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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Date of Report (Date of earliest event reported): January 12, 2007
TOWERSTREAM CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 333-131087 20-8259086
(State or Other (Commission File Number) (IRS Employer
Jurisdiction Identification No.)
of Incorporation)
55 Hammerlund Way
Middletown, RI 02842
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (401) 848-5848
University Girls Calendar, Ltd.
1881 Brunswick Street, Suite 311
Halifax, Nova Scotia
Canada B3J-3L8
(Former Name or Former Address, if Changed Since Last Report)
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Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[_] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 DFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4 (c) under the
Exchange Act (17 CFR 240.13e-4(c))
CURRENT REPORT ON FORM 8-K
TOWERSTREAM CORPORATION
TABLE OF CONTENTS
Page
Item 1.01. Entry into a Material Definitive Agreement.................... 1
Item 2.01. Completion of Acquisition or Disposition of Assets............ 2
Merger........................................................ 2
Description of Our Company.................................... 4
Management's Discussion and Analysis or Plan of Operations.... 15
Risk Factors.................................................. 23
Security Ownership of Certain Beneficial Owners and Management 37
Directors and Executive Officers.............................. 39
Executive Compensation........................................ 42
Certain Relationships and Related Transactions................ 47
Item 2.03. Creation of a Direct Financial Obligation or an Obligation
under an Off-Balance Sheet arrangement of a Registrant........ 49
Item 3.02. Unregistered Sales of Equity Securities....................... 49
Item 5.01. Changes in Control of Registrant.............................. 54
Item 5.02. Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers; Compensatory
Arrangements of Certain Officers........................... 54
Item 5.06. Change in Shell Company Status................................ 54
Item 7.01 Regulation FD Disclosure...................................... 54
Item 9.01. Financial Statements and Exhibits............................. 55
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ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
THE MERGER
On January 12, 2007, we entered into an Agreement of Merger and Plan of
Reorganization (the "Merger Agreement") with Towerstream Corporation, a
privately-held Delaware corporation ("Towerstream"), and Towerstream
Acquisition, Inc., our newly formed wholly-owned Delaware subsidiary
("Acquisition Sub"). On January 12, 2007 Acquisition Sub was merged with and
into Towerstream, and Towerstream became our wholly-owned subsidiary (the
"Merger"). Pursuant to the terms of the Merger Agreement, following the Merger,
Towerstream's name was changed to "Towerstream I, Inc." and our name was changed
to "Towerstream Corporation."
On January 5, 2007, University Girls Calendar, Ltd., a Delaware corporation
("UGC-DE"), merged with University Girls Calendar, Ltd., ("UGC-NV"), its parent,
for the sole purpose of changing our state of incorporation to Delaware from
Nevada pursuant to a Certificate of Ownership and Merger dated January 5, 2007
and approved by stockholders on January 5, 2007. Under the terms of the
Certificate of Ownership and Merger, each share of UGC-NV was exchanged for
1.310344828 shares of UGC-DE.
Pursuant to the terms of the Merger Agreement:
o Each share of Towerstream issued and outstanding immediately prior to
the closing of the Merger was converted into the right to receive
0.7007716 shares of our Common Stock, par value $0.001 per share (the
"Common Stock") (15,000,000 shares in total);
o 1,900,000 shares of Common Stock issued and outstanding previously
registered on Form SB-2 for resale by the holders thereof will remain
outstanding, and all other shares of our Common Stock outstanding
prior to the Merger were cancelled in connection with the Merger.
o Upon the closing of the Merger, each outstanding option or warrant to
acquire Towerstream capital stock was assumed by us and will
thereafter be exercisable for shares of our Common Stock.
o Certain outstanding convertible promissory notes in the aggregate
principal amount of $2,191,636 (of which $1,691,636 was convertible
into shares of our Common Stock at a conversion price of $1.50 per
share, $250,000 was convertible into 156,250 shares of our Common
Stock at a conversion price $1.60 per share and $250,000 was
convertible into 174,825 shares of our Common Stock at a conversion
price of $1.43 per share) were converted upon the consummation of the
Merger.
In addition, upon the effectiveness of the Merger:
o Paul Pedersen resigned as our sole director and officer.
o Our Board of Directors was reconstituted to consist of Philip Urso,
Jeffrey M. Thompson and Howard L. Haronian.
o We issued $10,244,500 of units (the "Units"), with each Unit
consisting of (i) 50,000 shares of Common Stock and (ii) a five-year
detachable warrant to purchase 25,000 shares of Common Stock at $4.50
per share (the "Unit Warrant"), for a purchase price of $112,500 per
Unit, in a private placement offering to accredited investors (the
"Private Placement").
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On January 18, 2007 we issued $1,253,125 of additional Units and terminated
the Private Placement. On January 18, 2007 we also issued $3,500,000 of our 8%
Senior Convertible Debentures due December 31, 2009 (the "Senior Debentures")
pursuant to a Securities Purchase Agreement dated as of January 18, 2007.
The foregoing descriptions do not purport to be complete and are qualified
in their entirety by reference to the complete text of the agreements and
documents which are filed as Exhibits hereto and incorporated herein by
reference.
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
As used in this Current Report on Form 8-K, all references to the
"Company," "we," "our," and "us" for periods prior to the closing of the Merger
refer to Towerstream Corporation, a privately held corporation as existed prior
to the Merger, and references to the "Company," "we," "our," and "us" for
periods subsequent to the closing of the Merger refer to Towerstream Corporation
and its subsidiary, including Towerstream I, Inc. Information regarding the
principal terms of the Merger are set forth below.
MERGER
THE MERGER. On January 12, 2007, we entered into the Merger Agreement with
Towerstream and Acquisition Sub. Upon closing of the Merger on January 12, 2007,
Acquisition Sub was merged with and into Towerstream, and Towerstream became our
wholly-owned subsidiary. Pursuant to the terms of the Merger Agreement, we
changed our name to "Towerstream Corporation" and Towerstream changed its name
to "Towerstream I, Inc.".
Pursuant to the Merger Agreement, at closing, stockholders of Towerstream
received 0.7007716 of one share of our Common Stock for each issued and
outstanding share of Towerstream's Common Stock. As a result, upon the closing
of the merger we issued 15,000,000 shares of our Common Stock to the former
stockholders of Towerstream, representing approximately 70% of our
outstanding Common Stock (without giving effect to conversion or exercise of
convertible indebtedness, warrants, or options except as noted) following: (i)
the Merger, (ii) the closing of the Private Placement, (iii) the conversion of
certain indebtedness into shares of our Common Stock, and (iv) the cancellation
of 3,931,048 shares of our Common Stock held by our former sole officer and
director. In connection with the closing of the Merger and shortly therefor, we
completed the closing of the private placement and received gross proceeds of
$14,997,625, including $3,500,000 of Senior Debentures.
As a result, 1,900,000 shares of our Common Stock were outstanding prior to
taking into account the closing of the Merger and the Private Placement. The
1,900,000 shares constituted our "public float" prior to the Merger and will
continue to represent the shares of our Common Stock held for resale without
further registration by the holders thereof until such time as the applicability
of Rule 144 or other exemption from registration under the Securities Act of
1933, as amended (the "Securities Act") permits additional sales, or a further
registration statement has been declared effective. Pursuant to the plan of
distribution described in our registration statement on Form SB-2, the
registered public float shares may be sold by the holders thereof in various
manners, including ordinary brokerage transactions and in transactions in which
broker-dealers solicit purchasers, block trades, purchases by a broker-dealer as
principal and resale by a broker-dealer for its own account, privately
negotiated transactions, a combination of any such methods of sale and any other
method permitted pursuant to applicable law as described in the prospectus.
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We assumed all of Towerstream's obligations under its outstanding stock
options and warrants prior to the Merger. At the time of the Merger, Towerstream
had outstanding stock options and warrants to purchase shares of Common Stock
issued to employees and others at various prices, which outstanding stock
options and warrants became stock options and warrants to purchase 0.7007716 of
such number of shares of the our Common Stock, after giving effect to the
Merger. Neither we nor Towerstream had any other stock options or warrants to
purchase shares of capital stock outstanding immediately prior to the Merger. A
total of 3,200,000 shares of Common Stock will be reserved for issuance as
warrants or options in lieu of the options or warrants eligible for issuance by
Towerstream prior to the Merger. The outstanding options and warrants of
Towerstream were exchanged for a total of 2,645,062 options to purchase our
common stock.
The shares of our Common Stock issued to the former holders of
Towerstream's common stock in connection with the Merger, and the shares of our
Common Stock issued in the Private Placement, were not registered under the
Securities Act, in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act and Regulation D promulgated thereunder,
which exempts transactions by an issuer not involving any public offering. These
securities may not be offered or sold in the United States absent registration
or an applicable exemption therefrom. Certificates representing shares issued
pursuant to the Merger or the Private Placement will contain a legend stating
the same.
CHANGES RESULTING FROM THE MERGER. We intend to carry on Towerstream's
business as our sole line of business. We have relocated our executive offices
to 55 Hammerlund Way, Middletown, Rhode Island 02842 and our telephone number is
(401) 848-5848.
Pre-Merger stockholders of Towerstream will not be required to exchange
their existing Towerstream stock certificates for certificates of the Company.
We cannot be certain that we will receive approval to list our Common Stock on
any exchange or market.
The Merger and its related transactions were approved by the holders of a
requisite number of shares of Towerstream's capital stock by written consent on
January 12, 2007. Under Delaware law, Towerstream's stockholders who did not
vote in favor of the Merger, and stockholders of the Company who did not vote in
favor of the Merger, may demand in writing, pursuant to the exercise of
statutory rights of appraisal under the law of such jurisdictions, that they be
paid the fair value of their shares.
CHANGES TO THE BOARD OF DIRECTORS. Upon the effective time of the Merger on
January 12, 2007, Paul Pedersen resigned as our sole director and executive
officer and was the sole director and officer of Acquisition Sub. At the time of
the Merger the size of the Board of Directors was increased to three members,
and Jeffrey M. Thompson, Philip Urso, and Howard L. Haronian were elected as
directors of the Company and Jeffrey M. Thompson was elected as the sole
director of Towerstream I, Inc., its wholly-owned subsidiary. Following their
election and effective subsequent to the Merger, the size of the Board of
Directors was increased to five members and Paul Koehler and William Bush were
appointed as independent directors. Mr. Haronian is also an independent member
of the Board of Directors, as defined by the NASDAQ Stock Market, although Mr.
Haronian, a founder of Towerstream, is cousin to Mr. Urso, who is also a
founder.
All directors hold office for a one-year term until the election and
qualification of their successors. Officers are elected by the Board of
Directors and serve at the discretion of the Board of Directors.
ACCOUNTING TREATMENT; CHANGE OF CONTROL. The Merger is being accounted for
as a "reverse merger," since the stockholders of Towerstream prior to the Merger
own a majority of the outstanding shares of our Common Stock immediately
following the Merger. Towerstream is deemed to be the acquiror in the reverse
merger. Consequently, the assets and liabilities and the historical operations
that will be reflected in the financial statements prior to the Merger will be
those of Towerstream and will be recorded at the historical cost basis of
Towerstream, and the consolidated financial statements after
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completion of the Merger will include the assets and liabilities of the Company
and Towerstream from the closing date of the Merger. Except as described in the
previous paragraphs, no arrangements or understandings exist among present or
former controlling stockholders with respect to the election of members of the
Company's Board of Directors and, to our knowledge, no other arrangements exist
that might result in a change of control of the Company. Further, as a result of
the issuance of the shares of the Company's Common Stock pursuant to the Merger,
a change in control of the Company occurred on the date of consummation of the
Merger. The Company will continue to be a "small business issuer," as defined
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
following the Merger.
DESCRIPTION OF OUR COMPANY
We are a provider of fixed wireless broadband services, using the standards
on which "WiMAX" (Wireless Interoperability of Microwave Access) platforms are
based, with operations in New York City, Boston, Chicago, Los Angeles, San
Francisco and Providence, Rhode Island.
Our predecessor business was owned by UGC-NV, a Nevada corporation formed
on June 2, 2005, which conducted business through a wholly-owned subsidiary
University Girls Calendar, Ltd., a Nova Scotia company, ("UGC Nova Scotia"). UGC
Nova Scotia was acquired on June 30, 2005 from Paul Pedersen, formerly our sole
officer and director. Until January 12, 2007 our business consisted of printing,
production, marketing and distribution. On January 3, 2007, we entered an
agreement for the sale of all of the stock of UGC Nova Scotia to Paul Pedersen.
After the Merger, the Company succeeded to the business of Towerstream as its
sole line of business.
DESCRIPTION OF OUR BUSINESS
All references to the "Company," "we," "our" and "us" for periods prior to
the closing of the Merger refer to Towerstream, and references to the "Company,"
"we," "our" and "us" for periods subsequent to the closing of the Merger refer
to UGC-DE and its subsidiaries.
COMPANY OVERVIEW
We are a provider of fixed wireless broadband services to businesses in key
metropolitan areas.
We utilize radio spectrum regulated by the Federal Communications
Commission, ("FCC") and unregulated radio spectrum in our activities. Utilizing
this spectrum, our activities include services ranging from business Internet
(Internet Service Provider - "ISP") provided to our existing customers for a
monthly fee, to preparation for mobile wireless "WiMAX" (Wireless
Interoperability of Microwave Access). Our activities involve radio
transmissions over the electromagnetic waves from one fixed point to another
fixed point and from one fixed point to multiple fixed points. In this way, we
completely eliminate the need for traditional phone company "last mile" copper
wire connections. We provide approximately 2,200 T-1 equivalents to our 700
currently active buildings utilizing only airborne transmissions, commonly
referred to as fixed wireless services. We expect our current operations to
further our long term objectives of becoming a leader in the growing fixed
wireless business and to establish a leading position in the emerging mobile
wireless market. Our plans include generating future sources of revenue from
mobile wireless that can be added to our networks, such as mobile Internet,
transporting mobile phone traffic from one transmit site to another or to the
public service telephone network, also known as "backhauling," and providing
cost effective extensions to networks that utilize fiber-optic cables.
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All of our business activities are in the early stages of development. We
currently offer fixed wireless services in New York City, Boston, Chicago, Los
Angeles, San Francisco, and Providence, Rhode Island. We currently plan to grow
our business to include up to 30 cities.
We offer communications services that provide access to information,
interactive media content, and applications via high speed Internet connections
that provide customers voice ("VoIP") capabilities. Features similar to
cellular, cable modem, digital subscriber line ("DSL") and wireless fidelity
("Wi-Fi") networks are available to our customers.
We generated revenues of nearly $5 million for the nine-month period ended
September 30, 2006. By owning our entire network, we were able to achieve gross
margins in excess of 70% and have been EBITDA positive since 2004.
Our services are designed to offer customers:
o FLEXIBILITY - Customers can select advanced Internet and telephone
service that suit their needs and budget. We offer feature-rich,
broadband wireless Internet access without the need for fiber,
telephone or cable lines. Smaller businesses can increase their
bandwidth at any time in 1.0 MB increments usually without additional
installation or equipment charges.
o SPEED - Installation typically occurs within one week of the order
and, with our rapid installation program, customers can be up and
running in 48 hours. Speeds for our services range from 1.5 Mbps per
second in our "starter" system for small businesses and up to 1,000
Mbps per second in our custom packages.
o PORTABILITY - Customers can access our services from anywhere in our
coverage area, up to 20 miles away.
o SIMPLICITY - We offer packages designed to provide small, medium and
large businesses with complete Internet and VoIP phone solutions. Our
current customer agreement is just one page long and easy to
understand. In August 2005, we announced a strategic alliance with
Vonage Holdings Corp., an Edison, New Jersey-based VoIP telephone
service provider. Our alliance with Vonage has enabled us to provide
our customers with an integrated solution to their telecommunications
and Internet connectivity needs.
o VALUE - We own our entire network, which enables us to price our
services lower than most of our competitors.
With the advent of entertainment and content delivery over the Internet,
VoIP and applications such as online social networking, the Internet is changing
social behavior. People are demanding fast broadband connectivity on an
increasingly mobile basis. We believe that our services meet this demand, which
accounts for our rapid subscriber growth rate.
We deploy our network using antennae installed on rooftops that send and
receive signals. Using microwave, or WiMAX, spectrum enables us to provide
wireless Internet connectivity and enables applications such as VoIP phone
service at prices far below that of our competitors by reducing our costs in
deploying our network.
As compared to cellular, cable and DSL networks that generally rely on
infrastructure originally designed for non-broadband purposes, our network was
designed specifically to support wireless broadband services. We have created a
new model for delivering reliable bandwidth to the commercial
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market. By leveraging second-generation multipoint fixed wireless technology, we
have built an expandable network that is up to 99.999% reliable.
We were founded by Philip Urso and Jeffrey M. Thompson in December 1999. We
connected to our first customer in April 2000. As of September 30, 2006, we
offered our services in 7 markets in the United States, including New York City,
Los Angeles, Chicago, San Francisco and the greater Boston, Providence and
Newport areas. As of September 30, 2006, we covered approximately 700 buildings
enabled with Towerstream services that all have paying customers. We believe our
success to date is in part a result of the substantial operating experience of
our senior management team, led by our Chairman, Philip Urso, our President and
Chief Executive Officer, Jeffrey M. Thompson and our Chief Financial Officer,
George E. Kilguss, III.
Our principal executive office is located at 55 Hammarlund Way, Middletown,
Rhode Island 02842 and our telephone number is (401) 848-5848.
INDUSTRY
We believe the U.S. broadband market offers significant long-term growth
potential. According to "IDC," in 2005, an estimated 38.1 million households, or
33% of all U.S. households, subscribed to a broadband service. However, an
estimated 36.5 million households, or 32% of all U.S. households, accessed the
Internet via a dial-up or other narrowband connection, while an estimated 40.7
million households, or 35% of all U.S. households, had no Internet connectivity
at all. Of the 38.1 million households with broadband connectivity in 2005,
approximately 55% used a cable modem, 42% used DSL and 3% used other services
such as wireless broadband or fiber networks.
