technology
Corporation (these exceptions hereinafter referred to as the "Excepted
Issuances"), the Company will not issue any securities with a variable/floating
conversion feature which are or could be (by conversion or registration)
free-trading securities prior to the expiration of 12 months from the actual
effective date of the registration statement described in Section 9.1(d) above
(the "Exclusion Period"). Notwithstanding the above, if the Purchaser elects not
to further fund the Company following the transaction contemplated hereby, the
Purchaser shall waive the provisions of this Section 10.
11. SECURITY INTEREST. The Company has granted to the Purchaser a security
interest in certain assets of the Company pursuant to a Security Agreement. It
is hereby agreed and acknowledged by the Company that the Note and any and all
monetary obligations arising under the Note or this Agreement are included in
the Obligations as defined in the Security Agreement, dated May 16, 2002.
12. MISCELLANEOUS.
12.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individuals executing this Agreement and other
agreements on behalf of the Company agree to submit to the jurisdiction of such
courts and waive trial by jury. The prevailing party shall be entitled to
recover from the other party its reasonable attorney's fees and costs. In the
event that any provision of this Agreement or any other agreement delivered in
connection herewith is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of any agreement.
12.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the Purchaser and the
closing of the transactions contemplated hereby. All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
12.3 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto
and shall inure to the benefit of and be enforceable by each person who shall be
a holder of the Securities from time to time.
12.4 Entire Agreement. This Agreement, the exhibits and schedules hereto,
the Related Agreements and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.
12.5 Severability. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
12.6 Amendment and Waiver.
(a) This Agreement may be amended or modified only upon the written consent
of the Company and the Purchaser.
(b) The obligations of the Company and the rights of the holders of the
Securities under the Agreement may be waived only with the written consent of
such holders of Securities. The rights of the holder of a Note may be waived
only with the written consent of the holder of such Note.
12.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Related
Agreements, shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring. All remedies, either under this Agreement, the Note or the
Related Agreements, by law or otherwise afforded to any party, shall be
cumulative and not alternative.
12.8 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day, (c) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the Company
at the address as set forth on the signature page hereof and to the Purchaser at
the address set forth on the signature page hereto for such Purchaser, with a
copy in the case of the Purchaser to ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq., ▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇, facsimile number (▇▇▇) ▇▇▇-▇▇▇▇, or at
such other address as the Company or the Purchaser may designate by ten days
advance written notice to the other parties hereto.
12.9 Attorneys' Fees. In the event that any suit or action is instituted to
enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including, without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
12.10 Titles and Subtitles. The titles of the sections and subsections of
the Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.
12.11 Facsimile Signatures; Counterparts. This Agreement may be executed by
facsimile signatures and in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument.
12.12 Broker's Fees. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein, except as specified herein with respect to
the Purchaser. Each party hereto further agrees to indemnify each other party
for any claims, losses or expenses incurred by such other party as a result of
the representation in this Section 12.12 being untrue.
12.13 Indemnification. The Company shall indemnify the Purchaser for any
losses or expenses incurred by the Purchaser in connection with any claims
brought against the Purchaser by any third party (including any other
stockholder of the Company) as a result of the transactions contemplated by this
Agreement, other than for a breach of representation or warranty made by the
Purchaser herein.
12.14 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Agreement and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Agreement to
favor any party against the other.
[Securities Purchase Agreement Signature Page]
IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES
PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.
COMPANY: PURCHASER:
PATH 1 NETWORK TECHNOLOGIES INC. LAURUS MASTER FUND, LTD.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇ Grin
----------------------------- -----------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇ Name: ▇▇▇▇▇ Grin
Title: Chief Financial Officer Address: c/o Ironshore Corporate Services Ltd.
Address: ▇.▇. ▇▇▇ ▇▇▇▇ G.T., Queensgate House,
3636 Nobel Drive, Suite ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ Grand Cayman, Cayman Islands
LIST OF EXHIBITS
Form of Offering Convertible Note Exhibit A
Form of Warrant Exhibit B
Form of Opinion Exhibit C
A-1
EXHIBIT A
FORM OF CONVERTIBLE NOTE
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE
COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO PATH 1 NETWORK TECHNOLOGIES INC., THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONVERTIBLE NOTE
FOR VALUE RECEIVED, PATH 1 NETWORK TECHNOLOGIES INC., a Delaware
corporation (hereinafter called the "Borrower"), hereby promises to pay to
LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., ▇.▇. ▇▇▇ ▇▇▇▇
G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax:
▇▇▇-▇▇▇-▇▇▇▇ (the "Holder") or its registered assigns, on order, without demand,
the sum of Three Hundred Thousand Dollars ($300,000), with any accrued and
unpaid interest on May 7, 2004 (the "Maturity Date").
