Exhibit 99.1
SERIES A PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
This Agreement (the "Agreement") is made as of the 17th day of
February, 2006 by and among Farmstead Telephone Company, Inc., a Delaware
corporation (the "Company"), and the investors listed on Exhibit A attached
to this Agreement (each a "Purchaser" and together the "Purchasers").
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock and Warrants.
1.1 Sale and Issuance of Series A Preferred Stock and
Warrants.
(a) The Company shall adopt and file with the Secretary
of State of the State of Delaware on or before the Initial Closing (as
defined below) the Certificate of Designations in the form of Exhibit B
attached to this Agreement (the "Certificate of Designations").
(b) Subject to the terms and conditions of this
Agreement, each Purchaser agrees to purchase at the Closing and the Company
agrees to sell and issue to each Purchaser at the Closing that number of
units ("Units") set forth opposite each Purchaser's name on Exhibit A, each
Unit to consist of (i) one share of the Company's Series A Preferred Stock,
$.001 par value per share ("Series A Preferred Stock"), and (ii) a Warrant
to purchase five shares of the Company's Common Stock, $.001 par value per
share ("Common Stock"). The purchase price for each Unit shall be $17.00.
1.2 Closing; Delivery.
(a) The initial purchase and sale of the Units shall
take place remotely via the exchange of documents and signatures, at 10:00
a.m., on February 17, 2006, or at such other time and place as the Company
and the initial Purchasers mutually agree upon, orally or in writing (which
time and place are designated as the "Initial Closing"). In the event that,
pursuant to Section 1.3, there is more than one closing, the term "Closing"
shall apply to each such closing unless otherwise specified. The minimum
aggregate purchase price for the Units sold at the Initial Closing shall be
$500,000 in cash.
(b) At each Closing, the Company shall deliver to each
Purchaser a certificate representing the Shares and the Warrant being
purchased by such Purchaser at such Closing against payment of the purchase
price therefor by check payable to the Company, by wire transfer to a bank
account designated by the Company, by cancellation or conversion of
indebtedness of the Company to Purchaser, including interest, or by any
combination of such methods.
1.3 Sale of Additional Units.
(a) After the Initial Closing and prior to the Second
Closing (as defined below), the Company may sell, on the same terms and
conditions as those contained in this Agreement, at one or more additional
Closings, additional Units (the "Additional Units") to one or more
purchasers (the "Additional Purchasers"). Exhibit A to this Agreement shall
be updated to reflect the number of Additional Units purchased at each such
Closing and the parties purchasing such Additional Units. The aggregate
number of Additional Units that can be sold pursuant to this Section 1.3(a)
shall be $4,000,000 minus the aggregate sale price of the Units sold at the
Initial Closing, divided by the per Unit purchase price.
(b) On or before April 17, 2006, the Company may sell,
on the same terms and conditions as those contained in this Agreement,
additional Units (the "Secondary Units") to one or more purchasers (the
"Secondary Purchasers"). The date of the purchase and sale of the Secondary
Units is referred to in this Agreement as the "Second Closing." Exhibit A
to this Agreement shall be updated to reflect the number of Secondary Units
purchased at such Second Closing and the Secondary Purchasers purchasing
such Secondary Units. The aggregate number of Secondary Units that can be
sold at the Second Closing pursuant to this Section 1.3(b) shall be
$4,000,000 minus the aggregate sale price of the Units sold at the Initial
Closing and Additional Units sold pursuant to Section 1.3(a), divided by
the per Unit purchase price.
1.4 Defined Terms Used in this Agreement. In addition to the
terms defined elsewhere, the following terms used in this Agreement shall
be construed to have the meanings set forth or referenced below.
"Affiliate" means, with respect to any specified Person, any
other Person who or which, directly or indirectly, controls, is controlled
by, or is under common control with such specified Person, including,
without limitation, any partner, officer, director, member or employee of
such Person and any venture capital fund now or hereafter existing that is
controlled by or under common control with one or more general partners or
managing members of, or shares the same management company with, such
Person.
"Certificate of Incorporation" means the Company's Certificate
of Incorporation, as amended and in effect from time to time, including
without limitation the Certificate of Designations.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Intellectual Property" means all patents, patent
applications, trademarks, trademark applications, service marks,
tradenames, copyrights, trade secrets, licenses, domain names, mask works,
information and proprietary rights and processes used, or as are necessary,
to the conduct of the Company's business as now conducted and as presently
proposed to be conducted.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
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"Investors' Rights Agreement" means the agreement between the
Company and the Purchasers dated as of the date of the Initial Closing, in
the form of Exhibit C attached to this Agreement.
"Key Employee" means any officer or executive-level employee,
as well as any employee or consultant who either alone or in concert with
others develops, invents, programs or designs any Company Intellectual
Property.
"Knowledge," including the phrase "to the Company's knowledge,"
shall mean the actual knowledge, after reasonable investigation, of the
officers of the Company.
"Material Adverse Effect" means a material adverse effect on
the business, assets (including intangible assets), liabilities, financial
condition, property, prospects or results of operations of the Company.
"Person" means any individual, corporation, partnership, trust,
limited liability company, association or other entity.
"Purchaser" means each of the Purchasers who is initially a
party to this Agreement and any Additional Purchaser and Secondary
Purchaser who becomes a party to this Agreement at a subsequent Closing
under Section 1.3.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Shares" means the shares of Series A Preferred Stock issued at
the Initial Closing and at any subsequent Closing under Section 1.3.
"Transaction Agreements" means this Agreement, the Investors'
Rights Agreement and the Warrants.
"Warrants" means the Warrants issued at the Initial Closing and
at any subsequent Closing under Section 1.3, in the form attached as
Exhibit D.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to each Purchaser that, except as set forth
on the Disclosure Schedule to this Agreement which exceptions shall be
deemed to be part of the representations and warranties made hereunder, the
following representations are true and complete as of the date of the
Initial Closing, except as otherwise indicated. The Disclosure Schedule
shall be arranged in sections corresponding to the numbered and lettered
sections and subsections contained in this Section 2, and the disclosures
in any section or subsection of the Disclosure Schedule shall qualify other
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sections and subsections in this Section 2 only to the extent it is readily
apparent from a reading of the disclosure that such disclosure is
applicable to such other sections and subsections.
For purposes of these representations and warranties (other
than those in Sections 2.2 and 2.3), the term "the Company" shall include
any Subsidiaries (as defined below) of the Company, unless otherwise noted
herein.
2.1 Organization, Good Standing, Corporate Power and
Qualification. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
has all requisite corporate power and authority to carry on its business as
presently conducted and as proposed to be conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction
in which the failure to so qualify would have a Material Adverse Effect.
2.2 Capitalization. The authorized capital of the Company
consists, immediately prior to the Initial Closing, of:
(a) 30,000,000 shares of Common Stock, 3,817,132 shares
of which are issued and outstanding immediately prior to the Initial
Closing. All of the outstanding shares of Common Stock have been duly
authorized, are fully paid and nonassessable and were issued in compliance
with all applicable federal and state securities laws. The Company holds no
treasury stock and no shares of Series A Preferred Stock in its treasury.
(b) 2,000,000 shares of Preferred Stock, of which
355,000 shares have been designated Series A Preferred Stock, none of which
are issued and outstanding immediately prior to the Initial Closing. The
rights, privileges and preferences of the Preferred Stock are as stated in
the Certificate of Designations and as provided by the general corporation
law of the jurisdiction of the Company's incorporation.
(c) The Company has reserved an aggregate of 3,919,241
shares of Common Stock for issuance to officers, directors, employees and
consultants of the Company pursuant to its Stock Option Plan and Employee
Stock Purchase Plan duly adopted by the Board of Directors and approved by
the Company stockholders (the "Stock Plans"). Of such reserved shares of
Common Stock, 1,234,122 shares of Common Stock remain available for
issuance to officers, directors, employees and consultants pursuant to the
Stock Plans. The Company has made available to the Purchasers complete and
accurate copies of the Stock Plans and forms of agreements used thereunder.
(d) Except for (A) the Warrants and the conversion
privileges of the Shares to be issued under this Agreement, (B) the rights
provided in Section 4 of the Investors' Rights Agreement, and (C) the
securities and rights described in Sections 2.2(a) and (c) of this
Agreement and Section 2.2(d) of the Disclosure Schedule, there are no
outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal or similar rights) or agreements, orally
or in writing, to purchase or acquire from the Company any shares of Common
Stock or Series A Preferred Stock, or any securities convertible into or
exchangeable for shares of Common Stock or Series A Preferred Stock.
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(e) None of the Company's stock purchase agreements or
stock option documents contains a provision for acceleration of vesting (or
lapse of a repurchase right) or other changes in the vesting provisions or
other terms of such agreement or understanding upon the occurrence of any
event or combination of events. The Company has never adjusted or amended
the exercise price of any stock options previously awarded, whether through
amendment, cancellation, replacement grant, repricing, or any other means.
No stock options, stock appreciation rights or other equity-based awards
issued or granted by the Company are subject to the requirements of Section
409A of the Code. Except as set forth in the Certificate of Designations,
the Company has no obligation (contingent or otherwise) to purchase or
redeem any of its capital stock.
2.3 Subsidiaries. Section 2.3 of the Disclosure Schedule
lists each corporation, partnership, trust, joint venture, limited
liability company, association, or other business entity owned or
controlled, in whole or in part, directly or indirectly, by the Company
("Subsidiaries"), including its name, jurisdiction of formation, and
ownership. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the state of its formation, has all requisite
power and authority to carry on its business as presently conducted and as
proposed to be conducted and is duly qualified to transact business and is
in good standing in each jurisdiction in which the failure to so qualify
would have a Material Adverse Effect. The Company is not a participant in
any joint venture, partnership or similar arrangement.
2.4 Authorization. The Company has full power and authority
to enter into the Transaction Agreements, and to issue the Shares and
Warrants at the Closing and the Common Stock issuable upon conversion of
the Shares and exercise of the Warrants. No consent, approval or vote of
the stockholders of the Company is required in order for the Company to
authorize, execute or perform its obligations under the Transaction
Agreements, to issue the Shares and Warrants at the Closing, or to issue
shares of Common Stock upon conversion of the Shares or exercise of the
Warrants. The Transaction Agreements, when executed and delivered by the
Company, shall constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their
respective terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, or other
laws of general application relating to or affecting the enforcement of
creditors' rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (iii) to the extent the indemnification provisions contained
in the Investors' Rights Agreement may be limited by applicable federal or
state securities laws.
2.5 Valid Issuance of Shares and Warrants. The Shares, when
issued, sold and delivered in accordance with the terms and for the
consideration set forth in this Agreement, will be validly issued, fully
paid and nonassessable and free of restrictions on transfer other than
restrictions on transfer under the Transaction Agreements, applicable state
and federal securities laws and liens or encumbrances created by or imposed
by a Purchaser. The Warrants, when issued, sold and delivered in accordance
with the terms and for the consideration set forth in this Agreement, will
be validly issued and free of restrictions on transfer other than
restrictions on transfer under the Transaction Agreements, applicable state
and federal securities laws and liens or encumbrances created by or imposed
by a Purchaser. Assuming the accuracy of the representations of the
Purchasers in Section 3 of this Agreement and subject to the filings
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described in Section 2.6(ii) below, the Shares and Warrants will be issued
in compliance with all applicable federal and state securities laws. The
Common Stock issuable upon conversion of the Shares and exercise of the
Warrants has been duly reserved for issuance, and upon issuance in
accordance with the terms of the Certificate of Designations or Warrants,
as applicable, will be validly issued, fully paid and nonassessable and
free of restrictions on transfer other than restrictions on transfer under
the Transaction Agreements, applicable federal and state securities laws
and liens or encumbrances created by or imposed by a Purchaser. Based in
part upon the representations of the Purchasers in Section 3 of this
Agreement, and subject to Section 2.6 below, the Common Stock issuable upon
conversion of the Shares and exercise of the Warrants will be issued in
compliance with all applicable federal and state securities laws.
2.6 Governmental Consents and Filings. Assuming the accuracy
of the representations made by the Purchasers in Section 3 of this
Agreement, no consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority is required on the part of
the Company in connection with the consummation of the transactions
contemplated by this Agreement, except for (i) the filing of the
Certificate of Designations, which will have been filed as of the Initial
Closing, and (ii) filings pursuant to Regulation D of the Securities Act,
and applicable state securities laws, which have been made or will be made
in a timely manner.
2.7 Litigation. There is no claim, action, suit, proceeding,
arbitration, complaint, charge or investigation pending or to the Company's
knowledge, currently threatened (i) against the Company or any director or
Key Employee of the Company; (ii) that questions the validity of the
Transaction Agreements or the right of the Company to enter into them, or
to consummate the transactions contemplated by the Transaction Agreements;
or (iii) to the Company's knowledge, that would reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect.
Neither the Company nor, to the Company's knowledge, any of its officers or
directors, is a party or is named as subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government
agency or instrumentality (in the case of officers or directors, such as
would affect the Company). There is no action, suit, proceeding or
investigation by the Company pending or which the Company intends to
initiate. The foregoing includes, without limitation, actions, suits,
proceedings or investigations pending or threatened in writing (or any
basis therefor known to the Company) involving the prior employment of any
of the Company's employees, their services provided in connection with the
Company's business, or any information or techniques allegedly proprietary
to any of their former employers, or their obligations under any agreements
with prior employers.
2.8 Intellectual Property. The Company owns or possesses or
can acquire on commercially reasonable terms sufficient legal rights to all
Company Intellectual Property without any known conflict with, or
infringement of, the rights of others. To the Company's knowledge, no
product or service marketed or sold (or proposed to be marketed or sold) by
the Company violates or will violate any license or infringes or will
infringe any intellectual property rights of any other party. Other than
with respect to commercially available software products under standard
end-user object code license agreements, there are no outstanding options,
licenses, agreements, claims, encumbrances or shared ownership interests of
any kind relating to the Company Intellectual Property, nor is the Company
bound by or a party to any options,
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licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other Person. The
Company has not received any communications alleging that the Company has
violated or, by conducting its business, would violate any of the patents,
trademarks, service marks, tradenames, copyrights, trade secrets, mask
works or other proprietary rights or processes of any other Person. The
Company has obtained and possesses valid licenses to use all of the
software programs present on the computers and other software-enabled
electronic devices that it owns or leases or that it has otherwise provided
to its employees for their use in connection with the Company's business.
To the Company's knowledge, it will not be necessary to use any inventions
of any of its employees or consultants (or Persons it currently intends to
hire) made prior to their employment by the Company. Each employee and
consultant has assigned to the Company all intellectual property rights he
or she owns that are related to the Company's business as now conducted and
as presently proposed to be conducted. Section 2.8 of the Disclosure
Schedule lists all Company Intellectual Property. The Company has not
embedded any open source, copyleft or community source code in any of its
products generally available or in development, including but not limited
to any libraries or code licensed under any General Public License, Lesser
General Public License or similar license arrangement. For purposes of this
Section 2.8, the Company shall be deemed to have knowledge of a patent
right if the Company has actual knowledge of the patent right or would be
found to be on notice of such patent right as determined by reference to
United States patent laws.
2.9 Compliance with Other Instruments and Law. The Company is
not in violation or default (i) of any provisions of its Certificate of
Incorporation or Bylaws, (ii) of any instrument, judgment, order, writ or
decree issued against the Company, (iii) under any note, indenture or
mortgage to which it is party, (iv) under any lease, agreement, contract or
purchase order to which it is a party or by which it is bound that is
required to be listed on the Disclosure Schedule, or (v) of or under any
law, statute, rule or regulation applicable to the Company, the violation
of which law, statute, rule or regulation would have a Material Adverse
Effect. The execution, delivery and performance of the Transaction
Agreements and the consummation of the transactions contemplated by the
Transaction Agreements will be exempt from all antitakeover, business
combination, control share and other similar statutes, rules and
regulations and will not result in any violation of or be in conflict with
or constitute, with or without the passage of time and giving of notice,
either (i) a default under any such provision, instrument, judgment, order,
writ, decree, contract or agreement or (ii) an event which results in the
creation of any lien, charge or encumbrance upon any assets of the Company
or the suspension, revocation, forfeiture, or nonrenewal of any material
permit or license applicable to the Company.
2.10 Private Placement Memorandum. The Private Placement
Memorandum prepared by the Company and delivered to the Purchasers in
connection herewith (i) was, when provided to the Purchasers, and is,
accurate and complete and (ii) did not, when provided to the Purchasers,
and does not, contain any statement which is false or misleading with
respect to any material fact, or omit to state any material fact necessary
in order to make the statements made therein not false or misleading.
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2.11 SEC Filings. The Company has filed all registration
statements, forms, reports and other documents required to be filed by the
Company with the SEC since January 1, 2003, and has made available to the
Purchaser copies of all registration statements, forms, reports and other
documents filed by the Company with the SEC since such date, all of which
are publicly available on the SEC's XXXXX system. All such registration
statements, forms, reports and other documents (including those that the
Company may file after the date hereof until the final Closing) are
referred to herein as the "Company SEC Reports." The Company SEC Reports
(i) were or will be filed on a timely basis, (ii) at the time filed, were
or will be prepared in compliance in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable
to such Company SEC Reports, and (iii) did not or will not at the time they
were or are filed contain any untrue statement of a material fact or omit
to state a material fact required to be stated in such Company SEC Reports
or necessary in order to make the statements in such Company SEC Reports,
in the light of the circumstances under which they were made, not
misleading. No Subsidiary of the Company is subject to the reporting
requirements of Section 13(a) or Section 15(d) of the Exchange Act.
