-----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, RWRZZYpEOMFwelbZ+AudlIeTQ5uxhCE4cgfqStW3PUgHxK2OolWALtmhfZ10nLxu gm40ryk6INdKo47YZDOLSw== 0000912057-01-006409.txt : 20010224 0000912057-01-006409.hdr.sgml : 20010224 ACCESSION NUMBER: 0000912057-01-006409 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010216 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYBRID NETWORKS INC CENTRAL INDEX KEY: 0000900091 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770250931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-23289 FILM NUMBER: 1551550 BUSINESS ADDRESS: STREET 1: 6409 GUADALUPE MINES ROAD CITY: SAN JOSE STATE: CA ZIP: 95120 BUSINESS PHONE: 4083236500 MAIL ADDRESS: STREET 1: 6409 GUADALUPE MINES ROAD CITY: SAN JOSE STATE: CA ZIP: 95120 8-K 1 a2039627z8-k.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): FEBRUARY 16, 2001 HYBRID NETWORKS, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or Other Jurisdiction of Incorporation) 0-23289 77-02520931 (Commission File Number) (I.R.S. Employer Identification Number) 6409 GUADALUPE MINES ROAD, SAN JOSE, CA 95120 (Address of principal executive offices) (Zip Code) (408) 323-6250 (Registrant's Telephone Number, Including Area Code) ITEM 5. OTHER EVENTS. On February 19, 2001, Hybrid Networks, Inc. issued the following Press Release. SAN JOSE, Calif., Feb. 19, 2001 -- Hybrid Networks Inc. (Nasdaq: HYBR), the worldwide leader in high-capacity MMDS fixed broadband wireless Internet access systems, today announced it has entered into an agreement with a fund of The Palladin Group LP that will provide the company with up to $15 million in cash to fund future operations. Under the agreement, Hybrid Networks has received an initial investment of $7.5 million from The Halifax Fund LP, which is managed by the Palladin Group, by selling convertible debentures aggregating $7.5 million in principal amount that will be convertible into Hybrid common stock. The financing agreement also contains a five-year warrant for the purchase of 833,333 shares of Hybrid common stock at a price of $9 per share. Hybrid can, after certain conditions have been satisfied, compel the exercise of this warrant at an exercise price equal to the lower of $9 or 94 percent of the then current market price, which could enable Hybrid Networks to receive up to an additional $7.5 million of equity financing later this year. "The financing agreement enables us to continue to develop our products and aggressively expand our sales efforts into the rapidly growing international markets," said Michael D. Greenbaum, president and CEO of Hybrid Networks. "In 2001, our fixed broadband wireless system will continue to evolve, and we will take advantage of the best technology components as they become available." "Research shows that demand for wireless broadband is extremely high," said Richard Biebel, a portfolio manager of The Halifax Fund. "We believe Hybrid Networks provides the only scalable, readily available solution able to meet the needs of this high-growth market. We're also excited about Hybrid's adaptive modulation technology that will further enhance its dominant position in the industry." The Halifax Fund, is a leading private equity fund that focuses on direct investments in high-growth companies. The fund seeks to provide funding to public companies that provide products or services with demonstrated consumer or commercial demand. 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. ---------------------------------- The following exhibits are filed herewith:
EXHIBIT DESCRIPTION ------- ----------- 4.01 Securities Purchase Agreement between Halifax Fund and the Registrant dated as of February 16, 2001 4.02 Form of 6% Convertible Debenture due 2003 4.03 Form of Common Stock Purchase Warrant dated as of February 16, 2001 4.04 Form of Adjustment Warrant dated as of February 16, 2001 4.05 Registration Rights Agreement dated as of February 16, 2001
3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February __, 2001 Hybrid Networks, Inc. By: _____________________________________ Michael D. Greenbaum President and Chief Executive Officer 4 EX-4.01 2 a2039627zex-4_01.txt EXHIBIT 4.01 EXHIBIT 4.01 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT ("AGREEMENT") dated as of February 16, 2001 by and among HYBRID NETWORKS, INC., a Delaware corporation (the "COMPANY"), and each person or entity listed as a Purchaser on SCHEDULE I attached to this Agreement (each individually a "PURCHASER" and collectively the "PURCHASERS"). W I T N E S S E T H: WHEREAS, the Company desires to sell and issue to the Purchasers, and the Purchasers, severally, but NOT jointly, wish to purchase from the Company, (i) an aggregate of up to $7.5 million in principal amount of the Company's 6% Convertible Debentures in the form attached hereto as Annex A (the "DEBENTURES"), which are convertible into shares of the Company's Common Stock, $0.001 par value ("COMMON STOCK"), (ii) five (5) year warrants, in the form attached hereto as Annex B, to purchase an aggregate of up to 833,333 shares of Common Stock at an initial exercise price of $9.00 per share (the "PURCHASE WARRANTS"), and (iii) warrants, in the form attached hereto as Annex C, to purchase a number of shares of Common Stock calculated pursuant to a formula set forth therein (the "ADJUSTMENT WARRANTS," and together with the Purchase Warrants, the "WARRANTS"), all on the terms and conditions described below; WHEREAS, the shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants (collectively being the "REGISTRABLE SECURITIES") will carry registration rights, pursuant to the terms of that certain Registration Rights Agreement to be entered into between the Company and the Purchasers substantially in the form annexed hereto as Annex D (the "REGISTRATION RIGHTS AGREEMENT"). NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I PURCHASE AND SALE OF SHARES AND WARRANTS Section 1.1 ISSUANCE OF DEBENTURES AND WARRANTS. Upon the following terms and conditions, the Company shall issue and sell to the Purchasers, and the Purchasers, severally, NOT jointly, shall purchase from the Company, the principal amount of Debentures and number of Purchase Warrants indicated next to the Purchasers' names on Schedule I attached hereto, together with the Adjustment Warrants. (a) PURCHASE PRICE. The purchase price for the Debentures and Warrants to be acquired by each Purchaser (the "PURCHASE PRICE") shall be the Purchase Price set forth next to such Purchaser's name on Schedule I. (b) THE CLOSING. (i) The closing of the purchase and sale of the Debentures and Warrants (the "CLOSING") shall take place on or about the date hereof (the "CLOSING DATE"). On the Closing Date the parties shall deliver all the items described in Section 4.3 below. In connection therewith, (1) the Company shall deliver original executed Debentures and Warrants to Kleinberg, Kaplan, Wolff & Cohen, P.C. ("KKWC") on or before the Closing Date to hold for Closing, (2) the Company and the Purchasers shall exchange signature pages to this Agreement and the Registration Rights Agreement by facsimile on the date hereof (with originals to be forwarded to KKWC by overnight courier), and (3) the certificate, Sprint Consent and opinion of counsel referenced in Section 4.2 below, respectively, shall be delivered to KKWC on or before the Closing Date to hold for Closing (which certificate, Sprint Consent and opinion may be by facsimile with originals to follow). (ii) On the Closing Date, the Company shall deliver to each Purchaser all the Debentures and Warrants purchased hereunder by such Purchaser, each registered in the name of such Purchaser or its nominee. On the Closing Date, each Purchaser shall deliver its Purchase Price by wire transfer to an account designated in writing by the Company. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Closing. Additionally, at the Closing the Company shall pay (or Halifax Fund, L.P. shall, at its option, pay for the account of the Company, with such payments being credited towards Halifax Fund, L.P.'s payment of its Purchase Price) to KKWC its legal fees and disbursements as set forth in Section 3.4, and to Cardinal Capital Management ("CCM") its fee of $100,000. ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the following representations and warranties to the Purchasers as of the date hereof and the Closing Date except as may be set forth in a Schedule attached hereto bearing the subsection number of the subsection modified by such Schedule (it being agreed that the disclosure set forth in any Schedule shall only apply to the specified subsection of this Section 2.1 referred to in the caption of such Schedule): (a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of Delaware and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company does not have any direct or indirect subsidiaries (defined -2- as any entity of which the Company owns, directly or indirectly, 50% or more of the equity or voting power). Except where specifically indicated to the contrary, all references in this Agreement to subsidiaries shall be deemed to refer to all direct and indirect subsidiaries of the Company. Except where specifically indicated to the contrary, all references in this Article II to the Company shall be deemed to refer to the Company and its consolidated subsidiaries. Each of the Company and its subsidiaries 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. "MATERIAL ADVERSE EFFECT" means any adverse effect on the business, operations, prospects, properties or condition (financial or otherwise) of the entity with respect to which such term is used and which is (either alone or together with all other adverse effects) material to such entity and other entities controlling or controlled by such entity taken as a whole, and any material adverse effect on the transactions contemplated under this Agreement, the Registration Rights Agreement or any other agreement or document contemplated hereby or thereby. (b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Debentures, the Warrants and the Registration Rights Agreement (the "TRANSACTION DOCUMENTS") and to issue the Debentures, Warrants and Registrable Securities (collectively, the "SECURITIES") in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including the issuance of the Registrable Shares, have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors (or any committee or subcommittee thereof) or stockholders is required, (iii) the Transaction Documents have been duly executed and delivered by the Company and (iv) the Transaction Documents constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. (c) CAPITALIZATION. The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock and 5,000,000 shares of preferred stock, of which there are 21,972,866 shares of Common Stock and no shares of preferred stock issued and outstanding; no shares of Common Stock and no shares of preferred stock were reserved for issuance to persons other than the Purchasers. All of the outstanding shares of the Company's Common Stock and, if issued, preferred stock have been validly issued and are fully paid and non-assessable. No shares of capital stock are entitled to preemptive rights and, there are no outstanding options or outstanding warrants for shares of Common Stock (excluding the Warrants). There are no other scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights exchangeable for or convertible into, any shares of capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, or commitments to purchase or acquire, any shares, or securities or rights convertible or exchangeable into shares, of capital stock of the Company. The Company has furnished the Purchasers with a true and correct copy -3- of the Company's Amended and Restated Certificate of Incorporation (the "CHARTER"), as in effect on the date hereof, and a true and correct copy of the Company's By-Laws, as in effect on the date hereof (the "BY-LAWS"). (d) ISSUANCE OF REGISTRABLE SECURITIES. The Securities are duly authorized and reserved for issuance, and, when issued upon conversion and/or exercise of the Debentures or Warrants, respectively, in accordance therewith, the Registrable Securities will be validly issued, fully paid and non-assessable, free and clear of any and all liens, claims and encumbrances, and, subject to the registration of such shares in accordance with the applicable provisions of the Securities Act of 1933, as amended (the "SECURITIES ACT" or the "ACT") and the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), will be entitled to be quoted and/or listed (as the case may be) on the Nasdaq National Market System, the American Stock Exchange, the New York Stock Exchange or Nasdaq Small Cap Market (each an "APPROVED MARKET"), and the holders of such Registrable Securities shall be entitled to all rights and preferences then accorded to a holder of Common Stock. The outstanding shares of freely tradable Common Stock are currently quoted on the Nasdaq National Market System. (e) NO CONFLICTS. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby and the issuance of the Securities do not and will not (i) result in a violation of the Company's Charter or By-Laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company is a party and the loss of which could reasonably be expected to have a Material Adverse Effect on the Company (collectively, "COMPANY AGREEMENTS"), 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 any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected, except (other than in the case of clause (i) above) where such violation would not reasonably be expected to have a Material Adverse Effect. The business of the Company and its direct and indirect subsidiaries is being conducted in material compliance with (i) its Charter and By-Laws, (ii) all Company Agreements and (iii) all applicable laws, ordinances or regulations of any governmental entity, except (other than in the case of clause (i) above) where such violation would not reasonably be expected to have a Material Adverse Effect. Except for filings, consents and approvals required under applicable state and federal securities laws, rules or regulations, or the rules and regulations of the Approved Markets and covered by the Registration Rights Agreement, the Company is not required under federal, state, local or foreign law, rule or regulation, or under any agreement, to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or third party in order for it to execute, deliver or perform any of its obligations under the Transaction Documents, or to issue and sell the Securities, except for the registration provisions provided in the Registration Rights Agreement, the written consent ("SPRINT CONSENT") of Sprint to the Transaction Documents and the transactions contemplated thereby, and compliance with the "piggy-back" registration rights provisions of the Company's outstanding registration rights agreements described in Schedule 2.1(f) hereto (and disclosing the names of the potential selling stockholders and the maximum number of shares that they could require to be registered). -4- (f) SEC DOCUMENTS; NO NON-PUBLIC INFORMATION; FINANCIAL STATEMENTS. The Common Stock is registered pursuant to Section 12(g) of the Exchange Act and since June 30, 1999 the Company and its subsidiaries have filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act, including all such proxy information, solicitation statement and registration statements, and any amendments thereto required to have been filed as of the Closing Date (all of the foregoing including filings incorporated by reference therein being referred to herein as the "SEC DOCUMENTS"). The Company has not directly or indirectly provided, and will not directly or indirectly provide, to the Purchasers any material non-public information or any information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed (except for information which will be publicly disclosed on or before March 7, 2001). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the Securities Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder 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. No event or circumstance has occurred prior to the date hereof or will have occurred as of or on the Closing Date which would require the Company to disclose such event or circumstance in order to make the statements in the SEC Documents not misleading but which has not, or will have not, been so disclosed. (g) FINANCIAL STATEMENTS. The financial statements of the Company and its subsidiaries 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 United States 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 and its subsidiaries 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). The occurrence of any potential event described in Schedule 2.1(g) will not cause a default, breach or violation of any material agreement of the Company, including, without limitation, any loan agreement or any agreement with a customer or supplier (or constitute an event which with notice or lapse of time or both would become a default, breach or violation). (h) PRINCIPAL EXCHANGE/MARKET. The principal market on which the Common Stock is currently quoted is the Nasdaq National Market System. (i) NO MATERIAL ADVERSE CHANGE. Except as disclosed in the Pre-Agreement SEC Documents, since December 31, 1999, no Material Adverse Effect has occurred or exists, and no event or circumstance has occurred that with notice or the passage of time or both is reasonably likely to result in a Material Adverse Effect with respect to the Company or its subsidiaries on a consolidated basis. -5- (j) NO UNDISCLOSED LIABILITIES. The Company and its subsidiaries have no liabilities or obligations not disclosed in the Pre-Agreement SEC Documents (as defined below), other than those liabilities incurred in the ordinary course of the Company's or its subsidiaries' respective businesses since December 31, 1999, which liabilities, individually or in the aggregate, do not have a Material Adverse Effect on the Company or its direct or indirect subsidiaries. (k) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. To the best knowledge of the Company, no material event or circumstance has occurred or exists with respect to the Company or its direct or indirect subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. (l) NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, or, to its knowledge, any person acting on its or their behalf has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Securities. (m) NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor to its knowledge any person acting on its or their behalf, has directly or indirectly (i) issued any securities of any kind, other than upon the exercise of outstanding stock options, during the six month period immediately prior to the date hereof, or (ii) made any other offers or sales of any security or solicited any offers to buy any security under circumstances that would require registration of the Securities. The issuance of the Securities to the Purchasers will not be integrated with any other issuance of the Company's securities (past, current or future) which requires stockholder approval under the rules of the NASDAQ National Market System. (n) FORM S-3. The Company is eligible to file the Registration Statement (as defined in the Registration Rights Agreement) on Form S-3 under the Act and rules promulgated thereunder, and Form S-3 is permitted to be used for the transactions contemplated hereby under the Act and rules promulgated thereunder. (o) INTELLECTUAL PROPERTY. The Company and its subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, patent applications, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and confidential business information, computer software, and all other proprietary or intellectual property rights, and all goodwill associated with the foregoing (collectively, "INTELLECTUAL PROPERTY") necessary or desirable to conduct their respective businesses as now conducted or currently contemplated to be conducted in the future. Except for such expirations and terminations that would not individually or in the aggregate have a Material Adverse Effect on the Company, none of the Company's Intellectual Property rights have expired or terminated, or are expected to expire or terminate within three (3) years from the date of this Agreement. Except as would not individually or in the aggregate have a Material Adverse Effect, the Company and its subsidiaries do not have any knowledge of any infringement, interference or misappropriation by -6- the Company or its subsidiaries of or with Intellectual Property or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others, and there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding Intellectual Property or other infringement, interference or misappropriation. The Company and its subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their Intellectual Property. (p) POISON PILL PROVISIONS. Neither the Company nor any of its subsidiaries have a stockholder rights plan. None of the acquisition of the Securities nor the deemed beneficial ownership of shares of Registrable Securities prior to, or the acquisition of Registrable Securities pursuant to, the conversion or exercise of the Debentures or Warrants, respectively, will in any event under any circumstance, but without giving effect to the ownership of any other securities of the Company, trigger the poison pill provisions of any other or subsequently adopted plan or agreement, or a substantially similar occurrence under any successor or similar plan. (q) NO LITIGATION. Except as set forth in the reports or documents filed at least 5 Trading Days prior to the Closing Date by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act (the "PRE-AGREEMENT SEC DOCUMENTS"), no litigation or claim (including those for unpaid taxes) against the Company or any of its subsidiaries is pending or, to the Company's knowledge, threatened, and no other event has occurred, which if determined adversely could reasonably be expected to have a Material Adverse Effect on the Company or could reasonably be expected to materially and adversely affect the transactions contemplated hereby. There is no legal proceeding described in the Pre-Agreement SEC Documents that could reasonably be expected to have a Material Adverse Effect on the Company. (r) BROKERS. The Company has taken no action which would give rise to any claim by any person, other than CCM and Chase Securities, Inc., for brokerage commissions, finder's fees or similar payments by the Company or any Purchaser relating to this Agreement or the transactions contemplated hereby. The Company shall be responsible for all payments to CCM and all payments required to Chase Securities, Inc. (s) OTHER SECURITIES. There are no outstanding securities issued by the Company that are entitled to registration rights under the Act. There are no outstanding securities issued by the Company that are directly or indirectly convertible into, exercisable into, or exchangeable for, shares of Common Stock of the Company, or that have anti-dilution or similar rights that would be affected by the issuance of any of the Securities. (t) CERTAIN TRANSACTIONS. Except as disclosed in the Pre-Agreement SEC Documents, none of the officers, directors, or key employees of the Company is presently a party to any transaction with the Company or any of its subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. -7- (u) INSURANCE. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as reasonably prudent and customary in the businesses in which the Company and its direct and indirect subsidiaries are engaged. Neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost. (v) NO RELIANCE ON PURCHASERS. The Company acknowledges and agrees that each Purchaser is acting solely in the capacity of an arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the performance hereunder and thereunder and the transactions contemplated hereby and thereby. The Company further represents to the Purchasers that the Company's decision to enter into the Transaction Documents and the performance hereunder and thereunder has been based solely on the independent evaluation by the Company and its representatives. (w) FOREIGN CORRUPT PRACTICES ACT. Neither the Company, nor any director, officer, agent, employee or other person acting on behalf of the Company or any subsidiary has, in the course of acting for, or on behalf of, the Company, directly or indirectly used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; directly or indirectly made any direct or indirect unlawful payment to any foreign or domestic government or party official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or any similar treaties of the United States; or directly or indirectly made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government or party official or employee. (x) APPLICATION OF TAKEOVER PROTECTIONS. The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any anti-takeover provision contained in the Company's Certificate of Incorporation or By-Laws or Delaware law which is or could become applicable to the Purchasers as a result of the transactions contemplated by the Transaction Documents, including, without limitation, the Company's issuance of the Common Stock and the Purchasers' ownership of Common Stock. (y) ACKNOWLEDGEMENT OF DILUTION. The number of shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants may increase substantially in certain circumstances. The Company acknowledges that its obligation to issue shares of Common Stock in accordance with the Transaction Documents is absolute and unconditional, regardless of the dilution that such issuance may have on other shareholders of the Company. (z) CURRENT DEBT. In the absence of the occurrence after the date hereof of any event of default or other event causing the acceleration of such indebtedness (which the Company does not reasonably expect), the Company is not obligated (and will not become obligated with notice or the passage of time or both) to pay any amounts to London Pacific (under the convertible debentures issued to it or otherwise) until April 30, 2002. -8- Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser as to itself only, hereby makes the following representations and warranties to the Company as of the date hereof and the Closing Date: (a) ORGANIZATION. Such Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. (b) AUTHORIZATION; ENFORCEMENT. (i) Such Purchaser has the requisite power and authority to enter into and perform the Transaction Documents and to purchase the Securities being sold to it hereunder, (ii) the execution and delivery of the Transaction Documents by such Purchaser and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary corporate or partnership action, and (iii) the Transaction Documents constitute valid and binding obligations of such Purchaser enforceable against such Purchaser in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. (c) NO CONFLICTS. The execution, delivery and performance of the Transaction Documents and the consummation by such Purchaser of the transactions contemplated thereby do not and will not (i) result in a violation of such Purchaser's organizational documents, or (ii) conflict with any agreement, indenture or instrument to which such Purchaser is a party, or (iii) result in a material violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Purchaser. (d) SECURITIES PURCHASE REPRESENTATIONS. (i) ACCESS TO OTHER INFORMATION. Such Purchaser acknowledges that the Company has made available to such Purchaser the opportunity to examine the SEC Documents and such additional documents from the Company and to ask questions of, and receive full answers from, the Company concerning, among other things, the Company, its financial condition, its management, its prior activities and any other information which such Purchaser considers relevant or appropriate in connection with entering into this Agreement. (ii) RISKS OF PURCHASE. Such Purchaser acknowledges that the Securities have not been registered under the Act. Such Purchaser is capable of assessing the risks of purchasing the Securities and is fully aware of the economic risks thereof. (iii) PURCHASE REPRESENTATION. Such Purchaser is purchasing the Debentures and Warrants, and may purchase the Registrable Securities, for its