The following terms shall apply to this Note:
ARTICLE I
DEFAULT RELATED PROVISIONS
1.1 Payment Grace Period. The Borrower shall have a seven (7) day grace
period to pay any monetary amounts due under this Note, after which grace period
a default interest rate of five percent (5%) per annum above the then applicable
interest rate hereunder shall apply to the amounts owed hereunder.
1.2 Conversion Privileges. The Conversion Privileges set forth in Article
II shall remain in full force and effect immediately from the date hereof and
until the Note is paid in full.
1.3 Interest Rate. Interest payable on this Note shall accrue at the annual
rate of twelve percent (12%) and be payable in arrears commencing one month from
the date hereof and on the first business day of each consecutive calendar month
thereafter, and on the Maturity Date, accelerated or otherwise, due and payable
as described below.
ARTICLE II
PAYMENTS OF PRINCIPAL AND INTEREST
2.1 Monthly Payments. Subject to the terms of this Article II, the Borrower
shall repay one-eighteenth of the original principal amount of this Note (to the
extent such amount has not been converted pursuant to Article III below),
together with interest accrued to date on such portion of the original principal
amount plus any and all default payments owing under the Purchase Agreement but
not previously paid (collectively the "Monthly Amount"), in accordance with
Section 2.2 below, on the first business day of each consecutive calendar month
(each, a "Repayment Date"), beginning on the first such day which occurs
following the date hereof.
2.2 Cash or Common Stock. Subject to the terms hereof, the Borrower has the
sole option to determine whether to satisfy payment of the Monthly Amount in
full on each Repayment Date either in cash or in shares of Common Stock, or a
combination of both. The Borrower shall deliver to the Holder a written
irrevocable notice in the form of Exhibit B attached hereto electing to pay such
Monthly Amount in full on such Repayment Date in either cash or Common Stock, or
a combination of both ("Repayment Election Notice"). Such Repayment Election
Notice shall be delivered at least ten (10) days prior to the applicable
Repayment Date (the date of such notice being hereinafter referred to as the
"Notice Date"). The Holder shall have the right to defer for any period of time
the payment of the Monthly Amount in shares of Common Stock in its sole
discretion. If such Repayment Election Notice is not delivered within the
prescribed period set forth in the preceding sentence, then the repayment shall
be made in either cash or shares of Common Stock on the same terms hereunder at
the Holder's sole option. If the Borrower elects or is required to repay all or
a portion of the Monthly Amount in cash on a Repayment Date, then on such
Repayment Date the Borrower shall pay to the Holder such amount in satisfaction
of such obligation. If the Borrower elects or is required to repay any portion
of the Monthly Amount in shares of Common Stock, the number of such shares to be
issued for such Repayment Date shall be the number determined by dividing (x)
the portion of the Monthly Amount to be paid in shares of Common Stock, by (y)
the applicable Conversion Price as of such Repayment Date.
2.3 No Effective Registration. Notwithstanding anything to the contrary
herein, the Borrower shall be prohibited from exercising its right to repay the
Monthly Amount in shares of Common Stock (and must deliver cash in respect
thereof) on the applicable Repayment Date if at any time from the Notice Date
until the time at which the Holder receive such shares there fails to exist an
effective registration statement or an Event of Default hereunder exists or
occurs, unless otherwise waived in writing by the Holder in whole or in part at
the Holder's option.
2.4 Share Price/Issuance Limitations. Notwithstanding anything to the
contrary herein, if the closing price of the Common Stock as reported by
Bloomberg, L.P. on the Principal Market for any of the 11 trading days preceding
a Repayment Date was less than 125% of the Maximum Base Price, and the Borrower
has elected to pay all or a portion of the Monthly Amount in shares of Common
Stock, then, instead of the Borrower delivering the required number of shares of
Common Stock on the Repayment Date, the Holder will be permitted to convert up
to the Monthly Amount that is payable in shares of Common Stock at a Conversion
Price of 85% of the average of the three lowest closing prices during the twenty
(20) trading days immediately preceding the Conversion Date. Any part of the
Monthly Amount not converted into shares of Common Stock by the following
Repayment Date shall be paid by the Borrower in cash on such following Repayment
Date. At any time during the relevant month, the Borrower has the option to pay
the Monthly Amount, or the unconverted part thereof, in cash and the Conversion
Price set forth in this Section 2.4 shall no longer be applicable.
By way of example, for the Repayment Date of September 1, if the Borrower
delivers a Repayment Election Notice on August 15 to pay the Monthly Amount in
shares of Common Stock and if on August 10, the stock price was $1.50, the
Holder will be permitted to convert the portion of the Monthly Amount that the
Borrower has determined is payable in shares of Common Stock at the following
Conversion Price: 85% of the average of the three lowest closing prices during
the twenty (20) trading days immediately preceding the Conversion Date. Any
portion of the Monthly Amount originally due September 1 that the Holder has not
converted into shares of Common Stock by October 1 shall be due in cash on
October 1.