2.12 Agreements; Actions.
(a) Except for the Transaction Agreements, there are no
agreements, understandings, instruments, contracts or proposed transactions
to which the Company is a party or by which it is bound that involve (i)
obligations (contingent or otherwise) of, or payments to, the Company in
excess of $50,000 within a calendar year, (ii) the license of any patent,
copyright, trademark, trade secret or other proprietary right to or from
the Company, (iii) the grant of rights to manufacture, produce, assemble,
license, market, or sell its products to any other Person that limit the
Company's exclusive right to develop, manufacture, assemble, distribute,
market or sell its products, or (iv) indemnification by the Company with
respect to infringements of proprietary rights.
(b) The Company has not (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to
any class or series of its capital stock, (ii) incurred any indebtedness
for money borrowed or incurred any other liabilities individually in excess
of $50,000 or in excess of $500,000 in the aggregate, (iii) made any loans
or advances to any Person, other than ordinary advances for travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary
course of business. The Company is not a guarantor or indemnitor of any
indebtedness of any other Person.
2.13 Certain Transactions.
(a) Other than (i) standard employee benefits generally
made available to all employees and (ii) the purchase of shares of the
Company's capital stock and the issuance of options to purchase shares of
the Company's Common Stock, in each instance, approved in the written
minutes of the Board of Directors (previously provided to the Purchasers or
their counsel), there are no agreements, understandings or proposed
transactions between the
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Company and any of its officers, directors, consultants or Key Employees,
or any Affiliate thereof.
(b) The Company is not indebted, directly or
indirectly, to any of its directors, officers or employees or to their
respective spouses or children or to any Affiliate of any of the foregoing,
other than in connection with expenses or advances of expenses incurred in
the ordinary course of business or employee relocation expenses and for
other customary employee benefits made generally available to all
employees. None of the Company's directors, officers or employees, or any
members of their immediate families, or any Affiliate of the foregoing (i)
are, directly or indirectly, indebted to the Company or, (ii) to the
Company's knowledge, have any direct or indirect ownership interest in any
firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation which
competes with the Company except that directors, officers or employees or
stockholders of the Company may own stock in (but not exceeding two percent
(2%) of the outstanding capital stock of) publicly traded companies that
may compete with the Company.
2.14 Rights of Registration and Voting Rights. Except as
provided in the Investors' Rights Agreement, the Company is not under any
obligation to register under the Securities Act any of its currently
outstanding securities or any securities issuable upon exercise or
conversion of its currently outstanding securities. To the Company's
knowledge, no stockholder of the Company has entered into any agreements
with respect to the voting of capital shares of the Company.
2.15 Absence of Liens. The property and assets that the
Company owns are free and clear of all mortgages, deeds of trust, liens,
loans and encumbrances, except for statutory liens for the payment of
current taxes that are not yet delinquent and encumbrances and liens that
arise in the ordinary course of business and do not materially impair the
Company's ownership or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance with such
leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances other than those of the lessors of such
property or assets.
2.16 Financial Statements. The Company has made available to
each Purchaser its audited and unaudited financial statements contained in
any Company SEC Report since January 1, 2005 (collectively, the "Financial
Statements"). The Financial Statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated, except that the unaudited Financial
Statements may not contain all footnotes required by generally accepted
accounting principles. The Financial Statements fairly present in all
material respects the financial condition and operating results of the
Company as of the dates, and for the periods, indicated therein, subject in
the case of the unaudited Financial Statements to normal year-end audit
adjustments. Except as set forth in the Financial Statements, the Company
has no material liabilities or obligations, contingent or otherwise, other
than (i) liabilities incurred in the ordinary course of business subsequent
to September 30, 2005, (ii) obligations under contracts and commitments
incurred in the ordinary course of business and (iii) liabilities and
obligations of a type or nature not required under generally accepted
accounting principles to be reflected in the Financial Statements, which,
in all such cases, individually and in the aggregate would not have a
Material Adverse Effect. The
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Company maintains and will continue to maintain a standard system of
accounting established and administered in accordance with generally
accepted accounting principles and applicable law. Since September 30,
2005, there have not been any events or circumstances of any kind that have
had or could reasonably be expected to result in a Material Adverse Effect.
2.17 Employee Matters. To the Company's knowledge, no Key
Employee intends to terminate employment with the Company or is otherwise
likely to become unavailable to continue as a Key Employee, nor does the
Company have a present intention to terminate the employment of any of the
foregoing. With respect to each employee benefit plan maintained,
established or sponsored by the Company, or which the Company participates
in or contributes to, which is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), the Company has made all
required contributions and has no liability to any such employee benefit
plan, other than liability for health plan continuation coverage described
in Part 6 of Title I(B) of ERISA, and has complied in all material respects
with all applicable laws for any such employee benefit plan.
2.18 Tax Returns and Payments. There are no federal, state,
county, local or foreign taxes dues and payable by the Company which have
not been timely paid. There are no accrued and unpaid federal, state,
country, local or foreign taxes of the Company which are due, whether or
not assessed or disputed. There have been no examinations or audits of any
tax returns or reports by any applicable federal, state, local or foreign
governmental agency. The Company has duly and timely filed all federal,
state, county, local and foreign tax returns required to have been filed by
it and there are in effect no waivers of applicable statutes of limitations
with respect to taxes for any year.
2.19 Insurance. The Company has in full force and effect fire
and casualty insurance policies with extended coverage, sufficient in
amount (subject to reasonable deductions) to allow it to replace any of its
properties that might be damaged or destroyed.
2.20 Permits. The Company and each of its Subsidiaries has all
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, the lack of which could reasonably be expected to
have a Material Adverse Effect. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.21 Corporate Documents. The Certificate of Incorporation and
Bylaws of the Company are in the form provided to the Purchasers. The copy
of the minute books of the Company have been made available to the
Purchasers.
2.22 Real Property Holding Corporation. The Company is not now
and has never been a "United States real property holding corporation" as
defined in the Code and any applicable regulations promulgated thereunder.
The Company has filed with the Internal Revenue Service all statements, if
any, with its United States income tax returns which are required under
such regulations.
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2.23 Disclosure. No representation or warranty of the Company
contained in this Agreement, as qualified by the Disclosure Schedule, and
no certificate furnished or to be furnished to Purchasers at the Closing
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were
made.
3. Representations and Warranties of the Purchasers. Each
Purchaser hereby represents and warrants to the Company, severally and not
jointly, that:
3.1 Authorization. The Purchaser has full power and authority
to enter into the Transaction Agreements. The Transaction Agreements to
which such Purchaser is a party, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and any other laws of general application affecting
enforcement of creditors' rights generally, and as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies, or (b) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made
with the Purchaser in reliance upon the Purchaser's representation to the
Company, which by the Purchaser's execution of this Agreement, the
Purchaser hereby confirms, that the Shares and Warrants to be acquired by
the Purchaser will be acquired for investment for the Purchaser's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Purchaser has no present
intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, the Purchaser further
represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any Person to sell, transfer or
grant participations to such Person or to any third Person, with respect to
any of the Shares or Warrants. The Purchaser has not been formed for the
specific purpose of acquiring the Shares or Warrants.
3.3 Restricted Securities. The Purchaser understands that the
Shares and Warrants have not been registered under the Securities Act, by
reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature
of the investment intent and the accuracy of the Purchaser's
representations as expressed herein. The Purchaser understands that the
Shares and Warrants are "restricted securities" under applicable U.S.
federal and state securities laws and that, pursuant to these laws, the
Purchaser must hold the Shares indefinitely unless they are registered with
the Securities and Exchange Commission and qualified by state authorities,
or an exemption from such registration and qualification requirements is
available. The Purchaser acknowledges that the Company has no obligation to
register or qualify the Shares, the Common Stock into which Shares may be
converted, the Warrants or the Warrant Shares for resale except as set
forth in the Investors' Rights Agreement. The Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period, and on
11
requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able
to satisfy.
3.4 Legends. The Purchaser understands that the Shares,
Warrant Shares and any securities issued in respect of or exchange for the
Shares or Warrant Shares, may bear one or all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS (COLLECTIVELY, THE "ACTS"), AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER ALL APPLICABLE ACTS OR UNLESS AN OPINION OF COUNSEL IS
DELIVERED TO THE ISSUER IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO
THE EFFECT THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER ALL
APPLICABLE ACTS."
(b) Any legend set forth in, or required by, the other
Transaction Agreements.
(c) Any legend required by the securities laws of any
state to the extent such laws are applicable to the securities represented
by the certificate so legended.
3.5 Accredited Investor. The Purchaser is an accredited
investor as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act.
3.6 Foreign Investors. If the Purchaser is not a United
States person (as defined by Section 7701(a)(30) of the Code), such
Purchaser hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Units or any use of this Agreement,
including (i) the legal requirements within its jurisdiction for the
purchase of the Units, (ii) any foreign exchange restrictions applicable to
such purchase, (iii) any governmental or other consents that may need to be
obtained, and (iv) the income tax and other tax consequences, if any, that
may be relevant to the purchase, holding, redemption, sale, or transfer of
the Shares or Warrants. Such Purchaser's subscription and payment for and
continued beneficial ownership of the Shares and Warrants will not violate
any applicable securities or other laws of the Purchaser's jurisdiction.
3.7 No General Solicitation. Neither the Purchaser, nor any
of its officers, directors, employees, agents, stockholders or partners has
either directly or indirectly, including through a broker or finder (a)
engaged in any general solicitation, or (b) published any advertisement in
connection with the offer and sale of the Shares and Warrants.
3.8 Exculpation Among Purchasers. Each Purchaser acknowledges
that it is not relying upon any Person, other than the Company and its
officers and directors, in making its investment or decision to invest in
the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling Persons, officers, directors, partners, agents, or employees of
any
12
Purchaser shall be liable to any other Purchaser for any action heretofore
or hereafter taken or omitted to be taken by any of them in connection with
the purchase of the Shares and Warrants.
3.9 Residence. If the Purchaser is an individual, then the
Purchaser resides in the state or province identified in the address of the
Purchaser set forth on Exhibit A; if the Purchaser is a partnership,
corporation, limited liability company or other entity, then the office or
offices of the Purchaser in which its principal place of business is
identified in the address or addresses of the Purchaser set forth on
Exhibit A; provided that to the extent such Purchaser lists a foreign
address, such Purchaser hereby further represents that it has no place of
business or residence within the United States of America.
4. Conditions to the Purchasers' Obligations at Closing. The
obligations of each Purchaser to purchase Units at the Initial Closing or
any subsequent Closing are subject to the fulfillment, on or before such
Closing, of each of the following conditions, unless otherwise waived:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true and correct
in all material respects as of such Closing, except that any such
representations and warranties shall be true and correct in all respects
where such representation and warranty is qualified with respect to
materiality.
4.2 Performance. The Company shall have performed and
complied with all covenants, agreements, obligations and conditions
contained in this Agreement that are required to be performed or complied
with by the Company on or before such Closing.
4.3 Compliance Certificate. The President of the Company
shall deliver to the Purchasers at such Closing a certificate certifying
that the conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body of the United
States or of any state that are required in connection with the lawful
issuance and sale of the Shares and Warrants pursuant to this Agreement
shall be obtained and effective as of such Closing.
4.5 Opinion of Company Counsel. The Purchasers shall have
received from Gesmer Xxxxxxxxx LLP, counsel for the Company, an opinion,
dated as of the date of such Closing, in a form mutually acceptable to such
counsel and counsel for the Purchasers.
4.6 Board of Directors. As of the Initial Closing, the
authorized size of the Board shall be eight, including one board seat
reserved for the Series A Director (as defined in the Certificate of
Designations).
4.7 Investors' Rights Agreement. The Company and each
Purchaser (other than the Purchaser relying upon this condition to excuse
such Purchaser's performance hereunder) and the other stockholders of the
Company named as parties thereto shall have executed and delivered the
Investors' Rights Agreement.
13
4.8 Certificate of Designations. The Company shall have filed
the Certificate of Designations with the Secretary of State of Delaware on
or prior to the Closing, which shall continue to be in full force and
effect as of the Closing.
4.9 Secretary's Certificate. The Secretary of the Company
shall have delivered to the Purchasers at the Closing a certificate
certifying (i) the Certificate of Incorporation and Bylaws of the Company
and (ii) resolutions of the Board of Directors of the Company approving the
Transaction Agreements, the transactions contemplated under the Transaction
Agreements and the Certificate of Designations.
4.10 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
and all documents incident thereto shall be reasonably satisfactory in form
and substance to each Purchaser, and each Purchaser (or its counsel) shall
have received all such counterpart original and certified or other copies
of such documents as reasonably requested. Such documents may include good
standing certificates.
4.11 Preemptive Rights. The Company shall have fully satisfied
(including with respect to rights of timely notification) or obtained
enforceable waivers in respect of any preemptive or similar rights directly
or indirectly affecting any of its securities.
5. Conditions of the Company's Obligations at Closing. The
obligations of the Company to sell Units to the Purchasers at the Initial
Closing or any subsequent Closing are subject to the fulfillment, on or
before the Closing, of each of the following conditions, unless otherwise
waived:
5.1 Representations and Warranties. The representations and
warranties of each Purchaser contained in Section 3 shall be true and
correct in all material respects as of such Closing.
5.2 Performance. The Purchasers shall have performed and
complied with all covenants, agreements, obligations and conditions
contained in this Agreement that are required to be performed or complied
with by them on or before such Closing.
5.3 Qualifications. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body of the United
States or of any state that are required in connection with the lawful
issuance and sale of the Shares and Warrants pursuant to this Agreement
shall be obtained and effective as of the Closing.
5.4 Payments. The Purchasers shall have delivered to the
Company all such payments for the Units as indicated in Exhibit A hereto.
6. Miscellaneous.
Survival of Warranties. Unless otherwise set forth in this Agreement, the
representations and warranties of the Company and the Purchasers contained
in or made pursuant to this Agreement shall survive the execution and
delivery of this Agreement and shall terminate on the third (3rd)
anniversary of the final Closing and shall in no way be affected by any
14
investigation or knowledge of the subject matter thereof made by or on
behalf of the Purchasers or the Company.
6.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
6.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the General Corporation Law of the State of
Delaware as to matters within the scope thereof, and as to all other
matters shall be governed by and construed in accordance with the internal
laws of the Commonwealth of Massachusetts, without regard to its principles
of conflicts of laws.
6.4 Counterparts; Facsimile. This Agreement may be executed
and delivered by facsimile signature and in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered
in construing or interpreting this Agreement.
6.6 Notices. All notices and other communications given or
made pursuant to this Agreement shall be in writing and shall be deemed
effectively given: (a) upon personal delivery to the party to be notified,
(b) when sent by confirmed electronic mail or facsimile if sent during
normal business hours of the recipient, and if not so confirmed, then on
the next business day, (c) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid, or
(d) one (1) day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of
receipt. All communications shall be sent to the respective parties at
their address as set forth on the signature page or Exhibit A, or to such
e-mail address, facsimile number or address as subsequently modified by
written notice given in accordance with this Section 6.6. A copy of any
notice or other communication given to any Purchaser shall also be given to
X.X. Xxxxx Securities, Inc., 00 Xxxx Xxxxxx, 0xx Xxxxx, Xxxxxx, XX 00000,
Attn: General Counsel, and to Xxxxxx, Xxxx & Xxxxx LLP, Xxx Xxxxxxx Xxxx
Xxxxxxxxxxx, Xxxxx Xxxxxx Xxxxxxxx, 0xx Xxxxx, Xxxxxx, XX, 00000, Attn:
Xxxxxxx X. Xxxxxx, Esq. A copy of any notice or other communication given
to the Company shall also be given to Gesmer Xxxxxxxxx LLP, 00 Xxxxx
Xxxxxx, Xxxxxx, XX 00000, Attn: Xxx Xxx, Esq. and Xxxxx X. Xxxxxxxx, III,
Esq.
6.7 No Finder's Fees. Each party represents that it neither
is nor will be obligated for any finder's fee or commission in connection
with this transaction, other than amounts paid or payable to X.X. Xxxxx
Securities, Inc. Each Purchaser agrees to indemnify and to hold harmless
the Company from any liability for any commission or compensation in the
nature of a finder's or broker's fee arising out of this transaction (and
the costs and expenses of
15
defending against such liability or asserted liability) for which each
Purchaser or any of its officers, employees, or representatives is
responsible. The Company agrees to indemnify and hold harmless each
Purchaser from any liability for any commission or compensation in the
nature of a finder's or broker's fee arising out of this transaction (and
the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
6.8 Fees and Expenses. At the Closing, the Company shall pay
the reasonable fees and expenses of Xxxxxx, Xxxx & Xxxxx LLP, outside
special counsel for the Purchasers, in an amount not to exceed, in the
aggregate, $25,000.
6.9 Amendments and Waivers. Except as set forth in Section
1.3 of this Agreement, any term of this Agreement may be amended,
terminated or waived only with the written consent of the Company and (i)
the holders of a majority of the then-outstanding Shares, shares issued
upon conversion of the Shares, Warrants and Warrant Shares, voting together
as a class and assuming for this purpose the exercise of all Warrants and
conversion of all Shares, or (ii) for an amendment, termination or waiver
effected prior to the Initial Closing, Purchasers obligated to purchase a
majority of the Units to be issued at the Initial Closing. Any amendment or
waiver effected in accordance with this Section 6.9 shall be binding upon
the Purchasers and each transferee of Shares, shares issued upon conversion
of Shares, Warrants and Warrant Shares, each future holder of all such
securities, and the Company.
6.10 Severability. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of
any other provision.
6.11 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any
such right, power or remedy of such non-breaching or non-defaulting party
nor shall it be construed to be a waiver of any such breach or default, or
an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default
be deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character
on the part of any party of any breach or default under this Agreement, or
any waiver on the part of any party of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall be cumulative
and not alternative.