According to IDC, the U.S. broadband market is expected to grow at an 18.4%
compound annual growth rate between 2006 and 2009. Broadband penetration is
expected to exceed 52% of U.S. households by 2009 as dial-up subscribers migrate
to broadband connectivity and people with no Internet access become broadband
subscribers. The worldwide broadband market is expected to experience similar
growth trends, with IDC forecasting a 17% compound annual growth rate from 126.7
million households with broadband Internet connectivity at the end of 2004 to
273.4 million by the end of 2009.
In addition to growing broadband demand, the rapid growth of mobile email
products, as well as sales of laptop and ultra-portable computers, leads us to
believe that subscribers will increasingly favor Internet access that provides
for portability or mobility. According to IDC, U.S. laptop sales are expected to
increase by 21% annually, from 20.5 million in 2005 to 43.4 million in 2009, and
U.S. smart handheld device shipments are expected to increase by approximately
38% annually, from 7.3 million in 2005 to 26.4 million in 2009. As purchases of
laptops and other portable data devices continue to accelerate, we believe
consumers increasingly will look for more efficient and effective ways to access
the Internet on these devices. According to IDC, spending on wireless data
services is expected to increase from $8.8 billion in 2005 to $27.7 billion in
2009, representing a 33% compound annual growth rate.
As wireless broadband becomes widely available, we believe demand for a
broad range of mobile applications will dramatically increase, including demand
for email, web browsing, VoIP telephony, streaming audio and video, video
conferencing, gaming, e-commerce, music and video downloading and file
transfers. For instance, in its VoIP Forecast Model dated August 2005, Jupiter
Research estimates that, in 2005, approximately 3 million U.S. households used a
VoIP-based broadband telephony service, while 110.5 million used a traditional
switched access telephony service, according to the Federal Communications
Commission ("FCC"), Statistics of Communications Common Carriers Report. The
U.S. VoIP-based broadband telephony market is expected to grow to 16.0 million
households by 2009, according to Jupiter Research estimates, representing a 52%
compound annual growth rate. The worldwide VoIP telephony market is expected to
experience a similar growth trend, with iSuppli
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Corporation forecasting in its fourth quarter 2005 Broadband and Digital Home
Topical Report growth in VoIP subscribers from 14.9 million subscribers in 2005
to 148.8 million subscribers in 2009, a 78% compound annual growth rate.
All references in this Current Report on Form 8-K to data or information
provided by IDC were published in the following reports: October 2005 U.S.
Broadband Services 2005-2009 Forecast and Internet Commerce Market Model; March
2005 Worldwide Broadband Services 2005-2009 Forecast; October 2005 Worldwide
Portable PC 2005-2009 Forecast by Screen Size; November 2005 Worldwide Smart
Handheld Device 2005-2009 Forecast and Analysis and IDC's 2005 Telecom Black
Book, version 2.
COMPETITIVE STRENGTHS
We believe the following competitive strengths enable us to meet the demand
for reliable, fixed wireless broadband services:
o RELIABILITY - Our model leverages second-generation multipoint fixed
wireless technology, enabling us to build an expandable network that
delivers broadband services with up to 99.999% reliability.
o FAST SERVICE AND INSTALLATION - Our Rapid Installation Program allows
customers to be up and running in 48 hours. In addition, we have
developed a customer service system to ensure that customers'
questions are quickly answered by a member of our team. We offer an
industry-leading Service Level Agreement ("SLA") to ensure customers
receive the highest availability, lowest latency and packet loss on
both our network and the last mile.
o EFFICIENT ECONOMIC MODEL - Our economic model is characterized by low
fixed capital and operating expenditures relative to other wireless
and wireline broadband service providers. We own our entire network,
dispensing with the costs involved in using lines owned by telephone
or cable companies. Our system is expandable and covers an area up to
several miles away from each tower, which will enable us to realize
incremental savings in our build-out costs as our subscriber base
grows.
o WORLD-CLASS MANAGEMENT TEAM - Our executive management has over 60
years of combined experience in the communications industry with
companies such as Bell Atlantic, New England Telephone and Stratos
Global Corporation.
BUSINESS STRATEGY
We intend to continue to grow our business by pursuing the following
strategies:
o Deploy our service broadly and rapidly increase our subscriber base.
We intend to deploy our advanced wireless broadband network broadly
both in terms of geography and categories of subscribers. We intend to
increase the number of markets we serve, taking advantage of our
staged roll-out model to deploy our services throughout major United
States markets. We also plan to serve a range of commercial
subscribers, from small businesses to large enterprises.
o Offer superior value to our customers. We intend to leverage the costs
savings inherent in our model by offering our services and enhanced
reliability and customer support at prices currently well below those
of our competitors, making us the provider of choice for many
businesses.
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o Offer premium differentiated services. We intend to generate
incremental revenues, leverage our cost structure and improve
subscriber retention by offering a variety of premium services.
SERVICES -- DOMESTIC WIRELESS BROADBAND
We offer businesses broadband connectivity featuring a compelling
combination of integrated services, simplicity of installation and use and speed
at value prices. We offer commercial subscribers a choice of service plans
designed to accommodate the varying needs of different size enterprises. In
addition, we offer custom packages to accommodate subscribers with special
needs.
Our standard service plans are:
o Small Businesses Our T-1 equivalent is 1.5 Mbps (1,500,000 bits per
second), duplex, meaning that, (unlike most cable and DSL) there is
full throughput for both uploads and downloads. Also unlike most cable
and DSL offerings, we guarantee the performance of our service with a
SLA that guarantees uptime, latency and throughput.
Available in Los Angeles, Chicago, New York and San Francisco, our "5 for
5" plan currently provides 5 Mbps for $500 per month. We offer a full SLA
guarantee of 1.5 Mbps, just like a telephone company T-1 line. In addition,
we add 3.5 Mbps on a best efforts basis, for a total bandwidth of 5 Mbps,
the equivalent of more than 3 T-1 lines.
o Medium-Sized Businesses We offer 10 and 20 Mbps connections, which are
also guaranteed with a SLA that guarantees uptime, latency and
throughput.
o Large Enterprises For large enterprises, we offer value prices on
links from 100 to 1000 Mbps. We also provide a SLA that guarantees
uptime, latency and throughput.
COMPETITIVE ADVANTAGES
Our services enjoy the following competitive advantages:
o Reliability We use proven microwave technology and offer a SLA. We
also connect the customer to our Wireless Ring in the Sky, which has
no single point of failure. In addition, the ring is fed by multiple
Tier 1 Internet Providers located at opposite ends of your city and
connected to our national ring, fed by multiple Tier 1 carriers. We
believe that we are the only wireless broadband provider that offers
True Separate Egress for true redundancy. With DSL and cable
offerings, all wires are rendered dead by one backhoe swipe or switch
failure. Our Wireless Ring in the Sky is backhoe-proof, weather-proof
and outage-proof.
o Price--DS3 and T3 are arbitrary Telco denominations representing
throughput of 45 Mbps. We currently offer 100 Mbps for $5,000 per
month, including Internet access--with no other charges (such as a
local loop charge). 1,000 Mbps prices are available upon request. We
offer the throughput of more than 2 DS3s for less than the price of 1
DS3. We do not pass along a local loop charge to our customers,
because we do not have to buy one from the telephone company.
o Quick Installation--Our antennae are typically located at the highest
points above a city, and can connect to business locations up to 20
miles away. We can generally build this type of link in two weeks.
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MARKETS SERVED AND DEPLOYMENT
We determine which markets to enter by assessing a number of criteria in
four broad categories. First, we evaluate our ability to deploy our service in a
given market, taking into consideration our spectrum position, the availability
of towers and zoning constraints. Second, we assess the market by evaluating the
number of competitors, existing price points, demographic characteristics and
distribution channels. Third, we perform an analysis to evaluate the economic
potential of the market, focusing on our forecasts of revenue growth
opportunities, capital requirements and projected cash flow. Finally, we look at
market clustering opportunities and other cost efficiencies that might be
realized.
Based on this approach, as of September 30, 2006, we offered wireless
broadband connectivity in six markets representing approximately 42% of small
and medium business (5 to 249 employees) in the top 20 metropolitan statistical
areas.
TECHNOLOGY
We have developed various proprietary technologies for use in our business.
We utilize custom designed provisioning and client relationship software to
close sales and assure customer satisfaction and service levels during the
critical post installation period and throughout the life of our contracts. In
addition, our technology permits us to constantly monitor and maintain network
performance through real-time online monitoring, which is also available for use
by our customers. We do not rely on patent or trademarks for our business.
SALES AND MARKETING
o Direct. We have hired salespeople to sell our services directly to
subscribers. As of September 30, 2006, we employed approximately 18
salespeople. We generally compensate these employees on a salary plus
commission basis.
o Indirect. Our indirect sales channels include a variety of authorized
representatives, such as integrators, resellers, and online operators.
Authorized representatives assist in developing awareness of and
demand for our service by promoting our services and brand as part of
their own advertising and direct marketing campaigns.
o Wholesale distribution. As our markets mature, we expect our use of
available marketing channels will shift toward our lower-cost
channels. Over time, we expect our direct sales force will become
increasingly focused on new market development.
COMPETITION
The market for broadband services is highly competitive, and includes
companies that offer a variety of services using a number of distinctly
different technological platforms, such as cable networks, DSL, third-generation
cellular, satellite, wireless Internet service and other emerging technologies.
We compete with these companies on the basis of the portability, ease of use,
speed and price of our respective services.
Principal competitors include:
Cable Modem and DSL Services
We compete with companies that provide Internet connectivity through cable
modems or DSL. Principal competitors include cable companies, such as Comcast,
and incumbent telephone companies, such as AT&T or Verizon. Both the cable and
telephone companies deploy their services over wired
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networks initially designed for voice and one-way data transmission that have
subsequently been upgraded to provide for additional services.
Cellular and PCS Services
Cellular and PCS (personal communications service) carriers are seeking to
expand their capacity to provide data and voice services that are superior to
ours. These providers have substantially broader geographic coverage than we
have and, for the foreseeable future, than we will have. If one or more of these
providers can display technologies that compete effectively with our services,
the mobility and coverage offered by these carriers may provide even greater
competition than we currently face. Moreover, more advanced cellular and PCS
technologies, such as 3G mobile technologies currently offer broadband service
with packet data transfer speeds of up to 2 Mbps for fixed applications, and
slower speeds for mobile applications. We believe mobile operators, including
Cingular, Sprint Nextel, T-Mobile, Verizon and others, will roll out 3G cellular
services across most major U.S. markets by the end of 2007. We also expect that
3G technology will be improved to increase connectivity speeds to make it more
suitable for a range of advanced applications.
Satellite
Satellite providers like Wild Blue and Hughes Network Services offer
broadband data services that address a niche market, mainly less densely
populated areas that are unserved or underserved by competing service providers.
Although satellite offers service to a large geographic area, latency caused by
the time it takes for the signal to travel to and from the satellite may
challenge the ability to provide some services, such as VoIP, and reduces the
size of the addressable market.
Other
We believe other emerging technologies may also seek to enter the broadband
services market. For example, we are aware that several power generation and
distribution companies intend to provide broadband Internet services over
existing power lines.
We also face competition from other wireless broadband service providers
that use licensed spectrum. Potential competitors using licensed spectrum may
include established providers such as Sprint Nextel, which we believe is the
largest holder of spectrum in the 2.495 to 2.690 GHz band in the United States.
In addition to these commercial operators, many local governments,
universities and other governmental or quasi-governmental entities are providing
or subsidizing free Wi-Fi networks.
Moreover, if our technology is successful and garners widespread support,
we expect these and other competitors to adopt or modify our technology or
develop a technology similar to ours.
REGULATORY MATTERS
Overview
Wireless broadband services are subject to regulation by the FCC. At the
federal level, the FCC has jurisdiction over the use of the electromagnetic
spectrum (i.e., wireless transmissions) and has exclusive jurisdiction over all
interstate telecommunications services (those that originate in one state and
terminate in another state). State regulatory commissions have jurisdiction over
intrastate communications. Municipalities may regulate limited aspects of our
business by, for example, imposing zoning requirements and requiring
installation permits. The regulations of these agencies are continually
10
evolving through rulemaking and other administrative and judicial proceedings,
and there is no guarantee that in the future regulatory changes will not have an
adverse effect on our business. A number of legislative and regulatory proposals
under consideration by federal, state and local governmental entities may lead
to the repeal, modification or introduction of laws or regulations that could
affect our business. Significant areas of existing and potential regulation for
our business include broadband Internet access, telecommunications and spectrum
regulation and Internet taxation.
Telecommunications Regulation
The FCC has classified Internet access services generally as interstate
"information services" rather than as "telecommunications services" regulated
under Title II of the Communications Act of 1934, as amended (the "Communication
Act"). Accordingly, most regulations that apply to telephone companies and other
common carriers currently do not apply to our wireless broadband Internet access
service. For example, we are not currently required to contribute a percentage
of gross revenues from our Internet access services to universal service funds,
or USF, used to support local telephone service and advanced telecommunications
services for schools, libraries and rural health care facilities.
Internet access providers also are not required to file tariffs with the
FCC, setting forth the rates, terms, and conditions of their service offerings.
The FCC, however, is currently considering whether to impose various consumer
protection obligations, similar to Title II obligations, on broadband Internet
access providers, including DSL, cable modem and wireless broadband Internet
access providers. These requirements may include obligations related to
truth-in-billing, slamming, discontinuing service, customer proprietary network
information and federal USF mechanisms. Internet access providers are currently
subject to generally applicable state consumer protection laws enforced by state
Attorneys General and general Federal Trade Commission, or FTC, consumer
protection rules.
The FCC has not yet classified interconnected VoIP services as information
services or telecommunications services under the Communications Act. In
November 2004, the FCC determined that, regardless of their regulatory
classification, certain interconnected VoIP services qualify as interstate
services with respect to economic regulation. The FCC preempted state
regulations that address such issues as entry certification, tariffing, and
Enhanced 911 requirements, as applied to certain interconnected VoIP services.
This ruling is being appealed.
The FCC is conducting a comprehensive proceeding to address all types of
IP-enabled services, including interconnected VoIP service, and to consider what
regulations, if any, should be applied to such services, as use of broadband
services becomes more widespread. In June 2005, the FCC adopted the first set of
regulations in this comprehensive IP-enabled proceeding, imposing Enhanced
911-related requirements on interconnected VoIP service providers as a condition
of offering such service to consumers. The FCC defined "interconnected VoIP
service" as voice service that: (i) enables real-time, two-way voice
communications; (ii) requires a broadband connection from the user's location;
(iii) requires IP-compatible customer premises equipment ("CPE"); and (iv)
permits users generally to receive calls that originate on and terminate to the
public switched telephone network, or PSTN. Effective November 28, 2005, all
interconnected VoIP providers are required to transmit, via the wireline
Enhanced 911 network, all 911 calls, as well as a call-back number and the
caller's registered location for each call, to the appropriate provided that the
public safety answering point, or PSAP, is capable of receiving and processing
that information. In addition, all interconnected VoIP providers must have a
process to obtain a subscriber's registered location prior to activating
service, and must allow their subscribers to update their registered location
immediately if the subscriber moves the service to a different location.
Interconnected VoIP providers are also required to prominently and in plain
English advise subscribers of the manner in which dialing 911 using VoIP service
is different from dialing 911 service using traditional telephone service, and
to provide warning labels with VoIP CPE.
11
The FCC is considering additional regulations, including: (i) whether to
require interconnected VoIP providers to develop future capabilities to
automatically identify a subscriber's physical location without assistance from
the subscriber; (ii) what intercarrier compensation regime should apply to
interconnected VoIP traffic over the PSTN; (iii) whether, and to what extent,
federal USF obligations should be imposed upon VoIP providers.
On August 5, 2005, the FCC adopted an Order finding that both
facilities-based broadband Internet access providers and interconnected VoIP
providers are subject to the Communications Assistance for Law Enforcement Act,
or CALEA, which requires service providers covered by that statute to build
certain law enforcement surveillance assistance capabilities into their
communications networks. The FCC required facilities-based broadband Internet
access providers and interconnected VoIP providers to comply with CALEA
requirements by May 14, 2007. This ruling is currently being appealed.
On May 3, 2006, the FCC adopted an additional Order addressing the CALEA
compliance obligations of these providers. In that order the FCC: (i) affirmed
the May 14, 2007 compliance deadline; (ii) indicated compliance standards are to
be developed by the industry within the telecommunications standards-setting
bodies working together with law enforcement; (iii) permitted the use of certain
third parties to satisfy CALEA compliance obligations; (iv) restricted the
availability of compliance extensions; (v) concluded that facilities-based
broadband Internet access providers and interconnected VoIP providers are
responsible for any CALEA development and implementation costs; (vi) declared
that the FCC may pursue enforcement action, in addition to remedies available
through the courts, against any non-compliant provider; and (vii) adopted
interim progress report filing requirements.
Broadband Internet-related and IP-services regulatory policies are
continuing to develop, and it is possible that our broadband Internet access and
VoIP services could be subject to additional regulations in the future. The
extent of the regulations that will ultimately be applicable to these services
and the impact of such regulations on the ability of providers to compete are
currently unknown.