2.5 Deemed Conversions. Any repayment of the Monthly Amount in shares of
Common Stock pursuant to the terms hereof shall constitute and be deemed a
conversion of such portion of the applicable principal amount of this Note for
all purposes under this Note and the Purchase Agreement (except as otherwise
provided herein).
ARTICLE III
CONVERSION RIGHTS
3.1. Conversion into the Borrower's Common Stock.
(a) Subject to the provisions set forth above, the Holder shall have the
right, but not the obligation, from and after the date hereof, and then at any
time until this Note is fully paid, to convert the principal portion of this
Note and/or interest or fees due and payable into fully paid and nonassessable
shares of common stock of the Borrower as such stock exists on the date of
issuance of this Note, or any shares of capital stock of the Borrower into which
such stock shall hereafter be changed or reclassified (the "Common Stock") at
the conversion price as defined in Section 3.1(b) hereof (the "Conversion
Price"), determined as provided herein. Upon delivery to the Borrower of a
Notice of Conversion as described in Section 8 of the Securities Purchase
Agreement entered into between the Borrower and certain persons who are
signatories thereto, including the Holder, relating to this Note (the "Purchase
Agreement") of the Holder's written request for conversion (the date of giving
such notice of conversion being a "Conversion Date"), the Borrower shall issue
and deliver to the Holder within three business days from the Conversion Date
that number of shares of Common Stock for the portion of the Note converted in
accordance with the foregoing. At the election of the Holder, the Borrower will
deliver accrued but unpaid interest on the Note through the Conversion Date
directly to the Holder on or before the Delivery Date (as defined in the
Purchase Agreement). The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing that portion of the
principal of the Note to be converted and interest, if any, by the Conversion
Price. In the event of any conversions of outstanding principal amount under
this Note in part pursuant to this Article III, such conversions shall be deemed
to constitute conversions of outstanding principal amount applying to Monthly
Amounts for the Repayment Dates in chronological order. For example, if the
original principal amount of this Note is $300,000 and the Holder converted
$33,333 of such original principal amount prior to the first Repayment Date,
then (1) the principal amount of the Monthly Amount due on the first Repayment
Date would equal $0, (2) the principal amount of the Monthly Amount due on the
second Repayment Date would equal $0 and (3) the principal amount of the Monthly
Amount due on each of the remaining Repayment Dates would be $16,666.
(b) Subject to adjustment as provided in Section 3.1(c) hereof, the
Conversion Price per share shall be $.85 (the "Maximum Base Price"). If an Event
of Default has occurred and be continuing hereunder then the Conversion Price
shall be equal to the lower of (i) the Maximum Base Price; or (ii) eighty
percent (80%) of the average of the three lowest closing prices for the Common
Stock on NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market
System, American Stock Exchange, or New York Stock Exchange (whichever of the
foregoing is at the time the principal trading exchange or market for the Common
Stock, the "Principal Market"), or on any securities exchange or other
securities market on which the Common Stock is then being listed or traded, for
the thirty (30) trading days prior to but not including the Conversion Date.
(c) The Maximum Base Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 3.1(a)
and 3.1(b), shall be subject to adjustment from time to time upon the happening
of certain events while this conversion right remains outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time shall
consolidate with or merge into or sell or convey all or substantially all its
assets to any other corporation, this Note, as to the unpaid principal portion
thereof and accrued interest thereon, shall thereafter be deemed to evidence the
right to purchase such number and kind of shares or other securities and
property as would have been issuable or distributable on account of such
consolidation, merger, sale or conveyance, upon or with respect to the
securities subject to the conversion or purchase right immediately prior to such
consolidation, merger, sale or conveyance. The foregoing provision shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such securities of such
successor or purchaser after any such consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid principal portion thereof and accrued interest thereon, shall thereafter
be deemed to evidence the right to purchase an adjusted number of such
securities and kind of securities as would have been issuable as the result of
such change with respect to the Common Stock immediately prior to such
reclassification or other change.
C. Stock Splits, Combinations and Dividends. If the shares of Common Stock
are subdivided or combined into a greater or smaller number of shares of Common
Stock, or if a dividend is paid on the Common Stock in shares of Common Stock,
the Conversion Price shall be proportionately reduced in case of subdivision of
shares or stock dividend or proportionately increased in the case of combination
of shares, in each such case by the ratio which the total number of shares of
Common Stock outstanding immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.