6.12 Entire Agreement. This Agreement (including the Exhibits
hereto), the Certificate of Designations and the other Transaction
Agreements constitute the full and entire understanding and agreement
between the parties with respect to the subject matter hereof, and any
other written or oral agreement relating to the subject matter hereof
existing between the parties are expressly canceled.
6.13 No Commitment for Additional Financing. The Company
acknowledges and agrees that no Purchaser has made any representation,
undertaking, commitment or
16
agreement to provide or assist the Company in obtaining any financing,
investment or other assistance, other than the purchase of the Units as set
forth herein and subject to the conditions set forth herein. In addition,
the Company acknowledges and agrees that (i) no statements, whether written
or oral, made by any Purchaser or its representatives on or after the date
of this Agreement shall create an obligation, commitment or agreement to
provide or assist the Company in obtaining any financing or investment,
(ii) the Company shall not rely on any such statement by any Purchaser or
its representatives and (iii) an obligation, commitment or agreement to
provide or assist the Company in obtaining any financing or investment may
only be created by a written agreement, signed by such Purchaser and the
Company, setting forth the terms and conditions of such financing or
investment and stating that the parties intend for such writing to be a
binding obligation or agreement. Each Purchaser shall have the right, in it
sole and absolute discretion, to refuse or decline to participate in any
other financing of or investment in the Company, and shall have no
obligation to assist or cooperate with the Company in obtaining any
financing, investment or other assistance.
[Remainder of Page Intentionally Left Blank]
17
IN WITNESS WHEREOF, the parties have executed this Series A Preferred
Stock and Warrant Purchase Agreement as of the date first written above.
COMPANY:
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ Xxxx-Xxxx Xxxxxxxxxxx
-----------------------------
Name: Xxxx-Xxxx Xxxxxxxxxxx
-----------------------------
Title: Chief Executive Officer &
President
-----------------------------
Address:
-----------------------------
PURCHASERS:
Meadowbrook Opportunity Fund LLC
------------------------------------
(Print Name of Purchaser)
By: /s/ Xxxxxxx Xxxxxx
-----------------------------
Name: Xxxxxxx Xxxxxx
-----------------------------
(print)
Title: Manager
-----------------------------
Address:
-----------------------------
EXHIBITS AND SCHEDULES
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Certificate of Designations
Exhibit C - Form of Investors' Rights Agreement
Exhibit D - Form of Warrant
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
---------------------------------------------------------------------------
Name Contact Information Number of Units Purchase Price
---------------------------------------------------------------------------
Meadowbrook 000 Xxxx Xxxx Xxxx 44,117 $749,989
Opportunity Fund Suite 690
LLC Xxxxxxxxx, XX 00000
Attn: General Counsel
Telephone: 000-000-0000
Fax: 000-000-0000
Email: xxxxxxxx@xxxxxxxxxxxxxxxxxx.xxx
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
EXHIBIT B
---------
FORM OF
CERTIFICATE OF DESIGNATIONS
EXHIBIT B
Certificate of Designations of the Preferred Stock
of
Farmstead Telephone Group, Inc.
to be Designated
Series A Preferred Stock
------------------------
Farmstead Telephone Group, Inc., a Delaware corporation (the
"Corporation"), pursuant to authority conferred on the Board of Directors
of the Corporation by the Certificate of Incorporation and in accordance
with the provisions of Section 151 of the General Corporation Law of the
State of Delaware, certifies that the Board of Directors of the
Corporation, at a meeting duly called and held, at which a quorum was
present and acting throughout, duly adopted the following resolution:
RESOLVED: That, pursuant to the authority expressly granted to
and vested in the Board of Directors of the Corporation in accordance with
the provisions of its Certificate of Incorporation, as amended, a series of
Preferred Stock of the Corporation be and hereby is established, to be
designated "Series A Preferred Stock"; that the Board of Directors be and
hereby is authorized to issue such shares of Series A Preferred Stock from
time to time and for such consideration and on such terms as the Board of
Directors shall determine; and that, subject to the limitations provided by
law and by the Corporation's Certificate of Incorporation, the powers,
designations, preferences and relative, participating, optional or other
special rights of, and the qualifications, limitations or restrictions
upon, the Series A Preferred Stock shall be as follows:
SERIES A PREFERRED STOCK
Three hundred and fifty-five thousand (355,000) shares of the
authorized and unissued Preferred Stock of the Corporation are hereby
designated "Series A Preferred Stock" with the following rights,
preferences, powers, privileges and restrictions, qualifications and
limitations.
1. Dividends.
From and after the date of the issuance of any shares of Series A
Preferred Stock, dividends at the rate per annum of $1.36 per share shall
accrue on such shares of Series A Preferred Stock (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares) (the "Accruing
Dividends"). Accruing Dividends shall accrue from day to day, whether or
not declared, and shall be cumulative; provided that, except as set forth
in the following sentence of this Section 1 or in Subsection 2.1 or Section
6, the Corporation shall be under no obligation to pay such Accruing
Dividends. The Corporation shall not declare, pay or set aside any
dividends on shares of any other class or series of capital stock of the
Corporation (other than dividends on shares of Common Stock payable in
shares of Common Stock) unless (in addition to the obtaining of any
consents required elsewhere in the Certificate of Incorporation) the
holders of the Series A Preferred Stock then outstanding shall first
receive a dividend on each outstanding share of Series A Preferred Stock in
an amount at least equal to the amount of the aggregate Accruing Dividends
then accrued on such share of Series A Preferred Stock and not previously
paid. The "Series A Original Issue Price" shall mean $17.00 per share,
subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization with respect to the
Series A Preferred Stock. Any reference herein to the "Certificate of
Incorporation" shall mean the Corporation's Certificate of Incorporation as
amended and in effect from time to time, including this and any other
Certificate of Designations with respect to the Preferred Stock of the
Corporation.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
Consolidations and Asset Sales.
2.1 Preferential Payments to Holders of Series A Preferred
Stock. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
Series A Preferred Stock then outstanding shall be entitled to be paid out
of the assets of the Corporation available for distribution to its
stockholders (on a pari passu basis with the holders of any series of
Preferred Stock ranking on liquidation on a parity with the Series A
Preferred Stock), and before any payment shall be made to the holders of
Common Stock or any other class or series of capital stock ranking on
liquidation junior to the Series A Preferred Stock by reason of their
ownership thereof, (i) an amount per share equal to two (2) times the
Series A Original Issue Price, plus any Accruing Dividends accrued but
unpaid thereon, whether or not declared, together with any other dividends
declared but unpaid thereon, or (ii) in the event of a Deemed Liquidation
Event, as defined below, an amount per share equal to the Series A Original
Issue Price, plus any Accruing Dividends accrued but unpaid thereon,
whether or not declared, together with any other dividends declared but
unpaid thereon. If upon any such liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the holders of shares of
Series A Preferred Stock and any other series of Preferred Stock ranking on
liquidation on a parity with the Series A Preferred Stock the full amount
to which they shall be entitled under this Subsection 2.1, the holders of
shares of Series A Preferred Stock and any other series of Preferred Stock
ranking on liquidation on a parity with the Series A Preferred Stock shall
share ratably in any distribution of the assets available for distribution
in proportion to the respective amounts which would otherwise be payable in
respect of the shares held by them upon such distribution if all amounts
payable on or with respect to such shares were paid in full.
2.2 Distribution of Remaining Assets. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, after the payment of all preferential amounts required to be
paid to the holders of shares of Series A Preferred Stock and any other
series of Preferred Stock of the Corporation ranking on liquidation senior
to the Common Stock, the remaining assets of the Corporation available for
distribution to its stockholders shall be distributed among the holders of
the shares of Series A Preferred Stock, any other series of Preferred Stock
entitled pursuant to the terms of the Certificate of Incorporation to
participate with the Common Stock in the distribution of such remaining
assets and Common Stock, pro rata based on the number of shares held by
each such holder, treating for this purpose all such securities as if they
had been converted to Common Stock pursuant to the terms of the Certificate
of Incorporation immediately prior to such dissolution, liquidation or
winding up of the Corporation. The aggregate amount which a holder of a
share of Series A
2
Preferred Stock is entitled to receive under Subsections 2.1 and 2.2 is
hereinafter referred to as the "Series A Liquidation Amount."
2.3 Deemed Liquidation Events.
2.3.1 Definition. Each of the following events shall be
considered a "Deemed Liquidation Event":
(a) a merger or consolidation in which
(i) the Corporation is a constituent party
or
(ii) a subsidiary of the Corporation is a
constituent party and the Corporation
issues shares of its capital stock
pursuant to such merger or
consolidation,
except any such merger or consolidation involving the Corporation or a
subsidiary in which the shares of capital stock of the Corporation
outstanding immediately prior to such merger or consolidation continue to
represent, or are converted into or exchanged for shares of capital stock
that represent, immediately following such merger or consolidation, at
least a majority, by voting power, of the capital stock of (1) the
surviving or resulting corporation or (2) if the surviving or resulting
corporation is a wholly owned subsidiary of another corporation immediately
following such merger or consolidation, the parent corporation of such
surviving or resulting corporation (provided that, for the purpose of this
Subsection 2.3.1, all shares of Common Stock issuable upon exercise of
Options (as defined below) outstanding immediately prior to such merger or
consolidation or upon conversion of Convertible Securities (as defined
below) outstanding immediately prior to such merger or consolidation shall
be deemed to be outstanding immediately prior to such merger or
consolidation and, if applicable, converted or exchanged in such merger or
consolidation on the same terms as the actual outstanding shares of Common
Stock are converted or exchanged); or
(b) the sale, lease, transfer, exclusive license
or other disposition, in a single transaction or series of related
transactions, by the Corporation or any subsidiary of the Corporation of
all or substantially all the assets of the Corporation and its subsidiaries
taken as a whole, or the sale or disposition (whether by merger or
otherwise) of one or more subsidiaries of the Corporation if substantially
all of the assets of the Corporation and its subsidiaries taken as a whole
are held by such subsidiary or subsidiaries, except where such sale, lease,
transfer, exclusive license or other disposition is to a wholly owned
subsidiary of the Corporation.
2.3.2 Effecting a Deemed Liquidation Event.
(a) The Corporation shall not have the power to
effect a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(i)
above unless the agreement or plan of merger or consolidation for such
transaction provides that the consideration payable to the stockholders of
the Corporation shall be allocated among the holders of capital stock of
the Corporation in accordance with Subsections 2.1 and 2.2 above.
(b) In the event of a Deemed Liquidation Event
referred to in Subsection 2.3.1(a)(ii) or 2.3.1(b) above, if the
Corporation does not effect a dissolution of the
3
Corporation under the General Corporation Law within 90 days after such
Deemed Liquidation Event, then (i) the Corporation shall send a written
notice to each holder of Series A Preferred Stock no later than the 90th
day after the Deemed Liquidation Event advising such holders of their right
(and the requirements to be met to secure such right) pursuant to the terms
of the following clause (ii) to require the redemption of such shares of
Series A Preferred Stock, and (ii) if the holders of a majority of the then
outstanding shares of Series A Preferred Stock so request in a written
instrument delivered to the Corporation not later than 120 days after such
Deemed Liquidation Event, the Corporation shall use the consideration
received by the Corporation for such Deemed Liquidation Event (net of any
retained liabilities associated with the assets sold or technology
licensed, as determined in good faith by the Board of Directors of the
Corporation) (the "Net Proceeds"), to the extent legally available
therefor, on the 150th day after such Deemed Liquidation Event, to redeem
all outstanding shares of Series A Preferred Stock at a price per share
equal to the Series A Liquidation Amount. Notwithstanding the foregoing, in
the event of a redemption pursuant to the preceding sentence, if the Net
Proceeds are not sufficient to redeem all outstanding shares of Series A
Preferred Stock and of any other series of Preferred Stock ranking on
redemption on parity with the Series A Preferred Stock that is required to
then be redeemed, or if the Corporation does not have sufficient lawfully
available funds to effect such redemption, the Corporation shall redeem a
pro rata portion of each holder's shares of Series A Preferred Stock and
any such other series of Preferred Stock to the fullest extent of such Net
Proceeds or such lawfully available funds, as the case may be, based on the
respective amounts which would otherwise be payable in respect of the
shares to be redeemed if the legally available funds were sufficient to
redeem all such shares, and shall redeem the remaining shares to have been
redeemed as soon as practicable after the Corporation has funds legally
available therefor. The provisions of Subsections 6.2 through 6.4 below
shall apply, with such changes in the details thereof as are necessitated
by the context, to the redemption of the Series A Preferred Stock pursuant
to this Subsection 2.3.2(b). Prior to the distribution or redemption
provided for in this Subsection 2.3.2(b), the Corporation shall not expend
or dissipate the consideration received for such Deemed Liquidation Event,
except to discharge expenses incurred in connection with such Deemed
Liquidation Event or in the ordinary course of business.
2.3.3 Amount of Deemed Paid or Distributed. The amount
deemed paid or distributed to the holders of capital stock of the
Corporation upon any such merger, consolidation, sale, transfer, exclusive
license, other disposition or redemption shall be the cash or the value of
the property, rights or securities paid or distributed to such holders by
the Corporation or the acquiring person, firm or other entity. If the
amount deemed paid or distributed under this Subsection 2.3.3 is made in
property other than in cash, the value of such distribution shall be the
fair market value of such property, determined as follows:
(a) For securities not subject to investment
letters or other similar restrictions on free marketability,
(i) if traded on a securities exchange or
the NASDAQ Stock Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange or market over the 30-
period ending three days prior to the closing of such transaction;
4
(ii) if actively traded over-the-counter,
the value shall be deemed to be the average of the closing prices over the
30-day period ending three days prior to the closing of such transaction;
or
(iii) if there is no active public market,
the value shall be the fair market value thereof, as determined in good
faith by the Board of Directors of the Corporation.
(b) The method of valuation of securities subject
to investment letters or other similar restrictions on free marketability
(other than restrictions arising solely by virtue of a stockholder's status
as an affiliate or former affiliate) shall take into account an appropriate
discount (as determined in good faith by the Board of Directors of the
Corporation) from the market value as determined pursuant to clause (a)
above so as to reflect the approximate fair market value thereof.
3. Voting.
3.1 General. On any matter presented to the stockholders of
the Corporation for their action or consideration at any meeting of
stockholders of the Corporation (or by written consent of stockholders in
lieu of meeting), each holder of outstanding shares of Series A Preferred
Stock shall be entitled to cast the number of votes equal to the number of
whole shares of Common Stock into which the shares of Series A Preferred
Stock held by such holder are convertible as of the record date for
determining stockholders entitled to vote on such matter. Except as
provided by law or by the other provisions of the Certificate of
Incorporation, holders of Series A Preferred Stock shall vote together with
the holders of Common Stock, and with the holders of any other series of
Preferred Stock the terms of which so provide, as a single class.
3.2 Election of Directors. The holders of record of the
shares of Series A Preferred Stock, exclusively and as a separate class,
shall be entitled to elect one (1) director of the Corporation (the "Series
A Director"). Any director elected as provided in the preceding sentence
may be removed without cause by, and only by, the affirmative vote of the
holders of a majority of the then outstanding shares of Series A Preferred
Stock. The holders of record of the shares of Common Stock and of any other
class or series of voting stock (including the Series A Preferred Stock),
exclusively and voting together as a single class, shall, subject to the
rights of any additional series of Preferred Stock that may be established
from time to time, be entitled to elect the balance of the total number of
directors of the Corporation. At any meeting held for the purpose of
electing a director, the presence in person or by proxy of the holders of a
majority of the outstanding shares of the class or series entitled to elect
such director shall constitute a quorum for the purpose of electing such
director. A vacancy in any directorship filled by the holders of any class
or series shall be filled only by vote or written consent in lieu of a
meeting of the holders of such class or series or by any remaining director
or directors elected by the holders of such class or series pursuant to
this Subsection 3.2. The rights of the holders of the Series A Preferred
Stock under the first sentence of this Subsection 3.2 shall terminate on
the first date following the Series A Original Issue Date (as defined
below) on which there are issued and outstanding 1,000 shares of Series A
Preferred Stock.
3.3 Series A Preferred Stock Protective Provisions. At
any time when at least 37.5% of the aggregate number of shares of Series A
Preferred Stock issued pursuant to the Series A Preferred Stock and Warrant
Purchase Agreement dated as of February 17, 2006
5
between the Corporation and the Purchasers named therein (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares) are
outstanding, the Corporation shall not, either directly or indirectly by
amendment, merger, consolidation or otherwise, do any of the following
without (in addition to any other vote required by law or the Certificate
of Incorporation) the written consent or affirmative vote of the holders of
a majority of the then outstanding shares of Series A Preferred Stock,
given in writing or by vote at a meeting, consenting or voting (as the case
may be) separately as a class:
(a) liquidate, dissolve or wind-up the business
and affairs of the Corporation, effect any Deemed Liquidation Event, or
consent to any of the foregoing;
(b) amend, alter, waive or repeal any provision
of the Certificate of Incorporation or Bylaws of the Corporation in a
manner that adversely affects the Series A Preferred Stock;
(c) take any action that alters or changes the
privileges, preferences or rights of the Series A Preferred Stock;
(d) create, or authorize the creation of, by
reclassification or otherwise, or issue or obligate itself to issue shares
of, any additional class or series of capital stock unless the same ranks
junior to or on parity with the Series A Preferred Stock with respect to
the rights, preferences and privileges of the Series A Preferred Stock,
including with respect to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, the payment of dividends and
redemption voting, conversion, antidilution and other rights; or increase
or decrease the authorized number of shares of Series A Preferred Stock or
any other class or series of capital stock;
(e) purchase or redeem (or permit any subsidiary
to purchase or redeem) or pay or declare any dividend or make any
distribution on, any shares of capital stock of the Corporation other than
(i) redemptions of or dividends or distributions on the Series A Preferred
Stock as expressly authorized herein, (ii) dividends or other distributions
payable on the Common Stock solely in the form of additional shares of
Common Stock and (iii) repurchases of stock from employees in connection
with the cessation of employment at the lower of the original purchase
price or the then-current fair market value thereof;
(f) incur, alone or collectively with one or more
subsidiaries, aggregate indebtedness in excess of $500,000, other than
additional loans from Laurus Master Fund Ltd.;
(g) incur, alone or collectively with one or more
subsidiaries, aggregate capital expenditures in excess of $5,000,000 in
connection with or relating to the build-out of the Corporation's One IP
Voice Subsidiary;
(h) sell, transfer, assign, pledge or license any
material intellectual property right of the Corporation or any subsidiary,
other than licenses granted to customers in the ordinary course of
business; or
(i) increase or decrease the authorized number of
directors constituting the Board of Directors to a number other than eight
(8).