Spectrum Regulation
The FCC routinely reviews its spectrum policies and may change its position
on spectrum allocations from time to time. On July 29, 2004, the FCC issued
rules revising the band plan for base radio systems, or BRS, and educational
broadband services, or EBS, and establishing more flexible technical and service
rules to facilitate wireless broadband operations in the 2.495 to 2.690 GHz
band. The FCC adopted new rules that (i) expand the permitted uses of EBS and
BRS spectrum so as to facilitate the provision of high-speed data and voice
services accessible to mobile and fixed users on channels that previously were
used primarily for one-way video delivery to fixed locations; and (ii) change
some of the frequencies on which BRS and EBS operations are authorized to enable
more efficient operations. These new rules streamlined licensing and regulatory
burdens associated with the prior service rules and created a "PCS-like"
framework for geographic licensing and interference protection. Under the new
rules, existing holders of BRS and EBS licenses and leases generally have
exclusive rights over use of their assigned frequencies to provide commercial
wireless broadband services to residences, businesses, educational and
governmental entities within their geographic markets. These rules also require
BRS licensees to bear their own expenses in transitioning to the new band plan
and, if they are seeking to initiate a transition, to pay the costs of
transitioning EBS licensees to the new band plan. The transition rules also
provide a mechanism for reimbursement of transaction costs by other operators in
the market. Additionally, the FCC expanded the scope of its spectrum leasing
rules and policies to allow BRS and EBS licensees to enter into flexible,
long-term spectrum leases.
On April 21, 2006, the FCC issued an Order adopting comprehensive rules for
relocating incumbent BRS operations in the 2.150 to 2.162 GHz band. These rules
will further facilitate the transition to the new 2.495 to 2.690 GHz band plan.
12
On April 27, 2006, the FCC released an Order revising and clarifying its
BRS/ EBS rules. Significantly, the FCC generally reaffirmed the flexible
technical and operational rules upon which our systems are designed and
operating. The FCC clarified the process of transitioning from the old spectrum
plan to the new spectrum plan, but reduced the transition area from large "major
economic areas," to smaller, more manageable "basic trading areas." Proponents
seeking to initiate a transition to the new band plan will be given a 30-month
timeframe within which to notify the FCC of their intent to initiate a
transition, followed by a 3-month planning period and an 18-month period
transition completion period. In markets where no proponent initiates a
transition, licensees will be permitted to self-transition to the new band plan.
The FCC adopted a procedure whereby the proponent will be reimbursed for the
value it adds to a market through reimbursement by other commercial operators in
a market, on a pro-rata basis, after the transition is completed and the FCC has
been notified.
The FCC also clarified the procedure by which BRS and EBS licensees must
demonstrate substantial service, and required them to demonstrate substantial
service by May 1, 2011. Substantial service showings demonstrate to the FCC that
a licensee is not warehousing spectrum, but rather is using the spectrum to
provide actual service to subscribers. If a BRS or EBS licensee fails to
demonstrate substantial service by May 1, 2011, its license may be cancelled and
made available for re-licensing.
The FCC reaffirmed its decision to permit mobile satellite service
providers to operate in the 2.496 to 2.5 GHz band on a shared, co-primary basis
with BRS licensees. It also concluded that spectrum sharing in the 2.496 to 2.5
GHz band between BRS licensees and a limited number of incumbent licensees, such
as broadcast auxiliary service, fixed microwave, and public safety licensees, is
feasible. It therefore declined to require the relocation of those incumbent
licensees in the 2.496 to 2.5 GHz band. Additionally, the FCC reaffirmed its
conclusion that BRS licensees can share the 2.496 to 2.5 GHz band with
industrial, scientific, and medical, or ISM, devices because ISM devices
typically operate in a controlled environment and use frequencies closer to 2.45
GHz. The FCC also reaffirmed its decision to permit low-power, unlicensed
devices to operate in the 2.655 to 2.69 GHz band, but emphasized that unlicensed
devices in the band may not cause harmful interference to licensed BRS
operations. Previously, low-power, unlicensed devices were permitted to operate
in the 2.5 to 2.655 GHz band, but not in the 2.655 to 2.69 GHz band.
Finally, the FCC reaffirmed the application of its spectrum leasing rules
and policies to BRS and EBS, and ruled that new EBS spectrum leases may provide
for a maximum term (including initial and renewal terms) of 30 years. The FCC
further required that new EBS spectrum leases with terms of 15 years or longer
must allow the EBS licensee to review its educational use requirements every
five years, beginning at the fifteenth year of the lease.
Although we believe that the FCC's BRS/ EBS rules will enable us to pursue
our long-term business strategy, these rules may materially and adversely affect
our business. In addition, these rules may be amended in a manner that
materially and adversely affects our business.
Internet Taxation
The Internet Tax Non-Discrimination Act, which was passed by Congress in
November 2004 and signed into law in December 2004, renewed and extended until
November 2007 a moratorium on taxes on Internet access and multiple,
discriminatory taxes on electronic commerce. This moratorium had previously
expired in November 2003, and as with the preceding Internet Tax Freedom Act,
"grandfathered" states that taxed Internet access prior to October 1998 to allow
them to continue to do so. Certain states have enacted various taxes on Internet
access or electronic commerce, and selected states' taxes are being contested on
a variety of bases. However, state tax laws may not be successfully contested
and future state and federal laws imposing taxes or other regulations on
Internet access and electronic
13
commerce may arise, any of which could increase the cost of providing Internet
services, which could, in turn, materially adversely affect our business.
EMPLOYEES
As of January 12, 2007 we had approximately 40 employees, approximately 12
of whom were administrative, 10 of whom were technicians and engineers and
approximately 18 of whom were in sales. We believe our employee relations are
good.
PROPERTY
Our corporate headquarters are located in Middleton, Rhode Island and
occupy a total of approximately 4,000 square feet. Our lease term expires in
2008.
We believe our office space is adequate for our immediate needs. Additional
space may be required as we expand our activities. We do not foresee any
significant difficulties in obtaining any required additional facilities.
LEGAL PROCEEDINGS
There are no legal proceedings pending, or to our knowledge threatened
against us.
FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties, many of which are beyond our control. Our
actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth in this report. Important factors that may cause actual results to differ
from projections include, but are not limited to, for example:
o adverse economic conditions;
o our inability to raise additional capital to finance our activities;
o unexpected costs, lower than expected sales and revenues, and
operating defects;
o adverse results of any legal proceedings;
o inability to attract or retain qualified senior management personnel,
including sales and marketing, and technical personnel; and
o pending or future legislation and regulation of our industry;
o other specific risks that may be referred to in this report, including
those under "Risk Factors."
All statements, other than statements of historical facts, included in this
report regarding our strategy, future operations, financial position, estimated
revenue or losses, projected costs, prospects, current expectations, forecasts,
and plans and objectives of management are forward-looking statements. When used
in this report, the words "will," "may," "believe," "anticipate," "intend,"
"estimate," "expect," "should," "project," "plan" and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain such identifying words. All forward-looking
14
statements speak only as of the date of this report. We do not undertake any
obligation to update any forward-looking statements or other information
contained herein, except as required by federal securities laws. You should not
place undue reliance on these forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in or suggested by the
forward-looking statements in this report are reasonable, we cannot assure you
that these plans, intentions or expectations will be achieved. We have disclosed
important factors that could cause our actual results to differ materially from
our expectations under "Risk Factors" and elsewhere in this report. These
cautionary statements qualify all forward-looking statements attributable to us
or persons acting on our behalf.
Information regarding market and industry statistics contained in this
report is included based on information available to us that we believe is
accurate. It is generally based on academic and other publications that are not
produced for purposes of securities offerings or economic analysis. We have not
reviewed or included data from all sources, and we cannot assure you of the
accuracy or completeness of the data included in this report. Forecasts and
other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates
of future market size, revenue and market acceptance of products and services.
We have no obligation to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements. See "Risk Factors" for a more detailed discussion of uncertainties
and risks that may have an impact on future results.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
All references to the "Company," "we," "our" and "us" for periods prior to
the closing of the Merger refer to Towerstream, and references to the "Company,"
"we," "our" and "us" for periods subsequent to the closing of the Merger refer
to UGC-DE and its subsidiaries.
The following discussion highlights the principal factors that have
affected our financial condition and results of operations as well as our
liquidity and capital resources for the periods described. This discussion
contains forward-looking statements. Please see "Special Cautionary Statement
Concerning Forward-Looking Statements" and "Risk Factors" for a discussion of
the uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.
We were originally incorporated in Nevada under the name "University Girls
Calendar, Ltd." on June 2, 2005. Our business was printing, production,
marketing and distribution. On January 4, 2007, we abandoned this enterprise. On
January 12, 2007, we acquired Towerstream pursuant to the terms of the Merger
Agreement. This transaction was accounted for as a reverse merger
(recapitalization) with Towerstream deemed to be the accounting acquirer, and us
as the legal acquirer. Accordingly, the historical financial information
presented in future financial statements will be that of Towerstream as adjusted
to give effect to any difference in the par value of our and Towerstream's stock
with an offset to capital in excess of par value. The basis of the assets,
liabilities and stockholders' equity of Towerstream, the accounting acquirer,
have been carried over in the recapitalization. Upon the closing of this Merger,
we became a provider of fixed wireless broadband services, using the standards
on which "WiMAX" platforms are based, with operations in New York City, Boston,
Chicago, Los Angeles, San Francisco and Providence, Rhode Island.
Towerstream was incorporated in the State of Delaware on December 17, 1999.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004.
Revenues. During the year ended December 31, 2005, we had revenues of
$5,397,510 as compared to revenues of $4,602,109 during the year ended December
31, 2004, an increase of
15
approximately 17%. This increase is a result of both an increase in the number
of subscribers on our network and an increase in the average bandwidth usage per
subscriber.
Operating Loss. Operating expenses, which consists of cost of revenues,
customer support services, selling expense, depreciation and general and
administrative costs, totaled $6,127,770 for the year ended December 31, 2005 as
compared to $5,127,871 for the year ended December 31, 2004. Operating loss was
$730,260 for the year ended December 31, 2005 as compared to $525,762 for the
year ended December 31, 2004
Cost of revenues. Cost of revenues, which consist of tower rental charges,
bandwidth purchases, and related engineering costs and overhead (exclusive of
depreciation) totaled $1,509,505 for the year ended December 31, 2005 compared
with $1,026,068 in the prior fiscal year, resulting in gross margins (before
depreciation) of 72.0% and 77.7% respectively. The decreased margin is a result
adding additional capacity to existing markets and the opening of our Los
Angeles market in December 2004 and the opening of our San Francisco market in
October of 2005.
Selling, General, and Administrative Expenses. Selling, General, and
Administrative Expenses which consist of commissions, salaries, advertising, and
overhead expenses, totaled $3,265,352 for the year ended December 31, 2005 as
compared to $2,980,400 for the year ended December 31, 2004, an increase of
approximately 10%. This increase is primarily attributable to expanding sales,
administrative, and engineering activities which are in turn reflected in our
increased sales. Our management believes that our expenses will continue to
increase as sales continue to grow and additional staff is added to support our
growth initiatives.
Customer Support Services. Customer support services totaled $419,356 for
the year ended December 31, 2005, as compared to $378,767 for the year ended
December 31, 2004, an increase of approximately 11%. This increase is primarily
attributable to the increase of personnel and systems required to deliver
customer care services.
Depreciation Expense. Depreciation expense totaled $933,557 for the year
ended December 31, 2005, as compared to $742,636 for the year ended December 31,
2004. The increase is directly related to the increased purchases of capital
equipment.
Net Loss. We had a net loss of $947,205 for the year ended December 31,
2005 as compared to $699,664 for the year ended December 31, 2004. The increase
is attributable to increases in depreciation and operating expenses out pacing
revenue growth. Our management believes that net losses will continue as we make
required additions to sales, engineering, administration, and our network in
order to fuel expected revenue and subscriber growth.
Net Cash Provided by Operating Activities. We generated positive cash flow
from operations for the years ended December 31, 2005 and 2004. Specifically,
net cash derived from operating activities totaled $479,285 for the year ended
December 31, 2005 as compared to $284,386 for the year ended December 31, 2004.
The increase was primarily due to an increase in the amount of deferred
executive compensation and extended credit terms from trade payables.
Net Cash Used in Investing Activities. Net cash used in investing
activities totaled $1,378,027 for the year ended December 31, 2005 compared to
$1,023,398 for the year ended December 31, 2004. The cash was used for the
purchase of network and customer premise equipment and related capitalized
costs. The primary reason for the increased investment in 2005 was additional
subscriber installations, increased network capacity and new market expansion.
16
Net Cash Provided by Financing Activities. Net cash provided by financing
activities totaled $1,101,792 for the year ended December 31, 2005 as compared
to $592,273 for the year ended December 31, 2004. The reason for this increase
was that we raised additional equity and debt of 350,000 in 2006 versus 2005 in
order to fund our operations.
NINE-MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE-MONTHS ENDED SEPTEMBER
30, 2005.
Revenues. During the nine months ended September 30, 2006, we had revenues
of $4,732,678 as compared to revenues of $3,995,550 during the nine months ended
September 30, 2005, an increase of approximately 18%. This increase is primarily
attributable to an increase in the number of subscribers on our network
Operating Loss. Operating expenses, which consists of cost of revenues,
customer support services, selling expense, depreciation and general and
administrative costs, totaled $4,914,062 for the nine months ended September 30,
2006 as compared to $4,417,311 for the nine month period ended September 30,
2005. Operating loss was $181,384 for the nine months ended September 30, 2006
as compared to a loss of $421,761 for the nine months ended September 30, 2005.
Cost of revenues. Cost of revenues, which consist of tower rental charges,
bandwidth purchases, and related engineering costs and overhead (exclusive of
depreciation) totaled $1,246,482 for the nine months ended September 30, 2006
compared with $1,080,937 in the prior fiscal period, resulting in gross margins
(before depreciation) of 73.6% and 72.9% respectively. The increased margin is a
result of new subscribers coming on to the network utilizing existing fixed cost
capacity.
Selling, General, and Administrative Expenses. Selling, General, and
Administrative Expenses which consist of commissions, salaries, advertising, and
overhead expenses, totaled $2,384,145 for the nine months ended September 30,
2006 as compared to $2,334,246 for the nine months ended September 30, 2005.
While we have been able to maintain our levels of overhead year over year,
management believes that our expenses will increase in the future as additional
staff is added to support sales growth initiatives.
Customer support services. Customer support services totaled $406,643 for
the nine months ended September 30, 2006, as compared to $315,219 for the nine
months ended September 30, 2005, an increase of approximately 29%. This increase
is primarily attributable to the increase of personnel and systems required to
deliver customer care services as our subscriber base increases.
Depreciation Expense. Depreciation expense totaled $876,792 for the year
ended December 31, 2005, as compared to $686,908 for the year ended December 31,
2004. The increase is directly related to the increased purchases of capital
equipment.
Net Loss. We had a net loss of $236,898 for the nine months ended September
30, 2006 as compared to $578,982 for the nine months ended September 30, 2005.
The decrease in net loss is attributable to the increase in sales. Management
believes that net losses will continue as we make required additions to sales,
engineering, administration and our network in order to fuel expected revenue
and subscriber growth.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities totaled $703,016 for the nine months ended September 30, 2006 as
compared to $576,364 for the nine months
17
ended September 30, 2005. The year over year improvement was primarily due to
improved operating results derived from increases in revenues.
Net Cash Used in Investing Activities. Net cash used in investing
activities was $734,560 for the nine months ended September 30, 2006 as compared
to $994,575 for the nine months ended September 30, 2005. This decrease was the
result of taking advantage of capital expended on the network's capacity and
coverage areas in previous years. As a result, we spent less capital on our
network of approximately $252,000 in the nine month period ended September 30,
2006 than in the previous period.
Net Cash Provided By Financing Activities. Net cash provided by financing
activities was $234,135 for the nine months ended September 30, 2006 as compared
to $914,705 for the nine months ended September 30, 2005. As a result of the
improved operating results, we required less funding from outside sources to
meet our working capital needs.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, we had negative working capital of $2,323,230
which was due primarily to the short term nature of our debt. Approximately $1.7
million of our debt obligation is either on a demand basis or had maturities of
less than one year.
As of September 30, 2006, we had negative working capital position of
$2,247,855. As in previous periods, this negative position is primarily a result
of approximately, $1.8 million of our debt obligations that is either on a
demand basis or had maturities of less than one year. Nevertheless, management
believes that Towerstream's current operating activities together with the money
raised from the Private Placement in January 2007 will enable us to meet
anticipated cash requirements for fiscal 2007.
As of September 30, 2006 and December 31, 2005, we had cash and cash
equivalents of $405,640 and $203,050, respectively. We have historically met our
liquidity requirements from a variety of sources, including internally generated
cash and short-term borrowings from both related parties and financial
institutions.
Loans From Related Parties. As of September 30, 2006, we owed a total of
approximately $2,150,000 to five of our stockholders for past borrowings and
services. On October 1, 2006 we repaid one loan in the amount of $250,000. The
loans have been short term in nature and have varying interest rates, repayment
terms, and conversion features into our Common Stock.
During January 2007, our related party lenders sold approximately $1.7
million of debt to unrelated third-parties. The transferred notes which total
$1,691,636 bear interest at 10% payable monthly and, following the Merger were
automatically converted into our Common Stock at $1.50 per share in accordance
with the amended terms of the notes.
One note to a related party in the amount of $250,000 not transferred bore
interest at 10% per annum and, following the Merger, was converted into our
Common Stock at $1.43 per share, in accordance with its original terms of
issuance.
Private Placement. On January 12, 2007, our newly formed acquisition
subsidiary merged with and into Towerstream. In connection with the Merger, all
but 1,900,000 shares of our outstanding Common Stock were cancelled. Also, in
connection with the Merger, we issued 15,000,000 shares of our Common Stock in
exchange for all the outstanding common stock of Towerstream. As a result of
these transactions, the former owners of Towerstream became the controlling
stockholders of our company and we changed our name to "Towerstream
Corporation." Accordingly, the Merger is a reverse merger that has been
accounted for as a recapitalization of Towerstream. Concurrent with the Merger,
we sold
18
5,110,056 shares of our Common Stock for gross proceeds of $11,497,625 (at $2.25
per share) through the Private Placement. In addition, these investors received
five-year warrants to purchase 2,555,028 shares of our Common Stock at an
exercise price of $4.50 per share.
