-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IGT6DTzqIavYKCNMf9ZMRGz6dil4NTDJjeqpK65clBZuuZTmDKvSKfinxvgTYcCk z2Bw9uUoLhnSgtfz5/kYrA== 0000892569-99-002497.txt : 19990923 0000892569-99-002497.hdr.sgml : 19990923 ACCESSION NUMBER: 0000892569-99-002497 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19990922 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN TELECOMMUNICATIONS CORP CENTRAL INDEX KEY: 0000722572 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 953733534 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-87551 FILM NUMBER: 99715140 BUSINESS ADDRESS: STREET 1: 733 LAKEFIELD RD CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 BUSINESS PHONE: 8053738688 MAIL ADDRESS: STREET 1: 733 LAKEFIELD ROAD CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 FORMER COMPANY: FORMER CONFORMED NAME: ABM COMPUTER SYSTEMS DATE OF NAME CHANGE: 19870317 FORMER COMPANY: FORMER CONFORMED NAME: AUTOMATED BUSINESS MACHINES INC DATE OF NAME CHANGE: 19830802 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FRANKLIN TELECOMMUNICATIONS CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 3670 95-3733534 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361 (805) 373-8688 ADDRESS AND TELEPHONE NUMBER, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) FRANK W. PETERS 733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361 (805) 373-8688 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) COPY TO: ROBERT J. ZEPFEL, ESQ. HADDAN & ZEPFEL LLP 4675 MACARTHUR COURT, SUITE 710 NEWPORT BEACH, CALIFORNIA 92660 (949) 752-6100 APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Amendment to Registration Statement is declared effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- Title of each Proposed Proposed Class of Maximum Maximum Securities Securities Offering Aggregate Amount of to be to be Price Per Offering Registration Registered Registered Unit Price Fee ------------ ---------- --------- ----------- ------------ Common Stock(1) 4,264,736 $2.81 $11,983,908 $3,331.52
2 (1) Pursuant to Rule 416 under the Securities Act of 1933, there are also being registered such indeterminate number of additional shares of common stock as may be issuable upon the exercise of the common stock purchase warrants described herein pursuant to the antidilution provisions thereof. The proposed maximum offering price per share and maximum aggregate offering price for the shares being registered hereby is calculated in accordance with Rule 457(c) under the Securities Act. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of l933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 3 PROSPECTUS 4,264,736 SHARES FRANKLIN TELECOMMUNICATIONS CORP. COMMON STOCK These shares of common stock are being offered by Crescent International Ltd., one of our current shareholders. We issued the shares, or reserved the shares for issuance, to Crescent International, Ltd. in connection with investments made in the Company in August and September 1999. The selling shareholder may sell the shares covered by this Prospectus on the American Stock Exchange and in ordinary brokerage transactions, in negotiated transactions or otherwise, at prevailing market prices at the time of sale or at negotiated prices, and may engage a broker or dealer to sell the shares. For additional information on the selling shareholder's possible methods of sale, you should refer to the section of this prospectus entitled "Plan of Distribution." The selling shareholder may be deemed to be an "underwriter" within the meaning of the Securities Act in connection with the sale of its shares. We will not receive any proceeds from the sale of the shares, but will bear the costs relating to the registration of the shares. Our common stock is traded on American Stock Exchange under the symbol "FCM." On September 20, 1999, the closing price for our common stock was $2.81 per share. The shares offered in this prospectus involve a high degree of risk. You should carefully consider the "Risk Factors" beginning on page 2 in determining whether to purchase shares of our common stock. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS SEPTEMBER __, 1999. 1 4 You should rely only on information contained or incorporated by reference in this prospectus. See "Information Incorporated by Reference" on page 10. Neither we nor the selling shareholder have authorized any other person to provide you with information different from that contained in this prospectus. The information contained in this prospectus is correct only as of the date on the cover, regardless of the date this prospectus was delivered to you or the date on which you acquired any of the shares. FORWARD-LOOKING STATEMENTS This prospectus contains "forward-looking statements." These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, and the adequacy of our available cash resources. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described above and elsewhere in this prospectus. OUR BUSINESS Franklin Telecommunications Corp. designs, builds and sells Internet Telephony equipment and other high speed communications products and subsystems. Our products are marketed through Original Equipment Manufacturers ("OEMs") and distributors, as well as directly to end users. In addition, through our majority-owned subsidiary, FNet Corp. we provide Internet Protocol telephony services and Internet access to businesses and individuals. Franklin was formed in 1981. Our address is 733 Lakefield Road, Westlake Village, California 91361 and our telephone number is (805) 373-8688. RISK FACTORS You should carefully consider the following factors and other information in this prospectus before deciding to invest in our shares. You should not purchase any of the shares unless you can afford a complete loss of your investment. WE HAVE A HISTORY OF OPERATING LOSSES. We have incurred operating losses in each of our last three fiscal years, and have a significant accumulated deficit. Our operating losses have resulted from a number of factors, including reduced demand for our original hardware products, higher expenses for the development of new hardware products and for installing the infrastructure for the Internet telephony and Internet services business of FNet, and increasing sales and marketing expenses to promote new products and services. Much of our operating capital during this period has been derived from equity financings, rather than from operations. We have been dependent on these equity financings to sustain our ongoing operations. Thus, an investment in our shares is highly speculative and we cannot assure you that you will realize any return on your investment or that you will not lose their entire investment. OUR SUBSIDIARY, FNET, POSES CERTAIN RISKS. Several year ago we organized FNet, which offers Internet Protocol telephony services and Internet access. We have devoted significant resources and management time to the organization and development of FNet. We currently own approximately 70% of the common stock of FNet, with the balance owned by members of management, including Franklin=s CEO, and certain investors. We believe that the growth of FNet will benefit Franklin through increased demand for our communications hardware as well as the value of our interest in FNet. However, FNet may adversely affect our principal 2 5 business in the short term due to competing demands on our resources and management. Also, the fact that members of Franklin's management, including our CEO, hold a direct interest in FNet may pose conflicts of interest. FNet is a relatively new business venture, and it can be expected that its operations will be subject to many of the expenses, delays and risks inherent in the establishment of a new business. WE DEPEND ON SEVERAL MAJOR CUSTOMERS. Our sales have been concentrated in a relatively small number of customers, who account for a significant portion of our revenues. During the fiscal year ended June 30, 1999, a single customer represented 76% of sales. The loss of any major customer could adversely affect the Company. The Company has no ongoing supply contracts with any of its major customers. WE MAY HAVE DIFFICULTIES IN MANAGING OUR GROWTH. Our growth has placed a significant strain on our personnel and systems. To accommodate our current size and manage growth, we must improve our operational, financial and information systems, and expand, train and manage our employee base. This problem may be more serious if we acquire additional businesses, as each such business must then be integrated into our operations and systems. As we expand our customer base, we will experience greater demands on our network infrastructure, technical staff and resources. If such demand results in difficulties satisfying the needs of our customers, it could negatively affect us by causing subscribers or potential subscribers to utilize competitive long distance telephone service providers and Internet service providers. We believe that our ability to provide timely access for customers, and adequate customer and technical support, will mainly depend on our ability to attract, train, integrate and retain qualified employees. IT IS LIKELY WE WILL REQUIRE ADDITIONAL CAPITAL. All of the proceeds of this offering will be received by the selling shareholder. While we may receive cash from the exercise of warrants covered by this Prospectus, we can't be sure that we will derive any specific amount from this offering. We may require additional capital to sustain our business as presently operated, and developments in our business and possible expansion into other markets could indicate that we need to raise additional capital. OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our quarterly operating results may vary significantly due to a variety of factors, including the availability and cost of materials and components, the introduction of new products, the timing of our marketing efforts, pricing pressures, general economic and industry conditions that affect customer demand, and other factors. OUR FUTURE GROWTH DEPENDS UPON AN INCREASE IN THE USE OF INTERNET PROTOCOL TELEPHONY AS A MEDIUM FOR VOICE COMMUNICATIONS. The Internet Protocol telephony business has little operating history, and is evolving rapidly. Until very recently, the sound quality of Internet telephony calls was poor, and the technology is still in the early stages of development. As the industry has grown, substantial improvements to sound quality have been made but technological impediments still need to be overcome. In addition, the capacity constraints of the public Internet network could hinder further development of Internet telephony if callers experience delays, errors in transmissions or other difficulties. We have attempted to reduce this risk by utilizing private leased lines, international private lines, Frame Relay lines and T-1 lines for voice traffic, while using the Internet primarily for fax and data traffic and only secondarily for voice traffic. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for our services are 3 6 subject to a high level of uncertainty and risk. In particular, the Internet must be accepted as a viable alternative to traditional telephony service. Customers that have already invested substantial resources in integrating traditional telephony service with their operations may be particularly reluctant or slow to adopt a new technology that makes their existing infrastructure obsolete. Because this market is new and evolving, it is difficult to predict the size of this market and its growth rate. If the Internet telephony market fails to develop, develops more slowly than we expect or becomes saturated with competitors, then our business, results of operations and financial condition will be materially adversely affected. OUR BUSINESS IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID TECHNOLOGICAL CHANGES. The internet telephony, data communications and telecommunications industry is extremely competitive. Our principal competitors in the manufacture of communications hardware are Lucent Technologies, Nokia, HyperCom, Clarent, Ascend Communications and Cisco Systems. Most of these companies have substantially greater marketing, financial, technical and field support resources. In addition, we could face strong competition from a number of established computer and telecommunications firms which may enter the market in the future. The fields of internet telephony and data communications are marked by rapid changes in technology, which can cause products to become obsolete over very short time frames. Thus, our performance will depend on our ability to develop and market new hardware products and services to meet changing technology, pricing considerations and other market factors. Our business could be severely impacted if we were to experience delays in developing new hardware products and services or enhancements. The market for internet telephony services has been extremely competitive, and is expected to be so for the foreseeable future. Many companies offer Internet telephony products and services, and many of these companies have a substantial presence in this market. Most of the current Internet telephony products permit voice communications over the Internet between two parties that are both connected to the Internet with sound-equipped personal computers and where both parties are using identical Internet telephony software products. Current product offerings include VocalTec Communications' Internet Phone, QuarterDeck's WebPhone and Microsoft's NetMeeting. In addition, a number of large telecommunications providers and equipment manufacturers, such as Cisco, Lucent, Northern Telecom and Dialogic, have announced that they intend to offer server-based products. These products are expected to allow voice communications over the Internet between parties using a personal computer and a telephone and between two parties using telephones. Cisco Systems has also taken a further step by recently acquiring two companies that produce devices that help Internet service providers transition voice and data traffic to cell and packet networks while maintaining traditional phone usage and infrastructure. Internet telephony service providers, such as ICG Communications, IPVoice.com, ITXC, RSL Communications (through its Delta Three subsidiary) and VIP Calling, route Internet telephony traffic to destinations on a worldwide basis. In addition, major long distance providers, such as AT&T, Deutsche Telekom, Frontier, MCI WorldCom, and Qwest Communications, as well as other major companies such as Motorola and Intel, have all entered or plan to enter the Internet telephony market. Many of our competitors are larger than and have substantially greater financial, distribution and marketing resources than we do. We cannot be certain that we will be able to compete successfully in the developing Internet telephony market. The entry of new participants from these categories and the potential entry of competitors from other categories (such as computer hardware manufacturers) would result in substantially greater competition. The ability of these competitors or others to bundle services and products with Internet connectivity services could place FNet at a significant competitive disadvantage. In addition, competitors in the telecommunications industry may be able to provide customers with reduced communications costs in connection with their long distance telephone and Internet access services, reducing the overall 4 7 cost of telephone and Internet access and significantly increasing pricing pressures on FNet. WE FACE PRICING PRESSURES, PARTICULARLY IN THE INTERNET TELEPHONY MARKET. The success of our current product and service offerings is based on our ability to provide discounted voice communications by taking advantage of cost savings achieved through Internet telephony. In recent years, the price of traditional domestic and international long distance calls has been declining. In response to these declines, many internet telephony providers have lowered the price of their service offerings. Should prices of traditional long distance calls decline to a point where we no longer have a price advantage over our competitors, we would lose a significant competitive advantage and would have to rely on factors other than price to differentiate our product and service offerings. If we fail to do so, our business could be materially adversely affected. OUR BUSINESS DEPENDS ON OUR NETWORK INFRASTRUCTURE AND CAPACITY, AND MAY BE SUBJECT TO SYSTEM FAILURE AND SECURITY RISKS The future success of FNet's business will depend on the capacity, reliability and security of its network infrastructure. FNet will be required to expand and improve this infrastructure as the number of customers and the amount and type of information its customers communicate over the Internet increases, and the means by which customers connect to the Internet evolve. Such expansion and improvement may require substantial financial, operational and managerial resources. Capacity constraints have occurred at many Internet Service Providers, both at the level of particular "points of presence" ("POPs") (affecting only customers attempting to use that particular POP) and in connection with system wide services (such as e-mail and news services, which can affect all customers). From time to time, FNet has experienced delayed delivery from suppliers of new telephone lines, modems, servers and other equipment used by FNet in providing its services. Any severe shortage of new telephone lines, modems, servers or other equipment could result in incoming access lines becoming full during peak times, causing busy signals for customers who are trying to connect to the Internet. Similar problems may occur if FNet is unable to expand the capacity of its various network, e-mail, World Wide Web and other servers quickly enough to keep pace with demand from our expanding customer base. If the capacity of such servers is exceeded, customers will experience delays when trying to use a particular service. Further, if FNet does not maintain sufficient capacity in its network connections, customers will experience a general slowdown of all services on the Internet. Any of these events could cause customers to terminate use of FNet's services. Accordingly, our business would be damaged if we failed to expand or enhance our network infrastructure on a timely basis, or failed to adapt it to an expanding customer base, changing customer requirements or evolving industry standards. FNet's operations are dependent on its ability to protect its telecommunications and computer equipment against damage from fire, earthquake, power loss, telecommunication failure and similar events. The occurrence of a natural disaster or another unanticipated problem at our headquarters and network hub or at POPs through which customers connect to the Internet could cause interruptions in the services provided by FNet. In addition, failure of FNet's telecommunications providers to provide the data communications capacity required by FNet as a result of a natural disaster, operational disruption or for any other reason could cause interruptions in the services provided by FNet. FNet's network infrastructure may be vulnerable to computer viruses and other similar disruptive problems caused by its customers, other Internet users or other third parties. Computer viruses and other problems could lead to interruptions, delays in or cessation of service to FNet's customers, as well as corruption of FNet's or its customers' computer systems. Inappropriate use of the Internet by third parties could also potentially jeopardize the security of confidential information stored in the computer systems of FNet or those of its customers, which may cause losses to FNet or its customers, or deter certain persons from using FNet's services. We expect that FNet's customers may increasingly use the Internet 5 8 for commercial transactions in the future. Any network malfunction or security breach could cause these transactions to be delayed, not completed or completed with compromised security. Alleviating problems caused by computer viruses or other inappropriate uses or security breaches may cause interruptions, delays or cessation in service to FNet's customers. Customers or others could assert claims of liability against us as a result of such events. FNet does not presently maintain redundant or backup Internet services or backbone facilities or other redundant computing and telecommunications facilities. OUR BUSINESS DEPENDS ON OUR ABILITY TO PROTECT OUR TECHNOLOGY. Our success will depend in part on protecting our proprietary technology. While we have patents covering certain of our products, we rely principally on copyright law for protection of our hardware and software designs, as well as trade secret law, confidentiality agreements and our technical abilities and responsiveness to the demands of customers to protect ours proprietary rights. THE TELECOMMUNICATIONS BUSINESS IS HEAVILY REGULATED, AND REGULATORY CHANGES COULD DISRUPT OUR BUSINESS. Some of our products are subject to regulations of the Federal Communications Commission. Certain regulations require that products which reside on a customer's premises and interconnect the public switched network meet certain standards to prevent harm to the network. Other regulations limit the levels of electromagnetic radiation which may emanate from an electronic device located on a customer's premises. We currently comply with these regulations and we foresee no problem in complying with these regulations in the future. The use of the Internet to provide telephone service is a recent market development. The Federal Communications Commission is considering whether to impose surcharges or additional regulations on certain providers of Internet telephony. In April of 1998 the FCC issued a report on the implementation of the universal service provisions of the Telecommunications Act. The report indicates that the FCC plans to examine the question of whether certain forms of "phone-to-phone" Internet telephony are information services or telecommunications services. The FCC noted that it did not have, as of the date of the Report, an adequate record on which to make a definitive pronouncement, but that the record suggested that certain forms of phone-to-phone Internet telephony appear to have the same functionality as non-Internet telecommunications services and lack the characteristics that would render them information services. If the FCC were to determine that certain services are subject to FCC regulation as telecommunications services, the FCC may require providers of Internet telephony services to make universal service contributions, pay access charges or be subject to traditional common carrier regulation. In addition, the FCC sets the access charges on traditional telephony traffic and if it reduces these access charges, the cost of traditional long distance telephone calls will probably be lowered, thereby decreasing our competitive pricing advantage. In September 1998, two regional Bell operating companies, U S WEST and BellSouth, advised Internet telephony providers that the regional companies would impose access charges on Internet telephony traffic. In addition, U S WEST has petitioned the FCC for a declaratory ruling that providers of interstate Internet telephony must pay federal access charges, and has petitioned the public utilities commissions of two states for similar rulings concerning payment of access charges for intrastate Internet telephone calls. It is not known whether these companies, U S WEST and BellSouth, will actually impose access charges or when such charges will become effective. If these companies succeed in imposing access charges that may reduce the cost savings of using Internet telephony as compared to traditional telephone service. The existence of such access charges could adversely affect the development of our Internet telephony business. In February 1999, the FCC adopted an order concerning payment of reciprocal compensation that provides support for a possible finding by the FCC that providers of Internet telephony must pay access charges for at least some portions of Internet telephony services. If the FCC were to make such a finding, the payment of access charges could adversely affect our business. Many of our competitors are 6 9 lobbying the FCC for the imposition of access charges on Internet telephony traffic. To our knowledge, there are currently no domestic and few foreign laws or regulations that prohibit voice communications over the Internet. State public utility commissions may retain jurisdiction to regulate the provision of intrastate Internet telephony services. A number of countries that currently prohibit competition in the provision of voice telephony have also prohibited Internet telephony. Other countries permit but regulate Internet telephony. If Congress, the FCC, state regulatory agencies or foreign governments begin to regulate Internet telephony, such regulation may interfere with our business. WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS. We anticipate that a substantial portion of FNet=s business will be based outside of the United States, and international expansion is a significant component of our strategy. We cannot assure you that we will be successful in expanding into additional international markets. In addition to the uncertainty regarding our ability to generate revenue from foreign operations and expand our international presence, there are certain risks inherent in conducting a telecommunications business on an international basis, including uncertain and changing legal and regulatory requirements, political instability, and subscriber fraud. AS AN INTERNET SERVICE PROVIDER, FNET MAY BE SUBJECT TO SPECIALIZED RISKS. The law relating to the liability of Internet Service Providers and online service companies for information carried on or disseminated through their networks has not yet been definitively established. Several private lawsuits seeking to impose such liability upon Internet Service Providers and online services companies are currently pending. Although no such claims have been asserted against FNet to date, there can be no assurance that such claims will not be asserted in the future, or if asserted, will not be successful. The Telecommunications Act imposes fines on any entity that knowingly (i) uses any interactive computer service or telecommunications device to send obscene or indecent material to minors; (ii) makes obscene or indecent material available to minors via an interactive computer service; or (iii) permits any telecommunications facility under such entity's control to be used for the purposes detailed above. As the law in this area develops, the potential imposition of liability upon FNet for information carried on and disseminated through its network could require it to implement measures to reduce its exposure to such liability. The implementation of such measures could require the expenditure of substantial resources or the discontinuation of certain service offerings. Any costs that are incurred as a result of such expenditure, contesting any such asserted claims or the imposition of liability could have a material adverse effect on FNet. Due to the increasing use of the Internet, it is possible that additional laws and regulations may be adopted with respect to the Internet covering issues such as content, user privacy, pricing, libel, intellectual property protection and infringement and technology export and other controls. Changes in the regulatory environment relating to the Internet services industry, including regulatory changes that directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition, could affect the Company. OUR NETWORK DEPENDS ON UNRELATED TELECOMMUNICATIONS CARRIERS. We depend on other telecommunications carriers to route our telephone traffic. All of the telephone calls made by FNet=s customers are connected at least in part through leased transmission facilities. In many of the foreign jurisdictions in which FNet conducts or plans to conduct business, the primary provider transmission facilities is a governmental telephone monopoly. Accordingly, we may be required to lease transmission capacity at artificially high rates from a single provider. These rates may prevent us from generating a profit on those calls. In addition, national telephone companies may not be required by law to allow us to lease necessary transmission lines. In any event, we may encounter delays in 7 10 negotiating leases and interconnection agreements, which would delay commencement of operations. In the United States, the providers of local exchange transmission facilities are generally the incumbent local exchange carriers, including the regional Bell operating companies. The permitted pricing of local exchange facilities in the United States is subject to uncertainties. The Federal Communications Commission issued an order requiring existing local exchange carriers to price those facilities at total element long-run incremental cost, and the United States Supreme Court recently upheld the FCC's jurisdiction to set a pricing standard for incumbent local exchange carrier facilities provided to competitors. However, the local exchange carriers could challenge the FCC's total element long-run incremental cost standard and, if they succeed, the result may be to increase the cost of local exchange carrier facilities obtained by us. Many of the international telephone calls made by our customers are transported via transmission facilities that we lease from our current and potential competitors. We lease facilities from local exchange carriers that are our competitors, such as the regional Bell operating companies. We generally lease lines on a fixed-cost basis. These include leases of transmission capacity for point-to-point circuits on a monthly or longer-term fixed-cost basis. OUR PRODUCTS AND SERVICES MAY BE SUBJECT TO RISKS RELATED TO THE YEAR 2000 PROBLEM. Many computer systems and software products are coded to understand only dates that have two digits for the relevant year. These systems and products need upgrading to accept four digit entries in order to distinguish 21st century dates from 20th century dates. Without upgrading, many computer applications could fail or create erroneous results beginning in the year 2000. We are conducting an assessment to ensure that our computer-related applications will not fail or create erroneous results as a result of these issues. The "Year 2000" problems of companies on the Internet generally could affect our systems or operations. SELLING SHAREHOLDER Crescent International, Ltd., the selling shareholder, acquired 1,932,368 shares of common stock (the "Shares"), and two warrants to purchase shares of common stock (the "Warrants") in August and September of 1999. The first Warrant is a warrant to purchase an indeterminate number of shares at an exercise price of $.01 per share. The number of shares is determined by reference to the market price of the Company's Common Stock on the date the registration statement of which this Prospectus is a part is declared effective, as compared to the purchase price for the shares. Thus, if the market price on the effective date exceeds the purchase price for the shares, the warrant effectively expires on that date. If the market price on the effective date is lower than the purchase price, then the warrant is exercisable to purchase a number of shares calculated so that the market value of the original shares plus the market value of the warrant shares equal the initial purchase price. The second warrant is a warrant to purchase up to 400,000 shares at an exercise price of $1.55 per share. This exercise price is subject to adjustment under certain circumstances in the event of stock splits, stock dividends, recapitalizations, reclassifications, and similar events. The resale of the Shares and the shares issuable upon exercise of the Warrants have been registered in the registration statement of which this Prospectus is a part. The following table sets forth certain information as of September 15, 1999, regarding the ownership of the Company's common stock by the selling shareholder and as adjusted to give effect to the sale of the shares offered in this Prospectus. The information relating to the shares owned by the selling shareholder prior to the offering and the number of shares being offered excludes the number of shares issuable upon exercise of the Warrants. 8 11
Ownership After Offering Shares if All Shares Offered Owned Prior Shares Being Hereby Are Sold Selling Shareholder to Offering Offered Shares Percent - ------------------- ----------- ------------ -------- ------- Crescent International Ltd. 1,932,368 1,932,368 -0- -0-
The selling shareholder and its officers and directors have not held any positions or office or had any other material relationship with the Company or any of its affiliates within the past three years. PLAN OF DISTRIBUTION The shares are being offered on behalf of the selling shareholder, and we will not receive any proceeds from the offering. The shares may be sold or distributed from time to time by the selling shareholder, or by pledgees, donees or transferees of, or other successors in interest to, the selling shareholder, directly to one or more purchasers (including pledgees) or through brokers, dealers or underwriters who may act solely as agent or may acquire such shares as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices, or at fixed prices, which may be subject to change. The sale of the shares may be effected through one or more of the following methods: (i) ordinary brokers' transactions, which may include long or short sales; (ii) transactions involving cross or block trades or otherwise on the American Stock Exchange; (iii) purchases by brokers, dealers or underwriters as principal and resale by such purchasers for their own accounts pursuant to this prospectus; (iv) "at the market" to or through market makers or into established trading markets, including direct sales to purchasers or sales effected through agents; and (v) any combination of the foregoing, or by any other legally available means. In addition, the selling shareholder may enter into hedging transactions with broker-dealers who may engage in short sales in the course of hedging the position they assume with the selling shareholder. The selling shareholder also may enter into option or other transactions with broker-dealers that require the delivery by such broker-dealers of the shares, which shares may be resold thereafter pursuant to this prospectus. We cannot be certain that all or any of the shares will be sold by the selling shareholder. Brokers, dealers, underwriters or agents participating in the sale of the shares as agents may receive compensation in the form of commissions, discounts or concessions from the selling shareholder and/or purchasers of the shares for whom such broker-dealers may act as agent, or to whom they may sell as principal, or both (which compensation to a particular broker-dealer may be less than or in excess of customary commissions). The selling shareholder and any broker-dealers or other persons who act in connection with the sale of the common stock may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission they receive and proceeds of any sale of such shares may be deemed to be underwriting discounts and commissions under the Securities Act. Neither the Company nor the selling shareholder can presently estimate the amount of such compensation. The Company knows of no existing arrangements between the selling shareholder and any other shareholder, broker, dealer, underwriter or agent relating to the sale or distribution of the shares. The selling shareholder and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, which provisions may limit the timing of purchases and sales of any of the shares by the selling shareholder or any other such persons. The foregoing may affect the marketability of the shares. We will pay substantially all of the expenses incidental to the registration, offering and sale of the shares to the public, other than any commissions or discounts of underwriters, broker-dealers or 9 12 agents. We and the selling shareholder have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. INFORMATION INCORPORATED BY REFERENCE AND OTHER AVAILABLE INFORMATION This prospectus is part of a Registration Statement on Form S-3 that we filed with the SEC. Certain information in the Registration Statement has been omitted from this prospectus in accordance with SEC rules. We file annual, quarterly and special reports and other information with the SEC. You may read and copy the Registration statement and any other document that we file at the SEC's public reference rooms located at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to you free of charge at the SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by reference" certain of our publicly-filed documents into this Prospectus, which means that information included in those documents is considered part of this Prospectus. Information that we file with the SEC subsequent to the date of this Prospectus will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until the selling shareholder has sold all the shares. The following documents filed with the SEC are incorporated by reference in this prospectus: (1) Our Annual Report on Form 10-K for the year ended June 30, 1999; and (2) The description of our common stock set forth under the caption "Description of Common Stock" in our Registration Statement on Form S-1 (File No. 333-24791) as originally filed with the Securities and Exchange Commission on April 9, 1997, or as subsequently amended (the "Registration Statement"). We will furnish without charge to you, on written or oral request, a copy of any or all of the documents incorporated by reference, other than exhibits to such documents. You should direct any requests for documents to Secretary, Franklin Telecommunications Corp, 733 Lakefield Road, Westlake Village, California 91361. The information relating to the Company contained in this prospectus is not comprehensive and should be read together with the information contained in the incorporated documents. EXPERTS The financial statements incorporated in this prospectus by reference from our Annual Report on Form 10-K for the year ended June 30, 1999, have been so incorporated in reliance on the report of Singer Lewak Goldstein & Greenbaum LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. LEGAL MATTERS Certain legal matters with respect to the legality under California law of the shares of Common Stock offered hereby will be passed upon for the Company by Haddan & Zepfel LLP, Newport Beach, California. 10 13 NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS
PAGE ---- Forward-Looking Statements............... 2 Our Business............................. 2 Risk Factors............................. 2 Selling Shareholder...................... 8 Plan of Distribution..................... 9 Information Incorporated by Reference and Other Available Information........ 10 Experts.................................. 10 Legal Matters............................ 10
4,264,736 SHARES FRANKLIN TELECOMMUNICATIONS CORP. COMMON STOCK PROSPECTUS September __, 1999 11 14 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses incurred or to be incurred by the Company in connection with the preparation and filing of this Registration Statement are estimated to be as follows: Printing and duplication expenses.......................... $ 7,000.00 Registration fee........................................... 3,331.52 Legal fees and expenses.................................... 5,000.00 Accounting fees and expenses............................... 2,000.00 Transfer Agent fees........................................ 300.00 Miscellaneous.............................................. 1,500.00 Total............................................ $19,131.52 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Bylaws provide that the Company may indemnify its officers and directors, and may indemnify its employees and other agents, to the fullest extent permitted by California law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to officers, directors or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. ITEM 16. EXHIBITS The following exhibits are filed with this Registration Statement:
EXHIBIT NUMBER DESCRIPTIONS ------- ------------ 3.1* Restated Articles of Incorporation of Franklin Telecommunications Corp. 3.2* Bylaws of Franklin Telecommunications Corp. 5.1 Opinion of Haddan & Zepfel LLP 10.1* Employment Agreement, dated March 1, 1993 between Franklin Telecommunications Corp. and Frank W. Peters.