6
4. Optional Conversion.
The holders of the Series A Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
4.1 Right to Convert.
4.1.1 Conversion Ratio. Each share of Series A Preferred
Stock shall be convertible, at the option of the holder thereof, at any
time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the
Series A Original Issue Price by the Series A Conversion Price (as defined
below) in effect at the time of conversion. The "Series A Conversion Price"
shall initially be equal to $1.70. Such initial Series A Conversion Price,
and the rate at which shares of Series A Preferred Stock may be converted
into shares of Common Stock, shall be subject to adjustment as provided
below.
4.1.2 Termination of Conversion Rights. In the event of a
liquidation, dissolution or winding up of the Corporation or a Deemed
Liquidation Event, the Conversion Rights shall terminate at the close of
business on the last full day preceding the date fixed for the payment of
any such amounts distributable on such event to the holders of Series A
Preferred Stock.
4.2 Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the fair
market value of a share of Common Stock as determined in good faith by the
Board of Directors of the Corporation. Whether or not fractional shares
would be issuable upon such conversion shall be determined on the basis of
the total number of shares of Series A Preferred Stock the holder is at the
time converting into Common Stock and the aggregate number of shares of
Common Stock issuable upon such conversion.
4.3 Mechanics of Conversion.
4.3.1 Notice of Conversion. In order for a holder of
Series A Preferred Stock to voluntarily convert shares of Series A
Preferred Stock into shares of Common Stock, such holder shall surrender
the certificate or certificates for such shares of Series A Preferred Stock
(or, if such registered holder alleges that such certificate has been lost,
stolen or destroyed, a lost certificate affidavit and agreement reasonably
acceptable to the Corporation to indemnify the Corporation against any
claim that may be made against the Corporation on account of the alleged
loss, theft or destruction of such certificate), at the office of the
transfer agent for the Series A Preferred Stock (or at the principal office
of the Corporation if the Corporation serves as its own transfer agent),
together with written notice that such holder elects to convert all or any
number of the shares of the Series A Preferred Stock represented by such
certificate or certificates and, if applicable, any event on which such
conversion is contingent. Such notice shall state such holder's name or the
names of the nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. If required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or
his, her or its attorney duly authorized in writing. The close
7
of business on the date of receipt by the transfer agent (or by the
Corporation if the Corporation serves as its own transfer agent) of such
certificates (or lost certificate affidavit and agreement) and notice shall
be the time of conversion (the "Conversion Time"), and the shares of Common
Stock issuable upon conversion of the shares represented by such
certificate shall be deemed to be outstanding of record as of such date.
The Corporation shall, as soon as practicable after the Conversion Time,
issue and deliver to such holder of Series A Preferred Stock, or to his,
her or its nominees, a certificate or certificates for the number of full
shares of Common Stock issuable upon such conversion in accordance with the
provisions hereof, a certificate for the number (if any) of the shares of
Series A Preferred Stock represented by the surrendered certificate that
were not converted into Common Stock, and cash as provided in Subsection
4.2 in lieu of any fraction of a share of Common Stock otherwise issuable
upon such conversion and payment of any declared but unpaid dividends (but
not any undeclared Accruing Dividends) on the shares of Series A Preferred
Stock converted.
4.3.2 Reservation of Shares. The Corporation shall at all
times when the Series A Preferred Stock shall be outstanding, reserve and
keep available out of its authorized but unissued capital stock, for the
purpose of effecting the conversion of the Series A Preferred Stock, such
number of its duly authorized shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Series A
Preferred Stock; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of
all then outstanding shares of the Series A Preferred Stock, the
Corporation shall take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number
of shares as shall be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to the Certificate of Incorporation.
Before taking any action which would cause an adjustment reducing the
Series A Conversion Price below the then par value of the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, the
Corporation will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of Common Stock at such adjusted
Series A Conversion Price.
4.3.3 Effect of Conversion. All shares of Series A
Preferred Stock which shall have been surrendered for conversion as herein
provided shall no longer be deemed to be outstanding and all rights with
respect to such shares shall immediately cease and terminate at the
Conversion Time, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and to receive payment of any
dividends declared but unpaid thereon. Any shares of Series A Preferred
Stock so converted shall be retired and cancelled and may not be reissued
as shares of such series, and the Corporation may thereafter take such
appropriate action (without the need for stockholder action) as may be
necessary to reduce the authorized number of shares of Series A Preferred
Stock accordingly.
4.3.4 No Further Adjustment. Upon any such conversion, no
adjustment to the Series A Conversion Price shall be made for any declared
but unpaid dividends on the Series A Preferred Stock surrendered for
conversion or on the Common Stock delivered upon conversion.
4.3.5 Taxes. The Corporation shall pay any and all issue
and other similar taxes that may be payable in respect of any issuance or
delivery of shares of Common Stock upon conversion of shares of Series A
Preferred Stock pursuant to this Section 4. The
8
Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
shares of Common Stock in a name other than that in which the shares of
Series A Preferred Stock so converted were registered, and no such issuance
or delivery shall be made unless and until the person or entity requesting
such issuance has paid to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
4.3.6 Listing. The Corporation shall: (i) on a timely
basis prepare and file with NASDAQ or any over-the-counter market or
securities exchange on which the Common Stock is listed or traded from time
to time any necessary notification or listing form regarding the listing of
the additional shares of Common Stock which is at least equal to the
maximum number of shares then issuable upon conversion of the Series A
Preferred Stock, (ii) maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all such shares then issuable upon
conversion of the Series A Preferred Stock and (iii) provide to each holder
of Series A Preferred Stock evidence of such filing upon written request.
4.4 Adjustments to Series A Conversion Price for Diluting
Issues.
4.4.1 Special Definitions. For purposes of this Article
Fourth, the following definitions shall apply:
(a) "Option" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire Common Stock or
Convertible Securities.
(b) "Series A Original Issue Date" shall mean the
date on which the first share of Series A Preferred Stock was issued.
(c) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities directly or
indirectly convertible into or exchangeable for Common Stock, or any other
agreements or instruments obligating the Company to issue Common Stock or
other Convertible Securities, but excluding Options.
(d) "Additional Shares of Common Stock" shall
mean all shares of Common Stock issued (or, pursuant to Subsection 4.4.3
below, deemed to be issued) by the Corporation after the Series A Original
Issue Date, other than the following shares of Common Stock, and shares of
Common Stock deemed issued pursuant to the following Options and
Convertible Securities (collectively "Exempted Securities"):
(i) shares of Common Stock, Options or
Convertible Securities issued as a
dividend or distribution on Series A
Preferred Stock;
(ii) shares of Common Stock, Options or
Convertible Securities issued by reason
of a dividend, stock split, split-up or
other distribution on shares of Common
Stock that is covered by Subsection
4.5, 4.6, 4.7 or 4.8 below;
(iii) up to 4,819,241 shares of Common
Stock, including Options therefor
(subject to appropriate adjustment
9
in the event of any stock dividend,
stock split, combination or other
similar recapitalization affecting
such shares), issued to employees or
directors of, or consultants or
advisors to, the Corporation or any of
its subsidiaries, including pursuant
to the Stock Option Plan and the
Employee Stock Purchase Plan of the
Corporation, whether issued before or
after the Series A Original Issue Date
(provided that any Options for such
shares that expire or terminate
unexercised or any restricted stock
repurchased by the Corporation at cost
shall not be counted toward such
maximum number unless and until such
shares are regranted as new stock
grants (or as new Options));
(iv) shares of Common Stock issuable upon
conversion or exercise of any and all
Options and Convertible Securities
outstanding prior to the Series A
Original Issue Date (provided that
Options covered by clause (iii) above
shall not be covered by this clause
(iv);
(v) shares of Common Stock, including
warrants therefor, issued to the
Company's current or previous brokers,
underwriters and placement agents; and
(vi) shares of Common Stock (subject to
appropriate adjustment in the event of
any stock dividend, stock split,
combination or other similar
recapitalization affecting such
shares) issued to Laurus Master Fund
Ltd. pursuant to the security
agreement, notes and warrants as they
are currently in effect.
4.4.2 No Adjustment of Series A Conversion Price. No
adjustment in the Series A Conversion Price shall be made as the result of
the issuance or deemed issuance of Additional Shares of Common Stock if the
Corporation receives written notice from the holders of a majority of the
then outstanding shares of Series A Preferred Stock agreeing that no such
adjustment shall be made as the result of the issuance or deemed issuance
of such Additional Shares of Common Stock.
4.4.3 Deemed Issue of Additional Shares of Common Stock.
(a) If the Corporation at any time or from time
to time after the Series A Original Issue Date shall issue any Options or
Convertible Securities (excluding Options or Convertible Securities which
are themselves Exempted Securities) or shall fix a record date for the
determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares
of Common Stock (as set forth in the instrument relating thereto, assuming
the satisfaction of any conditions to exercisability, convertibility or
exchangeability but without regard to any provision contained
10
therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued
as of the time of such issue or, in case such a record date shall have been
fixed, as of the close of business on such record date.
(b) If the terms of any Option or Convertible
Security, the issuance of which resulted in an adjustment to the Series A
Conversion Price pursuant to the terms of Subsection 4.4.4 below, are
revised as a result of an amendment to such terms or any other adjustment
pursuant to the provisions of such Option or Convertible Security (but
excluding automatic adjustments to such terms pursuant to anti-dilution or
similar provisions of such Option or Convertible Security) to provide for
either (1) any increase or decrease in the number of shares of Common Stock
issuable upon the exercise, conversion or exchange of any such Option or
Convertible Security or (2) any increase or decrease in the consideration
payable to the Corporation upon such exercise, conversion or exchange,
then, effective upon such increase or decrease becoming effective, the
Series A Conversion Price computed upon the original issue of such Option
or Convertible Security (or upon the occurrence of a record date with
respect thereto) shall be readjusted to such Series A Conversion Price as
would have obtained had such revised terms been in effect upon the original
date of issuance of such Option or Convertible Security. Notwithstanding
the foregoing, no readjustment pursuant to this clause (b) shall have the
effect of increasing the Series A Conversion Price to an amount which
exceeds the lower of (i) the Series A Conversion Price in effect
immediately prior to the original adjustment made as a result of the
issuance of such Option or Convertible Security, or (ii) the Series A
Conversion Price that would have resulted from any issuances of Additional
Shares of Common Stock (other than deemed issuances of Additional Shares of
Common Stock as a result of the issuance of such Option or Convertible
Security) between the original adjustment date and such readjustment date.
(c) If the terms of any Option or Convertible
Security (excluding Options or Convertible Securities which are themselves
Exempted Securities), the issuance of which did not result in an adjustment
to the Series A Conversion Price pursuant to the terms of Subsection 4.4.4
below (either because the consideration per share (determined pursuant to
Subsection 4.4.5 hereof) of the Additional Shares of Common Stock subject
thereto was equal to or greater than the Series A Conversion Price then in
effect, or because such Option or Convertible Security was issued before
the Series A Original Issue Date), are revised after the Series A Original
Issue Date as a result of an amendment to such terms or any other
adjustment pursuant to the provisions of such Option or Convertible
Security (but excluding automatic adjustments to such terms pursuant to
anti-dilution or similar provisions of such Option or Convertible Security)
to provide for either (1) any increase or decrease in the number of shares
of Common Stock issuable upon the exercise, conversion or exchange of any
such Option or Convertible Security or (2) any increase or decrease in the
consideration payable to the Corporation upon such exercise, conversion or
exchange, then such Option or Convertible Security, as so amended or
adjusted, and the Additional Shares of Common Stock subject thereto
(determined in the manner provided in Subsection 4.4.3(a) above) shall be
deemed to have been issued effective upon such increase or decrease
becoming effective.
(d) Upon the expiration or termination of any
unexercised Option or unconverted or unexchanged Convertible Security (or
portion thereof) which resulted (either upon its original issuance or upon
a revision of its terms) in an adjustment to the Series A
11
Conversion Price pursuant to the terms of Subsection 4.4.4 below, the
Series A Conversion Price shall be readjusted to such Series A Conversion
Price as would have obtained had such Option or Convertible Security (or
portion thereof) never been issued.
(e) If the number of shares of Common Stock
issuable upon the exercise, conversion or exchange of any Option or
Convertible Security, or the consideration payable to the Corporation upon
such exercise, conversion and/or exchange, is calculable at the time such
Option or Convertible Security is issued or amended but is subject to
adjustment based upon subsequent events, any adjustment to the Series A
Conversion Price provided for in this Subsection 4.4.3 shall be effected at
the time of such issuance or amendment based on such number of shares or
amount of consideration without regard to any provisions for subsequent
adjustments (and any subsequent adjustments shall be treated as provided in
clauses (b) and (c) of this Subsection 4.4.3). If the number of shares of
Common Stock issuable upon the exercise, conversion or exchange of any
Option or Convertible Security, or the consideration payable to the
Corporation upon such exercise, conversion or exchange, cannot be
calculated at all at the time such Option or Convertible Security is issued
or amended, any adjustment to the Series A Conversion Price that would
result under the terms of this Subsection 4.4.3 at the time of such
issuance or amendment shall instead be effected at the time such number of
shares and/or amount of consideration is first calculable (even if subject
to subsequent adjustments), assuming for purposes of calculating such
adjustment to the Series A Conversion Price that such issuance or amendment
took place at the time such calculation can first be made.
4.4.4 Adjustment of Series A Conversion Price Upon
Issuance of Additional Shares of Common Stock. In the event the Corporation
shall at any time after the Series A Original Issue Date issue Additional
Shares of Common Stock (including Additional Shares of Common Stock deemed
to be issued pursuant to Subsection 4.4.3), without consideration or for a
consideration per share less than the Series A Conversion Price in effect
immediately prior to such issue, then the Series A Conversion Price shall
be reduced, concurrently with such issue, to a price (calculated to the
nearest one-hundredth of a cent) determined in accordance with the
following formula:
CP2 = CP1 * (A + B) divided by (A + C).
For purposes of the foregoing formula, the following definitions shall
apply:
(a) "CP2" shall mean the Series A Conversion
Price in effect immediately after such issue of Additional Shares of Common
Stock
(b) "CP1" shall mean the Series A Conversion
Price in effect immediately prior to such issue of Additional Shares of
Common Stock;
(c) "A" shall mean the number of shares of Common
Stock outstanding immediately prior to such issue of Additional Shares of
Common Stock (treating for this purpose as outstanding all shares of Common
Stock reserved for issuance or issuable upon exercise of Options
outstanding immediately prior to such issue or upon conversion or exchange
of Convertible Securities (including the Series A Preferred Stock)
outstanding (assuming exercise of any outstanding Options therefor) or
reserved for issuance immediately prior to such issue);
12
(d) "B" shall mean the number of shares of Common
Stock that would have been issued if such Additional Shares of Common Stock
had been issued at a price per share equal to CP1 (determined by dividing
the aggregate consideration received by the Corporation in respect of such
issue by CP1); and
(e) "C" shall mean the number of such Additional
Shares of Common Stock issued in such transaction.
4.4.5 Determination of Consideration. For purposes of
this Subsection 4.4, the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as
follows:
(a) Cash and Property: Such consideration shall:
(i) insofar as it consists of cash, be
computed at the aggregate amount of
cash received by the Corporation,
excluding amounts paid or payable for
accrued interest;
(ii) insofar as it consists of property
other than cash, be computed at the
fair market value thereof at the time
of such issue, as determined in good
faith by the Board of Directors of the
Corporation; and
(iii) in the event Additional Shares of
Common Stock are issued together with
other shares or securities or other
assets of the Corporation for
consideration which covers both, be the
proportion of such consideration so
received, computed as provided in
clauses (i) and (ii) above, as
determined in good faith by the Board
of Directors of the Corporation.
(b) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares
of Common Stock deemed to have been issued pursuant to Subsection 4.4.3,
relating to Options and Convertible Securities, shall be determined by
dividing
(i) the total amount, if any, received or
receivable by the Corporation as
consideration for the issue of such
Options or Convertible Securities, plus
the minimum aggregate amount of
additional consideration (as set forth
in the instruments relating thereto,
without regard to any provision
contained therein for a subsequent
adjustment of such consideration)
payable to the Corporation upon the
exercise of such Options or the
conversion or exchange of such
Convertible Securities, or in the case
of Options for Convertible Securities,
the exercise of such Options for
Convertible Securities
13
and the conversion or exchange of such
Convertible Securities, by
(ii) the maximum number of shares of Common
Stock (as set forth in the instruments
relating thereto, without regard to any
provision contained therein for a
subsequent adjustment of such number)
issuable upon the exercise of such
Options or the conversion or exchange
of such Convertible Securities, or in
the case of Options for Convertible
Securities, the exercise of such
Options for Convertible Securities and
the conversion or exchange of such
Convertible Securities.