In connection with the Private Placement, we incurred placement agent fees
totaling approximately $446,400, and issued five-year warrants to purchase
140,917 shares of our Common Stock at an exercise price of $4.50 per share to
the placement agents. In addition, we incurred other professional fees and
expenses totaling approximately $522,300 in connection with the Merger.
Senior Debenture. In conjunction with the Merger, we sold $3,500,000 of
senior convertible debentures (the "Debentures"). The Debentures require
quarterly interest-only payments of 8% per annum and mature on December 31,
2009. The Debentures are convertible into shares of our Common Stock at a
conversion price of $2.75 per share subject to certain limitations as defined
and to certain registration rights. In addition, holders of the Debentures
received five-year warrants to purchase 636,364 shares of our Common Stock at an
exercise price of $4.00 per share and five-years warrants to purchase 636,364
shares of our Common Stock at an exercise price of $6.00 per share.
In connection with the issuance of the Debentures, we incurred placement
agent fees totaling approximately $140,000, and issued five-year warrants to
purchase 63,634 shares of our Common Stock with an estimated fair value of
$34,750 to the placement agent at an exercise price of $4.50 per share.
The above financing activities produced net proceeds of $14,411,237 which
will be used to significantly expand our sales and marketing efforts as well as
the expansion into new markets.
CHARACTERISTICS OF OUR REVENUE AND EXPENSES
We are a fixed wireless broadband provider. We generate our revenue through
the provision of high speed internet access to business customers in several
major U.S. markets including: Boston, Chicago, Los Angeles, New York City,
Providence, and San Francisco. We seek to enter service agreements with
customers for contracted terms of 1, 2 or 3 years. We bill for our service
monthly in advance. Payments received in advance of services performed are
recorded as deferred revenue.
Cost of revenue primarily consists of all expenses that are directly
attributable to providing our service and include the costs associated with
bandwidth purchases and tower and rooftop rents. Fluctuations in our gross
margin may occur due to the addition of network capacity to either existing
points of presence or adding additional coverage through the addition of new
locations or opening of new markets.
Sales and marketing expenses primarily consist of the salaries, benefits,
travel and other costs of our sales and marketing teams, as well as marketing
initiatives and business development expenses. General and administrative
expenses primarily consist of the costs attributable to the support of our
operations, such as: costs related to information systems, salaries, expenses
and office space costs for executive management, inside sales, technical
support, financial accounting, purchasing, administrative and human resources
personnel, insurance, recruiting fees, legal, accounting and other professional
services.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our financial statements are prepared in conformity with Generally Accepted
Accounting Principles in the United States of America, which requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Critical accounting policies
are those that require the application of management's most difficult,
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subjective, or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and that may change in
subsequent periods. In preparing the financial statements, management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. In preparing the financial
statements, management has utilized available information, including our past
history, industry standards and the current economic environment, among other
factors, in forming its estimates and judgments, giving due consideration to
materiality. Actual results may differ from these estimates. In addition, other
companies may utilize different estimates, which may impact the comparability of
our results of operations to those of companies in similar businesses. We
believe that of our significant accounting policies, the following may involve a
higher degree of judgment and estimation.
Accounts Receivable. We carry our accounts receivable at cost less an
allowance for doubtful accounts. The allowance for bad debts reflects
management's best estimate of probable losses inherent in the accounts
receivable balance. Periodically, management evaluates its accounts receivable
and establishes an allowance for doubtful accounts, based on the history of past
write-offs, collections, and current credit conditions. The allowance for
uncollectible accounts at December 31, 2005 was $45,000 and bad debt expense for
2005 and 2004 was approximately $114,000 and $15,000, respectively.
Property and Equipment. Property and equipment are stated at cost. The
costs associated with the construction of the network and subscriber
installations are capitalized. Costs include equipment, installation costs and
materials. Depreciation is computed by the straight-line method over the
following estimated useful lives:
Years
-----
Furniture, fixtures and equipment 5-7
Computer equipment 5
Systems software 3
Network and base station equipment 5-7
Customer premise equipment 5-7
Expenditures for maintenance and repairs, which do not generally extend the
useful life of the assets, are charged to operations as incurred. Gains or
losses on disposal of property and equipment are reflected in the statement of
operations in the period of the disposal.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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Advertising Costs. We charge advertising costs to expense as incurred.
Advertising costs for the years ended December 31, 2005 and 2004 were
approximately $240,000 and $180,000, respectively.
Long-Lived Assets. Long-lived assets consist primarily of property and
equipment. Long-lived assets are reviewed annually for impairment or whenever
events or circumstances indicate their carrying value may not be recoverable.
When such events or circumstances arise, an estimate of the future undiscounted
cash flows produced by the asset, or the appropriate grouping of assets, is
compared to the asset's carrying value to determine if impairment exists
pursuant to the requirements of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". If the asset is determined to be impaired, the impairment loss is
measured based on the excess of its carrying value over its fair value. Assets
to be disposed of are reported at the lower of their carrying value or net
realizable value.
Revenue Recognition. Revenues are recognized at the time access to our
internet services is made available to our customers. Contractual arrangements
range from one to three years. Deferred revenues are recognized as a liability
when billings are received in advance of the date when revenues are earned. Our
revenue arrangements with multiple deliverables under Emerging Issues Task Force
Issue ("EITF") No. 00-21 are deemed to be immaterial.
Stock-Based Compensation. We account for stock-based compensation under the
intrinsic value method in accordance with the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB Opinion No. 25, compensation expense is based upon the difference, if any,
generally on the date of grant, between the fair value of our stock and the
exercise price of the option. In December 2002, the Financial Accounting
Standard Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," SFAS No. 148, which amends SFAS No.
123, requires the measurement of the fair value of stock options or warrants to
be included in the statement of operations or disclosed in the notes to
financial statements. We record our stock-based compensation under the
Accounting Principles Board (APB) No. 25 and have elected the disclosure-only
alternative under SFAS No. 123.
Convertible Notes Payable. We account for conversion options embedded in
convertible notes in accordance with Statement of Financial Accounting Standard
("SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133") and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19").
SFAS 133 generally requires companies to bifurcate conversion options embedded
in convertible notes and preferred shares from their host instruments and to
account for them as free standing derivative financial instruments in accordance
with EITF 00-19. SFAS 133 provides for an exception to this rule when
convertible notes are deemed to be conventional as that term is described in the
implementation guidance provided in paragraph 61(k) of Appendix A to SFAS 133
and further clarified in EITF 05-2
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"The Meaning of Conventional Convertible Debt Instrument" in Issue No. 00-19.
SFAS 133 provides for an additional exception to this rule when the economic
characteristics and risks of the embedded derivative instrument are clearly and
closely related to the economic characteristics and risks of the host
instrument. We account for convertible notes (deemed conventional) and
non-conventional convertible debt instruments classified as equity under EITF
00-19 "Accounting for Derivative Financial Investments indexed to, and
potentially settled in, a Company's own stock " ("EITF 00-19") and in accordance
with the provisions of Emerging Issues Task Force Issue ("EITF") 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features,"
("EITF 98-5"), EITF 00-27 "Application of EITF 98-5 to Certain Convertible
Instruments." Accordingly, we record, as a discount to convertible notes, the
intrinsic value of such conversion options based upon the differences between
the fair value of the underlying Common Stock at the commitment date of the note
transaction and the effective conversion price embedded in the note. Debt
discounts under these arrangements are amortized over the term of the related
debt to their earliest date of redemption.
Income taxes. Until closing of the Merger, we had made an election to be
taxed under the provisions of Subchapter S of the Internal Revenue Code whereby
the individual stockholders will report their share of our net income on their
personal tax returns. Accordingly, the accompanying financial statements contain
no provisions for federal and state income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2005, the FASB ratified the following consensus reached in
EITF Issue 05-8: a) The issuance of convertible debt with a beneficial
conversion feature results in a basis difference in applying FASB Statement of
Financial Accounting Standards SFAS No. 109. Recognition of such a feature
effectively creates a debt instrument and a separate equity instrument for book
purposes, whereas the convertible debt is treated entirely as a debt instrument
for income tax purposes. b) The resulting basis difference should be deemed a
temporary difference because it will result in a taxable amount when the
recorded amount of the liability is recovered or settled. c) Recognition of
deferred taxes for the temporary difference should be reported as an adjustment
to additional paid-in capital. This consensus is effective in the first interim
or annual reporting period commencing after December 15, 2005, with early
application permitted. The effect of applying the consensus should be accounted
for retroactively to all debt instruments containing a beneficial conversion
feature that are subject to EITF Issue 00-27 (and thus is applicable to debt
instruments converted or extinguished in prior periods but which are still
presented in the financial statements). The adoption of this pronouncement is
not expected to have a material impact on the Company's financial statements.
In June 2005, the EITF reached consensus on Issue No. 05-6 ("EITF 05-6").
EITF 05-6 provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. The guidance in EITF 05-6 will be applied prospectively and is
effective for periods beginning after June 29, 2005. The adoption of EITF 05-6
did not have a material impact on the Company's financial position, results of
operations or cash flows.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
'Conventional Convertible Debt Instrument' in EITF No. 00-19, 'Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered 'conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
EITF No. 05-2 is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. The adoption of this
pronouncement did not have a material impact on the Company's financial
position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction." This Statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. The statements apply to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in the fiscal
years beginning after December 15, 2005. Management does not believe this
pronouncement will have a material impact on the Company's financial position or
results of operations.
In March 2006, the FASB issued Statement of Financial Accounting Standard
156 "Accounting for Servicing of Financial Assets"("SFAS 156"), which requires
all separately recognized servicing assets and servicing liabilities be
initially measured at fair value. SFAS 156 permits, but does not require, the
subsequent measurement of servicing assets and servicing liabilities at fair
value. Adoption is required as of the beging of the first fiscal year that
begins after September 15, 2006. early adoption is permitted. The adoption of
SFAS 156 is not expected to have material effect on the Company's consolidated
financial position, results of operations or cash flows.
In Spetember 2006, the FASB issued SFAS No. 157, "accounting for Fair Value
Measurements: ("SFAS 157"). SFAS 157 defines fair value, and establishes a
framework for measuring fair value in generally accepted accounting principals
and expands disclosure about fair value measurements. SFAS 157 is effective for
the Company for Fiscal Periods subsequent to November 15, 2007. The Company does
not expect the new standard to have a material impact on the Company's financial
position, results of operations or cash flows.
In September 2006, the staff of the SEC issued Staff Accounting Bulletin
No. 108 ("SAB 108) which provides interpretive guidance on how the effects of
the carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 was effective for year 2006.
Adoption of SAB did not have a material impact on the Company's consolidate
financial position, results of operations or cash flows.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve
principal. Our funds are currently held in checking accounts and money market
funds which do not subject us to risk of a loss of principal due to changes in
prevailing interest rates. We intend to maintain our excess cash funds in a
portfolio of cash and cash equivalents that may include investments in a variety
of investment-grade securities, such as commercial paper, money market funds,
government and non-government debt securities and certificates of deposit with
maturities of less than thirteen months. Some of these securities may be subject
to market risk due to changes in prevailing interest rates, which may cause
fluctuations in market value.
The fair value of our cash and short-term investment portfolio at September
30, 2006, approximated its carrying value due to the short-term maturities of
these investments. The potential decrease in fair value resulting from a
hypothetical 10% increase in interest rates at year-end for our investment
portfolio is not material.
RISK FACTORS
Investing in our Common Stock involves a high degree of risk. Prospective
investors should carefully consider the risks described below, together with all
of the other information included or referred to in this Current Report on Form
8-K, before purchasing shares of our Common Stock. There are numerous and varied
risks, known and unknown, that may prevent us from achieving our goals. If any
of these risks actually occurs, our business, financial condition or results of
operation may be materially adversely affected. In such case, the trading price
of our Common Stock could decline and investors in our Common Stock could lose
all or part of their investment.
RISKS RELATING TO OUR BUSINESS
WE ARE AN EARLY STAGE COMPANY. WE HAVE A HISTORY OF OPERATING LOSSES AND WE
EXPECT TO CONTINUE TO REALIZE SIGNIFICANT NET LOSSES FOR THE FORESEEABLE FUTURE.
We were formed in 1999. We have recorded a net loss in each year of our
operations. Our net loss in 2004 was approximately $700,000, and our net loss in
2005 was approximately $950,000. We expect a net loss for 2006. As of December
31, 2005, our accumulated deficit was $7,401,469. As we are an early stage
company, we cannot anticipate with certainty what our earnings, if any, will be
in any future period. We expect to incur significant net losses as we expand our
sales force, develop our network, expand our markets, and pursue our business
strategy. In addition, we are subject to the following additional risks:
o Our results of operations may fluctuate significantly, which may
adversely affect the value of an investment in our Common Stock;
23
o We may be unable to build-out our network, expand our services, meet
the objectives we have established for our business strategy or grow
our business profitably, or at all;
o We have not yet completed a full cycle of subscriber contract
termination and renewal, and because of our limited operating history,
it may be difficult to accurately predict our customer "churn" and
long-term subscriber losses and other important performance metrics;
and
o Our network and related technologies may fail, the quality and number
of services we are able to provide may decline, we may have inadequate
spectrum capacity, wireless broadband services may not become widely
accepted, WiMax may not become widely adopted, and we may suffer
losses if any of the foregoing risks materialize or our network fails
to operate for an extended period of time.
If we are unable to execute our business strategy and grow our business,
either as a result of the risks identified in this section or for any other
reason, our business, prospects, financial condition and results of operations
will be adversely affected.
IF WE DO NOT OBTAIN ADDITIONAL FINANCING, OUR BUSINESS, PROSPECTS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WILL BE ADVERSELY AFFECTED.
The proceeds of the Private Placement provided some, but not all, of the
capital we believe is necessary to implement our long-term business strategy.
Accordingly, we will need to obtain significant additional financing in the
event that our plans require significant expenditures not presently
contemplated, such as for capital expenditures, for FCC spectrum auction bids,
or to cover operating expenses from expanded services or to service future
indebtedness. For example, we may determine that additional frequencies may be
required to be competitive or we may expand into new markets or services.
We may not be able to secure such financing when needed in adequate amounts
or on acceptable terms, if at all. To execute our business strategy, we may
issue additional equity securities in public or private offerings, potentially
at a price lower than the Private Placement offering price or the market price
at the time of such issuance. We may seek additional debt financing, and may be
forced to incur significant interest expense. We also may decide to sell
additional debt or equity securities in our subsidiaries, which may be dilutive
to existing stockholders' ownership interests in or reduce or eliminate our
income, if any, from those operations. If we cannot secure sufficient funding we
may be forced to forego strategic opportunities or delay, scale back or
eliminate network deployments, operations, spectrum acquisitions and
investments.
SOME OF OUR COMPETITORS ARE BETTER ESTABLISHED AND HAVE RESOURCES SIGNIFICANTLY
GREATER THAN WE HAVE, WHICH MAY MAKE IT DIFFICULT TO ATTRACT AND RETAIN
SUBSCRIBERS.
The market for broadband services is highly competitive, and we compete
with several other companies within a single market including large
well-established phone companies like AT&T and Verizon and cable companies. Many
of our competitors are better established or have greater financial resources
than we have. Our competitors include:
o Cable operators offering high-speed Internet connectivity services and
voice communications;
o Incumbent and competitive local exchange carriers providing DSL
services over existing wide, metropolitan, and local area networks;
24
o 3G cellular, PCS and other wireless providers offering wireless
broadband services and capabilities, including developments in
existing cellular and PCS technology that may increase network speeds
or have other advantages over our services;
o Internet service providers offering dial-up Internet connectivity;
o Municipalities and other entities operating free or subsidized
networks;
o Providers of VoIP telephone services;
o Wireless Internet service providers using licensed or unlicensed
spectrum;
o Satellite and fixed wireless service providers offering or developing
broadband Internet connectivity and VoIP telephone;
o Electric utilities and other providers offering or planning to offer
broadband Internet connectivity over power lines; and
o Resellers providing wireless Internet service by "piggy-backing" on
DSL or networks operated by others.
Moreover, we expect other existing and prospective competitors,
particularly if our services are successful, to adopt technologies or business
plans similar to ours, or seek other means to develop a product competitive with
our services. Many of our competitors are well-established and have larger and
better developed networks and systems, longer-standing relationships with
customers and suppliers, greater name recognition, and greater financial,
technical, marketing, and human resources than we have. These competitors can
often subsidize competing services with revenues from other sources, such as
advertising, and thus may offer their products and services at lower prices than
ours. These or other competitors may also reduce the prices of their services
significantly or may offer broadband connectivity packaged with other products
or services. We may not be able to reduce our prices or otherwise alter our
services correspondingly, which would make it more difficult to attract and
retain subscribers.
INDEBTEDNESS COULD LIMIT OUR FINANCING OPTIONS AND LIQUIDITY POSITION AND MAY
LIMIT OUR ABILITY TO GROW OUR BUSINESS.
Our present indebtedness and any indebtedness incurred in the future could
have important consequences to the holders of our Common Stock, such as:
o We may not be able to obtain additional financing to fund working
capital, operating losses, capital expenditures or acquisitions on
terms acceptable to us or at all;
o We may be unable to refinance our indebtedness on terms acceptable to
us or at all;
o Indebtedness could make us more vulnerable to economic downturns and
limits our ability to withstand competitive pressures; and
o Cash flows from operations may be insufficient to operate our business
and service any indebtedness now owed or incurred in the future.
