SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of January 19,
2006, by and among Conolog Corporation, a Delaware corporation (the "Company"),
and the subscribers identified on the signature page hereto (each a "Subscriber"
and collectively "Subscribers").
WHEREAS, the Company and the Subscribers are executing and delivering
this Agreement in reliance upon an exemption from securities registration
afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"1933 Act").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase up to Five Million Dollars ($5,000,000) (the "Purchase Price") of
principal amount of promissory notes of the Company ("Note" or "Notes"), a form
of which is annexed hereto as Exhibit A, convertible into shares of the
Company's common stock, $0.01 par value (the "Common Stock") at a per share
conversion price set forth in the Note ("Conversion Price"); and share purchase
warrants (the "Warrants"), in the form annexed hereto as Exhibit B, to purchase
shares of Common Stock (the "Warrant Shares"). The Notes, shares of Common Stock
issuable upon conversion of the Notes (the "Shares"), the Warrants and the
Warrant Shares are collectively referred to herein as the "Securities"; and
WHEREAS, the aggregate proceeds of the sale of the Notes and the
Warrants contemplated hereby shall be held in escrow pursuant to the terms of a
Funds Escrow Agreement to be executed by the parties substantially in the form
attached hereto as Exhibit C (the "Escrow Agreement").
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Subscribers hereby
agree as follows:
1. Conditions To Closing. Subject to the satisfaction or
waiver of the terms and conditions of this Agreement, on the Closing Date, each
Subscriber shall purchase and the Company shall sell to each Subscriber a Note
in the principal amount designated on the signature page hereto. The aggregate
amount of the Notes to be purchased by the Subscribers on the Closing Date
shall, in the aggregate, be equal to the Closing Purchase Price.
2. Closing Date. The "Closing Date" shall be the date that
subscriber funds representing the net amount due the Company from the Closing
Purchase Price of the Offering is transmitted by wire transfer or otherwise to
or for the benefit of the Company. Notwithstanding anything to the contrary
herein, the parties to this Agreement agree that the Closing Date shall be
deemed to be January 19, 2006. The consummation of the transactions contemplated
herein for all Closings shall take place at the offices of Grushko & ▇▇▇▇▇▇▇,
P.C., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, upon the
satisfaction of all conditions to Closing set forth in this Agreement.
3. Class A Warrants. On the Closing Date, the Company will
issue and deliver Class A Warrants to the Subscribers (the "Warrants"). One
Class A Warrant will be issued for each one Share which would be issued on the
Closing Date assuming the complete conversion of the Notes issued on such
Closing Date at the Conversion Price in effect on the Closing Date assuming such
Closing Date were a Conversion Date. The per Warrant Share exercise price to
acquire a Warrant Share upon exercise of a Warrant shall be equal to $103% of
the closing bid price of the Company's common stock on the Principal Market for
the trading day preceding, the Closing Date, as reported by Bloomberg L.P. The
Class A Warrants shall be exercisable until five (5) years after the Closing
Date. The Warrants will be
exercisable on a cashless basis as described in the Warrants.
4. Subscriber's Representations and Warranties. Each
Subscriber hereby represents and warrants to and agrees with the Company only as
to such Subscriber that:
(a) Organization and Standing of the Subscribers. If
the Subscriber is an entity, such Subscriber is a corporation, partnership or
other entity duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization and Power. Each Subscriber has the
requisite power and authority to enter into and perform this Agreement and to
purchase the Notes and Warrants being sold to it hereunder. The execution,
delivery and performance of this Agreement by such Subscriber and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Subscriber or its Board of Directors,
stockholders, partners, members, as the case may be, is required. This Agreement
has been duly authorized, executed and delivered by such Subscriber and
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Subscriber enforceable against the Subscriber in
accordance with the terms thereof.
(c) No Conflicts. The execution, delivery and
performance of this Agreement and the consummation by such Subscriber of the
transactions contemplated hereby or relating hereto do not and will not (i)
result in a violation of such Subscriber's charter documents or bylaws or other
organizational documents or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument or obligation to which
such Subscriber is a party or by which its properties or assets are bound, or
result in a violation of any law, rule, or regulation, or any order, judgment or
decree of any court or governmental agency applicable to such Subscriber or its
properties (except for such conflicts, defaults and violations as would not,
individually or in the aggregate, have a material adverse effect on such
Subscriber). Such Subscriber is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or to purchase the Notes or acquire the
Warrants in accordance with the terms hereof, provided that for purposes of the
representation made in this sentence, such Subscriber is assuming and relying
upon the accuracy of the relevant representations and agreements made by the
Company herein.
(d) Information on Company. The Subscriber has had
access at the ▇▇▇▇▇ Website of the Commission to the Company's Form 10-KSB for
the year ended July 31, 2004 and all periodic or other reports filed with the
Commission (hereinafter referred to as the "Reports"). In addition, the
Subscriber has received in writing from the Company such other information
concerning its operations, financial condition and other matters as the
Subscriber has requested in writing (such other information is collectively, the
"Other Written Information"), and considered all factors the Subscriber deems
material in deciding on the advisability of investing in the Securities.
(e) Information on Subscriber. The Subscriber is, and
will be at the time of the conversion of the Notes and exercise of the Warrants,
an "accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the 1933 Act, is experienced in investments and business
matters, has made investments of a speculative nature and has purchased
securities of United States publicly-owned companies in private placements in
the past and, with its representatives, has such knowledge and experience in
financial, tax and other business matters as to enable the Subscriber to make an
informed investment decision with respect to the proposed purchase of the Note,
which represents a speculative investment. The Subscriber has the authority and
is duly and legally qualified to purchase and
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own the Securities. The Subscriber is able to bear the risk of such investment
for an indefinite period and to afford a complete loss thereof. The information
set forth on the signature page hereto regarding the Subscriber is accurate.
(f) Purchase of Notes and Warrants. On the Closing
Date, the Subscriber will purchase the Notes and Warrants as principal for its
own account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof.
(g) Compliance with Securities Act. The Subscriber
understands and agrees that the Securities have not been registered under the
1933 Act or any applicable state securities laws, by reason of their issuance in
a transaction that does not require registration under the 1933 Act (based in
part on the accuracy of the representations and warranties of Subscriber
contained herein), and that such Securities must be held indefinitely unless a
subsequent disposition is registered under the 1933 Act or any applicable state
securities laws or is exempt from such registration.
(h) Shares Legend. The Shares and the Warrant Shares
shall bear the following or similar legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO [THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."
(i) Warrants Legend. The Warrants shall bear the
following or similar 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. 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 ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED."
(j) Note Legend. The Note shall bear the following
legend:
"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
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AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER
SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(k) Communication of Offer. The offer to sell the
Securities was communicated to the Subscriber by the Company. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
(l) Authority; Enforceability. This Agreement and
other agreements delivered together with this Agreement or in connection
herewith have been duly authorized, executed and delivered by the Subscriber and
are valid and binding agreements enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity; and Subscriber
has full corporate power and authority necessary to enter into this Agreement
and such other agreements and to perform its obligations hereunder and under all
other agreements entered into by the Subscriber relating hereto.
(m) Restricted Securities. Subscriber understands
that the Securities have not been registered under the 1933 Act and such
Subscriber will not sell, offer to sell, assign, pledge, hypothecate or
otherwise transfer any of the Securities unless pursuant to an effective
registration statement under the 1933 Act. Notwithstanding anything to the
contrary contained in this Agreement, and provided that prior to any transfer,
the Subscriber and the proposed transferee execute and deliver to the Company a
representation letter that is reasonably acceptable to the Company, such
Subscriber may transfer (without restriction and without the need for an opinion
of counsel) the Securities to its Affiliates (as defined below) provided that
each such Affiliate is an "accredited investor" under Regulation D, such
Affiliate agrees to be bound by the terms and conditions of this Agreement. The
Company will be liable for damages arising out of any unreasonable delay in
reissuing Common Stock to an Affiliate of the Subscriber. Subscriber indemnifies
the Company in the event an exemption from such transfer under the 1933 Act is
found not to have been available. For the purposes of this Agreement, an
"Affiliate" of any person or entity means any other person or entity directly or
indirectly controlling, controlled by or under direct or indirect common control
with such person or entity. Affiliate includes each subsidiary of the Company.
For purposes of this definition, "control" means the power to direct the
management and policies of such person or firm, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise.
(n) No Governmental Review. Each Subscriber
understands that no United States federal or state agency or any other
governmental or state agency has passed on or made recommendations or
endorsement of the Securities or the suitability of the investment in the
Securities nor have such authorities passed upon or endorsed the merits of the
offering of the Securities.
(o) Correctness of Representations. Each Subscriber
represents as to such Subscriber that the foregoing representations and
warranties are true and correct as of the date hereof and, unless a Subscriber
otherwise notifies the Company prior to each Closing Date shall be true and
correct as of the Closing Date.
(p) Survival. The foregoing representations and
warranties shall survive the Closing Date until three years after the Closing
Date.