4.4.6 Multiple Closing Dates. In the event the
Corporation shall issue on more than one date Additional Shares of Common
Stock that are a part of one transaction or a series of related
transactions and that would result in an adjustment to the Series A
Conversion Price pursuant to the terms of Subsection 4.4.4 above, and such
issuance dates occur within a period of no more than 90 days from the first
such issuance to the final such issuance, then, upon the final such
issuance, the Series A Conversion Price shall be readjusted to give effect
to all such issuances as if they occurred on the date of the first such
issuance (and without giving effect to any additional adjustments as a
result of any such subsequent issuances within such period).
4.5 Adjustment for Stock Splits and Combinations. If
the Corporation shall at any time or from time to time after the Series A
Original Issue Date effect a subdivision of the outstanding Common Stock,
the Series A Conversion Price in effect immediately before that subdivision
shall be proportionately decreased so that the number of shares of Common
Stock issuable on conversion of each share of such series shall be
increased in proportion to such increase in the aggregate number of shares
of Common Stock outstanding. If the Corporation shall at any time or from
time to time after the Series A Original Issue Date combine the outstanding
shares of Common Stock, the Series A Conversion Price in effect immediately
before the combination shall be proportionately increased so that the
number of shares of Common Stock issuable on conversion of each share of
such series shall be decreased in proportion to such decrease in the
aggregate number of shares of Common Stock outstanding. Any adjustment
under this subsection shall become effective at the close of business on
the date the subdivision or combination becomes effective.
4.6 Adjustment for Certain Dividends and Distributions. In
the event the Corporation at any time or from time to time after the Series
A Original Issue Date shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable on the Common Stock in additional shares of
Common Stock, then and in each such event the Series A Conversion Price in
effect immediately before such event shall be decreased as of the time of
such issuance or, in the event such a record date shall have been fixed, as
of the close of business on such record date, by multiplying the Series A
Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total
number of shares of Common Stock issued and
outstanding immediately
14
prior to the time of such issuance or the
close of business on such record date, and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and
outstanding immediately prior to the time of
such issuance or the close of business on
such record date plus the number of shares of
Common Stock issuable in payment of such
dividend or distribution.
Notwithstanding the foregoing, (a) if such record date shall have been
fixed and such dividend is not fully paid or if such distribution is not
fully made on the date fixed therefor, the Series A Conversion Price shall
be recomputed accordingly as of the close of business on such record date
and thereafter the Series A Conversion Price shall be adjusted pursuant to
this subsection as of the time of actual payment of such dividends or
distributions; and (b) that no such adjustment shall be made if the holders
of Series A Preferred Stock simultaneously receive a dividend or other
distribution of shares of Common Stock in a number equal to the number of
shares of Common Stock as they would have received if all outstanding
shares of Series A Preferred Stock had been converted into Common Stock on
the date of such event.
4.7 Adjustments for Other Dividends and Distributions. In the
event the Corporation at any time or from time to time after the Series A
Original Issue Date shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation (other than a
distribution of shares of Common Stock in respect of outstanding shares of
Common Stock) or in other property and the provisions of Section 1 do not
apply to such dividend or distribution, then and in each such event the
holders of Series A Preferred Stock shall receive, simultaneously with the
distribution to the holders of Common Stock, a dividend or other
distribution of such securities or other property in an amount equal to the
amount of such securities or other property as they would have received if
all outstanding shares of Series A Preferred Stock had been converted into
Common Stock on the date of such event.
4.8 Adjustment for Merger or Reorganization, etc. Subject to
the provisions of Subsection 2.3, if there shall occur any reorganization,
recapitalization, reclassification, consolidation or merger involving the
Corporation in which the Common Stock (but not the Series A Preferred
Stock) is converted into or exchanged for securities, cash or other
property (other than a transaction covered by Subsections 4.4, 4.6 or 4.7),
then, following any such reorganization, recapitalization,
reclassification, consolidation or merger, each share of Series A Preferred
Stock shall thereafter be convertible in lieu of the Common Stock into
which it was convertible prior to such event into the kind and amount of
securities, cash or other property which a holder of the number of shares
of Common Stock of the Corporation issuable upon conversion of one share of
Series A Preferred Stock immediately prior to such reorganization,
recapitalization, reclassification, consolidation or merger would have been
entitled to receive pursuant to such transaction; and, in such case,
appropriate adjustment (as determined in good faith by the Board of
Directors of the Corporation) shall be made in the application of the
provisions in this Section 4 with respect to the rights and interests
thereafter of the holders of the Series A Preferred Stock, to the end that
the provisions set forth in this Section 4 (including provisions with
respect to changes in and other adjustments of the Series A Conversion
Price)
15
shall thereafter be applicable, as nearly as reasonably may be, in relation
to any securities or other property thereafter deliverable upon the
conversion of the Series A Preferred Stock.
4.9 Certificate as to Adjustments. Upon the occurrence of
each adjustment or readjustment of the Series A Conversion Price pursuant
to this Section 4, the Corporation at its expense shall, as promptly as
reasonably practicable but in any event not later than 30 days thereafter,
compute such adjustment or readjustment in accordance with the terms hereof
and furnish to each holder of Series A Preferred Stock a certificate
setting forth such adjustment or readjustment (including the kind and
amount of securities, cash or other property into which the Series A
Preferred Stock is convertible) and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, as
promptly as reasonably practicable after the written request at any time of
any holder of Series A Preferred Stock (but in any event not later than 30
days thereafter), furnish or cause to be furnished to such holder a
certificate setting forth (i) the Series A Conversion Price then in effect,
and (ii) the number of shares of Common Stock and the amount, if any, of
other securities, cash or property which then would be received upon the
conversion of Series A Preferred Stock.
4.10 Notice of Record Date. In the event:
(a) the Corporation shall take a record of the
holders of its Common Stock (or other capital stock or securities at the
time issuable upon conversion of the Series A Preferred Stock) for the
purpose of entitling or enabling them to receive any dividend or other
distribution, or to receive any right to subscribe for or purchase any
shares of capital stock of any class or any other securities, or to receive
any other security; or
(b) of any capital reorganization of the
Corporation, any reclassification of the Common Stock of the Corporation,
or any Deemed Liquidation Event; or
(c) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation,
then, and in each such case, the Corporation will send or cause to be sent
to the holders of the Series A Preferred Stock a notice specifying, as the
case may be, (i) the record date for such dividend, distribution or right,
and the amount and character of such dividend, distribution or right, or
(ii) the effective date on which such reorganization, reclassification,
consolidation, merger, transfer, dissolution, liquidation or winding-up is
proposed to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such other capital stock or
securities at the time issuable upon the conversion of the Series A
Preferred Stock) shall be entitled to exchange their shares of Common Stock
(or such other capital stock or securities) for securities or other
property deliverable upon such reorganization, reclassification,
consolidation, merger, transfer, dissolution, liquidation or winding-up,
and the amount per share and character of such exchange applicable to the
Series A Preferred Stock and the Common Stock. Such notice shall be sent at
least 10 days prior to the record date or effective date for the event
specified in such notice.
5. Mandatory Conversion.
5.1 Trigger Events. Upon the earliest to occur of (a) the
closing of the sale of shares of Common Stock to the public at a price of
at least $5.00 per share (subject to
16
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), in a
firm-commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended,
resulting in at least $10,000,000 of gross proceeds to the Corporation, (b)
the date and time, or the occurrence of an event, specified by vote or
written consent of the holders of a majority of the then outstanding shares
of Series A Preferred Stock or (c) the close of business on the date on
which the closing sale price of the Common Stock, as quoted on the OTC
Bulletin Board or on any national securities exchange on which such
securities are listed, whichever is applicable, is greater than $5.00 per
share (subject to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization
affecting such shares) for 20 consecutive trading days (the earliest of
such times, the "Mandatory Conversion Time"), (i) all outstanding shares of
Series A Preferred Stock shall automatically be converted into shares of
Common Stock, at the then effective conversion rate, and (ii) such shares
may not be reissued by the Corporation.
5.2 Procedural Requirements. All holders of record of shares
of Series A Preferred Stock shall be sent written notice of the Mandatory
Conversion Time and the place designated for mandatory conversion of all
such shares of Series A Preferred Stock pursuant to this Section 5. Such
notice need not be sent in advance of the occurrence of the Mandatory
Conversion Time. Upon receipt of such notice, each holder of shares of
Series A Preferred Stock shall surrender his, her or its certificate or
certificates for all such shares (or, if such holder alleges that such
certificate has been lost, stolen or destroyed, a lost certificate
affidavit and agreement reasonably acceptable to the Corporation to
indemnify the Corporation against any claim that may be made against the
Corporation on account of the alleged loss, theft or destruction of such
certificate) to the Corporation at the place designated in such notice, and
shall thereafter receive certificates for the number of shares of Common
Stock to which such holder is entitled pursuant to this Section 5. At the
Mandatory Conversion Time, all outstanding shares of Series A Preferred
Stock shall be deemed to have been converted into shares of Common Stock,
which shall be deemed to be outstanding of record, and all rights with
respect to the Series A Preferred Stock so converted, including the rights,
if any, to receive notices and vote (other than as a holder of Common
Stock), will terminate, except only the rights of the holders thereof, upon
surrender of their certificate or certificates (or lost certificate
affidavit and agreement) therefor, to receive the items provided for in the
last sentence of this Subsection 5.2. If so required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by
written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or by his, her or its
attorney duly authorized in writing. As soon as practicable after the
Mandatory Conversion Time and the surrender of the certificate or
certificates (or lost certificate affidavit and agreement) for Series A
Preferred Stock, the Corporation shall issue and deliver to such holder, or
to his, her or its nominees, a certificate or certificates for the number
of full shares of Common Stock issuable on such conversion in accordance
with the provisions hereof, together with cash as provided in Subsection
4.2 in lieu of any fraction of a share of Common Stock otherwise issuable
upon such conversion and the payment of any Accruing Dividends accrued but
unpaid, whether or not declared, and any declared but unpaid dividends on
the shares of Series A Preferred Stock converted.
5.3 Effect of Mandatory Conversion. All shares of Series A
Preferred Stock shall, from and after the Mandatory Conversion Time, no
longer be deemed to be outstanding and, notwithstanding the failure of the
holder or holders thereof to surrender the certificates for such shares on
or prior to such time, all rights with respect to such shares shall
immediately
17
cease and terminate at the Mandatory Conversion Time, except only the right
of the holders thereof to receive shares of Common Stock in exchange
therefor and any dividends declared but unpaid thereon. Such converted
Series A Preferred Stock shall be retired and cancelled and may not be
reissued as shares of such series, and the Corporation may thereafter take
such appropriate action (without the need for stockholder action) as may be
necessary to reduce the authorized number of shares of Series A Preferred
Stock accordingly.
6. Redemption.
6.1 Redemption. All of the outstanding shares of Series A
Preferred Stock shall be redeemed by the Corporation out of funds lawfully
available therefor at a price equal to the Series A Original Issue Price,
plus any Accruing Dividends accrued but unpaid thereon, whether or not
declared, together with any other dividends declared but unpaid thereon
(the "Redemption Price"), in three annual installments commencing 270 days
after receipt by the Corporation at any time on or after February 17, 2011
and prior to February 17, 2013, from the holders of a majority of the then
outstanding shares of Series A Preferred Stock, of written notice
requesting redemption of all shares of Series A Preferred Stock (the date
of each such installment being referred to as a "Redemption Date"). On each
Redemption Date, the Corporation shall redeem, on a pro rata basis in
accordance with the number of shares of Series A Preferred Stock owned by
each holder, that number of outstanding shares of Series A Preferred Stock
determined by dividing (i) the total number of shares of Series A Preferred
Stock outstanding immediately prior to such Redemption Date by (ii) the
number of remaining Redemption Dates (including the Redemption Date to
which such calculation applies). If the Corporation does not have
sufficient funds legally available to redeem on any Redemption Date all
shares of Series A Preferred Stock and of any other class or series of
capital stock to be redeemed on such Redemption Date, the Corporation shall
redeem a pro rata portion of each holder's redeemable shares of such
capital stock out of funds legally available therefor, based on the
respective amounts which would otherwise be payable in respect of the
shares to be redeemed if the legally available funds were sufficient to
redeem all such shares, and shall redeem the remaining shares to have been
redeemed as soon as practicable after the Corporation has funds legally
available therefor.
6.2 Redemption Notice. Written notice of the mandatory
redemption (the "Redemption Notice") shall be sent to each holder of record
of Series A Preferred Stock not less than 40 days prior to each Redemption
Date. Each Redemption Notice shall state:
(a) the number of shares of Series A Preferred Stock
held by the holder that the Corporation shall redeem on the Redemption Date
specified in the Redemption Notice;
(b) the Redemption Date and the Redemption Price;
(c) the date upon which the holder's right to convert
such shares terminates (as determined in accordance with Subsection 4.1);
and
(d) that the holder is to surrender to the Corporation,
in the manner and at the place designated, his, her or its certificate or
certificates representing the shares of Series A Preferred Stock to be
redeemed.
18
6.3 Surrender of Certificates; Payment. On or before the
applicable Redemption Date, each holder of shares of Series A Preferred
Stock to be redeemed on such Redemption Date, unless such holder has
exercised his, her or its right to convert such shares as provided in
Section 4, shall surrender the certificate or certificates representing
such shares (or, if such registered holder alleges that such certificate
has been lost, stolen or destroyed, a lost certificate affidavit and
agreement reasonably acceptable to the Corporation to indemnify the
Corporation against any claim that may be made against the Corporation on
account of the alleged loss, theft or destruction of such certificate) to
the Corporation, in the manner and at the place designated in the
Redemption Notice, and thereupon the Redemption Price for such shares shall
be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof. In the event less than
all of the shares of Series A Preferred Stock represented by a certificate
are redeemed, a new certificate representing the unredeemed shares of
Series A Preferred Stock shall promptly be issued to such holder.
6.4 Rights Subsequent to Redemption. If the Redemption Notice
shall have been duly given, and if on the applicable Redemption Date the
Redemption Price payable upon redemption of the shares of Series A
Preferred Stock to be redeemed on such Redemption Date is paid or tendered
for payment or deposited with an independent payment agent so as to be
available therefor, then notwithstanding that the certificates evidencing
any of the shares of Series A Preferred Stock so called for redemption
shall not have been surrendered, dividends with respect to such shares of
Series A Preferred Stock shall cease to accrue after such Redemption Date
and all rights with respect to such shares shall forthwith after the
Redemption Date terminate, except only the right of the holders to receive
the Redemption Price without interest upon surrender of their certificate
or certificates therefor.
7. Redeemed or Otherwise Acquired Shares. Any shares of Series A
Preferred Stock which are redeemed or otherwise acquired by the Corporation
or any of its subsidiaries shall be automatically and immediately cancelled
and retired and shall not be reissued, sold or transferred. Neither the
Corporation nor any of its subsidiaries may exercise any voting or other
rights granted to the holders of Series A Preferred Stock following
redemption.
8. Waiver. Any of the rights, powers, preferences and other terms
of the Series A Preferred Stock set forth herein may be waived on behalf of
all holders of Series A Preferred Stock by the affirmative written consent
or vote of the holders of a majority of the shares of Series A Preferred
Stock then outstanding.
9. Notices. Any notice required or permitted by the provisions of
this Article Fourth to be given to a holder of shares of Series A Preferred
Stock shall be mailed, postage prepaid, to the post office address last
shown on the records of the Corporation, or given by electronic
communication in compliance with the provisions of the General Corporation
Law, and shall be deemed sent upon such mailing or electronic transmission.
19
IN WITNESS WHEREOF, this Certificate of Designations has been
executed by a duly authorized officer of this corporation on this 17th day
of February, 2006.
By: /s/ Xxxx-Xxxx Xxxxxxxxxxx
--------------------------------
Xxxx-Xxxx Xxxxxxxxxxx
CEO and President
20
EXHIBIT C
---------
FORM OF INVESTORS' RIGHTS AGREEMENT
EXHIBIT C
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT ("Agreement") is made as of the 17th
day of February, 2006, by and between Farmstead Telephone Group, Inc., a
Delaware corporation (the "Company"), each of the investors listed on
Schedule A hereto, each of which is referred to in this Agreement as an
"Investor", and each of the Holders listed on Schedule A hereto.
RECITALS
--------
WHEREAS, the Company and the Investors are parties to the Series A
Preferred Stock and Warrant Purchase Agreement of even date herewith (the
"Purchase Agreement"); and
WHEREAS, in order to induce the Company to enter into the Purchase
Agreement and to induce the Investors to invest funds in the Company pursuant
to the Purchase Agreement, the Investors and the Company hereby agree that
this Agreement shall govern the rights of the Investors to cause the Company
to register shares of Common Stock issuable to the Investors, to receive
certain information from the Company, and to participate in future equity
offerings by the Company, and shall govern certain other matters as set forth
in this Agreement;
NOW, THEREFORE, the parties hereby agree as follows:
1. Definitions. For purposes of this Agreement:
1.1 "Affiliate" means, with respect to any specified Person,
any other Person who or which, directly or indirectly, controls, is
controlled by, or is under common control with such specified Person,
including without limitation any partner, officer, director, manager or
employee of such Person and any venture capital fund now or hereafter
existing that is controlled by or under common control with one or more
general partners or managing members of, or shares the same management
company with, such Person.
