EXHIBIT 10.15
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of May ___, 2004,
by and among iSECUREtrac, Corp., a Delaware corporation (the "Company"), and the
subscribers identified on the signature page hereto (each a "Subscriber" and
collectively "Subscribers").
WHEREAS, the Company and the Subscribers are executing and delivering this
Agreement in reliance upon an exemption from securities registration afforded by
the provisions of Section 4(2), Section 4(6) and/or Regulation D ("Regulation
D") as promulgated by the United States Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "1933 Act").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase a minimum of $1,000,000 and up to a maximum of $2,500,000 (the
"Purchase Price") of principal amount of 4% promissory notes of the Company
("Note" or "Notes") convertible into shares of the Company's common stock, $.001
par value (the "Common Stock") at a per share conversion price equal to $0.23
("Conversion Price"); and share purchase warrants in the forms annexed hereto as
Exhibit A and Exhibit B (the "Warrants") to purchase shares of Common Stock (the
"Warrant Shares"). The Conversion Price is subject to adjustment as described in
the Note and this Agreement. The Notes, shares of Common Stock issuable upon
conversion of the Notes (the "Shares"), the Warrants and the Warrant Shares are
collectively referred to herein as the "Securities"; and
WHEREAS, the aggregate proceeds of the sale of the Notes and the Warrants
contemplated hereby may be held in escrow pursuant to the terms of a Funds
Escrow Agreement which will be executed by the parties substantially in the form
attached hereto as Exhibit C (the "Escrow Agreement").
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement, the Company and the Subscribers hereby
agree as follows:
1. Purchase and Sale of Notes and Warrants. Subject to the
satisfaction (or waiver) of the conditions to Closing set forth in this
Agreement and the Escrow Agreement, each Subscriber shall purchase the Notes and
Warrants for the portion of the Purchase Price indicated on the signature page
hereto, and the Company shall sell such Notes and Warrants to the Subscriber.
The Purchase Price for the Notes and Warrants shall be paid in cash. The entire
Purchase Price shall be allocated to the Notes.
2. Escrow Arrangements; Form of Payment. Upon execution hereof by
the parties and pursuant to the terms of the Escrow Agreement, each Subscriber
agrees to make the deliveries required of such Subscriber as set forth in the
Escrow Agreement and the Company agrees to make the deliveries required of the
Company as set forth in the Escrow Agreement.
3. Warrants.
(a) A Warrants. On the Closing Date the Company will issue A
Warrants to the Subscribers. One (1) A Warrant will be issued for each two (2)
Shares which would be issued on the Closing Date assuming the complete
conversion of the Notes at the Conversion Price. The per Warrant Share exercise
price to acquire a Warrant Share upon exercise of an A Warrant shall be the
average fo the daily volume weighted average prices of the Common Stock as
reported by Bloomberg L.P. for the OTC Bulletin Board ("Bulletin Board") using
the AQR function ("VWAP") for the ten (10) trading days ending the second
trading day preceding the Closing Date. The A Warrants shall be exercisable
until five (5) years after the Closing Date. The Warrants will be subject to
Call by the Company as described in Exhibit A.
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(b) B Warrants. On the Closing Date the Company will issue B
Warrants to the Subscribers. One (1) B Warrant will be issued for each two
dollars ($2.00) of Purchase Price paid by each Subscriber divided by the
Conversion Price. The per Warrant Share exercise price to acquire a Warrant
Share upon exercise of a B Warrant shall be equal to the Per Share Purchase
Price. The B Warrants shall be exercisable until the registration statement
described in Section 11.1(iv) hereof has been effective for one hundred and
twenty (120) days. The B Warrants will be subject to Call as described in
Exhibit B hereto. The B Warrants will be exercisable only if the shareholders of
the Company approve the resolution to increase the authorize Common Stock of the
Company as described in the Pre-14A filing made with the Commission on April 27,
2004, at the proposed June 4, 2004 meeting or any adjournment thereof (the
"Approval").
4. Subscriber's Representations and Warranties. Each Subscriber
hereby represents and warrants to and agrees with the Company only as to such
Subscriber that:
(a) Information on Company. The Subscriber has been furnished
with or has had access at the XXXXX Website of the Commission to the Company's
Form 10-KSB for the year ended December 31, 2003 as filed with the Commission,
together with all subsequently filed Forms 10-QSB, 8-K, and filings made with
the Commission available at the XXXXX website (hereinafter referred to
collectively as the "Reports"). In addition, the Subscriber has received in
writing from the Company such other information concerning its operations,
financial condition and other matters as the Subscriber has requested in writing
(such other information is collectively, the "Other Written Information"), and
considered all factors the Subscriber deems material in deciding on the
advisability of investing in the Securities. (b) Information on Subscriber. The
Subscriber is, and will be at the time of the conversion of the Notes and
exercise of any of the Warrants, an "accredited investor", as such term is
defined in Regulation D promulgated by the Commission under the 1933 Act, is
experienced in investments and business matters, has made investments of a
speculative nature and has purchased securities of United States publicly-owned
companies in private placements in the past and, with its representatives, has
such knowledge and experience in financial, tax and other business matters as to
enable the Subscriber to utilize the information made available by the Company
to evaluate the merits and risks of and to make an informed investment decision
with respect to the proposed purchase, which represents a speculative
investment. The Subscriber has the authority and is duly and legally qualified
to purchase and own the Securities. The Subscriber is able to bear the risk of
such investment for an indefinite period and to afford a complete loss thereof.
The information set forth on the signature page hereto regarding the Subscriber
is accurate.
(c) Purchase of Common Stock and Warrants. On the closing
date, the Subscriber will purchase the Notes and Warrants as principal for its
own account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof.
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(d) Compliance with Securities Act. The Subscriber understands
and agrees that the Securities have not been registered under the 1933 Act or
any applicable state securities laws, by reason of their issuance in a
transaction that does not require registration under the 1933 Act (based in part
on the accuracy of the representations and warranties of Subscriber contained
herein), and that such Securities must be held indefinitely unless a subsequent
disposition is registered under the 1933 Act or any applicable state securities
laws or is exempt from such registration. In any event, and subject to
compliance with applicable securities laws, the Subscriber may enter into
hedging transactions with third parties, which may in turn engage in short sales
of the Securities in the course of hedging the position they assume and the
Subscriber may also enter into short positions or other derivative transactions
relating to the Securities, or interests in the Securities, and deliver the
Securities, or interests in the Securities, to close out their short or other
positions or otherwise settle short sales or other transactions, or loan or
pledge the Securities, or interests in the Securities, to third parties that in
turn may dispose of these Securities.
(e) Shares Legend. The Shares and the Warrant Shares shall
bear the following or similar legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ISECURETRAC, CORP. THAT SUCH REGISTRATION IS
NOT REQUIRED."
(f) Warrants Legend. The Warrants shall bear the following
or similar legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO ISECURETRAC, CORP. THAT
SUCH REGISTRATION IS NOT REQUIRED."
(g) Note Legend. The Note shall bear the following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE
COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER
SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
ISECURETRAC, CORP. THAT SUCH REGISTRATION IS NOT REQUIRED."
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(h) Communication of Offer. The offer to sell the Securities
was directly communicated to the Subscriber by the Company. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
(i) Authority; Enforceability. This Agreement and other
agreements delivered together with this Agreement or in connection herewith have
been duly authorized, executed and delivered by the Subscriber and are valid and
binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity; and Subscriber has full corporate
power and authority necessary to enter into this Agreement and such other
agreements and to perform its obligations hereunder and under all other
agreements entered into by the Subscriber relating hereto.
(j) Restricted Securities. Subscriber understands that the
Securities have not been registered under the 1933 Act and such Subscriber will
not sell, offer to sell, assign, pledge, hypothecate or otherwise transfer any
of the Securities unless (i) pursuant to an effective registration statement
under the 1933 Act, (ii) such Subscriber provides the Company with an opinion of
counsel, in a form reasonably acceptable to the Company, to the effect that a
sale, assignment or transfer of the Securities may be made without registration
under the 1933 Act, or (iii) Subscriber provides the Company with reasonable
assurances (in the form of seller and broker representation letters) that the
Shares or the Warrant Shares, as the case may be, can be sold pursuant to (A)
Rule 144 promulgated under the 1933 Act, or (B) Rule 144(k) promulgated under
the 1933 Act, in each case following the applicable holding period set forth
therein. Notwithstanding anything to the contrary contained in this Agreement,
such Subscriber may transfer (without restriction and without the need for an
opinion of counsel) the Securities to its Affiliates (as defined below) provided
that each such Affiliate is an "accredited investor" under Regulation D and such
Affiliate agrees to be bound by the terms and conditions of this Agreement.
For the purposes of this Agreement, an "Affiliate" of any
specified Subscriber means any other person or entity directly or indirectly
controlling, controlled by or under direct or indirect common control with such
specified Subscriber. For purposes of this definition, "control" means the power
to direct the management and policies of such person or firm, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.
(k) No Governmental Review. Each Subscriber understands that
no United States federal or state agency or any other governmental or state
agency has passed on or made recommendations or endorsement of the Securities or
the suitability of the investment in the Securities nor have such authorities
passed upon or endorsed the merits of the offering of the Securities.
(l) No Prior Short Selling. Each Subscriber represents and
warrants to the Company that as of the date of this Agreement and the Closing
Date, such Subscriber, Subscriber's agents, representatives and affiliates will
not, directly or indirectly, have any (i) "short" position (as such term is
employed in Rule 3b-3 of the 0000 Xxx) in the Common Stock, or (ii) a hedged
position which would establish a net short position with respect to the Common
Stock.
(m) Correctness of Representations. Each Subscriber represents
as to such Subscriber that the foregoing representations and warranties are true
and correct as of the date hereof and, unless a Subscriber otherwise notifies
the Company prior to the Closing Date (as hereinafter defined), shall be true
and correct as of the Closing Date.
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(n) Survival. The foregoing representations and warranties
shall survive the Closing Date for a period of two years.
5. Company Representations and Warranties. The Company represents
and warrants to and agrees with each Subscriber that:
(a) Due Incorporation. The Company and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the respective jurisdictions of their incorporation
and have the requisite corporate power to own their properties and to carry on
their business as now being conducted. The Company and each of its subsidiaries
is duly qualified as a foreign corporation to do business and is in good
standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the business, operations or financial condition of the
Company.
(b) Outstanding Stock. All issued and outstanding shares of
capital stock of the Company and each of its subsidiaries have been duly
authorized and validly issued and are fully paid and nonassessable.
(c) Authority; Enforceability. This Agreement, the Note, the
Warrants, the Escrow Agreement and any other agreements delivered together with
this Agreement or in connection herewith (collectively "Transaction Documents")
have been duly authorized, executed and delivered by the Company and are valid
and binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity. The Company has full corporate
power and authority necessary to enter into and deliver the Transaction
Documents and to perform its obligations thereunder.
(d) Additional Issuances. There are no outstanding agreements
or preemptive or similar rights affecting the Company's common stock or equity
and no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of common stock or equity of the
Company or other equity interest in any of the subsidiaries of the Company
except as described on Schedule 5(d).
(e) Consents. No consent, approval, authorization or order of
any court, governmental agency or body or arbitrator having jurisdiction over
the Company, or any of its affiliates, the American Stock Exchange, the National
Association of Securities Dealers, Inc., Nasdaq, SmallCap Market, the Bulletin
Board nor the Company's shareholders is required for the execution by the
Company of the Transaction Documents and compliance and performance by the
Company of its obligations under the Transaction Documents, including, without
limitation, the issuance and sale of the Securities.
(f) No Violation or Conflict. Assuming the representations and
warranties of the Subscribers in Section 4 are true and correct, neither the
issuance and sale of the Securities nor the performance of the Company's
obligations under this Agreement and all other agreements entered into by the
Company relating thereto by the Company will:
(i) violate, conflict with, result in a breach of, or constitute a default
(or an event which with the giving of notice or the lapse of time or both would
be reasonably likely to constitute a default) under (A) the articles or
certificate of incorporation, charter or bylaws of the Company, (B) to the
Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation
or determination applicable to the Company of any court, governmental agency or
body, or arbitrator having jurisdiction over the Company or any of its
subsidiaries or over the properties or assets of the Company or any of its
affiliates, (C) the terms of any bond, debenture, note or any other evidence of
indebtedness, or any agreement, stock option or other similar plan, indenture,
lease, mortgage, deed of trust or other instrument to which the Company or any
of its affiliates or subsidiaries is a party, by which the Company or any of its
affiliates or subsidiaries is bound, or to which any of the properties of the
Company or any of its affiliates or subsidiaries is subject, or (D) the terms of
any "lock-up" or similar provision of any underwriting or similar agreement to
which the Company, or any of its affiliates or subsidiaries is a party except
the violation, conflict, breach, or default of which would not have a material
adverse effect on the Company; or
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(ii) result in the creation or imposition of any lien, charge
or encumbrance upon the Securities or any of the assets of the Company, its
subsidiaries or any of its affiliates; or
(iii) result in the activation of any anti-dilution rights or a reset or
repricing of any debt or security instrument of any other creditor or equity
holder of the Company, nor result in the acceleration of the due date of any
obligation of the Company; or
(iv) result in the activation of any piggy-back registration
rights of any person or entity holding securities of the Company or having the
right to receive securities of the Company.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security interests,
liens, claims or other encumbrances, subject to restrictions upon transfer under
the 1933 Act and any applicable state securities laws;
(ii) have been, or will be, duly and validly authorized and on
the date of conversion of the Notes and upon exercise of the Warrants, the
Shares and Warrant Shares will be duly and validly issued, fully paid and
nonassessable (and if registered pursuant to the 1933 Act, and resold pursuant
to an effective registration statement will be free trading and unrestricted,
provided that each Subscriber complies with the prospectus delivery requirements
of the 1933 Act);
(iii) will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities of the
Company; and
(iv) will not subject the holders thereof to personal
liability by reason of being such holders.
(h) Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the Company,
or any of its affiliates that would affect the execution by the Company or the
performance by the Company of its obligations under the Transaction Documents.
Except as disclosed in the Reports, there is no pending or, to the best
knowledge of the Company, basis for or threatened action, suit, proceeding or
investigation before any court, governmental agency or body, or arbitrator
having jurisdiction over the Company, or any of its affiliates which litigation
if adversely determined would have a material adverse effect on the Company.
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(i) Reporting Company. The Company is a publicly-held company
subject to reporting obligations pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended (the "1934 Act") and has a class of common
shares registered pursuant to Section 12(g) of the 1934 Act. Pursuant to the
provisions of the 1934 Act, the Company has timely filed all reports and other
materials required to be filed thereunder with the Commission during the
preceding twelve months.
(j) No Market Manipulation. The Company has not taken, and
will not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the Common Stock of the Company to facilitate the sale or resale of
the Securities or affect the price at which the Securities may be issued or
resold.
(k) Information Concerning Company. The Reports contain all
material information relating to the Company and its operations and financial
condition as of their respective dates which information is required to be
disclosed therein. Since the date of the financial statements included in the
Reports, and except as modified in the Other Written Information or in the
Schedules hereto, there has been no material adverse change in the Company's
business, financial condition or affairs not disclosed in the Reports. The
Reports do not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances when made.
(l) Stop Transfer. The Securities, when issued, will be
restricted securities. The Company will not issue any stop transfer order or
other order impeding the sale, resale or delivery of any of the Securities,
except as may be required by any applicable federal or state securities laws and
unless contemporaneous notice of such instruction is given to the Subscriber.
(m) Defaults. Except as described on Schedule 5(m), the
Company is not in violation of its articles of incorporation or bylaws. The
Company is (i) not in default under or in violation of any other material
agreement or instrument to which it is a party or by which it or any of its
properties are bound or affected, which default or violation would have a
material adverse effect on the Company, (ii) not in default with respect to any
order of any court, arbitrator or governmental body or subject to or party to
any order of any court or governmental authority arising out of any action, suit
or proceeding under any statute or other law respecting antitrust, monopoly,
restraint of trade, unfair competition or similar matters, or (iii) to its
knowledge not in violation of any statute, rule or regulation of any
governmental authority which violation would have a material adverse effect on
the Company.
(n) No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offer of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
the Bulletin Board. Nor will the Company or any of its affiliates or
subsidiaries take any action or steps that would cause the offer of the
Securities to be integrated with other offerings. The Company will not conduct
any offering other than the transactions contemplated hereby that will be
integrated with the offer or issuance of the Securities.
(o) No General Solicitation. Neither the Company, nor any of
its affiliates, nor to its knowledge, any person acting on its or their behalf,
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the 0000 Xxx) in connection with the offer or
sale of the Securities.
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(p) Listing. The Company's common stock is quoted on the
Bulletin Board. The Company has not received any oral or written notice that its
common stock is not eligible nor will become ineligible for quotation on the
Bulletin Board nor that its common stock does not meet all requirements for the
continuation of such quotation and the Company satisfies and as of the Closing
Date, the Company will satisfy all the requirements for the continued quotation
of its common stock on the Bulletin Board.
(q) No Undisclosed Liabilities. The Company has no liabilities
or obligations which are material, individually or in the aggregate, which are
not disclosed in the Reports and Other Written Information, other than those
incurred in the ordinary course of the Company's businesses since December 31,
2003 and which, individually or in the aggregate, would reasonably be expected
to have a material adverse effect on the Company's financial condition, other
than as set forth in Schedule 5(q).
(r) No Undisclosed Events or Circumstances. Since December 31,
2003, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the Reports.
(s) Capitalization. The authorized and outstanding capital
stock of the Company as of the date of this Agreement and the Closing Date are
set forth on Schedule 5(s). Except as set forth in the Reports and Other Written
Information and Schedule 5(d), there are no options, warrants, or rights to
subscribe to, securities, rights or obligations convertible into or exchangeable
for or giving any right to subscribe for any shares of capital stock of the
Company. All of the outstanding shares of Common Stock of the Company have been
duly and validly authorized and issued and are fully paid and nonassessable.
(t) Dilution. The Company's executive officers and directors
understand the nature of the Securities being sold hereby and recognize that the
issuance of the Securities will have a potential dilutive effect on the equity
holdings of other holders of the Company's equity or rights to receive equity of
the Company. The board of directors of the Company has concluded, in its good
faith business judgment, that the issuance of the Securities is in the best
interests of the Company. The Company specifically acknowledges that its
obligation to issue the Shares upon conversion of the Notes, and the Warrant
Shares upon exercise of the Warrants is binding upon the Company and enforceable
regardless of the dilution such issuance may have on the ownership interests of
other shareholders of the Company or parties entitled to receive equity of the
Company.
(u) No Disagreements with Accountants and Lawyers. There are
no disagreements of any kind presently existing, or reasonably anticipated by
the Company to arise, between the Company and the accountants and lawyers
formerly or presently employed by the Company, including but not limited to
disputes or conflicts over payment owed to such accountants and lawyers.
(v) Investment Company. The Company is not, and is not an
Affiliate (as defined in Rule 405 under the 0000 Xxx) of, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(w) Correctness of Representations. The Company represents
that the foregoing representations and warranties are true and correct as of the
date hereof in all material respects, and, unless the Company otherwise notifies
the Subscribers prior to the Closing Date, shall be true and correct in all
material respects as of the Closing Date.
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(x) Survival. The foregoing representations and warranties
shall survive the Closing Date for a period of two years.
6. Regulation D Offering. The offer and issuance of the Securities
to the Subscribers is being made pursuant to the exemption from the registration
provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933
Act and/or Rule 506 of Regulation D promulgated thereunder. On the Closing Date,
the Company will provide an opinion reasonably acceptable to Subscriber from the
Company's legal counsel opining on the availability of an exemption from
registration under the 1933 Act as it relates to the offer and issuance of the
Securities and other matters reasonably requested by Subscribers. A form of the
legal opinion is annexed hereto as Exhibit D. The Company will provide, at the
Company's expense, such other legal opinions in the future as are reasonably
necessary for the issuance and resale of the Common Stock issuable upon
conversion of the Notes and exercise of the Warrants.
7.1. Conversion of Note.
(a) Upon the conversion of the Note or part thereof, the
Company shall, at its own cost and expense, take all necessary action, including
obtaining and delivering, an opinion of counsel to assure that the Company's
transfer agent shall issue stock certificates in the name of Subscriber (or its
nominee) or such other persons as designated by Subscriber and in such
denominations to be specified at conversion representing the number of shares of
common stock issuable upon such conversion. The Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company's Common Stock and that, unless waived by the
Subscriber, the Shares will be free-trading, and freely transferable, and will
not contain a legend restricting the resale or transferability of the Shares
provided the Shares are being sold pursuant to an effective registration
statement covering the Shares or are otherwise exempt from registration.
(b) Subscriber will give notice of its decision to exercise
its right to convert the Note or part thereof by telecopying an executed and
completed Notice of Conversion (a form of which is annexed as Exhibit A to the
Note) to the Company via confirmed telecopier transmission or otherwise pursuant
to Section 13(a) of this Agreement. The Subscriber will not be required to
surrender the Note until the Note has been fully converted or satisfied. Each
date on which a Notice of Conversion is telecopied to the Company in accordance
with the provisions hereof shall be deemed a Conversion Date. The Company will
itself or cause the Company's transfer agent to transmit the Company's Common
Stock certificates representing the Shares issuable upon conversion of the Note
to the Subscriber via express courier for receipt by such Subscriber within five
(5) business days after receipt by the Company of the Notice of Conversion (such
fifth day being the "Delivery Date"). In the event the Shares are electronically
transferable, then delivery of the Shares must be made by electronic transfer
provided request for such electronic transfer has been made by the Subscriber. A
Note representing the balance of the Note not so converted will be provided by
the Company to the Subscriber if requested by Subscriber, provided the
Subscriber delivers an original Note to the Company. To the extent that a
Subscriber elects not to surrender a Note for reissuance upon partial payment or
conversion, the Subscriber hereby indemnifies the Company against any and all
loss or damage attributable to a third-party claim in an amount in excess of the
actual amount then due under the Note.