own account and not with a view to distribution in violation of any securities laws; provided, however, that by making the representations herein, such Purchaser does not agree to hold the Securities for any minimum or other specific term -9- and reserves the right to dispose of the Securities at any time in accordance with federal and state securities laws applicable to such disposition. (iv) RESTRICTED SECURITIES. Such Purchaser acknowledges and understands that the terms of issuance have not been reviewed by the SEC or by any state securities authorities and that the Securities have been issued in reliance on the certain exemptions for non-public offerings under the Act, which exemptions depend upon, among other things, the representations made and information furnished by such Purchaser. (v) ABILITY TO BEAR ECONOMIC RISK. Such Purchaser is an "accredited investor" as defined in Rule 501 of Regulation D, as amended, under the Act, and that it (i) is able to bear the economic risk of purchasing the Securities, (ii) is able to hold the Securities for an indefinite period of time, and (iii) can afford a complete loss of its purchase of the Securities. (e) BROKERS. Except for the broker's fee of CMM described herein and payable by the Company, such Purchaser has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Company relating to the Transaction Documents or the transactions contemplated thereby. All fees and amounts payable to the brokers listed in Section 2.1(r) shall be solely the responsibility of the Company. ARTICLE III COVENANTS Section 3.1 REGISTRATION AND LISTING; EFFECTIVE REGISTRATION. Until the earlier of (i) five (5) years from the Closing Date and (ii) the date on which the Purchasers neither hold any Registrable Securities nor have the right to acquire any Registrable Securities, the Company will cause the Common Stock to continue at all times to be registered under Section 12(b) or Section 12(g) 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 thereunder) to terminate or suspend such reporting and filing obligations. Until the earlier of (i) five (5) years from the Closing Date and (ii) the date on which the Purchasers neither hold any Registrable Securities nor have the right to acquire any Registrable Securities, the Company shall continue the listing and/or quoting of the Registrable Securities on the Nasdaq National Market System or one of the other Approved Markets and comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Approved Market on which the Registrable Securities are listed and/or quoted, as the case may be. The Company shall cause the Registrable Securities to be quoted on the Nasdaq National Market System no later than the registration of the Registrable Securities under the Act, and at all times shall continue such listing(s) and/or quoting on one of the Approved Markets. As used herein and in the other Transaction Documents, the term "EFFECTIVE REGISTRATION" shall mean: (i) the Company has complied with its material obligations -10- under all the Transaction Documents in all material respects and has not made any material misrepresentations under any of the Transaction Documents or under any other agreements between the Company and the Purchaser, except for those breaches or defaults which are capable of being cured and have been so cured within a reasonable time following notice of such breach or default (not to exceed 5 business days); (ii) the resale of all Registrable Securities (as defined in the Registration Rights Agreement) is covered by an effective registration statement in accordance with the terms of the Registration Rights Agreement and such registration statement is not subject to any suspension or stop orders; (iii) the resale of such Registrable Securities may be effected pursuant to a current and deliverable prospectus that is not subject to any blackout or similar circumstance (including a prospectus supplement filed with the SEC in accordance with the terms of the Purchase Warrant following any Issuer Notice); (iv) such Registrable Securities are listed, or approved for listing prior to issuance, on an Approved Market and are not subject to any trading suspension (nor shall trading generally have been suspended on such exchange or market), and the Company shall not have been notified of any pending or threatened proceeding or other action to delist or suspend the Common Stock on the Approved Market on which the Common Stock is then traded or listed; (v) the requisite number of shares of Common Stock shall have been duly authorized and reserved for issuance as required by the terms of the Transaction Documents; (vi) no Interfering Event (as described in the Registration Rights Agreement) then exists; and (vii) none of the Company or any direct or indirect subsidiary of the Company is subject to any Bankruptcy Event. For purposes hereof, "BANKRUPTCY EVENT" means any of the following events: (a) the Company or any subsidiary commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any subsidiary thereof; (b) there is commenced against the Company or any subsidiary any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company or any subsidiary is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any subsidiary suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Company or any subsidiary makes a general assignment for the benefit of creditors; (f) the Company or any subsidiary fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; (g) the Company or any subsidiary calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) the Company or any subsidiary, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing. Section 3.2 WARRANTS ON EXERCISE. Upon any partial exercise by a Purchaser (or then holder of the Warrants) of the Warrants, the Company shall issue and deliver to such Purchaser (or holder) within five Trading Days of the date on which such Warrants are exercised, a new Warrant or Warrants representing the adjusted number of shares of Common Stock issuable upon exercise of such Warrants. Section 3.3 REPLACEMENT CERTIFICATES. The certificate(s) or instrument(s) representing the Securities held by any Purchaser (or then holder) may be exchanged by such Purchaser (or such holder) at any time and from time to time for certificates or instruments with different denominations representing an equal aggregate number of Securities as requested by such -11- Purchaser (or such holder) upon surrendering the same. The Company will deliver such substitute certificates or instruments within 3 Trading Days. No service charge will be made for such registration or transfer or exchange. Section 3.4 EXPENSES. The Company shall pay to KKWC in immediately available funds, at the Closing and promptly upon receipt of any further invoices relating to the same, all reasonable legal fees and expenses incurred by the Purchasers in connection with the transactions contemplated by this Agreement, the Registration Rights Agreement, the Debentures and the Warrants, provided that any such amounts in excess of $35,000 shall be paid by Purchasers. At the Closing, the Company shall pay the amount due for such fees and expenses (which may include fees and expenses estimated to be incurred for the completion of the transaction, including post-closing matters), provided that any such amounts in excess of $35,000 shall be paid by Purchasers. In the event any amount paid by or on behalf of the Company is ultimately less than actual fees and expenses, the Company shall (subject to the $35,000 cap) promptly pay such deficiency to KKWC upon receipt of an invoice therefor. In lieu thereof, Halifax Fund, L.P. may pay such amounts due to KKWC, with the amount of such payment being credited towards the payment of its Purchase Price. Section 3.5 SECURITIES COMPLIANCE. The Company shall notify the SEC, in accordance with their requirements, of the transactions contemplated by Transaction Documents, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities. Without limiting the foregoing, the Company shall, within one (1) Trading Day following the Closing Date file a Form 8-K with the SEC and/or issue a press release describing in detail the transactions contemplated in the Transaction Documents. Within one (1) Trading Day following any delivery of an Issuer Notice (as defined in and pursuant to the Purchase Warrant), the Company shall file with the SEC a prospectus supplement to the prospectus included in the Registration Statement (as defined in the Registration Rights Agreement) as required by the terms of the Purchase Warrant and Registration Rights Agreement. Such Form 8-K and any other Form 8-K and/or press release, and/or prospectus supplement, or other publicity concerning the Transaction Documents, shall contain such information as is reasonably requested by the Purchaser and be approved by the Purchaser in writing prior to issuance. No Form 8-K and/or press release shall name the Purchaser except as shall be required by law or consented to in writing by the Purchaser, which consent will not be unreasonably withheld. If the Company fails to so file a Form 8-K, press release or prospectus supplement as required herein within the requisite time period, the Purchaser at any time may issue a press release covering the transactions contemplated by the Transaction Documents or such Issuer Notice, as the case may be (provided that the Company shall not be relieved of its obligations to so file a prospectus supplement). -12- Section 3.6 DIVIDENDS OR DISTRIBUTIONS; PURCHASES OF EQUITY SECURITIES. For so long as any Debentures or Adjustment Warrants remain outstanding, the Company agrees that it shall not (a) declare or pay any dividends or make any distributions to any holder or holders of Common Stock (other than dividends payable in Common Stock) in their capacity as shareholders, or (b) purchase or otherwise acquire for value, directly or indirectly, any shares of Common Stock or other equity security of the Company, other than repurchases of Common Stock or other equity securities from employees of or consultants to the Company upon the termination of their employment or consulting relationship to the extent required by the terms of their written agreements with the Company. Section 3.7 NOTICES. The Company agrees to provide all holders of Warrants with copies of all notices and information, including without limitation notices and proxy statements in connection with any meetings, that are provided to the holders of shares of Common Stock, contemporaneously with the delivery of such notices or information to such Common Stock holders. Section 3.8 USE OF PROCEEDS. The Company agrees that the proceeds received by the Company from the sale of the Debentures and Warrants hereunder and the sale of the shares of Common Stock issuable upon exercise of the Purchase Warrants shall be used only for legally permitted general corporate purposes and shall not be used to repay or prepay any indebtedness of the Company except for trade payables incurred in the ordinary course of business. Section 3.9 NOTIFICATION OF ADDITIONAL FINANCINGS; ADJUSTMENTS. The Company agrees that until the first anniversary of the Closing Date, the Purchasers shall have a right of first offer with respect to all non-public capital raising transactions as set forth in this Section 3.9. The Company shall give advance written notice to the Purchasers of its intention to complete any such financing so that the Purchasers may, to the extent they in their sole discretion determine to do so, propose to provide such financing, in which case they must propose such financing within three Trading Days following such notice by the Company. After any such proposal by one or more Purchasers is made, the Company shall negotiate in good faith with such Purchasers in order to attempt to agree on a financing transaction; provided, however, that if no such agreement in principle is reached within three Trading Days following the proposal, the Company shall not be precluded from seeking such financing from any other sources or from accepting such financing from any other sources. This right of first offer shall continue even if the Purchasers elect not to participate in one or more such financings. Notwithstanding anything herein to the contrary, this right of first offer shall not apply to issuances of the Company's securities pursuant to (i) the Company's current or future employee, director or bona fide consultant options plans and/or compensation arrangements, (ii) strategic corporate alliances not undertaken principally for financing purposes, and (iii) revolving or term loans provided to the Company by federal or state chartered banks or thrifts. Section 3.10 RESERVATION OF STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of Debentures and exercise of the Warrants, such number of its shares of Common Stock as shall from time to time be sufficient to effect the full conversion of all Debentures and the full exercise of all the Warrants, and if at any time the number of authorized but unissued shares of Common Stock shall not be -13- sufficient to effect the full conversion of all Debentures and the full exercise of the Warrants, the Company will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including without limitation engaging in best efforts to obtain the requisite shareholder approval. Without in any way limiting the foregoing, the Company agrees to reserve and at all times keep available solely for purposes of the conversion of Debentures and exercise of the Warrants such number of authorized but unissued shares of Common Stock that is at least equal to 200% of the aggregate shares issuable upon full conversion of the Debentures plus 100% of the number of shares of Common Stock issuable upon exercise of the Warrants in full (assuming for such purpose that the Adjustment Warrants are exercisable for the maximum number of shares issuable thereunder, without regard to any ownership limitations contained therein), which numbers shall be appropriately adjusted for any stock split, reverse split, stock dividend or reclassification of the Common Stock. If the Company falls below the reserves specified in the immediately preceding sentence and does not cure such non-compliance within 30 days of its start, then the Purchasers will be entitled to the compensatory payments specified in Section 2(b)(i) of the Registration Rights Agreement. If at any time the number of authorized but unissued shares of Common Stock is not sufficient to effect the full conversion of the Debentures and the full exercise of the Warrants, the Purchasers shall be entitled to, INTER ALIA, the premium price redemption rights provided in the Registration Rights Agreement. All calculations pursuant to this paragraph shall be performed without regard to any restrictions or limitations on beneficial ownership of Common Stock contained in the Debentures or Warrants. Section 3.11 BEST EFFORTS. The parties shall use their best efforts to satisfy timely each of the conditions described in Article 4 of this Agreement. Section 3.12 LIMITATIONS ON TRANSFERS. The Company shall not contribute or transfer its assets to any of its subsidiaries, other than a subsidiary that has delivered its guarantee to the Purchasers in form and substance satisfactory to the Purchasers. Section 3.13 FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with respect to the Securities, as required under Regulation D of the Act and to provide a copy thereof to each Purchaser promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall have reasonably determined is necessary to qualify the applicable Securities for sale to the Purchasers at the Closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to each Purchaser on or prior to the Closing Date. Section 3.14 NASDAQ RULE. Notwithstanding anything contained herein, the Debentures and Warrants shall not be convertible and exercisable to the extent that in excess of 4,372,600 shares of Common Stock (19.9% of the Common Stock issued and outstanding on the date hereof, which number shall be subject to readjustment for any stock split, stock dividend or reclassification of the Common Stock) (the "20% CAP") would be issued thereon, unless the Company receives stockholder approval for such issuance. Each Purchaser shall be entitled to receive the number of Registrable Securities equal to such Purchaser's pro rata share of the 20% Cap (based upon its aggregate Purchase Price hereunder). A Purchaser shall have the right to receive cash payments from the Company for all shares of Common Stock that this Section 3.14 -14- renders the Company incapable of issuing to such Purchaser ("Deficiency Shares") at the Premium Redemption Price (as defined in the Registration Rights Agreement) for such Deficiency Shares. If a Purchaser has received all Registrable Securities to which it is entitled to receive but has not depleted the total number of pro rata shares allocated to it, its remaining pro rata shares shall be reallocated amongst the Purchasers still to receive Registrable Securities on a pro rata basis. If applicable, the restrictions and redemption obligations set forth in this Section 3.14 shall cease to apply if (a) the Company obtains written shareholder approval to issue Common Shares in excess of the 20% Cap pursuant to the rules and regulations of the Nasdaq National Market System or (b) the Company provides the Purchasers with irrevocable written notice, based upon the written advice of its counsel, that any such issuance of Common Shares is not subject to the 20% Cap pursuant to the rules and regulations of the Nasdaq National Market System. The Company will use its best efforts promptly to obtain either the shareholder approval or the irrevocable notice described in the preceding sentence and to provide the Purchasers with a copy of same. Without limiting the foregoing, in the event at any time the number of Registrable Securities then issued or issuable upon full conversion and exercise of the Debentures and Warrants is 85% of the 20% Cap (assuming full conversion and exercise without regard to any beneficial ownership limitations set forth therein and assuming the Adjustment Date under the Adjustment Warrant occurs at such time if it has not already occurred), then the Company shall within 60 days hold a stockholders meeting and shall solicit the aforementioned shareholder approval by soliciting proxies in favor of issuing Common Shares in excess of the 20% Cap and will use its best efforts to have all affiliates of the Company which own or control shares of Common Stock to vote their shares in favor of such resolution. Section 3.15 TRANSACTIONS WITH AFFILIATES. The Company agrees that any transaction or arrangement between it or any of its subsidiaries and any affiliate or employee of the Company shall be effected on an arms' length basis in accordance with customary commercial practice and, except with respect to grants of options and stock to service providers, including employees and directors, shall be approved by a majority of the Company's outside directors. Section 3.16 PRESS RELEASE. Purchasers shall have the opportunity to review any press release in connection with the transactions contemplated hereby prior to its issuance. Section 3.17 REPORTING LACK OF EFFECTIVE REGISTRATION. The Company shall promptly notify each Purchaser in writing if there shall ever be a lack of Effective Registration, as well as when Effective Registration is re-established. Section 3.18 RULE 144. With a view to making available to the Purchasers the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Purchasers to sell securities of the Company to the public without registration ("RULE 144"), the Company agrees, until such time as all of the Securities may be freely sold to the public under Rule 144(k) (or any successor thereto), to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit any of the Company's other -15- obligations under this Agreement and the filing of such reports and other documents is required for the applicable provisions of Rule 144); and (c) furnish to each Purchaser so long as such Purchaser owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Purchasers to sell such securities pursuant to Rule 144 without registration. Section 3.19 SUBORDINATION. So long as any Debentures remain outstanding, the Company shall not, and shall cause each of its subsidiaries not to, without the prior written consent of the Purchasers which may be withheld for any reason in Purchasers' sole discretion, permit, create, incur, assume, guarantee or otherwise become directly or indirectly liable for, any indebtedness which is senior to the Debentures hereunder, other than (a) the convertible debentures issued to London Pacific for up to $5.5 million in aggregate principal amount outstanding, (b) indebtedness under commercial bank lines of credit, and (c) indebtedness outstanding under senior debt (collectively, "SENIOR DEBT") issued by the Company which (1) is not directly or indirectly convertible into, exercisable for or exchangeable into any capital stock or other equity of the Company and (2) does not directly or indirectly provide for or contemplate the issuance of capital stock or equity of the Company or any securities convertible into, exercisable for or exchangeable into such capital stock or equity. So long as any Debentures remain outstanding and until the Adjustment Period (as defined in the Adjustment Warrants) has expired, the Company shall not, and shall cause each of its subsidiaries not to, repay any indebtedness of the Company except for trade payables incurred in the ordinary course of business. Section 3.20 REPORTING EVENTS DESCRIBED IN SCHEDULE 2.1(f). The Company agrees that any discounts, expenses or liabilities which may need to be recorded as and to the extent described in Schedule 2.1(f) shall be so recorded on or prior to the end of the Company's first fiscal quarter for 2001, and any deferral of revenues as and to the extent described in Schedule 2.1(f) shall only be deferred until a date which is on or prior to March 31, 2001. ARTICLE IV CONDITIONS TO CLOSINGS Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL. The obligation hereunder of the Company to issue and/or sell the Debentures and Warrants to the Purchasers at the Closing is subject to the satisfaction at or before the Closing of each of the applicable conditions set forth below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. (a) ACCURACY OF THE PURCHASERS' REPRESENTATIONS AND WARRANTIES. The representations and WARRANTIES of the Purchasers will be true and correct as of the date when made and as of the Closing Date. -16- (b) PERFORMANCE BY THE PURCHASERS. The Purchasers shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Purchasers at or prior to the Closing including payment of the applicable purchase price. (c) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by the Transaction Documents. Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE. The obligation hereunder of the Purchasers to acquire and pay for the Debentures and Warrants at the Closing is subject to the satisfaction, at or before the Closing, of each of the applicable conditions set forth below. These conditions are for the Purchasers' benefit and may be waived by the Purchasers at any time in their sole discretion. (a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company shall be true and correct as of the date when made and as of the Closing date as though made at that time (except for representations and warranties expressly as of an earlier date, which shall be true and correct in all material respects as of such date). (b) PERFORMANCE BY THE COMPANY. The Company shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Company at or prior to the Closing, including, without limitation, delivery of the Debentures and Warrants. (c) TRADING AND/OR QUOTATION. Trading in and/or quotation of the Company's Common Stock shall not have been suspended by the SEC and trading in securities generally as reported by the Nasdaq National Market System (or other Approved Market) shall not have been suspended or limited, and the Common Stock shall be listed on an Approved Market. (d) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by Transaction Documents. The NASD shall not have objected or indicated that it may object to the consummation of any of the transactions contemplated by this Agreement. The Company shall have delivered a copy of the Sprint Consent to the Purchasers. (e) OPINION OF COUNSEL. The Purchasers shall have received an opinion of counsel to the Company in the applicable form attached hereto as EXHIBIT 4.2(e) and such other opinions, certificates and documents as the Purchasers or their counsel shall reasonably require incident to the closing. (f) REGISTRATION RIGHTS AGREEMENT. The Company and the Purchasers shall have executed and delivered the Registration Rights Agreement in the form and substance of ANNEX D attached hereto. (g) OFFICER'S CERTIFICATE. The Company shall have delivered to the Purchasers a certificate in form and substance satisfactory to the Purchasers and the Purchasers' counsel, -17- executed by an officer of the Company, certifying as to satisfaction of applicable closing conditions, incumbency of signing officers, and the true, correct and complete nature of the Certificate of Incorporation, By-laws, good standing and authorizing resolutions of the Company. (h) MISCELLANEOUS. The Company shall have delivered to the Purchasers such other documents relating to the transactions contemplated by this Agreement as the Purchasers or their counsel may reasonable request. Section 4.3 CLOSING DATE DELIVERIES. (a) On the Closing Date, the Company shall deliver to the Purchaser: (i) Debentures in the form of Annex A; (ii) Warrants in the form attached as Annex B and Annex C; (iii) The certificate referred to in Section 4.2(g) above; (iv) The executed Registration Rights Agreement; (v) The opinion of counsel referred to in Section 4.2(e) above; and (vi) A copy of the duly executed Sprint Consent. (b) On the Closing Date, the Purchasers shall deliver to the Company: (i) The Purchase Price set forth on Schedule I hereto; and (ii) The executed Registration Rights Agreement. ARTICLE V LEGEND AND STOCK The Debentures and Warrants issued hereunder shall be stamped or otherwise imprinted with a legend substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED FOR OFFER OR SALE UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. -18- Each certificate representing the shares of Common Stock issued upon conversion or exercise of Debentures or Warrants, prior to such shares being registered under the Act for resale or available for resale under Rule 144(k) under the Act, shall be stamped or otherwise imprinted with a legend in substantially the above form. The Company agrees to reissue shares of Common Stock issued upon conversion or exercise of Debentures or Warrants without the legend set forth above at such time as (i) the holder thereof is permitted to dispose of such shares issuable upon conversion of the Debentures or exercise of the Warrants pursuant to Rule 144(k) under the Act or has disposed of such securities pursuant to Rule 144 under the Act, or (ii) such shares are sold to a purchaser or purchasers who (in the opinion of counsel to the seller or such purchaser(s), in form and substance reasonably satisfactory to the Company and its counsel) are able to dispose of such shares publicly without registration under the Act, or (iii) such securities have been registered under the Act. Prior to the Registration Statement (as defined in the Registration Rights Agreement) being declared effective, any shares of Common Stock issued upon conversion or exercise of Debentures or Warrants shall bear a legend in the same form as the legend indicated above; provided that such legend shall be removed from such shares and the Company shall issue new certificates without such legend if (i) the holder has sold or disposed of such shares pursuant to Rule 144 under the Act, or the holder is permitted to dispose of such shares pursuant to Rule 144(k) under the Act, (ii) such shares are registered for resale under the Act, or (iii) such shares are sold to a purchaser or purchasers who (in the opinion of counsel to the seller or such purchaser(s), in form and substance reasonably satisfactory to the Company and it counsel) are able to dispose of such shares publicly without registration under the Act. Upon such Registration Statement becoming effective, the Company agrees to promptly, but no later than three (3) business days after any Purchaser's written request therefor (and surrender of legended stock certificates), issue new certificates representing such shares without such legend. Any shares issued after the Registration Statement has become effective shall be free and clear of any legends, transfer restrictions and stop orders. The Purchasers agree to sell the Common Stock issued upon conversion of Debentures or exercise of Warrants in accordance with the applicable prospectus delivery requirements or in accordance with an exemption from the registration requirements of the Act (including without limitation Rule 144). Purchaser acknowledges, and will cause any transferee of such Common Stock to whom such Common Stock was transferred other than as registered shares under the Registration Statement or pursuant to Rule 144 to acknowledge, that the Common Stock issued on conversion and exercise of the Debenture and Warrants has been issued pursuant to the exemption from registration provided by Regulation D under the Act and that the availability of such exemption is dependent upon the Purchaser's not disposing of such shares in an unregistered distribution in violation of securities laws, and Purchaser agrees, and will cause any such transferee to agree, not to dispose of any such Common Stock in an unregistered distribution in violation of securities laws. Nothing herein shall limit the right of any holder to pledge these securities pursuant to a bona fide margin account or lending arrangement entered into in compliance with law, including applicable securities laws. -19- ARTICLE VI INDEMNIFICATION In consideration of the Purchasers' execution and delivery of this Agreement and the Registration Rights Agreement and in addition to all of the Company's other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless the Purchasers and all of their partners, officers, directors, employees, members and direct or indirect Purchasers and any of the foregoing persons' agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate or document contemplated hereby or thereby, (c) any cause of action, suit or claim brought or made against such Indemnitee by a third party and arising out of or resulting from (i) the execution, delivery, performance, breach by the Company or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities or (iii) the status of the Purchaser or holder of the Securities or Warrants as Purchasers in the Company, and (d) the enforcement of this Section. ARTICLE VII GOVERNING LAW; MISCELLANEOUS. Section 7.