12 15 10.2 Stock Purchase Agreement, dated August 30, 1999 between Registrant and Crescent International Ltd. 10.3 Warrant, dated August 30, 1999, issued To Crescent International Ltd. (Early Put Warrant) 10.4 Warrant, dated August 30, 1999, issued To Crescent International Ltd. (Incentive Warrant) 10.5 Registration Rights Agreement, dated August 30, 1999 between the Registrant and Crescent International Ltd. 10.6 Amendment to Stock Purchase Agreement, dated September 15, 1999 between Registrant and Crescent International Ltd. 10.7 Amendment to Registration Rights Agreement, dated September 15, 1999 between Registrant and Crescent International Ltd. 10.8 Letter Agreement, dated September 15, 1999 between Registrant and Crescent International Ltd. 23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP 23.2 Consent of Haddan & Zepfel LLP (included as part of Exhibit 5.1).
- ---------- *Incorporated by reference from Registrant's Registration Statement on Form S-1 (No. 333-24791), filed with the Commission on April 9, 1997, and incorporated herein by reference. Item 17. Undertakings. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any Prospectus required by Section l0(a)(3) of the Securities Act of l933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement, including (but not limited to) any addition or deletion of a managing underwriter. (2) That, for the purpose of determining any liability under the Securities Act of l933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 13 16 (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of l933 may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 14 17 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Westlake Village, State of California, on September 22, 1999. FRANKLIN TELECOMMUNICATIONS CORP. By /s/ FRANK W. PETERS ------------------------------------ Frank W. Peters President POWER OF ATTORNEY The registrant and each person whose signature appears below hereby authorizes the agent for service named in this Registration Statement, with full power to act alone, to file one or more amendments (including post-effective amendments) to this Registration Statement, which amendments may make such changes in this Registration Statement as such agent for service deems appropriate, and the Registrant and each such person hereby appoints such agent for service as attorney-in-fact, with full power to act alone, to execute in the name and in behalf of the Registrant and any such person, individually and in each capacity stated below, any such amendments to this Registration Statement. In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- (1) Principal Executive Officer /s/ FRANK W. PETERS Chief Executive Officer and a September 22, 1999 - ----------------------------------------------------- Director Frank W. Peters (2) Principal Financial and Accounting Officer /s/ THOMAS RUSSELL Chief Financial Officer and a September 22, 1999 - ----------------------------------------------------- Director Thomas Russell (3) Directors /s/ PETER S. BUSWELL President and a Director September 22, 1999 - ----------------------------------------------------- Peter S. Buswell /s/ ROBERT S. HARP Director September 22, 1999 - ----------------------------------------------------- Robert S. Harp /s/ HERB MITCHELL Director September 22, 1999 - ----------------------------------------------------- Herb Mitchell
15 18 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTIONS ------- ------------ 3.1* Restated Articles of Incorporation of Franklin Telecommunications Corp. 3.2* Bylaws of Franklin Telecommunications Corp. 5.1 Opinion of Haddan & Zepfel LLP 10.1* Employment Agreement, dated March 1, 1993 between Franklin Telecommunications Corp. and Frank W. Peters. 10.2 Stock Purchase Agreement, dated August 30, 1999 between Registrant and Crescent International Ltd. 10.3 Warrant, dated August 30, 1999, issued To Crescent International Ltd. (Early Put Warrant) 10.4 Warrant, dated August 30, 1999, issued To Crescent International Ltd. (Incentive Warrant) 10.5 Registration Rights Agreement, dated August 30, 1999 between the Registrant and Crescent International Ltd. 10.6 Amendment to Stock Purchase Agreement, dated September 15, 1999 between Registrant and Crescent International Ltd. 10.7 Amendment to Registration Rights Agreement, dated September 15, 1999 between Registrant and Crescent International Ltd. 10.8 Letter Agreement, dated September 15, 1999 between Registrant and Crescent International Ltd. 23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP 23.2 Consent of Haddan & Zepfel LLP (included as part of Exhibit 5.1).
- ---------- *Incorporated by reference from Registrant's Registration Statement on Form S-1 (No. 333-24791), filed with the Commission on April 9, 1997, and incorporated herein by reference. EX-5.1 2 OPINION OF HADDAN & ZEPFEL LLP 1 Exhibit 5.1 [LETTERHEAD OF HADDAN & ZEPFEL LLP] September 22, 1999 Franklin Telecommunications Corp. 733 Lakefield Road Westlake Village, California 91361 Dear Sirs: You have requested our opinion with respect to certain matters in connection with the filing by Franklin Telecommunications Corp. (the "Company") of a Registration Statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission, covering the registration of up to 4,264,736 shares of the Company's Common Stock, without par value (the "Shares"), for issuance pursuant to a Stock Purchase Agreement, dated as of August 30,1999 between the Company and Crescent International Ltd., as amended by an Amendment to Stock Purchase Agreement dated September 15, 1999 (the "Stock Purchase Agreement"), and upon exercise of Stock Purchase Warrants issued pursuant to the Stock Purchase Agreement (the "Warrants"). In connection with this opinion, we have examined and relied upon the Registration Statement, the Company's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, the Stock Purchase Agreement, as amended, the Warrants, and the originals or copies certified to our satisfaction of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. We have assumed the genuineness and authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies thereof and the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares, when sold and issued in accordance with the Stock Purchase Agreement, as amended, and the Warrants, are or will be validly issued, fully paid, and nonassessable shares of Common Stock of the Company. We consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Haddan & Zepfel LLP ------------------------------- Haddan & Zepfel LLP EX-10.2 3 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.2 STOCK PURCHASE AGREEMENT BY AND BETWEEN CRESCENT INTERNATIONAL LTD. AND FRANKLIN TELECOMMUNICATIONS CORP. DATED AS OF AUGUST 30, 1999 2 TABLE OF CONTENTS
Page ARTICLE I CERTAIN DEFINITIONS.......................................................1 Section 1.1. "Bid Price"...........................................................1 Section 1.2. "Capital Shares"......................................................1 Section 1.3. "Closing".............................................................1 Section 1.4. "Closing Date"........................................................2 Section 1.5. "Commitment Period"...................................................2 Section 1.6. "Common Stock"........................................................2 Section 1.7. "Condition Satisfaction Date".........................................2 Section 1.8. "Daily Trading Value".................................................2 Section 1.9. "Damages".............................................................2 Section 1.10. "Early Put Shares"....................................................2 Section 1.11. "Early Put Warrant"...................................................2 Section 1.12. "Early Put Warrant Shares"............................................2 Section 1.13. "Effective Date"......................................................2 Section 1.14. "Exchange Act"........................................................2 Section 1.15. "Incentive Warrant Shares"............................................2 Section 1.16. "Incentive Warrant"...................................................2 Section 1.17. "Investment Amount"...................................................3 Section 1.18. "Legend"..............................................................3 Section 1.19. "Lowest Average Price"................................................3 Section 1.20. "Material Adverse Effect".............................................3 Section 1.21. "Maximum Commitment Amount"...........................................3 Section 1.22. "Maximum Put Amount"..................................................3 Section 1.23. "Minimum Bid Price"...................................................3 Section 1.24. "Minimum Put Amount"..................................................3 Section 1.25. "Minimum Time Interval"...............................................3 Section 1.26. "NASD"................................................................3 Section 1.27. "Outstanding".........................................................3 Section 1.28. "Person"..............................................................3 Section 1.29. "Principal Market"....................................................3 Section 1.30. "Purchase Price"......................................................3 Section 1.31. "Put".................................................................4
1 3 Section 1.32. "Put Date"............................................................4 Section 1.33. "Put Fees"............................................................4 Section 1.34. "Put Notice"..........................................................4 Section 1.35. "Put Notice Period"...................................................4 Section 1.36. "Put Shares"..........................................................4 Section 1.37. "Registrable Securities"..............................................4 Section 1.38. "Registration Rights Agreement".......................................4 Section 1.39. "Registration Statement"..............................................4 Section 1.40. "Regulation D"........................................................5 Section 1.41. "SEC".................................................................5 Section 1.42. "SEC Documents".......................................................5 Section 1.43. "Section 4(2)"........................................................5 Section 1.44. "Securities Act"......................................................5 Section 1.45. "Subscription Date"...................................................5 Section 1.46. "Subsidiary"..........................................................5 Section 1.47. "Trading Day".........................................................5 Section 1.48. "Underwriter".........................................................5 Section 1.49. "Valuation Period"....................................................5 Section 1.50. "Warrants"............................................................5 Section 1.51. "Warrant Shares"......................................................5 ARTICLE II PURCHASE AND SALE OF COMMON STOCK; TERMINATION OF OBLIGATIONS; INCENTIVE WARRANT.........................................................5 Section 2.1. Investments...........................................................6 Section 2.2. Mechanics.............................................................6 Section 2.3. Closings..............................................................6 Section 2.4. Termination of Agreement and Investment Obligation....................7 Section 2.5. The Incentive Warrant.................................................7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR................................7 Section 3.1. Intent................................................................7 Section 3.2. Sophisticated Investor................................................7 Section 3.3. Authority.............................................................7 Section 3.4. Not an Affiliate......................................................8 Section 3.5. Organization and Standing.............................................8 Section 3.6. Absence of Conflicts..................................................8 Section 3.7. Disclosure; Access to Information.....................................8
2 4 Section 3.8. Manner of Sale........................................................8 Section 3.9. Resale Restrictions...................................................8 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................9 Section 4.1. Organization of the Company...........................................9 Section 4.2. Authority.............................................................9 Section 4.3. Corporate Documents...................................................9 Section 4.4. Books and Records.....................................................9 Section 4.5. Capitalization.......................................................10 Section 4.6. Registration and Listing of Common Stock.............................10 Section 4.7. Financial Statements.................................................10 Section 4.8. SEC Documents........................................................10 Section 4.9. Exemption from Registration; Valid Issuances; New Issuances..........11 Section 4.10. No General Solicitation or Advertising in Regard to this Transaction..........................................................11 Section 4.11. No Conflicts.........................................................11 Section 4.12. No Material Adverse Change...........................................12 Section 4.13. No Undisclosed Liabilities...........................................12 Section 4.14. No Undisclosed Events or Circumstances...............................12 Section 4.15. No Integrated Offering...............................................12 Section 4.16. Litigation and Other Proceedings.....................................13 Section 4.17. No Misleading or Untrue Communication................................13 Section 4.18. Material Non-Public Information......................................13 ARTICLE V COVENANTS OF THE INVESTOR................................................13 Section 5.1. Compliance...........................................................13 Section 5.2. No Short Sales.......................................................13 ARTICLE VI COVENANTS OF THE COMPANY.................................................13 Section 6.1. Registration Rights..................................................14 Section 6.2. Reservation of Common Stock..........................................14 Section 6.3. Listing of Common Stock..............................................14 Section 6.4. Exchange Act Registration............................................14 Section 6.5. Legends..............................................................14 Section 6.6. Corporate Existence..................................................14 Section 6.7. Additional SEC Documents.............................................14 Section 6.8. Notice of Certain Events Affecting Registration; Suspension of Right to Make a Put..................................................14 Section 6.9. Consolidation; Merger................................................15
3 5 Section 6.10. Issuance of Put Shares, Warrant Shares and Additional Shares.........15 Section 6.11. Legal Opinion on Subscription Date...................................15 Section 6.12. No Similar Arrangement; Right of First Refusal.......................16 ARTICLE VII CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING..........16 Section 7.1. Conditions Precedent to the Obligation of the Company to Issue and Sell Common Stock................................................16 Section 7.2. Conditions Precedent to the Right of the Company to Deliver a Put Notice and the Obligation of the Investor to Purchase Put Shares...............................................................17 Section 7.3. Due Diligence Review; Non-Disclosure of Non-Public Information.......19 ARTICLE VIII LEGENDS..................................................................20 Section 8.1. Legends..............................................................20 Section 8.2. No Other Legend or Stock Transfer Restrictions.......................22 Section 8.3. Investor's Compliance................................................22 ARTICLE IX INDEMNIFICATION; ARBITRATION.............................................22 Section 9.1. Indemnification......................................................22 Section 9.2. Method of Asserting Indemnification Claims...........................23 Section 9.3. Arbitration..........................................................26 ARTICLE X MISCELLANEOUS............................................................26 Section 10.1. Put Fees and Transaction Costs.......................................26 Section 10.2. Reporting Entity for the Common Stock................................27 Section 10.3. Brokerage............................................................27 Section 10.4. Notices..............................................................27 Section 10.5. Assignment...........................................................28 Section 10.6. Amendment; No Waiver.................................................28 Section 10.7. Annexes and Exhibits; Entire Agreement...............................29 Section 10.8. Survival.............................................................29 Section 10.9. Severability.........................................................29 Section 10.10.Title and Subtitles..................................................29 Section 10.11.Counterparts.........................................................29 Section 10.12.Choice of Law........................................................29 Section 10.13.Other Expenses.......................................................29
4 6 STOCK PURCHASE AGREEMENT BY AND BETWEEN CRESCENT INTERNATIONAL LTD. AND FRANKLIN TELECOMMUNICATIONS CORP. DATED AS OF AUGUST 30, 1999 This STOCK PURCHASE AGREEMENT is entered into as of the 30th day of August, 1999 (this "Agreement"), by and between Crescent International Ltd. (the "Investor"), an entity organized and existing under the laws of Bermuda, and Franklin Telecommunications Corp., a corporation organized and existing under the laws of the State of California (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase, up to $6,500,000 of the Common Stock (as defined below); and WHEREAS, such investments will be made in reliance upon the provisions of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United States Securities Act of 1933, as amended and the rules and regulations promulgated thereunder (the "Securities Act"), and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments in Common Stock to be made hereunder. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I CERTAIN DEFINITIONS Section 1.1. "Bid Price" shall mean the closing bid price as reported under Section 10.2 of this Agreement. Section 1.2. "Capital Shares" shall mean the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of dividends (as and when declared) and assets (upon liquidation of the Company). Section 1.3. "Closing" shall mean one of the closings of a purchase and sale of the Common Stock pursuant to Section 2.1. 7 Section 1.4. "Closing Date" shall mean, with respect to a Closing, the first Trading Day following the Put Notice Period related to such Closing, provided all conditions to such Closing have been satisfied on or before such Trading Day. Section 1.5. "Commitment Period" shall mean the period commencing on the Subscription Date and expiring on the earlier to occur of (i) the date on which the Investor shall have purchased Put Shares pursuant to this Agreement for an aggregate Purchase Price of the Maximum Commitment Amount, (ii) the date this Agreement is terminated pursuant to Section 2.4, or (iii) the date occurring two years from the Subscription Date. Section 1.6. "Common Stock" shall mean the Company's common stock, no par value per share. Section 1.7. "Condition Satisfaction Date" shall have the meaning set forth in Section 7.2 of this Agreement. Section 1.8. "Daily Trading Value" shall mean, on any Trading Day, the Bid Price multiplied by the trading volume of the Common Stock. Section 1.9. "Damages" shall mean any and all losses, claims, damages, liabilities, costs and expenses (including, without limitation, any and all investigative, legal and other expenses reasonably incurred in connection with, and any and all amounts paid in defense or settlement of, any action, suit or proceeding between any indemnified party and any indemnifying party or between any indemnified party and any third party, or otherwise, or any claim asserted). Section 1.10. "Early Put Shares" shall mean the shares of Common Stock purchased by the Investor from the Company on the Subscription Date pursuant to Section 2.1(c). Section 1.11. "Early Put Warrant" shall mean the Early Put Warrant in the form of Exhibit C hereto issued pursuant to Section 2.1(d) of this Agreement. Section 1.12. "Early Put Warrant Shares" shall mean all shares of Common Stock issued or issuable pursuant to exercise of the Early Put Warrants. Section 1.13. "Effective Date" shall mean the earlier to occur of: (i) the date on which the SEC has declared effective a Registration Statement registering resale of Registrable Securities as set forth in Section 7.2(a) and (ii) the date on which such Registrable Securities first become eligible for resale pursuant to Rule 144 of the Securities Act. Section 1.14. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder. Section 1.15. "Incentive Warrant Shares" shall mean all shares of Common Stock issued or issuable pursuant to exercise of the Incentive Warrant. Section 1.16. "Incentive Warrant" shall mean the Incentive Warrant in the form of Exhibit B hereto issued pursuant to Section 2.5 of this Agreement. 2 8 Section 1.17. "Investment Amount" shall mean the dollar amount to be invested by the Investor to purchase Put Shares with respect to any Put Date as notified by the Company to the Investor in accordance with Section 2.2 hereof. Section 1.18. "Legend" shall have the meaning specified in Section 8.1. Section 1.19. "Lowest Average Price" shall mean the average of the lowest three consecutive Bid Prices during the applicable Valuation Period. Section 1.20. "Material Adverse Effect" shall mean any effect on the business, operations, properties, prospects, or financial condition of the Company that is material and adverse to the Company or to the Company and such other entities controlling or controlled by the Company, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise interfere with the ability of the Company to enter into and perform its obligations under any of (i) this Agreement, (ii) the Registration Rights Agreement and (iii) the Warrants. Section 1.21. "Maximum Commitment Amount" shall mean $6,500,000. Section 1.22. "Maximum Put Amount" shall mean $300,000. Section 1.23. "Minimum Bid Price" shall have the meaning set forth in Section 7.2(j) of this Agreement. Section 1.24. "Minimum Put Amount" shall mean $200,000. Section 1.25. "Minimum Time Interval" shall mean the mandatory twenty-two (22) Trading Days between any two Put Dates. Section 1.26. "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.27. "Outstanding" when used with reference to Common Shares or Capital Shares (collectively the "Shares"), shall mean, at any date as of which the number of such Shares is to be determined, all issued and outstanding Shares, and shall include all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that "Outstanding" shall not refer to any such Shares then directly or indirectly owned or held by or for the account of the Company. Section 1.28. "Person" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.29. "Principal Market" shall mean the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange, the Bulletin Board or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. 3 9 Section 1.30. "Purchase Price" shall mean, with respect to a Put, ninety-two percent (92%) of the Lowest Average Price. Section 1.31. "Put" shall mean each occasion the Company elects to exercise its right to tender a Put Notice requiring the Investor to purchase a discretionary amount of the Company's Common Stock, subject to the terms and conditions of this Agreement. Section 1.32. "Put Date" shall mean the Trading Day during the Commitment Period that a Put Notice to sell Common Stock to the Investor is deemed delivered pursuant to Section 2.2(b) hereof. Section 1.33. "Put Fees" shall have the meaning specified in Section 10.1 hereof. Section 1.34. "Put Notice" shall mean a written notice to the Investor setting forth the intended Closing Date and the Investment Amount that the Company intends to require the Investor to purchase pursuant to the terms of this Agreement. Section 1.35. "Put Notice Period" shall mean a period beginning on a Put Date and ending on a Closing Date; provided that in no event shall a Put Notice Period be less than seven (7) Trading Days. Section 1.36. "Put Shares" shall mean all shares of Common Stock issued or issuable pursuant to a Put that has been exercised or may be exercised in accordance with the terms and conditions of this Agreement. Section 1.37. "Registrable Securities" shall mean (i) the Put Shares, (ii) the Warrant Shares and (iii) any securities issued or issuable with respect to any of the foregoing by way of exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (w) the applicable Registration Statement has been declared effective by the SEC and all such Registrable Securities have been disposed of pursuant to the applicable Registration Statement, (x) all such Registrable Securities have been sold under circumstances under which all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") are met, (y) such time as all such Registrable Securities have been otherwise transferred to holders who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend or (z) in the opinion of counsel to the Company, which counsel shall be reasonably acceptable to the Investor, all such Registrable Securities may be sold without registration or the need for an exemption from any registration requirements and without any time, volume or manner limitations pursuant to Rule 144(k) (or any similar provision then in effect) under the Securities Act. Section 1.38. "Registration Rights Agreement" shall mean the registration rights agreement in the form of Exhibit A hereto. Section 1.39. "Registration Statement" shall mean a registration statement on Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, 4 10 on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate and which form shall be available for the resale of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement, the Registration Rights Agreement and the Warrants and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. Section 1.40. "Regulation D" shall have the meaning set forth in the recitals of this Agreement. Section 1.41. "SEC" shall mean the Securities and Exchange Commission. Section 1.42. "SEC Documents" shall mean the Company's latest Form 10-K as of the time in question, all Forms 10-Q and 8-K filed thereafter, and the Proxy Statement for its latest fiscal year as of the time in question until such time the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.43. "Section 4(2)" shall have the meaning set forth in the recitals of this Agreement. Section 1.44. "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.45. "Subscription Date" shall mean the date on which this Agreement is executed and delivered by the parties hereto. Section 1.46. "Subsidiary" shall mean any Person in which the Company, directly or indirectly through Subsidiaries or otherwise, beneficially owns more than fifty percent (50%) of either the equity interests in, or the voting control of, such Person. Section 1.47. "Trading Day" shall mean any day during which the Principal Market shall be open for business. Section 1.48. "Underwriter" shall mean any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to a Registration Statement. Section 1.49. "Valuation Period" shall mean (i) with respect to the Subscription Date, the twenty-two (22) Trading Day period immediately preceding the Subscription Date, (ii) with respect to an Effective Date, the twenty-two (22) Trading Day period immediately preceding such Effective Date and (iii) with respect to a Closing Date, the twenty-two (22) Trading Day period immediately preceding the applicable Put Date, during which the Purchase Price of the Common Stock is determined. Section 1.50. "Warrants" shall mean the Early Put Warrants and Incentive Warrant. Section 1.51. "Warrant Shares" shall mean the Early Put Warrant Shares and the Incentive Warrant Shares. 5 11 ARTICLE II PURCHASE AND SALE OF COMMON STOCK; TERMINATION OF OBLIGATIONS; INCENTIVE WARRANT Section 2.1. Investments. (a)Puts. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Put Date the Company may exercise a Put by the delivery of a Put Notice. The number of Put Shares that the Investor shall receive pursuant to such Put shall be determined by dividing the Investment Amount specified in the Put Notice by the Purchase Price with respect to such Put Date. (b)Maximum Amount of Puts. Unless the Company obtains the requisite approval of its shareholders in accordance with the corporate laws of California and the applicable rules of the Principal Market, no more than 19.9% of the Outstanding shares of Common Stock may be issued and sold pursuant to Puts and Warrants. (c)Early Put. The Company shall issue and sell and the Investor shall purchase, on the Subscription Date, shares of the Common Stock for an Investment Amount of $1,000,000 at the Purchase Price on the Subscription Date (the "Early Put Shares"). For the purpose only of such Early Put, the Investor waives the requirements of Section 2.2, and the conditions set forth in paragraphs (a) and (b) of Section 7.2 hereof. (d)Early Put Warrants. In addition to the Incentive Warrant (as defined hereinafter), on the Subscription Date, the Company shall issue to the Investor an Early Put Warrant with an exercise price of $0.01 for each share of Common Stock. Section 2.2. Mechanics. (a)Put Notice. At any time during the Commitment Period, the Company may deliver a Put Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, the Investment Amount for each Put as designated by the Company in the applicable Put Notice shall be neither less than the Minimum Put Amount nor more than the Maximum Put Amount. (b)Date of Delivery of Put Notice. A Put Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon New York time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon New York time on a Trading Day or at any time on a day which is not a Trading Day. No Put Notice may be deemed delivered, on a day that is not a Trading Day. 6 12 Section 2.3. Closings. On each Closing Date for a Put, (i) the Company shall deliver irrevocable instructions to the transfer agent to prepare and deliver to the Investor a share certificate in the name of the Investor and in the amount of the applicable Put Shares and (ii) the Investor shall deliver to the Company the Investment Amount specified in the Put Notice by wire transfer of immediately available funds to the account designated in the Put Notice. In addition, on or prior to such Closing Date, each of the Company and the Investor shall deliver to the other all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Section 2.4. Termination of Agreement and Investment Obligation. The Company shall have the right to terminate this Agreement at any time upon thirty (30) days' written notice to the Investor. The Investor shall have the right to immediately terminate this Agreement (including with respect to any Put, notice of which has been given but the applicable Closing Date has not yet occurred) in accordance with Section 6.12 or in the event that: (i) the Registration Statement with respect to shares of Common Stock purchased through the Early Put is not effective within ninety (90) days following the Subscription Date, (ii) a Registration Statement with respect to shares of Common Stock purchased through any subsequent Put is not effective within ninety (90) days following the applicable Closing Date, (iii) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of thirty (30) Trading Days during the Commitment Period, (iv) the Company shall at any time fail to comply with the requirements of Section 6.2, 6.3, 6.4, 6.5, 6.6, 6.8 or 6.9. Section 2.5. The Incentive Warrant. On the Subscription Date, the Company shall issue the Incentive Warrant to the Investor. The Incentive Warrant shall be delivered by the Company to the Investor upon execution of this Agreement by the parties hereto. The Incentive Warrant Shares shall be registered for resale pursuant to the Registration Rights Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR The Investor represents and warrants to the Company that: Section 3.1. Intent. The Investor is entering into this Agreement for its own account and the Investor has no view to the distribution of the Registrable Securities or Warrants and has no present arrangement (whether or not legally binding) at any time to sell the Registrable Securities or Warrants to or through any person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold the Registrable Securities or Warrants for any minimum or other specific term and reserves the right to dispose of the Registrable Securities or Warrants at any time pursuant to the Registration Statement and in accordance with federal and state securities laws applicable to such disposition. Section 3.2. Sophisticated Investor. The Investor is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as defined in Rule 501 of Regulation D), and Investor has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Common Stock. The 7 13 Investor acknowledges that an investment in the Common Stock is speculative and involves a high degree of risk. Section 3.3. Authority. Each of this Agreement and the Registration Rights Agreement has been duly authorized by all necessary corporate action and no further consent or authorization of the Investor, or its Board of Directors or stockholders is required. Each of this Agreement and the Registration Rights Agreement was validly executed and delivered by the Investor and each is a valid and binding agreement of the Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 3.4. Not an Affiliate. The Investor is not an officer, director or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company. Section 3.5. Organization and Standing. Investor is duly organized, validly existing, and in good standing under the laws of Bermuda. Section 3.6. Absence of Conflicts. The execution and delivery of this Agreement and any other document or instrument contemplated hereby, and the consummation of the transactions contemplated thereby, and compliance with the requirements thereof, will not (a) violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Investor, or, to the Investor's knowledge, (b) violate any provision of any indenture, instrument or agreement to which Investor is a party or is subject, or by which Investor or any of its assets is bound, (c) conflict with or constitute a material default thereunder, (d) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Investor to any third party, or (e) require the approval of any third-party (that has not been obtained) pursuant to any material contract to which Investor is subject or to which any of its assets, operations or management may be subject. Section 3.7. Disclosure; Access to Information. Investor has received all documents, records, books and other information pertaining to Investor's investment in the Company that have been requested by Investor. The Investor has received and reviewed copies of the SEC Documents. Section 3.8. Manner of Sale. At no time was Investor presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. Section 3.9. Resale Restrictions. It is acknowledged by Investor that any Registrable Securities and Warrants to be acquired by Investor have not been registered under the federal securities laws or any applicable state securities laws in reliance upon exemptions available for non-public or limited offerings. Investor understands that Investor must bear the economic risk of the investment in the Registrable Securities and Warrants because the Registrable Securities and Warrants have not been so registered and therefore are subject to restrictions upon transfer such that they may not be sold or otherwise transferred unless registered under the applicable securities laws or an exemption from such registration is available. Investor will not reoffer, sell, 8 14 assign, transfer, pledge, encumber, hypothecate or otherwise dispose of any Registrable Securities or the Warrants in the absence of an effective registration statement, qualification or authorization relating thereto under federal and applicable state securities laws or an opinion of qualified counsel satisfactory to the Company to the effect that the proposed transaction in the Registrable Securities or the Warrants will neither constitute or result in any violation of the federal or state securities laws. Subject to Section 8.1 of this Agreement, any certificate or other document that may be issued representing any shares of Registrable Securities or the Warrants may be endorsed with a legend to this effect. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Investor that: Section 4.1. Organization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Except as set forth in the SEC Documents, the Company does not own more than fifty percent (50%) of the outstanding capital stock of or control any other business entity. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a Material Adverse Effect. Section 4.2. Authority. (i) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, the Registration Rights Agreement and the Warrants and to issue the Put Shares, the Warrants and the Warrant Shares; (ii) the execution and delivery of this Agreement and the Registration Rights Agreement, and the execution, issuance and delivery of the Warrants, by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required; and (iii) each of this Agreement and the Registration Rights Agreement has been duly executed and delivered, and the Warrants have been duly executed, issued and delivered, by the Company and constitute valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 4.3. Corporate Documents. The Company has furnished or made available to the Investor true and correct copies of the Company's Articles of Incorporation, as amended and in effect on the date hereof (the "Certificate"), and the Company's By-Laws, as amended and in effect on the date hereof (the "By-Laws"). Section 4.4. Books and Records. The minute books and other similar records of the Company and its subsidiaries as made available to Investor prior to the execution of this 9 15 Agreement contain a true and complete record, in all material respects, of all action taken at all meetings and by all written consents in lieu of meetings of the stockholders, the boards of directors and committees of the boards of directors of the Company and the subsidiaries. The stock transfer ledgers and other similar records of the Company and the subsidiaries as made available to Investor prior to the execution of this Agreement accurately reflect all record transfers prior to the execution of this Agreement in the capital stock of the Company and the subsidiaries. Neither the Company nor any subsidiary has any of its Books and Records recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Company or a subsidiary. Section 4.5. Capitalization. The authorized capital stock of the Company consists of 90,000,000 shares of Common Stock, of which 25,806,726 shares are issued and outstanding, and 10,000,000 shares of preferred stock, none of which are issued and outstanding. Except for (i) options to purchase not more than 11,422,000 shares of Common Stock with purchase prices between $0.10 and $2.78 per share; and (ii) warrants to purchase not more than 1,047,510 shares of Common Stock with purchase prices between $0.78 and $5.00 per share, 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. Section 4.6. Registration and Listing of Common Stock. The Company has registered its Common Stock pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance with all reporting requirements of the Exchange Act, and the Company has maintained all requirements for the continued listing or quotation of its Common Stock, and such Common Stock is currently listed or quoted on the Principal Market. As of the date hereof, the Principal Market is the American Stock Exchange. Section 4.7. Financial Statements. Prior to the execution of this Agreement, the Company has delivered to the Investor true and complete copies of the following financial statements: (a) the audited balance sheets of the Company and its consolidated subsidiaries as of June 30, 1997, and June 30, 1998, and the related audited consolidated statements of operations, stockholders' equity and cash flows for each of the fiscal years then ended, together with a true and correct copy of the report of such audited information by Singer Lewak Greenbaum & Goldstein LLP, and all letters from such accountants with respect to the results of such audits; and (b) the unaudited balance sheets of the Company and its consolidated subsidiaries as of March 31, 1999, found in the Company's 10-Q filed on April 29, 1999, for the quarterly period ended March 31, 1999 and the related unaudited consolidated statements of operations and stockholders' equity for the portion of the fiscal year then ended. 10 16 The financial statements of the Company delivered to the Investor have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Section 4.8. SEC Documents. The Company has delivered or made available to the Investor true and complete copies of the SEC Documents (including, without limitation, proxy information and solicitation materials). The Company has not provided to the Investor any information that, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company, but which has not been so disclosed. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form and substance in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may include summary notes and may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Section 4.9. Exemption from Registration; Valid Issuances; New Issuances. The sale and issuance of the Warrants, the Warrant Shares, and the Put Shares in accordance with the terms and on the bases of the representations and warranties set forth in this Agreement, may and shall be properly issued pursuant to Rule 4(2), Regulation D and/or any applicable state law. When issued and paid for as herein provided, the Put Shares and the Warrant Shares shall be duly and validly issued, fully paid, and nonassessable. Neither the sales of the Put Shares, the Warrants, or the Warrant Shares pursuant to, nor the Company's performance of its obligations under, this Agreement, the Registration Rights Agreement or the Warrants shall (i) result in the creation or imposition of any liens, charges, claims or other encumbrances upon the Put Shares, the Warrant Shares, or any of the assets of the Company, or (ii) entitle the holders of Outstanding Capital Shares to preemptive or other rights to subscribe to or acquire the Capital Shares or other securities of the Company. The Put Shares and the Warrant Shares shall not subject the Investor to personal liability by reason of the ownership thereof. The Put Shares and Warrant Shares have been duly authorized by the Company, but have not been issued (whether or not subsequently repurchased by the Company) to any Person, and when issued to the Investor in 11 17 accordance with this Agreement and the Warrants will not have been issued (whether or not subsequently repurchased by the Company) to any Person other than the Investor. Section 4.10. No General Solicitation or Advertising in Regard to this Transaction. Neither the Company nor any of its affiliates nor any distributor or any person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to any of the Put Shares, the Warrants, or the Warrant Shares, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Common Stock under the Securities Act. Section 4.11. No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, including without limitation the issuance of the Put Shares, the Warrants and the Warrant Shares do not and will not (i) result in a violation of the Certificate or By-Laws or (ii) conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to which the Company is a party, or (iii) result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect) nor is the Company otherwise in violation of, conflict with or in default under any of the foregoing; provided, however, that for purposes of the Company's representations and warranties as to violations of foreign law, rule or regulation referenced in clause (iii), such representations and warranties are made only to the best of the Company's knowledge insofar as the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby are or may be affected by the status of the Investor under or pursuant to any such foreign law, rule or regulation. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and sell the Common Stock or the Warrants in accordance with the terms hereof (other than any SEC, NASD or state securities filings that may be required to be made by the Company subsequent to any Closing, any registration statement that may be filed pursuant hereto, and any shareholder approval required by the rules applicable to companies whose common stock trades on the American Stock Exchange); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Investor herein. Section 4.12. No Material Adverse Change. Since June 30, 1998, no event has occurred that would have a Material Adverse Effect on the Company. 12 18 Section 4.13. No Undisclosed Liabilities. The Company has no liabilities or obligations that are material, individually or in the aggregate, other than those incurred in the ordinary course of the Company's businesses since June 30, 1998, and which, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company. Section 4.14. No Undisclosed Events or Circumstances. Since June 30, 1998, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, 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. Section 4.15. 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, other than pursuant to this Agreement, under circumstances that would require registration of the Common Stock under the Securities Act. Section 4.16. Litigation and Other Proceedings. Except as may be set forth in the SEC Documents, there are no lawsuits or proceedings pending or to the best knowledge of the Company threatened, against the Company, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which might have a Material Adverse Effect. Except as set forth in the SEC Documents, no judgment, order, writ, injunction or decree or award has been issued by or, so far as is known by the Company, requested of any court, arbitrator or governmental agency which might result in a Material Adverse Effect. Section 4.17. No Misleading or Untrue Communication. The Company, any Person representing the Company, and, to the knowledge of the Company, any other Person selling or offering to sell the Put Shares, the Warrants or the Warrant Shares in connection with the transactions contemplated by this Agreement, have not made, at any time, any oral communication in connection with the offer or sale of the same which contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. Section 4.18. Material Non-Public Information. The Company is not in possession of, nor has the Company or its agents disclosed to the Investor, any material non-public information that (i) if disclosed, would, or could reasonably be expected to have, an effect on the price of the Common Stock or (ii) according to applicable law, rule or regulation, should have been disclosed publicly by the Company prior to the date hereof but which has not been so disclosed. ARTICLE V COVENANTS OF THE INVESTOR Section 5.1. Compliance. The Investor's trading activities with respect to shares of the Company's Common Stock will be in compliance with all applicable state and federal securities laws, rules and regulations and the rules and regulations of the Principal Market on which the Company's Common Stock is listed. 13 19 Section 5.2. No Short Sales. During the thirty (30) days prior to the Subscription Date, neither the Investor nor any affiliate of the Investor has, and during the Commitment Period neither the Investor nor any affiliate of the Investor will (i) engage in any short sale of the Common Stock of the Company, or (ii) take any action or engage in any transaction for the purpose of affecting the market price of the Company's Common Stock. Nothing in this Section 5.2 shall prohibit the Investor or any affiliate from making regular sales of the Common Stock acquired pursuant to this Agreement. ARTICLE VI COVENANTS OF THE COMPANY Section 6.1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all respects with the terms thereof. Section 6.2. Reservation of Common Stock. As of the date hereof, the Company has available and the Company shall reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to satisfy any obligation to issue the Put Shares and the Warrant Shares; such amount of shares of Common Stock to be reserved shall be calculated based upon the minimum Purchase Price for the Put Shares under the terms and conditions of this Agreement and the Exercise Price of the Incentive Warrant and the maximum number of Early Put Warrant Shares issuable pursuant to the Early Put Warrant. The number of shares so reserved from time to time, as theretofore increased or reduced as hereinafter provided, may be reduced by the number of shares actually delivered. Section 6.3. Listing of Common Stock. The Company shall exercise best efforts to maintain the listing of the Common Stock on a Principal Market, and as soon as practicable (but in any event prior to the Closing Date for any Put) will cause the Put Shares and the Warrant Shares with respect to such Put to be listed on the Principal Market. The Company further shall, if the Company applies to have the Common Stock traded on any other Principal Market, include in such application the Put Shares and the Warrant Shares, and shall take such other action as is necessary or desirable in the opinion of the Investor to cause the Common Stock to be listed on such other Principal Market as promptly as possible. The Company shall use commercially reasonable efforts to continue the listing and trading of its Common Stock on the Principal Market (including, without limitation, maintaining sufficient net tangible assets) and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the NASD and the Principal Market. Section 6.4. Exchange Act Registration. After each Registration Statement becomes effective, the Company shall cause the Common Stock covered by such Registration Statement to continue to be registered under Section 12(g) or 12(b) of the Exchange Act, will comply in all respects with its reporting and filing obligations under the Exchange Act, and will not take any action or file any document (whether or not permitted by the Exchange Act or the rules 14 20 thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under the Exchange Act. Section 6.5. Legends. The certificates evidencing the Put Shares and the Warrant Shares shall be free of legends, except as provided for in Article VIII. Section 6.6. Corporate Existence. The Company shall take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.7. Additional SEC Documents. During the Commitment Period, the Company shall deliver to the Investor, as and when the originals thereof are submitted to the SEC for filing, copies of all SEC Documents so furnished or submitted to the SEC. Section 6.8. Notice of Certain Events Affecting Registration; Suspension of Right to Make a Put. The Company shall immediately notify the Investor, but in no event later than two (2) business days by facsimile and by overnight courier, upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of a Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) the declaration by the SEC of the effectiveness of a Registration Statement; and (vi) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate, and the Company shall promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Put Notice during the continuation of any of the foregoing events. While in possession of material non-public information received from the Company, the Investor shall not dispose of any Registrable Securities until such information is disclosed to the public (a "Restricted Period"); provided that, if such Restricted Period exceeds one hundred twenty (120) days, the liquidated damages described in Section 1.1(c) of the Registration Rights Agreement shall be increased to three percent (3.0%) until such Restricted Period shall have elapsed. Section 6.9. Consolidation; Merger. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or 15 21 substantially all of the assets of the Company to, another entity unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement and the Warrants. Section 6.10. Issuance of Put Shares, Warrant Shares and Additional Shares. The sale of the Put Shares and the issuance of the Warrant Shares pursuant to exercise of the Warrants shall be made in accordance with the provisions and requirements of Regulation D and any applicable state law. Issuance of the Warrant Shares pursuant to exercise of the Warrants through a cashless exercise shall be made in accordance with the provisions and requirements of Section 3(a)(9) under the Securities Act and any applicable state law. Section 6.11. Legal Opinion on Subscription Date. The Company's independent counsel shall deliver to the Investor on the Subscription Date an opinion in the form of Exhibit D, except for paragraph 7 thereof. Section 6.12. No Similar Arrangement; Right of First Refusal. The Company shall refrain from entering into any other agreements, arrangements or understandings granting to the Company the right to sell shares of its securities to one or more investors in placements exempt from registration under the Securities Act until thirty (30) calendar days after this Agreement is terminated pursuant to Section 2.4 hereof (the "Exclusivity Period"). The Exclusivity Period shall not apply to an issuance of securities exempt from registration under the Securities Act by the Company in connection with any strategic investment, corporate partnering arrangements, or other situations in which the investment in the Company is not strictly a financial one. If the Company, for the purpose of obtaining any additional financing, wishes to sell shares of its securities in placements exempt from registration under the Securities Act during the Exclusivity Period (a "Sale") to a party other than the Investor (the "Third Party"), the Company shall first offer (the "Offer") to the Investor, in writing, the right to purchase such shares (the "Offered Shares") at the bona fide price offered by the Third Party (the "Offer Price"). The Offer shall grant the Investor the right during the five (5) Trading Days immediately following the date of the Offer to elect to purchase any or all of the Offered Shares. The Company, in connection with such a Sale, shall refrain from circumventing or attempting to circumvent the Investor's right of first refusal by way of making such a Sale to any of its affiliates without first making an Offer to the Investor. If the Investor so exercises it's right to purchase any or all of the Offered Shares, the purchase will be treated as a Put except that the purchase price for the Offered Shares shall be the Offer Price. The closing and method of payment shall be as provided for in Section 2.2 hereof and the Closing Date shall be seven (7) Trading Days after the Investor exercises such right. If the Investor fails to exercise its right to purchase any or all of the Offered Shares, then during the thirty (30) calendar days immediately following the expiration of such right, the Company shall be free to sell any or all of the Offered Shares to a purchaser for a purchase price not lower than the Offer Price payable on terms and conditions that are not more favorable to such purchaser than those contained in the Offer. In the event that the Company effects a Sale to a Third Party, the Investor may immediately terminate this Agreement. ARTICLE VII 16 22 CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING Section 7.1. Conditions Precedent to the Obligation of the Company to Issue and Sell Common Stock. The obligation hereunder of the Company to issue and sell the Put Shares to the Investor incident to each Closing is subject to the satisfaction, at or before each such Closing, of each of the conditions set forth below. (a)Accuracy of the Investor's Representation and Warranties. The representations and warranties of the Investor shall be true and correct in all material respects as of the date of this Agreement and as of the date of each such Closing as though made at each such time. (b)Performance by the Investor. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2. Conditions Precedent to the Right of the Company to Deliver a Put Notice and the Obligation of the Investor to Purchase Put Shares. Following completion of the Early Put, the right of the Company to deliver a Put Notice and the obligation of the Investor hereunder to acquire and pay for the Put Shares incident to a Closing is subject to the satisfaction, on (i) the applicable Put Date and (ii) the applicable Closing Date (each a "Condition Satisfaction Date"), of each of the following conditions: (a)Registration of the Registrable Securities with the SEC. As set forth in the Registration Rights Agreement, the Company shall have filed with the SEC either: (i) a Registration Statement covering the resale of the Common Stock purchased by the Investor through the Early Put that shall have been declared effective by the SEC in no event later than ninety (90) days after the Subscription Date, and a Registration Statement covering the resale of the Common Stock purchased by the Investor through all subsequent Puts that shall have been declared effective by the SEC prior to any subsequent Put; or (ii) a Combined Registration Statement (as defined in the Registration Rights Agreement) that shall have been declared effective by the SEC in no event later than ninety (90) days after the Subscription Date. (b)Effective Registration Statement. As set forth in the Registration Rights Agreement, the Registration Statement(s) shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to a Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of a Registration Statement, either temporarily or permanently, or intends or has threatened to do so 17 23 (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), (ii) no other suspension of the use or withdrawal of the effectiveness of such Registration Statement or related prospectus shall exist and (iii) with respect to the second Put only, the Company shall have notified the Investor in accordance with Section 6.8 that the Registration Statement covering the Registrable Securities purchased by the Investor through the Early Put has been declared effective by the SEC and (iv) at least 30 days shall have elapsed since the Initial Registration Statement (as defined in the Registration Rights Agreement) has been declared effective by the SEC. (c)Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company shall be true and correct as of each Condition Satisfaction Date as though made at each such time (except for representations and warranties specifically made as of a particular date). (d)Performance by the Company. The Company shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement, the Registration Rights Agreement and the Warrants to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e)No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or adopted by any court or governmental authority of competent jurisdiction that prohibits the transactions contemplated by this Agreement or otherwise has a Material Adverse Effect, and no actions, suits or proceedings shall be in progress, pending or threatened by any Person, that seek to enjoin or prohibit the transactions contemplated by this Agreement or otherwise could reasonably be expected to have a Material Adverse Effect. For purposes of this paragraph (e), no proceeding shall be deemed pending or threatened unless one of the parties has received written or oral notification thereof prior to the applicable Closing Date. (f)No Suspension of Trading In or Delisting of Common Stock. The trading of the Common Stock shall not have been suspended by the SEC, the Principal Market or the NASD and the Common Stock shall have been approved for listing or quotation on and shall not have been delisted from the Principal Market. The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market. (g)Legal Opinion. The Company shall have caused to be delivered to the Investor, within five (5) Trading Days of the effective date of a Registration Statement, an opinion of the Company's independent counsel in the form of Exhibit D hereto, addressed to the Investor. 18 24 (h)Due Diligence. Pursuant to Section 7.3, the Investor shall not have a material dispute with the Company as to the adequacy of the disclosure contained in the Registration Statement. (i)Five Percent Limitation. On each Closing Date, the number of Put Shares then to be purchased by the Investor shall not exceed the number of such shares that, when aggregated with all other shares of Common Stock and Registrable Securities then owned by the Investor beneficially or deemed beneficially owned by the Investor, would result in the Investor owning no more than 4.9% of all of such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Section 13(d) of the Exchange Act and the regulations promulgated thereunder. For purposes of this Section, in the event that the amount of Common Stock outstanding as determined in accordance with Section 13(d) of the Exchange Act and the regulations promulgated thereunder is greater on a Closing Date than on the date upon which the Put Notice associated with such Closing Date is given, the amount of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether the Investor, when aggregating all purchases of Common Stock made pursuant to this Agreement and, if any, Warrant Shares would own more than 4.9% of the Common Stock following such Closing Date. (j)Minimum Bid Price. The Bid Price equals or exceeds $2.00 on each of the seven (7) Trading Days immediately preceding the Subscription Date and on each Trading Day during any Put Notice Period. (k)Minimum Average Daily Trading Value. The average of the Daily Trading Value during the twenty-two (22) Trading Days immediately preceding the applicable Put Notice Period equals or exceeds $160,000. (l)No Knowledge. The Company shall have no knowledge of any event more likely than not to have the effect of causing any Registration Statement to be suspended or otherwise ineffective (which event is more likely than not to occur within the fifteen Trading Days following the Trading Day on which such notice is deemed delivered). (m)Minimum Time Interval. The Minimum Time Interval shall have elapsed since the immediately preceding Put Date. (n)Shareholder Vote. The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market. (o)Other. On each Condition Satisfaction Date, the Investor shall have received and been reasonably satisfied with such other certificates and documents as shall have been reasonably requested by the Investor in order for the Investor to confirm the Company's satisfaction of the conditions set forth in this Section 7.2., including, without limitation, a certificate in substantially the form and substance 19 25 of Exhibit E hereto, executed in either case by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate. Section 7.3. Due Diligence Review; Non-Disclosure of Non-Public Information. (a)The Company shall make available for inspection and review by the Investor, advisors to and representatives of the Investor (who may or may not be affiliated with the Investor and who are reasonably acceptable to the Company), and any Underwriter, any Registration Statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or Underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of such Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and Underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of such Registration Statement. (b)Each of the Company, its officers, directors, employees and agents shall in no event disclose non-public information to the Investor, advisors to or representatives of the Investor unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (c)Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts; provided, however, that notwithstanding anything herein to the contrary, the Company shall, as hereinabove provided, immediately notify the advisors and representatives of the Investor and any Underwriters of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the applicable Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required 20 26 to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 7.3 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms and conditions of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that such Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in such Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE VIII LEGENDS Section 8.1. Legends. Each of the Warrant and, unless otherwise provided below, each certificate representing Registrable Securities will bear the following legend (the "Legend"): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF AUGUST 30, 1999, BETWEEN FRANKLIN TELECOMMUNICATIONS CORP. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM FRANKLIN TELECOMMUNICATIONS CORP.'S EXECUTIVE OFFICES. As soon as practicable after the execution and delivery hereof, but in any event within five (5) Trading Days hereafter, the Company shall issue to the transfer agent for its Common Stock (and to any substitute or replacement transfer agent for its Common Stock upon the Company's appointment of any such substitute or replacement transfer agent) instructions in substantially the form of Exhibit F hereto, with a copy to the Investor. Other than as required as a result of change in law, such instructions shall be irrevocable by the Company from and after 21 27 the date hereof or from and after the issuance thereof to any such substitute or replacement transfer agent, as the case may be, except as otherwise expressly provided in the Registration Rights Agreement. It is the intent and purpose of such instructions, as provided therein, to require the transfer agent for the Common Stock from time to time upon transfer of Registrable Securities by the Investor to issue certificates evidencing such Registrable Securities free of the Legend during the following periods and under the following circumstances and without consultation by the transfer agent with the Company or its counsel and without the need for any further advice or instruction or documentation to the transfer agent by or from the Company or its counsel or the Investor: (a)At any time after the applicable Effective Date, upon surrender of one or more certificates evidencing Common Stock that bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered; provided that (i) the applicable Registration Statement shall then be effective and (ii) if reasonably requested by the transfer agent the Investor confirms to the transfer agent that the Investor has transferred the Registrable Securities pursuant to such Registration Statement and has complied with the prospectus delivery requirement. (b)At any time upon any surrender of one or more certificates evidencing Registrable Securities that bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered and containing representations that the Investor is permitted to dispose of such Registrable Securities without limitation as to amount or manner of sale pursuant to Rule 144(k) under the Securities Act. Section 8.2. No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in Section 8.1 has been or shall be placed on the share certificates representing the Common Stock and no instructions or "stop transfers orders," so called, "stock transfer restrictions," or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Article VIII. Section 8.3. Investor's Compliance. Nothing in this Article VIII shall affect in any way the Investor's obligations under any agreement to comply with all applicable securities laws upon resale of the Common Stock. ARTICLE IX INDEMNIFICATION; ARBITRATION Section 9.1. Indemnification. (a)The Company agrees to indemnify and hold harmless the Investor, its partners, affiliates, officers, directors, employees, and duly authorized agents, and each Person or entity, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with 22 28 its controlling persons from and against any Damages, joint or several, and any action in respect thereof to which the Investor, its partners, affiliates, officers, directors, employees, and duly authorized agents, and any such controlling person becomes subject to, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of Company contained in this Agreement, as such Damages are incurred, unless such Damages result primarily from the Investor's gross negligence, recklessness or bad faith in performing its obligations under this Agreement; provided, however, that the maximum aggregate liability of the Company shall be limited to the amount actually invested by the Investor under this Agreement, and provided, further, that in no event shall this provision be deemed to limit any rights to indemnification arising under the Registration Rights Agreement. (b)The Investor agrees to indemnify and hold harmless the Company, its partners, affiliates, officers, directors, employees, and duly authorized agents, and each Person or entity, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with its controlling persons from and against any Damages, joint or several, and any action in respect thereof to which the Company, its partners, affiliates, officers, directors, employees, and duly authorized agents, and any such controlling person becomes subject to, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of the Investor contained in this Agreement, as such Damages are incurred, unless such Damages result primarily from the Company's gross negligence, recklessness or bad faith in performing its obligations under this Agreement; provided, however, that the maximum aggregate liability of the Investor shall be limited to the amount actually invested by the Investor under this Agreement, and provided, further, that in no event shall this provision be deemed to limit any rights to indemnification arising under the Registration Rights Agreement. Section 9.2. Method of Asserting Indemnification Claims. All claims for indemnification by any Indemnified Party (as defined below) under Section 9.1 shall be asserted and resolved as follows: (a)In the event any claim or demand in respect of which any person claiming indemnification under any provision of Section 9.1 (an "Indemnified Party") might seek indemnity under Section 9.1 is asserted against or sought to be collected from such Indemnified Party by a person other than the Company, the Investor or any affiliate of the Company (a "Third Party Claim"), the Indemnified Party shall deliver a written notification, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim for indemnification that is being asserted under any provision of Section 9.1 against any person (the "Indemnifying Party"), together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such Third Party Claim (a "Claim Notice") with 23 29 reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim to the extent that the Indemnifying Party's ability to defend has been irreparably prejudiced by such failure of the Indemnified Party. The Indemnifying Party shall notify the Indemnified Party as soon as practicable within the period ending thirty (30) calendar days following receipt by the Indemnifying Party of either a Claim Notice or an Indemnity Notice (as defined below) (the "Dispute Period") whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party under Section 9.1 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim. (i) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 9.2(a), then the Indemnifying Party shall have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which proceedings shall be vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages or that provides for the payment of monetary damages as to which the Indemnified Party shall not be indemnified in full pursuant to Section 9.1). The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole cost and expense of the Indemnified Party, at any time prior to the Indemnifying Party's delivery of the notice referred to in the first sentence of this clause (i), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate to protect its interests; and provided further, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this clause (i), and except as provided in the preceding sentence, the Indemnified Party shall bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnified Party may take over the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity under Section 9.1 with respect to such Third Party Claim. 24 30 (ii) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to Section 9.2(a), or if the Indemnifying Party gives such notice but fails to prosecute vigorously and diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Dispute Period, then the Indemnified Party shall have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings shall be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this clause (ii), if the Indemnifying Party has notified the Indemnified Party within the Dispute Period that the Indemnifying Party disputes its liability or the amount of its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this clause (ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party shall reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this clause (ii), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation. (iii) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its liability or the amount of its liability to the Indemnified Party with respect to the Third Party Claim under Section 9.1 or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party with respect to such Third Party Claim, the Damages in the amount specified in the Claim Notice shall be conclusively deemed a liability of the Indemnifying Party under Section 9.1 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute, and if not resolved 25 31 through negotiations within the period of thirty (30) calendar days immediately following the Dispute Period, such dispute shall be resolved by arbitration in accordance with Section 9.3. (b)In the event any Indemnified Party should have a claim under Section 9.1 against the Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver a written notification of a claim for indemnity under Section 9.1 specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim (an "Indemnity Notice") with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that the Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim or the amount of the claim described in such Indemnity Notice or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes the claim or the amount of the claim described in such Indemnity Notice, the Damages in the amount specified in the Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under Section 9.1 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the period of thirty (30) calendar days immediately following the Dispute Period, such dispute shall be resolved by arbitration in accordance with Section 9.3. Section 9.3. Arbitration. Any dispute under this Agreement (including, without limitation, pursuant to Section 9.2) or the Warrants shall be submitted to arbitration and shall be finally and conclusively determined by the decision of a board of arbitration consisting of three (3) members (the "Board of Arbitration") selected as hereinafter provided. Each of the Company, on the one hand, and the Investor and/or any other Indemnified Party, on the other hand, shall select one (1) member and the third member shall be selected by mutual agreement of the other members, or if the other members fail to reach agreement on a third member within twenty (20) days after their selection, such third member shall thereafter be selected by the American Arbitration Association upon application made to it for such purpose by the other members. The Board of Arbitration shall meet on consecutive business days in New York City, New York or such other place as a majority of the members of the Board of Arbitration determines more appropriate, and shall reach and render a decision in writing (concurred in by a majority of the members of the Board of Arbitration). In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures as a majority of the members of the Board of Arbitration deems necessary or appropriate. To the extent practicable, decisions of the Board of Arbitration shall be rendered no more than thirty (30) calendar days following commencement of proceedings with respect thereto. The Board of Arbitration shall cause its written decision to be delivered to the Company and the Investor and/or any other Indemnified Party. Any decision made by the Board of Arbitration (either prior to or after the 26 32 expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the Company and the Investor and/or any other Indemnified Party and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. The non-prevailing party to any arbitration shall bear the expense of both parties in relation thereto, including but not limited to the parties' attorneys' fees, if any, and the expenses and fees of the Board of Arbitration. ARTICLE X MISCELLANEOUS Section 10.1. Put Fees and Transaction Costs. In connection with the execution of this agreement the following Put Fees and Transaction Costs (as defined below) are payable by the Company. (a)Put Fees. The Company shall pay certain fees (the "Put Fees") to the payee entities in accordance with Schedule 10.1. Crescent is authorized by the Company to retain and to pay on behalf of the Company Put Fees, to the payee entities in accordance with Schedule 10.1. (b)Transaction Costs. The fees, expenses and disbursements of the Investor's counsel (the "Investor Legal Fees") shall be paid as follows: (i) the Investor shall pay the initial $10,000 of Investor Legal Fees; (ii) the Company shall pay all Investor Legal Fees in excess of $10,000 and less than $20,000; and (iii) the Investor shall pay all Investor Legal Fees in excess of $20,000. The Company and the Investor shall share equally all the Investor due diligence costs in connection with the consummation of this Agreement and the transactions contemplated hereby (the "Due Diligence Costs," and together with the Investor Legal Fees, the "Transaction Costs"), provided that the Company's share of the Due Diligence Costs shall not exceed $10,000. The Company shall pay to the Investor the Company's share of the Transaction Costs on the Subscription Date, to the extent such share of the Transaction Costs can be determined on the Subscription Date. The Company shall pay its share of the remaining Transaction Costs to the Investor not later than ten (10) days after receipt of notice from the Investor that such amount is due. The Company agrees to pay its own expenses incident to the performance of its obligations hereunder. Section 10.2. Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on the Principal Market on any given Trading Day for the purposes of this Agreement shall be the Bloomberg L.P. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 10.3. Brokerage. Except as disclosed in Section 10.1, each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker which would impose a legal obligation to pay any fee or commission. The Company on 27 33 the one hand, and the Investor, 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 finder's fees 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. Section 10.4. 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 given in accordance herewith. 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: If to the Company: Franklin Telecommunications Corp. 733 Lakefield Road Westlake Village, CA 91361 Attention: Frank W. Peters Telephone: (805) 373-8868 Facsimile: (805) 373-7373 with a copy (which shall not constitute notice) to: Hadden & Zepfel LLP 4675 MacArthur Court, Suite 710 Newport Beach, CA 92660 Attention: Robert J. Zepfel, Esq. Telephone: (949) 752-6100 Facsimile: (949) 752-6161 if to the Investor: Crescent International Ltd. c/o GreenLight (Switzerland) SA 84, av Louis-Casai, P.O. Box 42 1216 Geneva, Cointrin Switzerland Attention: Melvyn Craw/Maxi Brezzi Telephone: +41 22 791 72 56 28 34 Facsimile: +41 22 929 53 94 with a copy (which shall not constitute notice) to: Rogers & Wells LLP 200 Park Avenue, 52nd Floor New York, NY 10166 Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq. Telephone: (212) 878-8000 Facsimile: (212) 878-8375 Either party hereto may from time to time change its address or facsimile number for notices under this Section by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 10.5. Assignment. Neither this Agreement nor any rights of the Investor or the Company hereunder may be assigned by either party to any other person. Notwithstanding the foregoing, the Investor's interest in this Agreement may be assigned at any time, in whole or in part, to any affiliate of the Investor upon the prior written consent of the Company, which consent shall not to be unreasonably withheld provided, however, that any such assignment or transfer shall relieve the Investor of its duties under this Agreement only upon performance thereof by any such assignee or transferee. Section 10.6. Amendment; No Waiver. No party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth in this Agreement or therein. Except as expressly provided in this Agreement, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by both parties hereto. The failure of the either party to insist on strict compliance with this Agreement, or to exercise any right or remedy under this Agreement, shall not constitute a waiver of any rights provided under this Agreement, nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising such a right or remedy in the future. Section 10.7. Annexes and Exhibits; Entire Agreement. All annexes and exhibits to this Agreement are incorporated herein by reference and shall constitute part of this Agreement. This Agreement, the Warrants and the Registration Rights Agreement set forth the entire agreement and understanding of the parties relating to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written, relating to the subject matter hereof. Section 10.8. Survival. The provisions of Articles VI, VIII, IX and X, and of Section 7.3, shall survive the termination of this Agreement. Section 10.9. Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party. 29 35 Section 10.10.Title and Subtitles. The titles and subtitles used in this Agreement are used for the convenience of reference and are not to be considered in construing or interpreting this Agreement. Section 10.11.Counterparts. This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. Section 10.12.Choice of Law. This Agreement shall be construed under the laws of the State of New York. Section 10.13.Other Expenses. In the event that a dispute between the parties is not determined by a Board of Arbitration, the non-prevailing party in any action, suit or proceeding shall bear all investigative, legal and other expenses reasonably incurred in connection with, and any and all amounts paid in defense or settlement of such action, suit or proceeding. 30 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. Crescent International Ltd. By: /s/ Maxi Brezzi /s/ Omar A. Ali --------------------------------------------------- GreenLight (Switzerland) S.A. as Investor's manager Name: Title: Franklin Telecommunications Corp. By: /s/ Thomas Russell --------------------------------------------------- Name: Thomas Russell Title: Chief Financial Officer 31 37 EXHIBIT A FORM OF REGISTRATION RIGHTS AGREEMENT 34 38 EXHIBIT B FORM OF INCENTIVE WARRANT 35 39 EXHIBIT C [FORM OF EARLY PUT WARRANT] 36 40 EXHIBIT D FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL August ___, 1999 Crescent International Ltd. c/o GreenLight (Switzerland) SA 84, av Louis-Casai, P.O. Box 42 1216 Geneva, Cointrin Switzerland Re: Stock Purchase Agreement Between Crescent International Ltd. and Franklin Telecommunications Corp. Ladies and Gentlemen: This opinion is furnished to you pursuant to Section [6.11] [7.2(g)] of the Stock Purchase Agreement by and between Crescent International Ltd., a Bermuda entity (the "Investor") and Franklin Telecommunications Corp. (the "Company"), dated August ___, 1999 (the "Stock Purchase Agreement"), which provides for the issuance and sale by the Company of up to _________ shares of Common Stock of the Company (the "Put Shares"), a warrant to purchase up to ________ shares of Common Stock of the Company (the "Incentive Warrant") and warrants to purchase a number of shares to be determined in accordance with the terms of such warrants (the "Early Put Warrants", and together with the Incentive Warrant, the "Warrants") (the shares of Common Stock issued or issuable pursuant to exercise of the Warrants are referred to herein as the "Warrant Shares"). All terms used herein have the meanings defined for them in the Stock Purchase Agreement unless otherwise defined herein. We have acted as counsel for the Company in connection with the negotiation of the Stock Purchase Agreement, the Warrants, and the Registration Rights Agreement between the Investor and the Company, dated August ___, 1999 (the "Registration Rights Agreement" and together with the Stock Purchase Agreement, the "Agreements"). As counsel, we have made such legal and factual examinations and inquires as we have deemed advisable or necessary for the purpose of rendering this opinion. In addition, we have examined, among other things, originals or copies of such corporate records of the Company, certificates of public officials and such other documents and questions of law that we consider necessary or advisable for the purpose of rendering this opinion. In such examination we have assumed the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to original documents of all copies submitted to us as copies thereof, the legal capacity of natural persons, and the due execution and delivery of all documents (except as to due execution and delivery by the Company) where due execution and delivery are a prerequisite to the effectiveness thereof. As used in this opinion, the expression "to our knowledge" refers to the current actual knowledge of the attorneys of this firm who have worked on matters for the Company solely in connection with the Agreements and the Warrants and the transactions contemplated thereby. 37 41 For purposes of this opinion, we have assumed that you have all requisite power and authority, and have taken any and all necessary corporate action, to execute and deliver the Agreements, and we are assuming that the representations and warranties made by the Investor in the Agreements and pursuant thereto are true and correct. Based upon and subject to the foregoing, we are of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite power and authority (corporate and other) to carry on its business and to own, lease and operate its properties and assets as described in the Company's SEC Documents. To our knowledge, except as set forth in the SEC Documents, the Company does not own more than fifty percent (50%) of the outstanding capital stock of or control any other business entity. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the Company owns or leases property, other than those in which the failure so to qualify would not have a Material Adverse Effect. 2. The Company has the requisite corporate power and authority to enter into and perform its obligations under the Agreements and the Warrants and to issue the Put Shares, the Warrants and the Warrant Shares. The execution and delivery of the Agreements, and the execution, issuance and delivery of the Warrants, by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required. Each of the Agreements has been duly executed and delivered, and the Warrants have been, and upon issuance will be, duly executed, issued and delivered, by the Company and each of the Agreements and the Warrants constitutes, and upon issuance will constitute, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. 3. The execution, delivery and performance of the Agreements and the Warrants by the Company and the consummation by the Company of the transactions contemplated thereby, including without limitation the issuance of the Put Shares, the Warrant and the Warrant Shares, do not and will not (i) result in a violation of the Company's Articles or By-Laws; (ii) to our knowledge, conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to which the Company is a party, except for such conflicts, defaults, terminations, amendments, accelerations and cancellations as would not, individually or in the aggregate, have a Material Adverse Effect; or (iii) result in a violation of any federal or state law, rule or regulation 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. To our knowledge, the Company is not in violation of any terms of its Articles or Bylaws. 38 42 4. The issuance of the Put Shares and the Warrants in accordance with the Stock Purchase Agreement, and the issuance of the Warrant Shares in accordance with the Warrants, will be exempt from registration under the Securities Act of 1933 and will be in compliance with California state securities laws. When so issued, the Put Shares and the Warrant 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 Articles or Bylaws or, to our knowledge, in any agreement to which the Company is party. 5. To our knowledge, except as disclosed in the SEC Documents, there are no claims, actions, suits, proceedings or investigations that are pending against the Company or its properties, or against any officer or director of the Company in his or her capacity as such, nor has the Company received any written threat of any such claims, actions, suits, proceedings, or investigations which are required to be and have not been disclosed in the SEC Documents. 6. To our knowledge, there are no outstanding options, warrants, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any right to subscribe for or acquire any shares of Common Stock or contracts, commitments, understanding, or arrangements by which the Company is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock, except as described in the SEC Documents. [7. Nothing has come to our attention that has caused us to believe that the Registration Statement and the Prospectus at the time the Registration Statement became effective and as of the date of the filing with the Commission of the Company's most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q incorporated by reference into such Registration Statement contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; however, we express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data derived therefrom included in the Registration Statement or the Prospectus.] [For Opinion pursuant to Section 7.2(g).] This opinion is furnished to the Investor solely for its benefit in connection with the transactions described above and may not be relied upon by any other person or for any other purpose without our prior written consent. Very truly yours, 39 43 EXHIBIT E COMPLIANCE CERTIFICATE ----------------- The undersigned, __________, hereby certifies, with respect to shares of common stock of Franklin Telecommunications Corp. (the "Company") issuable in connection with the Put Notice, dated _____________ (the "Notice"), delivered pursuant to Article II of the Stock Purchase Agreement, dated August ___, 1999, by and between the Company and Crescent International Ltd. (the "Agreement"), as follows: 1. The undersigned is the duly elected [Office] of the Company. 2. The representations and warranties of the Company set forth in Article V of the Agreement are true and correct in all material respects as though made on and as of the date hereof. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Closing Date related to the Notice and has complied in all material respects with all obligations and conditions contained in Article VII of the Agreement. The undersigned has executed this Certificate this ____ day of ________, ____. ------------------------------------ Name: Title: 40 44 EXHIBIT F FORM OF TRANSFER AGENT INSTRUCTIONS 41 EX-10.3 4 WARRANT, DATED SEPTEMBER 15, 1999 1 EXHIBIT 10.3 EARLY PUT WARRANT THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF AUGUST 30, 1999, BETWEEN Franklin Telecommunications Corp. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM Franklin Telecommunications Corp.'S EXECUTIVE OFFICES. August 30, 1999 Warrant to Purchase Shares of Common Stock of Franklin Telecommunications Corp. (hereinafter an "Early Put Warrant"), up to a total number determined in accordance with Section 2(b) hereof. Franklin Telecommunications Corp., an entity organized and existing under the laws of the State of California (the "Company"), hereby agrees that Crescent International Ltd. (the "Investor") or any other Warrant Holder is entitled, on the terms and conditions set forth below, to purchase from the Company at any time during the Exercise Period up to a total number, determined in accordance with Section 2(b) hereof, of fully paid and nonassessable shares of Common Stock, no par value per share, of the Company (the "Common Stock"), as the same may be adjusted from time to time pursuant to Section 7 hereof, at the Exercise Price (hereinafter defined), as the same may be adjusted pursuant to Section 7 hereof. The resale of the shares of Common Stock or other securities issuable upon exercise or exchange of this Early Put Warrant is subject to the provisions of the Registration Rights Agreement (as defined below). Section 1. Definitions. "Agreement" shall mean the Stock Purchase Agreement, dated the date hereof, between the Company and the Investor. "Capital Shares" shall mean the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. "Exercise Date" shall mean either (i) the date this Early Put Warrant, the Exercise Notice and the Aggregate Exercise Price are received by the Company or (ii) the date advanced copy of the 2 Exercise Notice is sent by facsimile to the Company, provided that this Early Put Warrant, the original Exercise Notice, and the Aggregate Exercise Price are received by the Company within three (3) business days thereafter. If this Early Put Warrant, the original Exercise Notice and the Aggregate Exercise Price are not received within three (3) business days in accordance with clause (ii) above, the Exercise Date shall be the date this Incentive Warrant, the original Exercise Notice and the Aggregate Exercise Price are received by the Company. "Exercise Notice" shall mean the exercise form attached hereto as Exhibit A duly executed by the Warrant Holder. "Exercise Period" shall mean the period beginning on the Effective Date applicable to the Put Closing and continuing until the two-year period thereafter; provided that such period shall be extended one day for each day after the applicable Effective Date, that the Registration Statement covering (i) shares purchased by the Investor through the applicable Put and (ii) the Early Put Warrant Shares related to such Put and purchasable by exercise of this Early Put Warrant, is not effective during the period such Registration Statement is required to be effective pursuant to the Registration Rights Agreement. "Exercise Price" as of the date hereof shall mean $0.01 per share of Common Stock, subject to the adjustments provided for in Section 7 of this Early Put Warrant. "Per Share Early Put Warrant Value" shall mean the difference resulting from subtracting the Exercise Price from the Bid Price of one share of Common Stock on the Trading Day immediately preceding the Exercise Date. "Put Closing" shall mean the closing of the purchase and sale of 966,184 shares of Common Stock for an investment amount equal to $1,000,000 which occurred on August 30, 1999, and the closing of the purchase and sale of 966,184 shares of Common Stock for an investment amount equal to $1,000,000 which occurred on September 14, 1999, for a total Investment Amount of $2,000,000. "Registration Rights Agreement" shall mean the registration rights agreement, dated the date hereof between the Company and the Investor. "Subscription Date" shall mean the date on which the Agreement is executed and delivered by the parties hereto. "Warrant Holder" shall mean the Investor or any assignee or transferee of all or any portion of this Early Put Warrant; and other capitalized terms used but not defined herein shall have their respective meanings set forth in the Agreement. Section 2. Exercisability. a. Timing. If the Purchase Price on the Effective Date applicable to the Put Closing is lower than the Purchase Price on the Subscription Date with respect to such Put, this Early Put Warrant shall become immediately exercisable, subject to clause c. below. b. Number of Shares. The number of shares of Common Stock for which this Early Put Warrant is exercisable (the "Early Put Warrant Shares") shall be determined by subtracting (x) the Investment Amount divided by the Purchase Price on the Subscription Date 3 from (y) the Investment Amount divided by the Purchase Price on the Effective Date applicable to the Put Closing. c. Cash Payment in Lieu of Exercise. In the event that the Investor gives notice of exercise of this Early Put Warrant (in whole or in part) in accordance with Section 3 hereof, then the Company may, in lieu of issuance of shares of Common Stock pursuant to such exercise, pay to the Investor the Cash-Out Price (as defined below) for any or all of the shares of Common Stock purchasable by the Investor through the exercise of this Early Put Warrant. In the event that the Investor gives notice of exercise of this Early Put Warrant (in whole or in part) in accordance with Section 3 hereof and the number of Early Put Warrant Shares related to the Put Closing to be purchased pursuant to such exercise exceeds the number of shares registered pursuant to Section 1.1a. of the Registration Rights Agreement (the "Excess Shares"), then the Company may, in lieu of issuance of shares of Common Stock pursuant to such exercise, pay to the Investor the Cash-Out Price (as defined below) for any or all of the Excess Shares. d. Notice of Cash Payment in Lieu of Exercise. In the event that the Company elects to pay cash in lieu of exercise for any Early Put Warrant Shares or any Excess Shares in accordance with Section 2c. (the "Cash-Out Option"), the Company shall promptly give notice to the Investor of such election which notice shall be given no later than one business day following notice of the Investor's intention to exercise this Early Put Warrant and which notice shall set forth the number of shares of Common Stock for which the Company elects the Cash-Out Option. e. Method of Cash-Out; Effect of Cash-Out. In the event that the Company chooses the Cash-Out Option, then in lieu of delivering stock certificates as provided in Section 5 hereof, the Company shall deliver by wire transfer of immediately available funds to an account designated by the Investor as soon as practicable after the exercise of this Early Put Warrant (in full or in part), and in any event within three (3) Trading Days thereafter, the Cash-Out Price (as defined below) for any and all shares of Common Stock for which the Company elects the Cash-Out Option. "Cash-Out Price" shall mean the product of (x) the Bid Price of one share of Common Stock on the Trading Day immediately preceding the Exercise Date multiplied by (y) the number of shares of Common Stock for which the Company proposes to pay cash in lieu of exercise pursuant to Section 2c. Section 3. Exercise; Cashless Exercise. a. Method of Exercise. This Early Put Warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period, by the Warrant Holder by (i) the surrender of this Early Put Warrant, the Exercise Notice and the Aggregate Exercise Price to the Company at the address