1.2 "Certificate of Incorporation" means the Company's
Certificate of Incorporation as amended and as in effect from time to time,
including without limitation any Certificate of Designation with respect to
the Series A Preferred Stock and any other series of preferred stock.
1.3 "Common Stock" means shares of the Company's common stock,
par value $0.001 per share.
1.4 "Damages" means any loss, claim, damage, or liability
(joint or several) to which a party hereto may become subject under the
Securities Act, the Exchange Act, or other federal or state law, insofar as
such loss, claim, damage, or liability (or any action in respect thereof)
arises out of or is based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any registration statement of the
Company, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto;
(ii) an omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein
not misleading; or (iii) any violation or alleged violation by any other
party hereto of the Securities Act, the Exchange Act, any state securities
law, or any rule or regulation promulgated under the Securities Act, the
Exchange Act, or any state securities law.
1.5 "Derivative Securities" means any securities or rights
convertible into, or exercisable or exchangeable for, Common Stock, including
options and warrants.
1.6 "Exchange Act" means the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
1.7 "Form S-3" means such form under the Securities Act as in
effect on the date hereof or any registration form under the Securities Act
subsequently adopted by the SEC that permits incorporation of substantial
information by reference to other documents filed by the Company with the
SEC.
1.8 "GAAP" means generally accepted accounting principles in
the United States.
1.9 "Holder" means any holder of Registrable Securities who is
a party to this Agreement.
1.10 "Major Investor" means any Investor that, individually or
together with such Investor's Affiliates, holds at least 100,000 shares of
Series A Preferred Stock (as adjusted for any stock split, stock dividend,
combination, or other recapitalization or reclassification effected after the
date hereof).
1.11 "New Securities" means, collectively, equity securities of
the Company, whether or not currently authorized, as well as rights, options,
or warrants to purchase such equity securities, or securities of any type
whatsoever that are, or may become, convertible or exchangeable into or
exercisable for such equity securities.
1.12 "Person" means any individual, corporation, partnership,
trust, limited liability company, association or other entity.
1.13 "Qualified Secondary Offering" means a firm-commitment
underwritten public offering of Common Stock to the public at a price of at
least $5.00 per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar recapitalization
affecting such shares) pursuant to an effective registration statement under
the Securities Act resulting in at least $10,000,000 of gross proceeds to the
Company.
1.14 "Register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration
or ordering of effectiveness of such registration statement or document.
2
1.15 "Registrable Securities" means (i) the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock, upon
exercise of the Warrants and upon exercise of the warrants issued by the
Company to X.X. Xxxxx Securities, Inc., or its assign, upon any Closing (as
defined in the Purchase Agreement) and (ii) any Common Stock issued as (or
issuable upon the conversion or exercise of any warrant, right, or other
security that is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, the shares referenced in clause (i)
above.
1.16 "Registrable Securities then outstanding" means the number
of shares determined by adding the Common Stock issued or issuable pursuant
to the conversion of Series A Preferred Stock issued pursuant to the Purchase
Agreement, the exercise of Warrants and other then-exercisable or convertible
securities that are Registrable Securities.
1.17 "Restricted Securities" means the securities of the Company
required to bear the legend set forth in Section 2.9(a) hereof.
1.18 "Rule 144" means Rule 144 promulgated by the SEC under the
Securities Act.
1.19 "SEC" means the Securities and Exchange Commission.
1.20 "Securities Act" means the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
1.21 "Selling Expenses" means all selling commissions and stock
transfer taxes applicable to the sale of Registrable Securities, and fees and
disbursements of counsel for any Holder (except as provided in Section 2.3).
1.22 "Series A Director" means the director of the Company that
the holders of record of the Series A Preferred Stock are entitled to elect
pursuant to the Certificate of Incorporation.
1.23 "Series A Preferred Stock" means shares of the Company's
Series A Preferred Stock, par value $0.001 per share.
1.24 "Warrants" means the warrants issued or issuable pursuant
to the Purchase Agreement.
2. Registration Rights. The Company covenants and agrees as follows:
2.1 Registration. The Company shall use its best efforts to:
(a) within 90 days after the Second Closing (as defined
in the Purchase Agreement), file and effectuate a registration statement
under the Securities Act on Form S-3 (or if not eligible to use Form S-3,
Form S-1) covering all Registrable Securities;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement, and the prospectus used in
connection with such registration
3
statement, as may be necessary to comply with the Securities Act in order to
enable the disposition of all securities covered by such registration
statement (including without limitation responding to SEC comments and
preparing and filing any amendments to the registration statement in response
to such comments, within 10 days of the receipt of such SEC comments, and
requesting effectiveness of the registration statement within three (3) days
of "no review" or "no further comment" responses from the SEC);
(c) keep such registration statement effective until all
Registrable Securities registered thereunder have been sold;
(d) furnish to the selling Holders such numbers of copies
of a prospectus, including a preliminary prospectus, as required by the
Securities Act, and such other documents as the Holders may reasonably
request in order to facilitate their disposition of their Registrable
Securities;
(e) register and qualify the securities covered by such
registration statement under such other securities or blue-sky laws of such
jurisdictions as shall be reasonably requested by the selling Holders;
(f) cause all such Registrable Securities covered by such
registration statement to be listed on such national securities exchange or
trading system on which similar securities issued by the Company are listed
from time to time;
(g) promptly make available for inspection by each
selling Holder and any attorney or accountant or other agent retained by any
such Holder, all financial and other records, pertinent corporate documents,
and properties of the Company, and cause the Company's officers, directors,
employees, and independent accountants to supply all information reasonably
requested by any such seller, attorney, accountant, or agent, in connection
with any such registration statement;
(h) notify each selling Holder, promptly after the
Company receives notice thereof, of the time when such registration statement
has been declared effective or a supplement to any prospectus forming a part
of such registration statement has been filed; and
(i) after such registration statement becomes effective,
notify each selling Holder of any request by the SEC that the Company amend
or supplement such registration statement or prospectus.
Notwithstanding the foregoing obligations, if the Company furnishes to
Holders a certificate signed by the Company's chief executive officer stating
that in the good faith judgment of the Company's Board of Directors it would
be materially detrimental to the Company and its stockholders for such
registration statement to remain effective for as long as such registration
statement otherwise would be required to remain effective, because such
effectiveness would require premature disclosure of material information that
the Company has a bona fide material business purpose for preserving as
confidential, then the Company shall have the right to require Holders to
suspend sales thereunder for so long as is necessary; provided that such
right to suspend may not be exercised for more than thirty (30) days in any
twelve (12) month period; and provided further that during any such
suspension the Company shall not register any
4
securities for its own account or that of any other stockholder and shall
similarly suspend sales under all other registration statements, other than
pursuant to a registration statement relating solely to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase, or similar plan.
2.2 Furnish Information. Each Holder shall furnish to the
Company such information regarding itself, the Registrable Securities held by
it, and the intended method of disposition of such securities as is
reasonably required to effect the registration of such Holder's Registrable
Securities.
2.3 Expenses of Registration. All expenses (other than Selling
Expenses) incurred in connection with registrations, filings, or
qualifications pursuant to Section 2, including all registration, filing, and
qualification fees; printers' and accounting fees; fees and disbursements of
counsel for the Company; and the reasonable fees and disbursements of one
counsel for the selling Holders, shall be borne and paid by the Company. All
Selling Expenses relating to Registrable Securities registered pursuant to
this Section 2 shall be borne and paid by the Holders pro rata on the basis
of the number of Registrable Securities registered on their behalf.
2.4 Delay of Registration. In the event the registration
statement required pursuant to Section 2.1 is not declared effective within
90 days of the Second Closing, the Company shall pay to the Holders an
aggregate of $500 for each business day following such 90th day until and
including the date on which such registration statement becomes effective
(such amount to be allocated pro rata among the Holders based on the
percentage of Registrable Securities held by each Holder (assuming conversion
of Series A Preferred Stock and exercise of Warrants)). Such amounts shall be
paid promptly by check to each Holder on a monthly or more frequent basis.
Such payments shall be required irrespective of the reason for the delay,
including without limitation a delay permitted by the final paragraph of
Section 2.1.
2.5 Indemnification.
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each selling Holder, and the partners, members,
officers, directors, and stockholders of each such Holder; legal counsel and
accountants for each such Holder; any underwriter (as defined in the
Securities Act) for each such Holder; and each Person, if any, who controls
such Holder or underwriter within the meaning of the Securities Act or the
Exchange Act, against any Damages, and the Company will pay to each such
Holder, underwriter, controlling Person, or other aforementioned Person any
legal or other expenses reasonably incurred thereby in connection with
investigating any matter or defending any proceeding from which Damages may
result, as such expenses are incurred; provided, however, that the indemnity
agreement contained in this Section 2.5(a) shall not apply to amounts paid in
settlement of any such investigation or proceeding if such settlement is
effected without the consent of the Company, which consent shall not be
unreasonably withheld, nor shall the Company be liable for any Damages to the
extent that they arise out of or are based upon actions or omissions made in
reliance upon and in conformity with written information furnished by or on
behalf of any such Holder, underwriter, controlling Person, or other
aforementioned Person expressly for use in connection with such registration.
5
(b) To the extent permitted by law, each selling Holder,
severally and not jointly, will indemnify and hold harmless the Company, and
each of its directors, each of its officers who has signed the registration
statement, each Person (if any), who controls the Company within the meaning
of the Securities Act, legal counsel and accountants for the Company, any
underwriter (as defined in the Securities Act), any other Holder selling
securities in such registration statement, and any controlling Person of any
such underwriter or other Holder, against any Damages, in each case only to
the extent that such Damages arise out of or are based upon actions or
omissions made in reliance upon and in conformity with written information
furnished by or on behalf of such selling Holder expressly for use in
connection with such registration; and each such selling Holder will pay to
the Company and each other aforementioned Person any legal or other expenses
reasonably incurred thereby in connection with investigating any
investigation or defending any proceeding from which Damages may result, as
such expenses are incurred; provided, however, that the indemnity agreement
contained in this Section 2.5(b) shall not apply to amounts paid in
settlement of any such investigation or proceeding if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld; and provided further that in no event shall any
indemnity under this Section 2.5(b) exceed the proceeds from the offering
(net of any Selling Expenses) received by such Holder, except in the case of
fraud or willful misconduct by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 2.5 of notice of the commencement of any action (including any
governmental action) for which a party may be entitled to indemnification
hereunder, such indemnified party will, if a claim in respect thereof is to
be made against any indemnifying party under this Section 2.5, give the
indemnifying party notice of the commencement thereof. The indemnifying party
shall have the right to participate in such action and, to the extent the
indemnifying party so desires, participate jointly with any other
indemnifying party to which notice has been given, and to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party (together with all other indemnified parties that
may be represented without conflict by one counsel) shall have the right to
retain one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and
any other party represented by such counsel in such action. The failure to
give notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of
any liability to the indemnified party under this Section 2.5 except to the
extent that the indemnifying party demonstrates that such failure materially
prejudiced the indemnifying party's ability to defend such action. The
failure to give notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 2.5.
(d) The foregoing indemnity agreements of the Company and
the selling Holders are subject to the condition that, insofar as they relate
to any Damages arising from any untrue statement or alleged untrue statement
of a material fact contained in, or omission or alleged omission of a
material fact from, a preliminary prospectus (or necessary to make the
statements therein not misleading) that has been corrected in the form of
prospectus included in the registration statement at the time it becomes
effective, or any amendment or supplement thereto filed with the SEC pursuant
to Rule 424(b) under the Securities Act (the "Final Prospectus"), such
indemnity agreement shall not inure to the benefit of any Person if a
6
copy of the Final Prospectus was furnished to the indemnified party and such
indemnified party failed to deliver, at or before the confirmation of the
sale of the shares registered in such offering, a copy of the Final
Prospectus to the Person asserting the loss, liability, claim, or damage in
any case in which such delivery was required by the Securities Act.
(e) To provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) any
party otherwise entitled to indemnification hereunder makes a claim for
indemnification pursuant to this Section 2.5 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 2.5 provides for indemnification
in such case, or (ii) contribution under the Securities Act may be required
on the part of any party hereto for which indemnification is provided under
this Section 2.5, then, and in each such case, such parties will contribute
to the aggregate losses, claims, damages, liabilities, or expenses to which
they may be subject (after contribution from others) in such proportion as is
appropriate to reflect the relative fault of the each of indemnifying party
and the indemnified party in connection with the statements, omissions, or
other actions that resulted in such loss, claim, damage, liability, or
expense, as well as to reflect any other relevant equitable considerations.
The relative fault of the indemnifying party and of the indemnified party
shall be determined by reference to, among other things, whether the untrue
or allegedly untrue statement of a material fact, or the omission or alleged
omission of a material fact, relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission; provided, however, that, in any such
case, (x) no Holder will be required to contribute any amount in excess of
the net proceeds to the Holder (net of any Selling Expenses) of all such
Registrable Securities offered and sold by such Holder pursuant to such
registration statement, and (y) no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation; and provided further that in no event shall a
Holder's liability pursuant to this Section 2.5(e), when combined with the
amounts paid or payable by such Holder pursuant to Section 2.5(b), exceed the
proceeds from the sale (net of any Selling Expenses) received by such Holder,
except in the case of willful misconduct or fraud by such Holder.
(f) The obligations of the Company and Holders under this
Section 2.5 shall survive the completion of any offering of Registrable
Securities in a registration under this Section 2, and otherwise shall
survive the termination of this Agreement.
2.6 Reports Under Exchange Act; Listing. With a view to
allowing the Company to use Form S-3 for the registration required hereunder,
the Company shall use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act and otherwise to remain eligible to file
such registration statement on Form S-3. The Company shall: (i) on a timely
basis prepare and file with NASDAQ or any over-the-counter market or
securities exchange on which the Common Stock is listed or traded from time
to time any necessary notification or listing form regarding the listing of
the additional shares of Common Stock which is at least equal to the maximum
number of shares then issuable upon exercise of the Warrants and other
warrants
7
referred to in clause (i) of the definition of "Registrable Securities"
above, (ii) maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all such shares then issuable upon such exercise and
(iii) provide to each Investor and Holder evidence of such filing upon
written request. The Investors and Holders acknowledge that the Common Stock
is not currently listed on NASDAQ or any national securities exchange.
2.7 Limitations on Subsequent Registrations. From and after the
date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the Registrable Securities then
outstanding, (i) until the registration statement required hereunder is
declared effective, file, agree to file or announce plans to file a
registration statement (other than registration statements relating to or in
connection with (A) the sale of securities to employees of the Company
pursuant to a stock option, warrant, stock purchase, or similar plan; (B)
registration rights under any of the existing Convertible Promissory Note and
Warrant Agreements with various investors for bridge financings in January
and February of 2006; (C) registration rights under the Borrowing Note
Registration Rights Agreement with Laurus Master Fund Ltd.; (D) registrations
rights for securities underlying any warrants issued to X.X. Xxxxx
Securities, Inc. as part of its fees) or (ii) enter into any agreement with
any holder or prospective holder of any securities of the Company that would
allow such holder or prospective holder to include such securities in any
registration or to demand registration of any securities.
2.8 Assignment of Registration Rights. Each Holder's rights and
obligations pursuant to this Section 2 may be assigned by a Holder along with
the transfer of Registrable Securities or securities convertible into or
exercisable for Registrable Securities; provided, however, that (i) the
Company is furnished with written notice of the name and address of such
transferee and the securities with respect to which such registration rights
are being transferred, and (ii) such transferee agrees in writing to be bound
by and subject to the terms and conditions of this Agreement.
2.9 Restrictions on Transfer.
(a) Each certificate representing (i) the Series A
Preferred Stock, (ii) the Registrable Securities, and (iii) any other
securities issued in respect of the securities referenced in clauses (i) and
(ii), upon any stock split, stock dividend, recapitalization, merger,
consolidation, or similar event, shall be stamped or otherwise imprinted with
a legend in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS (COLLECTIVELY, THE "ACTS"), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER ALL APPLICABLE ACTS OR UNLESS AN OPINION OF COUNSEL IS
DELIVERED TO THE ISSUER IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE
UNDER ALL APPLICABLE ACTS.
8
THE SALE OR OTHER DISPOSITION OF ANY OF THE SHARES REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED BY AN INVESTOR RIGHTS AGREEMENT, AS AMENDED
FROM TIME TO TIME, AMONG CERTAIN OF THE SHAREHOLDERS OF THE COMPANY AND
THE COMPANY (THE "INVESTOR RIGHTS AGREEMENT"). A COPY OF THE INVESTOR
RIGHTS AGREEMENT IS AVAILABLE FOR INSPECTION DURING NORMAL BUSINESS
HOURS AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY.
The first such legend shall be removed upon the request of a Holder at such
time as the securities bearing such legend are eligible for resale under Rule
144(k). The Holders consent to the Company making a notation in its records
and giving instructions to any transfer agent of the Restricted Securities in
order to implement the restrictions on transfer set forth in this Section
2.9.
(b) Before any proposed sale, pledge, or transfer of any
Restricted Securities, unless there is in effect a registration statement
under the Securities Act covering the proposed transaction, the Holder
thereof shall give notice to the Company of such Holder's intention to effect
such sale, pledge, or transfer. Each such notice shall describe the manner
and circumstances of the proposed sale, pledge, or transfer in sufficient
detail and, if reasonably requested by the Company, shall be accompanied at
such Holder's expense by either (i) a written opinion of legal counsel who
shall, and whose legal opinion shall, be reasonably satisfactory to the
Company, addressed to the Company, to the effect that the proposed
transaction may be effected without registration under the Securities Act;
(ii) a "no action" letter from the SEC to the effect that the proposed sale,
pledge, or transfer of such Restricted Securities without registration will
not result in a recommendation by the staff of the SEC that action be taken
with respect thereto; or (iii) any other evidence reasonably satisfactory to
counsel to the Company to the effect that the proposed sale, pledge, or
transfer of the Restricted Securities may be effected without registration
under the Securities Act, whereupon the Holder of such Restricted Securities
shall be entitled to sell, pledge, or transfer such Restricted Securities in
accordance with the terms of the notice given by the Holder to the Company.