25
OUR OBLIGATIONS TO THE HOLDER OF THE SENIOR DEBENTURES IS SECURED BY ALL OF OUR
ASSETS, SO IF WE DEFAULT ON THOSE OBLIGATIONS, THE SENIOR DEBENTURES HOLDER CAN
FORECLOSE ON OUR ASSETS.
The holders of the Senior Debentures have a security interest in all of our
assets and those of our subsidiaries. As a result, if we default under our
obligations to the Senior Debenture holder, the Senior Debenture holder can
foreclose its security interest and liquidate some or all of these assets, which
would harm our business, financial condition and results of operations.
WE MAY EXPERIENCE DIFFICULTIES IN CONSTRUCTING, UPGRADING AND MAINTAINING OUR
NETWORK, WHICH COULD ADVERSELY AFFECT CUSTOMER SATISFACTION, INCREASE SUBSCRIBER
TURNOVER AND REDUCE OUR REVENUES.
Our success depends on developing and providing products and services that
give subscribers high quality Internet connectivity, including satisfying their
VoIP expectations. If the number of subscribers using our network and the
complexity of our products and services increase, we will require more
infrastructure and network resources to maintain the quality of our services.
Consequently, we may be required to make substantial investments to construct
and improve our facilities and equipment and to upgrade our technology and
network infrastructure. If we do not implement these developments successfully,
or if we experience inefficiencies, operational failures, or unforeseen costs
during implementation, the quality of our products and services could decline.
We may experience quality deficiencies, cost overruns and delays in
implementing our network improvements and expansion, in maintenance and upgrade
projects, including the portions of those projects not within our control or the
control of our contractors. Our network requires the receipt of permits and
approvals from numerous governmental bodies, including municipalities and zoning
boards. Such bodies often limit the expansion of transmission towers and other
construction necessary for our business. Failure to receive approvals in a
timely fashion can delay system rollouts and raise the cost of completing
projects. In addition, we typically are required to obtain rights from land,
building and tower owners to install our antennae and other equipment to provide
service to our subscribers. We may not be able to obtain, on terms acceptable to
us, or at all, the rights necessary to construct our network and expand our
services.
We also face challenges in managing and operating our network. These
challenges include operating, maintaining and upgrading network and customer
premises equipment to accommodate increased traffic or technological advances,
and managing the sales, advertising, customer support, billing and collection
functions of our business while providing reliable network service at expected
speeds and VoIP telephone at expected levels of quality. Our failure in any of
these areas could adversely affect customer satisfaction, increase subscriber
turnover or churn, increase our costs, decrease our revenues and otherwise have
a material adverse effect on our business, prospects, financial condition and
results of operations.
IF WE DO NOT OBTAIN AND MAINTAIN RIGHTS TO USE LICENSED SPECTRUM IN ONE OR MORE
MARKETS, WE MAY BE UNABLE TO OPERATE IN THESE MARKETS WHICH COULD ADVERSELY
AFFECT OUR ABILITY TO EXECUTE OUR BUSINESS STRATEGY.
Since we plan to provide our services using unlicensed and licensed
spectrum, we depend on our ability to secure and maintain sufficient rights to
use licensed spectrum by obtaining licenses or long-term leases in each of the
markets in which we operate or intend to operate. Obtaining licensed spectrum
can be a long and difficult process that can be costly and require a
disproportionate amount of our management resources, and may require us to incur
significant indebtedness or secure additional capital. We may not be successful
in our efforts to secure financing and may not be deemed a qualified bidder due
to our small size or our creditworthiness, or be able to acquire, lease, or
maintain the spectrum necessary to execute our strategy.
26
Licensed spectrum, whether owned or leased, poses additional risks,
including:
o Inability to satisfy build-out or service deployment requirements upon
which spectrum licenses or leases are, or may be, conditioned;
o Increases in spectrum acquisition costs or complexity;
o Competitive bids, pre-bid qualifications, and post-bid requirements
for spectrum acquisitions, in which we may not be successful leading
to, among other things, increased competition;
o Adverse changes to regulations governing spectrum rights;
o The risk that spectrum we have acquired or leased will not be
commercially usable or free of damaging interference from licensed or
unlicensed operators in our or adjacent bands;
o Contractual disputes with, or the bankruptcy or other reorganization
of, the license holders, which could adversely affect control over the
spectrum subject to such licenses;
o Failure of the FCC or other regulators to renew spectrum licenses as
they expire; and
o Invalidation of authorization to use all or a significant portion of
our spectrum.
We also expect the FCC to sell, via auction, a significant amount of
spectrum in the 700 Megahertz (or MHz) and 2.110 to 2.155 GHz bands during 2008.
We further expect the FCC to make additional spectrum available from time to
time. Additionally, other companies hold spectrum rights that could be made
available for lease or sale. The availability of additional spectrum in the
marketplace could change the market value of spectrum rights generally and, as a
result, may adversely affect the value of our spectrum.
UNLICENSED SPECTRUM IS SUBJECT TO INTENSE COMPETITION AND SLOWDOWNS DUE TO
MULTIPLE SIMULTANEOUS USERS.
Unlicensed or "free" spectrum is available to many users and may suffer
bandwidth limitations, interference, and slowdowns in the event of multiple
simultaneous users in an area that exceeds the capacity to handle traffic
requests. The availability of unlicensed spectrum is not limited nor do others
require permits or licenses to utilize the same unlicensed spectrum that we may
utilize in areas in which we believe unlicensed spectrum may be incorporated
into our service offerings. Unlicensed spectrum users may seek to compete with
our business and services and may have a cost advantage over other companies,
such as Towerstream, that utilize licensed spectrum in their business.
IF WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE
MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TO PREVENT FRAUD.
ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY
COULD HARM OUR BUSINESS AND ADVERSELY IMPACT THE TRADING PRICE OF OUR COMMON
STOCK.
Effective internal control is necessary for us to provide reliable
financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as
effectively as we would if an effective control environment existed, and our
business and reputation with investors may be harmed. As a result, our small
size and any current internal control deficiencies may adversely affect our
financial condition, results of operation and access to capital. We have not
performed an in-depth analysis to determine if in the past un-discovered
failures of internal controls exist, and may in the future discover, areas of
our internal control that need improvement.
27
INTERRUPTION OR FAILURE OF OUR INFORMATION TECHNOLOGY AND COMMUNICATIONS SYSTEMS
COULD IMPAIR OUR ABILITY TO PROVIDE OUR SERVICES, WHICH COULD DAMAGE OUR
REPUTATION AND HARM OUR OPERATING RESULTS.
We have experienced service interruptions in the past and may experience
service interruptions or system failures in the future. Any unscheduled service
interruption adversely affects our ability to operate our business and could
result in an immediate loss of revenues. If we experience frequent or persistent
system or network failures, our reputation could be permanently harmed. We may
make significant capital expenditures to increase the reliability of our
systems, but these capital expenditures may not achieve the results we expect.
Our services depend on the continuing operation of our information
technology and communications systems. Any damage to or failure of our systems
could result in interruptions in our service. Interruptions in our service could
reduce our revenues and profits, and our prospects could be damaged, if people
believe our network is unreliable. Our systems are vulnerable to damage or
interruption from earthquakes, terrorist attacks, floods, fires, power loss,
telecommunications failures, computer viruses, computer denial of service
attacks, and other attempts to harm our systems, and similar causes. Some of our
systems are not fully redundant, and our disaster recovery planning may not be
adequate. The occurrence of a natural disaster or unanticipated problems at our
network centers or equipment could result in lengthy interruptions in our
service and adversely affect our business, prospects, financial condition and
results of operations
WE MAY NOT BE ABLE TO EFFECTIVELY CONTROL AND MANAGE OUR GROWTH.
If our business and markets grow and develop it will be necessary for us to
finance and manage expansion in an orderly fashion. In addition, we may face
challenges in managing expanding product and service offerings (such as in
emerging WiMAX standards and mobile WiMax operations) and in integrating
acquired businesses with our own. Such eventualities will increase demands on
our existing management, workforce, and facilities. Failure to satisfy increased
demands could interrupt or adversely affect our operations and cause backlogs
and administrative inefficiencies.
WE MAY BE UNABLE TO ATTAIN PROFITABILITY BY INCREASING NET SALES, EXPANDING THE
RANGE OF OUR SERVICES OR ENTERING NEW MARKETS.
There can be no assurance that we will be able to attain or maintain
profitability and/or expand the sales of our business. Various factors,
including demand for our network, systems, and services, and our ability to
expand the range of our product and service offerings and to successfully enter
new markets (such as mobile WiMAX) may affect our ability to maintain or
increase the net sales of our business or any subsequently acquired businesses.
Many of these factors are beyond our control. In addition, in order to
effectively manage growth, we must expand and improve our operational, financial
and other internal systems and attract, train, motivate and retain qualified
employees. Expenditures related to our growth and acquisitions may negatively
affect our operating results, and we may not realize any incremental
profitability from our growth and acquisition efforts.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUING CONTRIBUTIONS OF OUR KEY
PERSONNEL.
We rely heavily on the services of Philip Urso, our Chairman, Jeffrey M.
Thompson, our Chief Executive Officer and President, and George E. Kilguss, III,
our Chief Financial Officer. Loss of the services of any of these individuals
could adversely impact our operations. In addition, we rely on our technical
personnel for reliability of our networks and systems. We believe our future
success will depend upon our ability or retain these key employees and our
ability to attract and retain other skilled engineering, technical, managerial,
and sales personnel, including outsourced personnel. We cannot
28
guarantee that any employee will remain employed with us for any definite period
of time and the loss of our personnel could have a material adverse effect on
our business and results of operations. Currently, our executives are not bound
by employment contracts or agreements and we do not maintain any policies of
"key man" insurance on our executives.
IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN HIGHLY QUALIFIED PERSONNEL, THE
QUALITY OF OUR SERVICES MAY DECLINE AND WE MAY NOT SUCCESSFULLY EXECUTE OUR
GROWTH STRATEGIES.
Our success depends in large part upon our ability to continue to attract,
train, motivate and retain highly skilled and experienced technical employees.
Qualified technical employees periodically are in great demand and may be
unavailable in the time frame required to satisfy our customers' requirements.
While we currently have available technical expertise sufficient for the
requirements of our business, expansion of our business could require us to
employ additional highly skilled technical personnel. We expect competition for
such personnel to increase as the markets for wireless and broadband services
expand. There can be no assurance that we will be able to attract and retain
sufficient numbers of highly skilled technical employees in the future. The loss
of technical personnel or our inability to hire or retain sufficient technical
personnel at competitive rates of compensation could impair our ability to
secure and complete customer engagements and could harm our business.
ANY ACQUISITIONS WE MAKE COULD RESULT IN DIFFICULTIES IN SUCCESSFULLY MANAGING
OUR BUSINESS AND CONSEQUENTLY HARM OUR FINANCIAL CONDITION.
We may seek to expand by acquiring competing businesses in our current or
other geographic markets, including as a means to acquire spectrum. We cannot
accurately predict the timing, size and success of our acquisition efforts and
the associated capital commitments that might be required. We expect to face
competition for acquisition candidates, which may limit the number of
acquisition opportunities available to us and may lead to higher acquisition
prices. There can be no assurance that we will be able to identify, acquire or
profitably manage additional businesses or successfully integrate acquired
businesses, if any, into our company, without substantial costs, delays or other
operational or financial difficulties. In addition, acquisitions involve a
number of other risks, including:
o failure of the acquired businesses to achieve expected results;
o diversion of management's attention and resources to acquisitions;
o failure to retain key customers or personnel of the acquired
businesses;
o disappointing quality or functionality of acquired equipment and
people: and
o risks associated with unanticipated events, liabilities or
contingencies.
Client dissatisfaction or performance problems at a single acquired
business could negatively affect our reputation. The inability to acquire
businesses on reasonable terms or successfully integrate and manage acquired
companies, or the occurrence of performance problems at acquired companies,
could result in dilution, unfavorable accounting treatment or one-time charges
and difficulties in successfully managing our business.
OUR INABILITY TO OBTAIN CAPITAL, USE INTERNALLY GENERATED CASH OR DEBT, OR USE
SHARES OF OUR COMMON STOCK TO FINANCE FUTURE ACQUISITIONS COULD IMPAIR THE
GROWTH AND EXPANSION OF OUR BUSINESS.
Reliance on internally generated cash or debt to finance our operations or
complete acquisitions could substantially limit our operational and financial
flexibility. The extent to which we will be able or
29
willing to use shares of our Common Stock to consummate acquisitions will depend
on our market value, which will vary, and liquidity, which is presently limited,
and the willingness of potential sellers to accept our Common Stock as full or
partial payment. Using shares of our Common Stock for this purpose also may
result in significant dilution to our then existing stockholders. To the extent
that we are unable to use our Common Stock to make future acquisitions, our
ability to grow through acquisitions may be limited by the extent to which we
are able to raise capital through debt or additional equity financings. No
assurance can be given that we will be able to obtain the necessary capital to
finance any acquisitions or our other cash needs. If we are unable to obtain
additional capital on acceptable terms, we may be required to reduce the scope
of any expansion or redirect resources committed to internal purposes. In
addition to requiring funding for acquisitions, we may need additional funds to
implement our internal growth and operating strategies or to finance other
aspects of our operations. Our failure to: (i) obtain additional capital on
acceptable terms; (ii) use internally generated cash or debt to complete
acquisitions because it significantly limits our operational or financial
flexibility; or (iii) use shares of our Common Stock to make future acquisitions
may hinder our ability to actively pursue our acquisition program.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD REDUCE THE
VALUE OF OUR SERVICES AND OUR BRAND.
Our ability to compete effectively depends on our ability to protect our
proprietary technologies, network designs, and processes. We may not be able to
safeguard and maintain our proprietary rights. We rely on trademarks and
policies and procedures related to confidentiality to protect our intellectual
property. Some of our intellectual property, however, is not covered by any of
these protections.
WE COULD BE SUBJECT TO CLAIMS THAT WE HAVE INFRINGED ON THE PROPRIETARY RIGHTS
OF OTHERS, WHICH CLAIMS WOULD LIKELY BE COSTLY TO DEFEND, COULD REQUIRE US TO
PAY DAMAGES AND COULD LIMIT OUR ABILITY TO USE NECESSARY TECHNOLOGIES IN THE
FUTURE.
Patent technologies or processes that are substantially equivalent or
superior to our processes or products and services, or products or services of
our vendors used in our business, could result in claims that our services and
products infringe on these patents or proprietary rights of others. Defending
against infringement claims, even meritless claims, is time consuming,
distracting, and costly. If we are found to be infringing proprietary rights of
a third party, we could be enjoined from using such third party's rights and be
required to pay substantial royalties and damages, and may no longer be able to
use the intellectual property on acceptable terms or at all. Failure to obtain
licenses to intellectual property could delay or prevent the development,
manufacture, or sale of our products or services and could cause us to establish
reserves that would impact our profitability, and expend significant resources
to develop or acquire non-infringing intellectual property.
WE RELY ON A LIMITED NUMBER OF THIRD PARTY SUPPLIERS THAT PRODUCE OUR NETWORK
EQUIPMENT AND TO INSTALL AND MAINTAIN OUR NETWORK SITES. IF THESE COMPANIES FAIL
TO PERFORM OR EXPERIENCE DELAYS, SHORTAGES, OR INCREASED DEMAND FOR THEIR
PRODUCTS OR SERVICES, WE MAY FACE SHORTAGE OF COMPONENTS, INCREASED COSTS, AND
MAY BE REQUIRED TO SUSPEND OUR NETWORK DEPLOYMENT AND OUR PRODUCT AND SERVICE
INTRODUCTION.
We depend on a limited number of third party suppliers to produce and
deliver products required for our networks. We also depend on a limited number
of third parties to install and maintain our network facilities. We do not
maintain any long term supply contracts with these manufacturers. If a
manufacturer or other provider does not satisfy our requirements, or if we lose
a manufacturer or any other significant provider, we may have insufficient
network equipment for delivery to subscribers and for installation or
maintenance of our infrastructure, and we may be forced to suspend the
deployment of our wireless broadband network and enrollment of new subscribers,
which would have an adverse effect on our business, prospects, financial
condition and operating results.
30
IF OUR DATA SECURITY MEASURES ARE BREACHED, SUBSCRIBERS MAY PERCEIVE OUR NETWORK
AND SERVICES AS NOT SECURE.
Network security and the authentication of the subscriber's credentials are
designed to protect unauthorized access to data on our network. Because
techniques used to obtain unauthorized access to or to sabotage networks change
frequently and may not be recognized until launched against a target, we may be
unable to anticipate or implement adequate preventive measures against
unauthorized access or sabotage. Consequently, unauthorized parties may overcome
our encryption and security systems and obtain access to data on our network,
including on a device connected to our network. In addition, because we operate
and control our network and our subscribers' Internet connectivity, unauthorized
access or sabotage of our network could result in damage to our network and to
the computers or other devices used by our subscribers. An actual or perceived
breach of network security, regardless of whether the breach is our fault, could
harm public perception of the effectiveness of our security measures, adversely
affect our ability to attract and retain subscribers, expose us to significant
liability and adversely affect our business prospects.
RISKS RELATING TO OUR INDUSTRY
THE INDUSTRY IN WHICH WE OPERATE IS CONTINUALLY EVOLVING, WHICH MAKES IT
DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND INCREASES THE RISK OF AN
INVESTMENT IN US. OUR SERVICES MAY BECOME OBSOLETE, AND WE MAY NOT BE ABLE TO
DEVELOP COMPETITIVE PRODUCTS OR SERVICES ON A TIMELY BASIS OR AT ALL.