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5. Company Representations and Warranties. The Company
represents and warrants to and agrees with each Subscriber that except as set
forth in the Reports and as otherwise qualified in the Transaction Documents:
(a) Due Incorporation. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has the requisite corporate power to own
its properties and to carry on its business is disclosed in the Reports. The
Company is duly qualified as a foreign corporation to do business and is in good
standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect. For purpose of this Agreement, a "Material Adverse Effect" shall
mean a material adverse effect on the financial condition, results of
operations, properties or business of the Company taken as a whole. For purposes
of this Agreement, "Subsidiary" means, with respect to any entity at any date,
any corporation, limited or general partnership, limited liability company,
trust, estate, association, joint venture or other business entity) of which
more than 50% of (i) the outstanding capital stock having (in the absence of
contingencies) ordinary voting power to elect a majority of the board of
directors or other managing body of such entity, (ii) in the case of a
partnership or limited liability company, the interest in the capital or profits
of such partnership or limited liability company or (iii) in the case of a
trust, estate, association, joint venture or other entity, the beneficial
interest in such trust, estate, association or other entity business is, at the
time of determination, owned or controlled directly or indirectly through one or
more intermediaries, by such entity. All the Company's material Subsidiaries as
of the Closing Date are set forth on Schedule 5(a) hereto.
(b) Outstanding Stock. All issued and outstanding
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable.
(c) Authority; Enforceability. Except for the
Approval, if the Approval is required by the applicable NASD Market Place Rules
and/or Nasdaq's corporate governance rules, the Agreement, the Note, the
Warrants, the Escrow Agreement, and any other agreements delivered together with
this Agreement or in connection herewith (collectively "Transaction Documents")
have been duly authorized, executed and delivered by the Company and are valid
and binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity. Except for the Approval, if the
Approval is required by the applicable NASD Market Place Rules and/or Nasdaq's
corporate governance rules, the Company has full corporate power and authority
necessary to enter into and deliver the Transaction Documents and to perform its
obligations thereunder.
(d) Additional Issuances. There are no outstanding
agreements or preemptive or similar rights affecting the Company's common stock
or equity and no outstanding rights, warrants or options to acquire, or
instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of any shares of common
stock or equity of the Company or other equity interest in any of the
Subsidiaries of the Company except as described on Schedule 5(d), or in the
Reports. The Common stock of the Company on a fully diluted basis outstanding as
of the last trading day preceding the Closing Date is set forth on Schedule
5(d).
(e) Consents. Except for the Approval described in
Section 9 of this Agreement, if the Approval is required by applicable NASD
Market Place Rules and/or Nasdaq's corporate governance rules, and the approval
and/or notice required by the corporate governance rules of the NASDAQ Capital
Market (formerly known as the NASDAQ SmallCap Market) (the "SmallCap"),
including but not limited to the requirement to file an Additional Shares
Listing Application with the SmallCap at least (15) days prior to the issuance
of the Shares or the Warrant Shares, no consent, approval,
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authorization or order of any court, governmental agency or body or arbitrator
having jurisdiction over the Company, or any of its Affiliates, any Principal
Market, nor the Company's shareholders is required for the execution by the
Company of the Transaction Documents and compliance and performance by the
Company of its obligations under the Transaction Documents, including, without
limitation, the issuance and sale of the Securities.
(f) No Violation or Conflict. Assuming the
representations and warranties of the Subscribers in Section 4 are true and
correct, neither the issuance and sale of the Securities nor the performance of
the Company's obligations under this Agreement and all other agreements entered
into by the Company relating thereto by the Company will:
(i) violate, conflict with, result in a
breach of, or constitute a default (or an event which with the giving of notice
or the lapse of time or both would be reasonably likely to constitute a default
in any material respect) of a material nature under (A) the articles or
certificate of incorporation, charter or bylaws of the Company, (B) to the
Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation
or determination applicable to the Company of any court, governmental agency or
body, or arbitrator having jurisdiction over the Company or over the properties
or assets of the Company or any of its Affiliates, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any agreement, stock
option or other similar plan, indenture, lease, mortgage, deed of trust or other
instrument to which the Company or any of its Affiliates is a party, by which
the Company or any of its Affiliates is bound, or to which any of the properties
of the Company or any of its Affiliates is subject, or (D) the terms of any
"lock-up" or similar provision of any underwriting or similar agreement to which
the Company, or any of its Affiliates is a party except the violation, conflict,
breach, or default of which would not have a Material Adverse Effect; or
(ii) result in the creation or imposition of
any lien, charge or encumbrance upon the Securities or any of the assets of the
Company or any of its Affiliates; or
(iii) result in the activation of any
anti-dilution rights or a reset or repricing of any debt or security instrument
of any other creditor or equity holder of the Company, nor result in the
acceleration of the due date of any obligation of the Company; or
(iv) result in the activation of any
piggy-back registration rights of any person or entity holding securities or
debt of the Company or having the right to receive securities of the Company.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any
security interests, liens, claims or other encumbrances, subject to restrictions
upon transfer under the 1933 Act and any applicable state securities laws;
(ii) have been, or will be, duly and validly
authorized and on the date of issuance of the Shares and upon exercise of the
Warrants, the Shares and Warrant Shares will be duly and validly issued, fully
paid and nonassessable or if registered pursuant to the 1933 Act, and resold
pursuant to an effective registration statement will be free trading and
unrestricted);
(iii) will not have been issued or sold in
violation of any preemptive or other similar rights of the holders of any
securities of the Company; and
(iv) will not subject the holders thereof to
personal liability by reason of being such holders provided Subscriber's
representations herein are true and accurate and Subscribers
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take no actions or fail to take any actions required for their purchase of the
Securities to be in compliance with all applicable laws and regulations; and
(v) will not result in a violation of
Section 5 under the 1933 Act.
(h) Litigation. There is no pending or, to the best
knowledge of the Company, threatened action, suit, proceeding or investigation
before any court, governmental agency or body, or arbitrator having jurisdiction
over the Company, or any of its Affiliates that would affect the execution by
the Company or the performance by the Company of its obligations under the
Transaction Documents. Except as disclosed in the Reports, there is no pending
or, to the best knowledge of the Company, basis for or threatened action, suit,
proceeding or investigation before any court, governmental agency or body, or
arbitrator having jurisdiction over the Company, or any of its Affiliates which
litigation if adversely determined would have a Material Adverse Effect.
(i) Reporting Company. The Company is a publicly-held
company subject to reporting obligations pursuant to Section 13 of the
Securities Exchange Act of 1934 (the "1934 Act") and has a class of common
shares registered pursuant to Section 12(g) of the 1934 Act. Pursuant to the
provisions of the 1934 Act, as amended, the Company has filed all 10-KSB and
10-QSB reports required to be filed thereunder with the Commission during the
preceding twelve months.
(j) No Market Manipulation. The Company and its
Affiliates have 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 to facilitate the
sale or resale of the Securities or affect the price at which the Securities may
be issued or resold, provided, however, that this provision shall not prevent
the Company from engaging in investor relations/public relations activities
consistent with past practices.
(k) Information Concerning Company. The Reports
contain all material information relating to the Company and its operations and
financial condition as of their respective dates and all the material
information required to be disclosed therein. Since the last day of the fiscal
year of the most recent audited financial statements included in the Reports
("Latest Financial Date"), and except as modified in the Other Written
Information or in the Schedules hereto, there has been no Material Adverse Event
relating to the Company's business, financial condition or affairs not disclosed
in the Reports. The Reports do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in light of the circumstances when
made.
(l) Stop Transfer. The Company will not issue any
stop transfer order or other order impeding the sale, resale or delivery of any
of the Securities, except as may be required by any applicable federal or state
securities laws and unless contemporaneous notice of such instruction is given
to the Subscriber.
(m) Defaults. The Company is not in violation of its
articles of incorporation or bylaws. The Company is (i) not in default under or
in violation of any other material agreement or instrument to which it is a
party or by which it or any of its properties are bound or affected, which
default or violation would have a Material Adverse Effect, (ii) not in default
with respect to any order of any court, arbitrator or governmental body or
subject to or party to any order of any court or governmental authority arising
out of any action, suit or proceeding under any statute or other law respecting
antitrust, monopoly, restraint of trade, unfair competition or similar matters,
or (iii) to the Company's knowledge not in violation of any statute, rule or
regulation of any governmental authority which violation would have a Material
Adverse Effect.
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(n) Not an 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 offer of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
the SmallCap Market or any Principal Market which would impair exemptions relied
upon in this Offering (as defined in Section 8(b)). Nor will the Company or any
of its Affiliates take any action or steps that would cause the offer or
issuance of the Securities to be integrated with other offerings which would
impair the exemptions relied upon in this Offering or the Company's ability to
timely comply with its obligations hereunder.
(o) No General Solicitation. Neither the Company, nor
any of its Affiliates, nor to its knowledge, any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the ▇▇▇▇ ▇▇▇) in connection with the
offer or sale of the Securities.