(c) The Company understands that a delay in the delivery of
the Shares in the form required pursuant to Section 7 hereof, or the Mandatory
Redemption Amount described in Section 7.2 hereof, later than two business days
after the Delivery Date or later than the Mandatory Redemption Payment Date (as
hereinafter defined) could result in economic loss to the Subscriber. As
compensation to the Subscriber for such loss, the Company agrees to pay (as
liquidated damages and not as a penalty) to the Subscriber for late issuance of
Shares in the form required pursuant to Section 7 hereof upon Conversion of the
Note in the amount of $100 per business day after the Delivery Date for each
$10,000 of Note principal amount being converted, of the corresponding Shares
which are not timely delivered. The Company shall pay any payments incurred
under this Section in immediately available funds upon demand. Furthermore, in
addition to any other remedies which may be available to the Subscriber, in the
event that the Company fails for any reason to effect delivery of the Shares by
the Delivery Date or make payment by the Mandatory Redemption Payment Date, the
Subscriber will be entitled to revoke all or part of the relevant Notice of
Conversion or rescind all or part of the notice of Mandatory Redemption by
delivery of a notice to such effect to the Company whereupon the Company and the
Subscriber shall each be restored to their respective positions immediately
prior to the delivery of such notice, except that late payment charges described
above shall be payable through the date notice of revocation or rescission is
given to the Company.
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(d) Nothing contained herein or in any document referred to
herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Subscriber and thus refunded to the
Company.
7.2. Mandatory Redemption at Subscriber's Election. In the event the
Company is prohibited from issuing Shares, or fails to timely deliver Shares on
a Delivery Date, or upon the occurrence of any other Event of Default (as
defined in the Note or in this Agreement) or for any reason other than pursuant
to the limitations set forth in Section 7.3 hereof, then at the Subscriber's
election, the Company must pay to the Subscriber ten (10) business days after
request by the Subscriber, at the Subscriber's election, a sum of money
determined by (i) multiplying up to the outstanding principal amount of the Note
designated by the Subscriber by 130%, or (ii) multiplying the number of Shares
otherwise deliverable upon conversion of an amount of Note principal and/or
interest designated by the Subscriber (with the date of giving of such
designation being a Deemed Conversion Date) at the then Conversion Price that
would be in effect on the Deemed Conversion Date by the highest closing price of
the Common Stock on the principal market for the period commencing on the Deemed
Conversion Date until the day prior to the receipt of the Mandatory Redemption
Payment, whichever is greater, together with accrued but unpaid interest thereon
("Mandatory Redemption Payment"). The Mandatory Redemption Payment must be
received by the Subscriber on the same date as the Company Shares otherwise
deliverable or within ten (10) business days after request, whichever is sooner
("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory Redemption
Payment, the corresponding Note principal and interest will be deemed paid and
no longer outstanding. Liquidated damages calculated pursuant to Section 7.1(c)
hereof, that have been paid or accrued for the thirty day period prior to the
actual receipt of the Mandatory Redemption Payment by the Subscriber shall be
credited against the Mandatory Redemption Payment.
7.3. Maximum Conversion. The Subscriber shall not be entitled to
convert on a Conversion Date that amount of the Note in connection with that
number of shares of Common Stock which would be in excess of the sum of (i) the
number of shares of common stock beneficially owned by the Subscriber and its
affiliates on a Conversion Date, and (ii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the determination
of this provision is being made on a Conversion Date, which would result in
beneficial ownership by the Subscriber and its affiliates of more than 9.99% of
the outstanding shares of common stock of the Company on such Conversion Date.
For the purposes of the provision to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
Subject to the foregoing, the Subscriber shall not be limited to aggregate
conversions of only 9.99% and aggregate conversions by the Subscriber may exceed
9.99%. The Subscriber may void the conversion limitation described in this
Section 7.3 upon and effective after 61 days prior written notice to the
Company. The Subscriber may allocate which of the equity of the Company deemed
beneficially owned by the Subscriber shall be included in the 9.99% amount
described above and which shall be allocated to the excess above 9.99%.
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7.4. Injunction - Posting of Bond. In the event a Subscriber shall
elect to convert a Note or part thereof or exercise the Warrant in whole or in
part, the Company may not refuse conversion or exercise based on any claim that
such Subscriber or any one associated or affiliated with such Subscriber has
been engaged in any violation of law, or for any other reason, unless, an
injunction from a court, on notice, restraining and or enjoining conversion of
all or part of said Note or exercise of all or part of said Warrant shall have
been sought and obtained by the Company and the Company has posted a surety bond
for the benefit of such Subscriber in the amount of 130% of the amount of the
Note, or aggregate purchase price of the Warrant Shares which are subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Subscriber to the extent Subscriber obtains judgment.
7.5. Buy-In. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if seven (7)
business days after the Delivery Date the Subscriber purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Subscriber of the Common Stock which the
Subscriber was entitled to receive upon such conversion (a "Buy-In"), then the
Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (B) the aggregate principal
and/or interest amount of the Note for which such conversion was not timely
honored, together with interest thereon at a rate of 15% per annum, accruing
until such amount and any accrued interest thereon is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). For example, if the
Subscriber purchases shares of Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of
note principal and/or interest, the Company shall be required to pay the
Subscriber $1,000, plus interest. The Subscriber shall provide the Company
written notice indicating the amounts payable to the Subscriber in respect of
the Buy-In. The delivery date by which Common Stock must be delivered pursuant
to this Section 7.5 shall be tolled for the amount of days that the Subscriber
does not deliver information reasonably requested by the Company's transfer
agent.
7.6 Adjustments. The Conversion Price and amount of Shares issuable
upon conversion of the Notes and exercise of the Warrants shall be adjusted to
offset the effect of stock splits, stock dividends, pro rata distributions of
property or equity interests to the Company's shareholders.
7.7. Redemption. The Company may not redeem or call the Note without
the consent of the holder of the Note except as set forth in the Note.
8. Broker/Legal Fees.
(a) Broker's Fee. The Company on the one hand, and each
Subscriber (for himself only) on the other hand, agree to indemnify the other
against and hold the other harmless from any and all liabilities to any persons
claiming brokerage commissions or broker's fees other than Xxxxxxx.xxx, Inc.
("Broker") on account of services purported to have been rendered on behalf of
the indemnifying party in connection with this Agreement or the transactions
contemplated hereby and arising out of such party's actions. The Company agrees
that it will pay the Broker a cash broker's fee of eight percent (8%) of the
Purchase Price ("Broker's Fees") directly out of the funds held pursuant to the
Escrow Agreement. The Company represents that there are no other parties
entitled to receive fees, commissions, or similar payments in connection with
the Offering except the Broker. The Broker will also be paid by the Company four
percent (4%) of the cash proceeds received by the Company from exercise of the A
Warrants and eight percent (8%) of the cash proceeds received by the Company
from exercise of the B Warrants (collectively "Warrant Exercise Compensation").
The Warrant Exercise Compensation must be paid by the Company to the Broker
within five (5) days after each receipt by the Company of Warrant Exercise cash
proceeds.
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(b) Broker's Warrants. On the Closing Date, the Company will
issue to the Broker Warrants identical to and carrying the same rights as the A
Warrants issuable to the Subscribers except that the exercise price to purchase
one Warrant Share shall be equal to the Per Share Purchase Price and the
Warrants shall not be subject to be Called by the Company. A form of Broker's
Warrant is annexed hereto as Exhibit E. The Broker will receive one (1) Warrant
for each five (5) A Warrants issued to the Subscribers on the Closing Date. All
the representations, covenants, warranties, undertakings, remedies, liquidated
damages, indemnification, and other rights including but not limited to
registration rights made or granted to or for the benefit of the Subscribers are
hereby also made by and granted to the Broker in respect of the Broker's
Warrants.
(c) Legal Fees. The Company shall pay to Grushko & Xxxxxxx,
P.C., a fee of $25,000 ("Legal Fees") of which $5,000 has already been paid, as
reimbursement for services rendered to the Subscribers in connection with this
Agreement and the purchase and sale of the Notes and Warrants (the "Offering")
and acting as Escrow Agent for the Offering. The Legal Fees will be payable on
the Closing Date out of funds held pursuant to the Escrow Agreement.
9. Covenants of the Company. The Company covenants and agrees with
the Subscribers as follows:
(a) Stop Orders. The Company will advise the Subscribers,
promptly after it receives notice of issuance by the Commission, any state
securities commission or any other regulatory authority of any stop order or of
any order preventing or suspending any offering of any securities of the
Company, or of the suspension of the qualification of the Common Stock of the
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) Listing. The Company shall promptly secure the listing of
the shares of Common Stock and the Warrant Shares upon each national securities
exchange, or automated quotation system upon which they are or become eligible
for listing (subject to official notice of issuance) and shall maintain such
listing so long as any Warrants are outstanding. The Company will maintain the
listing of its Common Stock on the American Stock Exchange, Nasdaq SmallCap
Market, Nasdaq National Market System, Bulletin Board, or New York Stock
Exchange (whichever of the foregoing is at the time the principal trading
exchange or market for the Common Stock (the "Principal Market")), and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market, as applicable.
The Company will provide the Subscribers copies of all notices it receives
notifying the Company of the threatened and actual delisting of the Common Stock
from any Principal Market. As of the date of this Agreement and the Closing
Date, the Bulletin Board is and will be the Principal Market.
(c) Market Regulations. The Company shall notify the
Commission, the Principal Market and applicable state authorities, in accordance
with their requirements, of the transactions contemplated by this Agreement, and
shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Securities to the Subscribers and promptly provide copies
thereof to Subscriber.
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(d) Reporting Requirements. From the date of this Agreement
and until the sooner of (i) two (2) years after the Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitation, the Company will (v) cause its Common Stock
to continue to be registered under Section 12(b) or 12(g) of the 1934 Act, (x)
comply in all respects with its reporting and filing obligations under the 1934
Act, (y) comply with all reporting requirements that are applicable to an issuer
with a class of shares registered pursuant to Section 12(b) or 12(g) of the 1934
Act, as applicable, and (z) comply with all requirements related to any
registration statement filed pursuant to this Agreement. The Company will use
its best efforts not to take any action or file any document (whether or not
permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate
or suspend such registration or to terminate or suspend its reporting and filing
obligations under said acts until two (2) years after the Closing Date. Until
the earlier of the resale of the Common Stock and the Warrant Shares by each
Subscriber or at least two (2) years after the Warrants have been exercised, the
Company will use its best efforts to continue the listing or quotation of the
Common Stock on the Principal Market or other market with the reasonable consent
of Subscribers holding a majority of the Shares and Warrant Shares, and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market. The Company
agrees to timely file a Form D with respect to the Securities if required under
Regulation D and to provide a copy thereof to each Subscriber promptly after
such filing.
(e) Use of Proceeds. The Company undertakes to use the
proceeds of the Subscribers' funds for the purposes set forth on Schedule 9(e)
hereto. A deviation from the use of proceeds set forth on Schedule 9(e) of more
than 10% per item or more than 20% in the aggregate shall be deemed a material
breach of the Company's obligations hereunder. Except as set forth on Schedule
9(e), the Purchase Price may not and will not be used for accrued and unpaid
officer and director salaries, payment of financing related debt, redemption of
outstanding redeemable notes or equity instruments of the Company nor non-trade
obligations outstanding on the Closing Date.
(f) Reservation. Prior to the Closing Date, the Company
undertakes to and through June 4, 2004, the Company shall reserve, pro rata, on
behalf of each holder of a Note or Warrant, from its authorized but unissued
common stock, a number of common shares equal to 100% of the amount of Common
Stock necessary to allow each holder of a Note to be able to convert all such
outstanding Notes, and reserve the amount of Warrant Shares issuable upon
exercise of the A Warrants. From and after June 5, 2004, the Company undertakes
to reserve, pro rata, on behalf of each holder of a Note or Warrant, from its
authorized but unissued common stock, a number of common shares equal to 120% of
the amount of Common Stock necessary to allow each holder of a Note to be able
to convert all such outstanding Notes and interest and reserve the amount of
Warrant Shares issuable upon exercise of the A Warrants and B Warrants. Subject
to obtaining the Approval, the Company undertakes to reserve, pro rata, on
behalf of each Subscriber and holder of a Warrant, from its authorized but
unissued common stock, a number of common shares equal to the amount of Warrant
Shares issuable upon exercise of the B Warrants, not later than ten days after
the Approval is obtained. Failure to have sufficient shares reserved pursuant to
this Section 9(f) for three (3) consecutive business days or ten (10) days in
the aggregate shall be a material default of the Company's obligations under
this Agreement.
(g) Taxes. From the date of this Agreement and until the
sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitations, the Company will promptly pay and discharge, or cause to
be paid and discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, property or
business of the Company; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books adequate reserves with respect thereto, and provided,
further, that the Company will pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefore.
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(h) Insurance. From the date of this Agreement and until the
sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitations, the Company will keep its assets which are of an
insurable character insured by financially sound and reputable insurers against
loss or damage by fire, explosion and other risks customarily insured against by
companies in the Company's line of business, in amounts sufficient to prevent
the Company from becoming a co-insurer and not in any event less than one
hundred percent (100%) of the insurable value of the property insured; and the
Company will maintain, with financially sound and reputable insurers, insurance
against other hazards and risks and liability to persons and property to the
extent and in the manner customary for companies in similar businesses similarly
situated and to the extent available on commercially reasonable terms.
(i) Books and Records. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep true records and
books of account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and affairs in accordance
with generally accepted accounting principles applied on a consistent basis.
(j) Governmental Authorities. From the date of this Agreement
and until the sooner of (i) two (2) years after the Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall duly observe and conform
in all material respects to all valid requirements of governmental authorities
relating to the conduct of its business or to its properties or assets.
(k) Intellectual Property. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall maintain in full force
and effect its corporate existence, rights and franchises and all licenses and
other rights to use intellectual property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.
(l) Properties. From the date of this Agreement and until the
sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitation, the Company will keep its properties in good repair,
working order and condition, reasonable wear and tear excepted, and from time to
time make all necessary and proper repairs, renewals, replacements, additions
and improvements thereto; and the Company will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have a
material adverse effect.
14
(m) Confidentiality/Public Announcement. From the date of this
Agreement and until the sooner of (i) two (2) years after the Closing Date, or
(ii) until all the Shares and Warrant Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company agrees that except in
connection with a Form 8-K or the Registration Statement, it will not disclose
publicly or privately the identity of the Subscribers unless expressly agreed to
in writing by a Subscriber or only to the extent required by law and then only
upon two days prior notice to Subscriber. In any event and subject to the
foregoing, the Company undertakes to file a Form 8-K or make a public
announcement describing the Offering not later than the second business day
after the Closing Date. In the Form 8-K or public announcement, the Company will
specifically disclose the amount of common stock outstanding immediately after
the Closing.
(n) Further Registration Statements. Except for a registration
statement filed on behalf of the Subscribers pursuant to Section 11 of this
Agreement or in connection with the securities identified on Schedule 11.1
hereto, the Company will not file any registration statements, including but not
limited to Form S-8, with the Commission or with state regulatory authorities
without the consent of the Subscriber until ninety (90) days after the actual
effective date of the registration statement described in Section 11.1(iv) of
this Agreement ("Actual Effective Date") during which such Registration
Statement shall be current and available for use in connection with the public
resale of the Shares and Warrant Shares ("Exclusion Period").
(o) Blackout. The Company undertakes and covenants that until
the first to occur of (i) the end of the Exclusion Period, or (ii) until all the
Shares and Warrant Shares have been resold pursuant to such registration
statement, the Company will not enter into any acquisition, merger, exchange or
sale or other transaction that could have the effect of delaying the
effectiveness of any pending registration statement or causing an already
effective registration statement to no longer be effective or current for a
period of ten (10) or more days.
(p) Non-Public Information. The Company covenants and agrees
that neither it nor any other Person acting on its behalf will provide any
Subscriber or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto such
Subscriber shall have agreed in writing to receive such information. The Company
understands and confirms that each Subscriber shall be relying on the foregoing
representations in effecting transactions in securities of the Company.
10. Covenants of the Company and Subscriber Regarding
Indemnification.
(a) The Company agrees to indemnify, hold harmless, reimburse
and defend the Subscribers, the Subscribers' officers, directors, agents,
affiliates, control persons, and principal shareholders, against any claim,
cost, expense, liability, obligation, loss or damage (including reasonable legal
fees) of any nature, incurred by or imposed upon the Subscriber or any such
person which results, arises out of or is based upon (i) any material
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant hereto; or (ii) after any applicable notice and/or cure
periods, any breach or default in performance by the Company of any covenant or
undertaking to be performed by the Company hereunder, or any other agreement
entered into by the Company and Subscriber relating hereto.
(b) Each Subscriber agrees to indemnify, hold harmless,
reimburse and defend the Company and each of the Company's officers, directors,
agents, affiliates, control persons against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company or any such person which results, arises
out of or is based upon (i) any material misrepresentation by such Subscriber in
this Agreement or in any Exhibits or Schedules attached hereto, or other
agreement delivered pursuant hereto; or (ii) after any applicable notice and/or
cure periods, any breach or default in performance by such Subscriber of any
covenant or undertaking to be performed by such Subscriber hereunder, or any
other agreement entered into by the Company and Subscribers, relating hereto.
(c) In no event shall the liability of any Subscriber or
permitted successor hereunder or under any other agreement delivered in
connection herewith be greater in amount than the dollar amount of the net
proceeds actually received by such Subscriber upon the sale of Registrable
Securities (as defined herein).
(d) The procedures set forth in Section 11.6 shall apply to
the indemnifications set forth in Sections 10(a) and 10(b) above.
15
11.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
(i) On one occasion, for a period commencing one hundred
twenty-one (121) days after the Closing Date, but not later than two (2) years
after the Closing Date ("Request Date"), upon a written request therefor from
any record holder or holders of more than 50% of the Shares issued and issuable
upon conversion of the Notes and Warrant Shares actually issued upon exercise of
the Warrants, the Company shall prepare and file with the Commission a
registration statement under the 1933 Act registering the Shares and Warrant
Shares including Warrant Shares issuable upon exercise of the Broker's Warrants
(collectively "Registrable Securities") which are the subject of such request
for unrestricted public resale by the holder thereof. For purposes of Sections
11.1(i) and 11.1(ii), Registrable Securities shall not include Securities which
are registered for resale in an effective registration statement or included for
registration in a pending registration statement, or which have been issued
without further transfer restrictions after a sale or transfer pursuant to Rule
144 under the 1933 Act. Upon the receipt of such request, the Company shall
promptly give written notice to all other record holders of the Registrable
Securities that such registration statement is to be filed and shall include in
such registration statement Registrable Securities for which it has received
written requests within ten (10) days after the Company gives such written
notice. Such other requesting record holders shall be deemed to have exercised
their demand registration right under this Section 11.1(i).
(ii) If the Company at any time proposes to register any of
its securities under the 1933 Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms X-0, X-0 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscribers or Holder pursuant to an effective registration statement, each
such time it will give at least fifteen (15) days' prior written notice to the
record holder of the Registrable Securities of its intention so to do. Upon the
written request of the holder, received by the Company within ten (10) days
after the giving of any such notice by the Company, to register any of the
Registrable Securities not previously registered, the Company will cause such
Registrable Securities as to which registration shall have been so requested to
be included with the securities to be covered by the registration statement
proposed to be filed by the Company, all to the extent required to permit the
sale or other disposition of the Registrable Securities so registered by the
holder of such Registrable Securities (the "Seller" or "Sellers"). In the event
that any registration pursuant to this Section 11.1(ii) shall be, in whole or in
part, an underwritten public offering of common stock of the Company, the number
of shares of Registrable Securities to be included in such an underwriting may
be reduced by the managing underwriter if and to the extent that the Company and
the underwriter shall reasonably be of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by the Company
therein; provided, however, that the Company shall notify the Seller in writing
of any such reduction. Notwithstanding the foregoing provisions, or Section 11.4
hereof, the Company may withdraw or delay or suffer a delay of any registration
statement referred to in this Section 11.1(ii) without thereby incurring any
liability to the Seller.
16
(iii) If, at the time any written request for registration is
received by the Company pursuant to Section 11.1(i), the Company has determined
to proceed with the actual preparation and filing of a registration statement
under the 1933 Act in connection with the proposed offer and sale for cash of
any of its securities for the Company's own account and the Company actually
does file such other registration statement, such written request shall be
deemed to have been given pursuant to Section 11.1(ii) rather than Section
11.1(i), and the rights of the holders of Registrable Securities covered by such
written request shall be governed by Section 11.1(ii).
(iv) The Company shall file with the Commission not later than
thirty (30) days after the Closing Date (the "Filing Date"), and cause to be
declared effective within one hundred and twenty (120) days after the Closing
Date (the "Effective Date"), a Form SB-2 registration statement (the
"Registration Statement") (or such other form that it is eligible to use) in
order to register the Registrable Securities for resale and distribution under
the 1933 Act. The Company will register not less than a number of shares of
common stock in the aforedescribed registration statement that is equal to 120%
of the Shares issuable upon conversion of the Notes and all of the Warrant
Shares issuable pursuant to this Agreement. The Registrable Securities shall be
reserved and set aside exclusively for the benefit of each Subscriber and
Warrant holder, pro rata, and not issued, employed or reserved for anyone other
than each such Subscriber and Warrant holder. The Registration Statement will
immediately be amended or additional registration statements will be immediately
filed by the Company as necessary to register additional shares of Common Stock
to allow the public resale of all Common Stock included in and issuable by
virtue of the Registrable Securities. Without the written consent of the
Subscriber, no securities of the Company other than the Registrable Securities
will be included in the Registration Statement except as disclosed on Schedule
11.1. It shall be deemed a Non-Registration Event if at any time after the
Effective Date the Company has registered for unrestricted resale on behalf of
the Subscriber fewer than 120% of the amount of Common Shares issuable upon full
conversion of all sums due under the Notes and 100% of the Warrant Shares
issuable upon exercise of the Warrants.
11.2. Registration Procedures. If and whenever the Company is
required by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the
registration of any Registrable Securities under the 1933 Act, the Company will,
as expeditiously as possible:
(a) subject to the timelines provided in this Agreement,
prepare and file with the Commission a registration statement required by
Section 11, with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as herein provided), and promptly
provide to the holders of the Registrable Securities copies of all filings and
Commission letters of comment and notify Subscribers and Grushko & Xxxxxxx, P.C.
within twenty-four (24) hours of (i) notice that the Commission has no (further)
comments on the Registration Statement, and (ii) the declaration of
effectiveness of the registration statement;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective
until such registration statement has been effective for a period of two (2)
years, and comply with the provisions of the 1933 Act with respect to the
disposition of all of the Registrable Securities covered by such registration
statement in accordance with the Sellers' intended method of disposition set
forth in such registration statement for such period;
17
(c) furnish to the Sellers, at the Company's expense, such
number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the
securities covered by such registration statement;
(d) use its best efforts to register or qualify the Sellers'
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Sellers shall request
in writing, provided, however, that the Company shall not for any such purpose
be required to qualify generally to transact business as a foreign corporation
in any jurisdiction where it is not so qualified or to consent to general
service of process in any such jurisdiction;
(e) if applicable, list the Registrable Securities covered by
such registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
(f) immediately notify the Sellers when a prospectus relating
thereto is required to be delivered under the 1933 Act, of the happening of any
event of which the Company has knowledge as a result of which the prospectus
contained in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing; and
(g) provided same would not be in violation of the provision
of Regulation FD under the 1934 Act, make available for inspection by the
Sellers, and any attorney, accountant or other agent retained by the Seller or
underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
attorney, accountant or agent in connection with such registration statement.