set forth in Section 14 hereof or (ii) the delivery by facsimile of an executed and completed Exercise Notice to the Company and delivery to the Company within three (3) business days thereafter of this Early Put Warrant, the original Exercise Notice and the Aggregate Exercise Price. b. Payment of Aggregate Exercise Price. Subject to paragraph (c) below, payment of the Aggregate Exercise Price shall be made by check or bank draft payable to the 4 order of the Company or by wire transfer to an account designated by the Company. If the amount of the payment received by the Company is less than the Aggregate Exercise Price, the Warrant Holder will be notified of the deficiency and shall make payment in that amount within five (5) business days of such notice. In the event the payment exceeds the Aggregate Exercise Price, the Company will refund the excess to the Warrant Holder within three (3) business days of both the receipt of such payment and the knowledge of such excess. c. Cashless Exercise. As an alternative to payment of the Aggregate Exercise Price in accordance with Section 3b. above, the Warrant Holder may elect to effect a cashless exercise by so indicating on the Exercise Notice and including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall surrender this Early Put Warrant for that number of shares of Common Stock determined by (i) multiplying the number of Early Put Warrant Shares for which this Early Put Warrant is being exercised by the Per Share Early Put Warrant Value and (ii) dividing the product by the Bid Price of one share of the Common Stock on the Trading Day immediately preceding the Exercise Date. d. Replacement Early Put Warrant. In the event that the Early Put Warrant is not exercised in full, the number of Early Put Warrant Shares shall be reduced by the number of such Early Put Warrant Shares for which this Early Put Warrant is exercised, and the Company, at its expense, shall forthwith issue and deliver to the Warrant Holder a new Early Put Warrant of like tenor in the name of the Warrant Holder or as the Warrant Holder may request, reflecting such adjusted number of Early Put Warrant Shares. Section 4. Five Percent Limitation. The Warrant Holder may not exercise this Early Put Warrant such that the number of Early Put Warrant Shares to be received pursuant to such exercise aggregated with all other shares of Common Stock then owned by the Warrant Holder beneficially or deemed beneficially owned by the Warrant Holder would result in the Warrant Holder owning more than 4.9% of all of such Common Stock as would be outstanding on such Exercise Date, as determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. As of any date prior to the Exercise Date, the aggregate number of shares of Common Stock into which this Early Put Warrant is exercisable, together with all other shares of Common Stock then beneficially owned (as such term is defined in Rule 13(d) under the Exchange Act) by such Warrant Holder and its affiliates, shall not exceed 4.9% of the total outstanding shares of Common Stock as of such date. Section 5. Delivery of Stock Certificates. a. Subject to the terms and conditions of this Early Put Warrant, as soon as practicable after the exercise of this Early Put Warrant in full or in part, and in any event within five (5) Trading Days thereafter, the Company at its expense (including, without limitation, the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate or certificates for the number of validly issued, fully paid and non-assessable Early Put Warrant Shares to which the Warrant Holder shall be entitled on such exercise, together with any other stock or other securities or property (including cash, where applicable) to which the Warrant Holder is 5 entitled upon such exercise in accordance with the provisions hereof; provided, however, that any such delivery to a location outside of the United States shall also be made within five (5) Trading Days after the exercise of this Early Put Warrant in full or in part. b. This Early Put Warrant may not be exercised as to fractional shares of Common Stock. In the event that the exercise of this Early Put Warrant, in full or in part, would result in the issuance of any fractional share of Common Stock, then in such event the Warrant Holder shall receive in cash an amount equal to the Bid Price of such fractional share within five (5) Trading Days. Section 6. Representations, Additional Warranties and Covenants of the Company. a. The Company shall take all necessary action and proceedings as may be required and permitted by applicable law, rule and regulation for the legal and valid issuance of this Early Put Warrant and the Early Put Warrant Shares to the Warrant Holder. b. At all times during the Exercise Period, the Company shall take all steps reasonably necessary and within its control to insure that the Common Stock remains listed or quoted on the Principal Market. c. The Early Put Warrant Shares, when issued in accordance with the terms hereof, will be duly authorized and, when paid for or issued in accordance with the terms hereof, shall be validly issued, fully paid and non-assessable. d. The Company has authorized and reserved for issuance to the Warrant Holder the requisite number of shares of Common Stock to be issued pursuant to this Early Put Warrant. The Company shall at all times reserve and keep available, solely for issuance and delivery as Early Put Warrant Shares hereunder, such shares of Common Stock as shall from time to time be issuable as Early Put Warrant Shares. Section 7. Adjustment of the Exercise Price. The Exercise Price and, accordingly, the number of Early Put Warrant Shares issuable upon exercise of the Early Put Warrant, shall be subject to adjustment from time to time upon the happening of certain events as follows: a. Reclassification, Consolidation, Merger or Mandatory Share Exchange. If the Company, at any time (a) between the Subscription Date and the Effective Date applicable to the Early Put or (b) between each subsequent issuance of a Put Notice by the Company and the applicable Effective Date therefor (i) reclassifies or changes its Outstanding Capital Shares or (ii) consolidates, merges or effects a mandatory share exchange with or into another corporation (other than a merger or mandatory share exchange with another corporation in which the Company is a continuing corporation and that does not result in any reclassification or change, or as a result of a subdivision or combination of Outstanding Capital Shares issuable upon exercise of this Early Put Warrant), then in any such event the Company, or such successor or purchasing corporation, as the case may be, shall, without payment of any additional consideration therefore, amend this Early Put Warrant or issue a new warrant providing that the Warrant Holder shall have rights not less favorable to the holder than those then applicable to this Early Put Warrant and to receive upon exercise under such amendment of this Early Put Warrant or new warrant, in lieu of each share of Common Stock theretofore issuable upon exercise of this Early Put Warrant 6 hereunder, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, mandatory share exchange, sale or transfer by the holder of one share of Common Stock issuable upon exercise of this Early Put Warrant had this Early Put Warrant been exercised immediately prior to such reclassification, change, consolidation, merger, mandatory share exchange or sale or transfer. Such amended warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7a. shall similarly apply to successive reclassifications, changes, consolidations, mergers, mandatory share exchanges and sales and transfers. b. Subdivision or Combination of Shares. If the Company, at any time (a) between the Subscription Date and the Effective Date applicable to the first Put or (b) between each subsequent issuance of a Put Notice by the Company and the applicable Effective Date therefor, shall subdivide its Common Stock, the number of shares of Common Stock issuable to the Investor hereunder shall be proportionately increased as of the effective date of such subdivision, or, if the Company shall take a record of holders of its Common Stock for the purpose of so subdividing, as of such record date, whichever is earlier. If the Company, at any time (a) between the Subscription Date and the Effective Date applicable to the first Put or (b) between each subsequent issuance of a Put Notice by the Company and the applicable Effective Date therefor, shall combine its Common Stock, the number of shares of Common Stock issuable to the Investor hereunder shall be proportionately decreased as of the effective date of such combination, or, if the Company shall take a record of holders of its Common Stock for the purpose of so combining, as of such record date, whichever is earlier. c. Stock Dividends. If the Company, at any time while this Early Put Warrant is unexpired and not exercised in full, shall pay a dividend in its Capital Shares, or make any other distribution of its Capital Shares, then the Exercise Price shall be adjusted, as of the date the Company shall take a record of the holders of its Capital Shares for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction: (i) the numerator of which shall be the total number of Outstanding Capital Shares immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of Outstanding Capital Shares immediately after such dividend or distribution. The provisions of this subsection c. shall not apply under any of the circumstances for which an adjustment is provided in subsections a. or b. d. Adjustment of Number of Shares. Upon each adjustment of the Exercise Price pursuant to any provisions of this Section 7, the number of Early Put Warrant Shares issuable hereunder at the option of the Warrant Holder shall be calculated, to the nearest one hundredth of a whole share, multiplying the number of Early Put Warrant Shares issuable prior to an adjustment by a fraction: 7 (i) the numerator of which shall be the Exercise Price before any adjustment pursuant to this Section 7; and (ii) the denominator of which shall be the Exercise Price after such adjustment. e. Liquidating Dividends, Etc. If the Company, at any time while this Early Put Warrant is unexpired and not exercised in full, makes a distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections a. through g.) while an exercise is pending, then the Warrant Holder shall be entitled to receive upon such exercise of the Early Put Warrant in addition to the Early Put Warrant Shares receivable in connection therewith, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per Capital Share multiplied by the number of Early Put Warrant Shares that, on the record date for such distribution, are issuable upon such exercise of the Early Put Warrant (with no further adjustment being made following any event which causes a subsequent adjustment in the number of Early Put Warrant Shares issuable), and an appropriate provision therefor shall be made a part of any such distribution. The value of a distribution that is paid in other than cash shall be determined in good faith by the Board of Directors of the Company. f. Other Provisions Applicable to Adjustments Under this Section. The following provisions will be applicable to the making of adjustments in any Exercise Price hereinabove provided in this Section 7: (i) Other Action Affecting Capital Shares. In case after the date hereof the Company shall take any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing subsections a. through e. hereof, inclusive, which in the opinion of the Company's Board of Directors would have a materially adverse effect upon the rights of the Warrant Holder at the time of exercise of the Early Put Warrant, the Exercise Price shall be adjusted in such manner and at such time as the Board of Directors on the advice of the Company's independent public accountants may in good faith determine to be equitable in the circumstances. (ii) Notice of Certain Actions. In the event the Company shall, at a time while the Incentive Warrant is unexpired and outstanding, take any action which pursuant to subsections a. through e. of this Section 7 may result in an adjustment of the Exercise Price, the Company shall give to the Warrant Holder at its last address known to the Company written notice of such action ten (10) days in advance of its effective date in order to afford to the Warrant Holder an opportunity to exercise the Incentive Warrant prior to such action becoming effective. (iii) Notice of Adjustments. Whenever the Exercise Price or number of Incentive Warrant Shares shall be adjusted pursuant to Section 7 hereof, the Company shall promptly make a certificate signed by its President or a Vice President and by its Treasurer or 8 Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Company's Board of Directors made any determination hereunder), and the Exercise Price and number of Incentive Warrant Shares purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by first class and postage prepaid) to the Holder of the Incentive Warrant. Section 8. No Impairment. The Company will not, by amendment of its Articles of Incorporation or By-Laws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Early Put Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrant Holder against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any Early Put Warrant Shares above the amount payable therefor on such exercise, and (b) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Early Put Warrant Shares on the exercise of this Early Put Warrant. Section 9. Rights As Stockholder. Prior to exercise of this Early Put Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Early Put Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings. However, in the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each Warrant Holder, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. Section 10. Replacement of Early Put Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Early Put Warrant and, in the case of any such loss, theft or destruction of the Early Put Warrant, upon 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 such Early Put Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Early Put Warrant of like tenor. Section 11. Choice of Law. This Agreement shall be construed under the laws of the State of New York, without giving effect to conflict of law provisions. Section 12. Entire Agreement; Amendments. This Early Put Warrant, the Incentive Warrant, the Registration Rights Agreement, and the Agreement contain the entire understanding of the parties with respect to the matters covered hereby and thereby. No provision of this Early 9 Put Warrant may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. Section 13. Restricted Securities. a. Registration or Exemption Required. This Early Put Warrant has been issued in a transaction exempt from the registration requirements of the Securities Act in reliance upon the provisions of Section 4(2) promulgated by the SEC under the Securities Act. This Early Put Warrant and the Early Put Warrant Shares issuable upon exercise of this Early Put Warrant may not be resold except pursuant to an effective registration statement or an exemption to the registration requirements of the Securities Act and applicable state laws. b. Legend. Any replacement Early Put Warrants issued pursuant to Section 2 hereof and any Early Put Warrant Shares issued upon exercise hereof, shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF August 30, 1999, BETWEEN Franklin Telecommunications Corp. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE FRANKLIN TELECOMMUNICATIONS CORP.'S EXECUTIVE OFFICES." Removal of such legend shall be in accordance with the legend removal provisions in the Agreement. c. No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in Section 13b. has been or shall be placed on the share certificates representing the Early Put Warrant Shares and no instructions or "stop transfer orders," so called, "stock transfer restrictions" or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Section 13. 10 d. Assignment. Assuming the conditions of Section 13a. above regarding registration or exemption have been satisfied, the Warrant Holder may sell, transfer, assign, pledge or otherwise dispose of this Early Put Warrant, in whole or in part. The Warrant Holder shall deliver a written notice to the Company substantially in the form of the assignment form attached hereto as Exhibit B (the "Assignment Notice"), indicating the person or persons to whom this Early Put Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days of receipt of such Assignment Notice, and shall deliver to the assignee(s) designated by the Warrant Holder a Early Put Warrant or Early Put Warrants of like tenor and terms for the specified number of shares. e. Investor's Compliance. Nothing in this Section 13 shall affect in any way the Investor's obligations under any agreement to comply with all applicable securities laws upon resale of the Common Stock. Section 14. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and 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: 11 if to the Company: Franklin Telecommunications Corp. 733 Lakefield Road Westlake Village, CA 91361 Attention: Frank W. Peters Telephone: (805) 373-8688 Facsimile: (805) 373-7373 with a copy (which shall not constitute notice) to: Haddan & Zepfel LLP 4675 MacArthur Court, Suite 710 Newport Beach, CA 92660 Attention: Robert J. Zepfel, Esq. Telephone: (949) 752-6100 Facsimile: (949) 752-6161 if to the Investor: Crescent International Ltd. c/o GreenLight (Switzerland) SA 84, av Louis-Casai, P.O. Box 42 1216 Geneva, Cointrin Switzerland Attention: Melvyn Craw/Maxi Brezzi Telephone: +41 22 791 72 56 Facsimile: +41 22 929 53 94 with a copy (which shall not constitute notice) to: Rogers & Wells LLP 200 Park Avenue New York, NY 10166 Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq. Telephone: (212) 878-8000 Facsimile: (212) 878-8375 Either party hereto may from time to time change its address or facsimile number for notices under this Section 14 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 15. Miscellaneous. This Early Put 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. The headings in this Early Put 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. 12 IN WITNESS WHEREOF, this Early Put Warrant was duly executed by the undersigned, thereunto duly authorized, as of the date first set forth above. Franklin Telecommunications Corp. By: /s/ Thomas Russell ------------------------------- Name: Thomas Russell Title: Chief Financial Officer Attested: By: /s/ Helen West -------------------------------- Name: Helen West Title: Secretary 13 EXHIBIT A TO THE EARLY PUT WARRANT EXERCISE FORM Franklin Telecommunications Corp. The undersigned (the "Registered Holder") hereby irrevocably exercises the right to purchase __________________ shares of Common Stock of Franklin Telecommunications Corp., an entity organized and existing under the laws of the State of California (the "Company"), evidenced by the attached Early Put Warrant, and herewith makes payment of the Exercise Price with respect to such shares in full in the form of (check the appropriate box) (i) Ucash or certified check in the amount of $________; (ii) Ywire transfer to the Company's account at __________________, _________, _________ (Account No.:_________); or (iii) Y______ Early Put Warrant Shares, which represent the amount of Early Put Warrant Shares as provided in the attached Early Put Warrant to be canceled in connection with such exercise, all in accordance with the conditions and provisions of said Early Put Warrant. The undersigned requests that stock certificates for such Early Put Warrant Shares be issued, and a Early Put Warrant representing any unexercised portion hereof be issued, pursuant to this Early Put Warrant in the name of the Registered Holder and delivered to the undersigned at the address set forth below. Dated:____________________________________ __________________________________________ Signature of Registered Holder __________________________________________ Name of Registered Holder (Print) __________________________________________ Address 14 NOTICE The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Early Put Warrant in every particular, without alteration or enlargement or any change whatsoever. 15 EXHIBIT B TO THE EARLY PUT WARRANT ASSIGNMENT (To be executed by the registered Warrant Holder (the "Registered Holder") desiring to transfer the Early Put Warrant, in whole or in part.) FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached Early Put Warrant hereby sells, assigns or transfers unto the person(s) named below (the "Assignee") the right to purchase ______________ shares of the Common Stock of Franklin Telecommunications Corp. evidenced by the attached Early Put Warrant and does hereby irrevocably constitute and appoint ______________________ (attorney) to transfer the number of shares specified of the said Early Put Warrant on the books of the Company, with full power of substitution in the premises. The undersigned requests that such Early Put Warrant be issued, and a Early Put Warrant representing any unsold, unassigned or non-transferred portion hereof be issued, pursuant to this Early Put Warrant in the name of the Registered Holder and delivered to the undersigned at the address set forth below. Dated:________________________________________ __________________________________________ Signature of Registered Holder __________________________________________ Name of Registered Holder (Print) __________________________________________ Address of Registered Holder __________________________________________ Name of Assignee (Print) __________________________________________ Address of Assignee (including zip code number) 16 NOTICE The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Early Put Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-10.4 5 WARRANT, DATED AUGUST 30, 1999 1 EXHIBIT 10.4 WARRANT THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF August 30, 1999, BETWEEN Franklin Telecommunications Corp. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM Franklin Telecommunications Corp.'S EXECUTIVE OFFICES. August 30, 1999 Warrant to Purchase up to 400,000 Shares of Common Stock of Franklin Telecommunications Corp. (hereinafter, the "Incentive Warrant"). Franklin Telecommunications Corp., an entity organized and existing under the laws of the State of California (the "Company"), hereby agrees that Crescent International Ltd. (the "Investor") or any other Warrant Holder is entitled, on the terms and conditions set forth below, to purchase from the Company at any time during the Exercise Period up to 400,000 fully paid and nonassessable shares of Common Stock, no par value per share, of the Company (the "Common Stock"), as the same may be adjusted from time to time pursuant to Section 6 hereof, at the Exercise Price (hereinafter defined), as the same may be adjusted pursuant to Section 6 hereof. The resale of the shares of Common Stock or other securities issuable upon exercise or exchange of this Incentive Warrant is subject to the provisions of the Registration Rights Agreement (as defined below). Section 1. Definitions. "Aggregate Exercise Price" shall mean the Exercise Price multiplied by the number of shares of Common Stock for which this Incentive Warrant is being exercised. "Agreement" shall mean the Stock Purchase Agreement, dated the date hereof, between the Company and the Investor. "Capital Shares" shall mean the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. 2 "Cashless Exercise" shall have the meaning set forth in Section 2c. hereof. "Exercise Date" shall mean either (i) the date this Incentive Warrant, the Exercise Notice and the Aggregate Exercise Price are received by the Company or (ii) the date advanced copy of the Exercise Notice is sent by facsimile to the Company, provided that this Incentive Warrant, the original Exercise Notice, and the Aggregate Exercise Price are received by the Company within three (3) business days thereafter. If this Incentive Warrant, the original Exercise Notice and the Aggregate Exercise Price are not received within three (3) business days in accordance with clause (ii) above, the Exercise Date shall be the date this Incentive Warrant, the original Exercise Notice and the Aggregate Exercise Price are received by the Company. "Exercise Notice" shall mean the exercise form attached hereto as Exhibit A duly executed by the Warrant Holder. "Exercise Period" shall mean that period beginning on the Subscription Date and continuing until the expiration of the five-year period thereafter; provided that such period shall be extended one day for each day after the Subscription Date, that the Registration Statement covering (i) shares purchased by the Investor through the first Put, (ii) the Early Put Warrant Shares related to such Put and (iii) the Incentive Warrant Shares purchasable through exercise of this Incentive Warrant, is not effective during the period such Registration Statement is required to be effective pursuant to the Registration Rights Agreement. "Exercise Price" as of the date hereof shall mean $1.5525 per share of Common Stock, subject to the adjustments provided for in Section 6 of this Incentive Warrant. "Per Share Warrant Value" shall mean the difference resulting from subtracting the Exercise Price from the Bid Price of one share of Common Stock on the Trading Day immediately preceding the Exercise Date. "Registration Rights Agreement" shall mean the registration rights agreement, dated the date hereof between the Company and the Investor. "Subscription Date" shall mean the date on which the Agreement is executed and delivered by the parties hereto. "Warrant Holder" shall mean the Investor or any assignee or transferee of all or any portion of this Incentive Warrant; and other capitalized terms used but not defined herein shall have their respective meanings set forth in the Agreement. Section 2. Exercise; Cashless Exercise. a. Method of Exercise. This Incentive Warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period, by the Warrant Holder by (i) the surrender of this Incentive Warrant, the Exercise Notice and the Aggregate Exercise Price to the Company at the address set forth in Section 13 hereof or (ii) the delivery by facsimile of an executed and completed Exercise Notice to the Company and delivery to the Company within three (3) business days thereafter of this Incentive Warrant, the original Exercise Notice and the Aggregate Exercise Price. 2 3 b. Payment of Aggregate Exercise Price. Subject to paragraph (c) below, payment of the Aggregate Exercise Price shall be made by check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company. If the amount of the payment received by the Company is less than the Aggregate Exercise Price, the Warrant Holder will be notified of the deficiency and shall make payment in that amount within five (5) business days of such notice. In the event the payment exceeds the Aggregate Exercise Price, the Company will refund the excess to the Warrant Holder within three (3) business days of both the receipt of such payment and the knowledge of such excess. c. Cashless Exercise. As an alternative to payment of the Aggregate Exercise Price in accordance with Section 2b. above, the Warrant Holder may elect to effect a cashless exercise by so indicating on the Exercise Notice and including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall surrender this Incentive Warrant for that number of shares of Common Stock determined by (i) multiplying the number of Incentive Warrant Shares for which this Incentive Warrant is being exercised by the Per Share Warrant Value and (ii) dividing the product by the Sale Price of one share of the Common Stock on the Trading Day immediately preceding the Exercise Date. d. Replacement Warrant. In the event that the Incentive Warrant is not exercised in full, the number of Incentive Warrant Shares shall be reduced by the number of such Incentive Warrant Shares for which this Incentive Warrant is exercised, and the Company, at its expense, shall forthwith issue and deliver to the Warrant Holder a new Incentive Warrant of like tenor in the name of the Warrant Holder or as the Warrant Holder may request, reflecting such adjusted number of Incentive Warrant Shares. Section 3. Five Percent Limitation. The Warrant Holder may not exercise this Incentive Warrant such that the number of Incentive Warrant Shares to be received pursuant to such exercise aggregated with all other shares of Common Stock then owned by the Warrant Holder beneficially or deemed beneficially owned by the Warrant Holder would result in the Warrant Holder owning more than 4.9% of all of such Common Stock as would be outstanding on such Exercise Date, as determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. As of any date prior to the Exercise Date, the aggregate number of shares of Common Stock into which this Incentive Warrant is exercisable, together with all other shares of Common Stock then beneficially owned (as such term is defined in Rule 13(d) under the Exchange Act) by such Warrant Holder and its affiliates, shall not exceed 4.9% of the total outstanding shares of Common Stock as of such date. Section 4. Delivery of Stock Certificates. a. Subject to the terms and conditions of this Incentive Warrant, as soon as practicable after the exercise of this Incentive Warrant in full or in part, and in any event within five (5) Trading Days thereafter, the Company at its expense (including, without limitation, the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate or certificates for the number of validly issued, fully paid and non-assessable Incentive Warrant Shares to which the Warrant Holder shall be entitled on such exercise, together with any other stock or 3 4 other securities or property (including cash, where applicable) to which the Warrant Holder is entitled upon such exercise in accordance with the provisions hereof; provided, however, that any such delivery to a location outside of the United States shall also be made within five (5) Trading Days after the exercise of this Incentive Warrant in full or in part. b. This Incentive Warrant may not be exercised as to fractional shares of Common Stock. In the event that the exercise of this Incentive Warrant, in full or in part, would result in the issuance of any fractional share of Common Stock, then in such event the Warrant Holder shall receive in cash an amount equal to the Sale Price of such fractional share within five (5) Trading Days. Section 5. Representations, Warranties and Covenants of the Company. a. The Company shall take all necessary action and proceedings as may be required and permitted by applicable law, rule and regulation for the legal and valid issuance of this Incentive Warrant and the Incentive Warrant Shares to the Warrant Holder. b. From the date hereof through the last date on which this Incentive Warrant is exercisable, the Company shall take all steps reasonably necessary and within its control to insure that the Common Stock remains listed or quoted on the Principal Market. c. The Incentive Warrant Shares, when issued in accordance with the terms hereof, will be duly authorized and, when paid for or issued in accordance with the terms hereof, shall be validly issued, fully paid and non-assessable. d. The Company has authorized and reserved for issuance to the Warrant Holder the requisite number of shares of Common Stock to be issued pursuant to this Incentive Warrant. The Company shall at all times reserve and keep available, solely for issuance and delivery as Incentive Warrant Shares hereunder, such shares of Common Stock as shall from time to time be issuable as Incentive Warrant Shares. Section 6. Adjustment of the Exercise Price. The Exercise Price and, accordingly, the number of Incentive Warrant Shares issuable upon exercise of the Incentive Warrant, shall be subject to adjustment from time to time upon the happening of certain events as follows: a. Reclassification, Consolidation, Merger or Mandatory Share Exchange. If the Company, at any time while this Incentive Warrant is unexpired and not exercised in full, (i) reclassifies or changes its Outstanding Capital Shares (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of outstanding securities issuable upon exercise of the Incentive Warrant) or (ii) consolidates, merges or effects a mandatory share exchange with or into another corporation (other than a merger or mandatory share exchange with another corporation in which the Company is a continuing corporation and that does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination of Outstanding Capital Shares issuable upon exercise of the Incentive Warrant), then in any such event the Company, or such successor or purchasing corporation, as the case may be, shall, without payment of any additional consideration therefore, amend this Incentive Warrant or issue a new 4 5 Incentive Warrant providing that the Warrant Holder shall have rights not less favorable to the holder than those then applicable to this Incentive Warrant and to receive upon exercise under such amendment of this Incentive Warrant or new Incentive Warrant, in lieu of each share of Common Stock theretofore issuable upon exercise of the Incentive Warrant hereunder, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, mandatory share exchange, sale or transfer by the holder of one share of Common Stock issuable upon exercise of the Incentive Warrant had the Incentive Warrant been exercised immediately prior to such reclassification, change, consolidation, merger, mandatory