(p) Listing. The Company's common stock is quoted on
the SmallCap. Other than prior notices, all of which the Company has complied
with and the notice dated June 24, 2004, and any subsequent notifications
related thereto from the SmallCap, the Company has not received any oral or
written notice that its common stock is not eligible nor will become ineligible
for quotation on the SmallCap nor that its common stock does not meet all
requirements for the continuation of such quotation. As of the date hereof,
other than the requirements of NASD Market Place Rule Section 4310 (c) (4), the
Company satisfies all the requirements for the continued quotation of its common
stock on the SmallCap.
(q) No Undisclosed Liabilities. Other than the
execution of this Subscription Agreement and the transactions contemplated
therein, the Company has no liabilities or obligations which are material,
individually or in the aggregate, which are not disclosed in the Reports and
Other Written Information, other than those incurred in the ordinary course of
the Company's businesses since the Latest Financial Date and which, individually
or in the aggregate, would reasonably be expected to have a Material Adverse
Effect, except as disclosed on Schedule 5(q).
(r) No Undisclosed Events or Circumstances. Other
than the execution of this Subscription Agreement and the transactions
contemplated therein, since the Latest Financial Date, no event or circumstance
has occurred or exists with respect to the Company or its businesses,
properties, operations or financial condition, that, under applicable law, rule
or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been so publicly announced or disclosed
in the Reports.
(s) Capitalization. The authorized and outstanding
capital stock of the Company as of the date of this Agreement and the Closing
Date (not including the Securities) are set forth on Schedule 5(d). Except as
set forth on Schedule 5(d) or as disclosed in the Reports, there are no options,
warrants, or rights to subscribe to, securities, rights or obligations
convertible into or exchangeable for or giving any right to subscribe for any
shares of capital stock of the Company or any of its Subsidiaries. All of the
outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and nonassessable.
(t) Dilution. The Company's executive officers and
directors understand the nature of the Securities being sold hereby and
recognize that the issuance of the Securities will have a potential dilutive
effect on the equity holdings of other holders of the Company's equity or rights
to receive equity of the Company. The board of directors of the Company has
concluded, in its good faith business judgment that the issuance of the
Securities is in the best interests of the Company. The Company specifically
acknowledges that subject to the Company's receiving the Approval, if the
Approval is
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required by the applicable NASD Market Place rules and/or Nasdaq's corporate
governance rules, its obligation to issue the Shares upon conversion of the
Notes, and the Warrant Shares upon exercise of the Warrants 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 or parties entitled to
receive equity of the Company.
(u) No Disagreements with Accountants and Lawyers.
There are no disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the Company and the accountants and
lawyers formerly or presently employed by the Company, including but not limited
to disputes or conflicts over payment owed to such accountants and lawyers.
(v) DTC Status. The Company's transfer agent is a
participant in and the Common Stock is eligible for transfer pursuant to the
Depository Trust Company Automated Securities Transfer Program. The name,
address, telephone number, fax number, contact person and email address of the
Company transfer agent is set forth on Schedule 5(v) hereto.
(w) Investment Company. Neither the Company nor any
Affiliate is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(x) Solvency. Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by the Company
of the proceeds from the Offering (i) the Company's fair saleable value of its
assets exceeds the amount that will be required to be paid on or in respect of
the Company's existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Company's assets do not constitute
unreasonably small capital to carry on its business for the current fiscal year
as now conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business
conducted by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company, together
with the proceeds the Company would receive, were it to liquidate all of its
assets, after taking into account all anticipated uses of the cash, would be
sufficient to pay all amounts on or in respect of its debt when such amounts are
required to be paid. The Company does not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt).
(y) Correctness of Representations. The Company
represents that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects, and, unless the Company
otherwise notifies the Subscribers prior to each Closing Date, shall be true and
correct in all material respects as of the Closing Date.
(z) Survival. The foregoing representations and
warranties shall survive the Closing Date until two years after the Closing
Date.
6. Regulation D Offering. The offer and issuance of the
Securities to the Subscribers is being made pursuant to the exemption from the
registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6)
of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion reasonably acceptable to
Subscriber from the Company's legal counsel opining on the availability of an
exemption from registration under the 1933 Act as it relates to the offer and
issuance of the Securities and other matters reasonably requested by
Subscribers. A form of the legal opinion is 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 issuance and resale of the Common
Stock issuable upon conversion of the Notes and exercise of the Warrants
pursuant to an effective registration statement, provided, however, the
Subscriber seeking such opinion meets all applicable requirements for such
resale and provided such Subscriber provides the
9
Company and/or its counsel with such information as the Company's counsel may
need in order to render such opinion. Subscriber agrees that any legal opinions
required hereunder or under any other Transaction Documents may be supplied by
the Company's in house General Counsel.
7.1. Conversion of Note.
(a) Upon the conversion of a Note or part thereof,
the Company shall, at its own cost and expense, take all necessary action,
including obtaining and delivering, an opinion of counsel to assure that the
Company's transfer agent shall issue stock certificates in the name of
Subscriber (or its nominee) or such other persons as designated by Subscriber
and in such denominations to be specified at conversion representing the number
of shares of Common Stock issuable upon such conversion, provided however, if
the stock certificates being issued pursuant to this Section are being issued to
the Subscriber's nominee and not in connection with a sale thereof, prior to
such issuance, the Subscriber and the proposed nominee shall execute and deliver
to the Company a representation letter that is reasonably acceptable to the
Company. 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, unless waived by the Subscriber, the Shares will, subject to the
provisions of this Subscription Agreement, be free-trading, and freely
transferable, and will not contain a legend restricting the resale or
transferability of the Shares provided the Shares are being sold pursuant to an
effective registration statement covering the Shares or are otherwise exempt
from registration. Subscriber hereby agrees to indemnify the Company in the
event an exemption from such transfer under the 1933 Act is found not to have
been available.
(b) Subscriber will give notice of its decision to
exercise its right to convert the Note, interest, any sum due to the Subscriber
under the Transaction Documents including Liquidated Damages, or part thereof by
telecopying an executed and completed Notice of Conversion (a form of which is
annexed as Exhibit A to the Note) to the Company via confirmed telecopier
transmission or otherwise pursuant to Section 12(a) of this Agreement. The
Subscriber will be required to surrender the Note prior to the conversion of the
Note. Subscriber will also be required to surrender the note within three
business days of the satisfaction by the Company of such Note. Each date on
which a Notice of Conversion is telecopied to the Company in accordance with the
provisions hereof shall be deemed a Conversion Date. The Company will itself or
cause the Company's transfer agent to transmit the Company's Common Stock
certificates representing the Shares issuable upon conversion of the Note to the
Subscriber via express courier for receipt by such Subscriber within five (5)
business days after receipt by the Company of the Notice of Conversion (such
fifth day being the "Delivery Date"). In the event the Shares are electronically
transferable, then delivery of the Shares must be made by electronic transfer
provided request for such electronic transfer has been made by the Subscriber
and the Subscriber has complied with all applicable securities laws in
connection with the sale of the Common Stock, including, without limitation, the
prospectus delivery requirements. A Note representing the balance of the Note
not so converted will be provided by the Company to the Subscriber if requested
by Subscriber, provided the Subscriber has delivered the original Note to the
Company. In the event that a Subscriber does not surrender a Note for reissuance
upon partial payment or conversion, the Subscriber hereby indemnifies the
Company against any and all loss or damage attributable to a third-party claim
in an amount in excess of the actual amount then due under the Note. "Business
day" and "trading day" as employed in the Transaction Documents is a day that
the New York Stock Exchange is open for trading for three or more hours.
(c) The Company understands that a delay in the
delivery of the Shares in the form required pursuant to Section 7.1 hereof, or
the Mandatory Redemption Amount described in Section 7.2 hereof, respectively
after the Delivery Date or the Mandatory Redemption Payment Date (as hereinafter
defined) could result in economic loss to the Subscriber. As compensation to the
Subscriber for such loss, the Company agrees to pay (as liquidated damages and
not as a penalty) to the Subscriber for late issuance
10
of Shares in the form required pursuant to Section 7.1 hereof upon Conversion of
the Note in the amount of $100 per business day after the Delivery Date for each
$10,000 of Note principal amount being converted of the corresponding Shares
which are not timely delivered. The Company shall pay any payments incurred
under this Section in immediately available funds upon demand.
(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 permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Subscriber and thus refunded
to the Company.
(e) The Company may in its sole discretion reduce the
Conversion Price of any Notes that have not been paid off or fully converted if
(i) the Approval has been obtained or (ii) if the Approval is not required by
the applicable NASD Market Place Rules and/or the Nasdaq's corporate governance
rules. In the event the Conversion Price is reduced pursuant to this Section
7.1(e), the Company shall notify any Subscribers holding Notes which have not
been paid by the Company or fully converted by the Subscribers of such reduced
Conversion Price.