The broadband and wireless services industries are characterized by rapid
technological change, competitive pricing, frequent new service introductions,
and evolving industry standards and regulatory requirements. We believe that our
success depends on our ability to anticipate and adapt to these challenges and
to offer competitive services on a timely basis. We face a number of
difficulties and uncertainties associated with our reliance on technological
development, such as:
o Competition from service providers using more traditional and
commercially proven means to deliver similar or alternative services;
o Competition from new service providers using more efficient, less
expensive technologies, including products not yet invented or
developed;
o Uncertain consumer acceptance;
o Realizing economies of scale;
o Responding successfully to advances in competing technologies in a
timely and cost-effective manner;
o Migration toward standards-based technology, requiring substantial
capital expenditures; and
o Existing, proposed or undeveloped technologies that may render our
wireless broadband and VoIP telephone services less profitable or
obsolete.
As the services offered by us and our competitors develop, businesses and
consumers may not accept our services as a commercially viable alternative to
other means of delivering wireless broadband and VoIP telephone services.
31
WE ARE SUBJECT TO EXTENSIVE REGULATION.
Our acquisition, lease, maintenance, and use of spectrum licenses are
extensively regulated by federal, state and local governmental entities. A
number of other federal, state and local privacy, security, and consumer laws
also apply to our business. These regulations and their application are subject
to continual change as new legislation, regulations or amendments to existing
regulations are adopted from time to time by governmental or regulatory
authorities, including as a result of judicial interpretations of such laws and
regulations. Current regulations directly affect the breadth of services we are
able to offer and may impact the rates, terms and conditions of our services.
Regulation of companies that offer competing services, such as cable and DSL
providers and telecommunications carriers, also affects our business.
In addition, the FCC or other regulatory authorities may in the future
restrict our ability to manage subscribers' use of our network, thereby limiting
our ability to prevent or address subscribers' excessive bandwidth demands. To
maintain the quality of our network and user experience, we may manage the
bandwidth used by our subscribers' applications, in part by restricting the
types of applications that may be used over our network. If the FCC or other
regulatory authorities were to adopt regulations that constrain our ability to
employ bandwidth management practices, excessive use of bandwidth-intensive
applications would likely reduce the quality of our services for all
subscribers. Such decline in the quality of our services could harm our
business.
The breach of a license or applicable law, even if inadvertent, can result
in the revocation, suspension, cancellation or reduction in the term of a
license or the imposition of fines. In addition, regulatory authorities may
grant new licenses to third parties, resulting in greater competition in
territories where we already have rights to licensed spectrum. In order to
promote competition, licenses may also require that third parties be granted
access to our bandwidth, frequency capacity, facilities or services. We may not
be able to obtain or retain any required license, and we may not be able to
renew a license on favorable terms, or at all.
Wireless broadband and VoIP telephone services may become subject to
greater state or federal regulation in the future. The scope of the regulations
that may apply to VoIP telephone service providers and the impact of such
regulations on providers' competitive position are presently unknown and could
be detrimental to our business and prospects.
OUR BUSINESS MODEL MAY HAVE TOO SHORT OF A TRACK RECORD FOR INVESTORS TO FAIRLY
EVALUATE US.
There is no track record for companies pursuing our strategy. Many fixed
wireless companies that have sought to develop markets in which we operate by
pursuing alternative business strategies or strategies similar to ours have
failed and there is no guarantee that our strategy will be successful or
profitable. If our strategy is unsuccessful, we may fail to meet our objectives
and not realize the revenues or profits from the business we pursue which would
have a material adverse affect on our business and results of operations.
THERE ARE FEW BARRIERS TO ENTRY TO SPECTRUM LEASING, CREATING THE POTENTIAL FOR
INCREASED COMPETITION.
Other entities hold similar FCC licenses and have access to the same or
similar spectrum as we do and may seek to operate in the same markets as we do.
These entities may be able to offer lower prices than we do or may have more
spectrum available or client acquisition success than we do, limiting the growth
of our business and creating significant competition. As such, there may be
limited barriers to entry for fixed wireless services and our business strategy
may be hurt by increasing competition.
32
RISKS RELATING TO THE COMMON STOCK
OUR COMMON STOCK PRICE MAY BE VOLATILE.
The market price of our Common Stock is likely to be highly volatile and
could fluctuate widely in price in response to various factors, many of which
are beyond our control, including the following:
o Technological innovations or new products and services by us or our
competitors;
o Additions or departures of key personnel;
o Sales of our Common Stock (particularly following effectiveness of the
resale registration statement required to be filed in connection with
the Private Placement and Senior Debentures);
o Expiration of lock-up agreements;
o Our ability to execute our business plan;
o Operating results that fall below expectations;
o Disruptions of operations;
o Changes in government regulations or regulatory approvals;
o Announcements regarding WiMAX and other technical standards;
o Loss of any strategic relationship;
o Industry developments;
o Economic and other external factors; and
o Period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our Common Stock.
The stock market in general, and the market for shares of technology
companies in particular, has experienced wide price and volume fluctuations.
Future fluctuations should be expected and could be unrelated or
disproportionate to our operating performance. In addition, in the past,
following periods of volatility in the trading price of a company's securities,
securities class action litigation has often been instituted against that
company. Such litigation, if instituted against us, could result in substantial
costs and divert our attention and resources and adversely affect the trading
price of our Common Stock.
WE HAVE NEVER PAID CASH DIVIDENDS ON OUR COMMON STOCK AND DO NOT ANTICIPATE
DOING SO IN THE FORESEEABLE FUTURE.
We do not anticipate any dividends will be paid on our Common Stock. The
payment of dividends on our Common Stock depends on earnings, financial
condition and other business and economic factors affecting us at such time as
the board of directors may consider relevant. If we do not pay dividends, our
Common Stock may be less valuable because a return on your investment will only
occur if our stock price appreciates.
33
MANAGEMENT MEMBERS ARE OUR LARGEST STOCKHOLDERS. AS A RESULT, MANAGEMENT CAN
EXERT SIGNIFICANT CONTROL OVER OUR BUSINESS AND AFFAIRS AND HAS ACTUAL OR
POTENTIAL INTERESTS THAT MAY DEPART FROM THOSE OF INVESTORS.
Philip Urso, Jeffrey M. Thompson, Howard L. Haronian, and George E.
Kilguss, III, and certain of their relatives, own in the aggregate approximately
9,214,427 shares of our Common Stock, or approximately 61%. These figures do not
reflect the increased percentages that they may have in the event that they
exercise any of the options or warrants that may hold or in the future be
granted, or upon exercise of any convertible debt securities held, or if they
otherwise acquire additional shares of our Common Stock. The interests of such
persons may differ from the interests of other stockholders. As a result, in
addition to their positions with us, such persons will have significant
influence over and control all corporate actions requiring stockholder approval,
irrespective of how our other stockholders may vote, including the following
actions:
o elect or defeat the election of our directors;
o amend or prevent amendment of our Certificate of Incorporation or
By-laws;
o effect or prevent a merger, sale of assets or other corporate
transaction; and
o control the outcome of any other matter submitted to the shareholders
for vote.
Such person's stock ownership may discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us, which in
turn could reduce our stock price or prevent our stockholders from realizing a
premium over our stock price.
AS A RESULT OF THE MERGER, WE HAVE BECOME SUBJECT TO THE REPORTING REQUIREMENTS
OF FEDERAL SECURITIES LAWS, WHICH CAN BE EXPENSIVE.
As a result of the Merger, we have become a public reporting company and,
accordingly, subject to the information and reporting requirements of the
Exchange Act and other federal securities laws, including compliance with the
Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly
reports, proxy statements and other information with the SEC (including
reporting of the Merger) and furnishing audited reports to stockholders will
cause our expenses to be higher than they would be if we remained privately held
and did not consummate the Merger.
We also expect that these new rules and regulations may make it more
difficult and expensive for us to obtain director and officer liability
insurance in the future and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain
qualified persons to serve on our Board of Directors or as executive officers.
BECAUSE WE BECAME PUBLIC BY MEANS OF A REVERSE MERGER, WE MAY NOT BE ABLE TO
ATTRACT THE ATTENTION OF MAJOR BROKERAGE FIRMS.
There may be risks associated with us becoming public through a "reverse
merger". Securities analysts of major brokerage firms may not provide coverage
of us since there is no incentive to brokerage firms to recommend the purchase
of our Common Stock. No assurance can be given that brokerage firms will, in the
future, want to conduct any secondary offerings on our behalf.
34
FAILURE TO CAUSE A REGISTRATION STATEMENT TO BECOME EFFECTIVE IN A TIMELY MANNER
COULD MATERIALLY ADVERSELY AFFECT US.
We have agreed, at our expense, to prepare a registration statement
covering the shares of Common Stock sold in the Private Placement and underlying
the warrants issued in connection with the Private Placement and all Common
Stock underlying the Senior Debenture and underlying the warrants issued in
connection with the Senior Debenture. In addition, shares of Common Stock that
were issued upon conversion of our outstanding convertible notes at the time of
the Merger have piggy-back registration rights in such registration. Our
obligation includes to use our best efforts to file a registration statement
with the SEC within 70 days of the Initial Closing of the Private Placement and
to use our best efforts to have the registration statement declared effective by
the SEC within 130 days of filing with the SEC under the terms of the Senior
Debenture. The terms of the registration rights agreement for the Units includes
our obligation to use our best efforts to file a registration statement with the
SEC within 60 days of the later of the final Closing on the sale of Units or the
Termination Date, and to have such registration statement declared effective
within 60 days of filing. The Company expects to file a single registration
statement to satisfy all of its obligations to register any shares of Common
Stock. There are many reasons, including those over which we have no control,
which could delay the filing or effectiveness of the registration statement,
including delays resulting from the SEC review process and comments raised by
the SEC during that process. Failure to file or cause a registration statement
to become effective in a timely manner or maintain its effectiveness could
materially adversely affect our company and require us to pay penalties to the
holders of those shares.
THERE IS CURRENTLY NO LIQUID TRADING MARKET FOR OUR COMMON STOCK AND WE CANNOT
ENSURE THAT ONE WILL EVER DEVELOP OR BE SUSTAINED.
There is currently no liquid trading market for our Common Stock. We cannot
predict how liquid the market for our Common Stock might become. Our Common
Stock is currently approved for quotation on the OTC Bulletin Board trading. We
anticipate listing our Common Stock for trading on the OTC Bulletin Board and,
as soon as practicable thereafter, on either the American Stock Exchange, The
NASDAQ Capital Market or a national or other securities exchange, assuming that
we can satisfy the initial listing standards for such. We currently do not
satisfy the initial listing standards, and cannot ensure that we will be able to
satisfy such listing standards or that our Common Stock will be accepted for
listing on any such exchange. Should we fail to satisfy the initial listing
standards of such exchanges, or our Common Stock be otherwise rejected for
listing and remain on the OTC Bulletin Board or be suspended from the OTC
Bulletin Board, the trading price of our Common Stock could suffer, the trading
market for our Common Stock may be less liquid and our Common Stock price may be
subject to increased volatility.
OUR COMMON STOCK MAY BE DEEMED A "PENNY STOCK", WHICH WOULD MAKE IT MORE
DIFFICULT FOR OUR INVESTORS TO SELL THEIR SHARES.
Our Common Stock may be subject to the "penny stock" rules adopted under
section 15(g) of the Exchange Act. The penny stock rules apply to non-NASDAQ
companies whose Common Stock trades at less than $5.00 per share or that have
tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
operating for three or more years). These rules require, among other things,
that brokers who trade penny stock to persons other than "established customers"
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade penny stocks because of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited. If
we remain subject to the penny stock rules for any significant period, it could
have an adverse effect on the market, if any, for our securities. If our
securities are subject to the penny stock rules, investors will find it more
difficult to dispose of our securities.
35
Furthermore, for companies whose securities are quoted on the OTC Bulletin
Board, it is more difficult to obtain accurate quotations, to obtain coverage
for significant news events because major wire services generally do not publish
press releases about such companies, and to obtain needed capital.
SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.
If our stockholders sell substantial amounts of our Common Stock in the
public market, including shares issued upon the exercise of outstanding options,
warrants, or convertible debt, the market price of our Common Stock could fall.
These sales also may make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
reasonable or appropriate. The shares of Common Stock issued to our officers,
directors and principal stockholders in the Merger are subject to a lock-up
agreement prohibiting sales of such shares for up to 12 months following the
Merger, subject to certain exceptions to permit contributions to charitable
organizations and privately negotiated transactions. In addition, the shares of
Common Stock included within the Units sold in the Private Placement and upon
conversion of the Senior Debentures and related warrants and other shares
subject to piggy-back registration rights will be freely tradable upon the
earlier of: (i) effectiveness of a registration statement covering such shares;
and (ii) the date on which such shares may be sold without registration pursuant
to Rule 144 under the Securities Act.
OUR COMPLIANCE WITH THE SARBANES-OXLEY ACT AND SEC RULES CONCERNING INTERNAL
CONTROLS MAY BE TIME CONSUMING, DIFFICULT AND COSTLY.
Iit may be time consuming, difficult and costly for us to develop and
implement the internal controls and reporting procedures required by the
Sarbanes-Oxley Act. Certain members of our management have limited or no
experience operating a company whose securities are traded or listed on an
exchange, or with SEC rules, requirements and practices applicable to a publicly
traded company. We may need to recruit, hire train and retain additional
financial reporting, internal controls and other personnel in order to develop
and implement appropriate internal controls and reporting procedures. If we are
unable to comply with the internal controls requirements of the Sarbanes-Oxley
Act, we may not be able to obtain the independent accountant certifications
required by the Sarbanes-Oxley Act.
PUBLIC COMPANY COMPLIANCE MAY MAKE IT MORE DIFFICULT TO ATTRACT AND RETAIN
OFFICERS AND DIRECTORS.
The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
a public company, we expect these new rules and regulations to increase our
compliance costs in 2007 and beyond and to make certain activities more time
consuming and costly. As a public company, we also expect that these new rules
and regulations may make it more difficult and expensive for us to obtain
director and officer liability insurance in the future and we may be required to
accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more difficult for
us to attract and retain qualified persons to serve on our board of directors or
as executive officers.
PERSONS ASSOCIATED WITH SECURITIES OFFERINGS, INCLUDING CONSULTANTS, MAY BE
DEEMED TO BE BROKER DEALERS.
If our securities are offered without engaging a registered broker-dealer
we may face claims for rescission and other remedies.
36
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK. OUR COMMON STOCK PRICE MAY
BE VOLATILE AND YOU MAY BE UNABLE TO SELL YOUR SHARES AT OR ABOVE THE OFFERING
PRICE.
There previously has been no established public trading market for our
Common Stock. The lack of any trading market may impair your ability to sell
your shares at the time you wish to sell them or at a price you consider
reasonable. The lack of an active market may also reduce the fair market value
of your shares. An inactive market may also impair our ability to raise capital
by selling shares of capital stock and may impair our ability to acquire other
companies or technologies by using Common Stock as consideration. We cannot
assure you that an active public market for our Common Stock will develop or be
sustained after the Private Placement.
OUR BOARD OF DIRECTORS MAY AUTHORIZE THE ISSUANCE OF ADDITIONAL SHARES OF OUR
STOCK THAT MAY CAUSE DILUTION.
Our charter authorizes our board of directors, without stockholder
approval, to:
o Authorize the issuance of additional preferred stock in connection
with future equity offerings, acquisitions of securities or other
assets of companies; and
o Classify or reclassify any unissued preferred stock and to set the
preferences, rights and other terms of the classified or reclassified
shares, including the issuance of shares of preferred stock that have
preference rights over the Common Stock with respect to dividends,
liquidation, voting and other matters or shares of Common Stock having
special voting rights.
The issuance of additional shares of our stock could be substantially
dilutive to your shares and may negatively affect the market price of our Common
Stock.
DELAWARE LAW AND OUR CHARTER CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT
A POTENTIAL TAKEOVER, EVEN IF SUCH TRANSACTION WOULD BE BENEFICIAL TO OUR
STOCKHOLDERS.
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of us or for our stockholders to
remove existing management, and may discourage a third party from offering to
acquire us, even if a change in control or in management would be beneficial to
our stockholders.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the number of shares
of Common Stock beneficially owned on January 12, 2007, immediately following
consummation of the Merger, by: (i) each director, (ii) each named executive
officer, and (iii) each stockholder known to us to beneficially own more than 5%
of our Common Stock, and (iii) all directors and executive officers as a group.
Except as otherwise indicated, each of the stockholders named below has sole
voting and investment power with respect to such shares of Common Stock
beneficially owned by them. Except for Paul Pedersen, none of the following
persons served in any capacity with the registrant as of the end of the
registrant's last fiscal year.
Except as otherwise set forth below, the address of each of the persons
listed below is 55 Hammarlund Way, Middletown, Rhode Island 02842.
37
NAME AND ADDRESS OF NUMBER OF SHARES SHARES BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED (1) OWNED (1)(2)
----------------------------------------------- ---------------------- -------------------
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Jeffrey M. Thompson, 2,528,350(3) 9.7%
Chief Executive Officer, President and Director
Philip Urso, 4,162,728(4) 15.9%
Chairman of the Board of Directors
George E. Kilguss, III, 1,107,219(5) 4.2%
Chief Financial Officer
Arthur Giftakis, 94,604(6) *
Vice President of Engineering and Operations
Howard L. Haronian, 1,758,375(7) 6.7%
Director
Paul Koehler, 0 0%
Director
William Bush, 0 0%
Director
Paul Pedersen (8) 0 0%
All current officers, directors and planned
directors as a group (7 persons) 9,651,275 37.0%
----------
* Represents less than 1%
(1) Unless otherwise indicated, includes shares owned by a spouse, minor
children and relatives sharing the same home, as well as entities owned or
controlled by the named person. Also includes options and warrants to
purchase shares of Common Stock exercisable within 60 days.
(2) Based on 23,468,889 shares of Common Stock issued and outstanding and
2,645,062 of options outstanding under the 2007 plan.