share exchange or sale or transfer. Such amended Incentive Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. The provisions of this Section 6a. shall similarly apply to successive reclassifications, changes, consolidations, mergers, mandatory share exchanges and sales and transfers. b. Subdivision or Combination of Shares. If the Company, at any time while this Incentive Warrant is unexpired and not exercised in full, shall subdivide its Common Stock, the Exercise Price shall be proportionately reduced as of the effective date of such subdivision, or, if the Company shall take a record of holders of its Common Stock for the purpose of so subdividing, as of such record date, whichever is earlier. If the Company, at any time while this Incentive Warrant is unexpired and not exercised in full, shall combine its Common Stock, the Exercise Price shall be proportionately increased as of the effective date of such combination, or, if the Company shall take a record of holders of its Common Stock for the purpose of so combining, as of such record date, whichever is earlier. c. Stock Dividends. If the Company, at any time while this Incentive Warrant is unexpired and not exercised in full, shall pay a dividend in its Capital Shares, or make any other distribution of its Capital Shares, then the Exercise Price shall be adjusted, as of the date the Company shall take a record of the holders of its Capital Shares for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction: (i) the numerator of which shall be the total number of Outstanding Capital Shares immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of Outstanding Capital Shares immediately after such dividend or distribution. The provisions of this subsection c. shall not apply under any of the circumstances for which an adjustment is provided in Sections 6a. or b. d. Adjustment of Number of Shares. Upon each adjustment of the Exercise Price pursuant to any provisions of this Section 6, the number of Incentive Warrant Shares issuable hereunder at the option of the Warrant Holder shall be calculated, to the nearest one hundredth of a whole share, multiplying the number of Incentive Warrant Shares issuable prior to an adjustment by a fraction: 5 6 (i) the numerator of which shall be the Exercise Price before any adjustment pursuant to this Section 6; and (ii) the denominator of which shall be the Exercise Price after such adjustment. e. Liquidating Dividends, Etc. If the Company, at any time while this Incentive Warrant is unexpired and not exercised in full, makes a distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections a. through g.) while an exercise is pending, then the Warrant Holder shall be entitled to receive upon such exercise of the Incentive Warrant in addition to the Incentive Warrant Shares receivable in connection therewith, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per Capital Share multiplied by the number of Incentive Warrant Shares that, on the record date for such distribution, are issuable upon such exercise of the Incentive Warrant (with no further adjustment being made following any event which causes a subsequent adjustment in the number of Incentive Warrant Shares issuable), and an appropriate provision therefor shall be made a part of any such distribution. The value of a distribution that is paid in other than cash shall be determined in good faith by the Board of Directors of the Company. f. Other Provisions Applicable to Adjustments Under this Section. The following provisions will be applicable to the making of adjustments in any Exercise Price hereinabove provided in this Section 6: (i) Other Action Affecting Capital Shares. In case after the date hereof the Company shall take any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing subsections a. through e. hereof, inclusive, which in the opinion of the Company's Board of Directors would have a materially adverse effect upon the rights of the Warrant Holder at the time of exercise of the Incentive Warrant, the Exercise Price shall be adjusted in such manner and at such time as the Board or Directors on the advice of the Company's independent public accountants may in good faith determine to be equitable in the circumstances. (ii) Notice of Certain Actions. In the event the Company shall, at a time while the Incentive Warrant is unexpired and outstanding, take any action which pursuant to subsections a. through e. of this Section 6 may result in an adjustment of the Exercise Price, the Company shall give to the Warrant Holder at its last address known to the Company written notice of such action ten (10) days in advance of its effective date in order to afford to the Warrant Holder an opportunity to exercise the Incentive Warrant prior to such action becoming effective. (iii) Notice of Adjustments. Whenever the Exercise Price or number of Incentive Warrant Shares shall be adjusted pursuant to Section 6 hereof, the Company shall promptly make a certificate signed by its President or a Vice President and by its Treasurer or 6 7 Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Company's Board of Directors made any determination hereunder), and the Exercise Price and number of Incentive Warrant Shares purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by first class and postage prepaid) to the Holder of the Incentive Warrant. Section 7. No Impairment. The Company will not, by amendment of its Articles of Incorporation or By-Laws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Incentive Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrant Holder against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any Incentive Warrant Shares above the amount payable therefor on such exercise, and (b) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Incentive Warrant Shares on the exercise of this Incentive Warrant. Section 8. Rights As Stockholder. Prior to exercise of this Incentive Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Incentive Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings. However, in the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each Warrant Holder, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. Section 9. Replacement of Incentive Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Incentive Warrant and, in the case of any such loss, theft or destruction of the Incentive Warrant, upon 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 such Incentive Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Incentive Warrant of like tenor. Section 10. Choice of Law. This Agreement shall be construed under the laws of the State of New York, without giving effect to conflict of law provisions. Section 11. Entire Agreement; Amendments. This Incentive Warrant, the Early Put Warrants, the Registration Rights Agreement, and the Agreement together with Exhibits and schedules hereto contain the entire understanding of the parties with respect to the matters 7 8 covered hereby and thereby. No provision of this Incentive Warrant may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. Section 12. Restricted Securities. a. Registration or Exemption Required. This Incentive Warrant has been issued in a transaction exempt from the registration requirements of the Securities Act in reliance upon the provisions of Section 4(2) promulgated by the SEC under the Securities Act. This Incentive Warrant and the Incentive Warrant Shares issuable upon exercise of this Incentive Warrant may not be resold except pursuant to an effective registration statement or an exemption to the registration requirements of the Securities Act and applicable state laws. b. Legend. Any replacement Incentive Warrants issued pursuant to Section 2 hereof and any Incentive Warrant Shares issued upon exercise hereof, shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF August 30, 1999, BETWEEN Franklin Telecommunications Corp. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE FRANKLIN TELECOMMUNICATIONS CORP.'S EXECUTIVE OFFICES." Removal of such legend shall be in accordance with the legend removal provisions in the Agreement. c. No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in Section 12b. has been or shall be placed on the share certificates representing the Incentive Warrant Shares and no instructions or "stop transfer orders," so called, "stock transfer restrictions" or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Section 12. 8 9 d. Assignment. Assuming the conditions of Section 12a. and 12b. above regarding registration or exemption have been satisfied, the Warrant Holder may sell, transfer, assign, pledge or otherwise dispose of this Incentive Warrant, in whole or in part. The Warrant Holder shall deliver a written notice to the Company substantially in the form of the assignment form attached hereto as Exhibit B (the "Assignment Notice"), indicating the person or persons to whom this Incentive Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days of receipt of such Assignment Notice, and shall deliver to the assignee(s) designated by the Warrant Holder a Incentive Warrant or Incentive Warrants of like tenor and terms for the specified number of shares. e. Investor's Compliance. Nothing in this Section 12 shall affect in any way the Investor's obligations under any agreement to comply with all applicable securities laws upon resale of the Common Stock. Section 13. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and 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 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: if to the Company: Franklin Telecommunications Corp. 733 Lakefield Road Westlake Village, CA 91361 Attention: Frank W. Peters Telephone: (805) 373-8688 Facsimile: (805) 373-7373 with a copy (which shall not constitute notice) to: Haddan & Zepfel LLP 4675 MacArthur Court, Suite 710 Newport Beach, CA 92660 Attention: Robert J. Zepfel, Esq. Telephone: (949) 752-6100 Facsimile: (949) 752-6161 9 10 if to the Investor: Crescent International Ltd. c/o GreenLight (Switzerland) SA 84, av Louis-Casai, P.O. Box 42 1216 Geneva, Cointrin Switzerland Attention: Melvyn Craw/Maxi Brezzi Telephone: +41 22 791 72 56 Facsimile: +41 22 929 53 94 with a copy (which shall not constitute notice) to: Rogers & Wells LLP 200 Park Avenue, 52nd Floor New York, NY 10166 Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq. Telephone: (212) 878-8000 Facsimile: (212) 878-8375 Either party hereto may from time to time change its address or facsimile number for notices under this Section 13 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 14. Miscellaneous. This Incentive 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. The headings in this Incentive 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. 10 11 IN WITNESS WHEREOF, this Incentive Warrant was duly executed by the undersigned, thereunto duly authorized, as of the date first set forth above. Franklin Telecommunications Corp. By: /s/ Thomas Russell ------------------------------- Name: Thomas Russell Title: Chief Financial Officer Attested: By: /s/ Helen West -------------------------------- Name: Helen West Title: Secretary 11 12 EXHIBIT A TO THE INCENTIVE WARRANT EXERCISE FORM Franklin Telecommunications Corp. The undersigned (the "Registered Holder") hereby irrevocably exercises the right to purchase __________________ shares of Common Stock of Franklin Telecommunications Corp., an entity organized and existing under the laws of the State of California, evidenced by the attached Incentive Warrant, and herewith makes payment of the Exercise Price with respect to such shares in full in the form of (check the appropriate box) (i) Ucash or certified check in the amount of $________; (ii) Ywire transfer to the Company's account at __________________, _________, _________ (Account No.:_________); or (iii) Y______ Incentive Warrant Shares, which represent the amount of Incentive Warrant Shares as provided in the attached Incentive Warrant to be canceled in connection with such exercise, all in accordance with the conditions and provisions of said Incentive Warrant. The undersigned requests that stock certificates for such Incentive Warrant Shares be issued, and a Incentive Warrant representing any unexercised portion hereof be issued, pursuant to this Incentive Warrant in the name of the Registered Holder and delivered to the undersigned at the address set forth below. Dated:______________________________________ ____________________________________________ Signature of Registered Holder ____________________________________________ Name of Registered Holder (Print) ____________________________________________ Address 12 13 NOTICE The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Incentive Warrant in every particular, without alteration or enlargement or any change whatsoever. 13 14 EXHIBIT B TO THE INCENTIVE WARRANT ASSIGNMENT (To be executed by the registered Warrant Holder (the "Registered Holder") desiring to transfer the Incentive Warrant, in whole or in part.) FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached Incentive Warrant hereby sells, assigns or transfers unto the person(s) named below (the "Assignee") the right to purchase ______________ shares of the Common Stock of Franklin Telecommunications Corp. evidenced by the attached Incentive Warrant and does hereby irrevocably constitute and appoint ______________________ (attorney) to transfer the number of shares specified of the said Incentive Warrant on the books of the Company, with full power of substitution in the premises. The undersigned requests that such Incentive Warrant be issued, and a Incentive Warrant representing any unsold, unassigned or non-transferred portion hereof be issued, pursuant to this Incentive Warrant in the name of the Registered Holder and delivered to the undersigned at the address set forth below. Dated:______________________________________ ____________________________________________ Signature of Registered Holder ____________________________________________ Name of Registered Holder (Print) ____________________________________________ Address of Registered Holder ____________________________________________ Name of Assignee (Print) ____________________________________________ Address of Assignee (including zip code number) 14 15 NOTICE The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Incentive Warrant in every particular, without alteration or enlargement or any change whatsoever. 15 EX-10.5 6 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.5 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of August 30, 1999, is made and entered into by and between Franklin Telecommunications Corp., an entity organized and existing under the laws of the State of California (the "Company"), and Crescent International Ltd., a Bermuda corporation (the "Investor"). WHEREAS, the Company and the Investor have entered into that certain Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), pursuant to which the Company will issue, from time to time, to the Investor up to $6,500,000 worth of shares of Common Stock, no par value per share, of the Company (the "Common Stock"); WHEREAS, pursuant to the terms of, and in partial consideration for, the Investor entering into the Stock Purchase Agreement, the Company has issued to the Investor an incentive warrant dated as of the date hereof, exercisable from time to time within five (5) years following the date of issuance (the "Incentive Warrant") for the purchase of an aggregate of up to 400,000 shares of Common Stock at a price specified in such Incentive Warrant; WHEREAS, pursuant to the terms of, and in partial consideration for, the Investor entering into the Stock Purchase Agreement, the Company will issue to the Investor an early put warrant, which may become exercisable from time to time as described in the Stock Purchase Agreement (the "Early Put Warrant" and together with the Incentive Warrant, the "Warrants") for the purchase of a number of shares of Common Stock and at a price to be determined as described in each such Early Put Warrant; WHEREAS, pursuant to the terms of, and in partial consideration for, the Investor's agreement to enter into the Stock Purchase Agreement, the Company has agreed to provide the Investor with certain registration rights with respect to the shares issued to the Investor and any additional shares of Common Stock issued or distributed to the Investor by way of a dividend, stock split, or other distribution in respect of the Shares, or acquired by way of any rights offering or similar offering made in respect of the shares (collectively, the "Registrable Securities"); NOW, THEREFORE, in consideration of the premises, the representations, warranties, covenants and agreements contained herein, in the Warrants, and in the Stock Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows (capitalized terms used herein and not defined herein shall have the respective meanings ascribed to them in the Stock Purchase Agreement): 2 ARTICLE I REGISTRATION RIGHTS Section 1.1. REGISTRATION STATEMENTS. a. Filing of Registration Statements. The Company shall register for resale all Put Shares issued or issuable to the Investor pursuant to the Stock Purchase Agreement and all Warrant Shares issued or issuable upon full exercise of the Warrants. Subject to the terms and conditions of this Agreement, the Company shall effect such registration in the manner provided in either (i) or (ii) below. The Company shall file with the SEC either: (i) on or before September 15, 1999, a registration statement (the "Initial Registration Statement") on such form promulgated by the SEC for which the Company qualifies, that counsel for the Company shall deem appropriate and which form shall be available for the sale of the shares of Common Stock purchased by the Investor through the Early Put (the "Initial Shares"), the Incentive Warrant Shares and the Early Put Warrant Shares. The aggregate number of shares to be registered under the Initial Registration Statement shall be equal to two hundred percent (200%) of the Initial Shares, plus the Incentive Warrant Shares. Prior to any subsequent put, the Company shall file with the SEC a registration statement (the "Subsequent Registration Statement" and together with the Initial Registration Statement, the "Registration Statements") on such form promulgated by the SEC for which the Company qualifies, that counsel for the Company shall deem appropriate and which form shall be available for the sale of the shares of Common Stock to be purchased by the Investor and any Warrant Shares which have not previously been registered. The aggregate number of shares to be registered under the Subsequent Registration Statement shall be equal to 125% of (X-Y)/Z, where X is the Maximum Commitment Amount, Y is the Investment Amount of the Early Put and Z is 92% of the Minimum Bid Price; or (ii) on or before September 15, 1999, a registration statement (the "Combined Registration Statement") on such form promulgated by the SEC for which the Company qualifies, that counsel for the Company shall deem appropriate and which form shall be available for the sale of all Put Shares issued or issuable pursuant to the terms of the Stock Purchase Agreement and all Warrant Shares issued or issuable upon full exercise of the Warrants. The aggregate number of shares to be registered under the Combined Registration Statement shall be equal to 125% of (A/B)+C, where A is the Maximum Commitment Amount, B is 92% of the Minimum Bid Price and C is the number of Incentive Warrant Shares. b. Effectiveness of the Registration Statements. The Company shall use its best efforts either: (i) to have the Initial Registration Statement declared effective by the SEC in no event later than ninety (90) calendar days after the Subscription Date and to have the Subsequent 2 3 Registration Statement declared effective by the SEC in no event later than 150 calendar days after the Subscription Date, or (ii) to have the Combined Registration Statement declared effective by the SEC in on event later than ninety (90) calendar days after the Subscription Date. The Company shall ensure that all Registration Statements remain in effect for a period ending 180 days following the earlier of termination of the Commitment Period and termination of the Investor's obligations pursuant to Section 2.4 of the Stock Purchase Agreement; provided that such period shall be extended one day for each day after the applicable Effective Date, that any Registration Statement covering shares purchased by the Investor is not effective during the period such Registration Statement is required to be effective pursuant to this Agreement; and provided further that the Company shall not be required to ensure that any Registration Statement covering shares purchased by the Investor remain in effect for such 180 day period if the shares registered thereunder shall have become freely tradable pursuant to Rule 144(k) of the Securities Act or have otherwise been sold. c. Failure to Obtain or Maintain Effectiveness of Registration Statements. In the event the Company fails for any reason to obtain the effectiveness of any Registration Statement within the time periods set forth in Section 1.1(b) (a "Tardy Registration Statement") or in the event that the Company fails for any reason to maintain the effectiveness of any Registration Statement (or the underlying prospectus) covering shares held by the Investor (an "Ineffective Registration Statement" together with a Tardy Registration Statement, a "Failed Registration Statement") (unless the Registrable Securities covered by such Registration Statement shall have become freely tradable pursuant to Rule 144(k) of the Securities Act or have been otherwise sold), for a period ending 180 days following the earlier of termination of the Commitment Period and termination of the Investor's obligations pursuant to Section 2.4 of the Stock Purchase Agreement (provided that such period shall be extended one day for each day after the applicable Effective Date, that the Registration Statement covering shares purchased by the Investor, is not effective during the period such Registration Statement is required to be effective pursuant to this Agreement), at any time during any period of such ineffectiveness (an "Ineffective Period"), then, in either event the Company shall pay to the Investor in immediately available funds into an account designated by the Investor an amount equal to two percent (2.0%) of the aggregate Purchase Price of all of the Registrable Securities under any such Failed Registration Statement then held by the Investor for each calendar month and for each portion of a calendar month, pro rata, during an Ineffective Period. Such payments shall be made on the first Trading Day after the earliest to occur of (i) the expiration of the applicable Ineffective Period and (ii) the last day of each calendar month during an Ineffective Period. d. Restricted Period. While in possession of material non-public information received from the Company, the Investor shall not dispose of any Registrable Securities until such information is disclosed to the public (a "Restricted Period"); provided that, if such Restricted Period exceeds one hundred twenty (120) days, the liquidated damages described in Section 1.1(c) hereof shall be increased to three percent (3.0%) until such restricted Period shall have elapsed. e. Failure to Register Sufficient Number of Shares. If the Early Put Warrant shall become exercisable for a number of shares in excess of the number of Early Put Warrant Shares included in the Initial Registration Statement ("Excess Shares"), then the Company shall immediately amend such Registration Statement (or file a new Registration Statement) to cover 3 4 the Excess Shares (such amended or new Registration Statement is referred to herein as an "Excess Registration Statement") and the Company shall pay to the Investor in immediately available funds into an account designated by the Investor an amount equal to one and a half percent (1.5%) of the product of (x) the number of Excess Shares multiplied by (y) the Bid Price of the Common Stock on the applicable Effective Date, for each calendar month and for each portion of a calendar month, pro rata, during the period from the Effective Date of the applicable Registration Statement and the Effective Date of the applicable Excess Registration Statement. f. Liquidated Damages. The Company and the Investor hereby acknowledge and agree that the sums payable under subsections 1.1(c), 1.1(d) and 1.1(e) hereof shall constitute liquidated damages and not penalties. The parties further acknowledge that (i) the amount of loss or damages likely to be incurred is incapable or is difficult to estimate precisely, (ii) the amounts specified in such subsections bear a reasonable proportion and are not plainly or grossly disproportionate to the probable loss likely to be incurred in connection with any failure by the Company to obtain or maintain the effectiveness of a Registration Statement, (iii) one of the reasons for the Company and the Investor reaching an agreement as to such amounts was the uncertainty and cost of litigation regarding the question of actual damages, and (iv) the Company and the Investor are sophisticated business parties and have been represented by sophisticated and able legal and financial counsel and negotiated this Agreement at arm's length. ARTICLE II REGISTRATION PROCEDURES Section 2.1. FILINGS; INFORMATION. The Company will effect the registration of the Registrable Securities in accordance with the intended methods of disposition thereof as furnished to the Company by any proposed seller of such Registrable Securities. Without limiting the foregoing, the Company in each such case will do the following as expeditiously as possible, but in no event later than the deadline, if any, prescribed therefor in this Agreement: a. The Company shall (i) prepare and file with the SEC the Registration Statement(s) covering the shares as described in subsection 1.1(a) above; (ii) use its best efforts to cause such filed Registration Statement(s) to become and remain effective (pursuant to Rule 415 under the Securities Act or otherwise) for the period prescribed by Section 1.1(b); (iii) prepare and file with the SEC such amendments and supplements to each Registration Statement and the prospectus used in connection therewith as may be necessary to keep each Registration Statement effective for the time period prescribed by Section 1.1(b); and (iv) comply with the provisions of the Securities Act with respect to the disposition of all securities covered by each Registration Statement during such period in accordance with the intended methods of disposition by the Investor set forth in each Registration Statement. b. The Company shall file all necessary amendments to each Registration Statement in order to effectuate the purpose of this Agreement, the Stock Purchase Agreement, and the Warrants. c. Five (5) Trading Days prior to filing each Registration Statement or prospectus, or any amendment or supplement thereto (excluding amendments deemed to result from the filing of documents incorporated by reference therein), the Company shall deliver to the 4 5 Investor and one firm of counsel representing the Investor, in accordance with the notice provisions of Section 4.8, copies of such Registration Statement as proposed to be filed, together with exhibits thereto, which documents will be subject to review and comment by the Investor and such counsel, and thereafter deliver to the Investor and such counsel, in accordance with the notice provisions of Section 4.8, such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such Registration Statement (including each preliminary prospectus) and such other documents or information as the Investor or counsel may reasonably request in order to facilitate the disposition of the Registrable Securities. d. The Company shall deliver, in accordance with the notice provisions of Section 4.8, to each broker as directed by the Investor such number of conformed copies of such Registration Statement and of each amendment and supplement thereto (in each case including all exhibits and documents incorporated by reference), such number of copies of the prospectus contained in such Registration Statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 promulgated under the Securities Act relating to the Registrable Securities, and such other documents, as may be reasonably requested to facilitate the disposition of the Registrable Securities. e. After the filing of each Registration Statement, the Company shall promptly notify the Investor of any stop order issued or threatened by the SEC in connection therewith and take all commercially reasonable actions required to prevent the entry of such stop order or to remove it if entered. f. The Company shall use its best efforts to (i) register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as the Investor may reasonably (in light of its intended plan of distribution) request, and (ii) cause the Registrable Securities to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable the Investor to consummate the disposition of the Registrable Securities; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (f), subject itself to taxation in any such jurisdiction, or consent or subject itself to general service of process in any such jurisdiction. g. The Company shall immediately notify the Investor, but in no event later than two (2) business days by facsimile and by overnight courier, upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the 5 6 happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of a Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) the declaration by the SEC of the effectiveness of a Registration Statement; and (vi) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate, and the Company shall promptly make available to the Investor any such supplement or amendment to the related prospectus. h. The Company shall enter into customary agreements and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities (whereupon the Investor may, at its option, require that any or all of the representations, warranties and covenants of the Company also be made to and for the benefit of the Investor). i. The Company shall make available to the Investor (and will deliver to Investor's counsel), subject to restrictions imposed by the United States federal government or any agency or instrumentality thereof, copies of all correspondence between the SEC and the Company, concerning any Registration Statement, and, except during a Blackout Period, will also make available for inspection by the Investor and any attorney, accountant or other professional retained by the Investor (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers and employees to supply all information reasonably requested by any Inspectors in connection with any Registration Statement. Records that the Company determines, in good faith, to be confidential and that it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or (ii) the disclosure or release of such Records is requested or required pursuant to oral questions, interrogatories, requests for information or documents or a subpoena or other order from a court of competent jurisdiction or other process; provided, however, that prior to any disclosure or release pursuant to clause (ii), the Inspectors shall provide the Company with prompt notice of any such request or requirement so that the Company may seek an appropriate protective order or waive such Inspectors' obligation not to disclose such Records; and, provided, further, that if failing the entry of a protective order or the waiver by the Company permitting the disclosure or release of such Records, the Inspectors, upon advice of counsel, are compelled to disclose such Records, the Inspectors may disclose that portion of the Records that counsel has advised the Inspectors that the Inspectors are compelled to disclose. The Investor agrees that information obtained by it solely as a result of such inspections (not including any information obtained from a third party who, insofar as is known to the Investor after reasonable inquiry, is not prohibited from providing such information by a contractual, legal or fiduciary obligation to the Company) shall be deemed confidential and shall not be used by it as the basis for any market transactions 6 7 in the securities of the Company or its affiliates unless and until such information is made generally available to the public. The Investor further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. j. To the extent required by law or reasonably necessary to effect a sale of Registrable Securities in accordance with prevailing business practices at the time of any sale of Registrable Securities pursuant to a Registration Statement, the Company shall deliver to the Investor a signed counterpart, addressed to the Investor, of (1) an opinion or opinions of counsel to the Company and (2) a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions of comfort letters, as the case may be, as the Investor therefor reasonably requests. k. The Company shall otherwise comply with all applicable rules and regulations of the SEC, including, without limitation, compliance with applicable reporting requirements under the Exchange Act. l. The Company shall appoint a transfer agent and registrar for all of the class that includes the Registrable Securities covered by a Registration Statement not later than the effective date of a Registration Statement. m. The Company may require the Investor to furnish promptly in writing to the Company such information as may be legally required in connection with any registration