D. Share Issuance. Subject to the provisions of this Section, if the
Borrower at any time shall issue any shares of Common Stock prior to the
conversion of the entire principal amount of the Note to a person other than the
Holder (otherwise than as: (i) provided in Sections 2.1(c)A, 2.1(c)B or 2.1(c)C
or this subparagraph D; or (ii) pursuant to options, warrants, or other
obligations to issue shares, outstanding on the date hereof as set forth in the
Schedules to the Purchase Agreement (which agreement is incorporated herein by
this reference); ((i) and (ii) above, are hereinafter referred to as the
"Existing Option Obligations") for a consideration less than the Conversion
Price that would be in effect at the time of such issue, then, and thereafter
successively upon each such issue, the Conversion Price shall be reduced to the
per share purchase price of such issue of additional shares of Common Stock. The
resulting quotient shall be the adjusted conversion price. Except for the
Existing Option Obligations and options that may be issued under any employee
incentive stock option and/or any qualified stock option plan adopted by the
Borrower, for purposes of this adjustment, the issuance of any security of the
Borrower carrying the right to convert such security into shares of Common Stock
or of any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Conversion Price upon the issuance of shares of Common Stock
upon exercise of such conversion or purchase rights.
(d) During the period the conversion right exists, the Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note. The Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. The Borrower agrees that its
issuance of this Note shall constitute full authority to its officers, agents,
and transfer agents who are charged with the duty of executing and issuing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.
3.2 Method of Conversion. This Note may be converted by the Holder in whole
or in part as described in Section 3.1(a) hereof and the Purchase Agreement.
Upon partial conversion of this Note, a new Note containing the same date and
provisions of this Note shall, at the request of the Holder, be issued by the
Borrower to the Holder for the principal balance of this Note and interest which
shall not have been converted or paid.
ARTICLE IV
EVENT OF DEFAULT
The occurrence of any of the following events of default ("Event of
Default") shall, at the option of the Holder hereof, make all sums of principal,
interest and other fees then remaining unpaid hereon and all other amounts
payable hereunder immediately due and payable, all without demand, presentment
or notice, or grace period, all of which hereby are expressly waived, except as
set forth below:
4.1 Failure to Pay Principal, Interest or other Fees. The Borrower fails to
pay any installment of principal, interest or other fees hereon or on any other
promissory note issued pursuant to the Purchase Agreement, when due and such
failure continues for a period of ten (10) days after the due date.
4.2 Breach of Covenant. The Borrower breaches any material covenant or
other term or condition of this Note or the Purchase Agreement in any material
respect and such breach, if subject to cure, continues for a period of ten (10)
days after written notice to the Borrower from the Holder.
4.3 Breach of Representations and Warranties. Any material representation
or warranty of the Borrower made herein, in the Purchase Agreement, or in any
agreement, statement or certificate given in writing pursuant hereto or in
connection therewith shall be false or misleading.
4.4 Receiver or Trustee. The Borrower shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such
a receiver or trustee shall otherwise be appointed.
4.5 Judgments. Any money judgment, writ or similar final process shall be
entered or filed against the Borrower or any of its property or other assets for
more than $500,000, and shall remain unvacated, unbonded or unstayed for a
period of forty-five (45) days.
4.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Borrower.
4.7 Delisting. Delisting of the Common Stock from the Principal Market or
such other principal exchange on which the Common Stock is listed for trading;
the Borrower's failure to comply with the conditions for listing; or
notification that the Borrower is not in compliance with the conditions for such
continued listing.
4.8 Concession. A concession by the Borrower, after applicable notice and
cure periods, under any one or more obligations in an aggregate monetary amount
in excess of $50,000.
4.9 Stop Trade. An SEC stop trade order or Principal Market trading
suspension.
4.10 Failure to Deliver Common Stock or Replacement Note. The Borrower's
failure to timely deliver Common Stock to the Holder pursuant to and in the form
required by this Note and Section 8 of the Purchase Agreement, or if required a
replacement Note.
4.11 Registration Default. The occurrence of a Non-Registration Event as
described in Section 9.4 of the Purchase Agreement.
ARTICLE V
MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.2 Notices. Any notice herein required or permitted to be given shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party notified, (b) when sent by confirmed telex or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day,
(c) five days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
Borrower at the address as set forth on the signature page to the Purchase
Agreement executed in connection herewith and to the Holder at the address set
forth on the signature page to the Purchase Agreement for such Holder, with a
copy to ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq., ▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇, facsimile number (▇▇▇) ▇▇▇-▇▇▇▇, or at such other address as the
Borrower or the Holder may designate by ten days advance written notice to the
other parties hereto. A Notice of Conversion shall be deemed given when made to
the Borrower pursuant to the Purchase Agreement.
5.3 Amendment Provision. The term "Note" and all reference thereto, as used
throughout this instrument, shall mean this instrument as originally executed,
or if later amended or supplemented, then as so amended or supplemented.
5.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder.
5.5 Cost of Collection. If default is made in the payment of this Note, the
Borrower shall pay the Holder hereof reasonable costs of collection, including
reasonable attorneys' fees.