The Company will not require such a legal opinion or "no action" letter (x)
in any transaction in compliance with Rule 144 or (y) in any transaction in
which such Holder distributes Restricted Securities to an Affiliate of such
Holder for no consideration; provided that each transferee agrees in writing
to be subject to the terms of this Section 2.9(b). Each certificate
evidencing the Restricted Securities transferred as above provided shall
bear, except if such transfer is made pursuant to Rule 144, the restrictive
legend set forth in Section 2.9(a), except that such certificate shall not
bear such restrictive legend if, in the opinion of counsel for such Holder
and the Company, such legend is not required in order to establish compliance
with any provisions of the Securities Act.
2.10 "Market Stand-off" Agreement. Each Holder hereby agrees
that it will not, without the prior written consent of the managing
underwriter, during the period commencing on the date of the final prospectus
relating to the Qualified Secondary Offering and ending on the date specified
by the Company and the managing underwriter, such period not to exceed ninety
(90) days after the effective date of the registration statement relating to
such offering, (i) lend; offer; pledge; sell; contract to sell; sell any
option or contract to purchase; purchase any option or contract to sell;
grant any option, right, or warrant to purchase; or
9
otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock held immediately before the effective date of
the registration statement for such offering or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or other securities, in cash, or otherwise. The
foregoing provisions of this Section 2.10 shall apply only to the first
Qualified Secondary Offering, shall not apply to the sale of any shares to an
underwriter pursuant to an underwriting agreement, and shall be applicable to
the Holders only if all officers, directors, and stockholders individually
owning more than one percent (1%) of the Company's outstanding Common Stock
are subject to the same restrictions. The underwriters in connection with the
Qualified Secondary Offering are intended third-party beneficiaries of this
Section 2.10 and shall have the right, power, and authority to enforce the
provisions hereof as though they were a party hereto. Each Holder further
agrees to execute such agreements as may be reasonably requested by the
underwriters in the Qualified Secondary Offering that are consistent with
this Section 2.10 or that are necessary to give further effect thereto. Any
discretionary waiver or termination of the restrictions of any or all of such
agreements by the Company or the underwriters shall apply pro rata to all
Holders subject to such agreements, based on the number of shares subject to
such agreements.
3. Information and Observer Rights.
3.1 Delivery of Financial Statements. For so long as 37.5% of
the shares of Series A Preferred Stock issued and sold pursuant to the
Purchase Agreement are outstanding, the Company shall deliver:
(a) to each Investor, as soon as practicable, but in any
event within ninety (90) days after the end of each fiscal year of the
Company, (i) a balance sheet as of the end of such year, (ii) statements of
income and of cash flows for such year and (iii) a statement of stockholders'
equity as of the end of such year, each audited and certified by independent
public accountants of nationally recognized standing selected by the Company;
(b) to each Investor, as soon as practicable, but in any
event within forty-five (45) days after the end of each of the first three
(3) quarters of each fiscal year of the Company, unaudited statements of
income and of cash flows for such fiscal quarter, and an unaudited balance
sheet and a statement of stockholders' equity as of the end of such fiscal
quarter, all prepared in accordance with GAAP (except that the financial
report may (i) be subject to normal year-end audit adjustments and (ii) not
contain all notes thereto that may be required in accordance with GAAP);
(c) to each Major Investor, at the same time such
materials are provided to the Board of Directors of the Company, but in any
event within thirty (30) days after the end of each non-quarter-ending month,
an unaudited income statement and statement of cash flows for such month, as
applicable, and an unaudited balance sheet and statement of stockholders'
equity as of the end of such month, as applicable, all prepared in accordance
with GAAP (except that the financial report may (i) be subject to normal
year-end audit adjustments and (ii) not contain all notes thereto that may be
required in accordance with GAAP);
10
(d) to each Major Investor, at the same time such
materials are approved by the Board of Directors of the Company, but in any
event at least thirty (30) days before the end of each fiscal year, a budget
and business plan for the next fiscal year, prepared on a monthly basis,
including balance sheets, income statements, and statements of cash flow for
such months and, promptly after prepared, any other budgets or revised
budgets prepared by the Company;
(e) along with the financial statements delivered under
Section 3.1(a), Section 3.1(b) and Section 3.1(c), an instrument executed by
the chief financial officer and chief executive officer of the Company
certifying that such financial statements were prepared in accordance with
GAAP consistently applied with prior practice for earlier periods (except as
otherwise set forth in Section 3.1(b) and Section 3.1(c)) and fairly present
the financial condition of the Company and its results of operation for the
periods specified therein; and
(f) to each Investor, such other information relating to
the financial condition, business, prospects, or corporate affairs of the
Company as the Investor may from time to time reasonably request.
If, for any period, the Company has any subsidiary whose accounts are
consolidated with those of the Company, then in respect of such period the
financial statements delivered pursuant to the foregoing sections shall be
the consolidated and consolidating financial statements of the Company and
all such consolidated subsidiaries.
3.2 Inspection. The Company shall permit each Investor, at such
Investor's expense, to visit and inspect the Company's properties; examine
its books of account and records; and discuss the Company's affairs,
finances, and accounts with its officers, during normal business hours of the
Company as may be reasonably requested by the Investor with reasonable prior
notice to the Company.
3.3 Termination of Information Rights. The covenants set forth
in Section 3.1 and Section 3.2 shall terminate and be of no further force or
effect upon the earlier of (i) the closing of the Qualified Secondary
Offering or (ii) the conversion of all shares of Series A Preferred Stock
into Common Stock pursuant to the Certificate of Incorporation.
3.4 Confidentiality. Each Investor agrees that such Investor
will keep confidential and will not disclose, divulge, or use for any purpose
(other than to monitor its investment in the Company) any confidential
information obtained from the Company pursuant to the terms of this
Agreement, unless such confidential information (a) is known or becomes known
to the public in general (other than as a result of a breach of this Section
3.4 by such Investor), (b) is or has been independently developed or
conceived by the Investor without use of the Company's confidential
information, or (c) is or has been made known or disclosed to the Investor by
a third party without a breach of any obligation of confidentiality such
third party may have to the Company, provided, however, that an Investor may
disclose confidential information (i) to its attorneys, accountants,
consultants, and other professionals to the extent necessary to obtain their
services in connection with monitoring its investment in the Company; (ii) to
any prospective purchaser of any Registrable Securities from such Investor,
if such prospective purchaser agrees to be bound by the provisions of this
Section 3.4; (iii) to any
11
Affiliate, partner, member, stockholder, or wholly owned subsidiary of such
Investor in the ordinary course of business, provided that such Investor
informs such Person that such information is confidential and directs such
Person to maintain the confidentiality of such information; or (iv) as may
otherwise be required by law, provided that the Investor promptly notifies
the Company of such disclosure and takes reasonable steps to minimize the
extent of any such required disclosure. The Company acknowledges that certain
of the Investors are in the business of investing and therefore review the
business plans and related proprietary information of many enterprises,
including enterprises that may have products or services that compete
directly or indirectly with those of the Company. Nothing in this Agreement
shall preclude or in any way restrict the Investors from investing or
participating in any particular enterprise, regardless of whether such
enterprise has products or services that compete with those of the Company.
4. Rights to Future Stock Issuances.
4.1 Right of First Offer. Subject to first fulfilling the
preemptive rights of Laurus Master Fund Ltd. under the existing Security
Agreement with the Company, and thereafter subject to the terms and
conditions of this Section 4.1 and applicable securities laws, if the Company
proposes to offer or sell any New Securities, the Company shall first offer
such New Securities to each Investor. An Investor shall be entitled to
apportion the right of first offer hereby granted to it among itself and its
Affiliates in such proportions as it deems appropriate.
(a) The Company shall give notice (the "Offer Notice") to
each Investor, stating (i) its bona fide intention to offer such New
Securities, (ii) the number of such New Securities to be offered, and (iii)
the price and terms, if any, upon which it proposes to offer such New
Securities.
(b) By notification to the Company within twenty (20)
days after the Offer Notice is given, each Investor may elect to purchase or
otherwise acquire, at the price and on the terms specified in the Offer
Notice, up to that portion of such New Securities which equals the proportion
that the number of Registrable Securities (assuming conversion of Series A
Preferred Stock and exercise of Warrants) then held by such Investor bears to
the total number of Registrable Securities (assuming conversion of Series A
Preferred Stock and exercise of Warrants) then held by all the Investors. At
the expiration of such twenty (20) day period, the Company shall promptly
notify each Investor that elects to purchase or acquire all the shares
available to it (each, a "Fully Exercising Investor") of any other Investor's
failure to do likewise. During the ten (10) day period commencing after the
Company has given such notice, each Fully Exercising Investor may, by giving
notice to the Company, elect to purchase or acquire, in addition to the
number of shares specified above, up to that portion of the New Securities
for which Investors were entitled to subscribe but that were not subscribed
for by the Investors which is equal to the proportion that number of
Registrable Securities (assuming conversion of Series A Preferred Stock and
exercise of Warrants) then held by such Fully Exercising Investor bears to
the that number of Registrable Securities (assuming conversion of Series A
Preferred Stock and exercise of Warrants) then held by all Fully Exercising
Investors who wish to purchase such unsubscribed shares. The closing of any
sale pursuant to this Section 4.1(b) shall occur within sixty (60) days of
the date that the Offer Notice is given.
12
(c) If all New Securities referred to in the Offer Notice
are not elected to be purchased or acquired as provided in Section 4.1(b),
the Company may, during the ninety (90) day period following the expiration
of the periods provided in Section 4.1(b), offer and sell the remaining
unsubscribed portion of such New Securities to any Person or Persons at a
price not less than, and upon terms no more favorable to the offeree than,
those specified in the Offer Notice. If the Company does not enter into an
agreement for the sale of the New Securities within such period, or if such
agreement is not consummated within thirty (30) days of the execution
thereof, the right provided hereunder shall be deemed to be revived and such
New Securities shall not be offered unless first reoffered to the Investors
in accordance with this Section 4.1.
(d) The right of first offer in this Section 4.1 shall
not be applicable to (i) shares of Common Stock issued or deemed issued to
employees or directors of, or consultants to, the Company or any of its
subsidiaries pursuant to a plan, agreement, or arrangement approved by the
Board of Directors of the Company, including the Series A Director; (ii) the
issuance of securities pursuant to the conversion, exercise, or exchange of
Derivative Securities outstanding on the date hereof or issued pursuant to
the Purchase Agreement; (iii) the issuance of securities in connection with a
bona fide business acquisition by the Company, whether by merger,
consolidation, purchase of assets, exchange of stock, or otherwise, approved
by the Board of Directors of the Company, including the Series A Director;
(iv) the issuance of securities pursuant to Laurus Master Fund Ltd.; or (v)
the issuance of securities pursuant to the Purchase Agreement.
4.2 Termination. The covenants set forth in Section 4.1 shall
terminate and be of no further force or effect at the time of the expiration
of information rights pursuant to Section 3.3 above.
5. Miscellaneous.
5.1 Successors and Assigns. Each Investor and Holder hereby
agrees that it shall not, and may not, assign any of its rights and
obligations hereunder, unless such rights and obligations are assigned by
such Investor or Holder to any Person to which Registrable Securities or
securities convertible into or exercisable for Registrable Securities are
transferred by such Investor or Holder, in compliance with Section 2.9 if
applicable, and, in each case, such assignee shall be deemed an "Investor" or
"Holder" for purposes of this Agreement to the same extent that the
transferor was an Investor or Holder hereunder. The terms and conditions of
this Agreement inure to the benefit of and are binding upon the respective
successors and permitted assignees of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the
parties hereto or their respective successors and permitted assignees any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
5.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the General Corporation Law of the State of
Delaware as to matters within the scope thereof, and as to all other matters
shall be governed by and construed in accordance with the internal laws of
the Commonwealth of Massachusetts, without regard to its principles of
conflicts of laws.
13
5.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may
also be executed and delivered by facsimile signature and in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are for convenience only and are not to be considered in construing
or interpreting this Agreement.
5.5 Notices. All notices, requests, and other communications
given or made pursuant to this Agreement shall be in writing and shall be
deemed effectively given (i) upon personal delivery to the party to be
notified; (ii) when sent by confirmed electronic mail or facsimile if sent
during normal business hours of the recipient, and if not so confirmed, then
on the next business day; (iii) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid; or
(iv) one (1) day after deposit with a nationally recognized overnight
courier, specifying next-day delivery, with written verification of receipt.
All communications shall be sent to the respective parties at their addresses
as set forth on the signature page or Schedule A hereto, or to such email
address, facsimile number, or address as subsequently modified by written
notice given in accordance with this Section 5.5 A copy of any notice or
other communication given to any Investor or Holder shall also be given to
X.X. Xxxxx Securities, Inc., 00 Xxxx Xxxxxx, 0xx Xxxxx, Xxxxxx, XX 00000,
Attn: General Counsel, and to Xxxxxx, Xxxx & Xxxxx LLP, Xxx Xxxxxxx Xxxx
Xxxxxxxxxxx, Xxxxx Xxxxxx Xxxxxxxx, 0xx Xxxxx, Xxxxxx, XX, 00000, Attn:
Xxxxxxx X. Xxxxxx, Esq. A copy of any notice or other communication given to
the Company shall also be given to Gesmer Xxxxxxxxx LLP, 00 Xxxxx Xxxxxx,
Xxxxxx, XX 00000, Attn: Xxx Xxx, Esq. and Xxxxx X. Xxxxxxxx, III, Esq.
5.6 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance, and either retroactively or
prospectively) only with the written consent of the Company and the holders
of a majority of the Registrable Securities then outstanding; provided that
the Company may in its sole discretion waive compliance with Section 2.9(b)
(and the Company's failure to object promptly in writing to a proposed
assignment allegedly in violation of Section 2.9(b) shall be deemed to be a
waiver); and provided further that any Holder that is not also an Investor,
and any securities held by such Holder, shall be excluded from any written
consent relating solely to Section 3 or Section 4 hereof and shall not be
included as Registrable Securities then outstanding for such purpose.
Notwithstanding the foregoing, this Agreement may not be amended or
terminated and the observance of any term hereof may not be waived with
respect to any Investor without the written consent of such Investor, unless
such amendment, termination, or waiver applies to all Investors in the same
fashion (it being agreed that a waiver of the provisions of Section 4 with
respect to a particular transaction shall be deemed to apply to all Investors
in the same fashion if such waiver does so by its terms, notwithstanding the
fact that certain Investors may nonetheless, by agreement with the Company,
purchase securities in such transaction). The Company shall give prompt
notice of any amendment or termination hereof or waiver hereunder to any
party hereto that did not consent in writing to such amendment, termination,
or waiver. Any amendment, termination, or waiver effected in accordance with
this Section 5.6 shall be binding on all parties hereto, regardless of
whether any such party has consented thereto. No waivers of or exceptions to
any term,
14
condition, or provision of this Agreement, in any one or more instances,
shall be deemed to be or construed as a further or continuing waiver of any
such term, condition, or provision.
5.7 Severability. In case any one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of this Agreement, and
such invalid, illegal, or unenforceable provision shall be reformed and
construed so that it will be valid, legal, and enforceable to the maximum
extent permitted by law.
5.8 Aggregation of Stock. All shares of Registrable Securities
and securities convertible into or exercisable for Registrable Securities
held or acquired by Affiliates shall be aggregated together for the purpose
of determining the availability of any rights under this Agreement.
5.9 Entire Agreement. This Agreement (including any Schedules
and Exhibits hereto) constitutes the full and entire understanding and
agreement between the parties with respect to the subject matter hereof, and
any other written or oral agreement relating to the subject matter hereof
existing between the parties is expressly canceled, other than any
understandings or agreements between the Company and XX Xxxxx LLC or its
affiliates or assigns.
5.10 Delays or Omissions. No delay or omission to exercise any
right, power, or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any
such right, power, or remedy of such nonbreaching or nondefaulting party, nor
shall it be construed to be a waiver of or acquiescence to any such breach or
default, or to any similar breach or default thereafter occurring, nor shall
any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. All remedies, whether
under this Agreement or by law or otherwise afforded to any party, shall be
cumulative and not alternative.
[Remainder of Page Intentionally Left Blank]
15
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ Xxxx-Xxxx Xxxxxxxxxxx
--------------------------------
Name: Xxxx-Xxxx Xxxxxxxxxxx
--------------------------------
Title: Chief Executive Officer &
President
--------------------------------
Address:
--------------------------------
--------------------------------
Telephone No.:
--------------------------------
Fax No.:
--------------------------------
Email:
--------------------------------
INVESTOR:
Meadowbrook Opportunity Fund LLC
By: /s/ Xxxxxxx Xxxxxx
--------------------------------
Name: Xxxxxxx Xxxxxx
--------------------------------
Title: Manager
--------------------------------
Address:
--------------------------------
--------------------------------
Telephone No.:
--------------------------------
Fax No.:
--------------------------------
Email:
--------------------------------
16
SCHEDULE A
Investors and Holders
Investors and Holders
Meadowbrook Opportunity Fund LLC
000 Xxxx Xxxx Xxxx
Xxxxx 000
Xxxxxxxxx, XX 00000
Attn: General Counsel
Telephone: 000-000-0000
Fax: 000-000-0000
Email: xxxxxxxx@xxxxxxxxxxxxxxxxxx.xxx
Holders
X.X. Xxxxx Securities, Inc.