7.2. Mandatory Redemption at Subscriber's Election. In the
event (i) the Company is prohibited from issuing Shares, (ii) the Company fails
to timely deliver Shares on a Delivery Date, (iii) upon the occurrence of any
other Event of Default (as defined in the Note or in this Agreement), (iv) of
the liquidation, dissolution or winding up of the Company, or (v) a Change of
Control (as defined below) any of which that continues for more than ten days,
then at the Subscriber's election, the Company must pay to the Subscriber ten
(10) business days after request by the Subscriber, at the Subscriber's
election, a sum of money determined by (y) multiplying up to the outstanding
principal amount of the Note designated by the Subscriber by 120%, or (z)
multiplying the number of Shares otherwise deliverable upon conversion of an
amount of Note principal and/or interest designated by the Subscriber (with the
date of giving of such designation being a "Deemed Conversion Date") at the
Conversion Price that would be in effect on the Deemed Conversion Date by the
highest closing price of the Common Stock on the Principal Market for the period
commencing on the Deemed Conversion Date until the day prior to the receipt by
the Subscriber of the Mandatory Redemption Payment, whichever is greater,
together with accrued but unpaid interest thereon ("Mandatory Redemption
Payment"). The Mandatory Redemption Payment must be received by the Subscriber
on the same date as the Company Shares otherwise deliverable or within ten (10)
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. Liquidated
damages calculated pursuant to Section 7.1(c) hereof, that have been paid or
accrued for the twenty day period prior to the actual receipt of the Mandatory
Redemption Payment by the Subscriber shall be credited against the Mandatory
Redemption Payment. For purposes of this Section 7.2, "Change in Control" shall
mean (i) the Company becoming a Subsidiary of another entity, (ii) a majority of
the board of directors of the Company as of the Closing Date no longer serving
as directors of the Company except due to natural causes, (iii) the sale, lease
or transfer of substantially all the assets of the Company or Subsidiaries.
7.3. Maximum Conversion. The Subscriber shall not be entitled
to convert on a Conversion Date that amount of the 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 Subscriber and its
Affiliates 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 provision is being made on a Conversion Date, which would result in
beneficial ownership by the Subscriber and its Affiliates of more than 4.99% of
the outstanding shares of common stock of the Company on such
11
Conversion Date. 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 Subscriber shall not be limited
to aggregate conversions of only 4.99% and aggregate conversions by the
Subscriber may exceed 4.99%. The Subscriber may waive the conversion limitation
described in this Section 7.3, in whole or in part, upon and effective after 61
days prior written notice to the Company. The Subscriber may decide whether to
convert a Note or exercise Warrants to achieve an actual 4.99% ownership
position.
7.4. Injunction Posting of Bond. In the event a Subscriber
shall elect to convert a Note or part thereof or exercise the Warrant in whole
or in part, the Company may not refuse conversion or exercise based on any claim
that such Subscriber or any one associated or affiliated with such Subscriber
has been engaged in any violation of law, or for any other reason, unless, an
injunction from a court, on notice, restraining and or enjoining conversion of
all or part of such Note or exercise of all or part of such Warrant shall have
been sought and obtained by the Company and the Company has posted a surety bond
for the benefit of such Subscriber in the amount of 120% of the outstanding
principal and interest of the Note, or aggregate purchase price of the Warrant
Shares which are sought to be 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 Subscriber to the extent Subscriber
obtains judgment. Notwithstanding the foregoing, if the Company receives an
order restraining it from converting from a court or administration agency of
competent jurisdiction, it shall comply without a bond requirement.
7.5. Buy-In. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after seven (7)
business days after the Delivery Date the Subscriber purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Subscriber of the Common Stock which the
Subscriber was entitled to receive upon such conversion (a "Buy-In"), then the
Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber'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
Subscriber 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
Subscriber $1,000, plus interest. The Subscriber shall provide the Company
written notice and acceptable written proof of the purchase and the amount
thereof and indicating the amounts payable to the Subscriber in respect of the
Buy-In.
7.6 Adjustments. The Conversion Price, Warrant exercise price
and amount of Shares issuable upon conversion of the Notes and exercise of the
Warrants shall be adjusted as described in this Agreement, the Notes and
Warrants.
7.7. Redemption. The Note and Warrants shall not be redeemable
or mandatorily convertible except as described in the Note and Warrants.
8. Broker/Legal Fees.
(a) Broker's Commission. The Company on the one hand,
and each Subscriber (for himself only) on the other hand, agrees to indemnify
the other against and hold the other harmless from any and all liabilities to
any persons claiming brokerage commissions or similar fees other than other than
___________________________, ("Broker") on account of services purported to
have been
12
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby and arising out of such party's actions.
Anything in this Agreement to the contrary notwithstanding, each Subscriber is
providing indemnification only for such Subscriber's own actions and not for any
action of any other Subscriber. The liability of the Company and each
Subscriber's liability hereunder is several and not joint. The Company agrees
that it will pay the Broker the fees set forth on Schedule 8 hereto ("Broker's
Fees"). The Company represents that to the best of its knowledge there are no
other parties entitled to receive fees, commissions, or similar payments in
connection with the offering described in this Agreement except the Broker.
(b) Legal Fees. The Company shall pay to Grushko &
▇▇▇▇▇▇▇, P.C., a cash fee of $15,000 and the Broker shall pay to Grushko &
▇▇▇▇▇▇▇, P.C. a cash fee of $10,000 ("Legal Fees") as reimbursement for services
rendered to the Subscribers in connection with this Agreement and the purchase
and sale of the Notes and Warrants (the "Offering"). The Legal Fees will be
payable on the Closing Date out of funds held pursuant to the Escrow Agreement.
9. Covenants of the Company. The Company covenants and agrees
with the Subscribers as follows:
(a) Stop Orders. So long as the Subscribers own any
of the Securities, the Company will advise the Subscribers, within two hours
after the Company receives notice of issuance by the Commission, 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.
(b) Listing. The Company shall promptly secure the
listing of the shares of the Common Stock and the Warrant Shares upon each
national securities exchange, or automated quotation system upon which they are
or become eligible for listing (subject to official notice of issuance) and
shall maintain such listing so long as any Notes or Warrants are outstanding,
provided the Company's Common Stock continues to be listed on such national
securities exchange or automated quotation system. So long as Subscriber own any
securities, the Company will use its best reasonable efforts to maintain the
listing of its Common Stock on the American Stock Exchange, SmallCap, Nasdaq
National Market System, OTC Bulletin Board, 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")), and will comply in all
respects with the Company's reporting, filing or other obligations under the
bylaws or rules of the Principal Market, as applicable. So long as the
Subscriber own the securities, the Company will provide the Subscribers copies
of all notices it receives notifying the Company of the threatened and actual
delisting of the Common Stock from any Principal Market. As of the date of this
Agreement and the Closing Date, the SmallCap is the Principal Market.
(c) Market Regulations. The Company shall notify the
Commission, the Principal Market 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 the Subscribers and promptly provide copies
thereof to Subscriber.
(d) Filing Requirements. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company will (A) cause its Common
Stock to continue to be registered under Section 12(b) or 12(g) of the 1934 Act,
(B) comply in all respects with its reporting and filing obligations under the
1934 Act, (C) voluntarily comply with all reporting requirements that are
13
applicable to an issuer with a class of shares registered pursuant to Section
12(g) of the 1934 Act, if Company is not subject to such reporting requirements,
and (D) comply with all requirements related to any registration statement filed
pursuant to this Agreement. The Company will use its best efforts not to take
any action or file any document (whether or not permitted by the 1933 Act or the
1934 Act or the rules thereunder) to terminate or suspend such registration or
to terminate or suspend its reporting and filing obligations under said acts
until two (2) years after the Closing Date. Until the earlier of the resale of
the Common Stock, and the Warrant Shares by each Subscriber or two (2) years
after the Warrants have been exercised, the Company will use its best efforts to
continue the listing or quotation of the 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 Principal Market. The Company
agrees to timely file a Form D with respect to the Securities if required under
Regulation D and to provide a copy thereof to each Subscriber promptly after
such filing.
(e) Use of Proceeds. The proceeds of the Offering
will be employed by the Company for the purposes set forth on Schedule 9(e)
hereto. Except as set forth on Schedule 9(e), the Purchase Price may not and
will not be used for accrued and unpaid officer and director salaries, payment
of financing related debt, redemption of outstanding notes or equity instruments
of the Company, litigation related expenses or settlements, brokerage fees, nor
non-trade obligations outstanding on a Closing Date. For so long as any Notes
are outstanding, the Company will not prepay any financing related debt
obligations nor redeem any equity instruments of the Company.