5.6 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Agreement shall be brought only
in the state courts of New York or in the federal courts located in the state of
New York. Both parties and the individual signing this Note on behalf of the
Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Note is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or unenforceability of any other provision of this
Note.
5.7 Maximum Payments. Nothing contained herein shall be deemed to establish
or require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Borrower to the Holder and thus refunded to the Borrower.
5.8 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
IN WITNESS WHEREOF, the Borrower has caused this Note to be signed in its
name effective as of this 7th day of November, 2002.
PATH 1 NETWORK TECHNOLOGIES INC.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇
-------------------------------
WITNESS:
-------------------------------
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Note issued by PATH 1 NETWORK TECHNOLOGIES
INC. on November ___, 2002 into Shares of Common Stock of PATH 1 NETWORK
TECHNOLOGIES INC. (the "Company") according to the conditions set forth in such
Note, as of the date written below.
Date of Conversion:_____________________________________________________________
Conversion Price:_______________________________________________________________
Shares To Be Delivered:_________________________________________________________
Signature:______________________________________________________________________
Print Name:_____________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________
EXHIBIT B
FORM OF REPAYMENT ELECTION NOTICE
To: [HOLDER AT HOLDER'S ADDRESS]
Pursuant to Section 2.2 the Note of Path 1 Network Technologies Inc. issued
on November __, 2002, we hereby notify you that we are irrevocably electing to
repay the outstanding Monthly Amount (as defined in the Note) due on the
Repayment Date (as defined in the Note) which occurs on ______, 20__ (CHECK
ONE):
_____ In full in cash on such Repayment Date.
_____ In full in shares of the Company's Common Stock within three
(3) trading days following such Repayment Date.
Path 1 Network Technologies Inc.
By:
--------------------------------------
Name:
Title:
B-1
EXHIBIT B
Form of warrant
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO PATH 1 NETWORK TECHNOLOGIES INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.
Right to Purchase 75,000 Shares of Common Stock of Path 1 Network
Technologies Inc. (subject to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. 2002-2 Issue Date: November 7, 2002
PATH 1 NETWORK TECHNOLOGIES INC., a corporation organized under the laws of
the State of Delaware (the "Company"), hereby certifies that, for value
received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled,
subject to the terms set forth below, to purchase from the Company from and
after the Issue Date of this Warrant and at any time or from time to time before
5:00 p.m., New York time, through seven (7) years after such date (the
"Expiration Date"), up to 75,000 fully paid and nonassessable shares of Common
Stock (as hereinafter defined), $.001 par value per share, of the Company, at a
purchase price of $.85 per share (such purchase price per share as adjusted from
time to time as herein provided is referred to herein as the "Purchase Price").
The number and character of such shares of Common Stock and the Purchase Price
are subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" shall include Path 1 Network Technologies Inc. and
any corporation which shall succeed or assume the obligations of Path 1 Network
Technologies Inc. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock, $.001
par value per share, as authorized on the date of the Securities Purchase
Agreement referred to in Section 9 hereof, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after
such date, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on any
shares entitled to preference, and the holders of which shall ordinarily, in the
absence of contingencies, be entitled to vote for the election of a majority of
directors of the Company (even if the right so to vote has been suspended by the
happening of such a contingency) and (c) any other securities into which or for
which any of the securities described in (a) or (b) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger, sale
of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the date
hereof through and including the Expiration Date, the holder hereof shall be
entitled to receive, upon exercise of this Warrant in whole in accordance with
the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, shares of Common Stock of the Company, subject
to adjustment pursuant to Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the holder
hereof by delivery of an original or fax copy of the form of subscription
attached as Exhibit A hereto (the "Subscription Form") duly executed by such
Holder, to the Company at its principal office or at the office of its warrant
agent (as provided hereinafter), accompanied by payment, in cash, wire transfer,
or by certified or official bank check payable to the order of the Company, in
the amount obtained by multiplying the number of shares of Common Stock for
which this Warrant is then exercisable by the Purchase Price (as hereinafter
defined) then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but not for a
fractional share) by surrender of this Warrant in the manner and at the place
provided in subsection 1.2 except that the amount payable by the holder on such
partial exercise shall be the amount obtained by multiplying (a) the number of
shares of Common Stock designated by the holder in the Subscription Form by (b)
the Purchase Price then in effect. On any such partial exercise, the Company, at
its expense, will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant of like tenor, in the name of the holder hereof or as such
holder (upon payment by such holder of any applicable transfer taxes) may
request, the number of shares of Common Stock for which such Warrant may still
be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common Stock as of
a particular date (the "Determination Date") shall mean the Fair Market Value of
a share of the Company's Common Stock. Fair Market Value of a share of Common
Stock as of a Determination Date shall mean:
(a) If the Company's Common Stock is traded on an exchange or is
quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market,
then the closing or last sale price, respectively, reported for the last
business day immediately preceding the Determination Date.