11.3. Provision of Documents. In connection with each registration
described in this Section 11, each Seller will furnish to the Company in writing
such information and representation letters with respect to itself and the
proposed distribution by it as reasonably shall be necessary in order to assure
compliance with federal and applicable state securities laws.
11.4. Non-Registration Events. The Company and the Subscribers agree
that the Sellers will suffer damages if the Registration Statement is not filed
by the Filing Date and not declared effective by the Commission by the Effective
Date, and any registration statement required under Section 11.1(i) or 11.1(ii)
is not filed within 60 days after written request and declared effective by the
Commission within 120 days after such request, and maintained in the manner and
within the time periods contemplated by Section 11 hereof, and it would not be
feasible to ascertain the extent of such damages with precision. Accordingly, if
(i) the Registration Statement is not filed on or before the Filing Date or is
not declared effective on or before the sooner of the Effective Date, or within
three (3) business days of receipt by the Company of a written or oral
communication from the Commission that the Registration Statement will not be
reviewed or that the Commission has no further comments, (ii) if the
registration statement described in Sections 11.1(i) or 11.1(ii) is not filed
within 60 days after such written request, or is not declared effective within
120 days after such written request, or (iii) any registration statement
described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is filed and declared
effective but shall thereafter cease to be effective (without being succeeded
within ten (10) business days by an effective replacement or amended
registration statement) for a period of time which shall exceed 30 days in the
aggregate per year (defined as a period of 365 days commencing on the date the
Registration Statement is declared effective) or more than 20 consecutive days
(each such event referred to in clauses (i), (ii) and (iii) of this Section 11.4
is referred to herein as a "Non-Registration Event"), then the Company shall
deliver to the holder of Registrable Securities, as Liquidated Damages, an
amount equal to two percent (2%) for each thirty days or part thereof of the
Purchase Price of the Notes remaining unconverted and purchase price of Shares
issued upon conversion of the Notes owned of record by such holder as of and
during the pendency of such Non-Registration Event which are subject to such
Non-Registration Event. The maximum aggregate amount of Liquidated Damages
payable in connection with a Non-Registration Event shall be eight percent (8%)
of the Purchase Price. The Company must pay the Liquidated Damages in cash
within ten (10) days after the end of each thirty (30) day period or shorter
part thereof for which Liquidated Damages are payable. In the event a
Registration Statement is filed by the Filing Date but is withdrawn prior to
being declared effective by the Commission, then such Registration Statement
will be deemed to have not been filed.
18
11.5. Expenses. All expenses incurred by the Company in complying
with Section 11, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including reasonable
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, costs of insurance and
fee of one counsel for all Sellers (in an amount not to exceed $5,000) are
called "Registration Expenses." All underwriting discounts and selling
commissions applicable to the sale of Registrable Securities, including any fees
and disbursements of any additional counsel to the Seller, are called "Selling
Expenses." The Company will pay all Registration Expenses in connection with the
registration statement under Section 11. Selling Expenses in connection with
each registration statement under Section 11 shall be borne by the Seller and
may be apportioned among the Sellers in proportion to the number of shares sold
by the Seller relative to the number of shares sold under such registration
statement or as all Sellers thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the 1933 Act pursuant to Section 11, the Company will, to the
extent permitted by law, indemnify and hold harmless the Seller, each officer of
the Seller, each director of the Seller, each underwriter of such Registrable
Securities thereunder and each other person, if any, who controls such Seller or
underwriter within the meaning of the 1933 Act, against any losses, claims,
damages or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Securities was registered under the 1933 Act
pursuant to Section 11, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances when made, and will subject to the provisions of
Section 11.6(c) reimburse the Seller, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable to
the Seller to the extent that any such damages arise out of or are based upon an
untrue statement or omission made in any preliminary prospectus if (i) the
Seller failed to send or deliver a copy of the final prospectus delivered by the
Company to the Seller with or prior to the delivery of written confirmation of
the sale by the Seller to the person asserting the claim from which such damages
arise, (ii) the final prospectus would have corrected such untrue statement or
alleged untrue statement or such omission or alleged omission, or (iii) to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by any such Seller, or
any such controlling person in writing specifically for use in such registration
statement or prospectus.
19
(b) In the event of a registration of any of the Registrable
Securities under the 1933 Act pursuant to Section 11, each Seller severally but
not jointly will, to the extent permitted by law, indemnify and hold harmless
the Company, and each person, if any, who controls the Company within the
meaning of the 1933 Act, each officer of the Company who signs the registration
statement, each director of the Company, each underwriter and each person who
controls any underwriter within the meaning of the 1933 Act, against all losses,
claims, damages or liabilities, joint or several, to which the Company or such
officer, director, underwriter or controlling person may become subject under
the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the 1933 Act pursuant to Section 11, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereof,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the net proceeds actually received by the Seller from the sale of Registrable
Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 11.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 11.6(c), except and only if and to the extent the indemnifying
party is prejudiced by such omission. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 11.6(c) for any legal expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison with counsel
so selected, provided, however, that, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified parties, as a group, shall have the right to select one
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the reasonable expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
20
(d) In order to provide for just and equitable contribution in
the event of joint liability under the 1933 Act in any case in which either (i)
a Seller, or any controlling person of a Seller, makes a claim for
indemnification pursuant to this Section 11.6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 11.6 provides for indemnification in such case, or (ii)
contribution under the 1933 Act may be required on the part of the Seller or
controlling person of the Seller in circumstances for which indemnification is
not provided under this Section 11.6; then, and in each such case, the Company
and the Seller will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that the Seller is responsible only for the portion
represented by the percentage that the public offering price of its securities
offered by the registration statement bears to the public offering price of all
securities offered by such registration statement, provided, however, that, in
any such case, (y) the Seller will not be required to contribute any amount in
excess of the public offering price of all such securities offered by it
pursuant to such registration statement; and (z) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of the 0000
Xxx) will be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
11.7. Delivery of Unlegended Shares.
(a) Within five (5) business days (such fifth (5th) business
day being the "Unlegended Shares Delivery Date") after the business day on which
the Company has received (i) a notice that Registrable Securities have been sold
either pursuant to the Registration Statement or Rule 144 under the 1933 Act,
(ii) a representation that the prospectus delivery requirements, or the
requirements of Rule 144, as applicable, have been satisfied, and (iii) the
original share certificates representing the shares of Common Stock that have
been sold, and (iv) in the case of sales under Rule 144, customary
representation letters of the Subscriber and/or Subscriber's broker regarding
compliance with the requirements of Rule 144, the Company at its expense, (y)
shall deliver, and shall cause legal counsel selected by the Company to deliver,
to its transfer agent (with copies to Subscriber) an appropriate instruction and
opinion of such counsel, directing the delivery of shares of Common Stock
without any legends including the legends set forth in Sections 4(e) and 4(f)
above, issuable pursuant to any effective and current Registration Statement
described in Section 11 of this Agreement or pursuant to Rule 144 under the 1933
Act (the "Unlegended Shares"); and (z) cause the transmission of the
certificates representing the Unlegended Shares together with a legended
certificate representing the balance of the unsold shares of Common Stock, if
any, to the Subscriber at the address specified in the notice of sale, via
express courier, by electronic transfer or otherwise on or before the Unlegended
Shares Delivery Date. Transfer fees shall be the responsibility of the Seller.
(b) In lieu of delivering physical certificates representing
the Unlegended Shares, if the Company's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program,
upon request of a Subscriber, so long as the certificates therefor do not bear a
legend and the Subscriber is not obligated to return such certificate for the
placement of a legend thereon, the Company shall cause its transfer agent to
electronically transmit the Unlegended Shares by crediting the account of
Subscriber's prime Broker with DTC through its Deposit Withdrawal Agent
Commission system. Such delivery must be made on or before the Unlegended Shares
Delivery Date.
(c) The Company understands that a delay in the delivery of
the Unlegended Shares pursuant to Section 11 hereof later than two business days
after the Unlegended Shares Delivery Date could result in economic loss to a
Subscriber. As compensation to a Subscriber for such loss, the Company agrees to
pay late payment fees (as liquidated damages and not as a penalty) to the
Subscriber for late delivery of Unlegended Shares in the amount of $100 per
business day after the Delivery Date for each $10,000 of purchase price of the
Unlegended Shares subject to the delivery default. If during any 360 day period,
the Company fails to deliver Unlegended Shares as required by this Section 11.7
for an aggregate of thirty (30) days, then each Subscriber or assignee holding
Securities subject to such default may, at its option, require the Company to
redeem all or any portion of the Shares and Warrant Shares subject to such
default at a price per share equal to 130% of the Purchase Price of such Common
Stock and Warrant Shares. Upon payment of the aforementioned redemption amount,
the Company shall receive a credit against the daily liquidated damages actually
paid or accrued under this Section 11.7 (c) for the thirty days prior to actual
receipt by the Subscriber of the redemption payment. The Company shall pay any
payments incurred under this Section in immediately available funds upon demand.
21
(d)In addition to any other rights available to a Subscriber,
if the Company fails to deliver to a Subscriber Unlegended Shares as required
pursuant to this Agreement, within seven (7) business days after the Unlegended
Shares Delivery Date and the Subscriber purchases (in an open market transaction
or otherwise) shares of common stock to deliver in satisfaction of a sale by
such Subscriber of the shares of Common Stock which the Subscriber was entitled
to receive from the Company (a "Buy-In"), then the Company shall pay in cash to
the Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of common stock so
purchased exceeds (B) the aggregate purchase price of the shares of Common Stock
delivered to the Company for reissuance as Unlegended Shares, together with
interest thereon at a rate of 15% per annum, accruing until such amount and any
accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if a Subscriber purchases
shares of Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to $10,000 of purchase price of shares of Common Stock
delivered to the Company for reissuance as Unlegended Shares, the Company shall
be required to pay the Subscriber $1,000, plus interest. The Subscriber shall
provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.
(e) In the event a Subscriber shall request delivery of
Unlegended Shares as described in Section 11.7(e) and the Company is required to
deliver such Unlegended Shares pursuant to Section 11.7(e), the Company may not
refuse to deliver Unlegended Shares based on any claim that such Subscriber or
any one associated or affiliated with such Subscriber has been engaged in any
violation of law, or for any other reason, unless, an injunction or temporary
restraining order from a court, on notice, restraining and or enjoining delivery
of such Unlegended Shares or exercise of all or part of said Warrant shall have
been sought and obtained and the Company has posted a surety bond for the
benefit of such Subscriber in the amount of 130% of the amount of the aggregate
purchase price of the Common Stock and Warrant Shares which are subject to the
injunction or temporary restraining order, which bond shall remain in effect
until the completion of arbitration/litigation of the dispute and the proceeds
of which shall be payable to such Subscriber to the extent Subscriber obtains
judgment in Subscriber's favor.
12. (a) Right of First Refusal. Until one year after the Closing
Date, the Subscribers shall be given not less than seven (7) business days prior
written notice of any proposed sale by the Company of its common stock or other
securities or debt obligations, except in connection with (i) employee stock
options or compensation plans, (ii) as full or partial consideration in
connection with any merger, consolidation or purchase of substantially all of
the securities or assets of any corporation or other entity, or (iii) as has
been described in the Reports or Other Written Information filed with the
Commission or delivered to the Subscribers prior to the Closing Date
(collectively "Excepted Issuances"). The Subscribers who exercise their rights
pursuant to this Section 12(a) shall have the right during the seven (7)
business days following receipt of the notice to purchase all of such offered
common stock, debt or other securities in accordance with the terms and
conditions set forth in the notice of sale in the same proportion to each other
as their purchase of Notes in the Offering. In the event such terms and
conditions are modified during the notice period, the Subscribers shall be given
prompt notice of such modification and shall have the right during the original
notice period or for a period of seven (7) business days following the notice of
modification, whichever is longer, to exercise such right.
22
(b) Offering Restrictions. Until the Actual Effective Date,
except in connection with the Excepted Issuances, or the unsold portion of the
Offering, the Company will not enter into any agreement to, nor issue any
equity, convertible debt or other securities convertible into common stock
without the prior written consent of the Subscribers, which consent may be
withheld for any reason.
(c) Favored Nations Provision. Other than the Excepted
Issuances, if at any time until one year after the Actual Effective Date, if the
Company shall offer, issue or agree to issue any common stock or securities
convertible into or exercisable for shares of common stock (or modify any of the
foregoing which may be outstanding at any time prior to the Closing Date) to any
person or entity at a price per share or conversion or exercise price per share
which shall be less than the Conversion Price, without the consent of each
Subscriber holding Notes and/or Shares, then the Company shall issue, for each
such occasion, additional shares of Common Stock to each Subscriber so that the
average per share purchase price of the shares of Common Stock issued to the
Subscriber (of only the Common Stock or Warrant Shares still owned by the
Subscriber) is equal to such other lower price per share and the Conversion
Price shall be reduced to such other lower price per share. The delivery to the
Subscriber of the additional shares of Common Stock shall be not later than the
closing date of the transaction giving rise to the requirement to issue
additional shares of Common Stock. The Subscriber is granted the registration
rights described in Section 11 hereof in relation to such additional shares of
Common Stock except that the Filing Date and Effective Date vis-a-vis such
additional common shares shall be, respectively, the sixtieth (60th) and one
hundred and twentieth (120th) date after the closing date giving rise to the
requirement to issue the additional shares of Common Stock. For purposes of the
issuance and adjustment described in this paragraph, the issuance of any
security of the Company carrying the right to convert such security into shares
of Common Stock or of any warrant, right or option to purchase Common Stock
shall result in the issuance of the additional shares of Common Stock upon the
issuance of such convertible security, warrant, right or option and again upon
any subsequent issuances of shares of Common Stock upon exercise of such
conversion or purchase rights if such issuance is at a price lower than the then
Conversion Price. The rights of the Subscriber set forth in this Section 12 are
in addition to any other rights the Subscriber has pursuant to this Agreement
and any other agreement referred to or entered into in connection herewith.
(d) Maximum Exercise of Rights. In the event the exercise of
the rights described in Sections 12(a) and 12(c) would result in the issuance of
an amount of common stock of the Company that would exceed the maximum amount
that may be issued to a Subscriber calculated in the manner described in Section
7.3 of this Agreement, then the issuance of such additional shares of common
stock of the Company to such Subscriber will be deferred in whole or in part
until such time as such Subscriber is able to beneficially own such common stock
without exceeding the maximum amount set forth calculated in the manner
described in Section 7.3 of this Agreement. The determination of when such
common stock may be issued shall be made by each Subscriber as to only such
Subscriber.
13. Miscellaneous.
(a) Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Company, to: iSECUREtrac, Corp.,
0000 Xxxxx 000xx Xxxxxx, Xxxxx 000, Xxxxx, XX 00000, Attn: Xxxxxx X. Xxxxxxx,
Xx., CEO and President, telecopier: (000) 000-0000, with a copy by telecopier
only to: Xxxx Xxxxx, Esq., c/o iSECUREtrac, Corp., 0000 Xxxxx 000xx Xxxxxx,
Xxxxx 000, Xxxxx, XX 00000, telecopier: (000) 000-0000, (ii) if to the
Subscribers, to: the one or more addresses and telecopier numbers indicated on
the signature pages hereto, with an additional copy by telecopier only to:
Grushko & Xxxxxxx, P.C., 000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000,
telecopier number: (000) 000-0000, and (iii) if to the Broker, to: Xxxxxxx.xxx,
Inc., 000 Xxxxx Xxxxx Xxxxxx Xxxx, 0xx Xxxxx, Xxxxxxxxxx, XX 00000, Attn: Xxxx
X. Xxxxxxx, telecopier: (000) 000-0000.
23
(b) Closing. The consummation of the transactions contemplated
herein shall take place at the offices of Grushko & Xxxxxxx, P.C., 000 Xxxxx
Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, upon the satisfaction of all
conditions to Closing set forth in this Agreement ("Closing Date").
(c) Entire Agreement; Assignment. This Agreement and other
documents delivered in connection herewith represent the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by both parties. Neither the Company nor the
Subscribers have relied on any representations not contained or referred to in
this Agreement and the documents delivered herewith. No right or obligation of
either party shall be assigned by that party without prior notice to and the
written consent of the other party.
(d) Counterparts/Execution. This Agreement may be executed in
any number of counterparts and by the different signatories hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. This
Agreement may be executed by facsimile signature and delivered by facsimile
transmission.
(e) Law Governing this Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without regard to principles of conflicts of laws. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. The parties and the individuals
executing this Agreement and other agreements referred to herein or delivered in
connection herewith on behalf of the Company agree to submit to the jurisdiction
of such courts and waive trial by jury. The prevailing party shall be entitled
to recover from the other party its reasonable attorney's fees and costs. In the
event that any provision of this Agreement or any other agreement delivered in
connection herewith is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of any agreement.
(f) Specific Enforcement, Consent to Jurisdiction. The Company
and Subscriber acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof, this being in addition
to any other remedy to which any of them may be entitled by law or equity.
Subject to Section 13(e) hereof, each of the Company, Subscriber and any
signator hereto in his personal capacity hereby waives, and agrees not to assert
in any such suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction in New York of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. Nothing in this Section shall affect or limit
any right to serve process in any other manner permitted by law.
24
(g) Independent Nature of Subscribers. The Company
acknowledges that the obligations of each Subscriber under the Transaction
Documents are several and not joint with the obligations of any other
Subscriber, and no Subscriber shall be responsible in any way for the
performance of the obligations of any other Subscriber under the Transaction
Documents. The Company acknowledges that the decision of each Subscriber to
purchase Securities has been made by such Subscriber independently of any other
Subscriber and independently of any information, materials, statements or
opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or
prospects of the Company which may have been made or given by any other
Subscriber or by any agent or employee of any other Subscriber, and no
Subscriber or any of its agents or employees shall have any liability to any
Subscriber (or any other person) relating to or arising from any such
information, materials, statements or opinions. The Company acknowledges that
nothing contained in any Transaction Document, and no action taken by any
Subscriber pursuant hereto or thereto (including, but not limited to, the (i)
inclusion of a Subscriber in the SB-2 Registration Statement and (ii) review by,
and consent to, such Registration Statement by a Subscriber) shall be deemed to
constitute the Subscribers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Subscribers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company acknowledges
that each Subscriber shall be entitled to independently protect and enforce its
rights, including without limitation, the rights arising out of the Transaction
Documents, and it shall not be necessary for any other Subscriber to be joined
as an additional party in any proceeding for such purpose. The Company
acknowledges that it has elected to provide all Subscribers with the same terms
and Transaction Documents for the convenience of the Company and not because
Company was required or requested to do so by the Subscribers. The Company
acknowledges that such procedure with respect to the Transaction Documents in no
way creates a presumption that the Subscribers are in any way acting in concert
or as a group with respect to the Transaction Documents or the transactions
contemplated thereby.
(h) Equitable Adjustment. The Securities and the purchase
prices of Securities shall be equitably adjusted to offset the effect of stock
splits, stock dividends, and distributions of property or equity interests of
the Company to its shareholders.
[THIS SPACE INTENTIONALLY LEFT BLANK]
25
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
iSECUREtrac, Corp.
a Delaware corporation
By:
------------------------------
Name:
Title:
Dated: May , 2004
----
----------------------------------------------------- --------------------------- -------------------- ---------------------
SUBSCRIBER PURCHASE PRICE and A WARRANTS B WARRANTS
PRINCIPAL AMOUNT OF NOTE
----------------------------------------------------- --------------------------- -------------------- ---------------------
$500,000.00
ALPHA CAPITAL AKTIENGESELLSCHAFT
Xxxxxxxxx 0
0000 Xxxxxxxxxxx
Xxxxx, Lichtenstein
Fax: 000-00-00000000
----------------------------------
(Signature)
----------------------------------
Print Name and Title
----------------------------------------------------- --------------------------- -------------------- ---------------------
26
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
iSECUREtrac, Corp.
a Delaware corporation
By:
-------------------------------
Name:
Title:
Dated: May , 2004
----
----------------------------------------------------- --------------------------- -------------------- ---------------------
SUBSCRIBER PURCHASE PRICE and A WARRANTS B WARRANTS
PRINCIPAL AMOUNT OF NOTE
----------------------------------------------------- --------------------------- -------------------- ---------------------
----------------------------------
Print Name of Subscriber
----------------------------------
(Signature)
----------------------------------
Print Name and Title
Address:___________________________
----------------------------------
Fax: ______________________________
Tax ID Number:_____________________
(if any)
27
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Form of A Warrant
Exhibit B Form of B Warrant
Exhibit C Escrow Agreement
Exhibit D Form of Legal Opinion
Exhibit E Form of Broker's Warrant
Schedule 5(d) Additional Issuances
Schedule 5(m) Agreements Under Which
the Company is in Possible Default
Schedule 5(q) Undisclosed Liabilities
Schedule 5(s) Capitalization
Schedule 9(e) Use of Proceeds
Schedule 11.1 Other Securities to be Registered
28
Schedule 5(d) - Additional Issuances
Outstanding agreements or preemptive or similar rights affecting the
Company's common stock or equity and outstanding rights, warrants or options to
acquire, or instruments convertible into or exchange for, or agreements or
understandings with respect to the sale or issuance of any shares of common
stock or equity of the Company or other equity interest in any of the
subsidiaries of the Company on or about the date of Closing consists of:
Stock Options
In 2001 the Company issued options to purchase in the aggregate of 5,000,000
shares of common stock at an exercise price 85% of the average daily closing
price of common stock for the week prior to when the options were granted to the
Chairman of the Board of Directors. As of December 31, 2003, all of these
options had vested. The President was also issued options to purchase in the
aggregate of 1,000,000 shares of common stock at an exercise price 85% of the
average daily closing price of the Company's common stock for the week prior to
when the options were granted. As of December 31, 2003, all of these options had
vested. Zero and 91,000 options were exercised during the years ended 2003 and
2002.