00 Xxxx Xxxxxx
0xx Xxxxx
Xxxxxx, XX 00000
Attn: General Counsel
Telephone: 000-000-0000
Fax: 000-000-0000
Email: xxxxxxxx@xxxxxxx.xxx
EXHIBIT D
---------
FORM OF WARRANT
Exhibit D
NEITHER THIS WARRANT NOR THE SHARES OBTAINABLE UPON ITS EXERCISE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS (COLLECTIVELY, THE "ACTS"), AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS
AND UNTIL REGISTERED UNDER ALL APPLICABLE ACTS OR UNLESS AN OPINION OF
COUNSEL IS DELIVERED TO THE ISSUER IN FORM AND SUBSTANCE SATISFACTORY
TO THE ISSUER TO THE EFFECT THAT AN EXEMPTION FROM REGISTRATION IS
AVAILABLE UNDER ALL APPLICABLE ACTS.
THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER
DISPOSITION OF THESE SECURITIES IS RESTRICTED BY THE TERMS OF THIS
INSTRUMENT.
No. No. 2006- W - 4 February 17, 2006
FARMSTEAD TELEPHONE GROUP, INC.
WARRANT TO PURCHASE SHARES OF STOCK
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THIS CERTIFIES THAT, for value received, Meadowbrook Opportunity Fund
LLC, or its registered assigns (the "Holder"), is entitled to subscribe for
and purchase from Farmstead Telephone Group, Inc., a Delaware corporation
(the "Company"), at any time prior to or upon February 16, 2011 (the
"Expiration Date"), the Shares of the Company (as defined below) at the
applicable exercise price set forth below (as adjusted from time to time
pursuant to Section 4 hereof), subject to the provisions and upon the terms
and conditions hereinafter set forth (the "Warrant").
This Warrant is being executed and delivered in connection with that
certain Series A Preferred Stock and Warrant Purchase Agreement ("Purchase
Agreement") among the Company, the Holder and the other Purchasers named
therein dated as of February 17, 2006, the terms and conditions of which are
incorporated herein by reference. Unless otherwise noted herein, defined
terms defined in the Purchase Agreement shall have the same meaning when used
in this Warrant.
This Warrant is subject to the following terms and conditions:
1. Shares. As used herein, the term "Shares" means 220,585 shares of the
Company's Common Stock, $.001 par value per share (the "Common Stock"). The
term "Exercise Price" shall mean $2.125 per share. It is understood and
agreed that the number of Shares issuable hereunder and the applicable
Exercise Price are subject to adjustment from time to time pursuant to
Section 4 hereof.
2. Method of Exercise; Payment.
2.1 Cash Exercise. The purchase rights with respect to the Shares
represented by this Warrant may be exercised by the Holder, in whole or in
part, at any time, or from time to time, by the surrender of this Warrant
(together with a duly executed notice of exercise (the "Notice of Exercise")
in a form reasonably acceptable to the Company at the Company's then current
address, and by payment to
the Company of an amount equal to the applicable Exercise Price for the
Shares multiplied by the number of the Shares being purchased, which amount
may be paid, at the election of the Holder, by (i) wire transfer or check
payable to the order of the Company, (ii) cancellation by the Holder of
indebtedness or other obligations of the Company to the Holder or (iii) any
combination of (i) and (ii). The person in whose name any certificate
representing the Shares issuable upon any exercise of this Warrant shall be
deemed to have become the holder of record of, and shall be treated for all
purposes as the record holder of, the Shares represented thereby (and such
Shares shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which such surrender and payment are made.
As used herein, the term "person" means any individual or any corporation,
partnership, trust, limited liability company or other entity or organization
of any kind.
2.2 Net Issue Exercise. In lieu of exercising this Warrant pursuant
to Section 2.1 hereof, the Holder may elect to receive a number of Shares
equal to the value (as determined below) of this Warrant (or the portion
thereof being canceled) by surrender of this Warrant at the Company then
current address together with a duly executed Notice of Exercise in which the
appropriate alternative is initialed by the Holder. In such event, the
Company shall issue to the Holder the number of Shares computed using the
following formula:
X = Y (A-B)
------
A
Where X = the number of Shares to be issued to the Holder.
Y = the number of Shares subject to this Warrant or, if
only a portion of this Warrant is being exercised,
the portion of this Warrant being canceled (at the
time of such calculation).
A = the Fair Market Value of one Share (at the date of
such calculation).
B = the Exercise Price (as adjusted to the date of such
calculation).
2.3 Fair Market Value. For purposes of this Section 2, the Fair
Market Value of one (1) Share shall equal:
(a) the average of the closing sale prices of the Common Stock
(or any other security for which this Warrant is then exercisable) quoted on
the OTC Bulletin Board or the closing price quoted on any national securities
exchange on which such securities are listed, whichever is applicable,
immediately prior to the date of exercise; or
(b) if the Common Stock (or any other security for which this
Warrant is then exercisable) is not traded on the Nasdaq Stock Market or
Over-The-Counter or on a national securities exchange, the Fair Market Value
of a Share shall be agreed upon by the parties. If the parties cannot agree
within five (5) business days after the Notice of Exercise, the Company's
Board of Directors in good faith shall determine the Fair Market Value of a
Share, which such determination shall be binding upon the parties hereto. For
purposes of this Warrant, a business day shall be any day other than
Saturday, Sunday or any day in which the banking and commercial lending
institutions are generally closed to the public.
2.4 Stock Certificates. In the event of any exercise of the rights
represented by this Warrant, as promptly as practicable on or after the date
of exercise and in any event within ten (10) days thereafter, the Company at
its expense shall issue and deliver to the person or persons entitled to
receive the same a certificate or certificates representing the number of
Shares issued upon such exercise. In the event this Warrant is exercised in
part, as promptly as practicable on or after the date of exercise and in any
event
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within ten (10) days thereafter, the Company at its sole expense shall
execute and deliver a new Warrant of like tenor exercisable for the number of
Shares for which this Warrant may then be exercised.
2.5 Taxes. The issuance of the Shares upon the exercise of this
Warrant, and the delivery of certificates or other instruments representing
such Shares, shall be made without charge to the Holder for any tax or other
charge of whatever nature (except any applicable income tax upon sale) in
respect of such issuance and the Company shall bear any such taxes in respect
of such issuance.
3. Stock Fully Paid; Reservation of Shares. All of the Shares issuable
upon the exercise of the rights represented by this Warrant shall, upon
issuance and receipt of the applicable Exercise Price therefor, be fully paid
and nonassessable, and free from all preemptive rights, rights of first
refusal or first offer, taxes, liens and charges of whatever nature. During
the period within which the rights represented by this Warrant may be
exercised, the Company shall at all times have authorized and reserved for
issuance a sufficient number of shares of its securities, to provide for the
full exercise of the Shares represented by this Warrant, including any
adjustment of such number of Shares pursuant to Section 4 hereof. The Company
shall take all steps necessary to amend its Certificate of Incorporation
("Certificate") to provide sufficient reserves of shares of securities,
issuable upon full exercise of this Warrant. The Company hereby agrees that
its issuance of this Warrant shall constitute full authority to its officers
who are charged with the duty of executing stock certificates to execute and
issue the proper certificates for Shares upon the full or each partial
exercise of this Warrant.
4. Adjustment of Exercise Price and Number of Shares. The number and kind
of Shares purchasable upon the exercise of this Warrant and the Exercise
Price therefore shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
4.1 Adjustment for Reclassification, Consolidation or Merger. If
while this Warrant, or any portion hereof, remains outstanding and unexpired
there shall be (i) a reorganization, (ii) a merger or consolidation of the
Company with or into another person in which the Company is not the surviving
entity, or a reverse merger in which the Company is the surviving entity but
the shares of the Company's capital stock outstanding immediately prior to
the merger are converted by virtue of the merger into other property, whether
in the form of securities, cash, or otherwise, or (iii) a sale or transfer of
all or substantially all of the Company's properties and assets to any other
person in one transaction or a series of related transactions, then, as a
part of such reorganization, merger, consolidation, sale or transfer, all
necessary or appropriate lawful provisions shall be made so that the Holder
shall thereafter be entitled to receive upon exercise of this Warrant, during
the period specified herein and upon payment of the Exercise Price then in
effect, the greatest number of shares of stock or other securities or
property that a holder of the Shares deliverable upon exercise of this
Warrant would have been entitled to receive in such reorganization,
consolidation, merger, sale or transfer if this Warrant had been exercised
immediately prior to such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 4. If
the per Share consideration payable to the Holder for Shares in connection
with any such transaction is in a form other than cash or marketable
securities, then the value of such consideration shall be determined in
accordance with Section 2 hereof. The foregoing provisions of this paragraph
shall similarly apply to successive reorganizations, consolidations, mergers,
sales and transfers and to the stock or securities of any other corporation
that are at the time receivable upon the exercise of this Warrant. In all
events, appropriate adjustment shall be made in the application of the
provisions of this Warrant (including adjustment of the applicable Exercise
Price and number of Shares purchasable pursuant to the terms and conditions
of this Warrant) with respect to the rights and interests of the Holder after
the transaction, to the end that the provisions of this Warrant shall be
applicable after that event, as near as reasonably may be, in relation to any
shares or other property deliverable or issuable after such reorganization,
merger, consolidation, sale or transfer upon exercise of this Warrant.
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4.2 Adjustments for Split, Subdivision or Combination of Shares. If
the Company at any time while this Warrant, or any portion hereof, remains
outstanding and unexpired shall split or subdivide any class of securities as
to which purchase rights under this Warrant exist, into a greater number of
securities of the same class, the Exercise Price for such class of securities
shall be proportionately decreased and the securities issuable under the
Warrant shall be proportionately increased. If the Company at any time while
this Warrant, or any portion hereof, remains outstanding and unexpired shall
combine any class of securities as to which purchase rights under this
Warrant exist, into a lesser number of securities of the same class, the
Exercise Price for such class of securities shall be proportionately
increased and the securities issuable under the Warrant shall be
proportionately decreased.
4.3 Adjustments for Dividends in Stock or Other Securities or
Property. If while this Warrant, or any portion hereof, remains outstanding
and unexpired, the holders of any class of securities as to which purchase
rights under this Warrant exist at the time shall have received, or, on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive, without payment therefor, other or
additional stock or other securities or property (other than cash) of the
Company by way of dividend, then and in each case, this Warrant shall
represent the right to acquire, in addition to the number of shares of such
class of security receivable upon exercise of this Warrant, and without
payment of any additional consideration therefor, the amount of such other or
additional stock or other securities or property (other than cash) of the
Company that such holder would hold on the date of such exercise had it been
the holder of record of the class of security receivable upon exercise of
this Warrant on the date hereof and had thereafter, during the period from
the date hereof to and including the date of such exercise, retained such
shares and/or all other additional stock available by it as aforesaid during
said period, giving effect to all adjustments called for during such period
by the provisions of this Section 4.
4.4 Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 4 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features, but
excluding any equity compensation or incentive plan to the Company's
employees, directors and officers), then the Company's Board of Directors
shall make an appropriate and equitable adjustment in the Exercise Price and
the number of Shares obtainable upon exercise of this Warrant so as to
protect the rights of the Holder of this Warrant.
4.5 Notice of Adjustments. Upon any adjustment of the applicable
Exercise Price for the Shares and any increase or decrease in the number of
Shares purchasable upon the exercise of this Warrant, then, and in each such
case, the Company, within thirty (30) days thereafter, shall give written
notice thereof to the Holder at the address of such Holder as shown on the
books of the Company which notice shall state the Exercise Price for the
Shares as adjusted and, if applicable, the increased or decreased number of
Shares purchasable upon the exercise of this Warrant, setting forth in
reasonable detail the method of calculation of each.
5. Notices.
5.1 In the event that the Company shall propose at any time:
(a) to declare any dividend or distribution upon its capital
stock whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(b) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
4
(c) to effect any reclassification or recapitalization of its
capital stock outstanding involving a change in such securities; or
(d) to merge or consolidate with or into any other corporation,
or sell, transfer, lease, convey, or exclusively license all or substantially
all its property or business, or to voluntarily liquidate, dissolve or wind
up;
then, in connection with each such event, the Company shall send to the
Holder at least ten (10) days prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of capital stock shall be
entitled thereto) or for determining rights to vote, if any. Notwithstanding
the above, the ten days notice requirement may be shortened or waived upon
the written consent of the Holder.
5.2 Any written notice by the Company required or permitted hereunder
shall be given by hand delivery or first class mail, postage prepaid,
addressed to the Holder at the address shown on the books of the Company for
the Holder.
6. Registration Rights. The securities of the Company into which this
Warrant or such part of this Warrant is convertible shall have certain
registration rights as set forth in the Investors' Rights Agreement executed
pursuant to the Purchase Agreement.
7. Call Right. If and when the closing sale price of the Common Stock, as
quoted on the OTC Bulletin Board or on any national securities exchange on
which the Common Stock is listed, whichever is applicable, is first greater
than $5.10 per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar recapitalization
affecting such shares) for 20 consecutive trading days, the Company shall
have the right to repurchase this Warrant at a price equal to $2.55 in cash
for each share of Common Stock issuable upon exercise of this Warrant
(subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares).
In the event the Company elects to exercise this call right, the Company
shall provide written notice thereof to the Holder within 10 days following
such 20th consecutive trading day, which written notice shall indicate the
closing date for the repurchase, such closing date to occur within 20 days
following the date of such notice. Notwithstanding any exercise of this call
right, the Holder shall continue to be entitled to exercise this Warrant in
whole or in part until the closing of the repurchase.
8. Legend. Each certificate evidencing the Shares issued upon exercise of
this Warrant, or transfer of such shares (other than a transfer registered
under the Securities Act of 1933, as amended (the "Securities Act"), or any
subsequent transfer of shares so registered) shall be stamped or imprinted
with legends substantially in the following forms:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS (COLLECTIVELY, THE "ACTS"), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER ALL APPLICABLE ACTS OR UNLESS AN OPINION OF COUNSEL IS
DELIVERED TO THE ISSUER IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE
UNDER ALL APPLICABLE ACTS.
9. Removal of Legend. Upon request of a holder of a certificate with the
legends required by Section 8 hereof, the Company shall issue to such holder
a new certificate therefor free of any transfer
5
legend, if, with such request, the Company shall have received an opinion of
counsel satisfactory to the Company in form and substance to the effect that
any transfer by such holder of the shares evidenced by such certificate shall
not violate the Securities Act and any applicable state securities laws.
10. Fractional Shares. No fractional shares will be issued in connection
with any exercise hereunder. Any fraction of a share resulting from any
calculation will be rounded to the nearest whole share.
11. Rights of Stockholders. Subject to Sections 4 and 5 hereof, no Holder,
as such, shall be entitled to vote or receive dividends or be deemed the
holder of the Shares or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election
of directors or upon any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether upon
any recapitalization, issuance of stock, reclassification of stock, change of
par value, consolidation, merger, conveyance, or otherwise) or to receive
notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become issuable, as provided
herein.
12. Expiration of Warrant. This Warrant shall expire and shall no longer be
exercisable as of 5:00 p.m., Eastern Time, on the Expiration Date.
13. Transferability
Subject to compliance with applicable federal and state securities laws, the
Holder may transfer to (i) Holder's subsidiary, affiliate or parent entity;
(ii) Holder's spouse or children or grandchildren (in each case, natural or
adopted), or the spouses of such children or grandchildren, any trust
established solely for Holder's benefit or the benefit of Holder's spouse or
children or grandchildren (in each case, natural or adopted), or the spouses
of such children or grandchildren, or any corporation or partnership in which
the direct and beneficial owner of all of the equity interest is the Holder
or Holder's spouse or children or grandchildren (in each case, natural or
adopted), or the spouses of such children or grandchildren, or any trust for
the benefit of such persons; (iii) the heirs, executors, administrators,
personal representatives or distributees upon the death of Holder to whom
Holder's rights and obligations under the Warrant are transferred by will or
the laws of descent and distribution on account of death, or upon the
incompetency or disability of such Holder for purposes of the protection and
management of Holder's assets or (iv) any of the other Holders party to the
Purchase Agreement.
14. Miscellaneous.
14.1 This Warrant shall be governed by and construed in accordance
with the internal laws of the Commonwealth of Massachusetts applicable to
agreements made and to be performed entirely within the Commonwealth of
Massachusetts, without regard to the conflicts of law principles thereof.
14.2 The headings in this Warrant are for purposes of reference only,
and shall not limit or otherwise affect any of the terms hereof.
14.3 The terms of this Warrant shall be binding upon and shall inure
to the benefit of any successors or assigns of the Company and of the Holder
or holders hereof and of the Shares issued or issuable upon the exercise
hereof.
14.4 This Warrant and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof.
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14.5 The Company shall not, by amendment of its Certificate or bylaws,
or through any other means, directly or indirectly, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant and shall
at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Holder against impairment.
14.6 Upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant and, in the
case of any such loss, theft or destruction, upon delivery of an indemnity
agreement reasonably satisfactory in form and amount to the Company or, in
the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Company, at its expense, shall execute and deliver to the
Holder, in lieu thereof, a new Warrant of like date and tenor.
14.7 This Warrant and any provision hereof may be amended, waived or
terminated only by an instrument in writing signed by the Company and the
Holder.
-Remainder of Page Intentionally Left Blank-
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
FARMSTEAD TELEPHONE GROUP, INC.
/s/ Xxxx-Xxxx Xxxxxxxxxxx
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By: Xxxx-Xxxx Xxxxxxxxxxx
Its: Chief Executive Officer &
President