(b) If the Company's Common Stock is not traded on an exchange or on
the NASDAQ National Market System or the NASDAQ SmallCap Market but is
traded on the NASD OTC Bulletin Board, then the mean of the closing bid and
asked prices reported for the last business day immediately preceding the
Determination Date.
(c) Except as provided in clause (d) below, if the Company's Common
Stock is not publicly traded, then as the Holder and the Company agree or
in the absence of agreement by arbitration in accordance with the rules
then standing of the American Arbitration Association, before a single
arbitrator to be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation,
dissolution or winding up pursuant to the Company's charter, then all
amounts to be payable per share to holders of the Common Stock pursuant to
the charter in the event of such liquidation, dissolution or winding up,
plus all other amounts to be payable per share in respect of the Common
Stock in liquidation under the charter, assuming for the purposes of this
clause (d) that all of the shares of Common Stock then issuable upon
exercise of the Warrant are outstanding at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of the exercise
of the Warrant, upon the request of the holder hereof acknowledge in writing its
continuing obligation to afford to such holder any rights to which such holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant. If the holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to afford
to such holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or trust company
shall have been appointed as trustee for the holders of the Warrant pursuant to
Subsection 3.2, such bank or trust company shall have all the powers and duties
of a warrant agent (as hereinafter described) and shall accept, in its own name
for the account of the Company or such successor person as may be entitled
thereto, all amounts otherwise payable to the Company or such successor, as the
case may be, on exercise of this Warrant pursuant to this Section 1.
2.1 Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall be
deemed to be issued to the holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 7 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct in compliance with
applicable Securities Laws, a certificate or certificates for the number of duly
and validly issued, fully paid and nonassessable shares of Common Stock (or
Other Securities) to which such holder shall be entitled on such exercise, plus,
in lieu of any fractional share to which such holder would otherwise be
entitled, cash equal to such fraction multiplied by the then Fair Market Value
of one full share, together with any other stock or other securities and
property (including cash, where applicable) to which such holder is entitled
upon such exercise pursuant to Section 1 or otherwise.
2.2. Cashless Exercise.
(a) Payment may be made either in (i) cash or by certified or official
bank check payable to the order of the Company equal to the applicable
aggregate Purchase Price, (ii) by delivery of the Warrant, Common Stock
and/or Common Stock receivable upon exercise of the Warrant in accordance
with Section (b) below, or (iii) by a combination of any of the foregoing
methods, for the number of Common Shares specified in such form (as such
exercise number shall be adjusted to reflect any adjustment in the total
number of shares of Common Stock issuable to the holder per the terms of
this Warrant) and the holder shall thereupon be entitled to receive the
number of duly authorized, validly issued, fully-paid and non-assessable
shares of Common Stock (or Other Securities) determined as provided herein.
(b) Notwithstanding any provisions herein to the contrary, if the Fair
Market Value of one share of Common Stock is greater than the Purchase
Price (at the date of calculation as set forth below), in lieu of
exercising this Warrant for cash, the holder may elect to receive shares
equal to the value (as determined below) of this Warrant (or the portion
thereof being cancelled) by surrender of this Warrant at the principal
office of the Company together with the properly endorsed Subscription Form
in which event the Company shall issue to the holder a number of shares of
Common Stock computed using the following formula:
X=Y (A-B)
---
A
Where X= the number of shares of Common Stock to be
issued to the holder
Y= the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being exercised
(at the date of such calculation)
A= the Fair Market Value of one share of the
Company's Common Stock (at the date of such
calculation)
B= Purchase Price (as adjusted to the date of
such calculation)
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any time or
from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the Company following
the transfer of all or substantially all of its properties or assets, the
Company, prior to such dissolution, shall at its expense deliver or cause to be
delivered the stock and other securities and property (including cash, where
applicable) receivable by the holders of the Warrant after the effective date of
such dissolution pursuant to this Section 3 to a bank or trust company having
its principal office in New York, NY, as trustee for the holder or holders of
the Warrant.
3.3. Continuation of Terms. Upon any reorganization, consolidation, merger
or transfer (and any dissolution following any transfer) referred to in this
Section 3, this Warrant shall continue in full force and effect and the terms
hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially all of the
properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 4. In the
event this Warrant does not continue in full force and effect after the
consummation of the transaction described in this Section 3, then only in such
event will the Company's securities and property (including cash, where
applicable) receivable by the holders of the Warrant be delivered to the Trustee
as contemplated by Section 3.2.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be increased to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that would otherwise (but for the provisions of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.
5. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrant, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 11 hereof).
6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial
Statements. The Company will at all times reserve and keep available, solely for
issuance and delivery on the exercise of the Warrant, all shares of Common Stock
(or Other Securities) from time to time issuable on the exercise of the Warrant.