(3) Includes presently exercisable warrants to purchase 175,193 shares of
Common Stock at an exercise price of $1.14 per share, presently exercisable
options to purchase 175,193 of Common Stock at an exercise price of $1.43
per share, and presently exercisable options to purchase 280,309 at an
exercise price of $0.78.
(4) Includes 350,386 shares of Common Stock owned by Mr. Urso's minor children,
presently exercisable warrants to purchase 175,193 shares of Common Stock
at an exercise price if $1.14 per share and present exercisable options to
purchase 175,193 shares of Common Stock at an exercise price $1.43 per
share.
(5) Includes presently exercisable options to purchase 175,193 shares of Common
Stock at an exercise price of $1.43 per share.
(6) Represents presently exercisable options to purchase 94,604 shares of
Common Stock at an exercise price $1.43 per share.
(7) Represents presently exercisable options to purchase 35,039 shares of
Common Stock at an exercise price of $1.43 per share.
38
(7) Represents shares of Common Stock held as joint tenants with Mr. Horonian's
spouse.
(8) Paul Pedersen resigned as the sole director and executive officer of our
company and our subsidiaries effective upon consummation of the Merger. Mr.
Pedersen's business address is 1881 Brunswick Street, Suite 311, Halifax,
Nova Scotia B3J-3L8.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the members of our
Board of Directors and our executive officers. All of our current officers and
directors were appointed on January 12, 2007, the closing date of the Merger.
All directors hold office for one-year terms until the election and
qualification of their successors. Officers are elected annually by the board of
directors and serve at the discretion of the board of directors.
NAME AGE POSITION
---------------------- --- -----------------------------------------------
Jeffrey M. Thompson 42 Chief Executive Officer, President and Director
Philip Urso 48 Chairman of the Board of Directors
George E. Kilguss, III 45 Chief Financial Officer
Arthur Giftakis 40 Vice President of Engineering and Options
Howard Haronian 45 Director
Paul Koehler 47 Director
Bill Bush 41 Director
BIOGRAPHIES
JEFFREY M. THOMPSON, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr.
Thompson co-founded Towerstream in 2000, has served as a director since
inception and served as Towerstream's Chief Operating Officer from inception
until November 2005. In November 2005, Mr. Thompson was promoted from Chief
Operating Officer to President and Chief Executive Officer. In 1995, Mr.
Thompson founded EdgeNet Inc., a privately held internet service provider, and
was Vice President of Operations of EdgeNet Inc. through 1999. EdgeNet Inc. was
sold in 1997 to Citadel Broadcasting. Mr. Thompson holds a B.S. from the
University of Massachusetts.
PHILIP URSO, CHAIRMAN OF THE BOARD. Mr. Urso co-founded Towerstream in
October 1999 with Jeffrey M. Thompson and served as its Chief Executive Officer
until July 2005. Prior to that, Mr. Urso was President of eFortress, an Internet
service provider and division of Citadel Communications. At the time, Citadel
Communications was a publicly held, national radio station group with over 100
stations. Mr. Urso, with Mr. Thompson, founded eFortress in 1995 and sold it to
Citadel Communications in 1997. From 1983 until 1997, Mr. Urso owned and
operated a group of radio stations. In addition, Mr. Urso co-founded the
regional cell-tower company, MCF Communications.
GEORGE E. KILGUSS, III, CHIEF FINANCIAL OFFICER. Mr. Kilguss joined
Towerstream as Chief Financial Officer in January 2004 and manages all finance
and accounting activities of the business. From September 1998 until October
2000, Mr. Kilguss served as Chief Financial Officer of Stratos Global
Corporation, a publicly traded company on the Toronto Stock Exchange. He was
also an Executive Vice President of the company and served on Stratos' Board of
Directors from April 1999 to October 2000. From October 1997 until September
1998, Mr. Kilguss served as Executive Vice President of Corporate Development
and from January 1977 until October 1977 as Vice President of Corporate
Development. Prior to joining Stratos, Mr. Kilguss spent twelve years in the
investment and commercial banking industries primarily with Bank of Boston and
Fleet Associates, Inc., Fleet Financial Group's in-
39
house investment banking unit. He has significant experience in the areas of
mergers, acquisitions, and capital markets. Mr. Kilguss holds a Bachelors of
Science degree in Economics & Finance from the University of Hartford and a
Masters of Business Administration from the University of Chicago.
ARTHUR G. GIFTAKIS, VICE-PRESIDENT OF ENGINEERING AND OPERATIONS. Mr.
Giftakis joined Towerstream in 2003 as manager of engineering. He was promoted
to Vice President of Engineering and Operations in 2004. Prior to joining
Towerstream, Mr. Giftakis was at Sockeye Networks, a BGP optimization company
that was acquired by Internap. Mr. Giftakis held various solution architect
positions at Navisite and Digital Broadband Communications after spending 10
years with Bell Atlantic, now known as Verizon.
HOWARD L. HARONIAN, MD, DIRECTOR. Mr. Haronian was a founding board member
of Towerstream in 2000. Dr. Haronian is an interventional cardiologist and has
been President of Cardiology Specialists, Ltd. of RI since 1994. Mr. Haronian
completed the Yale Management Program for Physicians at the Yale School of
Management in 1999. He has been on the clinical faculty of the Yale School of
Medicine since 1994, serving on numerous PHO and Yale Network committees as well
as Director of the Cardiac Catheterization program of an affiliated hospital
since 2003. Mr. Haronian is a cousin of our Chairman, Philip Urso.
PAUL KOEHLER, DIRECTOR. Mr. Koehler was appointed to the Board of Directors
on January 12, 2007 to fill a vacancy. Mr. Koehler has served as Vice President
of Business Development of Pacific Ethanol, Inc. (NasdaqGM: PEIX) since June
2005. Mr. Koehler has over twenty years of experience in the electricity
industry, having focused during the past five years on acquiring and developing
wind power projects for PPM Energy, Inc., a subsidiary of Scottish Power. Prior
to joining PPM, Mr. Koehler was President and founder of Kinergy, a consulting
firm focused on renewable energy and risk management. In addition, Mr. Koehler
was a co-founder of ReEnergy, one of the companies acquired by Pacific Ethanol.
During the 1990s, Mr. Koehler worked for Portland General Electric and Enron in
marketing and origination of long term transactions, risk management, and energy
trading. Paul has a B.A. from the Honors College at the University of Oregon.
WILLIAM BUSH, DIRECTOR. Mr. Bush was appointed to our Board of Directors on
January 12, 2007 to fill a vacancy. Mr. Bush has been an executive officer of
Handheld Entertainment, Inc. (NASDAQ: ZVUE) since January 2006 and became its
Chief Financial Officer on June 26, 2006. Mr. Bush has over 15 years of
experience in accounting, financial support and business development. From 2002
to 2005, Mr. Bush was the Chief Financial Officer and Secretary for
International Microcomputer Software, Inc. (OTCBB:IMSI.OB), a developer and
distributor of precision design software, content and on-line services. Prior to
that he was a Director of Business Development and Corporate Controller for
Buzzsaw.com. Mr. Bush was one of the founding members of Buzzsaw.com, a
privately held company spun off from Autodesk, Inc. in 1999, focusing on online
collaboration, printing and procurement applications. From 1997 to 1999, Mr.
Bush worked as Corporate Controller at Autodesk, Inc. (NASDAQ:ADSK), the fourth
largest software applications company in the world. Prior to that, Mr. Bush
worked for seven years in public accounting, first with Ernst & Young, and later
with Price Waterhouse in Munich, Germany. He received a B.S. in Business
Administration from U.C. Berkeley and is a Certified Public Accountant.
BOARD COMMITTEES
AUDIT COMMITTEE. We established an audit committee of the board of
directors, currently comprised of Messrs. Bush, Haronian and Koehler, each of
whom is an independent director. Mr. Bush is a qualified financial expert as
defined in Item 407(d)(5)(ii) of Regulation S-B and serves as Chairman of the
audit committee. The audit committee's duties are to recommend to our board of
directors the engagement of independent auditors to audit our financial
statements and to review our accounting and
40
auditing principles. The audit committee reviews the scope, timing and fees for
the annual audit and the results of audit examinations performed by the internal
auditors and independent public accountants, including their recommendations to
improve the system of accounting and internal controls. The audit committee will
at all times be composed exclusively of directors who are, in the opinion of our
board of directors, free from any relationship that would interfere with the
exercise of independent judgment as a committee member and who possess an
understanding of financial statements and generally accepted accounting
principles.
COMPENSATION COMMITTEE. We established a compensation committee of the
board of directors, currently comprised of Messrs. Haronian and Bush. The
compensation committee reviews and approves our salary and benefits policies,
including compensation of executive officers. The compensation committee also
administers our stock option plans and recommends and approves grants of stock
options under such plans.
NOMINATING COMMITTEE. We established a nominating committee of the
board of directors, currently comprised of Messrs. Haronian and Koehler. The
nominating committee considers and makes recommendations on matters related to
the practices, policies and procedures of the board and takes a leadership role
in shaping our corporate governance. As part of its duties, the committee
assesses the size, structure and composition of the board and board committees,
coordinates evaluation of board performance and reviews board compensation. The
committee also acts as a screening and nominating committee for candidates
considered for election to the board. In this capacity it concerns itself with
the composition of the board with respect to depth of experience, balance of
professional interests, required expertise and other factors. The committee
evaluates prospective nominees identified on its own initiative or referred to
it by other board members, management, stockholders or external sources and all
self-nominated candidates. The committee uses the same criteria for evaluating
candidates nominated by stockholders and self-nominated candidates as it does
for those proposed by other board members, management and search companies.
CODE OF ETHICS
We adopted a Code of Business Conduct and Ethics on January 12, 2007. The
Code of Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002
and Item 406 of Regulation S-B, constitutes our code of ethics for senior
financial officers. The Code of Ethics is intended to promote honest and ethical
conduct, full and accurate reporting, and compliance with the law and other
matters. A copy of the Code of Ethics is attached hereto as Exhibit 14.1. A
printed copy of the Code of Ethics may also be obtained free of charge by
writing to the Corporate Secretary at Towerstream Corporation, 55 Hammerlund
Way, Middletown, Rhode Island 02842.
41
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the dollar value of all
cash and non-cash compensation earned by or awarded to the name executive
officers during the years shown. Except for Paul Pedersen, none of the following
persons served in any capacity with the registrant as of the end of the
registrant's last fiscal year.
Summary Compensation Table
Non-Equity Nonqualified
Incentive Deferred All
Stock Option Plan Compensation Other
Name and Principal Salary Bonus Awards Awards Compensation Earnings Compensation Total ($)
Position Year ($) ($) ($)(1) ($)(1) ($) ($) ($)
----------------------- ---- ------- ------ ------ ------- ------------ ------------ ------------ ---------
Jeffrey M. Thompson, 2006 171,000 30,000 10,000 211,000
Chief Executive Officer
2005 177,000 110,191 287,191
George Kilguss, III,
Chief Financial Officer 2006 135,000 45,000 180,000
2005 55,000 110,191 125,000 290,191
Arthur Giftakis,
VP of Engineering and 2006 120,000 120,000
Operations
2005 114,313 21,514 135,827
Paul Pedersen (2) 2006 0
2005 0
(1) The dollar value of stock awards and option awards are calculated in
accordance with Statement of Financial Account Standard ("SFAS") 123R,
Share Based Payments. Our policy and assumptions made in the valuation of
share based payments are contained in Note 2 our financial statements
attached hereto as Exhibit 99.1.
(2) Paul Pedersen resigned as the sole director and executive officer of our
company and our subsidiaries effective upon consummation of the Merger.
Outstanding Equity Awards at Fiscal Year-End
The following table summarize the total outstanding equity awards as of
December 31, 2006, for each named executive officer, including stock options and
restricted stock awards.
42
Option Awards
------------------------------------------------------
Number of Number of
Securities Securities
Underlying Underlying
Options (#) Options (#) Option Option
NAME Exercisable Unexercisable Price Expiration Date
------------------- ----------- ------------- ------ ---------------
Jeffrey M. Thompson 280,309 -- $0.78 4/29/2015
175,193 -- $1.43 2/28/2013
George Kilguss 175,193 -- $1.43 4/26/2015
Arthur Giftakis 11,679 23,360(1) $1.43 8/29/2015
59,566 -- $1.43 11/17/2013
Paul Pedersen (2) -- --
(1) 11,680 will vest on each of August 29, 2007 and August 29, 2008.
(2) Paul Pedersen resigned as the sole director and executive officer of our
company and our subsidiaries effective upon consummation of the Merger.
Stock Incentive Plan
The following is a summary of the material provisions of the
Towerstream Corporation 2007 Equity Compensation Plan (the "2007 Plan"), which
was approved by our stockholders on January 12, 2007. The summary is qualified
in its entirety by reference to the 2007 Plan itself, which is attached hereto
as Exhibit 4.1.
Purpose of the 2007 Plan. The 2007 Plan provides a means for our
Company to award specific equity-based benefits to officers and other employees,
consultants and directors, of our Company and our related companies and to
encourage them to exercise their best efforts to enhance the growth of our
Company and our related companies.
Eligibility. Employees and consultants of our Company and our related
companies and non-employee directors of our Company may receive awards under the
2007 Plan. Only our employees or employees of our subsidiary companies, however,
may receive incentive stock options ("ISOs") under the 2007 Plan.
Awards to be Offered. The 2007 Plan provides for the granting of:
o ISOs and nonqualified stock options ("NQSOs") to purchase shares;
o stock appreciation rights representing the right to receive an amount
measured by the appreciation in share value;
o stock subject to time-based and/or performance-based vesting
(restricted stock);
o restricted stock Units representing the right to receive an amount
measured by the value of a share of stock, subject to time-based
and/or performance-based vesting;
o stock awarded as a bonus (bonus stock); and
o dividend equivalent rights.
Shares Subject to the Plan. The total number of shares of Common Stock
that can be delivered under the 2007 Plan is 2,645,062, as of January 12, 2007,
the date of the Merger, 554,938 shares remained available for issuance pursuant
to the Plan.
43
If any award that requires the participant to exercise the award for
shares to be delivered terminates without having been exercised in full, if any
shares subject to an award are forfeited, if any shares are withheld for the
payment of taxes with respect to an award, or if any award payable in cash or
shares is paid in cash rather than in shares, the unexercised portion of the
award, the forfeited shares, the withheld shares, or the portion that was paid
in cash will continue to be available for future awards. However, if an option,
stock appreciation right, Performance Stock, PSU or Bonus Stock is cancelled or
forfeited, the shares subject to such awards will continue to be counted against
the maximum number of shares specified above for which options, stock
appreciation rights, Performance Stock, PSUs or Bonus Stock may be granted to an
employee in any calendar year.
In addition, the aggregate fair market value, determined at the time
the option is granted, of shares with respect to which ISOs are exercisable for
the first time by any participant during any calendar year, under the 2007 Plan
and under any other ISO plan of our Company or a related company, may not exceed
$100,000.
Administration, Amendment and Duration of 2007 Plan. The 2007 Plan
will be administered by the Compensation Committee of the board of directors
(the "Committee"), except that the Company's chief executive officer may grant a
limited number of options to participants other than to himself, other executive
officers who are "covered employees" under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), directors and consultants. Except
as noted in the previous sentence, the Committee selects the participants who
will receive awards, determine the type of award to be granted and determines
the terms and conditions of the award.
Terms and Conditions.
Stock Options. The 2007 Plan permits the Committee to grant options that
qualify as ISOs under the Code and NQSOs that do not so qualify. Only employees
of the Company or a subsidiary may receive ISOs. The Committee also determines
the exercise price of each option. The exercise price of an option, however, may
not be less than 100% of the fair market value of the underlying shares on the
date of grant (110% in the case of an ISO granted to a greater-than-10%
shareholder). The exercise price of any option may not be less than the par
value of the underlying share(s).
The Committee will fix the term of each option, but no term may exceed 10
years from the date of grant (five years in the case of an ISO granted to a
greater-than-10% shareholder). The Committee will determine at what time or
times each option may be exercised and any conditions that must be met before an
option may be exercised. Options may be made exercisable in installments, and
the exercisability of options may be accelerated by the Committee.
The exercise price of an option granted under the 2007 Plan may be paid: 1)
in full in cash (or its equivalent); 2) by shares of stock which the participant
already owns; 3) by shares of stock newly acquired on exercise of the option; 4)
by delivery of an irrevocable undertaking by a broker to deliver promptly to our
Company sufficient funds to pay the exercise price; or 5) by any combination of
the foregoing.
Stock Appreciation Rights. The Committee may grant stock appreciation
rights that entitle the participant to receive upon exercise an amount (in
shares, cash, or a combination of both) measured by the increase since the date
of grant in the value of the shares covered by the right. The Committee may
accelerate the date(s) on which stock appreciation rights may be exercised.
Restricted Stock. The Committee may grant shares of restricted stock
(for any or no consideration), subject to any restrictions the Committee may
determine. Except with respect to restricted stock whose restrictions lapse upon
the attainment of performance goals under Section 162(m) of the
44
Code, the Committee may accelerate the date(s) on which the restrictions will
lapse. Before the lapse of restrictions on shares of restricted stock, the
participant will have voting and dividend rights on the shares. Any participant
who makes an election under Section 83(b) of the Code with respect to restricted
stock, regarding the immediate recognition of income, must provide us with a
copy of the election within 10 days of filing the election with the Internal
Revenue Service.
The Committee may provide that restricted stock vests only to the
extent performance goals established by the Committee are met. The Committee may
select one or more performance criteria from the following list: sales,
revenues, profit, return on sales, net operating profit after taxes, investment
turnover, customer service indices, funds from operations, income from
operations, return on assets, return on net assets, asset turnover, return on
equity, return on capital, market price appreciation of Shares, economic value
added, total stockholder return, net income, pre-tax income, earnings per share,
operating profit margin, net income margin, sales margin, cash flow, market
share, sales growth, revenue, net revenue growth, capacity utilization, customer
penetration, increase in customer base, net income growth, expense control
and/or hiring of personnel. The criteria may apply to the individual, a
division, the Company or a subsidiary of the Company.