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS TO BE EXECUTED AND PERFORMED EXCLUSIVELY IN NEW YORK. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, OR SAN JOSE, CALIFORNIA, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT -20- IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. EACH PARTY HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY. Section 7.2 COUNTERPARTS. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. Section 7.3 HEADINGS. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Section 7.4 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. Section 7.5 ENTIRE AGREEMENT; AMENDMENTS; WAIVERS. (a) This Agreement supersedes all other prior oral or written agreements between the Purchasers, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein (including the other Transaction Documents) contain the entire understanding of the parties with respect to the matters covered herein and therein. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Purchasers, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. Notwithstanding the above, this Agreement shall not supersede or terminate the rights and obligations granted under a certain confidentiality agreement dated January 24, 2001 (accepted on January 30, 2001), as amended, by and between the Company and The Palladin Group, L.P. (b) Any Purchaser may at any time elect, by notice to the Company, to waive (whether permanently or temporarily, and subject to such conditions, if any, as such Purchaser may specify in such notice) any of their respective rights (but not obligations) under any of the Transaction Documents to acquire shares of Common Stock from the Company, in which event such waiver shall be binding against such Purchaser in accordance with its terms. Section 7.6 NOTICES. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing, must be delivered by (i) courier, mail or hand delivery or (ii) facsimile, and will be deemed to have been delivered upon receipt. The addresses and facsimile numbers for such communications shall be: If to the Company: -21- Hybrid Networks, Inc. 6409 Guadalupe Mines Road San Jose, California 95120 Telephone: 408-323-6500 Facsimile: 408-323-6470 Attention: President and CEO with a copy to: Fenwick and West LLP 2 Palo Alto Square Palo Alto, California 94306 Telephone: 650-494-0600 Facsimile: 650-494-1417 Attention: Dan Winnike, Esq. If to the Purchasers: To each Purchaser at the address and/or fax number set forth in Schedule I of this Agreement. with a copy to: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue New York, New York 10176 Telephone: 212-986-6000 Facsimile: 212-986-8866 Attention: Stephen M. Schultz, Esq. Each party shall provide five (5) days prior written notice to the other party of any change in address, telephone number or facsimile number. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date and recipient facsimile number or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. Section 7.7 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. A Purchaser may assign some or all of its rights hereunder without the consent of the Company in connection with any sale or transfer of all or any portion of the Securities held by such Purchaser. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers, including by merger or consolidation. -22- Section 7.8 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. Section 7.9 SURVIVAL. The representations, warranties and agreements of the Company and the Purchasers contained in the Agreement shall survive the Closing. Section 7.10 FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. Section 7.11 REMEDIES. Each Purchaser and each permitted assignee shall have all rights and remedies set forth in this Agreement, the Debentures, the Warrants and the Registration Rights Agreement and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Each Purchaser and each permitted assignee without prejudice may withdraw, revoke or suspend its pursuit of any remedy at any time prior to its complete recovery as a result of such remedy. Section 7.12 DAYS. Unless the context refers to "business days" or "Trading Days," all references herein to "days" shall mean calendar days. "TRADING DAY" shall mean (x) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, a day on which there is trading on such stock exchange, or (y) if the Common Stock is not listed on either of such stock exchange but sale prices of the Common Stock are reported on an automated quotation system, a day on which trading is reported on the principal automated quotation system on which sales of the Common Stock are reported, or (z) if the foregoing provisions are inapplicable, a day on which quotations are reported by National Quotation Bureau Incorporated. Section 7.13 RESCISSION AND WITHDRAWAL RIGHT. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, wherever the Purchasers exercise a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then the Purchasers may rescind or withdraw, in their sole discretion from time to time upon written notice to the Company, any such notice, demand or election in whole or in part without prejudice to its future actions and rights. Section 7.14 OBLIGATIONS ABSOLUTE. The Company's obligations under the Transaction Documents are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction. Section 7.15 PUBLICITY. The Company agrees that it will not disclose, and will not include in any public announcement, the name of any Purchaser without the express written -23- agreement of such Purchaser, which consent will not be unreasonably withheld, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. The Company agrees that it will deliver a copy of any public announcement regarding the matters covered by this Agreement or any agreement and document executed herewith to each Purchaser and any public announcement including the name of a Purchaser to such Purchaser, reasonably in advance of the release of such announcements. Section 7.16 LIKE TREATMENT OF PURCHASERS AND HOLDERS. Neither the Company nor any of its affiliates shall, directly or indirectly, pay or cause to be paid any consideration (immediate or contingent), whether by way of interest, fee, payment for the redemption, conversion of Debentures or exercise of the Securities, or otherwise, to any Purchaser or holder of Securities, for or as an inducement to, or in connection with the solicitation of, any consent, waiver or amendment of any terms or provisions of the Transaction Documents, unless such consideration is required to be paid to all Purchasers or holders of Securities bound by such consent, waiver or amendment. The Company shall not, directly or indirectly, redeem any Securities unless such offer of redemption is made pro rata to all Purchasers or holders of Securities, as the case may be, on identical terms. Section 7.17 ACTIONS OF PURCHASERS. Notwithstanding anything herein to the contrary, the actions and obligations of the Purchasers hereunder shall at all times be considered several and NOT joint, and the Purchasers are not, under any circumstances, agreeing to act jointly with respect to the Securities or any of their actions or obligations under the Transaction Documents. * * * * * [SIGNATURE PAGE FOLLOWS] -24- IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed as of the date and year first above written. HYBRID NETWORKS, INC. By: -------------------------------------- Name: Title: PURCHASERS: HALIFAX FUND, L.P. By: -------------------------------------- Name: Title: SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT LIST OF SCHEDULES - ----------------- Schedule I List of Purchasers Schedule 2.1(c) Reservation of Common Shares and Preemptive Rights Schedule 2.1(c)(i) Convertible Securities Schedule 2.1(f) SEC Documents; Non-Public Information; Financial Statements Schedule 2.1(g) Financial Statements Schedule 2.1(j) No Undisclosed Liabilities Schedule 2.1(m) No Integrated Offering Schedule 2.1(o) Intellectual Property Schedule 2.1(s)(i) Outstanding securities entitled to registration rights Schedule 2.1(s)(ii) Outstanding securities affected by the issuance of Securities Schedule 2.1(t) Certain Transactions LIST OF EXHIBITS - ---------------- Exhibit 4.2(e) Opinion of Counsel ANNEXES - ------- Annex A Debenture Annex B Purchase Warrant Annex C Adjustment Warrant Annex D Registration Rights Agreement
26 SCHEDULE I
PRINCIPAL AMOUNT OF NUMBER OF PURCHASER ADDRESS DEBENTURES PURCHASE WARRANTS PURCHASE PRICE --------- ------- ---------- ----------------- -------------- Halifax Fund, L.P. c/o The Palladin Group, L.P. $7,500,000 833,333 shares $7,500,000 195 Maplewood Avenue Maplewood, N.J. 07040 Attention: Steve Weiner Telephone: (973) 313-6478
EX-4.02 3 a2039627zex-4_02.txt EXHIBIT 4.02 EXHIBIT 4.02 ANNEX A NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS DEBENTURE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE DEBENTURE IN THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR CONVERSION OF ANY PORTION OF THIS DEBENTURE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS DEBENTURE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED INTEREST SET FORTH BELOW. 6% CONVERTIBLE DEBENTURE DUE FEBRUARY 16, 2003 OF HYBRID NETWORKS, INC. DEBENTURE NO.: ORIGINAL PRINCIPAL AMOUNT: $7,500,000 ISSUANCE DATE: FEBRUARY 16, 2001 NEW YORK, NEW YORK THIS DEBENTURE ("DEBENTURE") is one of a duly authorized issue of debentures of HYBRID NETWORKS, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "COMPANY"), designated as the Company's 6% Convertible Debentures Due February 16, 2003 ("MATURITY DATE") in an aggregate principal amount (when taken together with the original principal amounts of all other Debentures) which does not exceed Seven Million Five Hundred Thousand U.S. Dollars (U.S. $7,500,000) (the "DEBENTURES"). FOR VALUE RECEIVED, the Company hereby promises to pay to the order of HALIFAX FUND, L.P. or its registered assigns or successors-in-interest ("HOLDER") the principal sum of Seven Million Five Hundred Thousand Dollars (U.S. $7,500,000), together with all accrued but unpaid interest thereon (including amounts added to the principal amount hereunder as PIK Interest (defined below)), if any, on the Maturity Date, to the extent such principal amount and interest has not been converted into the Company's Common Stock, $0.001 par value per share (the "COMMON STOCK"), in accordance with the terms hereof. Interest on the unpaid principal balance hereof shall accrue at the rate of 6% per annum from the date of original issuance hereof (the "ISSUANCE DATE") until the same becomes due and payable on the Maturity Date, or such earlier date upon acceleration or by conversion or redemption in accordance with the terms hereof or of the other Transaction Documents. Interest on this Debenture shall accrue daily commencing on the Issuance Date, shall be compounded semi-annually and shall be computed on the basis of a 360-day year, 30-day months and actual days elapsed and shall be payable in accordance with Section 1 hereof. Notwithstanding anything contained herein, this Debenture shall bear interest on the due and unpaid Principal Amount from and after the occurrence and during the continuance of an Event of Default pursuant to Section 4(a), at the rate (the "DEFAULT RATE") equal to the lower of twenty percent (20%) per annum or the highest rate permitted by law. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs, then to unpaid interest and fees and any remaining amount to principal. All payments of principal and interest on this Debenture (to the extent such principal and/or interest is not converted into Common Stock or interest is not paid in PIK Interest (as defined below) in accordance with the terms hereof) shall be made in lawful money of the United States of America by wire transfer of immediately available funds to such account as the Holder may from time to time designate by written notice in accordance with the provisions of this Debenture or by Company check. This Debenture may not be prepaid in whole or in part except as otherwise provided herein or in the Transaction Documents. Whenever any amount expressed to be due by the terms of this Debenture is due on any day which is not a Business Day (as defined below), the same shall instead be due on the next succeeding day which is a Business Day. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Securities Purchase Agreement dated on or about the Issuance Date pursuant to which the Debentures were originally issued (the "PURCHASE AGREEMENT"). For purposes hereof the following terms shall have the meanings ascribed to them below: "BUSINESS COMBINATION" shall mean a Change in Control Transaction (as defined in the Purchase Warrant). "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the City of New York are authorized or required by law or executive order to remain closed. "CLOSING PRICE" shall mean $6.3212 as such Closing Price may be adjusted from time to time pursuant to the terms of this Debenture. "CONVERSION RATIO" means, at any time, a fraction, of which the numerator is the entire outstanding Principal Amount (or such portion thereof that is being redeemed or repurchased), and of which the denominator is the then applicable Conversion Price. "CONVERSION PRICE" shall equal the Closing Price, provided that in the event there is no Effective Registration (as defined in the Purchase Agreement), or this Debenture is otherwise not subject to automatic conversion as provided herein, on the date which is the earlier of (a) the Effective Date, or (b) the 180th day following the Closing Date, then the "Conversion Price" hereunder shall equal the Floating Price as of the applicable Conversion Date. "CONVERTIBLE SECURITIES" means any convertible securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock. "EFFECTIVE DATE" means the date on which a Registration Statement covering all the Underlying Shares and other Registrable Securities is declared effective by the SEC. 2 "EFFECTIVE REGISTRATION" shall have the meaning set forth in the Purchase Agreement. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "FLOATING PRICE" shall equal the lesser of the Closing Price and the lowest daily volume-weighted average sale price of the Common Stock on the Principal Market during the five (5) Trading Days immediately preceding the Conversion Date. "MFN TRANSACTION" shall mean a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions (the "MFN Offering") which grants to the investor (the "MFN Investor") the right to receive additional securities based upon future capital raising transactions of the Company on terms more favorable than those granted to the MFN Investor in the MFN Offering. "PER SHARE SELLING PRICE" shall include the amount actually paid by third parties for each share of Common Stock in a sale or issuance by the Company. In the event a fee is paid by the Company in connection with such transaction directly or indirectly to such third party or its affiliates, any such fee shall be deducted from the selling price pro rata to all shares sold in the transaction to arrive at the Per Share Selling Price. A sale of shares of Common Stock shall include the sale or issuance of rights, options, warrants or convertible, exchangeable or exercisable securities under which the Company is or may become obligated to issue shares of Common Stock, and in such circumstances the Per Share Selling Price of the Common Stock covered thereby shall also include the exercise, exchange or conversion price thereof (in addition to the consideration received by the Company upon such sale or issuance less the fee amount as provided above). In case of any such security issued in a Variable Rate Transaction or an MFN Transaction, the Per Share Selling Price shall be deemed to be the lowest conversion or exercise price at which such securities are converted or exercised or might have been converted or exercised in the case of a Variable Rate Transaction, or the lowest adjustment price in the case of an MFN Transaction, over the life of such securities. If shares are issued for a consideration other than cash, the Per Share Selling Price shall be the fair value of such consideration as determined in good faith by independent certified public accountants mutually acceptable to the Company and the Purchaser. In the event the Company directly or indirectly effectively reduces the conversion, exercise or exchange price for any Convertible Securities which are currently outstanding (other than pursuant to the terms of the transaction documentation for such securities as in effect on the date hereof), then the Per Share Selling Price shall equal such effectively reduced conversion, exercise or exchange price. "PRINCIPAL AMOUNT" shall refer to the sum of (i) the original principal amount of this Debenture (and any PIK Interest included as set forth in Section 1), (ii) all accrued but unpaid interest hereunder, and (iii) any default payments owing under the Transaction Documents but not previously paid or added to the Principal Amount. "PRINCIPAL MARKET" shall mean the NASDAQ National Market System or such other principal market or exchange on which the Common Stock is then listed for trading. "REGISTRATION STATEMENT" shall have the meaning set forth in the Registration Rights Agreement. 3 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "TRADING DAY" shall mean a day on which there is trading on the NASDAQ National Market System or such other market or exchange on which the Common Stock is then principally traded. "UNDERLYING SHARES" means the shares of Common Stock into which the Debentures are convertible in accordance with the terms hereof and the Purchase Agreement. "VARIABLE RATE TRANSACTION" shall mean a transaction in which the Company issues or sells (a) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (x) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the Common Stock at any time after the initial issuance of such debt or equity securities, or (y) with a fixed conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock (but excluding standard stock split anti-dilution provisions), or (b) any securities of the Company pursuant to an "equity line" structure which provides for the sale, from time to time, of securities of the Company which are registered for resale pursuant to the Securities Act. The following terms and conditions shall apply to this Debenture: SECTION 1. INTEREST. The Company shall pay the interest hereunder quarterly in arrears on each March 31, June 30, September 30 and December 31 (each a "PAYMENT DATE") either in cash or by adding such accrued amounts to the original principal amount due hereunder ("PIK INTEREST"), at the Company's option. All interest which is so added to the original principal amount due under this Debenture shall, for all purposes of this Debenture, be deemed to have been part of the principal indebtedness originally evidenced by this Debenture. The Company shall make such election to pay interest in cash or PIK Interest by delivering an irrevocable written notice to the Holders of Debentures stating such election at least 10 days prior to such Payment Date, PROVIDED, HOWEVER, that if the Company fails for any reason to notify the Holders as provided in this Section 1, the Company will be deemed to have elected to pay interest in PIK Interest. All holders of Debentures must be treated equally with respect to the payment of interest. SECTION 2. NO SENIOR DEBT. So long as any Principal Amount of Debentures is outstanding, the Company and its subsidiaries shall not, without the affirmative vote of the holders of at least 75% of the outstanding Principal Amount of the Debentures then outstanding, incur any additional indebtedness which is senior to the Debentures, except for (a) convertible debentures issued to London Pacific for an aggregate principal amount outstanding, including amounts outstanding on the Issuance Date, of up to $5.5 million, (b) indebtedness under working capital facilities from commercial bank lines of credit, and (c) Senior Debt, as defined in Section 3.19 of the Purchase Agreement. SECTION 3. CONVERSION. (a) AUTOMATIC AND OPTIONAL CONVERSION. 4 (i) AUTOMATIC CONVERSION. Subject to the terms hereof and restrictions and limitations contained herein, the outstanding Principal Amount of this Debenture shall be automatically converted in full into Common Stock on the Trading Day immediately following the Effective Date; PROVIDED, HOWEVER, that if the Effective Date does not occur on or prior to the 180th day following the Closing Date, then this Debenture shall no longer be subject to automatic conversion. Notwithstanding anything to the contrary herein, this Debenture shall not be automatically convertible into Common Stock on the Effective Date as provided above if (A) on the Effective Date, there is no Effective Registration, or (B) at any time from the thirtieth (30th) Trading Day immediately preceding the Effective Date until the time at which the Holder actually receives such shares of Common Stock issuable upon conversion, any of the following events or conditions shall have occurred or exist: (1) The number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to issue shares of Common Stock upon conversion in full of the outstanding Principal Amount due under all outstanding Debentures; (2) Such shares are not listed, or approved for listing prior to issuance, on the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange or the American Stock Exchange, or the Company's shares of Common Stock are delisted, suspended from trading or not otherwise listed for trading on the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange or the American Stock Exchange; (3) An Event of Default exists or occurs or the Company shall have otherwise materially breached or be in default under, or any material breach or default is continuing under, any of its obligations under this Debenture or the other Transaction Documents; or (4) The Company is subject to a Bankruptcy Event or, based on reasonable evidence, the Company fails to have adequate cash available to fund the Company's operations on a consolidated basis for ninety (90) days. In addition to and not in lieu of any provisions contained in the Transaction Documents, if the Effective Date does not occur on or prior to the 180th day following the Closing Date (or this Debenture otherwise is not automatically converted into Common Stock pursuant hereto prior to such 180th day), then the Holder may request that the Company redeem this Debenture, in whole, at a redemption price equal to 120% of the outstanding Principal Amount hereunder, by delivering a redemption request notice ("REDEMPTION REQUEST") to the Company. The Company shall have ten (10) days following its receipt of such Redemption Request to redeem this Debenture in whole or in part at such redemption price, provided that the Company shall not be obligated to so redeem this Debenture. (ii) OPTIONAL CONVERSION. Subject to the terms hereof and restrictions and limitations contained herein, to the extent that the Company elects not to, or otherwise fails to, redeem this Debenture in whole within 10 days following its receipt of a Redemption Request, the redemption offer contained in the Redemption Request shall be automatically deemed revoked and the Holder thereafter shall have the right, at such Holder's option, at any time and 5 from time to time to convert the outstanding Principal Amount under this Debenture in whole or in part by delivering to the Company a fully executed notice of conversion in the form of conversion notice attached hereto as EXHIBIT A (the "CONVERSION NOTICE"), which may be transmitted by facsimile. (iii) LIMITATIONS. Notwithstanding anything to the contrary herein, this Debenture and the outstanding Principal Amount hereunder shall not be convertible (automatically or otherwise) into Common Stock to the extent that such conversion would result in the Holder hereof exceeding the limitations contained in, or otherwise violating the provisions of, Section 3(i) below or the 20% Cap. (b) COMMON STOCK ISSUANCE UPON CONVERSION. (i) CONVERSION DATE PROCEDURES. Upon automatic conversion of this Debenture or conversion of this Debenture at the Holder's option, the outstanding Principal Amount hereunder shall be converted into such number of fully paid, validly issued and non-assessable shares of Common Stock, free of any liens, claims and encumbrances, as is determined by dividing the outstanding Principal Amount being converted by the then applicable Conversion Price. The automatic conversion date or the date of any Conversion Notice hereunder shall be referred to herein as the "CONVERSION DATE". If a conversion hereunder (automatic or otherwise) cannot be effected in full for any reason, or if the Holder is converting less than all of the outstanding Principal Amount hereunder pursuant to a Conversion Notice, the Company shall promptly deliver to the Holder (but no later than five Trading Days after the Conversion Date) a Debenture for such outstanding Principal Amount as has not been converted if this Debenture has been surrendered to the Company for partial conversion. The Holder shall not be required to physically surrender this Debenture to the Company unless the full outstanding Principal Amount represented by this Debenture is being converted. The Holder and the Company shall maintain records showing the outstanding Principal Amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Debenture upon each such conversion. (ii) STOCK CERTIFICATES OR DWAC. The Company will deliver to the Holder not later than three (3) Trading Days after the Conversion Date, a certificate or certificates which shall be free of restrictive legends and trading restrictions, representing