including, without limitation, all such information as may be requested by the SEC or the National Association of Securities Dealers. The Investor agrees to provide such information requested in connection with any registration within five (5) Trading Days after receiving such written request and the Company shall not be responsible for any delays in obtaining or maintaining the effectiveness of a Registration Statement caused by the Investor's failure to timely provide such information. Each seller of Registrable Securities shall notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such seller to the Company or of the occurrence of any event, in either case as a result of which any prospectus relating to the Registrable Securities contains or would contain an untrue statement of a material fact regarding such seller or its intended method of disposition of such Registrable Securities or omits to state any material fact regarding such seller or such seller's intended method of disposition of such Registrable Securities required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and promptly furnish to the Company any additional information required to correct and update any previously furnished information or required so that such prospectus shall not contain, with respect to such seller or the disposition of such Registrable Securities, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 2.2. REGISTRATION EXPENSES. In connection with each Registration Statement, the Company shall pay all registration expenses incurred in connection with the 7 8 registration thereunder (the "Registration Expenses"), including, without limitation: (i) all registration, filing, securities exchange listing and fees required by the National Association of Securities Dealers, (ii) all registration, filing, qualification and other fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities required hereby), (iii) all of the Company's word processing, duplicating, printing, messenger and delivery expenses, (iv) the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred by the Company in connection with the listing of the Registrable Securities, (vi) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any special audits or comfort letters or costs associated with the delivery by independent certified public accountants of such special audit(s) or comfort letter(s) requested pursuant to Section 2.1(j) hereof), (vii) the fees and expenses of any special experts retained by the Company in connection with such registration, (viii) premiums and other costs of policies of insurance purchased at the discretion of the Company against liabilities arising out of any public offering of the Registrable Securities being registered, and (ix) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting fees, discounts, transfer taxes or commissions, if any, attributable to the sale of Registrable Securities, which shall be payable by each holder of Registrable Securities pro rata on the basis of the number of Registrable Securities of each such holder that are included in a registration under this Agreement. Section 2.3. BLACKOUT PERIOD. Investor agrees by acquisition of Registrable Securities that, upon receipt of written notice from the Company of the occurrence of any event of the kind described in Section 2.1(g)(iv), for a period not to exceed 120 days (a "Blackout Period") the Investor shall forthwith discontinue the Investor's offer of the Registrable Securities pursuant to the Registration Statement relating to such Registrable Securities until the Investor shall have received copies of the supplemented or amended prospectus contemplated by Section 2.1(g)(iv) and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in the Investor's possession, of the prospectus relating to such Registrable Securities at the time of receipt of such notice. In the event that any Investor uses a prospectus in connection with the offering and sale of any of the Registrable Securities covered by such prospectus, such Investor will use only the latest version of such prospectus provided by the Company to the Investor. ARTICLE III INDEMNIFICATION AND CONTRIBUTION Section 3.1. INDEMNIFICATION BY THE COMPANY. a. The Company agrees to indemnify and hold harmless the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, and each Person or entity, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with the partners, Affiliates, officers, directors, employees and duly authorized agents of such controlling Person or entity (collectively, the "Controlling Persons"), from and against any and all losses, claims, damages, liabilities, costs 8 9 and expenses (including, without limitation, any and all reasonable attorneys' fees and disbursements and costs and expenses of investigating and defending any such claim and any and all amounts paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted) (collectively, "Damages"), joint or several, and any action or proceeding in respect thereof to which the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, and any Controlling Person, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, as and when incurred, insofar as such Damages (or actions or proceedings in respect thereof) (i) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, or in any preliminary prospectus, final prospectus, summary prospectus, documents filed under the Exchange Act and deemed to be incorporated by reference into any Registration Statement, application or other document executed by or on behalf other Company or based on written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Registrable Securities under the securities or blue sky laws thereof or filed with the SEC, amendment or supplement relating to the Registrable Securities or (ii) arise out of, or are based upon, any 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 shall reimburse the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, and each such Controlling Person, for any legal and other expenses reasonably incurred by the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, or any such Controlling Person, as incurred, in investigating or defending or preparing to defend against any such Damages or actions or proceedings; provided, however, that the Company shall not be liable to the extent that any such Damages arise out of the Investor's failure to send or give a copy of the final prospectus or supplement to the persons asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such person if such statement or omission was corrected in such final prospectus or supplement; provided, further, that the Company shall not be liable to the extent that any such Damages arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, or any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by the Investor or any other person who participates as a seller or as an underwriter in the offering or sale of such securities, in either case, in any questionnaire or other request by the Company, or otherwise specifically stating that it is for use in the preparation thereof. b. The Investor agrees to indemnify and hold harmless the Company, its partners, affiliates, officers, directors, employees and duly authorized agents, and the Controlling Persons, from and against any and all Damages, joint or several, and any action or proceeding in respect thereof to which the Company, its partners, affiliates, officers, directors, employees and duly authorized agents, and any Controlling Person, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, as and when incurred, insofar as such Damages (or actions or proceedings in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact provided in writing to the Company by the Investor expressly for use in any Registration Statement, preliminary prospectus, final prospectus or summary prospectus of the 9 10 Company filed in any jurisdiction in order to qualify the Registrable Securities under the securities or blue sky laws thereof or filed with the SEC and shall reimburse the Company, its partners, affiliates, officers, directors, employees and duly authorized agents, and each such Controlling Person, for any legal and other expenses reasonably incurred by the Company, its partners, affiliates, officers, directors, employees and duly authorized agents, or any such Controlling Person, as incurred, in investigating or defending or preparing to defend against any such Damages or actions or proceedings; provided, however, that the Investor shall not be liable to the extent that any such Damages arise out of the Company's failure to send or give a copy of the final prospectus or supplement to the persons asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such person if such statement or omission was corrected in such final prospectus or supplement; provided, further, that the Investor shall not be liable to the extent that any such Damages arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, or any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement made by the Company or any other person who participates as a seller or as an underwriter in the offering or sale of such securities. Section 3.2. METHOD OF ASSERTING INDEMNIFICATION CLAIMS. All claims for indemnification by any Indemnified Party (as defined below) under Section 3.1 shall be asserted and resolved as follows: a. In the event any claim or demand in respect of which any person claiming indemnification under any provision of Section 3.1 (an "Indemnified Party") might seek indemnity under Section 3.1 is asserted against or sought to be collected from such Indemnified Party by a person other than the Company, the Investor or any affiliate of the Company (a "Third Party Claim"), the Indemnified Party shall deliver a written notification, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim for indemnification that is being asserted under any provision of Section 3.1 against any person (the "Indemnifying Party"), together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such Third Party Claim (a "Claim Notice") with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim to the extent that the Indemnifying Party's ability to defend has been irreparably prejudiced by such failure of the Indemnified Party. The Indemnifying Party shall notify the Indemnified Party as soon as practicable within the period ending thirty (30) calendar days following receipt by the Indemnifying Party of either a Claim Notice or an Indemnity Notice (as defined below) (the "Dispute Period") whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party under Section 3.1 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim. (i) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 3.2(a), then the Indemnifying Party shall have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost 10 11 and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which proceedings shall be vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages or that provides for the payment of monetary damages as to which the Indemnified Party shall not be indemnified in full pursuant to Section 3.1). The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole cost and expense of the Indemnified Party, at any time prior to the Indemnifying Party's delivery of the notice referred to in the first sentence of this clause (i), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate to protect its interests; and provided further, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this clause (i), and except as provided in the preceding sentence, the Indemnified Party shall bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnified Party may take over the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity under Section 3.1 with respect to such Third Party Claim. (ii) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to Section 3.2(a), or if the Indemnifying Party gives such notice but fails to prosecute vigorously and diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Dispute Period, then the Indemnified Party shall have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings shall be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this clause (ii), if the Indemnifying Party has notified the Indemnified Party within the Dispute Period that the Indemnifying Party disputes its liability or the amount of its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this clause (ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party shall reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this clause (ii), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation. 11 12 (iii) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its liability or the amount of its liability to the Indemnified Party with respect to the Third Party Claim under Section 3.1 or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party with respect to such Third Party Claim, the Damages in the amount specified in the Claim Notice shall be conclusively deemed a liability of the Indemnifying Party under Section 3.1 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the period of thirty (30) calendar days immediately following the Dispute Period, such dispute shall be resolved by arbitration in accordance with Section 3.3. b. In the event any Indemnified Party should have a claim under Section 3.1 against the Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver a written notification of a claim for indemnity under Section 3.1 specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim (an "Indemnity Notice") with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that the Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim or the amount of the claim described in such Indemnity Notice or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes the claim or the amount of the claim described in such Indemnity Notice, the Damages in the amount specified in the Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under Section 3.1 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the period of thirty (30) calendar days immediately following the Dispute Period, such dispute shall be resolved by arbitration in accordance with Section 3.3. Section 3.3. ARBITRATION. Any dispute under this Agreement (including, without limitation, pursuant Section 3.2) or the Warrants shall be submitted to arbitration and shall be finally and conclusively determined by the decision of a board of arbitration consisting of three (3) members (the "Board of Arbitration") selected as hereinafter provided. Each of the Company, on the one hand, and the Investor and/or any other Indemnified Party, on the other hand, shall select one (1) member and the third member shall be selected by mutual agreement of the other members, or if the other members fail to reach agreement on a third member within twenty (20) days after their selection, such third member shall thereafter be selected by the American Arbitration Association upon application made to it for such purpose by the other members. The Board of Arbitration shall meet on consecutive business days in New York City, New York or such other place as a majority of the members of the Board of Arbitration determines more appropriate, and shall reach and render a decision in writing (concurred in by a majority of the members of the Board of Arbitration). In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures as a majority of the 12 13 members of the Board of Arbitration deems necessary or appropriate. To the extent practical, decisions of the Board of Arbitration shall be rendered no more than thirty (30) calendar days following commencement of proceedings with respect thereto. The Board of Arbitration shall cause its written decision to be delivered to the Company and the Investor and/or any other Indemnified Party. Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the Company and the Investor and/or any other Indemnified Party and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. The non-prevailing party to any arbitration shall bear the expense of both parties in relation thereto, including but not limited to the parties' attorneys' fees, if any, and the expenses and fees of the Board of Arbitration. Section 3.4. OTHER INDEMNIFICATION. Indemnification similar to that specified in the preceding paragraphs of this Article 3 (with appropriate modifications) shall be given by the Company with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. The provisions of this Article III shall be in addition to any other rights to indemnification, contribution or other remedies which an Indemnified Party may have pursuant to law, equity, contract or otherwise. Section 3.5. CONTRIBUTION. If the indemnification and reimbursement obligations provided for in any section of this Article III is unavailable or insufficient to hold harmless the Indemnified Parties in respect of any Damages referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Damages as between the Company on the one hand and the Investor or seller on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of the Investor or seller in connection with such statements or omissions, as well as other equitable considerations. The relative fault of the Company on the one hand and of the Investor or seller on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Investor agree that it would not be just and equitable if contribution pursuant to this Section 3.4 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the Damages referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 3.4, the Investor or seller shall in no event be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of the Investor or seller were sold to the public (less underwriting discounts and commissions) exceeds the amount of any damages which the Investor or seller has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation 13 14 (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE IV MISCELLANEOUS Section 4.1. OUTSTANDING REGISTRATION RIGHTS. Except for the agreement dated November 24, 1997, in which the Company has granted registration rights to Swartz Investments, L.L.C., the Company represents and warrants to the Investor that there is not in effect on the date hereof any other agreement by the Company pursuant to which any holders of securities of the Company have a right to cause the Company to register or qualify such securities under the Securities Act or any securities or blue sky laws of any jurisdiction. Section 4.2. TERM. The registration rights provided to the holders of Registrable Securities hereunder shall terminate at such time as all Registrable Securities have been issued and have ceased to be Registrable Securities. Notwithstanding the foregoing, paragraphs (c) and (d) of Section 1.1, Article III, Section 4.8, and Section 4.9 shall survive the termination of this Agreement. Section 4.3. RULE 144. If the Company is required to file reports under the Exchange Act, the Company will file in a timely manner, information, documents and reports in compliance with the Securities Act and the Exchange Act and will, at its expense, promptly take such further action as holders of Registrable Securities may reasonably request to enable such holders of Registrable Securities to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act ("Rule 144"), as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. If at any time the Company is not required to file such reports, it will, at its expense, forthwith upon the written request of any holder of Registrable Securities who intends to make a sale under Rule 144, make available adequate current public information with respect to the Company within the meaning of paragraph (c)(2) of Rule 144 or such other information as necessary to permit sales pursuant to Rule 144. Upon the request of the Investor, the Company will deliver to the Investor a written statement, signed by the Company's principal financial officer, as to whether it has complied with such requirements. This Section 4.3 shall terminate at the same time as the registration rights as provided in Section 4.2. Section 4.4. CERTIFICATE. The Company will, at its expense, forthwith upon the request of any holder of Registrable Securities, deliver to such holder a certificate, signed by the Company's principal financial officer, stating (a) the Company's name, address and telephone number (including area code), (b) the Company's Internal Revenue Service identification number, (c) the Company's Commission file number, (d) the number of shares of each class of stock outstanding as shown by the most recent report or statement published by the Company, and (e) whether the Company has filed the reports required to be filed under the Exchange Act for a period of at least ninety (90) days prior to the date of such certificate and in addition has filed the most recent annual report required to be filed thereunder. 14 15 Section 4.5. AMENDMENT AND MODIFICATION. Any provision of this Agreement may be waived, provided that such waiver is set forth in a writing executed by both parties to this Agreement. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the holders of a majority of the then outstanding Registrable Securities. Notwithstanding the foregoing, the waiver of any provision hereof with respect to a matter that relates exclusively to the rights of holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and does not directly or indirectly affect the rights of other holders of Registrable Securities may be given by holders of at least a majority of the Registrable Securities being sold by such holders; provided that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. No course of dealing between or among any Person having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any person under or by reason of this Agreement. Section 4.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The Investor may assign its rights under this Agreement to any subsequent holder the Registrable Securities, provided that the Company shall have the right to require any holder of Registrable Securities to execute a counterpart of this Agreement and agree to be bound by the provisions of this Agreement as a condition to such holder's claim to any rights hereunder. This Agreement, together with the Stock Purchase Agreement, the Warrants and the exhibits and schedules to such agreements together set forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. Section 4.7. SEPARABILITY. In the event that any provision of this Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected except to the extent necessary to delete such illegal, invalid or unenforceable provision unless that provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. Section 4.8. NOTICES. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and shall be (i) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (ii) delivered by reputable air courier service with charges prepaid, or (iii) 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 15 16 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: If to the Company: Franklin Telecommunications Corp. 733 Lakefield Road Westlake Village, CA 91361 Attention: Frank W. Peters Telephone: (805) 373-8688 Facsimile: (805) 373-7373 with a copy (which shall not constitute notice) to: Haddan & Zepfel LLP 4675 MacArthur Court, Suite 710 Newport Beach, CA 92660 Attention: Robert J. Zepfel, Esq. Telephone: (949) 752-6100 Facsimile: (949) 752-6161 if to the Investor: Crescent International Ltd. c/o GreenLight (Switzerland) SA 84, av Louis-Casai, P.O. Box 42 1216 Geneva, Cointrin Switzerland Attention: Melvyn Craw/Maxi Brezzi Telephone: +41 22 791 72 56 Facsimile: +41 22 929 53 94 with a copy (which shall not constitute notice) to: Rogers & Wells LLP 200 Park Avenue, 52nd Floor New York, NY 10166 Attention: Sara Hanks, Esq./ Earl S. Zimmerman, Esq. Telephone: (212) 878-8000 Facsimile: (212) 878-8375 Either party hereto may from time to time change its address or facsimile number for notices under this Section 4.8 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 4.9. GOVERNING LAW. This Agreement shall be construed under the laws of the State of New York, without giving effect to conflict of law provisions. 16 17 Section 4.10. HEADINGS. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement, nor shall they affect their meaning, construction or effect. Section 4.11. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original instrument and all of which together shall constitute one and the same instrument. Section 4.12. FURTHER ASSURANCES. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. Section 4.13. ABSENCE OF PRESUMPTION. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted. Section 4.14. REMEDIES. In the event of a breach or a threatened breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision may be inadequate compensation for any loss. 17 18 IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. Crescent International Ltd. By: /s/ Maxi Brezzi /s/ Omar A. Ali --------------------------------------- GreenLight (Switzerland) S.A. as Investor's manager Name: Title: Franklin Telecommunications Corp. By: /s/ Thomas Russell ---------------------------------------- Name: Thomas Russell Title: Chief Financial Officer 18 EX-10.6 7 AMENDMENT TO STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.6 AMENDMENT TO STOCK PURCHASE AGREEMENT This is an amendment (the "Amendment"), dated September 15, 1999, by and between CRESCENT INTERNATIONAL LIMITED (the "Investor"), an entity organized and existing under the laws of Bermuda, and FRANKLIN TELECOMMUNICATIONS CORP. (the "Company"), a corporation organized and existing under the laws of the State of California, to the Stock Purchase Agreement (the "Agreement"), dated August 30, 1999, by and between the Investor and the Company. All capitalized terms used and not otherwise defined herein shall have the same meanings as when used in the Agreement. WHEREAS, pursuant to the terms of the Agreement, the Investor has purchased and the Company has issued and sold $1,000,000 worth of Common Stock through the Early Put; WHEREAS, pursuant to the terms of this Amendment, the Investor shall purchase and the Company shall issue and sell an additional $1,000,000 worth of Common Stock under the Early Put; and NOW, THEREFORE, the parties agree as follows: 1. Section 2.1(c) of the Agreement is amended and restated in its entirety to read as follows: (c) Early Put. The Company shall issue and sell and the Investor shall purchase, on the Subscription Date, shares of the Common Stock for an Investment Amount of $1,000,000 at the Purchase Price on the Subscription Date, and the Company shall issue and sell and the Investor shall purchase, on September 15, 1999, shares of the Common Stock for an Investment Amount of $1,000,000 at the Purchase Price on the Subscription Date (all such shares in this Section 2.1(c) being referred to herein as the "Early Put Shares"). For the purpose only of such Early Put, the Investor waives the requirements of Section 2.2, and the conditions set forth in paragraphs (a) and (b) of Section 7.2 hereof. 2. Section 2.4 of the Agreement is amended and restated in its entirety to read as follows: Section 2.4. Termination of Agreement and Investment Obligation. The Company shall have the right to terminate this Agreement at any time upon thirty (30) days' written notice to the Investor. The Investor shall have the right to immediately terminate this Agreement (including with respect to any Put, notice of which has been given but the applicable Closing Date has not yet occurred) in accordance with Section 6.12 or in the event that: (i) the Registration Statement with respect to shares of Common Stock purchased through the Early Put is not effective within ninety-seven (97) days following the Subscription Date, (ii) a Registration Statement with respect to shares of Common Stock purchased through any subsequent Put is not effective within ninety-seven (97) days following the applicable Closing Date, (iii) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of thirty (30) Trading Days during the Commitment Period, (iv) the Company shall 2 at any time fail to comply with the requirements of Section 6.2, 6.3, 6.4, 6.5, 6.6, 6.8 or 6.9. 3. Section 7.2(a) of the Agreement is amended and restated in its entirety to read as follows: (a) Registration of the Registrable Securities with the SEC. As set forth in the Registration Rights Agreement, the Company shall have filed with the SEC either: (i) a Registration Statement covering the resale of the Common Stock purchased by the Investor through the Early Put that shall have been declared effective by the SEC in no event later than ninety-seven (97) days after the Subscription Date, and a Registration Statement covering the resale of the Common Stock purchased by the Investor through all subsequent Puts that shall have been declared effective by the SEC prior to any subsequent Put; or (ii) a Combined Registration Statement (as defined in the Registration Rights Agreement) that shall have been declared effective by the SEC in no event later than ninety-seven (97) days after the Subscription Date. IN WITNESS WHEREOF, this Amendment has been entered into on the day and year first herein written. CRESCENT INTERNATIONAL LIMITED By: /s/ Maxi Brezzi /s/ Omar A. Ali ------------------------------------- Name: Title: FRANKLIN TELECOMMUNICATIONS CORP. By: Thomas Russell ------------------------------------- Name: Thomas Russell Title: Chief Financial Officer EX-10.7 8 AMENDMENT TO REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.7 AMENDMENT TO REGISTRATION RIGHTS AGREEMENT This is an amendment (the "Amendment"), dated September 15, 1999, by and between CRESCENT INTERNATIONAL LIMITED (the "Investor"), an entity organized and existing under the laws of Bermuda, and FRANKLIN TELECOMMUNICATIONS CORP. (the "Company"), a corporation organized and existing under the laws of the State of California, to the Registration Rights Agreement (the "Agreement"), dated August 30, 1999, by and between the Investor and the Company. All capitalized terms used and not otherwise defined herein shall have the same meanings as when used in the Stock Purchase Agreement, dated August 30, 1999, by and between the Investor and the Company (the "Purchase Agreement"). WHEREAS, pursuant to the terms of the Purchase Agreement, the Investor purchased and the Company issued and sold $1,000,000 worth of Common Stock on the Subscription Date; WHEREAS, pursuant to the terms of an amendment to the Purchase Agreement dated as of the date hereof (the "Purchase Agreement Amendment"), the Investor purchased and the Company issued and sold an additional $1,000,000 worth of Common Stock; and WHEREAS, the Investor and the Company desire to extend the date by which the Registrable Securities shall be registered for resale; NOW, THEREFORE, the parties agree as follows: 1. Section 1.1(a) of the Agreement is amended and restated in its entirety to read as follows: a. Filing of Registration Statements. The Company shall register for resale all Put Shares issued or issuable to the Investor pursuant to the Stock Purchase Agreement and all Warrant Shares issued or issuable upon full exercise of the Warrants. Subject to the terms and conditions of this Agreement, the Company shall effect such registration in the manner provided in either (i) or (ii) below. The Company shall file with the SEC either: (i) on or before September 22, 1999, a registration statement (the "Initial Registration Statement") on such form promulgated by the SEC for which the Company qualifies, that counsel for the Company shall deem appropriate and which form shall be available for the sale of the shares of Common Stock purchased by the Investor through the Early Put (the "Initial Shares"), the Incentive Warrant Shares and the Early Put Warrant Shares. The aggregate number of shares to be registered under the Initial Registration Statement shall be equal to two hundred percent (200%) of the Initial Shares, plus the Incentive Warrant Shares. Prior to any subsequent put, the Company shall file with the SEC a registration statement (the "Subsequent Registration Statement" and together with the Initial Registration Statement, the "Registration Statements") on such form promulgated by the SEC for which the Company qualifies, that counsel for the Company shall deem appropriate and which form shall be available for the sale of the shares of Common Stock to be purchased by 2 the Investor and any Warrant Shares which have not previously been registered. The aggregate number of shares to be registered under the 3 Subsequent Registration Statement shall be equal to 125% of (X-Y)/Z, where X is the Maximum Commitment Amount, Y is the Investment Amount of the Early Put and Z is 92% of the Minimum Bid Price; or (ii) on or before September 22, 1999, a registration statement (the "Combined Registration Statement") on such form promulgated by the SEC for which the Company qualifies, that counsel for the Company shall deem appropriate and which form shall be available for the sale of all Put Shares issued or issuable pursuant to the terms of the Stock Purchase Agreement and all Warrant Shares issued or issuable upon full exercise of the Warrants. The aggregate number of shares to be registered under the Combined Registration Statement shall be equal to 125% of (A/B)+C, where A is the Maximum Commitment Amount, B is 92% of the Minimum Bid Price and C is the number of Incentive Warrant Shares. 