This Warrant entitles the holder hereof to receive copies of all financial and
other information distributed or required to be distributed to the holders of
the Company's Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with applicable
Securities laws, this Warrant, and the rights evidenced hereby, may be
transferred by any registered holder hereof (a "Transferor") with respect to any
or all of the Shares. On the surrender for exchange of this Warrant, with the
Transferor's endorsement in the form of Exhibit B attached hereto (the
"Transferor Endorsement Form") and together with evidence reasonably
satisfactory to the Company demonstrating compliance with applicable Securities
Laws, the Company at its expense but with payment by the Transferor of any
applicable transfer taxes) will issue and deliver to or on the order of the
Transferor thereof a new Warrant of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor.
8. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of this Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The Holder of this Warrant has been granted certain
registration rights by the Company. These registration rights are set forth in a
Securities Purchase Agreement entered into by the Company and Purchaser of the
Company's 12% Convertible Notes (the "Notes") at or prior to the issue date of
this Warrant. The terms of the Securities Purchase Agreement are incorporated
herein by reference. Upon the occurrence of a Non-Registration Event as
described in the Securities Purchase Agreement, in the event the Company is
unable to issue Common Stock upon exercise of this Warrant that has been
registered in the Registration Statement described in Section 9.1(d) of the
Securities Purchase Agreement, within the time periods described in the
Securities Purchase Agreement, which Registration Statement must be effective
throughout the exercise period of this Warrant, then upon written demand made by
the Holder, the Company will pay to the Holder of this Warrant, in lieu of
delivering Common Stock, a sum equal to the closing ask price of the Company's
Common Stock on the Principal Market (as defined in the Securities Purchase
Agreement) or such other principal trading market for the Company's Common Stock
on the trading date immediately preceding the date notice is given by the
Holder, less the Purchase Price, for each share of Common Stock designated in
such notice from the Holder.
10. Maximum Exercise. The Holder shall not be entitled to exercise this
Warrant on an exercise date, in connection with that number of shares of Common
Stock which would be in excess of the sum of (i) the number of shares of Common
Stock beneficially owned by the Holder and its affiliates on an exercise date,
and (ii) the number of shares of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this proviso is being made on
an exercise date, which would result in beneficial ownership by the Holder and
its affiliates of more than 4.99% of the outstanding shares of Common Stock of
the Company on such date. For the purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation
13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to
aggregate exercises which would result in the issuance of more than 4.99%. The
restriction described in this paragraph may be revoked upon 75 days prior notice
from the Holder to the Company and is automatically null and void upon an Event
of Default under the Note.
11. Warrant Agent. The Company may, by written notice to the each holder of
the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other
Securities) on the exercise of this Warrant pursuant to Section 1, exchanging
this Warrant pursuant to Section 7, and replacing this Warrant pursuant to
Section 8, or any of the foregoing, and thereafter any such issuance, exchange
or replacement, as the case may be, shall be made at such office by such agent.
12. Transfer on the Company's Books. Until this Warrant is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
13. Notices, etc. All notices and other communications from the Company to
the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder or, until any such holder furnishes to the
Company an address, then to, and at the address of, the last holder of this
Warrant who has so furnished an address to the Company.
14. Voluntary Adjustment by the Company. The Company may at any time during
the term of this Warrant reduce the then current Exercise Price to any amount
and for any period of time deemed appropriate by the Board of Directors of the
Company.
15. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by and construed in accordance with the
laws of State of New York without regard to principles of conflicts of laws. Any
action brought concerning the transactions contemplated by this Warrant shall be
brought only in the state courts of New York or in the federal courts located in
the state of New York. The individuals executing this Warrant on behalf of the
Company agree to submit to the jurisdiction of such courts and waive trial by
jury. The prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Warrant is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Warrant. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof. The
invalidity or unenforceability of any provision hereof shall in no way affect
the validity or enforceability of any other provision. The Company acknowledges
that legal counsel participated in the preparation of this Warrant and,
therefore, stipulates that the rule of construction that ambiguities are to be
resolved against the drafting party shall not be applied in the interpretation
of this Warrant to favor any party against the other party.
[THIS SPACE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of
the date first written above.
PATH 1 NETWORK TECHNOLOGIES INC.
By:_____________________________________
Witness:
________________________________
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: Path 1 Network Technologies Inc.