In November 2001, the Company granted options to purchase in the aggregate of
600,000 shares of common stock at an exercise price 85% of the average daily
closing price of the common stock for the week prior to when the options were
granted to the Senior Vice President of Technology, Senior Vice President of
Sales and Marketing, and Senior Vice President of Projects and Product
Development. As of December 31, 2003, all of these options had vested.
In January 2002, the Company granted options to purchase in the aggregate of
150,000 shares of common stock at an exercise price 85% of the average daily
closing price of the common stock for the week prior to when the options were
granted to the Senior Vice President Corporate Development and General Counsel.
As of January 1, 2004, all of these options had vested.
In June 2001, the shareholders of the Company approved the 2001 Omnibus Equity
Incentive Plan. The 2001 Omnibus Equity Incentive Plan provides for the granting
of stock options and other equity incentives for up to 1,000,000 shares of the
Company's Common Stock to the Company's officers, directors, consultants or
advisers who provide services to the Company and key employees at an exercise
price 85% of the average daily closing price of the Company's common stock for
the week prior to when the options were granted. As of January 1st of each year,
commencing with the year 2002, the aggregate number of options that may be
awarded under the Plan will automatically increase by a number equal to the
lesser of 1% of the total number of Common Shares then outstanding or 200,000.
During the years ended 2003 and 2002, grants for 715,000 and 702,500 shares of
Common Stock have been made, respectively. 120,000 and 71,250 of those options
were made to the Company's directors or executive officers. Options exercised
under the Omnibus plan during the years ended December 31, 2003, and 2002, were
none and 13,333, respectively. Options forfeited for the same time periods were
182,499 and 50,417, respectively. As of December 31, 2003, 50,416 shares of
Common Stock remain available for new option grants under this plan. The options
are to vest on a monthly basis over a one month to a 36-month period of time
from the date of grant.
In February 2003, the Company granted options to purchase in the aggregate of
400,000 shares of common stock at an exercise price 85% of the daily closing
price of the common stock on the date when the options were granted to the
Senior Vice President Corporate Development and General Counsel, Chief Financial
Officer, Senior Vice President of Product and Project Development and Senior
Vice President of Technology. The options are to vest on a monthly basis over a
two year period of time which began February 3, 2003.
29
In August 2003, the Company granted options to purchase in the aggregate of
500,000 shares of common stock at an exercise price 85% of the daily closing
price of the common stock on the date when the options were granted to the
Senior Vice President of Sales. The options are to vest on a monthly basis over
a two year period of time which began August 4, 2003.
In August 2003, the Company granted options to purchase in the aggregate of
250,000 shares of common stock at an exercise price 85% of the daily closing
price of the common stock on the date when the options were granted to the
President of Tracking Systems Corporation. The options are to vest on a monthly
basis over a two year period of time which began August 28, 2003.
In 2003, 140,825 stock options that had previously been issued to a former
stockholder were forfeited. In 2002, 1,333,333 stock options that had previously
been issued to an employee were exercised.
A further summary about options outstanding at December 31, 2003, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------------------------------------------------------------------------------------------------------------
$0.01 to 0.25 71,250 2 years $ 0.23 38,385 $0.23
$0.26 to 0.50 7,595,667 2 years 0.31 6,324,834 0.29
$0.51 to 0.75 271,667 2 years 0.60 207,500 0.60
$0.76 to 1.00 1,096,667 2 years 0.80 1,054,861 0.80
$1.01 to 1.50 110,000 2 years 1.35 85,417 1.35
--------------------------------------------------------------------------------------------------------------------------
Totals 9,145,251 7,710,997
==========================================================================================================================
During the quarter ended March 31, 2004, we granted options to purchase
2,947,750 shares of common stock to fifteen employees and one outside consultant
pursuant to their stock option agreements. The exercise prices are at 85% of
fair value of the Company's common stock and vest ratably over one month to two
years. We had 685,109 options forfeited and 157,495 options exercised during the
quarter ended March 31, 2004.
iSECUREtrac Corp., at March 31, 2004, had 11,250,397 outstanding stock options,
9,403,561 outstanding warrants, 9,125,470 shares issuable upon the conversion of
Series A Convertible Preferred Stock, 500,100 shares issuable upon the
conversion of Series B Convertible Preferred Stock, 2,000,000 shares issuable
upon conversion of a Subordinated Convertible Note and 4,950 shares issuable
upon conversion of a convertible subordinated debenture, that could potentially
dilute basic EPS in the future that were not included in the computation of
diluted EPS because to do so would have been anti-dilutive for the period
presented.
Common Stock Warrants
The Company issues warrants to stockholders and non-employees in connection with
various services these individuals provide the Company. The Company accounts for
the fair value of the warrants in accordance with SFAS No. 123.
30
The fair value of each warrant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for warrants in 2003 and 2002: dividend rate of 0%; price volatility
of 94.99% and 56.82%; risk-free interest rate of 5%; and expected lives of three
years.
A summary of all warrants outstanding on July 1, 2004, is as follows:
Total
Warrants
Issue Expiration Outstanding Reason Exercise
Last Name First Name Date Date 7/1/2004 Issued Price
--------- ---------- ---- ---- -------- ------ -----
Xxxxx Xxxxx 11/20/01 11/20/04 50,100 Direct Loan $ 0.998
Xxxxx Xxxxx 11/30/01 11/30/04 151,899 Direct Loan $ 0.9875
Xxxxx Xxxxx 01/03/02 01/03/05 77,429 Direct Loan $ 0.64575
Xxxxx Xxxxx 01/04/02 01/04/05 77,429 Direct Loan $ 0.64575
Xxxxx Xxxxx 01/07/02 01/07/05 77,851 Direct Loan $ 0.64225
Xxxxx Xxxxx 01/16/02 01/16/05 40,492 Direct Loan $ 0.6174
Xxxxx Xxxxx 01/27/02 01/27/05 40,038 Direct Loan $ 0.6244
Xxxxx Partners 02/04/02 02/04/05 236,518 Direct Loan $ 0.6342
Xxxxx Xxxxx 02/22/02 02/22/05 401,284 Direct Loan $ 0.623
GUNDYCO 06/27/02 06/30/06 62,500 Consulting $ 1.65
Buckshot Capital (Xxxxx) 08/07/03 08/07/08 200,000 Direct Loan $ 0.510
Xxxxxx Speed & Xxxx 08/18/03 08/18/05 20,000 Capital Lease $ 0.425
AHK Leasing, LLC 09/01/03 09/01/06 355,114 Capital Lease $ 0.352
AHK Leasing, LLC 09/01/03 09/01/06 217,014 Capital Lease $ 0.288
AHK Leasing, LLC 09/01/03 09/01/06 139,509 Capital Lease $ 0.448
AHK Leasing, LLC 09/01/03 09/01/06 97,656 Capital Lease $ 0.64
AHK Leasing, LLC 09/01/03 09/01/06 105,574 Capital Lease $ 0.592
AHK Leasing, LLC 09/01/03 09/01/06 111,607 Capital Lease $ 0.56
AHK Leasing, LLC 09/01/03 09/01/06 375,000 Capital Lease $ 0.48
Altron, Inc. 09/09/03 09/09/05 10,000 Consulting $ 1.00
Xxxxx Xxxxxx 10/14/03 10/14/06 432,000 Equity Financing $ 0.60
Xxxxx Xxxxx 11/21/03 11/21/06 255,102 Direct Loan $ 0.392
Bucks Corp 12/17/03 12/17/08 425,000 Equity Financing $ 0.48
Xxxxxx Xxxx D 12/17/03 12/17/08 158,500 Equity Financing $ 0.48
Xxxx & Xxxxx Xxxxxxxx 12/17/03 12/17/08 41,500 Equity Financing $ 0.48
Xxxx Xxxxxxx & Xxxx 01/05/04 01/05/09 25,000 Equity Financing $ 0.48
Genack & Xxxxx Xx & Xxxxx 01/05/04 01/05/09 38,500 Equity Financing $ 0.48
The Xxxxxx Living Trust 01/05/04 01/05/09 362,500 Equity Financing $ 0.48
Gerber 111 XXX Xxxxxx 01/05/04 01/05/09 87,500 Equity Financing $ 0.48
Xxxxxx Xxxxxxxxxx 111 XXX 01/05/04 01/05/09 11,500 Equity Financing $ 0.48
Xxxxxxxx Xxxxx 01/05/04 01/05/09 50,000 Equity Financing $ 0.48
Xxxxx Xxxx Xxxx Rev Trust 01/05/04 01/05/09 50,000 Equity Financing $ 0.48
Xxxxxx Xxxx D 01/15/04 01/15/09 318,500 Equity Financing $ 0.48
Metolius Fund 01/15/04 01/15/09 300,000 Equity Financing $ 0.48
Xxxx Xxxxx 01/15/04 01/15/09 6,500 Equity Financing $ 0.48
Xxxxxx Xxxxxxxxxxxxx XXX 01/28/04 01/28/09 21,000 Equity Financing $ 0.48
31
Xxxxxx Xxxx 01/28/04 01/28/09 27,500 Equity Financing $ 0.48
Xxxxxxx Xxxxxx & Xxxxx 01/28/04 01/28/09 80,000 Equity Financing $ 0.48
Xxxxxxxxx Xxxxxxxxxxx 01/28/04 01/28/09 25,000 Equity Financing $ 0.48
Xxxx Xxxxx 01/28/04 01/28/09 447,500 Equity Financing $ 0.48
Xxxxxxxxxx Xxxxxx JR 01/28/04 01/28/09 24,000 Equity Financing $ 0.48
Xxxx Xxxxx 02/17/04 02/17/09 2,500,000 Equity Financing $ 0.48
Xxxxxx Xxxx D 03/17/04 03/17/09 694,445 Equity Financing $ 0.432
Xxxxxx Xxxx D 03/22/04 03/22/09 125,000 Equity Financing $ 0.432
Xxxx Xxxxx A 05/13/04 05/13/07 300,000 Equity Financing $ 0.35
Xxxx Xxxxx A 05/18/04 05/18/07 150,000 Equity Financing $ 0.35
Xxxxxx Xxxxx M. 05/18/04 05/18/07 300,000 Equity Financing $ 0.35
Xxxxxxxx Xxxx 05/27/04 05/27/07 525,937 Equity Financing $ 0.37852
Xxxxxx Speed & Xxxx 05/27/04 05/27/07 172,403 Equity Financing $ 0.37852
Corpfin 05/28/04 05/28/09 521,739 Convertible Debt $ 0.23
Alpha Capital Aktiengesellschaft 05/28/04 05/28/09 1,086,957 Convertible Debt $ 0.3698
Bristol Investment Fund, Ltd. 05/28/04 05/28/09 652,174 Convertible Debt $ 0.3698
JM Investors 05/28/04 05/28/09 434,783 Convertible Debt $ 0.3698
|
Enable Growth Partners L.P. 05/28/04 05/28/09 217,391 Convertible Debt $ 0.3698
SRG Capital LLC 05/28/04 05/28/09 217,391 Convertible Debt $ 0.3698
Alpha Capital Aktiengesellschaft 05/28/04 120 days 1,086,957 Convertible Debt $ 0.23
Bristol Investment Fund, Ltd. 05/28/04 120 days 652,174 Convertible Debt $ 0.23
JM Investors 05/28/04 120 days 434,783 Convertible Debt $ 0.23
Enable Growth Partners L.P. 05/28/04 120 days 217,391 Convertible Debt $ 0.23
SRG Capital LLC 05/28/04 120 days 217,391 Convertible Debt $ 0.23
Xxxxxxxx Curhan Ford & Co 06/01/04 06/01/09 25,000 Consulting $ 0.64
Xxxxxxxxxxx Limited Partnership 06/30/04 06/30/09 543,478 Convertible Debt $ 0.3698
Whalehaven Funds Limited 06/30/04 06/30/09 217,391 Convertible Debt $ 0.3698
Republic Aggressive Growth, Inc. 06/30/04 06/30/09 434,783 Convertible Debt $ 0.3698
Xxxxxxxxxxx Limited Partnership 06/30/04 120 days 543,478 Convertible Debt $ 0.23
Whalehaven Funds Limited 06/30/04 120 days 217,391 Convertible Debt $ 0.23
Republic Aggressive Growth, Inc. 06/30/04 120 days 434,783 Convertible Debt $ 0.23
HEZA Holdings, Inc. 06/30/04 06/30/09 239,130 Convertible Debt $ 0.23
Sonz Partners LP 07/01/04 07/01/09 326,087 Convertible Debt $ 0.3698
Sonz Partners LP 07/01/04 120 days 326,087 Convertible Debt $ 0.23
19,848,640
==================
----------
*On December 17, 2003, the Company entered into an agreement with Xxxxxx X.
Xxxx, as a financial consultant, for raising from $2,000,000 to $5,000,000 in
equity capital through the sale of common stock with 100% warrant coverage. The
term of the agreement was for 90 days with a 90 day extension if the Company
raised at least $2,500,000 during that period. Under the terms of the Agreement,
the Company raised $2,400,000, by selling 5,000,000 shares of registered common
stock at $0.48 per share, through Fusion Capital Fund II, LLC (Fusion), a
Chicago-based institutional investor. Accordingly, the Company issued 5,000,000
warrants with an exercise price of $0.48 each, expiring five (5) years from the
date of issuance. The Company will have the option to redeem unexercised
warrants for a redemption price of $0.15 on 30 days notice to the warrant
holders, which it may do at any time after the common stock price closes at or
above $1.50 for ten or more consecutive trading days. The Company must provide
piggy back registration rights for the stock underlying the warrants.
32
Series A Convertible Preferred Stock
The Board of Directors has the authority, without any further vote or action by
the stockholders, to provide for the issuance of up to 1,000,000 shares of
Preferred Stock from time to time in one or more series with such designations,
rights, preferences and limitations as the Board of Directors may determine,
including the consideration received therefore. The Board also has the authority
to determine the number of shares comprising each series, dividend rates,
redemption provisions, liquidation preferences, sinking fund provisions,
conversion rights and voting rights without approval by the holders of Common
Stock. Although it is not possible to state the effect that any issuance of
Preferred Stock might have on the rights of holders of Common Stock, the
issuance of Preferred Stock may have one or more of the following effects: (i)
to restrict Common Stock dividends if Preferred Stock dividends have not been
paid; (ii) to dilute the voting power and equity interest of holders of Common
Stock to the extent that any Preferred Stock series has voting rights or is
convertible into Common Stock; or (iii) to prevent current holders of Common
Stock from participating in the Company's assets upon liquidation until any
liquidation preferences granted to holders of Preferred Stock are satisfied. In
addition, the issuance of Preferred Stock may, under certain circumstances, have
the effect of discouraging a change in control of the Company by, for example,
granting voting rights to holders of Preferred Stock that require approval by
the separate vote of the holders of Preferred Stock for any amendment to the
Certificate of Incorporation or any reorganization, consolidation, merger or
other similar transaction involving the Company. As a result, the issuance of
such Preferred Stock may discourage bids for the Company's Common Stock at a
premium over the market price therefore, and could have a materially adverse
effect on the market value of the Common Stock. The Board of Directors has
designated 10,000 shares of the Company's Preferred Stock as "Series A
Convertible Preferred Stock" (Series A Stock). Each share of Series A Stock is
convertible into 1,000 shares of Common Stock, subject to adjustment for stock
splits and similar events. The Series A Stock has a liquidation preference of
$1,000 per share (the "Stated Value") and a dividend preference equal to 9.5%
per annum of the Stated Value. Dividends are payable at the option of the Board
of Directors, in cash or in additional shares of Series A Stock (valued at
$1,000 per share). Holders of Series A Stock have no voting rights except with
respect to any action which (i) alters or changes the rights, preferences or
privileges of the Series A Stock materially and adversely, (ii) increases the
authorized number of shares of Series A Stock, (iii) creates any new class of
shares having preference over or being on a parity with the Series A Stock or
(iv) involves sales by the Company of a substantial portion of its assets, any
merger of the Company with another entity, or any amendment of the Company's
certificate of incorporation. The Company may redeem all or any part of the
Series A Stock at any time or from time to time. The base redemption price is
calculated as follows:
REDEMPTION DATE BASE REDEMPTION PRICE
-----------------------------------------------------------------------------------------------
If prior to September 30, 2002 103% of Stated Value
If on or after September 30, 2002, but before September 30, 2003 102% of Stated Value
If on or after September 30, 2003, but before September 30, 2004 101% of Stated Value
After September 30, 2004 100% of Stated Value
33
Holders of Series A Stock have been granted certain registration rights. The
Series A Stock is subject to mandatory conversion after September 30, 2004, at
the election of the Board of Directors.
310 shares of Series A Stock were issued in December 2002 to one company that
converted them into common shares. An additional 800 shares were converted to
common shares by Total Tech, LLC, during 2002. In 2003, 605 shares of Series A
Stock was issued to various individuals and companies that converted them into
common shares.
Series A Stockholders have received payment-in-kind dividends of $642,808 and
cash dividends of $190,000 during the year ended December 31, 2003, and
payment-in-kind dividends of $672,872 during the year ended December 31, 2002.
Series B Convertible Preferred Stock
The Board of Directors approved the Company's proposed private placement
offering of 3,500 shares of Series B Convertible Preferred Stock (Series B
Stock, $0.01 par value) as described in the Offering Memorandum dated December
1, 2002. The price per Share is $1,000 and will be paid in cash by each
subscriber at the time of subscription. Each share of Series B Stock being
offered is convertible to 1,667 shares of Common Stock. Each share so converted
would be priced at $0.60.
In 2002, 150 shares of Series B Stock were issued valued at $145,000, net of
offering costs of $5,000. During the year ended 2003, an additional 150 shares
of Series B Stock have been issued valued at $150,000.
The holders of Series B Stock will be entitled to receive cumulative, fixed-rate
dividends per annum at the following rates:
10.0% months 1 - 6
11.0% months 7-12
12.0% months 13-24
13.0% months 25-60
Dividends are payable quarterly and shall be payable in cash or in additional
shares of Series B Stock at the sole discretion of the Board of Directors. If
dividends are paid in Stock, each share shall be valued for this purpose at an
amount equal to the Original Purchase Price.
In the event of any liquidation or winding up of the Company, the holders of
Series B Stock will be entitled to receive in preference to the holders of
Common an amount equal to the Original Purchase Price plus any dividends
cumulated but not paid. A consolidation or merger of the Company, in which the
Company does not survive, or a sale of all or substantially all of its assets
shall be deemed to be a liquidation or winding up for purposes of the
liquidation preference. At any time, and from time to time prior to the
Mandatory Conversion date, the Company may call and/or retire in part or all
preferred shares outstanding. If Series B Stock is called prior to the Mandatory
Conversion date, the following premium would apply:
34
Prior to October 31, 2003 - 115%
Prior to October 31, 2004 - 110%
Prior to October 31, 2005 - 105%
At any time, and from time to time, after October 31, 2005, all or any part of
the Series B Stock may be converted into Common Stock at the then applicable
common stock equivalents, at the option of the Company. The common stock
equivalents, will be subject to adjustment to reflect any subdivisions or
combinations of Common Stock. The Series B Stock shall not be redeemable by the
holder. The holders of Series B Stock shall have no voting rights, except as
indicated herein.
Consent of the holders of at least a two-thirds majority of Series B Stock will
be required for any action which (i) alters or changes the rights, preferences
or privileges materially and adversely, (ii) increases the authorized number of
shares of Series B Stock, (iii) creates any new class of shares having
preference over or being on a parity with the Series B Stock, or (iv) involves
sale by the Company of a substantial portion of its assets, any merger of the
Company with another entity, or any amendment of the Company's certificate of
incorporation.
If the Company at any time grants, issues or sells any options, warrants,
convertible securities or rights to purchase stock pro rata to the record
holders of Common, the holders of Series B Stock shall be granted the same
rights on an as-converted basis.
35
Convertible Notes
On October 9, 2003, the Company borrowed $1,000,000 from Micro Capital Fund LP
(Micro Capital) under the terms of two Notes, both bearing an interest rate of
10% on the unpaid principal balance up to the scheduled maturity date of October
9, 2008. One Note, in the principal amount of $700,000 was made with Micro
Capital Fund LP, a Delaware limited partnership, and the second Note, in the
principal amount of $300,000 was made with a related entity, Micro Capital Fund,
Ltd., a Cayman Islands corporation. The entire principal and accrued interest of
the Notes are convertible into common stock at an exercise price of $0.50, upon
demand of the Note holder.
The Company may convert the Notes into its common stock upon the occurrence of
both of the following: (i) approval under the Securities Act of 1933 of a
registration statement allowing resale of the common stock underlying the Note
and (ii) the volume-weighted average price of the common stock underlying the
Note trades at or above $2.00 per share for 60 consecutive trading days.
Concurrent with execution of the Notes, the Company entered into a Registration
Rights Agreement with Micro Capital under which the Company agreed to provide
piggy back registration for 120% of the common stock underlying the Notes if it
files a registration statement with respect to any of its other securities. If
the Company has not filed a registration statement prior to October 9, 2005,
Micro Capital may demand the filing of a registration statement within 60 days
of the Company's receipt of its demand.
Other Registration Rights
On February 17, 2003, the Company entered into a Consulting Agreement with
Xxxxxxxxx Financial Communications, Inc. ("Xxxxxxxxx"), an Oregon corporation,
for investor communications and assistance in raising equity capital. Under the
terms of the Agreement, Xxxxxxxxx received 700,000 shares of unregistered common
stock. Under similar agreements prior to said Consulting Agreement, Xxxxxxxxx
received another 828,963 shares of unregistered common stock. The Company agreed
in the Consulting Agreement to provide Xxxxxxxxx with piggy back registration
rights for all unregistered stock received by Xxxxxxxxx as compensation for its
services, to be included in the next registration statement filed by the
Company. Xxxxxxxxx has agreed that it will not be included in the registration
statement to be filed by the Company on behalf of the former stockholders of
Tracking Systems Corporation (described below), but that it will be included in
the subsequent registration statement to be filed by the Company.
Required S-1 Filing
On August 12, 2003, the Company entered into a share exchange agreement with
Tracking Systems Corporation (TSC), headquartered in Harrisburg, Pennsylvania, a
privately held provider of criminal offender monitoring equipment services.