2. Section 1.1(b) of the Agreement is amended and restated in its entirety to read as follows: b. Effectiveness of the Registration Statements. The Company shall use its best efforts either: (i) to have the Initial Registration Statement declared effective by the SEC in no event later than ninety-seven (97) calendar days after the Subscription Date and to have the Subsequent Registration Statement declared effective by the SEC in no event later than 150 calendar days after the Subscription Date, or (ii) to have the Combined Registration Statement declared effective by the SEC in on event later than ninety-seven (97) calendar days after the Subscription Date. The Company shall ensure that all Registration Statements remain in effect for a period ending 180 days following the earlier of termination of the Commitment Period and termination of the Investor's obligations pursuant to Section 2.4 of the Stock Purchase Agreement; provided that such period shall be extended one day for each day after the applicable Effective Date, that any Registration Statement covering shares purchased by the Investor is not effective during the period such Registration Statement is required to be effective pursuant to this Agreement; and provided further that the Company shall not be required to ensure that any Registration Statement covering shares purchased by the Investor remain in effect for such 180 day period if the shares registered thereunder shall have become freely tradable pursuant to Rule 144(k) of the Securities Act or have otherwise been sold. 4 IN WITNESS WHEREOF, this Amendment has been entered into on the day and year first herein written. CRESCENT INTERNATIONAL LIMITED By: /s/ Maxi Brezzi /s/ Omar A. Ali ------------------------------------- Name: Title: FRANKLIN TELECOMMUNICATIONS CORP. By: Thomas Russell ------------------------------------- Name: Thomas Russell Title: Chief Financial Officer EX-10.8 9 LETTER AGREEMENT 1 EXHIBIT 10.8 [LETTERHEAD OF FRANKLIN TELECOMMUNICATIONS CORP.] Crescent International Limited c/o Greenlight (Switzerland) SA 84, av Louis-Casai, P.O. Box 161 1216 Geneva, Cointrin Switzerland Ladies and Gentlemen: Reference: is made to that certain Stock Purchase Agreement, dated as of August 30, 1999 (the "Agreement"), by and between Crescent International Ltd. ("Crescent") and Franklin Telecommunications Corp. Capitalized terms used in this letter not otherwise defined have the same meanings as in the Agreement. During the past several days you and we have had discussions regarding the Agreement. Upon conclusion of these discussions you and we agreed to increase the Investment Amount of the Early Put from $1,000,000 to $2,000,000. In addition, we agreed to amend the Agreement and the Registration Rights Agreement to extend the date by which the Registrable Securities shall be registered for resale. Finally, you have agreed to deliver to us for cancellation the Early Put Warrant issued on the Subscription Date on the condition that we issue to you an Early Put Warrant in the form attached hereto as Exhibit A. Accordingly, upon receipt of the Early Put Warrant issued on the Subscription Date, we will immediately issue to you an Early Put Warrant in the form attached hereto as Exhibit A. 2 Kindly confirm that the foregoing accurately sets forth your understanding of our agreement on the above-referenced matters by countersigning in the space provided below. Very truly yours, FRANKLIN TELECOMMUNICATIONS CORP. By: Thomas Russell ------------------------------------ Name: Thomas Russell Title: Chief Financial Officer AGREED AND ACCEPTED: CRESCENT INTERNATIONAL LIMITED By: /s/ Maxi Brezzi /s/ Omar A. Ali ------------------------------------ Name: Title: 3 EXHIBIT A FORM OF EARLY PUT WARRANT THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF AUGUST 30, 1999, BETWEEN FRANKLIN TELECOMMUNICATIONS CORP. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM FRANKLIN TELECOMMUNICATIONS CORP.'S EXECUTIVE OFFICES. August 30, 1999 Warrant to Purchase Shares of Common Stock of Franklin Telecommunications Corp. (hereinafter an "Early Put Warrant"), up to a total number determined in accordance with Section 2(b) hereof. Franklin Telecommunications Corp., an entity organized and existing under the laws of the State of California (the "Company"), hereby agrees that Crescent International Ltd. (the "Investor") or any other Warrant Holder is entitled, on the terms and conditions set forth below, to purchase from the Company at any time during the Exercise Period up to a total number, determined in accordance with Section 2(b) hereof, of fully paid and nonassessable shares of Common Stock, no par value per share, of the Company (the "Common Stock"), as the same may be adjusted from time to time pursuant to Section 7 hereof, at the Exercise Price (hereinafter defined), as the same may be adjusted pursuant to Section 7 hereof. The resale of the shares of Common Stock or other securities issuable upon exercise or exchange of this Early Put Warrant is subject to the provisions of the Registration Rights Agreement (as defined below). Section 1. Definitions. "Agreement" shall mean the Stock Purchase Agreement, dated the date hereof, between the Company and the Investor. "Capital Shares" shall mean the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. 4 "Exercise Date" shall mean either (i) the date this Early Put Warrant, the Exercise Notice and the Aggregate Exercise Price are received by the Company or (ii) the date advanced copy of the Exercise Notice is sent by facsimile to the Company, provided that this Early Put Warrant, the original Exercise Notice, and the Aggregate Exercise Price are received by the Company within three (3) business days thereafter. If this Early Put Warrant, the original Exercise Notice and the Aggregate Exercise Price are not received within three (3) business days in accordance with clause (ii) above, the Exercise Date shall be the date this Incentive Warrant, the original Exercise Notice and the Aggregate Exercise Price are received by the Company. "Exercise Notice" shall mean the exercise form attached hereto as Exhibit A duly executed by the Warrant Holder. "Exercise Period" shall mean the period beginning on the Effective Date applicable to the Put Closing and continuing until the two-year period thereafter; provided that such period shall be extended one day for each day after the applicable Effective Date, that the Registration Statement covering (i) shares purchased by the Investor through the applicable Put and (ii) the Early Put Warrant Shares related to such Put and purchasable by exercise of this Early Put Warrant, is not effective during the period such Registration Statement is required to be effective pursuant to the Registration Rights Agreement. "Exercise Price" as of the date hereof shall mean $0.01 per share of Common Stock, subject to the adjustments provided for in Section 7 of this Early Put Warrant. "Per Share Early Put Warrant Value" shall mean the difference resulting from subtracting the Exercise Price from the Bid Price of one share of Common Stock on the Trading Day immediately preceding the Exercise Date. "Put Closing" shall mean the closing of the purchase and sale of 966,184 shares of Common Stock for an investment amount equal to $1,000,000 which occurred on August 30, 1999, and the closing of the purchase and sale of 966,184 shares of Common Stock for an investment amount equal to $1,000,000 which occurred on September 14, 1999, for a total Investment Amount of $2,000,000. "Registration Rights Agreement" shall mean the registration rights agreement, dated the date hereof between the Company and the Investor. "Subscription Date" shall mean the date on which the Agreement is executed and delivered by the parties hereto. "Warrant Holder" shall mean the Investor or any assignee or transferee of all or any portion of this Early Put Warrant; and other capitalized terms used but not defined herein shall have their respective meanings set forth in the Agreement. Section 2. Exercisability. a. Timing. If the Purchase Price on the Effective Date applicable to the Put Closing is lower than the Purchase Price on the Subscription Date with respect to such Put, this Early Put Warrant shall become immediately exercisable, subject to clause c. below. 5 b. Number of Shares. The number of shares of Common Stock for which this Early Put Warrant is exercisable (the "Early Put Warrant Shares") shall be determined by subtracting (x) the Investment Amount divided by the Purchase Price on the Subscription Date from (y) the Investment Amount divided by the Purchase Price on the Effective Date applicable to the Put Closing. c. Cash Payment in Lieu of Exercise. In the event that the Investor gives notice of exercise of this Early Put Warrant (in whole or in part) in accordance with Section 3 hereof, then the Company may, in lieu of issuance of shares of Common Stock pursuant to such exercise, pay to the Investor the Cash-Out Price (as defined below) for any or all of the shares of Common Stock purchasable by the Investor through the exercise of this Early Put Warrant. In the event that the Investor gives notice of exercise of this Early Put Warrant (in whole or in part) in accordance with Section 3 hereof and the number of Early Put Warrant Shares related to the Put Closing to be purchased pursuant to such exercise exceeds the number of shares registered pursuant to Section 1.1a. of the Registration Rights Agreement (the "Excess Shares"), then the Company may, in lieu of issuance of shares of Common Stock pursuant to such exercise, pay to the Investor the Cash-Out Price (as defined below) for any or all of the Excess Shares. d. Notice of Cash Payment in Lieu of Exercise. In the event that the Company elects to pay cash in lieu of exercise for any Early Put Warrant Shares or any Excess Shares in accordance with Section 2c. (the "Cash-Out Option"), the Company shall promptly give notice to the Investor of such election which notice shall be given no later than one business day following notice of the Investor's intention to exercise this Early Put Warrant and which notice shall set forth the number of shares of Common Stock for which the Company elects the Cash-Out Option. e. Method of Cash-Out; Effect of Cash-Out. In the event that the Company chooses the Cash-Out Option, then in lieu of delivering stock certificates as provided in Section 5 hereof, the Company shall deliver by wire transfer of immediately available funds to an account designated by the Investor as soon as practicable after the exercise of this Early Put Warrant (in full or in part), and in any event within three (3) Trading Days thereafter, the Cash-Out Price (as defined below) for any and all shares of Common Stock for which the Company elects the Cash-Out Option. "Cash-Out Price" shall mean the product of (x) the Bid Price of one share of Common Stock on the Trading Day immediately preceding the Exercise Date multiplied by (y) the number of shares of Common Stock for which the Company proposes to pay cash in lieu of exercise pursuant to Section 2c. Section 3. Exercise; Cashless Exercise. a. Method of Exercise. This Early Put Warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period, by the Warrant Holder by (i) the surrender of this Early Put Warrant, the Exercise Notice and the Aggregate Exercise Price to the Company at the address set forth in Section 14 hereof or (ii) the delivery by facsimile of an executed and completed Exercise Notice to the Company and delivery to the Company within three (3) business days thereafter of this Early Put Warrant, the original Exercise Notice and the Aggregate Exercise Price. 6 b. Payment of Aggregate Exercise Price. Subject to paragraph (c) below, payment of the Aggregate Exercise Price shall be made by check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company. If the amount of the payment received by the Company is less than the Aggregate Exercise Price, the Warrant Holder will be notified of the deficiency and shall make payment in that amount within five (5) business days of such notice. In the event the payment exceeds the Aggregate Exercise Price, the Company will refund the excess to the Warrant Holder within three (3) business days of both the receipt of such payment and the knowledge of such excess. c. Cashless Exercise. As an alternative to payment of the Aggregate Exercise Price in accordance with Section 3b. above, the Warrant Holder may elect to effect a cashless exercise by so indicating on the Exercise Notice and including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall surrender this Early Put Warrant for that number of shares of Common Stock determined by (i) multiplying the number of Early Put Warrant Shares for which this Early Put Warrant is being exercised by the Per Share Early Put Warrant Value and (ii) dividing the product by the Bid Price of one share of the Common Stock on the Trading Day immediately preceding the Exercise Date. d. Replacement Early Put Warrant. In the event that the Early Put Warrant is not exercised in full, the number of Early Put Warrant Shares shall be reduced by the number of such Early Put Warrant Shares for which this Early Put Warrant is exercised, and the Company, at its expense, shall forthwith issue and deliver to the Warrant Holder a new Early Put Warrant of like tenor in the name of the Warrant Holder or as the Warrant Holder may request, reflecting such adjusted number of Early Put Warrant Shares. Section 4. Five Percent Limitation. The Warrant Holder may not exercise this Early Put Warrant such that the number of Early Put Warrant Shares to be received pursuant to such exercise aggregated with all other shares of Common Stock then owned by the Warrant Holder beneficially or deemed beneficially owned by the Warrant Holder would result in the Warrant Holder owning more than 4.9% of all of such Common Stock as would be outstanding on such Exercise Date, as determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. As of any date prior to the Exercise Date, the aggregate number of shares of Common Stock into which this Early Put Warrant is exercisable, together with all other shares of Common Stock then beneficially owned (as such term is defined in Rule 13(d) under the Exchange Act) by such Warrant Holder and its affiliates, shall not exceed 4.9% of the total outstanding shares of Common Stock as of such date. Section 5. Delivery of Stock Certificates. a. Subject to the terms and conditions of this Early Put Warrant, as soon as practicable after the exercise of this Early Put Warrant in full or in part, and in any event within five (5) Trading Days thereafter, the Company at its expense (including, without limitation, the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate or certificates for the number of validly issued, fully paid and non-assessable Early Put Warrant Shares to 7 which the Warrant Holder shall be entitled on such exercise, together with any other stock or other securities or property (including cash, where applicable) to which the Warrant Holder is entitled upon such exercise in accordance with the provisions hereof; provided, however, that any such delivery to a location outside of the United States shall also be made within five (5) Trading Days after the exercise of this Early Put Warrant in full or in part. b. This Early Put Warrant may not be exercised as to fractional shares of Common Stock. In the event that the exercise of this Early Put Warrant, in full or in part, would result in the issuance of any fractional share of Common Stock, then in such event the Warrant Holder shall receive in cash an amount equal to the Bid Price of such fractional share within five (5) Trading Days. Section 6. Representations, Additional Warranties and Covenants of the Company. a. The Company shall take all necessary action and proceedings as may be required and permitted by applicable law, rule and regulation for the legal and valid issuance of this Early Put Warrant and the Early Put Warrant Shares to the Warrant Holder. b. At all times during the Exercise Period, the Company shall take all steps reasonably necessary and within its control to insure that the Common Stock remains listed or quoted on the Principal Market. c. The Early Put Warrant Shares, when issued in accordance with the terms hereof, will be duly authorized and, when paid for or issued in accordance with the terms hereof, shall be validly issued, fully paid and non-assessable. d. The Company has authorized and reserved for issuance to the Warrant Holder the requisite number of shares of Common Stock to be issued pursuant to this Early Put Warrant. The Company shall at all times reserve and keep available, solely for issuance and delivery as Early Put Warrant Shares hereunder, such shares of Common Stock as shall from time to time be issuable as Early Put Warrant Shares. Section 7. Adjustment of the Exercise Price. The Exercise Price and, accordingly, the number of Early Put Warrant Shares issuable upon exercise of the Early Put Warrant, shall be subject to adjustment from time to time upon the happening of certain events as follows: a. Reclassification, Consolidation, Merger or Mandatory Share Exchange. If the Company, at any time (a) between the Subscription Date and the Effective Date applicable to the Early Put or (b) between each subsequent issuance of a Put Notice by the Company and the applicable Effective Date therefor (i) reclassifies or changes its Outstanding Capital Shares or (ii) consolidates, merges or effects a mandatory share exchange with or into another corporation (other than a merger or mandatory share exchange with another corporation in which the Company is a continuing corporation and that does not result in any reclassification or change, or as a result of a subdivision or combination of Outstanding Capital Shares issuable upon exercise of this Early Put Warrant), then in any such event the Company, or such successor or purchasing corporation, as the case may be, shall, without payment of any additional consideration therefore, amend this Early Put Warrant or issue a new warrant providing that the Warrant Holder shall have rights not less favorable to the holder than those then applicable to this Early Put Warrant 8 and to receive upon exercise under such amendment of this Early Put Warrant or new warrant, in lieu of each share of Common Stock theretofore issuable upon exercise of this Early Put Warrant hereunder, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, mandatory share exchange, sale or transfer by the holder of one share of Common Stock issuable upon exercise of this Early Put Warrant had this Early Put Warrant been exercised immediately prior to such reclassification, change, consolidation, merger, mandatory share exchange or sale or transfer. Such amended warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7a. shall similarly apply to successive reclassifications, changes, consolidations, mergers, mandatory share exchanges and sales and transfers. b. Subdivision or Combination of Shares. If the Company, at any time (a) between the Subscription Date and the Effective Date applicable to the first Put or (b) between each subsequent issuance of a Put Notice by the Company and the applicable Effective Date therefor, shall subdivide its Common Stock, the number of shares of Common Stock issuable to the Investor hereunder shall be proportionately increased as of the effective date of such subdivision, or, if the Company shall take a record of holders of its Common Stock for the purpose of so subdividing, as of such record date, whichever is earlier. If the Company, at any time (a) between the Subscription Date and the Effective Date applicable to the first Put or (b) between each subsequent issuance of a Put Notice by the Company and the applicable Effective Date therefor, shall combine its Common Stock, the number of shares of Common Stock issuable to the Investor hereunder shall be proportionately decreased as of the effective date of such combination, or, if the Company shall take a record of holders of its Common Stock for the purpose of so combining, as of such record date, whichever is earlier. c. Stock Dividends. If the Company, at any time while this Early Put Warrant is unexpired and not exercised in full, shall pay a dividend in its Capital Shares, or make any other distribution of its Capital Shares, then the Exercise Price shall be adjusted, as of the date the Company shall take a record of the holders of its Capital Shares for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Exercise Price in effect immediately prior to such payment or other distribution by a fraction: (i) the numerator of which shall be the total number of Outstanding Capital Shares immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of Outstanding Capital Shares immediately after such dividend or distribution. The provisions of this subsection c. shall not apply under any of the circumstances for which an adjustment is provided in subsections a. or b. d. Adjustment of Number of Shares. Upon each adjustment of the Exercise Price pursuant to any provisions of this Section 7, the number of Early Put Warrant Shares issuable hereunder at the option of the Warrant Holder shall be calculated, to the nearest one hundredth of a whole share, multiplying the number of Early Put Warrant Shares issuable prior to an adjustment by a fraction: 9 (i) the numerator of which shall be the Exercise Price before any adjustment pursuant to this Section 7; and (ii) the denominator of which shall be the Exercise Price after such adjustment. e. Liquidating Dividends, Etc. If the Company, at any time while this Early Put Warrant is unexpired and not exercised in full, makes a distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections a. through g.) while an exercise is pending, then the Warrant Holder shall be entitled to receive upon such exercise of the Early Put Warrant in addition to the Early Put Warrant Shares receivable in connection therewith, and without payment of any consideration other than the Exercise Price, an amount in cash equal to the value of such distribution per Capital Share multiplied by the number of Early Put Warrant Shares that, on the record date for such distribution, are issuable upon such exercise of the Early Put Warrant (with no further adjustment being made following any event which causes a subsequent adjustment in the number of Early Put Warrant Shares issuable), and an appropriate provision therefor shall be made a part of any such distribution. The value of a distribution that is paid in other than cash shall be determined in good faith by the Board of Directors of the Company. f. Other Provisions Applicable to Adjustments Under this Section. The following provisions will be applicable to the making of adjustments in any Exercise Price hereinabove provided in this Section 7: (i) Other Action Affecting Capital Shares. In case after the date hereof the Company shall take any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing subsections a. through e. hereof, inclusive, which in the opinion of the Company's Board of Directors would have a materially adverse effect upon the rights of the Warrant Holder at the time of exercise of the Early Put Warrant, the Exercise Price shall be adjusted in such manner and at such time as the Board of Directors on the advice of the Company's independent public accountants may in good faith determine to be equitable in the circumstances. (ii) Notice of Certain Actions. In the event the Company shall, at a time while the Incentive Warrant is unexpired and outstanding, take any action which pursuant to subsections a. through e. of this Section 7 may result in an adjustment of the Exercise Price, the Company shall give to the Warrant Holder at its last address known to the Company written notice of such action ten (10) days in advance of its effective date in order to afford to the Warrant Holder an opportunity to exercise the Incentive Warrant prior to such action becoming effective. (iii) Notice of Adjustments. Whenever the Exercise Price or number of Incentive Warrant Shares shall be adjusted pursuant to Section 7 hereof, the Company shall promptly make a certificate signed by its President or a Vice President and by its Treasurer or 10 Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Company's Board of Directors made any determination hereunder), and the Exercise Price and number of Incentive Warrant Shares purchasable at that Exercise Price after giving effect to such adjustment, and shall promptly cause copies of such certificate to be mailed (by first class and postage prepaid) to the Holder of the Incentive Warrant. Section 8. No Impairment. The Company will not, by amendment of its Articles of Incorporation or By-Laws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Early Put Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrant Holder against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any Early Put Warrant Shares above the amount payable therefor on such exercise, and (b) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Early Put Warrant Shares on the exercise of this Early Put Warrant. Section 9. Rights As Stockholder. Prior to exercise of this Early Put Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Early Put Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings. However, in the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each Warrant Holder, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. Section 10. Replacement of Early Put Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Early Put Warrant and, in the case of any such loss, theft or destruction of the Early Put Warrant, upon 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 such Early Put Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Early Put Warrant of like tenor. Section 11. Choice of Law. This Agreement shall be construed under the laws of the State of New York, without giving effect to conflict of law provisions. Section 12. Entire Agreement; Amendments. This Early Put Warrant, the Incentive Warrant, the Registration Rights Agreement, and the Agreement contain the entire understanding of the parties with respect to the matters covered hereby and thereby. No provision of this Early 11 Put Warrant may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. Section 13. Restricted Securities. a. Registration or Exemption Required. This Early Put Warrant has been issued in a transaction exempt from the registration requirements of the Securities Act in reliance upon the provisions of Section 4(2) promulgated by the SEC under the Securities Act. This Early Put Warrant and the Early Put Warrant Shares issuable upon exercise of this Early Put Warrant may not be resold except pursuant to an effective registration statement or an exemption to the registration requirements of the Securities Act and applicable state laws. b. Legend. Any replacement Early Put Warrants issued pursuant to Section 2 hereof and any Early Put Warrant Shares issued upon exercise hereof, shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED AS OF August 30, 1999, BETWEEN FRANKLIN TELECOMMUNICATIONS CORP. AND CRESCENT INTERNATIONAL LTD. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE FRANKLIN TELECOMMUNICATIONS CORP.'S EXECUTIVE OFFICES." Removal of such legend shall be in accordance with the legend removal provisions in the Agreement. c. No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in Section 13b. has been or shall be placed on the share certificates representing the Early Put Warrant Shares and no instructions or "stop transfer orders," so called, "stock transfer restrictions" or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Section 13. 12 d. Assignment. Assuming the conditions of Section 13a. above regarding registration or exemption have been satisfied, the Warrant Holder may sell, transfer, assign, pledge or otherwise dispose of this Early Put Warrant, in whole or in part. The Warrant Holder shall deliver a written notice to the Company substantially in the form of the assignment form attached hereto as Exhibit B (the "Assignment Notice"), indicating the person or persons to whom this Early Put Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days of receipt of such Assignment Notice, and shall deliver to the assignee(s) designated by the Warrant Holder a Early Put Warrant or Early Put Warrants of like tenor and terms for the specified number of shares. e. Investor's Compliance. Nothing in this Section 13 shall affect in any way the Investor's obligations under any agreement to comply with all applicable securities laws upon resale of the Common Stock. Section 14. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and 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: 13 if to the Company: Franklin Telecommunications Corp. 733 Lakefield Road Westlake Village, CA 91361 Attention: Frank W. Peters Telephone: (805) 373-8688 Facsimile: (805) 373-7373 with a copy (which shall not constitute notice) to: Hadden & Zepfel LLP 4675 MacArthur Court, Suite 710 Newport Beach, CA 92660 Attention: Robert J. Zepfel, Esq. Telephone: (949) 752-6100 Facsimile: (949) 752-6161 if to the Investor: Crescent International Ltd. c/o GreenLight (Switzerland) SA 84, av Louis-Casai, P.O. Box 42 1216 Geneva, Cointrin Switzerland Attention: Melvyn Craw/Maxi Brezzi Telephone: +41 22 791 72 56 Facsimile: +41 22 929 53 94 with a copy (which shall not constitute notice) to: Rogers & Wells LLP 200 Park Avenue New York, NY 10166 Attention: Sara Hanks, Esq./Earl S. Zimmerman, Esq. Telephone: (212) 878-8000 Facsimile: (212) 878-8375 Either party hereto may from time to time change its address or facsimile number for notices under this Section 14 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 15. Miscellaneous. This Early Put 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. The headings in this Early Put 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. 14 IN WITNESS WHEREOF, this Early Put Warrant was duly executed by the undersigned, thereunto duly authorized, as of the date first set forth above. Franklin Telecommunications Corp. By:________________________________ Name: Title: Attested: By:________________________________ Name: Title: Secretary 15 EXHIBIT A TO THE EARLY PUT WARRANT EXERCISE FORM Franklin Telecommunications Corp. The undersigned (the "Registered Holder") hereby irrevocably exercises the right to purchase __________________ shares of Common Stock of Franklin Telecommunications Corp., an entity organized and existing under the laws of the State of California (the "Company"), evidenced by the attached Early Put Warrant, and herewith makes payment of the Exercise Price with respect to such shares in full in the form of (check the appropriate box) (i) Ycash or certified check in the amount of $________; (ii) Ywire transfer to the Company's account at __________________, _________, _________ (Account No.:_________); or (iii) Y______ Early Put Warrant Shares, which represent the amount of Early Put Warrant Shares as provided in the attached Early Put Warrant to be canceled in connection with such exercise, all in accordance with the conditions and provisions of said Early Put Warrant. The undersigned requests that stock certificates for such Early Put Warrant Shares be issued, and a Early Put Warrant representing any unexercised portion hereof be issued, pursuant to this Early Put Warrant in the name of the Registered Holder and delivered to the undersigned at the address set forth below. Dated:____________________________________ __________________________________________ Signature of Registered Holder __________________________________________ Name of Registered Holder (Print) __________________________________________ Address 16 NOTICE The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Early Put Warrant in every particular, without alteration or enlargement or any change whatsoever. 17 EXHIBIT B TO THE EARLY PUT WARRANT ASSIGNMENT (To be executed by the registered Warrant Holder (the "Registered Holder") desiring to transfer the Early Put Warrant, in whole or in part.) FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached Early Put Warrant hereby sells, assigns or transfers unto the person(s) named below (the "Assignee") the right to purchase ______________ shares of the Common Stock of Franklin Telecommunications Corp. evidenced by the attached Early Put Warrant and does hereby irrevocably constitute and appoint ______________________ (attorney) to transfer the number of shares specified of the said Early Put Warrant on the books of the Company, with full power of substitution in the premises. The undersigned requests that such Early Put Warrant be issued, and a Early Put Warrant representing any unsold, unassigned or non-transferred portion hereof be issued, pursuant to this Early Put Warrant in the name of the Registered Holder and delivered to the undersigned at the address set forth below. Dated:_________________________________________ _______________________________________________ Signature of Registered Holder _______________________________________________ Name of Registered Holder (Print) _______________________________________________ Address of Registered Holder _______________________________________________ Name of Assignee (Print) _______________________________________________ Address of Assignee (including zip code number) 18 NOTICE The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Early Put Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-23.1 10 CONSENT OF SINGER, LEWAK, GREENBAUM & GOLDSTEIN 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report, dated August 23, 1999, which appears in the Annual Report on Form 10-K of Franklin Telecommunications Corp. and subsidiaries for the year ended June 30, 1999. We also consent to the reference to our Firm under the caption "Experts" in the aforementioned Registration Statement. SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California September 22, 1999 -----END PRIVACY-ENHANCED MESSAGE-----