(f) Reservation. Prior to the Closing Date, the
Company undertakes to reserve, pro rata, on behalf of the Subscribers from its
authorized but unissued common stock, a number of common shares equal to 175% of
the amount of Common Stock necessary to allow each Subscriber to be able to
convert all Notes issuable pursuant to this Agreement and interest thereon and
reserve 100% of the amount of Warrant Shares issuable upon exercise of the
Warrants. Failure to have sufficient shares reserved pursuant to this Section
9(f) for five (5) consecutive business days or fifteen (15) days in the
aggregate shall be a material default of the Company's obligations under this
Agreement and an Event of Default under the Note.
(g) Taxes. From the date of this Agreement and until
the sooner of (i) two (2) years after the Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitations, 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 therefore.
(h) Insurance. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, 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
one hundred percent (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
14
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.
(i) Books and Records. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company will keep true records
and books of account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and affairs in accordance
with generally accepted accounting principles applied on a consistent basis.
(j) Governmental Authorities. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company shall duly observe and
conform in all material respects to all valid requirements of governmental
authorities relating to the conduct of its business or to its properties or
assets.
(k) Intellectual Property. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, 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, unless it is
sold for value.
(l) Properties. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, 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 necessary 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.
(m) Confidentiality/Public Announcement. From the
date of this Agreement and until the sooner of (i) six months after the Closing
Date, or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company agrees
that except in connection with a Form 8-K or the Registration Statement or as
otherwise required in any other Commission filing or in filings with the
SmallCap or such other Principal Market, it will not disclose publicly the
identity of the Subscribers unless expressly agreed to in writing by a
Subscriber, only to the extent required by law or regulations of the SmallCap or
such other Principal Market. In any event and subject to the foregoing, the
Company shall make a public announcement describing the Offering not later than
the third business day after the Closing Date. The Company also undertakes to
file a Form 8-K describing the Offering. In the Form 8-K or public announcement,
the Company will specifically disclose the amount of common stock outstanding
immediately after the Closing. A form of the proposed Form 8-K or public
announcement to be employed in connection with the Closing is annexed hereto as
Exhibit E. The Subscribers expressly consent to the filing of such Form 8-K and
the making of the aforementioned public announcement.
(n) Further Registration Statements. Except for a
registration statement filed on behalf of the Subscribers pursuant to Section 11
of this Agreement and as set forth on Schedule 11.1 hereto, the Company will not
file any registration statements or amend any already filed registration
15
statement, including but not limited to Forms S-8, with the Commission or with
state regulatory authorities without the consent of the Subscriber until the
sooner of (i) the Registration Statement shall have been current and available
for use in connection with the resale of the Registrable Securities (as defined
in Section 11.1(i)) for a period of 30 days or (ii) until all the Shares and
Warrant Shares have been resold or transferred by the Subscribers pursuant to
the Registration Statement or Rule 144, without regard to volume limitations
(the "Exclusion Period"). The Exclusion Period will be tolled during the
pendency of an Event of Default as defined in the Note.
(o) Blackout. The Company undertakes and covenants
that until the end of the Exclusion Period, the Company will not enter into any
acquisition, merger, exchange or sale or other transaction that could have the
effect of delaying the effectiveness of any pending registration statement or
causing an already effective registration statement to no longer be effective or
current for a period ten (10) or more consecutive days nor more than twenty (20)
days during any consecutive three hundred and sixty-five (365) day period.
(p) Non-Public Information. The Company covenants and
agrees that neither it nor any other person acting on its behalf will provide
any Subscriber or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto such
Subscriber shall have agreed in writing to receive such information. The Company
understands and confirms that each Subscriber shall be relying on the foregoing
representations in effecting transactions in securities of the Company.
(q) Shareholder Approval. If required by the
applicable NASD Market Place Rules and/or Nasdaq's corporate governance rules,
the Company and Subscriber agree that until the Company either obtains
shareholder approval of the issuance of the Securities, or an exemption from
NASDAQ's corporate governance rules as they may apply to the Shares and
Warrants, and an opinion of counsel reasonably acceptable to Subscriber that the
issuance of the Shares and Warrants will not violate NASDAQ's corporate
governance rules nor may result in a delisting of the Company's common stock
from the SmallCap (the "Approval"), each Subscriber may not receive any Shares
or Warrants. If the Approval is required by the applicable NASD Market Place
Rules, and or Nasdaq's corporate governance rules, the Company covenants to use
its best reasonable efforts to obtain the Approval to allow the issuance of the
Shares and Warrants. If the Approval is required by the applicable NASD Market
Place Rules and/or the Nasdaq's corporate governance rules, the Company further
covenants to file the preliminary proxy statement relating to the Approval with
the Commission on or before thirty (30) days after the Closing Date ("Proxy
Filing Date"). If the Approval is required by the applicable NASD Market Place
Rules and/or the Nasdaq's corporate governance rules, the Company further
covenants to use its best reasonable efforts to obtain the Approval not later
than the sooner of seventy-five (75) days from the Closing Date ("Approval
Date"). If the Approval is required by the applicable NASD Market Place Rules
and/or Nasdaq's corporate governance rules, the Company's failure to (i) file
the proxy on or before the Proxy Filing Date; or (ii) the Company's failure to
convene a meeting or shareholders with a quorum present and vote upon the
Approval within seventy-five (75) days, or in the case of an SEC review, one
hundred and five (105) days after the Closing Date; or (iii) the Company's
failure to obtain the Approval on or before the Approval Date (any of the
preceding being an "Approval Default") shall be deemed a rejection ("Rejection")
and the Company shall immediately notify each Subscriber of such Approval
Default; provided, however that any Subscriber may waive such Rejection During
the ten (10) business days following its receipt of notification from the
Company that such Approval Default has occurred, in which case the Company shall
remain obligated to such Subscriber to use its best reasonable efforts to file
the proxy and obtain the Approval as set forth above.
(r) For purposes of this Section, in the event the
Subscribers or their permitted assignees no longer own any Notices, Warrants and
none of the Shares and Warrant Shares are held in the name of the Subscribers,
the Shares and Warrant Shares shall be deemed to have been
16
transferred by the Subscribers unless the Subscriber provide the Company with
written proof reasonably acceptable to the Company that the Shares or Warrant
Shares are still owned by such Subscriber or such Subscriber's Affiliate.
10. Covenants of the Company and Subscriber Regarding
Indemnification.
(a) The Company agrees to indemnify, hold harmless,
reimburse and defend the Subscribers, the Subscribers' 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 Subscriber
or any such person which results, arises out of or is based upon (i) any
material misrepresentation by Company or material breach of any warranty by
Company in this Agreement or in any Exhibits or Schedules attached hereto, or
other agreement delivered pursuant hereto; or (ii) after any applicable notice
and/or cure periods, any material breach or default in performance by the
Company of any covenant or undertaking to be performed by the Company hereunder,
or any other agreement entered into by the Company and Subscriber relating
hereto.
(b) Each Subscriber agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company's officers,
directors, agents, Affiliates, control persons against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Company or any such person which
results, arises out of or is based upon (i) any material misrepresentation by
such Subscriber or a material breach of any warranty by the Subscribers in this
Agreement or in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant hereto; or (ii) after any applicable notice and/or cure
periods, any material breach or default in performance by such Subscriber of any
covenant or undertaking to be performed by such Subscriber hereunder, or any
other agreement entered into by the Company and Subscribers, relating hereto.
(c) The procedures set forth in Section 11.6 shall
apply to the indemnification set forth in Sections 10(a) and 10(b) above.
11.1. Registration Rights. The Company hereby grants the
following registration rights to holders of the Securities.
(i) On one occasion, for a period commencing
ninety-one (91) days after the Closing Date, but not later than two (2) years
after the Closing Date, upon a written request therefor from any record holder
or holders of more than 50% of the Shares issued and issuable upon conversion of
the outstanding Notes and outstanding Warrant Shares, the Company shall prepare
and file with the Commission a registration statement under the 1933 Act
registering the Registrable Securities, as defined in Section 11.1(iv) hereof,
which are the subject of such request for unrestricted public resale by the
holder thereof. For purposes of Sections 11.1(i) and 11.1(ii), Registrable
Securities shall not include Securities which are (A) registered for resale in
an effective registration statement, (B) included for registration in a pending
registration statement, or (C) which have been issued without further transfer
restrictions after a sale or transfer pursuant to Rule 144 under the 1933 Act.
Upon the receipt of such request, the Company shall promptly give written notice
to all other record holders of the Registrable Securities that such registration
statement is to be filed and shall include in such registration statement
Registrable Securities for which it has received written requests within ten
(10) days after the Company gives such written notice. Such other requesting
record holders shall be deemed to have exercised their demand registration right
under this Section 11.1(i).