Under the terms of the agreement, the Company exchanged 4,423,077 shares its
common stock (valued at $2.3 million based upon the average of the bid and asked
prices for 20 trading days preceding the closing) for 100% of the common stock
of TSC and assumed $4,152,239 of TSC debt. The transaction was approved by the
stockholders of TSC on August 21, 2003, and was closed on August 28, 2003. TSC
is now a wholly owned subsidiary of the Company. The share exchange agreement
required the Company to register the 4,423,077 shares exchanged for the TSC
stock. The Company filed a registration statement with the SEC on Form S-4 on
November 26, 2003. In late December, the SEC notified the Company that the S-4
registration should more appropriately be refiled on Form S-1. The Company is
currently awaiting a decision on whether to include the registration of other
securities with such filing.
36
Schedule 5(m) - Agreements Under Which the Company is in Possible Default
o A note payable from U.S. Bank N.A. of Omaha, Nebraska. This note calls for
monthly payments of $16,557, including interest, through March 15, 2005, when
all remaining principal and interest are due. The interest rate is a variable
rate based on the U.S. Bank N.A. Reference Rate (the "Index Rate") plus 1%. As
of June 15, 2004, the Index Rate was 4% and the outstanding loan balance was
$219,003. This loan is secured by a security interest in the Company's tangible
and intangible assets and the personal guarantees of various stockholders. The
Company has not made one payment of $16,557, due June 15, 2004, for principal
and interest.
o An unsecured note payable from Xxxxxxx Corporation resulting from the
conversion of accounts payable. This short-term note carries an interest rate of
5% and matured on March 31, 2004. As of June 15, 2004, the outstanding loan
balance was $52,210. The Company is currently negotiating a mutually acceptable
pay-off schedule.
o A 6% Promissory Note to a stock holder in the principal amount of $1,000,000
plus accrued interest, due February 29, 2004. The Company has not paid any part
of the principal and interest. No demand for payment has yet been received by
the Company.
o A 10% Promissory Note to a stock holder in the principal amount of $400,000
plus accrued interest, due February 7, 2004. The Company has not paid any part
of the principal and interest. No demand for payment has yet been received by
the Company.
o The Share Exchange Agreement between the Company and Tracking Systems
Corporation (TSC), dated August 14, 2004 (the "Share Exchange Agreement"), under
which the Company agreed to file a registration statement with the SEC for
4,423,077 shares of the Company's common stock exchanged for all outstanding
stock in TSC ("TSC Stock"). The Company filed a registration statement on Form
S-4 on November 26, 2003. The Company was notified by the SEC in December of
2003, that the proposed registration was more appropriate on Form S-1. To date,
the Company has not yet filed such registration statement for TSC Stock on Form
S-1.
o Executive Employment Agreement, dated August 28, 2003, between Xxxx X.
Xxxxxxxxx, the former Chairman and CEO of TSC, and the Company, under which the
Company agreed to continue to pay Xx. Xxxxxxxxx'x annual salary of $170,000 in
monthly installments through August 28, 2004. Xx. Xxxxxxxxx was terminated on
March 23, 2004 and has not been paid since.
o Consulting Agreement, dated September 1, 2003, between Xxxxx Xxxxxxxx and TSC,
under which TSC, a wholly owned subsidiary of the Company, agreed to pay Xx.
Xxxxxxxx consulting fees in the amount of $4,167 per month, for certain
consulting services to be rendered, for a period of 12 months. The Company
terminated Xx. Xxxxxxx'x services on April 5, 2004 and she has received no
further consulting fees.
37
Schedule 5(q) - Undisclosed Liabilities
None.
38
Schedule 5(s) - Capitalization
The current authorized capital stock of the Company is 150,000,000 shares of
common stock and 1,000,000 shares of preferred stock. As of June 11, 2004,
57,153,078 shares of common stock and 9,425.47 shares of preferred stock were
outstanding.
39
Schedule 9(e) - Use of Proceeds
The Company will use the proceeds of the Notes, in the aggregate amount between
$1,000,000 and $2,500,000 to be executed with each Subscriber to (i) pay its
accounts payables and other debt service as are necessary; (ii) fund the
manufacturing of production Model 2100 Series personal tracking units, including
the purchase of necessary transmitters and other components, (iii) working
capital to pay for general operating costs, and (v) such items and services as
are necessary to assure the quality delivery of products to the Company's
customers.
40
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ISECURETRAC, CORP. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase ___________
shares of Common Stock of
iSECUREtrac, Corp. (subject to
adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT B
No. 2004-B-MAY-001 Issue Date: May ___, 2004
iSECURETRAC, CORP., a corporation organized under the laws of the State of
Delaware (the "Company"), hereby certifies that, for value received,
___________________, ___________________________________________________, Fax:
_____________, or its assigns (the "Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company at any time after the Company
obtains the Approval (as defined in Section 3(b) of the Subscription Agreement)
until 5:00 p.m., E.S.T on the one hundred and twentieth (120th) day after the
Actual Effective Date during which period a Registration Statement has been
continuously effective for the public sale of the Registrable Securities (the
"Expiration Date"), up to __________ fully paid and nonassessable shares of the
common stock of the Company (the "Common Stock"), $.001 par value per share at a
per share purchase price of $_____. The aforedescribed purchase price per share,
as adjusted from time to time as herein provided, is referred to herein as the
"Purchase Price." The number and character of such shares of Common Stock and
the Purchase Price are subject to adjustment as provided herein. The Company may
reduce the Purchase Price without the consent of the Holder. Capitalized terms
used and not otherwise defined herein shall have the meanings set forth in that
certain Subscription Agreement (the "Subscription Agreement"), dated May ___,
2004, entered into by the Company and the Holder.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" shall include iSECUREtrac, Corp. and any
corporation which shall succeed or assume the obligations of iSECUREtrac, Corp.
hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock, $.001
par value per share, as authorized on the date of the Subscription Agreement,
and (b) any other securities into which or for which any of the securities
described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
41
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the
Issue Date through and including the Expiration Date, the Holder hereof shall be
entitled to receive, upon exercise of this Warrant in whole in accordance with
the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, shares of Common Stock of the Company, subject
to adjustment pursuant to Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the
Holder hereof by delivery of an original or facsimile copy of the form of
subscription attached as Exhibit A hereto (the "Subscription Form") duly
executed by such Holder and surrender of the original Warrant to the Company at
its principal office or at the office of its Warrant Agent (as provided
hereinafter), accompanied by payment, in cash, wire transfer or by certified or
official bank check payable to the order of the Company, in the amount obtained
by multiplying the number of shares of Common Stock for which this Warrant is
then exercisable by the Purchase Price then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but
not for a fractional share) by surrender of this Warrant in the manner and at
the place provided in subsection 1.2 except that the amount payable by the
Holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of whole shares of Common Stock designated by the Holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the Holder hereof a new Warrant of like tenor, in the name of
the Holder hereof or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may request, the whole number of shares of Common
Stock for which such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common Stock
as of a particular date (the "Determination Date") shall mean:
(a) If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap Market or the
American Stock Exchange, LLC, then the average of the closing or last sale
price, respectively, reported for the five business days immediately preceding
the Determination Date;
(b) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System, the NASDAQ SmallCap Market or the
American Stock Exchange, Inc., but is traded in the over-the-counter market,
then the average of the closing bid and ask prices reported for the last
business day immediately preceding the Determination Date;
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree,
or in the absence of such an agreement, by arbitration in accordance with the
rules then standing of the American Arbitration Association, before a single
arbitrator to be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided; or
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event of
such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
42
1.5. Company Acknowledgment. The Company will, at the time of the
exercise of the Warrant, upon the request of the Holder hereof acknowledge in
writing its continuing obligation to afford to such Holder any rights to which
such Holder shall continue to be entitled after such exercise in accordance with
the provisions of this Warrant. If the Holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such Holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the Holder of the Warrants
pursuant to Subsection 3.2, such bank or trust company shall have all the powers
and duties of a warrant agent (as hereinafter described) and shall accept, in
its own name for the account of the Company or such successor person as may be
entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
2. Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall be
deemed to be issued to the Holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the Holder hereof, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct in compliance with
applicable securities laws, a certificate or certificates for the number of duly
and validly issued, fully paid and nonassessable shares of Common Stock (or
Other Securities) to which such Holder shall be entitled on such exercise,
together with any other stock or other securities and property (including cash,
where applicable) to which such Holder is entitled upon such exercise pursuant
to Section 1 or otherwise.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any time
or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the Holder of this
Warrant, on the exercise hereof as provided in Section 1, at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause to
be delivered the stock and other securities and property (including cash, where
applicable) receivable by the Holder of the Warrants after the effective date of
such dissolution pursuant to this Section 3 to a bank or trust company (a
"Trustee") having its principal office in New York, NY, as trustee for the
Holder of the Warrants.
43
3.3. Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the Other Securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any Other
Securities, including, in the case of any such transfer, the person acquiring
all or substantially all of the properties or assets of the Company, whether or
not such person shall have expressly assumed the terms of this Warrant as
provided in Section 4. In the event this Warrant does not continue in full force
and effect after the consummation of the transaction described in this Section
3, then only in such event will the Company's securities and property (including
cash, where applicable) receivable by the Holder of the Warrants be delivered to
the Trustee as contemplated by Section 3.2.
3.4 Share Issuance. Until the Expiration Date, if the Company shall
issue any Common Stock except for the Excepted Issuances (as defined in the
Subscription Agreement), prior to the complete exercise of this Warrant for a
consideration less than the Purchase Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Purchase Price shall be reduced to such other lower issue price. For purposes of
this adjustment, the issuance of any security or debt instrument of the Company
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Purchase Price upon the issuance of the above-described
security, debt instrument, warrant, right, or option. The reduction of the
Purchase Price described in this Section 3.4 is in addition to the other rights
of the Holder described in the Subscription Agreement.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the Holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be adjusted to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that would otherwise (but for the provisions of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.
5. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrants, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the Holder of the Warrant and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).
44
6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial
Statements. From and after the date the Approval is obtained, the Company will
at all times reserve and keep available, solely for issuance and delivery on the
exercise of the Warrants, all shares of Common Stock (or Other Securities) from
time to time issuable on the exercise of the Warrant. This Warrant entitles the
Holder hereof to receive copies of all financial and other information
distributed or required to be distributed to the holders of the Company's Common
Stock.
7. Assignment; Exchange of Warrant. This Warrant has not been registered
under the Securities Act of 1933, as amended (the "1933 Act"), or any applicable
state securities laws, and has been issued to the Holder for investment and not
with a view to the distribution of either the Warrant or the shares underlying
the Warrant ("Warrant Shares"). Neither this Warrant nor any of the Warrant
Shares or any other security issued or issuable upon exercise of this Warrant
may be sold, transferred, pledged or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an opinion of
counsel satisfactory to the Company that registration is not required under the
Act. Each certificate for the Warrant, the Warrant Shares and any other security
issued or issuable upon exercise of this Warrant shall contain a legend on the
face thereof, in form and substance satisfactory to counsel for the Company,
setting forth the restrictions on transfer contained in this Section. Subject to
compliance with applicable securities laws, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor"). On the surrender for exchange of this Warrant, with the
Transferor's endorsement in the form of Exhibit B attached hereto (the
"Transferor Endorsement Form") and together with an opinion of counsel
reasonably satisfactory to the Company that the transfer of this Warrant will be
in compliance with applicable securities laws, the Company at its expense,
twice, only, but with payment by the Transferor of any applicable transfer
taxes, will issue and deliver to or on the order of the Transferor thereof a new
Warrant or Warrants of like tenor, in the name of the Transferor and/or the
transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor. No such transfers shall result in a public
distribution of the Warrant; and the Company shall only be responsible for "blue
sky" compliance expenses for resales under any registration statement filed in
accordance with Section 11 of the Subscription Agreement for two (2) such
transfers to two (2) applicable states of the United States only.
8. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of this Warrant, the Company at its expense, twice only, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The Holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in the Subscription Agreement. The terms of the Subscription Agreement are
incorporated herein by this reference.
45
10. Maximum Exercise. The Holder shall not be entitled to exercise this
Warrant on an exercise date nor may the Company exercise its right to give a
Call Notice (as defined in Section 11) in connection with that number of Common
Stock which would be in excess of the sum of (i) the number of Common Stock
beneficially owned by the Holder and its affiliates on an exercise date or Call
Date, and (ii) the number of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this limitation is being made
on an exercise date or Call Date, which would result in beneficial ownership by
the Holder and its affiliates of more than 9.99% of the outstanding Common Stock
on such date. For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to
the foregoing, the Holder shall not be limited to aggregate exercises which
would result in the issuance of more than 9.99%. The restriction described in
this paragraph may be revoked upon sixty-one (61) days prior notice from the
Holder to the Company. The Holder may allocate which of the equity of the
Company deemed beneficially owned by the Subscriber shall be included in the
9.99% amount described above and which shall be allocated to the excess above
9.99%.
11. Call. The Company shall have the option to "call" the Warrants (the
"Warrant Call"), one or more times, in accordance with and governed by the
following:
(a) The Company shall exercise the Warrant Call by giving to the
Warrant Holder a written notice of call (the "Call Notice") during the period in
which the Warrant Call may be exercised. The effective date of each Call Notice
(the "Call Date") is the date on which notice is effective under the notice
provision of Section 15 of this Warrant.
(b) The Company's right to exercise the Warrant Call shall commence
thirty trading days after the Actual Effective Date as defined in the
Subscription Agreement.
(c) The number of shares of Common Stock to be issued upon exercise
of the Warrant which are subject to a Call Notice must be registered in a
registration statement effective from twenty-two trading days prior to the Call
Date and through the Delivery Date.
(d) A Call Notice may be given not sooner than ten (10) trading days
after the prior Call Date.
(e) A Call Notice may be given by the Company only within ten
trading days after the Common Stock has had a closing price as reported for the
Principal Market (as defined in the Subscription Agreement) of not less than one
hundred and fifty percent (150%) of the Purchase Price for twenty (20)
consecutive trading days ("Lookback Period").
(f) The Common Stock must be listed on the Principal Market for the
Lookback Period and through the Delivery Date.
(g) The Company shall not have received a notice from the Principal
Market during the sixty (60) calendar days prior to the Call Date that the
Company or the Common Stock does not meet the requirements for continued
quotation, listing or trading on the Principal Market.
(h) The Company and the Common Stock shall meet the requirements for
continued quotation, listing or trading on the Principal Market for the Lookback
Period and through the Delivery Date.
46
(i) Unless otherwise agreed to by the Holder of this Warrant, a Call
Notice must be given to all Warrant Holders who receive Warrants similar to this
Warrant (in terms of exercise price and other principal terms) issued on or
about the same Issue Date as this Warrant, in proportion to the amounts of
Common Stock which may be purchased by the respective Warrant Holders in
accordance with the respective Warrants held by each.
(j) The Warrant Holder shall exercise his Warrant rights and
purchase the Called Common Stock and pay for same within thirty (30) days after
the Call Date. If the Warrant Holder fails to timely pay the amount required by
the Warrant Call, the Company's sole remedy shall be to cancel a corresponding
amount of this Warrant.
(k) The Company may not exercise the right to Call this Warrant
after the occurrence of a default by the Company of a material term of this
Warrant or the Subscription Agreement.
12. Warrant Agent. The Company may, by written notice to the Holder of the
Warrant, appoint an agent (a "Warrant Agent") for the purpose of issuing Common
Stock (or Other Securities) on the exercise of this Warrant pursuant to Section
1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant
pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such Warrant Agent.
13. Transfer on the Company's Books. Until this Warrant is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
14. Warrant Exercise Compensation. The Company has agreed to pay
Xxxxxxx.xxx, Inc. ("Broker") Warrant Exercise Compensation as described in the
Subscription Agreement which is equal to eight percent (8%) of the cash proceeds
payable to the Company upon exercise of the Warrant.
15. Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Company to: iSECUREtrac, Corp., 0000
Xxxxx 000xx Xxxxxx, Xxxxx 000, Xxxxx, XX 00000, Attn: Xxxxxx X. Xxxxxxx, Xx.,
CEO and President, telecopier: (000) 000-0000, with a copy by telecopier only
to: Xxxx Xxxxx, Esq., c/o iSECUREtrac, Corp., 0000 Xxxxx 000xx Xxxxxx, Xxxxx
000, Xxxxx, XX 00000, telecopier: (000) 000-0000, (ii) if to the Holder, to the
address and telecopier number listed on the first paragraph of this Warrant,
with a copy by telecopier only to: Grushko & Xxxxxxx, P.C., 000 Xxxxx Xxxxxx,
Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, telecopier number: (000) 000-0000, and
(iii) if to the Broker, to: Xxxxxxx.xxx, Inc., 000 Xxxxx Xxxxx Xxxxxx Xxxx, 0xx
Xxxxx, Xxxxxxxxxx, XX 00000, Attn: Xxxx X. Xxxxxxx, telecopier: (000) 000-0000.
47
16. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York County in the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
48
IN WITNESS WHEREOF, the Company has executed this Warrant as of the date
first written above.
ISECURETRAC, CORP.
By:
-------------------------------
Name:
Title:
Witness:
-----------
49
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: ISECURETRAC, CORP.
The undersigned, the holder of the within Warrant, hereby irrevocably elects to
exercise this Warrant for, and to purchase thereunder, shares of Common Stock of
iSECUREtrac, Corp. and herewith makes payment of --------------- $ therefor, and
requests that the certificates for such shares be issued in the name of, and
---------------- delivered to whose address is
------------------------------------------------------------
-------------------------------------------------------------.
--------------------------
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the "Securities Act") or pursuant to an exemption from
registration under the Securities Act.
Dated:
-----------------
-----------------------------------------
(Signature must conform to name of holder
as specified on the face of the Warrant)
-----------------------------------------
(Address)
50
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto the person(s) named below under the heading "Transferees" the right
represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of ISECURETRAC, CORP. to which the within Warrant relates
specified under the headings "Percentage Transferred" and "Number Transferred,"
respectively, opposite the name(s) of such person(s) and appoints each such
person Attorney to transfer its respective right on the books of ISECURETRAC,
CORP. with full power of substitution in the premises.
---------------------- -------------------------- -----------------------------
Transferees Percentage Transferred Number Transferred
---------------------- -------------------------- -----------------------------
---------------------- -------------------------- -----------------------------
---------------------- -------------------------- -----------------------------
---------------------- -------------------------- -----------------------------
Dated:
------------ ------------------ ----------------------------------
(Signature must conform to name of
holder as specified on the
face of the warrant)
Signed in the presence of:
--------------------------------- ---------------------------------
(Name) ---------------------------------
(address)
ACCEPTED AND AGREED:
[TRANSFEREE]
---------------------------------
---------------------------------
(address)
---------------------------------
(Name)
51
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ISECURETRAC, CORP. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase ___________
shares of Common Stock of
iSECUREtrac, Corp. (subject to
adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT A
No. 2004-A-MAY-001 Issue Date: May ___, 2004
iSECURETRAC, CORP., a corporation organized under the laws of the State of
Delaware (the "Company"), hereby certifies that, for value received,
___________________, ___________________________________________________, Fax:
_____________, or its assigns (the "Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company at any time after the Issue Date
until 5:00 p.m., E.S.T on the fifth anniversary of the Issue Date (the
"Expiration Date"), up to __________ fully paid and nonassessable shares of the
common stock of the Company (the "Common Stock"), $.001 par value per share at a
per share purchase price of $_____. The aforedescribed purchase price per share,
as adjusted from time to time as herein provided, is referred to herein as the
"Purchase Price." The number and character of such shares of Common Stock and
the Purchase Price are subject to adjustment as provided herein. The Company may
reduce the Purchase Price without the consent of the Holder. Capitalized terms
used and not otherwise defined herein shall have the meanings set forth in that
certain Subscription Agreement (the "Subscription Agreement"), dated May ___,
2004, entered into by the Company and the Holder.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" shall include iSECUREtrac, Corp. and any
corporation which shall succeed or assume the obligations of iSECUREtrac, Corp.
hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock, $.001
par value per share, as authorized on the date of the Subscription Agreement,
and (b) any other securities into which or for which any of the securities
described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
52
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the
Issue Date through and including the Expiration Date, the Holder hereof shall be
entitled to receive, upon exercise of this Warrant in whole in accordance with
the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, shares of Common Stock of the Company, subject
to adjustment pursuant to Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the
Holder hereof by delivery of an original or facsimile copy of the form of
subscription attached as Exhibit A hereto (the "Subscription Form") duly
executed by such Holder and surrender of the original Warrant to the Company at
its principal office or at the office of its Warrant Agent (as provided
hereinafter), accompanied by payment, in cash, wire transfer or by certified or
official bank check payable to the order of the Company, in the amount obtained
by multiplying the number of shares of Common Stock for which this Warrant is
then exercisable by the Purchase Price then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but
not for a fractional share) by surrender of this Warrant in the manner and at
the place provided in subsection 1.2 except that the amount payable by the
Holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of whole shares of Common Stock designated by the Holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the Holder hereof a new Warrant of like tenor, in the name of
the Holder hereof or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may request, the whole number of shares of Common
Stock for which such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common Stock
as of a particular date (the "Determination Date") shall mean:
(a) If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap Market or the
American Stock Exchange, LLC, then the average of the closing or last sale
price, respectively, reported for the five business days immediately preceding
the Determination Date;
(b) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System, the NASDAQ SmallCap Market or the
American Stock Exchange, Inc., but is traded in the over-the-counter market,
then the average of the closing bid and ask prices reported for the last
business day immediately preceding the Determination Date;
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree,
or in the absence of such an agreement, by arbitration in accordance with the
rules then standing of the American Arbitration Association, before a single
arbitrator to be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided; or
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event of
such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
53
1.5. Company Acknowledgment. The Company will, at the time of the
exercise of the Warrant, upon the request of the Holder hereof acknowledge in
writing its continuing obligation to afford to such Holder any rights to which
such Holder shall continue to be entitled after such exercise in accordance with
the provisions of this Warrant. If the Holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such Holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the Holder of the Warrants
pursuant to Subsection 3.2, such bank or trust company shall have all the powers
and duties of a warrant agent (as hereinafter described) and shall accept, in
its own name for the account of the Company or such successor person as may be
entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
1.7 Delivery of Stock Certificates, etc. on Exercise. The Company
agrees that the shares of Common Stock purchased upon exercise of this Warrant
shall be deemed to be issued to the Holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the Holder hereof, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct in compliance with
applicable securities laws, a certificate or certificates for the number of duly
and validly issued, fully paid and nonassessable shares of Common Stock (or
Other Securities) to which such Holder shall be entitled on such exercise,
together with any other stock or other securities and property (including cash,
where applicable) to which such Holder is entitled upon such exercise pursuant
to Section 1 or otherwise.