The undersigned, pursuant to the provisions set forth in the attached Warrant
(No.____), hereby irrevocably elects to purchase (check applicable box):
___ ________ shares of the Common Stock covered by such Warrant; or
___ the maximum number of shares of Common Stock covered by such Warrant
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned herewith makes payment of the full purchase price for such
shares at the price per share provided for in such Warrant, which is
$___________. Such payment takes the form of (check applicable box or boxes):
___ $__________ in lawful money of the United States; and/or
___ the cancellation of such portion of the attached Warrant as is exercisable
for a total of _______ shares of Common Stock (using a Fair Market Value of
$_______ per share for purposes of this calculation); and/or
___ the cancellation of such number of shares of Common Stock as is necessary,
in accordance with the formula set forth in Section 2, to exercise this Warrant
with respect to the maximum number of shares of Common Stock purchaseable
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned requests that the certificates for such shares be issued in the
name of, and delivered to ____________________ whose address is ________________
_______________________________________________________________________________.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the "Securities Act") or pursuant to an exemption from
registration under the Securities Act.
Dated:___________________ _______________________________________
(Signature must conform to name of
holder as specified on the face of
the Warrant)
_______________________________________
(Address)
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto the person(s) named below under the heading "Transferees" the right
represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of Path 1 Network Technologies Inc. to which the within
Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred," respectively, opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the books
of Path 1 Network Technologies Inc. with full power of substitution in the
premises.
======================================== ===================================== =====================================
Transferees Percentage Number
Transferred Transferred
---------------------------------------- ------------------------------------- -------------------------------------
---------------------------------------- ------------------------------------- -------------------------------------
---------------------------------------- ------------------------------------- -------------------------------------
---------------------------------------- ------------------------------------- -------------------------------------
---------------------------------------- ------------------------------------- -------------------------------------
---------------------------------------- ------------------------------------- -------------------------------------
======================================== ===================================== =====================================
Dated: ,
----------------- -------- ---------------------------------------
(Signature must conform to name of
holder as specified on the face of
the warrant)
Signed in the presence of:
------------------------------- ---------------------------------------
(Name) (address)
---------------------------------------
ACCEPTED AND AGREED: (address)
[TRANSFEREE]
-------------------------------
(Name)
C-2
EXHIBIT C
FORM OF OPINION
1. The Company is a corporation validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power and
authority to own, operate and lease its properties and to carry on its business
as it is now being conducted.
2. The Company has the requisite corporate power and authority to execute,
deliver and perform its obligations under the Agreement and Related Agreements.
All corporate action on the part of the Company, its officers, directors and
stockholders necessary for (i) the authorization of the Agreement and Related
Agreements, and the performance of all obligations of the Company thereunder at
the Closing, and (ii) the authorization, sale, issuance and delivery of the
Securities pursuant to the Agreement and the Related Agreements has been taken.
The Conversion Shares and the Warrant Shares, when issued pursuant to and in
accordance with the terms of the Agreement and upon delivery, shall be validly
issued and outstanding, fully paid and non assessable.
3. The execution, delivery and performance of the Agreement, the Note or
the Related Agreements by the Company and the consummation of the transactions
contemplated by any thereof, will not, with or without the giving of notice or
the passage of time or both:
(a) Violate the provisions of the Charter or bylaws of the Company; or
(b) To the best of such counsel's knowledge, violate any judgment,
decree, order or award of any court binding upon the Company.
4. The Agreement and Related Agreements constitute and the Note, upon their
issuance will constitute, valid and legally binding obligations of the Company,
and are enforceable against the Company in accordance with their respective
terms.
5. The sale of the Note and the subsequent conversion of the Note into
Conversion Shares are not and will not be subject to any preemptive rights or,
to such counsel's knowledge, rights of first refusal that have not been properly
waived or complied with. The sale of the Warrant and the subsequent exercise of
the Warrant for Warrant Shares are not and will not be subject to any preemptive
rights or, to such counsel's knowledge, rights of first refusal that have not
been properly waived or complied with.
6. Assuming the accuracy of the representations and warranties of the
Purchasers contained in the Agreement, the offer, sale and issuance of the
Securities will be exempt from the registration requirements of the Securities
Act, and will have been registered or qualified (or are exempt from registration
and qualification) under the registration, permit or qualification requirements
of all applicable state securities laws. To the best of such counsel's
knowledge, neither the Company, nor any of its affiliates, nor any person acting
on its or their behalf, has directly or indirectly made any offers or sales of
any security or solicited any offers to buy and security under circumstances
that would cause the offering of the Securities pursuant to this Agreement to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Securities pursuant to Rule
506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions.
7. There is no action, suit, proceeding or investigation pending or, to the
best of such counsel's knowledge, currently threatened against the Company that
questions the validity of the Agreement or the Related Agreements or the right
of the Company to enter into any of such agreements, or to consummate the
transactions contemplated thereby, or which might result, either individually or
in the aggregate, in any material adverse change in the assets, condition,
affairs or prospects of the Company, financially or otherwise, or any change in
the current equity ownership of the Company. To the best of such counsel's
knowledge, the Company is not a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality; nor is there any action, suit, proceeding or investigation by
the Company currently pending or which the Company intends to initiate.