the number of shares of Common Stock being acquired upon the conversion of this Debenture. In lieu of delivering physical certificates representing the shares of Common Stock issuable upon conversion of this Debenture, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the Holder, the Company shall use commercially reasonable efforts to cause its transfer agent to electronically transmit such shares issuable upon conversion to the Holder (or its designee), by crediting the account of the Holder's (or such designee's) prime broker with DTC through its Deposit Withdrawal Agent Commission system (provided that the same time periods herein as for stock certificates shall apply). If in the case of any conversion hereunder, such certificate or certificates are not delivered to or as directed by the Holder by the third Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return this Debenture tendered for conversion. If 6 the Company fails to deliver to the Holder such certificate or certificates (or shares through DTC) pursuant to this Section 3(b) (free of any restrictions on transfer) in accordance herewith, prior to the fifth Trading Day after the Conversion Date, the Company shall pay to the Holder, in cash, an amount equal to 2% of the Principal Amount per month. (c) CONVERSION PRICE ADJUSTMENTS. (i) STOCK DIVIDENDS, SPLITS AND COMBINATIONS. If the Company or any of its subsidiaries, at any time while the Debentures are outstanding (A) shall pay a stock dividend or otherwise make a distribution or distributions on any equity securities (including instruments or securities convertible into or exchangeable for such equity securities) in shares of Common Stock, (B) subdivide outstanding Common Stock into a larger number of shares, or (C) combine outstanding Common Stock into a smaller number of shares, then each Affected Conversion Price (as defined below) shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding before such event and the denominator of which shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 3(c)(i) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. As used herein, the Affected Conversion Prices (each an "AFFECTED CONVERSION PRICE") shall refer to: (i) the Closing Price; and (ii) each reported daily volume-weighted average sale price of the Common Stock on the Principal Market occurring on any Trading Day included in the period used for determining the Conversion Price, which Trading Day occurred before the record date in the case of events referred to in clause (A) of this subparagraph 3(c)(i) and before the effective date in the case of the events referred to in clauses (B) and (C) of this subparagraph 3(c)(i). (ii) DISTRIBUTIONS. If the Company or any of its subsidiaries, at any time while the Debentures are outstanding, shall distribute to all holders of Common Stock evidences of its indebtedness or assets or cash or rights or warrants to subscribe for or purchase any security of the Company or any of its subsidiaries (excluding those referred to in Section 3(c)(i) above), then concurrently with such distributions to holders of Common Stock, the Company shall distribute to holders of the Debentures the amount of such indebtedness, assets, cash or rights or warrants which the holders of Debentures would have received had all their Debentures been converted into Common Stock at the then applicable Conversion Price immediately prior to the record date for such distribution. (iii) COMMON STOCK ISSUANCES. In the event that the Company or any of its subsidiaries (A) issues or sells any Common Stock or securities which are convertible into or exercisable or exchangeable for Common Stock (other than Debentures or Warrants issued under the Purchase Agreement), or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock or (B) directly or indirectly effectively reduces the conversion, exercise or exchange price for any Convertible Securities which are currently outstanding (other than pursuant to terms existing on the date hereof), at or to an effective Per Share Selling Price which is less than: 7 a) the closing sale price per share of the Common Stock on the Principal Market on the Trading Day next preceding such issue or sale or, in the case of issuances to holders of its Common Stock, the date fixed for the determination of stockholders entitled to receive such warrants, rights, or options ("FAIR MARKET PRICE"), then in each such case, the Closing Price in effect immediately prior to such issue or sale or record date, as applicable, shall be automatically reduced effective concurrently with such issue or sale to an amount determined by multiplying the Closing Price then in effect by a fraction, (x) the numerator of which shall be the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the aggregate consideration received by the Company for such additional shares would purchase at such Fair Market Price, and (y) the denominator of which shall be the number of shares of Common Stock of the Company outstanding immediately after such issue or sale; or b) the Closing Price, then in each such case, the Closing Price in effect immediately prior to such issue or sale or record date, as applicable, shall be automatically reduced effective concurrently with such issue or sale to an amount equal to such Per Share Selling Price. The foregoing provision of this subsection (iii) shall not apply to issuances, sales or reductions pursuant to (i) the Company's current or future employee, director or bona fide consultant options plans and/or compensation arrangements, (ii) strategic corporate alliances not undertaken principally for financing purposes, and (iii) revolving or term loans provided to the Company by federal or state chartered banks or thrifts. For the purposes of the foregoing adjustments, in the case of the issuance of any Convertible Securities, the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible Securities shall be deemed to be outstanding, provided that no further adjustment shall be made upon the actual issuance of Common Stock upon exercise, exchange or conversion of such Convertible Securities. For purposes of this Section 3(c)(iii), if an event occurs that triggers more than one of the above adjustment provisions, then only one adjustment shall be made and the calculation method which yields the greatest downward adjustment in the Closing Price shall be used. (iv) ROUNDING OF ADJUSTMENTS. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (v) NOTICE OF ADJUSTMENTS. Whenever any Affected Conversion Price is adjusted pursuant to Section 3(c)(ii) or (iii) above, the Company shall promptly deliver to each holder of the Debentures, a notice setting forth the Affected Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, provided that any failure to so provide such notice shall not affect the automatic adjustment hereunder. (vi) BUSINESS COMBINATIONS. In case of any Business Combination, the Holder shall have the right thereafter to, at its option, (A) convert this Debenture, in whole or in part, at the then applicable Conversion Price into the shares of stock and other securities, cash and/or property receivable upon or deemed to be held by holders of Common Stock following 8 such Business Combination, and the Holder shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which this Debenture could have been converted immediately prior to such Business Combination would have been entitled if such conversion were permitted, subject to such further applicable adjustments set forth in this Section 3 or (B) require the Company or its successor to redeem this Debenture, in whole or in part, at a redemption price equal to the greater of (i) the outstanding Principal Amount being redeemed plus any accrued and unpaid cash interest thereon and (ii) the product of (x) the average of the Fair Market Price for the five (5) Trading Days immediately preceding the Holder's election to have its Debentures redeemed and (y) the Conversion Ratio, provided that the Holder shall have notified the Company of its intent to have its Debentures converted or redeemed no later than the five Business Days prior to the closing date for the Business Combination; PROVIDED, HOWEVER, that in the event such Business Combination is a merger solely by an exchange of shares of common stock, then clause (B)(ii) above shall not apply, and the Holder, in addition to its rights under clause (B)(i) above, shall have the right to convert this Debenture, in whole or in part, pursuant to clause (A) above at a Conversion Price equal to the Floating Price. The terms of any such Business Combination shall include such terms so as to continue to give to the Holders the right to receive the amount of securities, cash and/or property upon any conversion or redemption following such Business Combination to which a holder of the number of shares of Common Stock deliverable upon such conversion would have been entitled in such Business Combination, and interest payable hereunder shall be in cash or such new securities and/or property, at the Holder's option. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. (vii) NOTICE OF CERTAIN EVENTS. If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock; or B. the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; 9 then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Debenture, and shall cause to be mailed to the Holder at its last address as it shall appear upon the books of the Company, on or prior to the date notice to the Company's stockholders generally is given, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange. (d) RESERVATION AND ISSUANCE OF UNDERLYING SECURITIES. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of this Debenture, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of the Debentures, not less than such number of shares of Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments under this Section 3 but without regard to any ownership limitations contained herein) upon the conversion of this Debenture hereunder (including PIK Interest) in Common Stock. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid, nonassessable and freely tradeable. (e) NO FRACTIONS. Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the closing price of a share of Common Stock at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) CHARGES, TAXES AND EXPENSES. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; PROVIDED, HOWEVER, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and PROVIDED FURTHER, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any such transfer. (g) CANCELLATION. After all of the Principal Amount and accrued but unpaid interest and default payments at any time owed on this Debenture have been paid in full or converted into Common Stock, this Debenture shall automatically be deemed canceled and the Holder shall promptly surrender the Debenture to the Company at the Company's principal executive offices. 10 (h) NOTICES PROCEDURES. Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by confirmed facsimile, or by a nationally recognized overnight courier service to the Company at the facsimile telephone number or address of the principal place of business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, or by a nationally recognized overnight courier service addressed to the Holder at the facsimile telephone number or address of the Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed delivered (i) upon receipt, when delivered personally, (ii) when sent by facsimile, upon receipt if received on a Business Day prior to 5:00 p.m. (Eastern Time), or on the first Business Day following such receipt if received on a Business Day after 5:00 p.m. (Eastern Time) or (iii) upon receipt, when deposited with a nationally recognized overnight courier service. (i) CONVERSION LIMITATIONS. (A) 9.9% LIMITATION. Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon conversion pursuant to the terms hereof shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such Holder (other than by virtue of the ownership of securities or rights to acquire securities (including the Debentures) that have limitations on the Holder's right to convert, exercise or purchase similar to the limitation set forth herein), together with all shares of Common Stock deemed beneficially owned at such time (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the right to convert, exercise or purchase similar to the limitation set forth herein) by the holder's "affiliates" at such time (as defined in Rule 144 of the Act) ("AGGREGATION PARTIES") that would be aggregated for purposes of determining whether a group under Section 13(d) of the Securities Exchange Act of 1934 as amended, exists, would exceed 9.9% of the total issued and outstanding shares of the Common Stock (the "RESTRICTED OWNERSHIP PERCENTAGE"). Each holder shall have the right (w) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company and (x) (subject to waiver) at any time and from time to time, to increase its Restricted Ownership Percentage immediately in the event of the announcement as pending or planned, of a Business Combination. (B) LIMITATION COVENANTS. The Holder covenants at all times on each day (each such day being referred to as a "COVENANT DAY") as follows: During the balance of such Covenant Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and the succeeding 61 days being referred to as the "COVENANT PERIOD") such Holder will not acquire shares of Common Stock pursuant to any right (including conversion of Debentures) existing at the commencement of the Covenant Period to the extent the number of shares so acquired by such Holder and its Aggregation Parties (ignoring all dispositions) would exceed: (x) the Restricted Ownership Percentage of the total number of shares 11 of Common Stock outstanding at the commencement of the Covenant Period, MINUS (y) the number of shares of Common Stock actually owned by such Holder and its Aggregation Parties at the commencement of the Covenant Period. A new and independent covenant will be deemed to be given by the Holder as of each moment of each Covenant Day. No covenant will terminate, diminish or modify any other covenant. The Holder agrees to comply with each such covenant. This Section 3(i)(B) controls in the case of any conflict with any other provision of the Purchase Agreement or any agreement entered into in connection therewith. The Company's obligation to issue shares of Common Stock which would exceed such limits referred to in this Section 3(i) shall be suspended to the extent necessary until such time, if any, as shares of Common Stock may be issued in compliance with such restrictions. (C) 19.9% LIMITATION. Notwithstanding anything contained herein, in no event shall the Company issue shares of Common Stock hereunder to the extent that the total number of shares issued or deemed issued to the Investors under the Purchase Agreement (when added to the Underlying Shares and Warrant Shares) would exceed 19.9% of the Company's issued and outstanding shares of Common Stock on the date of the Purchase Agreement. Only shares acquired pursuant to the Purchase Agreement, Debentures and Warrants will be included in determining whether the limitations would be exceeded for purposes of this paragraph. (D) NO COMPANY LIABILITY. The Company shall have no liability for issuing Underlying Shares in violation of Sections 3(i)(A) and (B) above if the Holder fails to advise the Company in writing prior to such issuance (which may be in the Conversion Notice) that upon such issuance the Restricted Ownership Percentage will be exceeded. SECTION 4. DEFAULTS AND REMEDIES. (a) EVENTS OF DEFAULT. An "EVENT OF DEFAULT" is: (i) a default in payment of the Principal Amount or accrued but unpaid interest thereon of any of the Debentures on or after the date such payment is due (to the extent such principal and/or amount has not been converted into Common Stock in accordance with the terms hereof), which default continues for 5 business days after written notice of such non-payment has been received by the Company; (ii) a default in the timely issuance of Underlying Shares upon and in accordance with terms hereof, which default continues for five business days after the Company has received written notice informing the Company that it has failed to issue shares or deliver stock certificates within the fifth day following the Conversion Date; (iii) failure by the Company for thirty (30) days after written notice has been received by the Company to comply with any material provision of any of the Debentures, the Purchase Agreement, the Registration Rights Agreement or the Warrants (including without limitation the failure to issue the requisite number of shares of Common Stock upon conversion hereof and the failure to redeem Debentures upon the Holder's request 12 following a Business Combination pursuant to Section 3(c)(vi), (iv) a material breach by the Company of its representations or warranties in the Purchase Agreement, Registration Rights Agreement or Warrants; (v) any default after any cure period under, or acceleration prior to maturity of, any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company for in excess of $1 million or for money borrowed the repayment of which is guaranteed by the Company for in excess of $1 million, whether such indebtedness or guarantee now exists or shall be created hereafter; or (vi) if the Company is subject to any Bankruptcy Event. (b) REMEDIES. If an Event of Default occurs and is continuing with respect to any of the Debentures, the Holder may declare all of the then outstanding Principal Amount of this Debenture and all other Debentures held by the Holder, including any interest due thereon, to be due and payable immediately, except that in the case of an Event of Default arising from events described in clauses (v) and (vi) of Section 4(a), this Debenture shall become due and payable without further action or notice. In the event of such acceleration, the amount due and owing to the Holder shall be the greater of (1) 120% of the outstanding Principal Amount of the Debentures held by the Holder (plus all accrued and unpaid interest, if any) and (2) the product of (A) the highest closing price for the five (5) Trading days immediately preceding the Holder's acceleration and (B) the Conversion Ratio. In either case the Company shall pay interest on such amount in cash at the Default Rate to the Holder if such amount is not paid within 7 days of Holder's request. The remedies under this Debenture shall be cumulative. SECTION 5. GENERAL. (a) PAYMENT OF EXPENSES. The Company agrees to pay all reasonable charges and expenses, including attorneys' fees and expenses, which may be incurred by the Holder in successfully enforcing this Debenture and/or collecting any amount due under this Debenture. (b) SAVINGS CLAUSE. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. In no event shall the amount of interest paid hereunder exceed the maximum rate of interest on the unpaid principal balance hereof allowable by applicable law. If any sum is collected in excess of the applicable maximum rate, the excess collected shall be applied to reduce the principal debt. If the interest actually collected hereunder is still in excess of the applicable maximum rate, the interest rate shall be reduced so as not to exceed the maximum allowable under law. (c) AMENDMENT. Neither this Debenture nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and Holders of 75% of the Principal Amount of all Debentures. (d) ASSIGNMENT, ETC. The Holder may assign or transfer this Debenture to any transferee only with the prior written consent of the Company, which may not be unreasonably withheld or delayed, provided that (i) the Holder may assign or transfer this Debenture to any of such Holder's affiliates without the consent of the Company and (ii) upon any Event of Default, the Holder may assign or transfer this Note without the consent of the Company. The Holder shall 13 notify the Company of any such assignment or transfer promptly. This Debenture shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and permitted assigns. (e) NO WAIVER. No failure on the part of the Holder to exercise, and no delay in exercising any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right, remedy or power hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to the Holder or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by the Holder from time to time. (f) GOVERNING LAW; JURISDICTION. (i) GOVERNING LAW. THIS DEBENTURE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF THAT WOULD OTHERWISE REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER JURISDICTION. (ii) JURISDICTION. The Company irrevocably submits to the exclusive jurisdiction of any State or Federal Court sitting in the State of New York, County of New York, or San Jose, California, over any suit, action, or proceeding arising out of or relating to this Debenture. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action, or proceeding brought in such a court and any claim that suit, action, or proceeding has been brought in an inconvenient forum. The Company agrees that the service of process upon it mailed by certified or registered mail (and service so made shall be deemed complete three days after the same has been posted as aforesaid) or by personal service shall be deemed in every respect effective service of process upon it in any such suit or proceeding. Nothing herein shall affect Holder's right to serve process in any other manner permitted by law. The Company agrees that a final non-appealable judgement in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. (iii) NO JURY TRIAL. The COMPANY hereto knowingly and voluntarily waives any and all rights it may have to a trial by jury with respect to any litigation based on, or arising out of, under, or in connection with, this Debenture. (g) REPLACEMENT DEBENTURES. This Debenture may be exchanged by Holder at any time and from time to time for a Debenture or Debentures with different denominations representing an equal aggregate outstanding Principal Amount, as reasonably requested by Holder, upon surrendering the same. No service charge will be made for such registration or exchange. In the event that Holder notifies the Company that this Debenture has been lost, stolen or destroyed, a replacement Debenture identical in all respects to the original Debenture (except for registration number and Principal Amount, if different than that shown on the original Debenture), shall be issued to the Holder, provided that the Holder executes and delivers 14 to the Company an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with the Debenture. [SIGNATURE PAGE FOLLOWS] 15 IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed on the day and in the year first above written. HYBRID NETWORKS, INC. By: -------------------------------------- Name: Title: ATTEST: - ------ Sign: -------------------------------------- Print Name: 16 EXHIBIT A FORM OF CONVERSION NOTICE (To be Executed by the Holder in order to Convert a Debenture) The undersigned hereby elects to convert the aggregate outstanding Principal Amount (as defined in the Debenture) indicated below of this Debenture into shares of Common Stock, $0.001 par value per share (the "Common Stock"), of HYBRID NETWORKS, INC. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. The undersigned represents as of the date hereof that, after giving effect to the conversion of this Debenture pursuant to this Conversion Notice, the undersigned will not exceed the "Restricted Ownership Percentage" contained in Section 3(i)(A) of this Debenture and will remain in compliance with Section 3(i)(B) of this Debenture. Conversion information: ------------------------------------------------------- Date to Effect Conversion ------------------------------------------------------- Aggregate Principal Amount of Debenture Being Converted ------------------------------------------------------- Number of shares of Common Stock to be Issued ------------------------------------------------------- Applicable Conversion Price ------------------------------------------------------- Signature ------------------------------------------------------- Name ------------------------------------------------------- Address EX-4.03 4 a2039627zex-4_03.txt EXHIBIT 4.03 EXHIBIT 4.03 ANNEX B THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS PURCHASE WARRANT DOES NOT REQUIRE PHYSICAL SURRENDER OF THE PURCHASE WARRANT UPON ANY PARTIAL EXERCISE HEREOF. AS A RESULT FOLLOWING ANY EXERCISE OF ANY PORTION OF THIS WARRANT, THE OUTSTANDING NUMBER OF SHARES AVAILABLE PURSUANT TO THIS WARRANT MAY BE LESS THAN THE AMOUNT OF SHARES SET FORTH BELOW. COMMON STOCK PURCHASE WARRANT TO PURCHASE 833,333 SHARES OF COMMON STOCK OF HYBRID NETWORKS, INC. --------------------- THIS CERTIFIES that, for value received, HALIFAX FUND, L.P. and its successors and assigns (the "HOLDER") is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time and from time to time on and after the date hereof ("PURCHASE WARRANT COMMENCEMENT DATE"), and on and prior to 8:00 p.m. Eastern Time on the fifth anniversary of the date of issuance hereof (the "EXPIRATION DATE"), but not thereafter, to subscribe for and purchase from HYBRID NETWORKS, INC., a Delaware corporation (the "COMPANY"), 833,333 shares (the "WARRANT SHARES") of common stock, $0.001 par value per share ("COMMON STOCK"), of the Company. The purchase price of one share of Common Stock under this Warrant shall be the Exercise Price, as defined below and as may be adjusted from time to time pursuant to the terms hereof. The Exercise Price and the number of shares for which this Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Securities Purchase Agreement dated on or about the date hereof (the "PURCHASE AGREEMENT") entered into between the Company, the Holder and the other Purchasers named therein (if any). 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Purchase Agreement. As used in this Warrant, the following terms shall have the following respective meanings: "ADJUSTMENT PERIOD" shall have the meaning set forth in the Adjustment Warrant. "CHANGE IN CONTROL TRANSACTION" will be deemed to exist if (i) there occurs any consolidation, merger or other business combination of the Company with or into any other corporation or other entity or person (whether or not the Company is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in any of such events the voting stockholders of the Company prior to such event cease to own 50% or more of the voting stock, or corresponding voting equity interests, of the surviving corporation after such event (including without limitation any "going private" transaction under Rule 13e-3 promulgated pursuant to the Exchange Act or tender offer by the Company under Rule 13e-4 promulgated pursuant to the Exchange Act for 20% or more of the Company's Common Stock), (ii) any person (as defined in Section 13(d) of the Exchange Act), together with its affiliates and associates (as such terms are defined in Rule 405 under the Act), beneficially owns or is deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act without regard to the 60-day exercise period) in excess of 50% of the Company's voting power, (iii) there is a replacement of more than one-half of the members of the Company's Board of Directors which is not approved by those individuals who are members of the Company's Board of Directors on the date thereof, or (iv) in one or a series of related transactions, there is a sale or transfer of all or substantially all of the assets of the Company, determined on a consolidated basis, or (v) the execution by the Company of an agreement to which the Company is a party or which it is bound providing for an event set forth in (i), (ii), (iii) or (iv) above, pursuant to which the Common Stock is converted or reclassified into other securities, cash or property. "CONVERTIBLE SECURITIES" means any convertible securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock. "EFFECTIVE REGISTRATION" shall have the meaning set forth in the Purchase Agreement. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "EXERCISE PRICE" means either the Fixed Price or the Variable Price, as applicable. "FIXED PRICE" shall mean $9.00, as such figure may be adjusted pursuant hereto. "NOTICE PERIOD" shall mean any period of twenty consecutive Trading Days commencing on the date designated by the Company in an Issuer Notice (as defined below). "PRICING PERIOD" for an Exercise Date shall mean the period beginning on and including the Trading Day immediately following the most recent prior Exercise Date in such Notice Period (or on and including the first Trading Day of such Notice Period if an Exercise Date for such Notice Period has not yet occurred) and ending on and including such Exercise Date. "PRINCIPAL MARKET" shall mean the Approved Market or such other market or exchange on which the Common Stock is then principally traded. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "TRADING DAY" shall mean a day on which there is trading on the Principal Market. 2 "VARIABLE PRICE", applicable for each Exercise Date during a Notice Period, shall equal the lesser of (a) the Fixed Price and (b) 94% of the average VWAP over the Pricing Period for such Exercise Date. "VOLUME LIMIT", for any Notice Period, shall mean 10% of the total number of shares of Common Stock traded on the Principal Market during the Notice Period (excluding (i) individual trades of 20,000 shares or more of Common Stock, and (ii) all transactions other than BONA FIDE, arm's length transactions between unaffiliated and unrelated persons and entities). "VWAP" shall mean the daily volume-weighted average sale price for the Common Stock on the Principal Market on any particular Trading Day as reported on Bloomberg's, as such figure may be adjusted pursuant hereto. 2. TITLE OF WARRANT. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose, in the name of the record holder hereof from time to time. The Company may deem and treat the registered holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the holder, and for all other purposes, and the Company shall not be affected by notice to the contrary except as provided herein. With the written consent of the Company, such written consent not to be unreasonably withheld, prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with (a) the Assignment Form annexed hereto properly endorsed, and (b) any other documentation reasonably necessary to satisfy the Company that such transfer is in compliance with all applicable securities laws; provided that no such transfer may be made to a person that is not an "ACCREDITED INVESTOR" as defined in Rule 501 of Regulation D of the Securities Act; and provided further that no consent of the Company is required for any transfer or assignment in whole or in part from time to time to an affiliate of the Purchaser or the then holder of this Purchase Warrant. The term "HOLDER" shall refer to the Holder or any subsequent transferee of this Warrant. If this Warrant is duly assigned in accordance with the terms hereof, then the Company agrees, upon the request of the assignee, to amend or supplement promptly any effective registration statement covering the Warrant Shares so that the such assignee is added as a selling stockholder thereunder, subject to such assignee providing the information required for such amendment or supplement and provided that no unreasonable change may be required to the description of the intended methods of distribution as set forth in the Registration Statement by virtue of such transfer. 3. AUTHORIZATION OF SHARES. The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant and payment of the Exercise Price as set forth herein will be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue or otherwise specified herein). 3 4. EXERCISE OF WARRANT. (a) EXERCISE PROCEDURE. Exercise of the purchase rights represented by this Warrant may be made at any time and from time to time, in whole or in part, on or after the Commencement Date but before 8:00 p.m. Eastern Time on the Expiration Date, by (i) delivering the Notice of Exercise annexed hereto duly completed and executed (which may be by facsimile) to the Company at the principal office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and upon payment of the full Exercise Price of the shares thereby purchased, whereupon the holder of this Warrant shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Subject to subsection (b) below, payment of the Exercise Price of the shares shall be by certified check or cashier's check or by wire transfer (of same day funds) to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of shares being purchased. (b) CASHLESS EXERCISE. Alternatively, and only in the event the Warrant Shares are not subject to Effective Registration or such exercise is not pursuant to an Issuer Notice (as defined below), the Holder may exercise this Warrant, in whole or in part in a "cashless" or "net-issue" exercise by delivering to the offices of the Company or any transfer agent for the Common Stock a Notice of Exercise specifying the number of Warrant Shares to be delivered to such Warrant holder ("DELIVERABLE SHARES") and the number of Warrant Shares with respect to which this Warrant is being exercised ("EXERCISED SHARES"). The number of Deliverable Shares shall be calculated as follows: # of Deliverable Shares = # of Exercised Shares x Fair Market Value of Common Stock Less Exercise Price ----------------------------------------------------- Fair Market Value of Common Stock "FAIR MARKET VALUE" shall be deemed to be the last reported sale price of Common Stock on the Trading Day immediately prior to exercise, or, if not reported, the fair market value of such Common Stock as reasonably determined by the Company and such Holder. (c) ISSUANCE OF WARRANT SHARES AND UNEXERCISED WARRANTS. In the event that this Warrant is not exercised in full, the number of Warrant Shares shall be reduced by the number of such Warrant Shares for which this Warrant is exercised and/or surrendered, and the Company, at its expense, shall within five (5) Trading Days, issue and deliver to or upon the order of the Holder a new Warrant of like tenor in the name of the Holder or as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, reflecting such adjusted number of Warrant Shares. All exercises of this Warrant will be deemed to occur as of the date of receipt by the Company of a validly executed Notice of Exercise (or such later date as may be indicated on such Notice of Exercise) (such date being referred to herein as the "EXERCISE DATE"), and certificates for shares of Common Stock purchased hereunder shall be delivered to the Holder hereof within three (3) Trading Days after the Exercise Date. The Holder may withdraw its Notice of Exercise under Section 3(a) or 3(b) at any time thereafter, in whole or in part, if the Company fails to timely deliver the applicable certificates to the Holder as provided in this Warrant. 4 In lieu of delivering physical certificates representing the Warrant Shares issuable upon conversion of this Warrant, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the holder, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Warrant Shares issuable upon exercise to the holder, by crediting the account of the holder's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery described above shall apply to the electronic transmittals through the DWAC system. The Company agrees to coordinate with DTC to accomplish this objective. (d) BOOK-ENTRY. Notwithstanding anything to the contrary set forth herein, upon exercise of any portion of this Warrant in accordance with the terms hereof, the Holder shall not be required to physically surrender this Warrant to the Company unless such Holder is purchasing the full amount of Warrant Shares represented by this Warrant. The Holder and the Company shall maintain records showing the number of Warrant Shares so purchased hereunder and the dates of such purchases or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Warrant upon each such exercise. (e) EXERCISE PRICE. The Exercise Price for Warrant Shares purchased on any Exercise Date which is not during a Notice Period shall be equal to the Fixed Price. The Exercise Price for Warrant Shares purchased on any Exercise Date which is during a Notice Period shall be equal to the Variable Price. (f) FORCED EXERCISE. (i) NOTICE AND OBLIGATION. Subject to the terms hereof, at any time and from time to time after the expiration of the Adjustment Period, the Company shall have the right to force the Holder to exercise this Warrant on the terms contained herein by delivering a written notice to the Holder (each such notice hereinafter referred to as an "ISSUER NOTICE") stating the number of Warrant Shares ("STATED NUMBER") for which this Warrant must be exercised during the Notice Period specified by the Company in such Issuer Notice. Such Issuer Notice shall be delivered to the Holder at least five (5) Trading Days but not more than twenty (20) Trading Days before the commencement of such Notice Period (otherwise such Issuer Notice shall be null and void). Contemporaneous with the delivery of any Issuer Notice, the Company shall deliver to the Holder a current and deliverable prospectus supplement to the Registration Statement (as defined in the Registration Rights Agreement) in accordance with the rules and regulations under the Securities Act (including disclosure of the Stated Number in such Issuer Notice and the timing of the related Notice Period), and the Company shall cause such prospectus supplement to be filed with the SEC within one Trading Day after delivery of the Issuer Notice to the Holder. Subject to subsection (ii) below, during each Notice Period, the Holder shall be obligated to exercise this Warrant in accordance with the terms hereof at any time and/or from time to time during such Notice Period such that the total number of Warrant Shares exercised hereunder shall equal the Stated Number, PROVIDED, HOWEVER, that the Holder shall not be obligated to exercise this Warrant for 5 Warrant Shares in excess of, or in violation of, the Volume Limit or the exercise limitations contained in Section 18 below. (ii) CONDITIONS. Notwithstanding anything to the contrary in this Warrant, unless (and only to the extent) waived by the Holder, the Company shall not be entitled to deliver an Issuer Notice or require the Holder to exercise any portion of this Warrant, and the Holder shall not be obligated to exercise this Warrant pursuant to this Section 4(f) unless, at all times from the date of such Issuer Notice until and including the last Trading Day of the applicable Notice Period, all of the following conditions are met: (1) There shall be Effective Registration; (2) The closing bid price of the Common Stock on the Principal Market shall be at least $3.50; (3) There shall not have occurred a Change in Control Transaction or the public announcement of a pending Change in Control Transaction which has not been abandoned or terminated; and (4) The total number of Warrant Shares issuable hereunder (regardless of any limitations contained herein) shall have been duly authorized and reserved for issuance. If any of the conditions described in clauses (1) through (4) above fail to be satisfied or exist after an Issuer Notice is so delivered, then the Holder shall have no further obligation to exercise this Warrant pursuant to such Issuer Notice; PROVIDED, HOWEVER, that the Holder may, in its sole discretion, but shall not be required to, exercise this Warrant in whole or in part at the Variable Price during the Notice Period, which shall not in any way act as a waiver of any of the Company's obligations, defaults or breaches under clauses (1) through (4) above and provided further that the Company may subsequently deliver an Isssuer Notice. The Company's delivery of an Issuer Notice shall constitute a representation by the Company that all the conditions specified in clauses (1) through (4) above have been satisfied as of the date of such Issuer Notice. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional Warrant Shares or scrip representing fractional Warrant Shares shall be issued upon the exercise of this Warrant. Any fractional share or scrip shall be rounded up to the nearest whole number. 6. CHARGES, TAXES AND EXPENSES. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; PROVIDED, HOWEVER, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, 6 this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and PROVIDED FURTHER, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issuance of any Warrant certificates or any certificates for the Warrant Shares in a name other than the name of the holder. 7. CLOSING OF BOOKS. The Company will at no time close its shareholder books or records in any manner which interferes with the timely exercise of this Warrant. 8. NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. Subject to Sections 12 and 13 of this Warrant and the provisions of any other written agreement between the Company and the Holder, prior to the exercise of this Warrant as provided herein, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Warrant Shares or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights. However, at the time of the exercise of this Warrant pursuant to Section 4 hereof, the Warrant Shares so purchased hereunder shall be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 9. REMEDIES. If the Company shall fail to deliver to the Holder the unlegended Warrant Shares to be issued to the Holder hereunder by the third Trading Day following the Exercise Date, whether by physical delivery of certificates or by book-entry transfer through DTC for such Warrant Shares, the Company shall, in addition to any other remedies under this Warrant or the Transaction Documents or at law or in equity, pay as additional damages in cash to the Holder, by the tenth (10th) Trading Day following the Exercise Date, an amount equal to one percent (1%), and on each succeeding fifth (5th) Trading Day thereafter until such Warrant Shares are delivered, an amount equal to two percent (2%), of the value of the Warrant Shares not delivered to the Holder by such third (3rd) Trading Day following the Exercise Date, based on the Fair Market Value as of the Exercise Date. The Company acknowledges that this remedy is partial and non-exclusive. 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT; DENOMINATION. In the event that any holder notifies the Company that its Warrant(s) have been lost, stolen or destroyed, then replacement Warrant(s) identical in all respects to the original Warrant(s) (except for any registration number and any adjustments to Exercise Price or the number of Warrant Shares issuable hereunder pursuant hereto, if different than that shown on the original Warrant(s)) shall be delivered to the holder by the Company within five (5) Trading Days, provided that such holder executes and delivers to the Company an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such Warrants. This Warrant is exchangeable for an equal aggregate number of Warrants of different 7 denominations, as requested by the holder surrendering the same. No service charge will be made for such registration, replacement, transfer or exchange. 11. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 12. EFFECT OF CERTAIN EVENTS. If at any time while this Warrant or any portion hereof is outstanding and unexpired there shall be a Change in Control Transaction, then the Holder shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such Change in Control Transaction, the kind and amount of consideration including cash, stock, other securities, assets or any other property, which it would have owned or have been entitled to receive upon or after the happening of such transaction had this Warrant been exercised immediately prior thereto, subject to further adjustment as provided in Section 13. The Company shall not consummate a Change in Control Transaction unless the entity resulting from such transaction (if not the Company), or such transferee entity, as the case may be, shall expressly assume, by supplemental agreement reasonably satisfactory in form and substance to the Holder, the due and punctual performance and observance of each and every covenant and condition of this Warrant to be performed and observed by the Company. 13. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. For purposes of any adjustment of the Exercise Price pursuant to this Section 13, the "Exercise Price" shall be deemed to be the Fixed Price and each VWAP during any Pricing Period (which VWAP occurs prior to the applicable event set forth below). (a) STOCK DIVIDENDS, SPLITS, COMBINATIONS AND RECLASSIFICATIONS. If, to the extent not covered by Section 12 above, the Company or any Subsidiary, at any time while this Warrant or any portion thereof is issued, outstanding and unexpired: (A) shall declare or pay a stock dividend or otherwise make a distribution or distributions on any equity securities (including securities convertible into or exchangeable or exercisable for such equity securities) in shares of Common Stock; (B) subdivide outstanding Common Stock into a larger number of shares; (C) combine outstanding Common Stock into a smaller number of shares; or (D) issue any shares of its capital stock in a reclassification of the Common Stock (including without limitation in connection with any merger or consolidation), then the Exercise Price hereunder shall be adjusted by multiplying the Exercise Price by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section 13(a) shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) DISTRIBUTIONS. If the Company or any Subsidiary, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock evidences of its 8 indebtedness or assets or cash or rights or warrants to subscribe for or purchase any security of the Company or any of its subsidiaries, then the Exercise Price in effect at the opening of business on the day following the date fixed for the determination of holders of Common Stock entitled to receive such distribution shall be adjusted by multiplying such Exercise Price by a fraction, the numerator of which shall be the Fair Market Value (as defined below) per share of the Common Stock less the then fair market value as reasonably determined by the Board of Directors of the portion of the evidences of indebtedness or assets or rights or warrants so distributed (and for which an adjustment to the Exercise Price has not previously been made pursuant to the terms of this Section 13) applicable to one share of Common Stock, and the denominator of which shall be such Fair Market Price per share of the Common Stock, such adjustment to become effective immediately after the opening of business on the day following the date fixed for the determination of holders of Common Stock entitled to receive such distribution. "FAIR MARKET PRICE" shall mean the closing market price per share of Common Stock on the Principal Market on the Trading Day next preceding such fixed determination date or such other date on which the Fair Market Price is being determined. The Company shall deliver to each holder of Warrants a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof. In the event that the Exercise Price shall change by more than 5%, the holders of Warrants shall have the right to have the fair market value determined by an independent nationally reputable investment banker mutually selected by the Company and the Holder, at the Company's expense. (c) COMMON STOCK ISSUANCES. In the event that the Company or any Subsidiary issues or sells any Common Stock or securities which are convertible into or exchangeable for its Common Stock (other than the Shares issued under the Purchase Agreement), or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock (other than shares or options issued or which may be issued pursuant to (i) the Company's current employee or director option plans or shares issued upon exercise of options, warrants or rights outstanding on the date of this Warrant and listed in the Company's SEC filings, or (ii) strategic corporate alliances not undertaken principally for financing purposes) (counting Convertible Securities as if such securities were converted, exercised or exchanged) based on the Fair Market Price at the time of issuance of such securities) at an effective purchase price per share which is less than the greater of (1) the Fair Market Price on the Trading Day next preceding such issue or sale or, in the case of issuances to holders of its Common stock, the date fixed for the determination of stockholders entitled to receive such warrants, rights, or options, or (2) the Exercise Price, then in each such case, the Exercise Price in effect immediately prior to such issue or sale or record date, as applicable, shall be reduced effective concurrently with such issue or sale to an amount determined by multiplying the Exercise Price then in effect by a fraction, (x) the numerator of which shall be the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the aggregate consideration received by the Company for such additional shares would purchase at such Exercise Price or Fair Market Price, as the case may be, and (y) the denominator of which shall be the number of shares of Common Stock of the Company outstanding immediately after such issue or sale; PROVIDED, HOWEVER, that 9 this Section 13(c) shall not apply if such effective purchase price per share is greater than the Exercise Price. For purposes of the preceding paragraph, in the event that the effective purchase price is less than both the Fair Market Price and the Exercise Price, then the calculation method which yields the greatest downward adjustment in the Exercise Price shall be used. For the purposes of the foregoing adjustment, in the case of the issuance of any Convertible Securities, the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible Securities shall be deemed to be outstanding, provided that no further adjustment shall be made upon the actual issuance of Common Stock upon exercise, exchange or conversion of such Convertible Securities. (d) INVERSE PROPORTIONAL ADJUSTMENTS TO EXERCISE PRICE AND WARRANT SHARES. In the event of any adjustment in the number of Warrant Shares issuable hereunder upon exercise, the Exercise Price shall be inversely proportionately increased or decreased as the case may be, such that aggregate purchase price for Warrant Shares upon full exercise of this Warrant shall remain the same. Similarly, in the event of any adjustment in the Exercise Price, the number of Warrant Shares issuable hereunder upon exercise shall be inversely proportionately increased or decreased as the case may be, such that aggregate purchase price for Warrant Shares upon full exercise of this Warrant shall remain the same. Any Stated Number shall be appropriately and equitably adjusted if any of the foregoing event occur. 14. NOTICES. If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant register of the Company, at least 20 calendar days prior to the 10 applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined and/or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up. 15. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at its option, at any time during the term of this Warrant, reduce but not increase the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 16. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, the Company shall promptly mail by registered or certified mail, return receipt requested, to the holder of this Warrant a notice setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 17. AUTHORIZED SHARES. The Company covenants that during the period this Warrant is outstanding and exercisable, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any and all purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Principal Market or any other domestic securities exchange or market upon which the Common Stock may be listed. 18. EXERCISE LIMITATION. (a) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon exercise pursuant to the terms hereof shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such Holder (other than by virtue of the ownership of securities or rights to acquire securities (including the Warrant Shares) that have limitations on the Holder's right to convert, exercise or purchase similar to the limitation set forth herein), together with all shares of Common Stock deemed beneficially owned (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the 11 right to convert, exercise or purchase similar to the limitation set forth herein) by the Holder's "affiliates" (as defined in Rule 144 of the Securities Act) ("AGGREGATION PARTIES") that would be aggregated for purposes of determining whether a group under Section 13(d) of the Exchange Act, exists, would exceed 9.9% of the total issued and outstanding shares of the Common Stock (the "RESTRICTED OWNERSHIP PERCENTAGE"). Each Holder shall have the right (x) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company and (y) (subject to waiver) at any time and from time to time, to increase its Restricted Ownership Percentage immediately in the event of the announcement as pending or planned, of a Change in Control Transaction. The Company shall have no liability for issuing Warrant Shares in violation hereof if the Holder fails to advise the Company in writing prior to such issuance (which may be in the Notice of Exercise) that upon such issuance the Restricted Ownership Percentage will be exceeded. (b) The Holder covenants at all times on each day (each such day being referred to as a "COVENANT DAY") as follows: During the balance of such Covenant Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and the succeeding 61 days being referred to as the "COVENANT PERIOD") such Holder will not acquire shares of Common Stock pursuant to any right (including exercise of Warrants) existing at the commencement of the Covenant Period to the extent the number of shares so acquired by such Holder and its Aggregation Parties (ignoring all dispositions) would exceed: (i) the Restricted Ownership Percentage of the total number of shares of Common Stock outstanding at the commencement of the Covenant Period, MINUS (ii) the number of shares of Common Stock actually owned by such Holder and its Aggregation Parties at the commencement of the Covenant Period. A new and independent covenant will be deemed to be given by the Holder as of each moment of each Covenant Day. No covenant will terminate, diminish or modify any other covenant. The Holder agrees to comply with each such covenant. This Section 18 controls in the case of any conflict with any other provision of the Purchase Agreement or any agreement entered into in connection therewith. The Company's obligation to issue Common Stock which would exceed such limits referred to in this Section 18 shall be suspended to the extent necessary until such time, if any, as shares of Common Stock may be issued in compliance with such restrictions. (c) Notwithstanding anything contained herein, in no event shall the Company issue shares of Common Stock hereunder to the extent that the total number of shares issued or deemed issued to the Holder under the Purchase Agreement would exceed 19.9% of the Company's issued and outstanding shares of Common Stock on the date of issuance hereof, unless otherwise approved by the Company's shareholders. Instead, the Company shall redeem this Warrant to the extent necessary at such consideration required to place the Holder in the 12 same economic position they would have been if not for such limitation or as otherwise provided under the Purchase Agreement. 19. MISCELLANEOUS. (a) ISSUE DATE; CHOICE OF LAW; VENUE; JURISDICTION; NO JURY TRIAL. THE PROVISIONS OF THIS WARRANT SHALL BE CONSTRUED AND SHALL BE GIVEN EFFECT IN ALL RESPECTS AS IF IT HAD BEEN ISSUED AND DELIVERED BY THE COMPANY ON THE DATE HEREOF. THIS WARRANT SHALL BE BINDING UPON ANY SUCCESSORS OR ASSIGNS OF THE COMPANY. THIS WARRANT WILL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCEPT FOR MATTERS ARISING UNDER THE SECURITIES ACT, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE COUNTY OF NEW YORK IN THE STATE OF NEW YORK AND IN SAN JOSE, CALIFORNIA IN CONNECTION WITH ANY DISPUTE ARISING UNDER THIS WARRANT AND HEREBY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION BASED ON FORUM NON CONVENIENS, TO THE BRINGING OF ANY SUCH PROCEEDING IN EITHER OF SUCH JURISDICTIONS. EACH PARTY HEREBY AGREES THAT IF THE OTHER PARTY TO THIS WARRANT OBTAINS A JUDGMENT AGAINST IT IN SUCH A PROCEEDING, THE PARTY WHICH OBTAINED SUCH JUDGMENT MAY ENFORCE SAME BY SUMMARY JUDGMENT IN THE COURTS OF ANY COUNTRY HAVING JURISDICTION OVER THE PARTY AGAINST WHOM SUCH JUDGMENT WAS OBTAINED, AND EACH PARTY HEREBY WAIVES ANY DEFENSES AVAILABLE TO IT UNDER LOCAL LAW AND AGREES TO THE ENFORCEMENT OF SUCH A JUDGMENT. EACH PARTY TO THIS WARRANT IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS IN ACCORDANCE WITH SECTION 19(C). NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. EACH PARTY WAIVES ITS RIGHT TO A TRIAL BY JURY. (b) MODIFICATION AND WAIVER. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only with the written approval of the holder hereof. Any amendment effected in accordance with this paragraph shall be binding upon the Holder, each future holder of this Warrant and the Company. No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. (c) NOTICES. Any notice, request or other document required or permitted to be given or delivered to the Holder or future holders hereof or the Company shall be personally delivered or facsimiled or shall be sent by reputable overnight courier or certified or registered mail, postage prepaid, to the Holder or each such holder at its address as shown on the books of the Company or to the Company at the address set forth in the Purchase Agreement. 13 All notices under this Warrant shall be deemed to have been given (i) in the case of personal delivery or facsimile, on the date of such delivery, (ii) in the case of mailing, on the fifth business day following the date of such mailing, and (iii) in the case of overnight courier, upon receipt. A party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance with the provisions of this Section 19(c). (d) SEVERABILITY. Whenever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Warrant in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Warrant shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (e) NO IMPAIRMENT. The Company shall not, by amendment of its Certificate of Incorporation 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 Warrant, but shall at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrant holder against impairment. Without limiting the generality of the foregoing, the Company (a) shall not increase the par value of any Warrant Shares above the amount payable therefor on such exercise, and (b) shall 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 Warrant Shares on the exercise of this Warrant. (f) SPECIFIC PERFORMANCE. The Company acknowledges and agrees that irreparable damage would occur in the event that the Company failed to perform any of the provisions of this Warrant in accordance with its specific terms. It is accordingly agreed that the Holder shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Warrant and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which the Holder may be entitled by law or equity. [SIGNATURE PAGE FOLLOWS] 14 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: February 16, 2001 HYBRID NETWORKS, INC. By: ______________________________ Name: Title: ATTEST: Sign: ______________________________ Print Name: 15 NOTICE OF EXERCISE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To: HYBRID NETWORKS, INC. Re: COMMON STOCK PURCHASE WARRANT issued on February ___, 2001 to __________________ to purchase shares of Common Stock (the "Warrant") (1) CHECK ONE: ____ (a) The undersigned hereby elects to purchase ________ shares of Common Stock of HYBRID NETWORKS, INC. pursuant to Section 4(a) of the Warrant, and will tender payment of the purchase price in full, together with all applicable transfer taxes payable pursuant to the Warrant, if any. OR ____ (b) The undersigned hereby exercises the Warrant with respect ________ shares of Common Stock of HYBRID NETWORKS, INC. on a cashless, "net basis" pursuant to Section 4(b) of the Warrant, and hereby instructs the Company to deliver _______ shares of Common Stock to the holder of the Warrant based on a Fair Market Value of $____. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: _______________________________ Name _______________________________ Address _______________________________ (3) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: _______________________________ Name _______________________________ Address _______________________________ (4) The undersigned hereby makes as of the date hereof the representations and warranties set forth in Section 2.2(d) of that certain Securities Purchase Agreement dated as of February 16, 2001 between the Company and the Purchasers named therein. The undersigned further represents as of the date hereof that, after giving effect to the exercise of this Warrant pursuant to this Notice of Exercise, the undersigned will remain in compliance with Section 18(b) of the Warrant and not exceed the "Restricted Ownership Percentage" contained in Section 18(a) of the Warrant. Dated:_______________ Print Name of Holder: __________________________________ (Sign) By:________________________ Print Name: Print Title: ASSIGNMENT FORM --------------- (To assign the foregoing Warrant, execute this form and supply the required information. Do not use this form to exercise the Warrant.) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of HYBRID NETWORKS, INC. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of HYBRID NETWORKS, INC. with full power of substitution in the premises. Dated: ______________ __________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ___________________________________________________ Address of Transferee ___________________________________________________ ___________________________________________________ In the presence of: ____________________________ EX-4.04 5 a2039627zex-4_04.txt EXHIBIT 4.04 EXHIBIT 4.04 ANNEX C THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR OTHERWISE. THIS ADJUSTMENT WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THIS ADJUSTMENT WARRANT DOES NOT REQUIRE PHYSICAL SURRENDER OF THE ADJUSTMENT WARRANT UPON ANY PARTIAL EXERCISE HEREOF. AS A RESULT, FOLLOWING ANY EXERCISE OF ANY PORTION OF THIS WARRANT, THE OUTSTANDING NUMBER OF SHARES AVAILABLE PURSUANT TO THIS WARRANT MAY BE LESS THAN THE AMOUNT OF SHARES SET FORTH BELOW. ADJUSTMENT WARRANT To Purchase Shares of $0.001 Par Value Common Stock of HYBRID NETWORKS, INC. THIS CERTIFIES that, for value received, HALIFAX FUND, L.P. (the "PURCHASER") is entitled, upon the terms, at the times and subject to the conditions hereinafter set forth, prior to 8:00 p.m. New York City time on the Termination Date (as defined herein) but not thereafter, to subscribe for and purchase from time to time from HYBRID NETWORKS, INC., a Delaware corporation (the "COMPANY"), all or a portion of an aggregate number of shares of Common Stock of the Company (the "ADJUSTMENT SHARES") determined in accordance with Section 3(c) hereof. The "EXERCISE PRICE" per share is $0.001. The Exercise Price per share and the number of shares for which this Adjustment Warrant is exercisable shall be subject to adjustment as provided herein. This Adjustment Warrant is being issued in connection with that certain Securities Purchase Agreement dated on or about the issuance date hereof (the "PURCHASE AGREEMENT") entered into among the Company, the Purchaser and the other purchasers named therein, if any. Any capitalized terms used but not defined in this Adjustment Warrant shall have the meaning specified in the Purchase Agreement. 1. TITLE OF ADJUSTMENT WARRANT. Prior to the expiration hereof and subject to compliance with applicable laws, this Adjustment Warrant and all rights hereunder are transferable, in whole or in respect of the right to purchase any part of the Adjustment Shares, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Adjustment Warrant together with (a) the Assignment Form annexed hereto properly endorsed, and (b) any other documentation reasonably necessary to satisfy the Company that such transfer is in compliance with all applicable securities laws. 2. AUTHORIZATION OF SHARES. The Company represents and covenants that all shares of Common Stock which may be issued upon the exercise from time to time of rights represented by this Adjustment Warrant will, upon exercise of the rights represented by this Adjustment Warrant and payment of the Exercise Price as set forth herein, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens, claims, encumbrances and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issuance). 3. EXERCISE OF ADJUSTMENT WARRANT FOR ADJUSTMENT SHARES. (a) DEFINITIONS. "ADJUSTMENT END DATE" means the 65th consecutive Trading Day following the Effective Date (subject to extension for each day that the Adjustment Period is extended, tolled or restarted as provided herein). Subject to Section 3(e), "ADJUSTMENT PERIOD" means the period beginning on and including the Trading Day immediately following the Effective Date and ending on and including the Adjustment End Date. "ADJUSTMENT PRICE" means the average of the fifteen (15) lowest VWAPs during the Adjustment Period after excluding the three (3) lowest VWAPs during the Adjustment Period; PROVIDED, HOWEVER, that (i) if such average is less than the Floor Price, then the "Adjustment Price" shall equal the Floor Price, and (ii) if such calculation is being made prior to the Adjustment End Date, then only the 18 lowest VWAPs occurring to date within the Adjustment Period shall be used; and PROVIDED FURTHER, that if the Company or any of its subsidiaries at any time prior to the Adjustment End Date (A) issues or sells any Common Stock or securities which are convertible into or exercisable or exchangeable for Common Stock (other than Debentures or Warrants issued under the Purchase Agreement), or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock or (B) directly or indirectly effectively reduces the conversion, exercise or exchange price for any Convertible Securities which are currently outstanding (whether by notice, amendment, operation or law, pursuant to the transaction documentation for such securities or otherwise, including if such adjustment is automatic or floating pursuant to the terms of the documents, and including if new securities are issued in exchange for or substitution of such securities), at or to an effective Per Share Selling Price which is less than the Adjustment Price as would otherwise be determined hereunder, then the Adjustment Price hereunder shall be equal to such Per Share Selling Price. Each VWAP used in determining the Adjustment Price shall be appropriately and equitably adjusted to reflect stock splits, stock dividends, recapitalizations and the like. 2 "AGGREGATE PURCHASE PRICE" equals the aggregate Purchase Price paid by the Purchaser for the Debentures and Warrants purchased by the Purchaser pursuant to the Purchase Agreement. "COMMENCEMENT DATE" means the 19th consecutive Trading Day of the Adjustment Period. "EFFECTIVE DATE" means the date on which the Registration Statement (as defined in the Registration Rights Agreement) covering all the Registrable Securities is declared effective by the SEC. "EFFECTIVE REGISTRATION" shall have the meaning set forth in the Purchase Agreement. "FLOOR PRICE" shall mean $3.50, which figure shall be appropriately and equitably adjusted to reflect stock splits, stock dividends, recapitalizations and the like. "PER SHARE SELLING PRICE" shall have the meaning specified in, and be determined in accordance with the provisions of, the Debentures. "PRINCIPAL MARKET" shall mean the Approved Market or such other market or exchange on which the Common Stock is then principally traded. "TERMINATION DATE" means the date which is three (3) months following the Adjustment End Date, subject to extension by 1 day for each day that the Adjustment Period is extended (provided that if on the Adjustment End Date the Adjustment Price is greater than or equal to 115% of the Closing Price, then the "Termination Date" shall mean the Adjustment End Date). "TRADING DAY" shall mean a day on which there is trading on the Principal Market. "VWAP" shall mean the daily volume-weighted average sale price for the Common Stock on the Principal Market on any particular Trading Day. (b) (i) EXERCISE OF ADJUSTMENT WARRANT BY PURCHASER. Subject to Section (iv) below, exercise of the rights represented by this Adjustment Warrant may be made at any time and from time to time, in whole or in part, on and after the Commencement Date and prior to 8:00 p.m. New York City time on the Termination Date, by the surrender on any business day of this Adjustment Warrant and a Notice of Exercise in the form annexed hereto duly completed and executed, at the principal office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and upon payment of the full Exercise Price of the shares thereby purchased, whereupon the holder of this Adjustment Warrant shall be entitled to receive a certificate for the number of Adjustment Shares for which this Adjustment Warrant has been so exercised. At 8:00 P.M., New York City time on the Termination Date, the portion of this Adjustment Warrant not exercised prior thereto shall be deemed to have been exercised in full (to the 3 extent not previously exercised) on a "cashless exercise" basis immediately prior to 8:00 P.M. New York City time on the Termination Date (and a Notice of Exercise shall be deemed given therefor). (ii) CASHLESS EXERCISE. Alternatively, the holder hereof may exercise this Adjustment Warrant, subject to Section (iv) below, in whole or in part in a "cashless" or "net-issue" exercise by delivering to the offices of the Company or any transfer agent for the Common Stock this Adjustment Warrant, together with a Notice of Exercise specifying the number of Adjustment Shares to be delivered to such Warrant holder ("DELIVERABLE SHARES") and the number of Adjustment Shares with respect to which this Adjustment Warrant is being exercised ("EXERCISED SHARES"). The number of Deliverable Shares shall be calculated as follows: # of Deliverable Shares = # of Exercised Shares x Fair Market Value of Common Stock Less Exercise Price ----------------------------------------------------- Fair Market Value of Common Stock "FAIR MARKET VALUE" shall have the meaning specified in Section 14(c) below. (iii) DATE OF EXERCISE; DELIVERY OF CERTIFICATES. All exercises will be deemed to occur as of the date of the Company's receipt of a duly executed Notice of Exercise (or such later date as may be specified in such Notice of Exercise), and certificates for shares of Common Stock purchased hereunder shall be delivered to the holder hereof within three (3) Trading Days after the date on which this Adjustment Warrant shall have been exercised as aforesaid. The Warrant holder may withdraw its Notice of Exercise under this Section 3(b) at any time thereafter if the Company fails to timely deliver the applicable certificates to the Warrant holder as provided in this Adjustment Warrant. (iv) BOOK-ENTRY. Notwithstanding anything to the contrary set forth herein, upon exercise of any portion of this Adjustment Warrant in accordance with the terms hereof, the Purchaser shall not be required to physically surrender this Adjustment Warrant to the Company unless such holder is purchasing the full amount of Adjustment Shares represented by this Adjustment Warrant. The Purchaser and the Company shall maintain records showing the number of Adjustment Shares so purchased hereunder and the dates of such purchases or shall use such other method, reasonably satisfactory to the Purchaser and the Company, so as not to require physical surrender of this Adjustment Warrant upon each such exercise. (c) ADJUSTMENT SHARE CALCULATIONS. Subject to Sections 3(e) and (f), the number of Adjustment Shares (if any) issuable in respect of this Adjustment Warrant shall be calculated (i) from time to time immediately upon any exercise hereof on or after the Commencement Date up until and including the Adjustment End Date, and (ii) immediately following the close of trading of the Principal Market on the Adjustment End Date, using the following formula: # of Adjustment Shares = Aggregate Purchase Price x 1.15 - # of Shares Previously Issued ------------------------------- Adjustment Price 4 Where the "# OF SHARES PREVIOUSLY ISSUED" equals the sum of (1) the number of Underlying Shares (as defined in the Debentures) actually issued on the Trading Day following the Effective Date upon conversion of the Debentures purchased by the Purchaser pursuant to the Purchase Agreement, and (2) the number of Adjustment Shares actually previously issued upon exercise hereof (such numbers shall be appropriately and equitably adjusted to reflect stock splits, stock dividends, recapitalizations and the like); PROVIDED, HOWEVER, that no shares will be due pursuant to Section 3(c) unless the Adjustment Price is less than 115% of the Closing Price (as defined in the Debenture), and PROVIDED FURTHER, that after any calculation hereunder, under no circumstances shall the number of Adjustment Shares hereunder be less than zero. The number of Adjustment Shares issuable hereunder shall be reduced by the number of such Adjustment Shares for which this Adjustment Warrant is exercised and/or surrendered, and the Company shall (subject to Section 3(b)(iv) above), at its expense, within five (5) Trading Days issue and deliver to or upon the order of the Warrant holder a new Adjustment Warrant of like tenor in the name of Warrant holder or as Warrant holder may request, reflecting such adjusted Adjustment Shares. (d) NOTICE AND CLOSING. The Purchaser shall perform the calculations pursuant to Section 3(c) above upon any exercise hereof before the Adjustment End Date and immediately following the close of business on the Adjustment End Date. The Purchaser shall deliver its written calculations to the Company by facsimile contemporaneously with such Notice of Exercise and/or prior to 8:00 P.M. Eastern Time on the second Trading Day following the Adjustment End Date, as the case may be, stating the Adjustment Price and the total number of Adjustment Shares then issuable hereunder, provided that such calculations contained in such notice, nor the failure to give any such notice, shall in any way affect the calculation of the number of Adjustment Shares hereunder pursuant to this Adjustment Warrant, nor shall any such calculation or failure to notify affect the Purchaser's right to exercise this Adjustment Warrant at any time on and after the Commencement Date for any or all Adjustment Shares then issuable hereunder determined as set forth herein. (e) EFFECTIVE REGISTRATION DURING STOCK ADJUSTMENT PERIOD. (i) If at any time during the Adjustment Period there shall be a lack of Effective Registration, the Purchaser (as to itself only) may at its option either (x) waive the lack of Effective Registration, in which case the Adjustment Period will continue uninterrupted with respect to the Purchaser in accordance with the other provisions of this Section 3, or (y) by written notice to the Company elect to suspend such Adjustment Period with respect to itself only (a "SUSPENSION NOTICE"). The Purchaser shall have three (3) Trading Days after receiving written notice from the Company of the lack of Effective Registration to make such election. 5 (ii) If the Purchaser elects pursuant to subsection (i) above to suspend the Adjustment Period and Effective Registration is subsequently re-established either before or after the scheduled end of the Adjustment Period, then the Purchaser may, at its option, elect (x) to treat the Adjustment Period as tolled for the duration (however long) of the lack of Effective Registration, such that the first full day of Effective Registration following delivery of the Suspension Notice shall be treated as and deemed to be the next day of the tolled Adjustment Period, or (y) to treat the Adjustment Period as having been extended by such number of days that is equal to the duration of the lack of Effective Registration. The Purchaser shall have three (3) Trading Days after receiving written notice from the Company of the re-establishment of Effective Registration to make such election. (f) EFFECTIVE REGISTRATION AS OF EXERCISE DATE. If there is not Effective Registration on the date of a exercise of this Warrant, then the Purchaser shall have the option (as to itself only) but not the obligation to receive from the Company, in lieu of the Adjustment Shares otherwise deliverable, an amount in immediately available funds equal to the product of (i) the highest closing price of the Common Stock on the Principal Market from the Effective Date through and including the Trading Day immediately prior to the date on which the Purchaser receives all the Adjustment Shares issuable upon such exercise, and (ii) the number of Adjustment Shares the Company otherwise would be obligated to deliver to such Purchaser upon such exercise. (g) NEW ADJUSTMENT WARRANT. Whenever this Adjustment Warrant is exercised and surrendered to the Company in accordance with Section 3(b) above, the Company shall issue a new Adjustment Warrant for the unexercised portion (if any) of this Adjustment Warrant and for the unexpired term (through the Termination Date) of this Adjustment Warrant. Until the Termination Date, such new Adjustment Warrant shall be issued even if the surrendered Adjustment Warrant was exercised for all the Adjustment Shares then issuable under such Adjustment Warrant. (h) REMEDIES. If the Company fails to deliver the specified number of Adjustment Shares (or amount of immediately available funds, as applicable pursuant to Section 3(f) above) to the Purchaser within ten (10) Trading Days of the time and at the place specified in this Section 3 upon exercise hereof, then the Purchaser may, without reducing its other rights at law or in equity, compel the Company to repurchase all or a part of its Securities (including the number of Adjustment Shares which, without regard to Effective Registration, should have been delivered by the Company) at the applicable Premium Redemption Price (as defined and specified in the Registration Rights Agreement). (i) ADJUSTMENTS. The number of Adjustment Shares issuable hereunder shall be appropriately adjusted to reflect any stock split, stock dividend, recapitalization or similar event so that the Purchaser receives the same economically equivalent value of Adjustment Shares as it would in the absence of such event. (j) ABSOLUTE OBLIGATION TO ISSUE ADJUSTMENT SHARES. The Company's obligations to issue and deliver Adjustment Shares in accordance with the terms hereof are absolute and 6 unconditional, irrespective of any action or inaction by the holder hereof to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the holder hereof or any other person of any obligation to the Company or any violation or alleged violation of law by the holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the holder hereof in connection with the issuance of Adjustment Shares. 4. NON-CERTIFICATED SHARES. In lieu of delivering physical certificates representing the Adjustment Shares, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the Purchaser, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Adjustment Shares to the Purchaser by crediting the account of the Purchaser's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery described in the immediately preceding paragraph shall apply to the electronic transmittals described herein. 5. LISTING OF ADJUSTMENT SHARES. The Company represents and covenants that any and all Adjustment Shares issued to the Purchaser hereunder shall be duly eligible for trading on the Nasdaq National Market System or another Approved Market. 6. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the issuance of the Adjustment Shares. 7. CHARGES, TAXES AND EXPENSES. Issuance of certificates for shares of Common Stock upon the exercise of this Adjustment Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Adjustment Warrant or in such name or names as may be directed by the holder of this Adjustment Warrant; PROVIDED, HOWEVER, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Adjustment Warrant, this Adjustment Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and PROVIDED FURTHER, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any such transfer. 8. CLOSING OF BOOKS. The Company will at no time close its shareholder books or records in any manner which interferes with the timely exercise of this Adjustment Warrant. 9. NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. Subject to Sections 13 and 14 below and the provisions of any other written agreement between the Company and the Purchaser, the Purchaser shall not be entitled to vote or receive dividends or be deemed the holder of Adjustment Shares or any other securities of the Company that may at any time be 7 issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Purchaser, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Adjustment Warrant shall have been exercised as provided herein. However, at the time of the exercise of this Adjustment Warrant pursuant to Section 3 above, the Adjustment Shares so purchased hereunder shall be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date of the Notice of Exercise. 10. ASSIGNMENT AND TRANSFER OF ADJUSTMENT WARRANT. This Adjustment Warrant may be assigned in whole or in part by the surrender of this Adjustment Warrant and the Assignment Form annexed hereto duly executed at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company); PROVIDED, HOWEVER, that this Adjustment Warrant may not be resold or otherwise transferred except (i) to an "ACCREDITED INVESTOR", (ii) in a transaction registered under the Securities Act of 1933, as amended (the "ACT"), or (iii) in a transaction pursuant to an exemption, if available, from registration under the Act and whereby, if reasonably requested by the Company, an opinion of counsel reasonably satisfactory to the Company is obtained by the holder of this Adjustment Warrant to the effect that the transaction is so exempt. 11. LOSS, THEFT, DESTRUCTION OR MUTILATION OF ADJUSTMENT WARRANT. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Adjustment Warrant or stock certificate representing any Adjustment Shares, and in case of loss, theft or destruction, of indemnity reasonably satisfactory to it, or upon surrender and cancellation of such Adjustment Warrant or stock certificate, if mutilated, the Company will promptly make and deliver a new Adjustment Warrant or stock certificate of like tenor and dated as of such delivery, in lieu of this Adjustment Warrant or such stock certificate. 12. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 13. EFFECT OF CERTAIN EVENTS. If at any time after the date hereof there shall be a merger or consolidation of the Company with or into, or a transfer of all or substantially all of the assets of the Company to, another entity (collectively, a "SALE OR MERGER TRANSACTION"), the holder of this Adjustment Warrant shall have the right thereafter to purchase, by exercise of this Adjustment Warrant, the kind and amount of cash, shares and other securities and property which it would have owned or have been entitled to receive after 8 the happening of such transaction had this Adjustment Warrant been exercised immediately prior thereto, subject to further adjustment as provided in Section 13. Notwithstanding the above, a Sale or Merger Transaction shall not be deemed to occur in the event the Company is the acquiring entity in connection with an acquisition by the Company. 14. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF ADJUSTMENT WARRANT SHARES. The number of and kind of securities purchasable upon exercise of this Adjustment Warrant shall be subject to adjustment from time to time as follows: (a) STOCK DIVIDENDS, SPLITS AND COMBINATIONS. If the Company or any of its subsidiaries, at any time while this Adjustment Warrant is outstanding (A) shall pay a stock dividend or otherwise make a distribution or distributions on any equity securities (including instruments or securities convertible into or exchangeable for such equity securities) in shares of Common Stock, (B) subdivide outstanding Common Stock into a larger number of shares, or (C) combine outstanding Common Stock into a smaller number of shares, then the number of Adjustment Shares then issuable hereunder shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding after such event and the denominator of which shall be the number of shares of Common Stock outstanding before such event. Any adjustment made pursuant to this Section 14(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) OTHER DISTRIBUTIONS. If at any time after the date hereof the Company distributes to holders of its Common Stock, other than as part of its dissolution, liquidation or the winding up of its affairs, any shares of its capital stock, any evidence of indebtedness or any of its assets (other than Common Stock), then the number of Adjustment Shares for which this Adjustment Warrant is exercisable shall be increased to equal the number of Adjustment Shares for which this Adjustment Warrant is exercisable immediately prior to such event multiplied by a fraction, (A) the numerator of which shall be the Fair Market Value (as defined below) per share of Common Stock on the record date for the dividend or distribution, and (B) the denominator of which shall be the Fair Market Value price per share of Common Stock on the record date for the dividend or distribution minus the amount allocable to one share of Common Stock of the value (as jointly determined in good faith by the Board of Directors of the Company and the Adjustment Warrant holder) of any and all such evidences of indebtedness, shares of capital stock, other securities or property, so distributed. In lieu of such change to the number of Adjustment Shares for which this Adjustment Warrant is exercisable, the Investor (as to itself only) may elect, in its sole discretion, to participate in such distribution and receive the shares of capital stock, evidence of indebtedness or other assets on an "as exercised" basis as if the Adjustment Warrant had been exercised in full for Adjustment Shares as of the record date for such distribution, without regard to the restrictions contained in Section 15 below. 9 For purposes of this Adjustment Warrant, "FAIR MARKET VALUE" shall equal the 10 Trading Day average closing price of the Common Stock on the Principal Market for the 10 Trading Days preceding the date of determination or, if the Common Stock is not listed or admitted to trading on any Principal Market, the average of the closing bid and asked prices on the over-the-counter market as furnished by any New York Stock Exchange member firm reasonably selected from time to time by the Company for that purpose and reasonably acceptable to the holder, or, if the Common Stock is not listed or admitted to trading on the Principal Market or traded over-the-counter and the average price cannot be determined as contemplated above, the Fair Market Value of the Common Stock shall be as reasonably determined in good faith by the Company's Board of Directors with the concurrence of the holder. (c) CHANGE IN CONTROL TRANSACTION. If at any time after the date hereof there shall be a Change in Control Transaction (as defined in the Purchase Warrant), then the Adjustment Warrant holder shall be entitled to receive upon or after such Change in Control Transaction becoming effective, and upon payment of the Exercise Price then in effect, the number of shares or other securities or property of the Company or of the successor corporation resulting from such Change in Control Transaction, which would have been received by the Adjustment Warrant holder for the shares of stock subject to this Adjustment Warrant had this Adjustment Warrant been exercised just prior to such transfer, merger or consolidation becoming effective or to the applicable record date thereof, as the case may be. The Company will not merge or consolidate with or into any other corporation, or sell or otherwise transfer its property, assets and business substantially or as an entirety to another corporation, unless the corporation resulting from such merger or consolidation (if not the Company), or such transferee corporation, as the case may be, shall expressly assume in writing the due and punctual performance and observance of each and every covenant and condition of this Adjustment Warrant to be performed and observed by the Company. (d) RECLASSIFICATION, ETC. If at any time after the date hereof there shall be a reorganization or reclassification of the securities as to which purchase rights under this Adjustment Warrant exist into the same or a different number of securities of any other class or classes, then the Adjustment Warrant holder shall thereafter be entitled to receive upon exercise of this Adjustment Warrant, during the period specified herein and upon payment of the Exercise Price then in effect, the number of shares or other securities or property resulting from such reorganization or reclassification, which would have been received by the Adjustment Warrant holder for the shares of stock subject to this Adjustment Warrant had this Adjustment Warrant at such time been exercised. (e) In the event of any increase in the number of Adjustment Shares issuable hereunder pursuant to the foregoing paragraphs, the Exercise Price hereunder shall be inversely proportionately reduced. In the event of any decrease in the number of Adjustment Shares issuable hereunder pursuant to the foregoing paragraphs, the Exercise Price hereunder shall be inversely proportionately increased. 10 15. 9.9% LIMITATION. (a) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Purchaser upon exercise pursuant to the terms hereof shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such holder (other than by virtue of the ownership of securities or rights to acquire securities (including the Warrant) that have limitations on the Purchaser's right to convert, exercise or purchase similar to the limitation set forth herein (the "Excluded Shares")), together with all shares of Common Stock deemed beneficially owned (not counting such affiliate's Excluded Shares) by the holder's "affiliates" (as defined in Rule 144 of the Act) ("AGGREGATION PARTIES") that would be aggregated for purposes of determining whether a group under Section 13(d) of the Securities Exchange Act of 1934, as amended, exists, would exceed 9.9% of the total issued and outstanding shares of the Company's Common Stock (the "RESTRICTED OWNERSHIP PERCENTAGE"). Each holder shall have the right (x) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company and (y) at any time and from time to time, to increase its Restricted Ownership Percentage immediately in the event of the announcement as pending or planned of an event of any Change in Control Transaction. The Company shall have no liability for issuing Adjustment Shares in violation hereof if the Holder fails to advise the Company in writing prior to such issuance (which may be in the Notice of Exercise) that upon such issuance the Restricted Ownership Percentage will be exceeded. (b) The Purchaser covenants at all times on each day (each such day being referred to as a "COVENANT DAY") as follows: During the balance of such Covenant Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and the succeeding 61 days being referred to as the "COVENANT PERIOD") such Purchaser will not acquire shares of Common Stock pursuant to any right (including the exercise of the Warrant) existing at the commencement of the Covenant Period to the extent the number of shares so acquired by such holder and its Aggregation Parties (ignoring all dispositions) would exceed: (x) the Restricted Ownership Percentage of the total number of shares of Common Stock outstanding at the commencement of the Covenant Period, MINUS (y) the number of shares of Common Stock owned by such holder and its Aggregation Parties at the commencement of the Covenant Period. A new and independent covenant will be deemed to be given by the holder as of each moment of each Covenant Day. No covenant will terminate, diminish or modify any other covenant. The holder agrees to comply with each such covenant. This Section 15 controls in the case of any conflict with any other provision of the Transaction Documents. 11 The Company's obligation to issue Adjustment Shares which would exceed such limits referred to in this Section 15 shall be suspended to the extent necessary until such time, if any, as shares of Common Stock may be issued in compliance with such restrictions. (c) NASDAQ RULE. Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Purchaser upon exercise pursuant to the terms hereof shall not be a number that would exceed the 20% Cap, provided that in the event that there are Deficiency Shares, the terms of Section 3.14 of the Purchase Agreement shall govern with respect to such Deficiency Shares and 20% Cap. 16. MISCELLANEOUS. (A) ISSUE DATE; CHOICE OF LAW; VENUE; JURISDICTION. THE PROVISIONS OF THIS ADJUSTMENT WARRANT SHALL BE CONSTRUED AND SHALL BE GIVEN EFFECT IN ALL RESPECTS AS IF IT HAD BEEN ISSUED AND DELIVERED BY THE COMPANY ON THE DATE HEREOF. THIS ADJUSTMENT WARRANT SHALL BE BINDING UPON ANY SUCCESSORS OR ASSIGNS OF THE COMPANY. THIS ADJUSTMENT WARRANT WILL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCEPT FOR MATTERS ARISING UNDER THE ACT, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE STATE OR U.S. DISTRICT COURT SITTING IN THE CITY OF NEW YORK IN THE STATE OF NEW YORK OR IN SAN JOSE, CALIFORNIA IN CONNECTION WITH ANY DISPUTE ARISING UNDER THIS ADJUSTMENT WARRANT AND HEREBY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS, TO THE BRINGING OF ANY SUCH PROCEEDING IN EITHER OF SUCH JURISDICTIONS. EACH PARTY HEREBY AGREES THAT IF THE OTHER PARTY TO THIS ADJUSTMENT WARRANT OBTAINS A JUDGMENT AGAINST IT IN SUCH A PROCEEDING, THE PARTY WHICH OBTAINED SUCH JUDGMENT MAY ENFORCE SAME BY SUMMARY JUDGMENT IN THE COURTS OF ANY COUNTRY HAVING JURISDICTION OVER THE PARTY AGAINST WHOM SUCH JUDGMENT WAS OBTAINED, AND EACH PARTY HEREBY WAIVES ANY DEFENSES AVAILABLE TO IT UNDER LOCAL LAW AND AGREES TO THE ENFORCEMENT OF SUCH A JUDGMENT. EACH PARTY TO THIS ADJUSTMENT WARRANT IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS IN ACCORDANCE WITH SECTION 16(C) AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE PROCESS IN 12 ANY OTHER MANNER PERMITTED BY LAW. EACH PARTY WAIVES ITS RIGHT TO A TRIAL BY JURY. (b) MODIFICATION AND WAIVER. This Adjustment Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. Any amendment effected in accordance with this paragraph shall be binding upon the Purchaser, each future holder of this Adjustment Warrant and the Company. No waivers of, or exceptions to, any term, condition or provision of this Adjustment Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. (c) NOTICES. Any notice, request or other document required or permitted to be given or delivered to the Purchaser or future holders hereof or the Company shall be personally delivered or shall be sent by certified or registered mail, postage prepaid, to the Purchaser or each such holder at its address as shown on the books of the Company or to the Company at the address set forth in the Purchase Agreement. All notices under this Adjustment Warrant shall be deemed to have been given when received. A party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance with the provisions of this Section 16(c). (d) SEVERABILITY. Whenever possible, each provision of this Adjustment Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Adjustment Warrant is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Adjustment Warrant in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Adjustment Warrant shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (e) NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation 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 Adjustment 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 Adjustment Warrant holder against impairment. Without limiting the generality of the foregoing, the Company 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 Adjustment Shares on the exercise of this Adjustment Warrant. * * * * * [SIGNATURE PAGE FOLLOWS] 13 IN WITNESS WHEREOF, the Company has caused this Adjustment Warrant to be executed by its officers thereunto duly authorized. Dated: February 16, 2001 HYBRID NETWORKS, INC. By: ______________________________ Name: Title: ATTEST: - ------- Sign:______________________________________ Print Name: 14 NOTICE OF EXERCISE To: HYBRID NETWORKS, INC. Re: Adjustment Warrant originally issued on February __, 2001 to ____________. (1) The undersigned hereby elects: (A) to purchase ________ shares of Common Stock of HYBRID NETWORKS, INC. pursuant to the terms of the attached or above-referenced Adjustment Warrant, and tenders herewith payment of the Exercise Price in full. (B) to purchase ____________ shares of Common Stock of HYBRID NETWORKS, INC. pursuant to the terms of the attached or above-referenced Adjustment Warrant, in a "cashless" or "net-issue" exercise and herewith makes payment therefor with ______ surrendered shares. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: _______________________________ (Name) _______________________________ (Address) _______________________________; and in addition (3) Please issue a new Adjustment Warrant for the unexercised portion (if any) and for the unexercised term (through the Termination Date) of the attached Adjustment Warrant in the name of the undersigned or in such other name as is specified below: Other Name: ____________________ (4) The undersigned represents as of the date hereof that, after giving effect to the exercise of this Adjustment Warrant pursuant to this Notice of Exercise, the undersigned will not exceed the "Restricted Ownership Percentage" contained in Section 15(a) of the Adjustment Warrant and will remain in compliance with Section 15(b) of the Adjustment Warrant. _________________________________________ (Name) _____________________ _________________________________________ (Date) (Signature) _________________________________________ (Address) ASSIGNMENT FORM (To assign the foregoing Adjustment Warrant, execute this form and supply the required information. Do not use this form to exercise the Adjustment Warrant.) FOR VALUE RECEIVED, the foregoing Adjustment Warrant of HYBRID NETWORKS, INC., and all rights evidenced thereby are hereby assigned to ___________________________ whose address is ___________________________________ _______________________________________________________________________________. Dated: ______________, ____ Holder's Signature: _____________________________ Holder's Address: _____________________________ _____________________________ Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Adjustment Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Adjustment Warrant. EX-4.05 6 a2039627zex-4_05.txt EXHIBIT 4.05 EXHIBIT 4.05 ANNEX D REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("AGREEMENT") is entered into as of February 16, 2001 by and between HYBRID NETWORKS, INC., a Delaware corporation with offices at 6409 Guadalupe Mines Road, San Jose, California 95120 (the "COMPANY"), and each of the entities listed under "Purchasers" on the signature page hereto (each a "PURCHASER" and collectively the "Purchasers"), each with offices at the address listed beside such Purchaser's name on Schedule I to the Purchase Agreement (as defined below). W I T N E S S E T H: WHEREAS, pursuant to that certain Securities Purchase Agreement dated as of the date hereof by and between the Company and the Purchasers (the "PURCHASE AGREEMENT"), the Company has agreed to sell and issue to the Purchasers, and the Purchasers have agreed to purchase from the Company, (i) an aggregate of up to $7.5 million in principal amount of the Company's 6% Convertible Debentures ("DEBENTURES"), which are convertible into shares ("UNDERLYING SHARES") of the Company's Common Stock, $0.001 par value ("COMMON STOCK"), (ii) 5-year warrants to purchase an aggregate of up to 833,333 shares ("PURCHASE SHARES") of Common Stock at an initial exercise price of $9.00 per share (the "PURCHASE WARRANTS"), and (iii) adjustment warrants to purchase a number of shares (together with the Purchase Shares, "WARRANT SHARES") of Common Stock calculated pursuant to a formula set forth therein (together with the Purchase Warrants, the "WARRANTS"), all as more fully specified and subject to the terms and conditions set forth in the Purchase Agreement; WHEREAS, pursuant to the terms of, and in partial consideration for the Purchasers' agreement to enter into, the Purchase Agreement, the Company has agreed to provide the Purchasers with certain registration rights with respect to the Underlying Shares and Warrant Shares, as well as certain other rights and remedies as set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in the Purchase Agreement and this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows: 1. CERTAIN DEFINITIONS. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Purchase Agreement and/or the Warrants. As used in this Agreement, the following terms shall have the following respective meanings: "CLOSING" and "CLOSING DATE" shall have the meanings ascribed to such terms in the Purchase Agreement. "COMMISSION" or "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "EFFECTIVENESS DEADLINE" has the meaning specified in Section 2(a) herein. "FAIR MARKET VALUE" shall have the meaning ascribed to such term in the Warrants. "HOLDER" and "HOLDERS" shall mean the Purchaser or the Purchasers, respectively, and any transferee of Registrable Securities, Debentures and/or Warrants which have not been sold to the public to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement. "INTERFERING EVENTS" shall have the meaning set forth in Section 2(b). "MONTHLY DELAY PAYMENT" shall have the meaning specified in Section 2(b)(i)(B). "PREMIUM REDEMPTION PRICE" shall mean the following: (a) as to the Debentures, the greater of (x) 120% of the Principal Amount (as defined in the Debentures) of all such Debentures being sold to the Company, or (y) 105% of the Principal Amount of the Debentures being sold to the Company multiplied by the highest Common Stock closing price on the Principal Market (or other Approved Market) between and including date of the event triggering the right of redemption and the trading day immediately prior to the actual redemption of such Debentures and divided by the then applicable Conversion Price (as defined in the Debentures), in each case payable in cash; (b) as to the Underlying Shares and Warrant Shares, the greater of (x) 105% of the dollar amount which is the product of (i) the number of shares to be redeemed, multiplied by (ii) the highest Common Stock closing price on the Principal Market (or other Approved Market) between and including the date of the event triggering the right of redemption and the trading day immediately prior to the actual redemption of such shares, or (y) 120% of the Principal Amount of the Debentures which were converted into the Underlying Shares being redeemed or 120% of the aggregate exercise price for the Warrant Shares being redeemed, as the case may be, in each case payable in cash; and (c) as to the Warrants, 105% of the dollar amount which is the product of (i) the number of Warrant Shares issuable to the Holder upon exercise thereof (assuming full exercise without regard to any beneficial ownership limitations set forth therein and assuming the Adjustment Date under the Adjustment Warrant occurs at such time if it has not already occurred) multiplied by (ii) the difference between (A) the highest Common Stock closing price on the Principal Market (or other Approved Market) between and including date of the event triggering the right of redemption and the trading day immediately prior to the actual redemption of such shares, less (B) the exercise price under such Warrants, in each case payable in cash. "REGISTRABLE SECURITIES" shall mean: (i) the Underlying Shares and the Warrant Shares (without regard to any limitations on beneficial ownership contained therein) or other securities issued or issuable to each Holder or its permitted transferee or designee (a) upon conversion of the Debentures and/or upon exercise of the Warrants, or (b) upon any distribution with respect to, any exchange for or any replacement of such Debentures or Warrants or (c) upon any conversion, exercise or exchange of any securities issued in connection with any such distribution, exchange or replacement; (ii) securities issued or issuable upon any stock split, stock dividend, recapitalization or similar event with respect to the foregoing; and (iii) any other security issued as a dividend or other distribution with respect to, in exchange for or in replacement of the securities referred to in the preceding clauses. 2 The terms "REGISTER", "REGISTERED" and "REGISTRATION" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses to be incurred by the Company in connection with each Holder's registration rights under this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, "blue sky" fees and expenses, reasonable fees and disbursements of counsel to Holders (using a single counsel selected by a majority in interest of the Holders) for a "due diligence" examination of the Company and review of the Registration Statement and related documents (to the extent that the aggregate of such fees and expenses does not exceed the difference between $35,000 and the aggregate fees and disbursements paid to KKWC under Section 3.4 of the Purchase Agreement), and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "REGISTRATION STATEMENT" shall have the meaning set forth in Section 2(a) herein. "REGISTRATION PERIOD" shall have the meaning specified in Section 5 herein. "REGULATION D" shall mean Regulation D as promulgated pursuant to the Securities Act, and as subsequently amended. "SECURITIES" means the Registrable Securities, the Debentures and the Warrants. "SECURITIES ACT" or "ACT" shall mean the Securities Act of 1933, as amended. "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities, and all fees and disbursements of counsel for Holders not included within "Registration Expenses". "TRADING DAY" shall mean (x) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, a day on which there is trading on such stock exchange, or (y) if the Common Stock is not listed on either of such stock exchanges but sale prices of the Common Stock are reported on an automated quotation system, a day on which trading is reported on the principal automated quotation system on which sales of the Common Stock are reported, or (z) if the foregoing provisions are inapplicable, a day on which quotations are reported by National Quotation Bureau Incorporated. 2. REGISTRATION REQUIREMENTS. The Company shall use its best efforts to effect the registration of the Registrable Securities (including without limitation the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable "blue sky" or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as would permit or facilitate the resale of all the Registrable Securities in the manner (including manner of sale) reasonably requested by the Holder and in all U.S. jurisdictions. Such best efforts by the Company shall include the following: 3 (a) The Company shall, as expeditiously as reasonably possible after the Closing Date: (i) But in any event within 30 days thereafter, prepare and file a registration statement with the Commission on Form S-3, as applicable, under the Securities Act (or in the event that the Company is ineligible to use either such form, such other form as the Company is eligible to use under the Securities Act) covering the resale by the Purchasers of the Registrable Securities (such registration statement, including any amendments or supplements thereto and prospectuses contained therein, is referred to herein as the "REGISTRATION STATEMENT"), which Registration Statement, to the extent allowable under the Securities Act and the rules promulgated thereunder (including Rule 416), shall state that such Registration Statement also covers such number of additional shares of Common Stock as may become issuable to prevent dilution resulting from stock splits, stock dividends or similar events. Subject to compliance with the rules of the SEC, the number of shares of Common Stock initially included in such Registration Statement shall be no less than 200% of the aggregate number of shares of Common Stock issuable upon full conversion of the Debentures (without regard to any beneficial ownership limitations set forth therein), plus 100% of the number of shares of Common Stock estimated in good faith to be issuable upon exercise of the Warrants in full (without regard to any beneficial ownership limitations set forth therein) as of the most recent filing date. Thereafter, the Company shall use its best efforts to cause such Registration Statement to be declared effective as soon as reasonably practicable, and in any event not later than 120 calendar days following the Closing Date (the "EFFECTIVENESS DEADLINE"). The Company shall provide Holders and their legal counsel reasonable opportunity to review any such Registration Statement or amendment or supplement thereto prior to filing. Without limiting the foregoing, the Company will promptly respond to all SEC comments, inquiries and requests, and shall request acceleration of effectiveness at the earliest possible date. If the Company is not initially eligible to use Form S-3, it will, at the request of a majority-in-interest of the holders of Registrable Securities, amend its Form S-1 to a Form S-3 at such time that it becomes eligible to do so. The Company shall notify the Holders in writing (A) within one day following each of the SEC's clearance to request acceleration of effectiveness of the Registration Statement and the Company's request for such acceleration of effectiveness and (B) immediately upon the SEC's declaration of such effectiveness. (ii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement, or prepare and file such additional registration statements, as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement in accordance with the intended methods of disposition by the seller thereof as set forth in the Registration Statement (and the disposition of all Registrable Securities as necessary to comply with this Agreement) and notify the Holders of the filing and 4 effectiveness of such Registration Statement and any amendments or supplements. (iii) After the registration, furnish to each Holder such numbers of copies of a current prospectus conforming with the requirements of the Act, copies of the Registration Statement, any amendment or supplement thereto and any documents incorporated by reference therein and such other documents as such Holder may reasonably require in order to facilitate the disposition of Registrable Securities owned by such Holder. (iv) Use its best efforts to register and qualify the securities covered by such Registration Statement under such other securities or "blue sky" laws of all U.S. jurisdictions (except in any such jurisdiction where the registration and qualification of the securities covered by such Registration Statement is exempt under the laws and regulations of such jurisdiction); provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) Notify each Holder immediately of the happening of any event (but not the substance or details of any such event unless specifically requested by a Holder who agrees in writing to maintain the confidentiality of such information) as a result of which the prospectus (including any supplements thereto or thereof and any information incorporated or deemed to be incorporated by reference therein) included in such Registration Statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and, pursuant to Section 2(f) (and subject to the grace periods in Section 2(b)(iii)), use its best efforts to promptly update and/or correct such prospectus. (vi) Notify each Holder immediately of the issuance by the Commission or any state securities commission or agency of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. The Company shall use its best efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time. (vii) Permit a single firm of counsel, designated as Holders' counsel by the Holders of a majority of the Registrable Securities included in the Registration Statement, to review the Registration Statement and all amendments and supplements thereto within a reasonable period of time prior to each filing, and shall not file any document in a form to which such counsel reasonably objects. (viii) Use its best efforts to list the Registrable Securities covered by such Registration Statement with all securities exchange(s) and/or markets on which the Common Stock is then listed and/or quoted and