2. Cashless Exercise.
(a) If a Registration Statement as defined in the Subscription
Agreement ("Registration Statement") is effective and the Holder may sell its
shares of Common Stock upon exercise hereof, this Warrant may be exercisable in
whole or in part for cash only as set forth in Section 1 above. If no such
Registration Statement is available, payment upon exercise may be made at the
option of the Holder either in (i) cash, wire transfer or by certified or
official bank check payable to the order of the Company equal to the applicable
aggregate Purchase Price, (ii) by delivery of Common Stock issuable upon
exercise of the Warrants in accordance with Section (b) below ("Cashless
Exercise") or (iii) by a combination of any of the foregoing methods, for the
number of Common Stock specified in such form (as such exercise number shall be
adjusted to reflect any adjustment in the total number of shares of Common Stock
issuable to the holder per the terms of this Warrant) and the holder shall
thereupon be entitled to receive the number of duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock (or Other Securities)
determined as provided herein.
(b) If the Fair Market Value of one share of Common Stock is greater
than the Purchase Price (at the date of calculation as set forth below) and no
Registration Statement relating to the shares of Common Stock underlying this
Warrant is effective, in lieu of exercising this Warrant for cash, the holder
may elect to receive shares equal to the value (as determined below) of this
Warrant (or the portion thereof being cancelled) by surrender of this Warrant at
the principal office of the Company together with the properly endorsed
Subscription Form in which event the Company shall issue to the holder a number
of shares of Common Stock computed using the following formula:
54
X = Y (A-B)
-------
A
Where X= the number of shares of Common Stock to be issued to the holder
Y= the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being exercised
(at the date of such calculation)
A= the Fair Market Value of one share of the
Company's Common Stock (at the date of such
calculation)
B= Purchase Price (as adjusted to the date of such calculation)
(c) The Holder may employ the cashless exercise feature described
above only during the pendency of a Non-Registration Event as described in
Section 11 of the Subscription Agreement.
(d) For purposes of Rule 144 promulgated under the 1933 Act, it is
intended, understood and acknowledged that the Commission currently has
interpreted Rule 144 to mean that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have commenced, on
the date this Warrant was originally issued pursuant to the Subscription
Agreement.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any time
or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the Holder of this
Warrant, on the exercise hereof as provided in Section 1, at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause to
be delivered the stock and other securities and property (including cash, where
applicable) receivable by the Holder of the Warrants after the effective date of
such dissolution pursuant to this Section 3 to a bank or trust company (a
"Trustee") having its principal office in New York, NY, as trustee for the
Holder of the Warrants.
55
3.3. Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the Other Securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any Other
Securities, including, in the case of any such transfer, the person acquiring
all or substantially all of the properties or assets of the Company, whether or
not such person shall have expressly assumed the terms of this Warrant as
provided in Section 4. In the event this Warrant does not continue in full force
and effect after the consummation of the transaction described in this Section
3, then only in such event will the Company's securities and property (including
cash, where applicable) receivable by the Holder of the Warrants be delivered to
the Trustee as contemplated by Section 3.2.
3.4 Share Issuance. Until the Expiration Date, if the Company shall
issue any Common Stock except for the Excepted Issuances (as defined in the
Subscription Agreement), prior to the complete exercise of this Warrant for a
consideration less than the Purchase Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Purchase Price shall be reduced to such other lower issue price. For purposes of
this adjustment, the issuance of any security or debt instrument of the Company
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Purchase Price upon the issuance of the above-described
security, debt instrument, warrant, right, or option. The reduction of the
Purchase Price described in this Section 3.4 is in addition to the other rights
of the Holder described in the Subscription Agreement.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the Holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be adjusted to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that would otherwise (but for the provisions of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.
5. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrants, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the Holder of the Warrant and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).
56
6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial
Statements. The Company will at all times reserve and keep available, solely for
issuance and delivery on the exercise of the Warrants, all shares of Common
Stock (or Other Securities) from time to time issuable on the exercise of the
Warrant. This Warrant entitles the Holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. Assignment; Exchange of Warrant. This Warrant has not been registered
under the Securities Act of 1933, as amended (the "1933 Act"), or any applicable
state securities laws, and has been issued to the Holder for investment and not
with a view to the distribution of either the Warrant or the shares underlying
the Warrant ("Warrant Shares"). Neither this Warrant nor any of the Warrant
Shares or any other security issued or issuable upon exercise of this Warrant
may be sold, transferred, pledged or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an opinion of
counsel satisfactory to the Company that registration is not required under the
Act. Each certificate for the Warrant, the Warrant Shares and any other security
issued or issuable upon exercise of this Warrant shall contain a legend on the
face thereof, in form and substance satisfactory to counsel for the Company,
setting forth the restrictions on transfer contained in this Section. Subject to
compliance with applicable securities laws, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor"). On the surrender for exchange of this Warrant, with the
Transferor's endorsement in the form of Exhibit B attached hereto (the
"Transferor Endorsement Form") and together with an opinion of counsel
reasonably satisfactory to the Company that the transfer of this Warrant will be
in compliance with applicable securities laws, the Company at its expense,
twice, only, but with payment by the Transferor of any applicable transfer
taxes, will issue and deliver to or on the order of the Transferor thereof a new
Warrant or Warrants of like tenor, in the name of the Transferor and/or the
transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor. No such transfers shall result in a public
distribution of the Warrant; and the Company shall only be responsible for "blue
sky" compliance expenses for resales under any registration statement filed in
accordance with Section 11 of the Subscription Agreement for two (2) such
transfers to two (2) applicable states of the United States only.
8. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of this Warrant, the Company at its expense, twice only, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The Holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in the Subscription Agreement. The terms of the Subscription Agreement are
incorporated herein by this reference.
10. Maximum Exercise. The Holder shall not be entitled to exercise this
Warrant on an exercise date nor may the Company exercise its right to give a
Call Notice (as defined in Section 11) in connection with that number of Common
Stock which would be in excess of the sum of (i) the number of Common Stock
beneficially owned by the Holder and its affiliates on an exercise date or Call
Date, and (ii) the number of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this limitation is being made
on an exercise date or Call Date, which would result in beneficial ownership by
the Holder and its affiliates of more than 9.99% of the outstanding Common Stock
on such date. For the purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to
the foregoing, the Holder shall not be limited to aggregate exercises which
would result in the issuance of more than 9.99%. The restriction described in
this paragraph may be revoked upon sixty-one (61) days prior notice from the
Holder to the Company. The Holder may allocate which of the equity of the
Company deemed beneficially owned by the Subscriber shall be included in the
9.99% amount described above and which shall be allocated to the excess above
9.99%.
57
11. Call. The Company shall have the option to "call" the Warrants (the
"Warrant Call"), one or more times, in accordance with and governed by the
following:
(a) The Company shall exercise the Warrant Call by giving to the
Warrant Holder a written notice of call (the "Call Notice") during the period in
which the Warrant Call may be exercised. The effective date of each Call Notice
(the "Call Date") is the date on which notice is effective under the notice
provision of Section 15 of this Warrant.
(b) The Company's right to exercise the Warrant Call shall commence
thirty trading days after the Actual Effective Date as defined in the
Subscription Agreement.
(c) The number of shares of Common Stock to be issued upon exercise
of the Warrant which are subject to a Call Notice must be registered in a
registration statement effective from twenty-two trading days prior to the Call
Date and through the Delivery Date.
(d) A Call Notice may be given not sooner than ten (10) trading days
after the prior Call Date.
(e) A Call Notice may be given by the Company only within ten
trading days after the Common Stock has had a closing price as reported for the
Principal Market (as defined in the Subscription Agreement) of not less than two
hundred percent (200%) of the Purchase Price for fifteen (15) consecutive
trading days ("Lookback Period").
(f) The Common Stock must be listed on the Principal Market for the
Lookback Period and through the Delivery Date.
(g) The Company shall not have received a notice from the Principal
Market during the sixty (60) calendar days prior to the Call Date that the
Company or the Common Stock does not meet the requirements for continued
quotation, listing or trading on the Principal Market.
(h) The Company and the Common Stock shall meet the requirements for
continued quotation, listing or trading on the Principal Market for the Lookback
Period and through the Delivery Date.
(i) Unless otherwise agreed to by the Holder of this Warrant, a Call
Notice must be given to all Warrant Holders who receive Warrants similar to this
Warrant (in terms of exercise price and other principal terms) issued on or
about the same Issue Date as this Warrant, in proportion to the amounts of
Common Stock which may be purchased by the respective Warrant Holders in
accordance with the respective Warrants held by each.
58
(j) The Warrant Holder shall exercise his Warrant rights and
purchase the Called Common Stock and pay for same within thirty (30) days after
the Call Date. If the Warrant Holder fails to timely pay the amount required by
the Warrant Call, the Company's sole remedy shall be to cancel a corresponding
amount of this Warrant.
(k) The Company may not exercise the right to Call this Warrant
after the occurrence of a default by the Company of a material term of this
Warrant or the Subscription Agreement.
12. Warrant Agent. The Company may, by written notice to the Holder of the
Warrant, appoint an agent (a "Warrant Agent") for the purpose of issuing Common
Stock (or Other Securities) on the exercise of this Warrant pursuant to Section
1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant
pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such Warrant Agent.
13. Transfer on the Company's Books. Until this Warrant is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
14. Warrant Exercise Compensation. The Company has agreed to pay
Xxxxxxx.xxx, Inc. ("Broker") Warrant Exercise Compensation as described in the
Subscription Agreement which is equal to four percent (4%) of the cash proceeds
payable to the Company upon exercise of the Warrant.
15. Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Company to: iSECUREtrac, Corp., 0000
Xxxxx 000xx Xxxxxx, Xxxxx 000, Xxxxx, XX 00000, Attn: Xxxxxx X. Xxxxxxx, Xx.,
CEO and President, telecopier: (000) 000-0000, with a copy by telecopier only
to: Xxxx Xxxxx, Esq., c/o iSECUREtrac, Corp., 0000 Xxxxx 000xx Xxxxxx, Xxxxx
000, Xxxxx, XX 00000, telecopier: (000) 000-0000, (ii) if to the Holder, to the
address and telecopier number listed on the first paragraph of this Warrant,
with a copy by telecopier only to: Grushko & Xxxxxxx, P.C., 000 Xxxxx Xxxxxx,
Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, telecopier number: (000) 000-0000, and
(iii) if to the Broker, to: Xxxxxxx.xxx, Inc., 000 Xxxxx Xxxxx Xxxxxx Xxxx, 0xx
Xxxxx, Xxxxxxxxxx, XX 00000, Attn: Xxxx X. Xxxxxxx, telecopier: (000) 000-0000.
59
16. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York County in the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
60
IN WITNESS WHEREOF, the Company has executed this Warrant as of the date
first written above.
ISECURETRAC, CORP.
By:
-------------------------------------
Name:
Title:
Witness:
------------
61
Exhibit A
FORM OF SUBSCRIPTION
(to be signed only on exercise of Warrant)
TO: ISECURETRAC, CORP.
The undersigned, pursuant to the provisions set forth in the attached Warrant
(No.____), hereby irrevocably elects to purchase (check applicable box):
___ ________ shares of the Common Stock covered by such Warrant; or
___ the maximum number of shares of Common Stock covered by such Warrant
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned herewith makes payment of the full purchase price for such
shares at the price per share provided for in such Warrant, which is
$___________. Such payment takes the form of (check applicable box or boxes):
___ $__________ in lawful money of the United States; and/or ___ the
cancellation of such portion of the attached Warrant as is exercisable for a
total of _______ shares of Common Stock (using a Fair Market Value of $_______
per share for purposes of this calculation); and/or
___ the cancellation of such number of shares of Common Stock as is necessary,
in accordance with the formula set forth in Section 2, to exercise this Warrant
with respect to the maximum number of shares of Common Stock purchasable
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned requests that the certificates for such shares be issued in the
name of, and delivered to
_____________________________________________________ whose address is
_________________________________________________
______________________________________ .
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the "Securities Act"), or pursuant to an exemption from
registration under the Securities Act.
Dated:
------------------------ ----------------------------------
(Signature must conform to name of
holder as specified on the face
of the Warrant)
---------------------------------
---------------------------------
(Address)
62
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto the person(s) named below under the heading "Transferees" the right
represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of ISECURETRAC, CORP. to which the within Warrant relates
specified under the headings "Percentage Transferred" and "Number Transferred,"
respectively, opposite the name(s) of such person(s) and appoints each such
person Attorney to transfer its respective right on the books of ISECURETRAC,
CORP. with full power of substitution in the premises.
-------------------- ----------------------- -----------------------
Transferees Percentage Transferred Number Transferred
-------------------- ----------------------- -----------------------
-------------------- ----------------------- -----------------------
-------------------- ----------------------- -----------------------
-------------------- ----------------------- -----------------------
-------------------- ----------------------- -----------------------
-------------------- ----------------------- -----------------------
-------------------- ----------------------- -----------------------
Dated: ,
----------- --------- ----------------------------------------
(Signature must conform to name of
holder as specified on the
face of the warrant)
Signed in the presence of:
------------------------------- ---------------------------------------
(Name)
---------------------------------------
(address)
ACCEPTED AND AGREED:
[TRANSFEREE]
---------------------------------------
---------------------------------------
(address)
-------------------------------
(Name)
63
Schedule 11.1 - Other Securities to be Registered
The Company intends to register 19,848,640 shares of common stock underlying the
warrants identified in Schedule 5(d); the 1,528,963 shares of common stock
issued to Xxxxxxxxx Financial Communications, Inc, as described in Schedule
5(d); the 2,631,579 shares of common stock underlying the Notes and accrued
interest of Micro Capital Fund, LP, as described in Schedule 5(d); and, the
4,423,077 shares of common stock exchanged with the former Tracking Systems
Corporation shareholders as described in Schedule 5(d).
In addition, the Company intends to register such stock as necessary to raise
such equity capital as the aggregate amount of the Notes are short a total of
$2,500,000.
64
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ISECURETRAC, CORP. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase ___________
shares of Common Stock of
iSECUREtrac, Corp. (subject to
adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT (finder)
No. 2004-F-MAY-001 Issue Date: May ___, 2004
iSECURETRAC, CORP., a corporation organized under the laws of the State of
Delaware (the "Company"), hereby certifies that, for value received,
___________________, ___________________________________________________, Fax:
_____________, or its assigns (the "Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company at any time after the Issue Date
until 5:00 p.m., E.S.T on the fifth anniversary of the Issue Date (the
"Expiration Date"), up to __________ fully paid and nonassessable shares of the
common stock of the Company (the "Common Stock"), $.001 par value per share at a
per share purchase price of $_____. The aforedescribed purchase price per share,
as adjusted from time to time as herein provided, is referred to herein as the
"Purchase Price." The number and character of such shares of Common Stock and
the Purchase Price are subject to adjustment as provided herein. The Company may
reduce the Purchase Price without the consent of the Holder. Capitalized terms
used and not otherwise defined herein shall have the meanings set forth in that
certain Subscription Agreement (the "Subscription Agreement"), dated May ___,
2004, entered into by the Company and the Subscribers of the Company's Common
Stock and Warrants.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" shall include iSECUREtrac, Corp. and any
corporation which shall succeed or assume the obligations of iSECUREtrac, Corp.
hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock, $.001
par value per share, as authorized on the date of the Subscription Agreement,
and (b) any other securities into which or for which any of the securities
described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
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1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the
Issue Date through and including the Expiration Date, the Holder hereof shall be
entitled to receive, upon exercise of this Warrant in whole in accordance with
the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, shares of Common Stock of the Company, subject
to adjustment pursuant to Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the
Holder hereof by delivery of an original or facsimile copy of the form of
subscription attached as Exhibit A hereto (the "Subscription Form") duly
executed by such Holder and surrender of the original Warrant to the Company at
its principal office or at the office of its Warrant Agent (as provided
hereinafter), accompanied by payment, in cash, wire transfer or by certified or
official bank check payable to the order of the Company, in the amount obtained
by multiplying the number of shares of Common Stock for which this Warrant is
then exercisable by the Purchase Price then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but
not for a fractional share) by surrender of this Warrant in the manner and at
the place provided in subsection 1.2 except that the amount payable by the
Holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of whole shares of Common Stock designated by the Holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the Holder hereof a new Warrant of like tenor, in the name of
the Holder hereof or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may request, the whole number of shares of Common
Stock for which such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common Stock
as of a particular date (the "Determination Date") shall mean:
(a) If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap Market or the
American Stock Exchange, LLC, then the average of the closing or last sale
price, respectively, reported for the five business days immediately preceding
the Determination Date;
(b) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System, the NASDAQ SmallCap Market or the
American Stock Exchange, Inc., but is traded in the over-the-counter market,
then the average of the closing bid and ask prices reported for the last
business day immediately preceding the Determination Date;
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree,
or in the absence of such an agreement, by arbitration in accordance with the
rules then standing of the American Arbitration Association, before a single
arbitrator to be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided; or
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event of
such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
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1.5. Company Acknowledgment. The Company will, at the time of the exercise
of the Warrant, upon the request of the Holder hereof acknowledge in writing its
continuing obligation to afford to such Holder any rights to which such Holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant. If the Holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to afford
to such Holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the Holder of the Warrants
pursuant to Subsection 3.2, such bank or trust company shall have all the powers
and duties of a warrant agent (as hereinafter described) and shall accept, in
its own name for the account of the Company or such successor person as may be
entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
1.7 Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall be
deemed to be issued to the Holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the Holder hereof, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct in compliance with
applicable securities laws, a certificate or certificates for the number of duly
and validly issued, fully paid and nonassessable shares of Common Stock (or
Other Securities) to which such Holder shall be entitled on such exercise,
together with any other stock or other securities and property (including cash,
where applicable) to which such Holder is entitled upon such exercise pursuant
to Section 1 or otherwise.
2. Cashless Exercise.
(a) If a Registration Statement as defined in the Subscription
Agreement ("Registration Statement") is effective and the Holder may sell its
shares of Common Stock upon exercise hereof, this Warrant may be exercisable in
whole or in part for cash only as set forth in Section 1 above. If no such
Registration Statement is available, payment upon exercise may be made at the
option of the Holder either in (i) cash, wire transfer or by certified or
official bank check payable to the order of the Company equal to the applicable
aggregate Purchase Price, (ii) by delivery of Common Stock issuable upon
exercise of the Warrants in accordance with Section (b) below ("Cashless
Exercise") or (iii) by a combination of any of the foregoing methods, for the
number of Common Stock specified in such form (as such exercise number shall be
adjusted to reflect any adjustment in the total number of shares of Common Stock
issuable to the holder per the terms of this Warrant) and the holder shall
thereupon be entitled to receive the number of duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock (or Other Securities)
determined as provided herein.
(b) If the Fair Market Value of one share of Common Stock is greater
than the Purchase Price (at the date of calculation as set forth below) and no
Registration Statement relating to the shares of Common Stock underlying this
Warrant is effective, in lieu of exercising this Warrant for cash, the holder
may elect to receive shares equal to the value (as determined below) of this
Warrant (or the portion thereof being cancelled) by surrender of this Warrant at
the principal office of the Company together with the properly endorsed
Subscription Form in which event the Company shall issue to the holder a number
of shares of Common Stock computed using the following formula:
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X = Y (A-B)
-------
A
Where X= the number of shares of Common Stock to be issued to the holder
Y= the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being exercised
(at the date of such calculation)
A= the Fair Market Value of one share of the
Company's Common Stock (at the date of such
calculation)
B= Purchase Price (as adjusted to the date of such calculation)
(e) The Holder may employ the cashless exercise feature described
above only during the pendency of a Non-Registration Event as described in
Section 11 of the Subscription Agreement.
(f) For purposes of Rule 144 promulgated under the 1933 Act, it is
intended, understood and acknowledged that the Commission currently has
interpreted Rule 144 to mean that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have commenced, on
the date this Warrant was originally issued pursuant to the Subscription
Agreement.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any time
or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the Holder of this
Warrant, on the exercise hereof as provided in Section 1, at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause to
be delivered the stock and other securities and property (including cash, where
applicable) receivable by the Holder of the Warrants after the effective date of
such dissolution pursuant to this Section 3 to a bank or trust company (a
"Trustee") having its principal office in New York, NY, as trustee for the
Holder of the Warrants.
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3.3. Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the Other Securities and property receivable
on the exercise of this Warrant after the consummation of such reorganization,
consolidation or merger or the effective date of dissolution following any such
transfer, as the case may be, and shall be binding upon the issuer of any Other
Securities, including, in the case of any such transfer, the person acquiring
all or substantially all of the properties or assets of the Company, whether or
not such person shall have expressly assumed the terms of this Warrant as
provided in Section 4. In the event this Warrant does not continue in full force
and effect after the consummation of the transaction described in this Section
3, then only in such event will the Company's securities and property (including
cash, where applicable) receivable by the Holder of the Warrants be delivered to
the Trustee as contemplated by Section 3.2.
3.4 Share Issuance. Until the Expiration Date, if the Company shall
issue any Common Stock except for the Excepted Issuances (as defined in the
Subscription Agreement), prior to the complete exercise of this Warrant for a
consideration less than the Purchase Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Purchase Price shall be reduced to such other lower issue price. For purposes of
this adjustment, the issuance of any security or debt instrument of the Company
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Purchase Price upon the issuance of the above-described
security, debt instrument, warrant, right, or option. The reduction of the
Purchase Price described in this Section 3.4 is in addition to the other rights
of the Holder described in the Subscription Agreement.
4. Extraordinary Events Regarding Common Stock. In the event that
the Company shall (a) issue additional shares of the Common Stock as a dividend
or other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the Holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be adjusted to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that would otherwise (but for the provisions of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.
5. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the Warrants, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the Holder of the Warrant and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).