(ii) From the Closing Date but not later than two (2)
years after the Closing Date, if the Company at any time proposes to register
any of its securities under the 1933 Act for sale to the public, whether for its
own account or for the account of other security holders or both, except with
respect
17
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 registered for resale by the
Subscribers or Holder pursuant to an effective registration statement, each such
time it will give at least fifteen (15) days' prior written notice to the record
holder of the Registrable Securities of its intention so to do. Upon the written
request of the holder, received by the Company within ten (10) days after the
giving of any such notice by the Company, to register any of the Registrable
Securities not previously registered, the Company will cause such Registrable
Securities as to which registration shall have been so requested to be included
with the securities to be covered by the registration statement proposed to be
filed by the Company, all to the extent required to permit the sale or other
disposition of the Registrable Securities so registered by the holder of such
Registrable Securities (the "Seller" or "Sellers"). In the event that any
registration pursuant to this Section 11.1(ii) 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 Seller in writing
of any such reduction. Notwithstanding the foregoing provisions, or Section 11.4
hereof, the Company may withdraw or delay or suffer a delay of any registration
statement referred to in this Section 11.1(ii) without thereby incurring any
liability to the Seller.
(iii) If, at the time any written request for
registration is received by the Company pursuant to Section 11.1(i), the Company
has determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the proposed offer
and sale for cash of any of its securities for the Company's own account and the
Company actually does file such other registration statement, such written
request shall be deemed to have been given pursuant to Section 11.1(ii) rather
than Section 11.1(i), and the rights of the holders of Registrable Securities
covered by such written request shall be governed by Section 11.1(ii).
(iv) The Company shall file with the Commission a
Form SB-2 registration statement (the "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 1933 Act on the sooner of (i) within five
(5) calendar days after the Approval has been obtained, if the Approval is
required by the applicable NASD Market Place Rules and/or Nasdaq's corporate
governance rules, or (ii) ninety-seven (97) days after the Closing Date (the
"Filing Date"), and use its reasonable best efforts cause to be declared
effective not later than sixty (60) calendar days after 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 175%
of the Shares issuable upon conversion of all of the Notes issuable to the
Subscribers, and 100% of the Warrant Shares issuable pursuant to this Agreement
upon exercise of the Warrants (collectively the "Registrable Securities"). The
Registrable Securities shall be reserved and set aside exclusively for the
benefit of each Subscriber and Warrant holder, pro rata, and not issued,
employed or reserved for anyone other than each such Subscriber and Warrant
holder. The Registration Statement will immediately be amended or additional
registration statements will be immediately filed by the Company as necessary to
register additional shares of Common Stock to allow the public resale of all
Common Stock included in and issuable by virtue of the Registrable Securities.
Except with the written consent of the Subscriber, or as described on Schedule
11.1 hereto, no securities of the Company other than the Registrable Securities
will be included in the Registration Statement, provided, however, and
notwithstanding anything to the contrary herein, the Company may include any
shares issued to the Broker or any designee of the Broker, upon the exercise of
warrants granted to the Broker pursuant to the Agreement between the Broker and
the Company dated January __, 2006. It shall be deemed a Non-Registration Event
if at any time after the date the Registration Statement is declared effective
by the Commission ("Actual Effective Date") the Company has registered for
resale on behalf of the Sellers fewer than 125% of the amount of Common
18
Shares issuable upon full conversion of all sums due under the Notes and 100% of
the Warrant Shares issuable upon exercise of the Warrants.
11.2. Registration Procedures. If and whenever the Company is
required by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the
registration of any Registrable Securities under the 1933 Act, the Company will,
as expeditiously as possible:
(a) subject to the timelines provided in this
Agreement, prepare and file with the Commission a registration statement
required by Section 11, 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),
promptly provide to the holders of the Registrable Securities copies of all
filings and Commission letters of comment and notify Subscribers (by telecopier
and by e-mail addresses provided by Subscribers) and Grushko & ▇▇▇▇▇▇▇, P.C. (by
telecopier and or by email to ▇▇▇▇▇▇▇▇▇@▇▇▇.▇▇▇) within two (2) business days
that the Company receives notice that (i) the Commission has no comments or no
further comments on the Registration Statement, and (ii) the registration
statement has been declared effective (failure to timely provide notice as
required by this Section 11.2(a) shall be a material breach of the Company's
obligation and an Event of Default as defined in the Notes and a
Non-Registration Event as defined in Section 11.4 of this Agreement);
(b) prepare and file with the Commission 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 such registration statement has been effective for a
period of two (2) years, and comply with the provisions of the 1933 Act with
respect to the disposition of all of the Registrable Securities covered by such
registration statement in accordance with the Sellers' intended method of
disposition set forth in such registration statement for such period;
(c) furnish to the Sellers, at the Company's expense,
such number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the
securities covered by such registration statement or make them electronically
available;
(d) use its commercially reasonable best efforts to
register or qualify the Registrable Securities covered by such registration
statement under the securities or "blue sky" laws of New York and such
jurisdictions as the Sellers shall request in writing, 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) if applicable, 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) if a prospectus relating to the Shares or the
Warrant Shares is required to be delivered under the 1933 Act, notify the
Subscribers within two hours of the Company's becoming aware 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 or which becomes subject to a
Commission, state or other governmental order suspending the effectiveness of
the registration statement covering any of the Shares; and
(g) provided same would not be in violation of the
provision of Regulation FD under the 1934 Act, make available for inspection by
the Sellers, and any attorney, accountant or other
19
agent retained by the Seller 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, attorney, accountant or agent in connection
with such registration statement.
11.3. Provision of Documents. In connection with each
registration described in this Section 11, each Seller 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.
11.4. Non-Registration Events. The Company and the Subscribers
agree that the Sellers will suffer damages if the Registration Statement is not
filed by the Filing Date and not declared effective by the Commission by the
Effective Date, and any registration statement required under Section 11.1(i) or
11.1(ii) is not filed within 60 days after written request and declared
effective by the Commission within 120 days after such request, and maintained
in the manner and within the time periods contemplated by Section 11 hereof, and
it would not be feasible to ascertain the extent of such damages with precision.
Accordingly, if (A) the Registration Statement is not filed on or before the
Filing Date, (B) is not declared effective on or before the Effective Date, (C)
due to the action or inaction of the Company the Registration Statement is not
declared effective within 3 business days after receipt by the Company or its
attorneys of a written or oral communication from the Commission that the
Registration Statement will not be reviewed or that the Commission has no
further comments, (D) if the registration statement described in Sections
11.1(i) or 11.1(ii) is not filed within 60 days after such written request, or
is not declared effective within 120 days after such written request, or (E) any
registration statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is
filed and declared effective but shall thereafter cease to be effective without
being succeeded within 15 business days by an effective replacement or amended
registration statement or for a period of time which shall exceed 30 days in the
aggregate per year (defined as a period of 365 days commencing on the Actual
Effective Date (each such event referred to in clauses (A) through (E) of this
Section 11.4 is referred to herein as a "Non-Registration Event"), then the
Company shall deliver to the holder of Registrable Securities, as Liquidated
Damages, an amount equal to two percent (2%) for each 30 days or part thereof of
the Purchase Price of the Notes remaining unconverted and purchase price of
Shares issued upon conversion of the Notes owned of record by such holder which
are subject to such Non-Registration Event. Notwithstanding anything to the
contrary in this section, a maximum of four percent (4%) liquidated damages will
be payable in connection with the Non-Registration Event described in this
Section 11.4. The Company must pay the Liquidated Damages in cash. The
Liquidated Damages must be paid within 10 days after the end of each thirty (30)
day period or shorter part thereof for which Liquidated Damages are payable. In
the event a Registration Statement is filed by the Filing Date but is withdrawn
prior to being declared effective by the Commission, then such Registration
Statement will be deemed to have not been filed. The Company shall use its best
reasonable efforts to respond to all oral or written comments received from the
Commission relating to the Registration Statement within 15 days in connection
with the initial filing of the Registration Statement and within 10 days in
connection with amendments to the Registration Statement after receipt of such
comments from the Commission. Failure to timely respond to Commission comments
is a Non-Registration Event for which Liquidated Damages shall accrue and be
payable by the Company to the holders of Registrable Securities at the same rate
set forth above. Notwithstanding the foregoing, the Company shall not be liable
to the Subscriber under this Section 11.4 for any events or delays occurring as
a consequence of the acts or omissions of the Subscribers contrary to the
obligations undertaken by Subscribers in this Agreement. Liquidated Damages will
not accrue nor be payable pursuant to this Section 11.4 nor will a
Non-Registration Event be deemed to have occurred for times during which
Registrable Securities are transferable by the holder of Registrable Securities
pursuant to Rule 144(k) under the 1933 Act.