prepare and file any 5 required filings with the National Association of Securities Dealers, Inc. or any exchange or market where the Common Stock is then traded. (ix) If applicable, cooperate with the Holders to avail themselves of the prospectus delivery mechanism set forth in Rule 153 (or successor thereto) under the Act. (b) Set forth below in this Section 2(b) are (I) events that may arise that the Purchasers consider will interfere with the full enjoyment of their rights under the Purchase Agreement and this Agreement (the "INTERFERING EVENTS"), and (II) certain remedies applicable in each of these events. Paragraphs (i) through (iv) of this Section 2(b) describe the Interfering Events, provide a remedy to the Purchasers if an Interfering Event occurs and provide that the Purchasers may require that the Company redeem outstanding Securities at a specified price if certain Interfering Events are not timely cured. Paragraph (v) provides, INTER ALIA, that if payments required as the remedy in the case of certain of the Interfering Events are not paid when due, the Company may be required by the Purchasers to redeem outstanding Securities at a specified price. The preceding paragraphs in this Section 2(b) are meant to serve only as an introduction to this Section 2(b), are for convenience only, and are not to be considered in applying, construing or interpreting this Section 2(b). (i) DELAY IN EFFECTIVENESS OF REGISTRATION STATEMENT. (A) In the event that the Registration Statement has not been declared effective by the Effectiveness Deadline, then the Company shall pay to each Holder a Monthly Delay Payment (as defined below) on the day after the Effectiveness Deadline. In addition, the Company shall pay the Holder a Monthly Delay Payment for each 30 day period (or portion thereof) thereafter during which the Registration Statement has not been declared effective, which Monthly Delay Payments shall not in the aggregate exceed the maximum percentage permitted by law. (B) As used in this Agreement, a "MONTHLY DELAY PAYMENT" shall be a cash payment equal to 2% of the aggregate Purchase Price paid by a Holder, payable on the date on which the specified condition in this Section 2(b) has not been fulfilled or the specified deficiency has not been remedied, and 2% of the aggregate Purchase Price paid by a Holder, payable for each 30-day period thereafter (or portion thereof) that the specified condition in this Section 2(b) has not been fulfilled or the specified deficiency has not been remedied. Payment of the Monthly Delay Payments, and any Premium Redemption Price payment due pursuant to the other provisions of this Section 2(b), shall be due and payable from the Company to such Holder within 5 business days of demand therefor. Without limiting the foregoing, if payment in immediately available funds of the 6 Premium Redemption Price is not made within such 5 business day period, the Holder may revoke and withdraw in whole or in part its election to cause the Company to make such mandatory purchase at any time prior to its receipt of such cash, without prejudice to its ability to elect to receive that particular or other Premium Redemption Price payments in the future. (ii) NO LISTING; PREMIUM PRICE REDEMPTION FOR DELISTING OF CLASS OF SHARES. (A) In the event that the Company fails, refuses or is unable to cause the Registrable Securities covered by the Registration Statement to be listed and/or quoted, as the case may be, with the Approved Market and each other securities exchange and market on which the Common Stock is then traded at all times during the Registration Period, then the Company shall make to each Holder a Monthly Delay Payment for each 30 day period (or portion thereof) during the Registration Period from and after such failure, refusal or inability to so list the Registrable Securities until the Registrable Securities are so listed and/or quoted. (B) In the event that shares of Common Stock of the Company are delisted from or not quoted on, or trading in the Common Stock is otherwise suspended on, an Approved Market at any time following the Closing Date and remains so delisted, not quoted or suspended for 5 consecutive Trading Days, then at the option of each Holder and to the extent such Holder so elects, the Company shall on 2 business days notice either (1) make to such Holder a Monthly Delay Payment for each 30 day period (or portion thereof) that the shares are delisted, not quoted or suspended or (2) redeem the Securities held by such Holder, in whole or in part, at a redemption price equal to the Premium Redemption Price; PROVIDED, however, that such Holder may revoke such request at any time prior to receipt of such Monthly Delay Payments or Premium Redemption Price, as the case may be. (iii) BLACKOUT PERIODS. In the event any Holder is unable to sell Registrable Securities under the Registration Statement for more than (A) 15 consecutive Trading Days or (B) an aggregate of 30 Trading Days in any 12 month period ("SUSPENSION GRACE PERIOD"), including without limitation by reason of the Company's failure to deliver unlegended shares, any suspension or stop order with respect to the Registration Statement or the fact that an event has occurred as a result of which the prospectus (including any supplements thereto) included in such Registration Statement then in effect includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, or the number of shares of Common Stock covered by the Registration Statement is insufficient at such time to make such sales (any of the foregoing, a "BLACKOUT"), then the Company shall make to each Holder a Monthly Delay Payment for each 30 day period (or portion thereof) from and after the expiration of the Suspension Grace Period. In lieu of receiving the 7 Monthly Delay Payment as provided above, a Holder shall have the right but not the obligation to elect to have the Company redeem its Securities at a price equal to the Premium Redemption Price. In the event that any Holder is unable to sell Registrable Securities under the Registration Statement after the Effective Date solely due to the obligation of the Company to file any post-effective amendment or prospectus supplement thereto as a result of any change in the plan of distribution of the Common Stock covered thereby requested by the selling stockholders or of the identity of the selling stockholders thereunder, then such period shall not be counted against the number of days constituting a Blackout provided that the Company acts in good faith to effect any such amendment or supplement as soon as reasonably possible. (iv) REDEMPTION FOR EXERCISE DEFICIENCY. In the event that the Company does not have a sufficient number of shares of Common Stock available to satisfy the Company's obligations to any Holder upon conversion of a Debenture or receipt of a notice of exercise of a Warrant from a Purchaser, or the Company is otherwise unable or unwilling for any reason to issue unlegended Common Stock as required by (and within the time frames required by), and in accordance with the provisions of, the Debentures, Warrants, this Agreement or the Purchase Agreement (each, an "EXERCISE DEFICIENCY"), then at any time 5 days after the commencement of the running of the first 30 day period following an Exercise Deficiency, at the request of any Holder, the Company promptly shall purchase from such Holder, on the terms set forth in Section 2(b)(i)(B) above, the Debentures that are unconvertible, the Warrants that are unexercisable and/or the shares of Common Stock required to be issued that have not been issued, in each case as a result of the Exercise Deficiency, at their Premium Redemption Price. (v) PREMIUM REDEMPTION PRICE FOR DEFAULTS. (A) The Company acknowledges that any failure, refusal or inability by the Company to perform the obligations described in the foregoing paragraphs (i) through (iv) will cause the Holders to suffer damages in an amount that will be difficult to ascertain, including without limitation damages resulting from the loss of liquidity in the Registrable Securities and the additional investment risk in holding the Registrable Securities. Accordingly, the parties agree, after consulting with counsel, that it is appropriate to include in this Agreement the foregoing provisions for Monthly Delay Payments and mandatory redemptions in order to compensate the Holders for such damages. The parties acknowledge and agree that the Monthly Delay Payments and mandatory redemptions set forth above represent the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such payments and mandatory redemptions are reasonable and will not constitute a penalty. (B) In the event that the Company fails to make any Monthly Delay Payment within 10 calendar days of demand therefor, each Holder shall have the right to sell to the Company any or all of its Securities at the Premium Redemption Price on the terms set forth in Section 2(b)(i)(B) above. 8 (vi) CUMULATIVE REMEDIES. Each Monthly Delay Payment triggered by an Interfering Event provided for in the foregoing paragraphs (i) through (iv) shall be in addition to each other Monthly Delay Payment triggered by another Interfering Event; provided, however, that in no event shall the Company be obligated to make to any Holder Monthly Delay Payments in an aggregate amount greater than 3% of the aggregate Purchase Price for any 30 day period (or portion thereof). The Monthly Delay Payments and mandatory redemptions provided for above are in addition to and not in lieu or limitation of any other rights the Holders may have at law, in equity or under the terms of the Transaction Documents including without limitation the right to specific performance. Each Holder shall be entitled to specific performance of any and all obligations of the Company in connection with the registration rights of the Holders hereunder. (c) If the Holder(s) intend to distribute the Registrable Securities by means of an underwriting, the Holder(s) shall so advise the Company. Any such underwriting may only be administered by investment bankers reasonably satisfactory to the Company. (d) The Company shall enter into such customary agreements for secondary offerings (including a customary underwriting agreement with the underwriter or underwriters, if any) and take all such other reasonable actions reasonably requested by the Holders in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registrable Securities are to be sold in an underwritten offering, the Company shall: (i) make such representations and warranties to the Holders and the underwriter or underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in secondary offerings; (ii) cause to be delivered, if requested, to the sellers of Registrable Securities and the underwriter or underwriters, if any, opinions of independent counsel to the Company, on and dated as of the effective day (or in the case of an underwritten offering or deemed underwritten offering, dated the date of delivery of any Registrable Securities sold pursuant thereto) of the Registration Statement, and within 90 days following the end of each fiscal year thereafter, which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Holders and the underwriter(s), if any, and their counsel and covering, without limitation, such matters as the due authorization and issuance of the securities being registered and compliance with securities laws by the Company in connection with the authorization, issuance and registration thereof and other matters that are customarily given to underwriters in underwritten offerings, addressed to the Holders and each underwriter, if any; (iii) cause to be delivered, immediately prior to the effectiveness of the Registration Statement (and, in the case of an underwritten offering or deemed underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), and at the beginning of each fiscal year following a year during 9 which the Company's independent certified public accountants shall have reviewed any of the Company's books or records, a "comfort" letter from the Company's independent certified public accountants addressed to the Holders and each underwriter, if any, stating that such accountants are independent public accountants within the meaning of the Securities Act and the applicable published rules and regulations thereunder, and otherwise in customary form and covering such financial and accounting matters as are customarily covered by letters of the independent certified public accountants delivered in connection with secondary offerings; such accountants shall have undertaken in each such letter to update the same during each such fiscal year in which such books or records are being reviewed so that each such letter shall remain current, correct and complete throughout such fiscal year; and each such letter and update thereof, if any, shall be reasonably satisfactory to the Holders; (iv) if an underwriting agreement is entered into, the same shall include customary indemnification and contribution provisions to and from the underwriters and procedures for secondary underwritten offerings; (v) deliver such documents and certificates as may be reasonably requested by the Holders of the Registrable Securities being sold or the managing underwriter or underwriters, if any, to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement, if any; and (vi) deliver to the Holders on the effective day (or in the case of an underwritten offering, dated the date of delivery of any Registrable Securities sold pursuant thereto) of the Registration Statement, and at the beginning of each fiscal quarter thereafter, a certificate in form and substance as shall be reasonably satisfactory to the Holders, executed by an executive officer of the Company and to the effect that all the representations and warranties of the Company contained in the Purchase Agreement are still true and correct except as disclosed in such certificate; the Company shall, as to each such certificate delivered at the beginning of each fiscal quarter, update or cause to be updated each such certificate during such quarter so that it shall remain current, complete and correct throughout such quarter; and such updates received by the Holders during such quarter, if any, shall have been reasonably satisfactory to the Holders. (e) The Company shall make available for inspection by the Holders, representative(s) of all the Holders together, any underwriter participating in any disposition pursuant to a Registration Statement, and any attorney or accountant retained by any Holder or underwriter, all financial and other records customary for purposes of the Holders' due diligence examination of the Company and review of any Registration Statement, all SEC Documents (as defined in the Purchase Agreement) filed subsequent to the Closing, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement, provided that such parties agree to keep such information confidential. 10 (f) The Company shall file a Registration Statement with respect to any newly authorized and/or reserved shares representing Registerable Securities that are not covered by an existing Registration Statement within twenty (20) business days of any shareholders meeting authorizing or reserving same and shall use its best efforts to cause such Registration Statement to become effective within ninety (90) days of such shareholders meeting. If the Holders become entitled, pursuant to an event described in clause (iii) of the definition of Registrable Securities, to receive any securities in respect of Registrable Securities that were already included in a Registration Statement, subsequent to the date such Registration Statement is declared effective, and the Company is unable under the securities laws to add such securities to the then effective Registration Statement, the Company shall promptly file, in accordance with the procedures set forth herein, an additional Registration Statement with respect to such newly Registrable Securities. The Company shall use its best efforts to (i) cause any such additional Registration Statement, when filed, to become effective under the Securities Act, and (ii) keep such additional Registration Statement effective during the period described in Section 5 below. All of the registration rights and remedies under this Agreement shall apply to the registration of such newly reserved shares and such new Registrable Securities, including without limitation the provisions providing for Monthly Delay Payments contained herein. 3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance with registration pursuant to this Agreement shall be borne by the Company, and all Selling Expenses of a Holder shall be borne by such Holder. 4. REGISTRATION ON FORM S-3; OTHER FORMS. The Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms, or in the event that the Company is ineligible to use such form, such form as the Company is eligible to use under the Securities Act. 5. REGISTRATION PERIOD. In the case of the registration effected by the Company pursuant to this Agreement, the Company will use its best efforts to keep such registration effective at all times during the period ("REGISTRATION PERIOD") commencing on the earlier of the effective date of the Registration Statement or the Effectiveness Deadline and continuing thereafter until the later to occur of (a) the date on which sales are permitted of all Registrable Securities without registration under Rule 144(k) (provided that the Company's transfer agent has accepted an instruction from the Company to such effect and assuming there is no cashless exercise of the Warrants) or (b) the earlier of the date on which (i) there are no longer any Debentures and Warrants outstanding or issuable and (ii) the fifth (5th) anniversary of the Closing Date. 6. INDEMNIFICATION. (a) THE COMPANY INDEMNITY. The Company will indemnify each Holder, each of its officers, directors and partners, and each person controlling each Holder, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any 11 untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on 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, or any violation by the Company of the Securities Act or any state securities law or in either case, any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to a Holder to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or the underwriter (if any) therefor and stated to be specifically for use therein. The indemnity agreement contained in this Section 6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably withheld). (b) HOLDER INDEMNITY. Each Holder will, severally and not jointly, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, partners, and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, each other Holder (if any), and each of their officers, directors and partners, and each person controlling such other Holder(s), against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse the Company and such other Holder(s) and their directors, officers and partners, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein, and provided that the maximum amount for which such Holder shall be liable under this indemnity shall not exceed the net proceeds received by such Holder from the sale of the Registrable Securities. The indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) PROCEDURE. Each party entitled to indemnification under this Section 6 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any 12 claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim in any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Article except to the extent that the Indemnifying Party is materially and adversely affected by such failure to provide notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. 7. CONTRIBUTION. If the indemnification provided for in Section 6 herein is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein (other than by reason of the exceptions provided therein), then each such Indemnifying Party, in lieu of indemnifying each of such Indemnified Parties, shall contribute to the amount paid or payable by each such Indemnified Party as a result of such losses, claims, damages or liabilities as between the Company on the one hand and any Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of such Holder in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of any Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by such Holder. In no event shall the obligation of any Indemnifying Party to contribute under this Section 7 exceed the amount that such Indemnifying Party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 6(a) or 6(b) hereof had been available under the circumstances. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Holders or the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraphs. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraphs 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, no Holder or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any Holder, the net proceeds received by such Holder from the sale of Registrable 13 Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such Holder or underwriter 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 (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. 8. SURVIVAL. The indemnity and contribution agreements contained in Sections 6 and 7 and the representations and warranties of the Company referred to in Section 2(d)(i) shall remain operative and in full force and effect regardless of (i) any termination of this Agreement or the Purchase Agreement or any underwriting agreement, (ii) any investigation made by or on behalf of any Indemnified Party or by or on behalf of the Company, and (iii) the consummation of the sale or successive resales of the Registrable Securities. 9. INFORMATION BY HOLDERS. Each Holder shall reasonably promptly furnish to the Company in writing such information regarding such Holder and the distribution and/or sale proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. The intended method or methods of disposition and/or sale (Plan of Distribution) of such securities as so provided by such Purchaser shall be included without alteration in the Registration Statement covering the Registrable Securities and shall not be changed without written consent of such Holder (which shall not be unreasonably withheld), except that such Holder may not require an intended method of disposition which violates applicable securities law or a description of the method of disposition to which the SEC objects. 10. NASDAQ LIMIT ON STOCK ISSUANCES. Section 3.14 of the Purchase Agreement shall govern limits imposed by NASDAQ rules on the issuance of Common Stock. 11. REPLACEMENT CERTIFICATES. The certificate(s) representing the Registrable Securities held by the Purchaser (or then Holder) may be exchanged by the Purchaser (or such Holder) at any time and from time to time for certificates with different denominations representing an equal aggregate number of Registrable Securities, as reasonably requested by the Purchaser (or such Holder) upon surrendering the same. No service charge will be made for such registration or transfer or exchange. 12. TRANSFER OR ASSIGNMENT. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The rights granted to the Purchasers by the Company under this Agreement to cause the Company to register Registrable Securities may be transferred or assigned (in whole or in part) to a transferee or assignee of Registrable Securities, Debentures or Warrants that are or that are convertible into or exercisable for, an aggregate of not less than 20,000 shares of Common Stock for transfers or assignments in part, and all other rights granted to the Purchasers by the Company hereunder may be transferred or assigned to any transferee or assignee of any Registrable Securities, Debentures or Warrants; PROVIDED in each case that the Company must be given written notice by the such Purchaser at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and 14 identifying the securities with respect to which such registration rights are being transferred or assigned; and PROVIDED FURTHER that the transferee or assignee of such rights agrees in writing to be bound by the provisions of this Agreement. 13. MISCELLANEOUS. (a) REMEDIES. The Company and the Purchasers acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. (b) JURISDICTION. THE COMPANY AND EACH OF THE PURCHASERS (I) HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT, THE STATE COURTS AND OTHER COURTS OF THE UNITED STATES SITTING IN NEW YORK COUNTY, NEW YORK, OR SAN JOSE, CALIFORNIA FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND (II) HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. THE COMPANY AND EACH OF THE PURCHASERS CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. (c) NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing by facsimile, mail or personal delivery and shall be effective upon actual receipt of such notice. The addresses for such communications shall be: TO THE COMPANY: Hybrid Networks, Inc. 6409 Guadalupe Mines Road San Jose, California 95120 Telephone: 408-323-6500 Facsimile: Attention: WITH A COPY TO: Fenwick and West LLP 15 2 Palo Alto Square Palo Alto, California 94306 Telephone: 650-494-0600 Facsimile: 650-494-1417 Attention: Dan Winnike, Esq. TO THE PURCHASERS: To each Purchaser at the address and/or fax number set forth on Schedule I of the Purchase Agreement WITH COPIES TO: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue New York, New York 10176 Telephone: (212) 986-6000 Facsimile: (212) 986-8866 Attention: Stephen M. Schultz, Esq. Any party hereto may from time to time change its address for notices by giving at least 10 days' written notice of such changed address to the other parties hereto. (d) INDEMNITY. Each party shall indemnify each other party against any loss, cost or damages (including reasonable attorney's fees) incurred as a result of such parties' breach of any representation, warranty, covenant or agreement in this Agreement. (e) WAIVERS. No waiver by any party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. The representations and warranties and the agreements and covenants of the Company and each Purchaser contained herein shall survive the Closing. (f) EXECUTION. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, it being understood that all parties need not sign the same counterpart. (g) PUBLICITY. The Company agrees that it will not disclose, and will not include in any public announcement, the name of any Purchaser without its express written approval, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. The Company agrees to deliver a copy of any public announcement regarding the matters covered by this Agreement or any agreement or document executed herewith to each Purchaser and any public announcement including the name of a Purchaser to such Purchaser, prior to the publication of such announcements. 16 (h) ENTIRE AGREEMENT. This Agreement, together with the Purchase Agreement, the Warrants and the agreements and documents contemplated hereby and thereby, contains the entire understanding and agreement of the parties, and may not be modified or terminated except by a written agreement signed by both parties. (i) GOVERNING LAW. THIS AGREEMENT AND THE VALIDITY AND PERFORMANCE OF THE TERMS HEREOF SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED ENTIRELY IN SUCH STATE. (j) SEVERABILITY. The parties acknowledge and agree that the Purchasers are not agents, affiliates or partners of each other, that all representations, warranties, covenants and agreements of the Purchasers hereunder are several and not joint, that no Purchaser shall have any responsibility or liability for the representations, warrants, agreements, acts or omissions of any other Purchaser, and that any rights granted to "Purchasers" hereunder shall be enforceable by each Purchaser hereunder. (k) JURY TRIAL. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY. (l) TITLES. The titles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. * * * SIGNATURE PAGE FOLLOWS * * * 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. COMPANY: HYBRID NETWORKS, INC., By: ----------------------------------------- Name: Title: PURCHASERS: HALIFAX FUND, L.P. By: ------------------------------------------ Name: Title: SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT 18 -----END PRIVACY-ENHANCED MESSAGE-----