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6. Reservation of Stock, etc. Issuable on Exercise of Warrant;
Financial Statements. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant. This Warrant entitles the Holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. Assignment; Exchange of Warrant. This Warrant has not been
registered under the Securities Act of 1933, as amended (the "1933 Act"), or any
applicable state securities laws, and has been issued to the Holder for
investment and not with a view to the distribution of either the Warrant or the
shares underlying the Warrant ("Warrant Shares"). Neither this Warrant nor any
of the Warrant Shares or any other security issued or issuable upon exercise of
this Warrant may be sold, transferred, pledged or hypothecated in the absence of
an effective registration statement under the Act relating to such security or
an opinion of counsel satisfactory to the Company that registration is not
required under the Act. Each certificate for the Warrant, the Warrant Shares and
any other security issued or issuable upon exercise of this Warrant shall
contain a legend on the face thereof, in form and substance satisfactory to
counsel for the Company, setting forth the restrictions on transfer contained in
this Section. Subject to compliance with applicable securities laws, this
Warrant, and the rights evidenced hereby, may be transferred by any registered
holder hereof (a "Transferor"). On the surrender for exchange of this Warrant,
with the Transferor's endorsement in the form of Exhibit B attached hereto (the
"Transferor Endorsement Form") and together with an opinion of counsel
reasonably satisfactory to the Company that the transfer of this Warrant will be
in compliance with applicable securities laws, the Company at its expense,
twice, only, but with payment by the Transferor of any applicable transfer
taxes, will issue and deliver to or on the order of the Transferor thereof a new
Warrant or Warrants of like tenor, in the name of the Transferor and/or the
transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor. No such transfers shall result in a public
distribution of the Warrant; and the Company shall only be responsible for "blue
sky" compliance expenses for resales under any registration statement filed in
accordance with Section 11 of the Subscription Agreement for two (2) such
transfers to two (2) applicable states of the United States only.
8. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of
like tenor.
9. Registration Rights. The Holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in the Subscription Agreement. The terms of the Subscription Agreement are
incorporated herein by this reference.
10. Maximum Exercise. The Holder shall not be entitled to exercise
this Warrant on an exercise date in connection with that number of shares of
Common Stock which would be in excess of the sum of (i) the number of shares of
Common Stock beneficially owned by the Holder and its affiliates on an exercise
date, and (ii) the number of shares of Common Stock issuable upon the exercise
of this Warrant with respect to which the determination of this limitation is
being made on an exercise date, which would result in beneficial ownership by
the Holder and its affiliates of more than 4.99% of the outstanding shares of
Common Stock on such date. For the purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3
thereunder. Subject to the foregoing, the Holder shall not be limited to
aggregate exercises which would result in the issuance of more than 4.99%. The
restriction described in this paragraph may be revoked upon sixty-one (61) days
prior notice from the Holder to the Company. The Holder may allocate which of
the equity of the Company deemed beneficially owned by the Subscriber shall be
included in the 4.99% amount described above and which shall be allocated to the
excess above 4.99%.
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11. Warrant Agent. The Company may, by written notice to the Holder
of the Warrant, appoint an agent (a "Warrant Agent") for the purpose of issuing
Common Stock (or Other Securities) on the exercise of this Warrant pursuant to
Section 1, exchanging this Warrant pursuant to Section 7, and replacing this
Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such Warrant Agent.
12. Transfer on the Company's Books. Until this Warrant is
transferred on the books of the Company, the Company may treat the registered
holder hereof as the absolute owner hereof for all purposes, notwithstanding any
notice to the contrary.
13. Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Company to: iSECUREtrac, Corp., 0000
Xxxxx 000xx Xxxxxx, Xxxxx 000, Xxxxx, XX 00000, Attn: Xxxxxx X. Xxxxxxx, Xx.,
CEO and President, telecopier: (000) 000-0000, with a copy by telecopier only
to: Xxxx Xxxxx, Esq., c/o iSECUREtrac, Corp., 0000 Xxxxx 000xx Xxxxxx, Xxxxx
000, Xxxxx, XX 00000, telecopier: (000) 000-0000, and (ii) if to the Holder, to
the address and telecopier number listed on the first paragraph of this Warrant,
with a copy by telecopier only to: Grushko & Xxxxxxx, P.C., 000 Xxxxx Xxxxxx,
Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, telecopier number: (000) 000-0000.
14. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York County in the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
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IN WITNESS WHEREOF, the Company has executed this Warrant as of the date
first written above.
ISECURETRAC, CORP.
By:
-------------------------------
Name:
Title:
Witness:
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Exhibit A
FORM OF SUBSCRIPTION
(to be signed only on exercise of Warrant)
TO: ISECURETRAC, CORP.
The undersigned, pursuant to the provisions set forth in the attached Warrant
(No.____), hereby irrevocably elects to purchase (check applicable box):
___ ________ shares of the Common Stock covered by such Warrant; or ___ the
maximum number of shares of Common Stock covered by such Warrant pursuant to the
cashless exercise procedure set forth in Section 2.
The undersigned herewith makes payment of the full purchase price for such
shares at the price per share provided for in such Warrant, which is
$___________. Such payment takes the form of (check applicable box or boxes):
___ $__________ in lawful money of the United States; and/or ___ the
cancellation of such portion of the attached Warrant as is exercisable for a
total of _______ shares of Common Stock (using a Fair Market Value of $_______
per share for purposes of this calculation); and/or
___ the cancellation of such number of shares of Common Stock as is necessary,
in accordance with the formula set forth in Section 2, to exercise this Warrant
with respect to the maximum number of shares of Common Stock purchasable
pursuant to the cashless exercise procedure set forth in Section 2.
The undersigned requests that the certificates for such shares be issued in the
name of, and delivered to _____________________________________________________
whose address is _________________________________________________
______________________________________ .
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the "Securities Act"), or pursuant to an exemption from
registration under the Securities Act.
Dated:
------------
----------------------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
----------------------------------------------
----------------------------------------------
(Address)
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Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto the person(s) named below under the heading "Transferees" the right
represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of ISECURETRAC, CORP. to which the within Warrant relates
specified under the headings "Percentage Transferred" and "Number Transferred,"
respectively, opposite the name(s) of such person(s) and appoints each such
person Attorney to transfer its respective right on the books of ISECURETRAC,
CORP. with full power of substitution in the premises.
---------------------- ------------------------- -----------------------------
Transferees Percentage Transferred Number Transferred
---------------------- ------------------------- -----------------------------
---------------------- ------------------------- -----------------------------
---------------------- ------------------------- -----------------------------
---------------------- ------------------------- -----------------------------
---------------------- ------------------------- -----------------------------
---------------------- ------------------------- -----------------------------
---------------------- ------------------------- -----------------------------
Dated: ,
------- --------
---------------------------------------------
(Signature must conform to name of holder as
specified on the face of the warrant)
Signed in the presence of:
--------------------------
(Name)
---------------------------------------------
---------------------------------------------
(address)
ACCEPTED AND AGREED:
[TRANSFEREE]
---------------------------------------------
---------------------------------------------
(address)
--------------------------
(Name)
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FUNDS ESCROW AGREEMENT
This Agreement is dated as of the ____ day of May, 2004 among iSECUREtrac,
Corp., a Delaware corporation (the "Company"), the Subscribers identified on
Schedule A hereto (each a "Subscriber" and collectively "Subscribers"), and
Grushko & Xxxxxxx, P.C. (the "Escrow Agent"):
W I T N E S S E T H:
WHEREAS, the Company and Subscribers have entered into a Subscription
Agreement calling for the sale by the Company to the Subscriber of convertible
promissory notes ("Notes") for an aggregate purchase price of up to $2,500,000
and the issuance of Warrants in the amounts set forth on Schedule A hereto; and
WHEREAS, the parties hereto require the Company to deliver the Notes and
Warrants against payment therefor, with such Notes, Warrants and the Escrowed
Funds to be delivered to the Escrow Agent to be held in escrow and released by
the Escrow Agent in accordance with the terms and conditions of this Agreement;
and
WHEREAS, the Escrow Agent is willing to serve as escrow agent pursuant to
the terms and conditions of this Agreement;
NOW THEREFORE, the parties agree as follows:
ARTICLE I
INTERPRETATION
1.1. Definitions. Capitalized terms used and not otherwise defined herein
that are defined in the Subscription Agreement shall have the meanings given to
such terms in the Subscription Agreement. Whenever used in this Agreement, the
following terms shall have the following respective meanings:
(a) "Agreement" means this Agreement and all amendments made hereto
and thereto by written agreement between the parties;
(b) "A Warrants" shall have the meaning set forth in Section 3(a) of
the Subscription Agreement;
(c) "B Warrants" shall have the meaning set forth in Section 3(b) of
the Subscription Agreement;
(d) "Broker" shall have the meaning set forth in Section 8 of
the Subscription Agreement;
(e) "Broker's Fee" shall have the meaning set forth in Section
8(a) of the Subscription Agreement;
(f) "Broker's Warrants" shall have the meaning set forth in Section
8(b) of the Subscription Agreement;
(g) "Closing Date" shall have the meaning set forth in Section 13(b)
of the Subscription Agreement;
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(h) "Escrowed Payment" means an aggregate cash payment of up to
$2,500,000 which is the Purchase Price as defined in the Subscription Agreement;
(i) "Legal Fees" shall have the meaning set forth in Section 8
of the Subscription Agreement;
(j) "Legal Opinion" means the original signed legal opinion
referred to in Section 6 of the Subscription Agreement;
(k) "Note" shall have the meaning set forth in the
Subscription Agreement;
(l) "Subscription Agreement" means the Subscription Agreement
(and the exhibits thereto) entered into or to be entered into by the parties in
reference to the sale and purchase of the Notes and Warrants;
(m) "Warrants" shall mean collectively the A Warrants and B
Warrants.
(n) Collectively, the executed Subscription Agreement executed
by the Company, the Notes, Warrants, Legal Opinion, and Broker's Warrants are
referred to as "Company Documents"; and
(o) Collectively, the Escrowed Payment and the Subscription
Agreement executed by the Subscribers are referred to as "Subscriber Documents".
1.2. Entire Agreement. This Agreement along with the Company Documents and
the Subscriber Documents constitute the entire agreement between the parties
hereto pertaining to the Company Documents and Subscriber Documents and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties. There are no warranties,
representations and other agreements made by the parties in connection with the
subject matter hereof except as specifically set forth in this Agreement, the
Company Documents and the Subscriber Documents.
1.3. Extended Meanings. In this Agreement words importing the singular
number include the plural and vice versa; words importing the masculine gender
include the feminine and neuter genders. The word "person" includes an
individual, body corporate, partnership, trustee or trust or unincorporated
association, executor, administrator or legal representative.
1.4. Waivers and Amendments. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by all parties, or, in the
case of a waiver, by the party waiving compliance. Except as expressly stated
herein, no delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver on
the part of any party of any right, power or privilege hereunder preclude any
other or future exercise of any other right, power or privilege hereunder.
1.5. Headings. The division of this Agreement into articles, sections,
subsections and paragraphs and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement.
76
1.6. Law Governing this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of conflicts of laws. Any action brought by either party against the
other concerning the transactions contemplated by this Agreement shall be
brought only in the state courts of New York or in the federal courts located in
the state of New York. Both parties and the individuals executing this Agreement
and other agreements on behalf of the Company agree to submit to the
jurisdiction of such courts and waive trial by jury. The prevailing party (which
shall be the party which receives an award most closely resembling the remedy or
action sought) shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Agreement or
any other agreement delivered in connection herewith is invalid or unenforceable
under any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of any agreement.
1.7. Specific Enforcement, Consent to Jurisdiction. The Company and
Subscriber acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injuction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof or thereof, this being
in addition to any other remedy to which any of them may be entitled by law or
equity. Subject to Section 1.6 hereof, each of the Company and Subscriber hereby
waives, and agrees not to assert in any such suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such court, that
the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Nothing in this Section
shall affect or limit any right to serve process in any other manner permitted
by law.
ARTICLE II
DELIVERIES TO THE ESCROW AGENT
2.1. Company Deliveries. Prior to the Closing Date, the Company shall
deliver to the Escrow Agent the executed Subscription Agreement, the Notes,
Warrants, Broker's Warrants, and Legal Opinion (collectively, the "Company
Documents").
2.2. Subscriber Deliveries. On or before the Closing Date, each Subscriber
shall deliver to the Escrow Agent its portion of the Purchase Price, and the
executed Subscription Agreement. The Escrowed Payment will be delivered pursuant
to the following wire transfer instructions:
Citibank, N.A.
0000 0xx Xxxxxx
Xxx Xxxx, XX 00000, XXX
ABA Number: 0210-00089
For Credit to: Grushko & Xxxxxxx, XXXX Trust Account
Account Number: 00000000
2.3. Intention to Create Escrow Over Company Documents and Subscriber
Documents. The Subscriber and Company intend that the Company Documents and
Subscriber Documents shall be held in escrow by the Escrow Agent pursuant to
this Agreement for their benefit as set forth herein.
77
2.4. Escrow Agent to Deliver Company Documents and Subscriber Documents.
The Escrow Agent shall hold and release the Company Documents and Subscriber
Documents only in accordance with the terms and conditions of this Agreement.
ARTICLE III
RELEASE OF COMPANY DOCUMENTS AND SUBSCRIBER DOCUMENTS
3.1. Release of Escrow. Subject to the provisions of Section 4.2, the
Escrow Agent shall release the Company Documents and Subscriber Documents as
follows:
(a) On the Closing Date, the Escrow Agent will simultaneously
release the Company Documents to the Subscriber and release the Subscription
Agreement, and the Purchase Price to or for the benefit of the Company except
that the Legal Fees will be released to the Subscriber's attorneys, and the
Broker's Fee and Broker's Warrants will be released to or for the benefit of the
Broker.
(b) All funds to be delivered to the Company shall be delivered
pursuant to the wire instructions to be provided in writing by the Company to
the Escrow Agent.
(c) Notwithstanding the above, upon receipt by the Escrow Agent of
joint written instructions ("Joint Instructions") signed by the Company and the
Subscriber, it shall deliver the Company Documents and Subscriber Documents in
accordance with the terms of the Joint Instructions.
(d) Notwithstanding the above, upon receipt by the Escrow
Agent of a final and non-appealable judgment, order, decree or award of a court
of competent jurisdiction (a "Court Order"), the Escrow Agent shall deliver the
Company Documents and Subscriber Documents in accordance with the Court Order.
Any Court Order shall be accompanied by an opinion of counsel for the party
presenting the Court Order to the Escrow Agent (which opinion shall be
satisfactory to the Escrow Agent) to the effect that the court issuing the Court
Order has competent jurisdiction and that the Court Order is final and
non-appealable.
(e) In the event executed Subscription Agreements executed by
Subscribers for an aggregate Purchase Price of not less than $1,000,000 and
corresponding Escrowed Payments for an aggregate of not less than $1,000,000
have not been received by the Escrow Agent on or before June 30, 2004, then the
Escrow Agent shall immediately release the Company Documents to the Company and
release the Subscriber Documents and Escrowed Payments to the Subscribers.
3.2. Acknowledgement of Company and Subscriber; Disputes. The Company and
the Subscriber acknowledge that the only terms and conditions upon which the
Company Documents and Subscriber Documents are to be released are set forth in
Sections 3 and 4 of this Agreement. The Company and the Subscriber reaffirm
their agreement to abide by the terms and conditions of this Agreement with
respect to the release of the Company Documents and Subscriber Documents. Any
dispute with respect to the release of the Company Documents and Subscriber
Documents shall be resolved pursuant to Section 4.2 or by agreement between the
Company and Subscriber.
ARTICLE IV
CONCERNING THE ESCROW AGENT
78
4.1. Duties and Responsibilities of the Escrow Agent. The Escrow Agent's
duties and responsibilities shall be subject to the following terms and
conditions:
(a) The Subscriber and Company acknowledge and agree that the Escrow Agent
(i) shall not be responsible for or bound by, and shall not be required to
inquire into whether either the Subscriber or Company is entitled to receipt of
the Company Documents and Subscriber Documents pursuant to, any other agreement
or otherwise; (ii) shall be obligated only for the performance of such duties as
are specifically assumed by the Escrow Agent pursuant to this Agreement; (iii)
may rely on and shall be protected in acting or refraining from acting upon any
written notice, instruction, instrument, statement, request or document
furnished to it hereunder and believed by the Escrow Agent in good faith to be
genuine and to have been signed or presented by the proper person or party,
without being required to determine the authenticity or correctness of any fact
stated therein or the propriety or validity or the service thereof; (iv) may
assume that any person believed by the Escrow Agent in good faith to be
authorized to give notice or make any statement or execute any document in
connection with the provisions hereof is so authorized; (v) shall not be under
any duty to give the property held by Escrow Agent hereunder any greater degree
of care than Escrow Agent gives its own similar property; and (vi) may consult
counsel satisfactory to Escrow Agent, the opinion of such counsel to be full and
complete authorization and protection in respect of any action taken, suffered
or omitted by Escrow Agent hereunder in good faith and in accordance with the
opinion of such counsel.
(b) The Subscriber and Company acknowledge that the Escrow Agent is acting
solely as a stakeholder at their request and that the Escrow Agent shall not be
liable for any action taken by Escrow Agent in good faith and believed by Escrow
Agent to be authorized or within the rights or powers conferred upon Escrow
Agent by this Agreement. The Subscriber and Company, jointly and severally,
agree to indemnify and hold harmless the Escrow Agent and any of Escrow Agent's
partners, employees, agents and representatives for any action taken or omitted
to be taken by Escrow Agent or any of them hereunder, including the fees of
outside counsel and other costs and expenses of defending itself against any
claim or liability under this Agreement, except in the case of gross negligence
or willful misconduct on Escrow Agent's part committed in its capacity as Escrow
Agent under this Agreement. The Escrow Agent shall owe a duty only to the
Subscriber and Company under this Agreement and to no other person.
(c) The Subscriber and Company jointly and severally agree to reimburse
the Escrow Agent for outside counsel fees, to the extent authorized hereunder
and incurred in connection with the performance of its duties and
responsibilities hereunder.
(d) The Escrow Agent may at any time resign as Escrow Agent hereunder by
giving five (5) days prior written notice of resignation to the Subscriber and
the Company. Prior to the effective date of the resignation as specified in such
notice, the Subscriber and Company will issue to the Escrow Agent a Joint
Instruction authorizing delivery of the Company Documents and Subscriber
Documents to a substitute Escrow Agent selected by the Subscriber and Company.
If no successor Escrow Agent is named by the Subscriber and Company, the Escrow
Agent may apply to a court of competent jurisdiction in the State of New York
for appointment of a successor Escrow Agent, and to deposit the Company
Documents and Subscriber Documents with the clerk of any such court.
(e) The Escrow Agent does not have and will not have any interest in the
Company Documents and Subscriber Documents, but is serving only as escrow agent,
having only possession thereof. The Escrow Agent shall not be liable for any
loss resulting from the making or retention of any investment in accordance with
this Escrow Agreement.
79
(f) This Agreement sets forth exclusively the duties of the Escrow Agent
with respect to any and all matters pertinent thereto and no implied duties or
obligations shall be read into this Agreement.
(g) The Escrow Agent shall be permitted to act as counsel for the
Subscriber in any dispute as to the disposition of the Company Documents and
Subscriber Documents, in any other dispute between the Subscriber and Company,
whether or not the Escrow Agent is then holding the Company Documents and
Subscriber Documents and continues to act as the Escrow Agent hereunder.
(h) The provisions of this Section 4.1 shall survive the resignation of
the Escrow Agent or the termination of this Agreement.
4.2. Dispute Resolution: Judgments. Resolution of disputes arising under
this Agreement shall be subject to the following terms and conditions:
(a) If any dispute shall arise with respect to the delivery, ownership,
right of possession or disposition of the Company Documents and Subscriber
Documents, or if the Escrow Agent shall in good faith be uncertain as to its
duties or rights hereunder, the Escrow Agent shall be authorized, without
liability to anyone, to (i) refrain from taking any action other than to
continue to hold the Company Documents and Subscriber Documents pending receipt
of a Joint Instruction from the Subscriber and Company, or (ii) deposit the
Company Documents and Subscriber Documents with any court of competent
jurisdiction in the State of New York, in which event the Escrow Agent shall
give written notice thereof to the Subscriber and the Company and shall
thereupon be relieved and discharged from all further obligations pursuant to
this Agreement. The Escrow Agent may, but shall be under no duty to, institute
or defend any legal proceedings which relate to the Company Documents and
Subscriber Documents. The Escrow Agent shall have the right to retain counsel if
it becomes involved in any disagreement, dispute or litigation on account of
this Agreement or otherwise determines that it is necessary to consult counsel.
(b) The Escrow Agent is hereby expressly authorized to comply with and
obey any Court Order. In case the Escrow Agent obeys or complies with a Court
Order, the Escrow Agent shall not be liable to the Subscriber and Company or to
any other person, firm, corporation or entity by reason of such compliance.
ARTICLE V
GENERAL MATTERS
5.1. Termination. This escrow shall terminate upon the release of all of
the Company Documents and Subscriber Documents or at any time upon the agreement
in writing of the Subscriber and Company.
5.2. Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
80
(a) If to the Company, to:
iSECUREtrac, Corp.
0000 Xxxxx 000xx Xxxxxx, Xxxxx 000
Xxxxx, XX 00000
Attn: Xxxxxx X. Xxxxxxx, Xx., CEO and President
Fax: (000) 000-0000
With a copy by telecopier only to:
Xxxx Xxxxx, Esq.
c/o iSECUREtrac, Corp.
0000 Xxxxx 000xx Xxxxxx, Xxxxx 000
Xxxxx, XX 00000
Fax: (000) 000-0000
(b) If to the Subscribers, to: the addresses and fax numbers listed on Schedule
A hereto
(c) If to the Broker, to:
Xxxxxxx.xxx, Inc.
000 Xxxxx Xxxxx Xxxxxx Xxxx, 0xx Xxxxx
Xxxxxxxxxx, XX 00000
Attn: Xxxx X. Xxxxxxx
Fax: (000) 000-0000
(d) If to the Escrow Agent, to:
Grushko & Xxxxxxx, P.C.
000 Xxxxx Xxxxxx, Xxxxx 0000
Xxx Xxxx, Xxx Xxxx 00000
Fax: 000-000-0000
or to such other address as any of them shall give to the others by notice made
pursuant to this Section 5.2.
5.3. Interest. The Escrowed Payment shall not be held in an interest
bearing account nor will interest be payable in connection therewith. In the
event the Escrowed Payment is deposited in an interest bearing account, each
Subscriber shall be entitled to receive its pro rata portion of any accrued
interest thereon, but only if the Escrow Agent receives from such Subscriber the
Subscriber's United States taxpayer identification number and other requested
information and forms.