11.5. Expenses. All reasonable expenses incurred by the
Company in complying with Section 11, including, without limitation, all
registration and filing fees, printing expenses (if required),
20
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
National Association of Securities Dealers, Inc., transfer taxes, and fees of
transfer agents and registrars, are called "Registration Expenses." All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities are called "Selling Expenses." The Company will pay all
Registration Expenses in connection with the registration statement under
Section 11. Selling Expenses in connection with each registration statement
under Section 11 shall be borne by the Seller and may be apportioned among the
Sellers in proportion to the number of shares sold by the Seller relative to the
number of shares sold under such registration statement or as all Sellers
thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the 1933 Act pursuant to Section 11, the Company will, to the
extent permitted by law, indemnify and hold harmless the Seller, each officer of
the Seller, each director of the Seller, each underwriter of such Registrable
Securities thereunder and each other person, if any, who controls such Seller or
underwriter within the meaning of the 1933 Act, against any losses, claims,
damages or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the 1933 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 was registered under the 1933 Act
pursuant to Section 11, 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
in light of the circumstances when made, and will subject to the provisions of
Section 11.6(c) reimburse the Seller, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable to
the Seller to the extent that any such damages arise out of or are based upon an
untrue statement or omission made in any preliminary prospectus if (i) the
Seller failed to send or deliver a copy of the final prospectus delivered or
made available by the Company to the Seller with or prior to the delivery of
written confirmation of the sale by the Seller to the person asserting the claim
from which such damages arise, (ii) the final prospectus would have corrected
such untrue statement or alleged untrue statement or such omission or alleged
omission, or (iii) 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 such Seller, or any such controlling person in writing specifically for
use in such registration statement or prospectus.
(b) In the event of a registration of any of the
Registrable Securities under the 1933 Act pursuant to Section 11, each Seller
severally but not jointly will, to the extent permitted by law, indemnify and
hold harmless the Company, and each person, if any, who controls the Company
within the meaning of the 1933 Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the 1933 Act, against
all losses, claims, damages or liabilities, joint or several, to which the
Company or such officer, director, underwriter or controlling person may become
subject under the 1933 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 1933 Act pursuant to Section 11, 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
officer, director, underwriter and controlling person for any legal or other
21
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder 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 made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the net proceeds actually received by the Seller from the sale of Registrable
Securities covered by such registration statement.
(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 11.6(c) and shall only relieve it from any liability which it may have
to such indemnified party under this Section 11.6(c), except and only 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 11.6(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, as a group, 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 1933 Act in any case in
which either (i) a Seller, or any controlling person of a Seller, makes a claim
for indemnification pursuant to this Section 11.6 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 11.6 provides for indemnification in
such case, or (ii) contribution under the 1933 Act may be required on the part
of the Seller or controlling person of the Seller in circumstances for which
indemnification is not provided under this Section 11.6; then, and in each such
case, the Company and the Seller 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 Seller 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, (y) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities sold by it pursuant to such registration statement; and (z) no person
or entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the ▇▇▇▇ ▇▇▇) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
11.7. Delivery of Unlegended Shares.
22
(a) Within three (3) business days (such third
business day being the "Unlegended Shares Delivery Date") after the business day
on which the Company has received (i) a notice that Shares or Warrant Shares or
any other Common Stock held by a Subscriber have been sold pursuant to the
Registration Statement or Rule 144 under the 1933 Act, (ii) a representation
that the prospectus delivery requirements, or the requirements of Rule 144, as
applicable and if required, have been satisfied, and (iii) the original share
certificates representing the shares of Common Stock that have been sold, and
(iv) in the case of sales under Rule 144, customary representation letters of
the Subscriber and/or Subscriber's broker regarding compliance with the
requirements of Rule 144, the Company at its expense, (y) shall deliver, and
shall cause legal counsel selected by the Company to deliver to its transfer
agent (with copies to Subscriber) an appropriate instruction and opinion of such
counsel, directing the delivery of shares of Common Stock without any legends
including the legend set forth in Section 4(h) above, reissuable pursuant to any
effective and current Registration Statement described in Section 11 of this
Agreement or pursuant to Rule 144 under the 1933 Act (the "Unlegended Shares");
and (z) cause the transmission of the certificates representing the Unlegended
Shares together with a legended certificate representing the balance of the
submitted Shares certificate, if any, to the Subscriber at the address specified
in the notice of sale, via express courier, by electronic transfer or otherwise
on or before the Unlegended Shares Delivery Date.
(b) In lieu of delivering physical certificates
representing the Unlegended Shares, if the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, upon request of a Subscriber, so long as the certificates
therefor do not bear a legend and the Subscriber is not obligated to return such
certificate for the placement of a legend thereon, the Company shall cause its
transfer agent to electronically transmit the Unlegended Shares by crediting the
account of Subscriber's prime Broker with DTC through its Deposit Withdrawal
Agent Commission system. Such delivery must be made on or before the Unlegended
Shares Delivery Date.
(c) The Company understands that a delay in the
delivery of the Unlegended Shares pursuant to Section 11 hereof later than two
business days after the Unlegended Shares Delivery Date could result in economic
loss to a Subscriber. As compensation to a Subscriber for such loss, the Company
agrees to pay late payment fees (as liquidated damages and not as a penalty) to
the Subscriber for late delivery of Unlegended Shares in the amount of $100 per
business day after the Delivery Date for each $10,000 of purchase price of the
Unlegended Shares subject to the delivery default. If during any 360 day period,
the Company fails to deliver Unlegended Shares as required by this Section 11.7
for an aggregate of thirty (30) days, then each Subscriber or assignee holding
Securities subject to such default may, at its option, require the Company to
redeem all or any portion of the Shares and Warrant Shares subject to such
default at a price per share equal to 120% of the Purchase Price of such Common
Stock and Warrant Shares ("Unlegended Redemption Amount"). The amount of the
aforedescribed liquidated damages that have accrued or been paid for the twenty
day period prior to the receipt by the Subscriber of the Unlegended Redemption
Amount shall be credited against the Unlegended Redemption Amount. The Company
shall pay any payments incurred under this Section in immediately available
funds upon demand.
(d) In addition to any other rights available to a
Subscriber, if the Company fails to deliver to a Subscriber Unlegended Shares as
required pursuant to this Agreement, within seven (7) business days after the
Unlegended Shares Delivery Date and the Subscriber purchases (in an open market
transaction or otherwise) shares of common stock to deliver in satisfaction of a
sale by such Subscriber of the shares of Common Stock which the Subscriber was
entitled to receive from the Company (a "Buy-In"), then the Company shall pay in
cash to the Subscriber (in addition to any remedies available to or elected by
the Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of common stock so
purchased exceeds (B) the aggregate purchase price of the shares of Common Stock
delivered to the Company for reissuance as Unlegended Shares
23
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 a Subscriber
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to $10,000 of purchase price of shares of Common
Stock delivered to the Company for reissuance as Unlegended Shares, the Company
shall be required to pay the Subscriber $1,000, plus interest. The Subscriber
shall provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.
(e) In the event a Subscriber shall request delivery
of Unlegended Shares as described in Section 11.7 and the Company is required to
deliver such Unlegended Shares pursuant to Section 11.7, the Company may not
refuse to deliver Unlegended Shares based on any claim that such Subscriber or
any one associated or affiliated with such Subscriber has been engaged in any
violation of law, or for any other reason, unless, an injunction or temporary
restraining order from a court, on notice, restraining and or enjoining delivery
of such Unlegended Shares or exercise of all or part of said Warrant shall have
been sought and obtained and the Company has posted a surety bond for the
benefit of such Subscriber in the amount of 120% of the amount of the aggregate
purchase price of the Common Stock and Warrant Shares which are subject to the
injunction or temporary restraining order, 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 Subscriber to the extent Subscriber obtains
judgment in Subscriber's favor.
11.8 Covenants of Subscriber. The Subscriber covenants and
promises to (i) the timely provision of any Subscriber information required
hereunder or reasonably requested by the Company in connection with the filing
and declaration of effectiveness of the Registration Statement and any
amendments to the Registration Statement; (ii) the timely execution of any and
all documents required hereunder or reasonably requested by the Company in
connection with the filing and declaration of effectiveness of the Registration
Statement and any amendments to the Registration Statement; and (iii) any other
timely action as required hereunder or reasonably requested by the Company in
connection with the filing and declaration of effectiveness of the Registration
Statement and any amendments of the Registration Statement.
12. (a) Right of Participation. Commencing on the date of this
Agreement and through the Exclusion Period, the Subscribers shall be given not
less than ten (10) business days prior written notice of any proposed sale by
the Company of its common stock or other securities or debt obligations, except
in connection with (i) employee stock options or compensation plans, (ii) as
full or partial consideration in connection with any merger, consolidation or
purchase of substantially all of the securities or assets of any corporation or
other entity, (iii) issuance of an aggregate of 600,000 Shares of the Company's
Common Stock which may be issued to officers, directors, consultants and
employees to the Company, or (iv) the issuance of the stock of the company in
connection with any outstanding warrants, options, convertible preferred stock
or any other security of the company which has been described in the Reports or
Other Written Information filed with the Commission or delivered to the
Subscribers prior to the Closing Date (collectively "Excepted Issuances"). The
Subscribers who exercise their rights pursuant to this Section 11(a) shall have
the right during the ten (10) business days following receipt of the notice to
participate in the purchase of such offered common stock, debt or other
securities in accordance with the terms and conditions set forth in the notice
of sale in the same proportion to each other as their purchase of Shares in the
Offering. In the event such terms and conditions are modified during the notice
period, the Subscribers shall be given prompt notice of such modification and
shall have the right during the original notice period or for a period of five
(5) business days following the notice of modification, whichever is longer, to
exercise such right. In the event there is an Approval Default, this Right of
Participation shall be extended and effective for 180 days after such Approval
Default.