5.4. Assignment; Binding Agreement. Neither this Agreement nor any right
or obligation hereunder shall be assignable by any party without the prior
written consent of the other parties hereto. This Agreement shall enure to the
benefit of and be binding upon the parties hereto and their respective legal
representatives, successors and assigns.
81
5.5. Invalidity. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal, or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the parties
hereto shall be enforceable to the fullest extent permitted by law.
5.6. Counterparts/Execution. This Agreement may be executed in any number
of counterparts and by different signatories hereto on separate counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument. This Agreement
may be executed by facsimile transmission and delivered by facsimile
transmission.
5.7. Agreement. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
iSECUREtrac, Corp.
the "Company"
By:
--------------------------
----------------------------
(Print Name of Subscriber)
----------------------------
(Signature of Subscriber)
ESCROW AGENT:
---------------------------
GRUSHKO & XXXXXXX, P.C.
82
SCHEDULE A TO FUNDS ESCROW AGREEMENT
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SUBSCRIBER PURCHASE PRICE and A WARRANTS B WARRANTS
PRINCIPAL AMOUNT OF NOTE
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83
[FORM OF LEGAL OPINION]
May , 2004 ---- TO THE SUBSCRIBERS LISTED ON SCHEDULE A HERETO:
We have acted as counsel to iSECUREtrac, Corp., a Delaware corporation
(the "Company") in connection with the offer and sale by the Company of shares
of the Company's $.001 par value common stock ("Common Stock") and issuance of A
and B common stock purchase warrants to purchase shares of Common Stock
(collectively "Warrants") in the amounts set forth on Schedule A, to the
Subscribers identified thereto, pursuant to the exemption from registration
under the Securities Act of 1933, as amended (the "Act) as set forth in
Regulation D ("Regulation D") promulgated thereunder. Capitalized terms used
herein and not otherwise defined shall have the meaning assigned to them in the
subscription agreement (the "Agreement") by and between the Company and
(Subscriber) (the "Purchaser") entered into at or about the date hereof. The
Agreement, and the agreements described below are sometimes hereinafter referred
to collectively as the "Documents".
In connection with the opinions expressed herein, we have made such
examination of law as we considered appropriate or advisable for purposes
hereof. As to matters of fact material to the opinions expressed herein, we have
relied, with your permission, upon the representations and warranties as to
factual matters contained in and made by the Company and the Purchaser pursuant
to the Documents and upon certificates and statements of certain government
officials and of officers of the Company as described below. We have also
examined originals or copies of certain corporate documents or records of the
Company as described below:
(a) Form of Agreement
(b) Form of Common Stock Certificate
(c) Form of A Warrant
(d) Form of B Warrant
(e) Form of Broker's Warrant
(f) Funds Escrow Agreement
(h) Certificate of Incorporation of the Company (i) Bylaws of the
Company
(j) Minutes of the action of the Company's Board of Directors,
including unanimous Board of Directors approval of the
Documents, a copy of which is annexed hereto.
In rendering this opinion, we have, with your permission, assumed: (a) the
authenticity of all documents submitted to us as originals; (b) the conformity
to the originals of all documents submitted to us as copies; (c) the genuiness
of all signatures; (d) the legal capacity of natural persons; (e) the truth,
accuracy and completeness of the information, factual matters, representations
and warranties contained in all of such documents; (f) the due authorization,
execution and delivery of all such documents by Subscribers, and the legal,
valid and binding effect thereof on Subscribers; and (g) that the Company and
the Purchasers will act in accordance with their respective representations and
warranties as set forth in the Documents.
We are members of the bar of the State of Delaware and New York. We
express no opinion as to the laws of any jurisdiction other than Delaware, New
York and the federal laws of the United States of America. We express no opinion
with respect to the effect or application of any other laws. Special rulings of
authorities administering any of such laws or opinions of other counsel have not
been sought or obtained by us in connection with rendering the opinions
expressed herein.
84
1. The Company and each of its subsidiaries is duly incorporated, validly
existing and in good standing in the states of their incorporation; have
qualified to do business in each state where required unless the failure to do
so would not have a material impact in the Company's operations; and have the
requisite corporate power and authority to conduct their business, and to own,
lease and operate their properties.
2. The Company has the requisite corporate power and authority to execute,
deliver and perform its obligations under the Documents. The Documents, and the
issuance of the Common Stock and Warrants and the reservation and issuance of
Common Stock issuable upon exercise of the Warrants ("Warrant Shares") have been
duly approved by the Board of Directors of the Company, and no further consent
or authorization of the Company or Board of Directors or stockholders is
required.
3. The execution, delivery and performance of the Documents by the Company
and the consummation of the transactions contemplated thereby, will not, with or
without the giving of notice or the passage of time or both:
(a) Violate the provisions of the Certificate of Incorporation or
bylaws of the Company; or
(b) Conflict with, or constitute a material default (or an event
that with notice or lapse of time or both would become a default) under, require
a consent under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture, instrument
or any "lock-up", refusal or similar provision of any underwriting or similar
agreement to which the Company is a party; or
(c) Result in a violation of any federal or state law, rule or
regulation or any rule or regulation of the Principal Market applicable to the
Company or by which any property or asset of the Company is bound or affected,
except for such violations as would not, individually or in the aggregate, have
a material adverse effect.
4. The Documents constitute the valid and legally binding obligations of
the Company and are enforceable against the Company in accordance with their
respective terms.
5. The issuance of the Common Shares, the Warrants (and Warrant Shares
upon exercise thereof) in accordance with the Subscription Agreement will be
exempt from registration under the Securities Act of 1933, as amended. When so
issued, the Warrants, Warrant Shares and Common Shares will be duly and validly
issued, fully paid and nonassessable, and free of any liens, encumbrances and
preemptive or similar rights contained in the Company's Certificate of
Incorporation or Bylaws or, to our knowledge, in any agreement to which the
Company is party.
6. The Company has either obtained the approval of the transactions
described in the Documents from the OTC Bulletin Board or no such approval is
required.
7. The Company and its Board of Directors have taken all necessary action,
if any, in order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Company's Certificate of
Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Subscribers as a result
of the Subscribers and the Company fulfilling their obligations or exercising
their rights under the Documents, including without limitation as a result of
the Company's issuance of the Securities and the Subscribers' ownership of the
Securities.
85
8. The authorized capital stock of the Company consists of ___________
shares of Common Stock, $_____ par value, of which ________ shares are issued
and outstanding and _________ shares of Preferred Stock, $______ par value, of
which _______ shares are issued and outstanding.
9. To our knowledge, the Company is not a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality.
Our opinions expressed above are specifically subject to the following
limitations, exceptions, qualifications and assumptions:
A. The effect of bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting the relief of debtors or the rights
and remedies of creditors generally, including without limitation the effect of
statutory or other law regarding fraudulent conveyances and preferential
transfers.
B. Limitations imposed by state law, federal law or general equitable
principles upon the specific enforceability of any of the remedies, covenants or
other provisions of any applicable agreement and upon the availability of
injunctive relief or other equitable remedies, regardless of whether enforcement
of any such agreement is considered in a proceeding in equity or at law.
C. This opinion letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, including the
General Qualifications and the Equitable Principles Limitation, and this opinion
letter should be read in conjunction therewith.
This opinion is rendered as of the date first written above, is solely for
your benefit in connection with the Agreement and may not be relief upon or used
by, circulated, quoted, or referred to nor may any copies hereof by delivered to
any other person without our prior written consent. We disclaim any obligation
to update this opinion letter or to advise you of facts, circumstances, events
or developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinions expressed herein.
Very truly yours,
86
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO ISECURETRAC, CORP. THAT SUCH
REGISTRATION IS NOT REQUIRED.
CONVERTIBLE NOTE
FOR VALUE RECEIVED, ISECURETRAC, CORP., a Delaware corporation
(hereinafter called "Borrower"), hereby promises to pay to
___________________________________________,
_________________________________________________________ (the "Holder")
or order, without demand, the sum of __________________________________
Dollars ($___________), with simple interest accruing at the annual rate
of 4%, on May ____, 2006 (the "Maturity Date").
This Note has been entered into pursuant to the terms of a subscription
agreement between the Borrower and the Holder, dated of even date herewith (the
"Subscription Agreement"), and shall be governed by the terms of such
Subscription Agreement. Unless otherwise separately defined herein, all
capitalized terms used in this Note shall have the same meaning as is set forth
in the Subscription Agreement. The following terms shall apply to this Note:
ARTICLE I
GENERAL PROVISIONS
1.1 Payment Grace Period. The Borrower shall have a ten (10) day grace
period to pay any monetary amounts due under this Note, after which grace period
a default interest rate of fifteen percent (15%) per annum shall apply to the
amounts owed hereunder.
1.2 Conversion Privileges. The Conversion Privileges set forth in Article
II shall remain in full force and effect immediately from the date hereof and
until the Note is paid in full regardless of the occurrence of an Event of
Default. The Note shall be payable in full on the Maturity Date, unless
previously converted into Common Stock in accordance with Article II hereof;
provided, that if an Event of Default has occurred (whether or not such Event of
Default is continuing), the Borrower may not pay this Note on or after the
Maturity Date, without the consent of the Holder.
1.3 Interest Rate. Simple interest payable on this Note shall accrue at
the annual rate of four percent (4%) and be payable upon each Conversion,
January 1, 2005 and semi-annually thereafter, and on the Maturity Date,
accelerated or otherwise, when the principal and remaining accrued but unpaid
interest shall be due and payable, or sooner as described below.
87
ARTICLE II
CONVERSION RIGHTS
The Holder shall have the right to convert the principal due under this
Note into Shares of the Borrower's Common Stock, $.001 par value per share
("Common Stock") as set forth below.
2.1. Conversion into the Borrower's Common Stock.
(a) The Holder shall have the right from and after the date of the
issuance of this Note and then at any time until this Note is fully paid, to
convert any outstanding and unpaid principal portion of this Note, and accrued
interest, at the election of the Holder (the date of giving of such notice of
conversion being a "Conversion Date") into fully paid and nonassessable shares
of Common Stock as such stock exists on the date of issuance of this Note, or
any shares of capital stock of Borrower into which such Common Stock shall
hereafter be changed or reclassified, at the conversion price as defined in
Section 2.1(b) hereof (the "Conversion Price"), determined as provided herein.
Upon delivery to the Borrower of a Notice of Conversion as described in Section
7 of the Subscription Agreement of the Holder's written request for conversion,
Borrower shall issue and deliver to the Holder within five (5) business days
from the Conversion Date ("Delivery Date") that number of shares of Common Stock
for the portion of the Note converted in accordance with the foregoing. At the
election of the Holder, the Borrower will deliver accrued but unpaid interest on
the Note in the manner provided in Section 1.3 through the Conversion Date
directly to the Holder on or before the Delivery Date (as defined in the
Subscription Agreement). The number of shares of Common Stock to be issued upon
each conversion of this Note shall be determined by dividing that portion of the
principal of the Note and interest to be converted, by the Conversion Price.
(b) Subject to adjustment as provided in Section 2.1(c) hereof, the
Conversion Price per share shall be $0.22 ("Maximum Base Price").
(c) The Maximum Base Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 2.1(a),
shall be subject to adjustment from time to time upon the happening of certain
events while this conversion right remains outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time
shall consolidate with or merge into or sell or convey all or substantially all
its assets to any other corporation, this Note, as to the unpaid principal
portion thereof and accrued interest thereon, shall thereafter be deemed to
evidence the right to purchase such number and kind of shares or other
securities and property as would have been issuable or distributable on account
of such consolidation, merger, sale or conveyance, upon or with respect to the
securities subject to the conversion or purchase right immediately prior to such
consolidation, merger, sale or conveyance. The foregoing provision shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such securities of such
successor or purchaser after any such consolidation, merger, sale or conveyance.
B. Reclassification, etc. If the Borrower at any time shall,
by reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid principal portion thereof and accrued interest thereon, shall thereafter
be deemed to evidence the right to purchase an adjusted number of such
securities and kind of securities as would have been issuable as the result of
such change with respect to the Common Stock immediately prior to such
reclassification or other change.
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C. Stock Splits, Combinations and Dividends. If the shares of Common Stock
are subdivided or combined into a greater or smaller number of shares of Common
Stock, or if a dividend is paid on the Common Stock in shares of Common Stock,
the Conversion Price shall be proportionately reduced in case of subdivision of
shares or stock dividend or proportionately increased in the case of combination
of shares, in each such case by the ratio which the total number of shares of
Common Stock outstanding immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.
D. Share Issuance. So long as this Note is outstanding, if the Borrower
shall issue any Common Stock except for the Excepted Issuances (as defined in
the Subscription Agreement), prior to the complete conversion of this Note for a
consideration less than the Conversion Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Conversion Price shall be reduced to such other lower issue price. For purposes
of this adjustment, the issuance of any security or debt instrument of the
Borrower carrying the right to convert such security or debt instrument into
Common Stock or of any warrant, right or option to purchase Common Stock shall
result in an adjustment to the Conversion Price upon the issuance of the
above-described security, debt instrument, warrant, right, or option. The
reduction of the Conversion Price described in this paragraph is in addition to
the other rights of the Holder described in the Subscription Agreement.
E. For purposes of Section 2.1(c)(D) above, Fair Market Value of a share
of Common Stock as of a particular date (the "Determination Date") shall mean
the Fair Market Value of a share of the Borrower's Common Stock. Fair Market
Value of a share of Common Stock as of a Determination Date shall mean:
(i) If the Borrower's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, the NASDAQ SmallCap Market or the
American Stock Exchange, Inc., then the closing or last sale price,
respectively, reported for the last business day immediately preceding the
Determination Date.
(ii) If the Borrower's Common Stock is not traded on an
exchange or on the NASDAQ National Market System, the NASDAQ SmallCap Market or
the American Stock Exchange, Inc., but is traded in the over-the-counter market,
then the mean of the closing bid and asked prices reported for the last business
day immediately preceding the Determination Date.
(iii) Except as provided in clause (iv) below, if the
Borrower's Common Stock is not publicly traded, then as the Holder and the
Borrower agree or in the absence of agreement by arbitration in accordance with
the rules then standing of the American Arbitration Association, before a single
arbitrator to be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided.
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(iv) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Borrower's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event of
such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (iv) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
(d) Whenever the Conversion Price is adjusted pursuant to Section 2.1(c)
above, the Borrower shall promptly deliver to the Holder a notice setting forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(e) During the period the conversion right exists, Borrower will reserve
from its authorized and unissued Common Stock a sufficient number of shares to
provide for the issuance of Common Stock upon the full conversion of this Note.
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable. Borrower agrees that its issuance of this
Note shall constitute full authority to its officers, agents, and transfer
agents who are charged with the duty of executing and issuing stock certificates
to execute and issue the necessary certificates for shares of Common Stock upon
the conversion of this Note.
(f) The terms of this Note are modifiable by the Holder pursuant to but
not limited to Section 12(c) of the Subscription Agreement.
2.2 Method of Conversion. This Note may be converted by the Holder in
whole or in part as described in Section 2.1(a) hereof and the Subscription
Agreement. Upon partial conversion of this Note, a new Note containing the same
date and provisions of this Note shall, at the request of the Holder, be issued
by the Borrower to the Holder for the principal balance of this Note and
interest which shall not have been converted or paid.
2.3 Maximum Conversion. The Holder shall not be entitled to convert on a
Conversion Date that amount of the Note in connection with that number of shares
of Common Stock which would be in excess of the sum of (i) the number of shares
of Common Stock beneficially owned by the Holder and its affiliates on a
Conversion Date, (ii) any Common Stock issuable in connection with the
unconverted portion of the Note, and (iii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the determination
of this provision is being made on a Conversion Date, which would result in
beneficial ownership by the Holder and its affiliates of more than 9.99% of the
outstanding shares of Common Stock of the Borrower on such Conversion Date. For
the purposes of the provision to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to
the foregoing, the Holder shall not be limited to aggregate conversions of only
9.99% and aggregate conversion by the Holder may exceed 9.99%. The Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section 2.3 will limit any conversion hereunder and to the extent that
the Holder determines that the limitation contained in this Section applies, the
determination of which portion of the Notes are convertible shall be the
responsibility and obligation of the Holder. The Holder may void the conversion
limitation described in this Section 2.3 upon and effective after 61 days prior
written notice to the Borrower. The Holder may allocate which of the equity of
the Borrower deemed beneficially owned by the Holder shall be included in the
9.99% amount described above and which shall be allocated to the excess above
9.99%.
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2.4 Mandatory Conversion. Provided an Event of Default as described in
this Note has not occurred, then the Borrower shall have the option to
mandatorily convert the outstanding principal amount of this Note upon ten (10)
days notice (such tenth day being the "Mandatory Conversion Date") to the Holder
of this Note ("Mandatory Conversion Notice"). A Mandatory Conversion Notice may
be given by the Borrower only within ten trading days after the Common Stock has
had a closing price as reported for the Principal Market (as defined in the
Subscription Agreement) of not less than one hundred and seventy-five percent
(175%) of the Conversion Price for ten (10) consecutive trading days. Unless
otherwise agreed to by the Holder of this Note, a Mandatory Redemption Notice
must be given to all Holders who hold Notes similar to this Note (in terms of
Conversion Price and other principal terms) issued on or about the same date as
this Note, in proportion to the amounts of Common Stock which may be purchased
by the respective Holders in accordance with the respective Notes held by each.
The Mandatory Conversion Date shall be deemed the Delivery Date and the Holder
shall have all of the rights of the Holder vis-a-vis the Mandatory Conversion
Date as if such date were the Delivery Date.
ARTICLE III
EVENT OF DEFAULT
The occurrence of any of the following events of default ("Event of
Default") shall, at the option of the Holder hereof, make all sums of principal
and interest then remaining unpaid hereon and all other amounts payable
hereunder immediately due and payable, upon demand, without presentment, or
grace period, all of which hereby are expressly waived, except as set forth
below:
3.1 Failure to Pay Principal or Interest. The Borrower fails to pay any
installment of principal, interest or other sum due under this Note when due and
such failure continues for a period of ten (10) days after the due date. The ten
(10) day period described in this Section 3.1 is the same ten (10) day period
described in Section 1.1 hereof.
3.2 Breach of Covenant. The Borrower breaches any material covenant or
other term or condition of the Subscription Agreement or this Note in any
material respect and such breach, if subject to cure, continues for a period of
ten (10) business days after written notice to the Borrower from the Holder.
3.3 Breach of Representations and Warranties. Any material representation
or warranty of the Borrower made herein, in the Subscription Agreement, or in
any agreement, statement or certificate given in writing pursuant hereto or in
connection therewith shall be false or misleading in any material respect as of
the date made and the Closing Date.
3.4 Receiver or Trustee. The Borrower shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or such
a receiver or trustee shall otherwise be appointed.
3.5 Judgments. Any money judgment, writ or similar final process shall be
entered or filed against Borrower or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a period
of forty-five (45) days.
3.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law,
or the issuance of any notice in relation to such event, for the relief of
debtors shall be instituted by or against the Borrower and if instituted against
Borrower are not dismissed within 45 days of initiation.
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3.7 Delisting. Delisting of the Common Stock from the OTC Bulletin Board
("OTCBB") or such other principal exchange on which the Common Stock is listed
for trading; failure to comply with the requirements for continued listing on
the OTCBB for a period of three consecutive trading days; or notification from
the OTCBB or any Principal Market that the Borrower is not in compliance with
the conditions for such continued listing on the OTCBB or other Principal
Market.
3.8 Stop Trade. An SEC or judicial stop trade order or Principal Market
trading ---------- suspension that lasts for five or more consecutive trading
days.
3.9 Failure to Deliver Common Stock or Replacement Note. Borrower's
failure to timely deliver Common Stock to the Holder pursuant to and in the form
required by this Note and Sections 7 and 11 of the Subscription Agreement, or,
if required, a replacement Note.
3.10 Non-Registration Event. The occurrence of a Non-Registration Event as
described in Section 11.4 of the Subscription Agreement.
3.11 Cross Default. A default by the Borrower of a material term,
covenant, warranty or undertaking of any other agreement to which the Borrower
and Holder are parties, or the occurrence of a material event of default under
any such other agreement, in each case, which is not cured after any required
notice and/or cure period.
ARTICLE IV
MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of
Holder hereof in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
4.2 Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Borrower to: iSECUREtrac, Corp.,
0000 Xxxxx 000xx Xxxxxx, Xxxxx 000, Xxxxx, XX 00000, Attn: Xxxxxx X. Xxxxxxx,
Xx., CEO and President, telecopier: (000) 000-0000, with a copy by telecopier
only to: Xxxx Xxxxx, Esq., c/o iSECUREtrac, Corp., 0000 Xxxxx 000xx Xxxxxx,
Xxxxx 000, Xxxxx, XX 00000, telecopier: (000) 000-0000, and (ii) if to the
Holder, to the name, address and telecopy number set forth on the front page of
this Note, with a copy by telecopier only to Grushko & Xxxxxxx, P.C., 000 Xxxxx
Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, telecopier number: (000) 000-0000.
92
4.3 Amendment Provision. The term "Note" and all reference thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented.
4.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns.
4.5 Cost of Collection. If default is made in the payment of this Note,
Borrower shall pay the Holder hereof reasonable costs of collection, including
reasonable attorneys' fees.
4.6 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. Both parties and the individual
signing this Agreement on behalf of the Borrower agree to submit to the
jurisdiction of such courts. The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs.
4.7 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
4.8 Redemption. This Note may not be redeemed or paid without the consent
of the Holder.
4.9 Shareholder Status. The Holder shall not have rights as a shareholder
of the Borrower with respect to unconverted portions of this Note. However, the
Holder will have the right of a shareholder of the Borrower with respect to the
Shares of Common Stock to be received after delivery by the Holder of a
Conversion Notice to the Borrower.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
by an authorized officer as of the ____ day of May, 2004.
ISECURETRAC, CORP.
By:
------------------------
Name:
Title:
WITNESS:
--------------------------------------
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NOTICE OF CONVERSION
(To be executed by the Registered Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Note issued by ISECURETRAC, CORP. on May
____, 2004 into Shares of Common Stock of ISECURETRAC, CORP. (the "Borrower")
according to the conditions set forth in such Note, as of the date written
below.
Date of Conversion:_____________________________________________________________
Conversion Price:_______________________________________________________________
Shares To Be Delivered:_________________________________________________________
Signature:______________________________________________________________________
Print Name:_____________________________________________________________________
Address:________________________________________________________________________
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