(b) Favored Nations Provision. Until the sooner of
180 days from the Actual
24
Effective Date of the Registration Statement, provided the Approval has been
obtained or is not required by the applicable NASD Market Place Rules and/or
Nasdaq's corporate governance rules, or the date the Notes have been paid, other
than in connection with the Excepted Issuances, if the Company shall offer,
issue or agree to issue any common stock or securities convertible into or
exercisable for shares of common stock (or modify any of the foregoing which may
be outstanding) to any person or entity at a price per share or conversion or
exercise price per share which shall be less than the Conversion Price without
the consent of each Subscriber holding Notes, the Conversion Price shall be
reduced to such other lower issue price. For purposes of the issuance and
adjustment described in this paragraph, the issuance of any security of the
Company 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 the
reduction of the Conversion Price upon the sooner of the agreement to or actual
issuance of such convertible security, warrant, right or option and again at any
time upon any subsequent issuances of shares of Common Stock upon exercise of
such conversion or purchase rights if such issuance is at a price lower than the
Conversion Price in effect upon such issuance. The rights of the Subscriber set
forth in this Section 12 are in addition to any other rights the Subscriber has
pursuant to this Agreement, the Note, any Transaction Document, and any other
agreement referred to or entered into in connection herewith.
(c) Paid In Kind. The Subscriber may demand that some
or all of the sums payable to the Subscriber pursuant to Sections 7.1(c), 7.2,
7.5, 11.4, 11.7(c), 11.7(d) and 11.7(e) that are not paid within ten business
days after the required payment date be paid in shares of Common Stock valued at
the Conversion Price in effect at the time Subscriber makes such demand or, at
the Subscriber's election, at such other valuation described in the Transaction
Documents. In addition to any other rights granted to the Subscriber herein, the
Subscriber is also granted the registration rights set forth in Section 11.1(ii)
hereof in relation to the aforedescribed shares of Common Stock.
(d) Maximum Exercise of Rights. In the event the
exercise of the rights described in Sections 12(a), 12(b) and 12(c) would result
in the issuance of an amount of common stock of the Company that would exceed
the maximum amount that may be issued to a Subscriber calculated in the manner
described in Section 7.3 of this Agreement, then the issuance of such additional
shares of common stock of the Company to such Subscriber will be deferred in
whole or in part until such time as such Subscriber is able to beneficially own
such common stock without exceeding the maximum amount set forth calculated in
the manner described in Section 7.3 of this Agreement. The determination of when
such common stock may be issued shall be made by each Subscriber as to only such
Subscriber.
(e) Offering Restrictions. Until the later of the (i)
the Approval, if the Approval is required by the applicable NASD Market Place
Rules and/or the Nasdaq's corporate governance rules, or (ii) six months after
the Closing Date and during the pendency of an Event of Default, provided there
is an effective registration statement current and available for resale of the
Registrable Securities, the Company will not enter into an agreement to nor
issue any equity, convertible debt or other securities convertible into common
stock or equity of the Company nor modify any of the foregoing which may be
outstanding at anytime, without the prior written consent of the Subscriber,
which consent may be withheld for any reason. Until six months after the Closing
Date, the Company will not enter into any equity line of credit or similar
agreement, nor issue nor agree to issue any floating or variable priced equity
linked instruments nor any of the foregoing or equity with price reset rights.
13. Miscellaneous.
(a) Notices. All notices, demands, requests,
consents, approvals, and other communications required or permitted hereunder
shall be in writing and, unless otherwise specified herein, shall be (i)
personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier
service with charges prepaid, or (iv) transmitted by
25
hand delivery, telegram, or facsimile, addressed as set forth below or to such
other address as such party shall have specified most recently by written
notice. Any notice or other communication required or permitted to be given
hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be: (i) if to the Company, to: Conolog Corporation, ▇
▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇, Attn: ▇▇▇▇▇▇ ▇▇▇▇▇, telecopier: (908)
722-5461, with a copy by telecopier only to: ▇▇▇▇▇▇▇ ▇▇▇▇▇ Bershad & ▇▇▇▇▇▇▇▇
LLP, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇ Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.,
telecopier: (▇▇▇) ▇▇▇-▇▇▇▇, (ii) if to the Subscribers, to: the one or more
addresses and telecopier numbers indicated on the signature pages hereto, with
an additional copy by telecopier only to: Grushko & ▇▇▇▇▇▇▇, P.C., ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, telecopier number: (▇▇▇) ▇▇▇-▇▇▇▇,
and (iii) if to the Broker, to: ________________________, Attn: _____________,
telecopier: __________.
(b) Entire Agreement; Assignment. This Agreement and
other documents delivered in connection herewith represent the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by both parties. Neither the Company nor the
Subscribers have relied on any representations not contained or referred to in
this Agreement and the documents delivered herewith. No right or obligation of
the Company shall be assigned without prior notice to and the written consent of
the Subscribers.
(c) Counterparts/Execution. This Agreement may be
executed in any number of counterparts and by the different signatories hereto
on separate counterparts, each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute but one and the same
instrument. This Agreement may be executed by facsimile signature and delivered
by facsimile transmission.
(d) Law Governing this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to conflicts of laws principles that would result in the
application of the substantive laws of another jurisdiction. Any action brought
by either party against the other concerning the transactions contemplated by
this Agreement shall be brought only in the civil or state courts of New York or
in the federal courts located in New York County. The parties executing this
Agreement and other agreements referred to herein or delivered in connection
herewith on behalf of the Company agree to submit to the jurisdiction of such
courts and waive trial by jury. 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.
(e) Specific Enforcement, Consent to Jurisdiction.
The Company and Subscriber acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to one or more
preliminary and final injunctions to prevent or cure breaches of the provisions
of this Agreement and to enforce specifically the terms and provisions hereof,
this being in addition to any other remedy to which any of them may be
26
entitled by law or equity. Subject to Section 13(d) hereof, each of the Company,
Subscriber and any signature hereto in his personal capacity hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction in New York of such court, that
the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Nothing in this Section
shall affect or limit any right to serve process in any other manner permitted
by law.
(f) Damages. In the event the Subscriber is entitled
to receive any liquidated damages pursuant to the Transactions, the Subscriber
may elect to receive the greater of actual damages or such liquidated damages.
(g) Independent Nature of Subscribers. The Company
acknowledges that the obligations of each Subscriber under the Transaction
Documents are several and not joint with the obligations of any other
Subscriber, and no Subscriber shall be responsible in any way for the
performance of the obligations of any other Subscriber under the Transaction
Documents. The Company acknowledges that each Subscriber has represented that
the decision of each Subscriber to purchase Securities has been made by such
Subscriber independently of any other Subscriber and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company which may have been made or
given by any other Subscriber or by any agent or employee of any other
Subscriber, and no Subscriber or any of its agents or employees shall have any
liability to any Subscriber (or any other person) relating to or arising from
any such information, materials, statements or opinions. The Company
acknowledges that nothing contained in any Transaction Document, and no action
taken by any Subscriber pursuant hereto or thereto (including, but not limited
to, the (i) inclusion of a Subscriber in the Registration Statement and (ii)
review by, and consent to, such Registration Statement by a Subscriber) shall be
deemed to constitute the Subscribers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the
Subscribers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. The
Company acknowledges that each Subscriber shall be entitled to independently
protect and enforce its rights, including without limitation, the rights arising
out of the Transaction Documents, and it shall not be necessary for any other
Subscriber to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that it has elected to provide all Subscribers
with the same terms and Transaction Documents for the convenience of the Company
and not because Company was required or requested to do so by the Subscribers.
The Company acknowledges that such procedure with respect to the Transaction
Documents in no way creates a presumption that the Subscribers are in any way
acting in concert or as a group with respect to the Transaction Documents or the
transactions contemplated thereby.
(h) As used in the Agreement, "consent of the
Subscribers" or similar language means the consent of holders of not less than
80% of the total of the Shares issued and issuable upon conversion of
outstanding Notes owned by Subscribers on the date consent is requested.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
CONOLOG CORPORATION
a Delaware corporation
By:_________________________________
Name:
Title:
Dated: January 19, 2006
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SUBSCRIBER NOTE PRINCIPAL
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$______
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(Signature)
By:
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LIST OF EXHIBITS AND SCHEDULES
Exhibit A Form of Note
Exhibit B Form of Warrant
Exhibit C Escrow Agreement
Exhibit D Form of Legal Opinion
Exhibit E Form of Form 8-K or Public Announcement
Schedule 5(a) Subsidiaries
Schedule 5(d) Additional Issuances / Capitalization
Schedule 5(q) Undisclosed Liabilities
Schedule 8 Broker
Schedule 9(e) Use of Proceeds
Schedule 11.1 Other Registrable Securities