Restricted Stock Unit. The Committee may grant restricted stock Units
subject to any restrictions the Committee may determine. A restricted stock Unit
entitles a participant to receive (with respect to a vested restricted stock
Unit) one share of our stock, the cash value thereof, or a combination of both.
Restricted stock Units are credited to a bookkeeping account in the
participant's name.
Although a participant will not have voting or dividend rights with respect
to his or her restricted stock Units, a participant will have dividend
equivalent rights on his or her restricted stock Units. On each date that the
Company pays a cash dividend to holders of shares, an additional number of
restricted stock Units equal to the total number of restricted stock Units
credited to the participant's bookkeeping account on such date, multiplied by
the dollar amount of the per share cash dividend, and divided by the fair market
value of a share on such date will be credited to the participant's account.
Restricted stock Units attributable to such dividend equivalent rights will
accumulate and vest at the same time as the restricted stock Units to which they
relate vest.
The Committee may provide that restricted stock Units vest only to the
extent performance goals established by the Committee are met. The Committee may
select one or more performance criteria from the above list for restricted
stock.
Bonus Stock. The Committee may grant awards entitling a participant to
receive shares without payment therefor as a bonus for services provided to our
Company or a related company. Bonus stock is fully vested on the date of grant.
Dividend Equivalent Rights. The Committee may grant a separate award
entitling a participant to receive dividend equivalent rights. Such dividend
equivalent rights shall accumulate and be paid shortly after they vest. Once
vested, they shall be paid at the same time corresponding cash dividends are
paid to shareholders.
Treatment of Awards upon Termination of Service. If a participant's service
terminates for any reason (including death or disability), all options and stock
appreciation rights then held by the participant that were not exercisable
immediately before the termination of service will terminate on that date,
except as otherwise stated in the participant's award agreement. Any remaining
options and stock appreciation rights will remain exercisable for one year from
the date of termination of service by reason of death or disability, three
months from the date of termination of service for any other reason, or for a
shorter or longer period as stated in the participant's award agreement.
Notwithstanding the post-termination
45
exercise periods described above, no option or stock appreciation right may be
exercised beyond its original term.
Except as otherwise stated in a participant's award agreement, if a
participant holds shares of restricted stock and terminates service for any
reason, including death or disability, before the lapse of the restrictions, the
participant will forfeit the shares to us. Except as otherwise stated in a
participant's award agreement, restricted stock Units and dividend equivalent
rights (granted with respect to such Units or granted on a stand-alone basis) to
which a participant has not become entitled will terminate irrevocably upon the
participant's termination of service for any reason, including death or
disability.
Transferability. Awards generally are not transferable, except by will or
under the laws of descent and distribution. The Committee has the authority,
however, to permit a participant to transfer NQSOs and Stock Appreciation
Rights.
Adjustments in Shares; Corporate Transactions. If a stock dividend, stock
split, reverse split, spin-off, or similar change in capitalization occurs, the
Committee will make appropriate adjustments to the maximum number and type of
shares that may be subject to awards and delivered under the 2007 Plan, the kind
and aggregate number of shares to outstanding awards, the exercise price of
outstanding options, and the amount over which appreciation of an outstanding
stock appreciation right is measured.
If a corporate transaction such as a merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation occurs, each
outstanding award will be assumed by the surviving or successor entity, except
that the Committee may elect to terminate all or a portion of any outstanding
award, effective upon the closing of the corporate transaction, if the Committee
determines that doing so is in our Company's best interests. If so, the
Committee or the will give each participant holding an option and stock
appreciation right not less than seven days' notice before the termination to
exercise any such option or stock appreciation right that is to be so
terminated, to the extent it is then exercisable, before the termination.
Further, in the event of a corporate transaction, the Committee in its
discretion, may:
o accelerate the date on which options, stock appreciation rights and
restricted stock Units (other than PSUs) vest; and/or
o remove restrictions from outstanding shares of restricted stock (other
than Performance Stock).
The Committee may also change the terms of any outstanding award to reflect the
corporate transaction, subject to certain limitations. Finally, the Committee or
the board of directors may, in lieu of the actions described above, arrange to
have the surviving or acquiring entity grant the participant a replacement award
that, in the judgment of the Committee, is substantially equivalent to the
replaced award
Compensation of Directors
The following table sets forth the dollar value of all cash and non-cash
compensation earned by or awarded to the directors of the Company during 2006.
Except for Paul Pedersen, none of the following person served in any capacity
with the registrant as of the end of registrant's last fiscal year.
46
Fee Nonqualified
Earned Non-Equity Deferred All
or Paid Stock Option Incentive Plan Compensation Other
in Cash Awards Awards Compensation Earnings Compensation
Name ($) ($)(1) ($)(1) ($) ($) ($) Total ($)
------------------ -------- ------ ------ -------------- ------------ ------------ ---------
Philip Urso 24,000 24,000
Howard L. Haronian 0 25,299 25,299
Paul Koehler 0 0
William Bush 0 0
Paul Pedersen (2) 0 0
(1) The dollar value of stock awards and option awards are calculated in
accordance with Statement of Financial Account Standard ("SFAS") 123R,
Share Based Payments. The Company's policy and assumptions made in the
valuation of share based payments are contained in Note 2 to the
Company's financial statements attached hereto as Exhibit 99.1.
(2) Paul Pedersen resigned as the sole director and sole officer of our company
and our subsidiaries upon the consummation of the Merger.
Narrative to Director Compensation Table
Pursuant to the Plan, each non-employee director shall be entitled to
receive ten-year options to purchase (i) 10,000 shares of our Common Stock at an
exercise price equal to the fair market value of our Common Stock on the date of
grant upon such non-employee director's initial election or appointment to the
board of directors and annually thereafter, plus 2,500 addition shares of Common
Stock for committee or board chairpersons, (ii) $25,000 per annum in cash, plus
$1,000 per meeting attended in person or by telephone, and (iii) $500 per
committee meeting.
On October 24, 2006, Mr. Howard L. Haronian received a one time grant of an
option to purchase 35,039 shares of our Common Stock at an exercise price of
$1.43 per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain related parties to Towerstream prior to the consummation of the
Merger entered into certain financing agreements with Towerstream. On January 4,
2007, prior to the Merger, Philip Urso, Towerstream's chairman, Natale Urso,
Philip Urso's father, George E. Kilguss, III, Towerstream's chief financial
officer, and Howard L. Haronian, a director of Towerstream and a cousin of
Philip Urso, collectively transferred an aggregate of $1,616,753 in outstanding
promissory notes (the "Notes") to a group of unaffiliated third parties (the
"Note Purchasers") in an arms-length transaction for cash. In connection with
the Note transfers, Towerstream agreed to certain modifications to the Notes and
agreed that Towerstream will cause such Notes, as modified, to be adopted as
obligations of the Company upon effectiveness of the Merger, and the Company
assumed such obligations on January 12, 2007. The Notes: have a maturity date of
January 4, 2008; (ii) accrue interest at the rate of 10% per annum; and (iii)
became automatically convertible into shares of Common Stock of the Company
immediately following the Merger at a conversion price of $1.50 per share. Each
of the transferred Notes has the same conversion features and terms as described
above. In addition, an additional Note in the principal amount of $250,000 was
outstanding with a right to be converted at $1.43 per share upon the
effectiveness of the Merger. On November 2, 2006, Towerstream issued a
Non-Negotiable Promissory Note in the principal amount of $250,000 due six
months following the issuance date (the "Note") in connection with certain
bridge financing arrangements. On January 4, 2007, Towerstream amended and
restated the Note, agreed to cause the Note to be adopted as an obligation of
the Company upon the effectiveness of the Merger,
47
and agreed such note may be convertible into shares of common stock of the
Company immediately following the Merger at a conversion price of $1.60 per
share. All of the foregoing Notes, as amended, automatically converted into
shares of Common Stock pursuant to their terms upon the effectiveness of the
Merger. As a result of such conversions, the Company issued 1,458,993 shares of
Common Stock following consummation of the Merger.
The prior transactions in which the Notes were issued are summarized below:
On August 2, 2002, we borrowed $250,000 from Natale and Elizabeth Urso and
issued a Non-Negotiable Subordinated Promissory Note in the original principal
amount of $250,000. Interest on the unpaid principal balance of the note accrued
at the rate of 10% per year and the note is payable 60 days following demand at
any time following the 180th day after the date of issuance.
On April 1, 2003, we borrowed $253,000 from Mr. Urso. and issued a
Promissory Note, dated April 1, 2003, in the original principal amount of
$253,000. The outstanding balance under note, together with the outstanding
balance under a Promissory note, dated November 30, 2004, in the original
principal amount of $100,000, and deferred compensation in the amounts of
$111,959.24 for 2004 and $76,659.15 for 2005 owed to Mr. Urso, was consolidated
under a single new Promissory Note, dated August 1, 2005, in the original
principal amount of $360,564.04. The new note accrued interest on the unpaid
outstanding balance thereunder at the rate of 5% per year and is due on August
1, 2008. The holder could convert up to 50% of he outstanding unpaid balance
under the note into shares of our Common Stock at a conversion price of $1.00
per share.
On November 6, 2003, we entered into a Loan and Security Agreement with
Sovereign Bank which provided for a $36,639.00 term loan from Sovereign to
Towerstream. The loan has a term of four years, is payable in equal monthly
installments and is secured by an Unlimited Guaranty of payment by Mr. Urso.
On September 7, 2004, we borrowed from George E. Kilguss, III, our Chief
Financial Officer, $150,000 and issued him a Convertible Promissory Note dated
November 7, 2004. The note accrued interest at 10% per year, was convertible
into shares of our Common Stock at a conversion price of $.80 per share and was
due on November 7, 2007.
On November 10, 2005, we borrowed $250,000 from Howard Haronian, one of our
directors, and issued Mr. Haronian a Promissory Note, dated November 10, 2005,
in the original principal amount of $250,000. The note accrued interest at the
rate of 10% per year, was convertible into shares of Towerstream Common Stock at
a conversion price of $1.00 per share and was due on November 10, 2006.
On December 7, 2005, we borrowed $250,000 from Mr. Urso and issued Mr. Urso
a Promissory Note, dated December 7, 2005, in the original principal amount of
$250,000. The note accrued interest on the unpaid balance thereunder at the rate
of 10% per year, was convertible into shares of Towerstream Common Stock at a
conversion price of $1.00 per share and was due on December 7, 2006.
On January 13, 2006 and July 12, 2006 we borrowed $250,000 and $50,000,
respectively, from Mr. Urso and issued two Demand Promissory Notes, dated
January 13, 2006 and July 12, 2006, to Mr. Urso in the original principal
amounts of $250,000 and $50,000, respectively. The notes accrued interest at the
rate of 10% per year and were payable 60 days following demand by the holder.
On October 1, 2006, we borrowed $125,000, from Mr. Urso and issued a
Secured Demand Promissory Note. The note accrued interest at the rate of 10% per
year, was payable 60 days following demand by the holder and was secured by all
of our the assets.
48
On October 1, 2006, we borrowed $150,000, from Mr. Haronian and issued Mr.
Haronian a Secured Demand Promissory Note. The note accrued interest at the rate
of 10% per year, was payable 60 days following demand by the holder and was
secured by all of our assets.
ITEM 2.03. CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT.
Reference is made to the disclosure set forth under Item 2.01 and Item 3.02
of this Current Report on Form 8-K which disclosure is incorporated herein by
reference.
ITEM 3.02. UNREGISTERED SALES OF EQUITY SECURITIES
In connection with the Merger, as of January 18, 2007, we accepted
subscriptions for a total of $11,497,625 of Units, each Unit consisting of (i)
50,000 shares of our Common Stock and (ii) a detachable warrant to purchase
25,000 shares of our Common Stock at an exercise price of $4.50 per share, which
expire on the fifth anniversary of the date on which the warrants are issued, at
a purchase price of $112,500 per Unit, from accredited investors pursuant to the
terms of a Confidential Private Offering Memorandum, dated December 21, 2006, as
supplemented (the "Memorandum").
In addition to the sale of the Units, we also accepted subscriptions for
$3,500,000 of Debentures offered pursuant to the Memorandum.
The Private Placement was made solely to "accredited investors," as that
term is defined in Regulation D under the Securities Act. The Common Stock and
warrants were not registered under the Securities Act, or the securities laws of
any state, and were offered and sold in reliance on the exemption from
registration afforded by Section 4(2) and Regulation D (Rule 506) under the
Securities Act and corresponding provisions of state securities laws, which
exempt transactions by an issuer not involving any public offering. In
connection with the Private Placement, we paid a cash fee in an amount of 7% of
the gross proceeds from the offering to certain placement agents and issued
placement agent warrants to purchase a number of shares equal to up to 5% of the
aggregate number of shares of the Company's common stock sold to investors
introduced by the placement agents.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 70,000,000 shares of Common Stock and
5,000,000 shares of preferred stock. Immediately following the Merger and the
closing of the Private Placement we issued an additional 5,110,056 shares of
Common Stock. Following the Merger and other transactions described herein our
capitalization was substantially as follows:
Shares Outstanding: Common Stock
------------
Issued to Towerstream Common Stockholders 15,000,000
Current Offering purchasers Common Stock (at $12,002,500) 5,110,056
Issued upon conversion of Convertible Promissory Notes 1,458,833
Stockholders of public company 1,900,000
------------
Total 23,468,889
49
COMMON STOCK
The holders of Common Stock are entitled to one vote per share. The
Company's Certificate of Incorporation does not provide for cumulative voting.
The holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the board of directors out of legally available
funds. Upon liquidation, dissolution or winding-up, the holders of Common Stock
are entitled to share ratably in all assets that are legally available for
distribution. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of any series of preferred stock, which may be designated
solely by action of the board of directors and issued in the future.
PREFERRED STOCK
The board of directors is authorized, subject to any limitations prescribed
by law, without further vote or action by the stockholders, to issue from time
to time shares of preferred stock in one or more series. Each such series of
preferred stock shall have such number of shares, designations, preferences,
voting powers, qualifications, and special or relative rights or privileges as
shall be determined by the board of directors, which may include, among others,
dividend rights, voting rights, liquidation preferences, conversion rights and
preemptive rights.
SENIOR DEBENTURE
On January 16, 2007, the Company entered into a Securities Purchase
Agreement and related agreements, and on January 18, 2007 issued the 8% Senior
Convertible Debentures (the "Senior Debentures") and the Senior Debenture Holder
Warrants (as defined below) and entered into the Registration Rights Agreement,
with the purchasers of $3,500,000 of the Senior Debentures. The Senior
Debentures have a maturity date of December 31, 2009 (the "Maturity Date") and
are convertible, at each holder's option, into shares of the Company's Common
Stock at a conversion price equal to $2.75 per share.
The Senior Debentures provide that the Company shall pay interest on the
aggregate unconverted and then outstanding principal amount of the Senior
Debentures at the rate of 8% per annum, payable quarterly in arrears on January
1, April 1, July 1 and October 1, beginning on January 1, 2008. So long as a
resale registration statement is in effect with respect to the shares of common
stock underlying the Senior Debenture, interest thereunder can be paid in either
cash or Common Stock, at the Company's discretion. If interest payments are made
in shares of Common Stock, the shares shall be valued at 90% of the ten (10) day
volume weighted average price of the Common Stock prior to the interest payment
date. In the event that there is an effective registration statement on file
with the SEC with respect to the Common Stock underlying the Senior Debenture
and the closing bid price for the ten (10) trading days prior to an interest
payment date is $3.44 or greater, the interest payment for that period will be
waived. If there is an effective registration statement on file with the SEC
with respect to the Common Stock underlying the Senior Debenture and the ten day
volume weighted average price of the Company's Common Stock exceeds $5.50 for
ten (10) consecutive trading days, the Company can require the holders to
convert the Senior Debentures upon ten (10) days prior written notice. Any
unconverted amount of the Senior Debentures shall be subject to full ratchet
anti-dilution protection with respect to the conversion price through the
earlier of (i) Maturity Date or (ii) full conversion of the Senior Debentures.
The Senior Debenture shall be senior indebtedness of the Company, and the
Company generally may not pledge or grant a lien on any of its assets without
the holders' consent. In addition, for one year following issuance of the Senior
Debentures, the Company has granted the holders of the Senior Debentures a right
of first refusal to participate in any equity or equity-linked financing
conducted by the
50
Company (other than traditional bank financing). The amount of this right shall
be pro rata, with the each Senior Debenture holder's portion equal to a fraction
the numerator of which shall be $3,500,000 and the denominator of which shall be
the sum of $3,500,000 and $11,497,625, the aggregate purchase price for the
Units sold pursuant to the Private Placement.
In connection with the Senior Debentures, the Company issued a five-year
warrant to purchase 1,272,727 shares of Common Stock, 50% of such shares being
exercisable at $4.00 per share and 50% of such shares being exercisable at $6.00
per share (the "Senior Debenture Holder Warrant"). In the event that any
adjustment is made in the conversion price of the Senior Debentures at any time
prior to the Maturity Date or the full conversion of the Senior Debentures, the
exercise price of the Senior Debenture Holder Warrants will be adjusted to a
price that is equal to 145% (for the $4.00 warrants) of the adjusted conversion
price, and 218% (for the $6.00 warrants) of the adjusted conversion price,
respectively.
The Company agreed to file a registration statement with the SEC covering
the resale of the shares of Common Stock underlying the Senior Debentures and
the Senior Debenture Holder Warrants within 70 days after the original issuance
of the Senior Debentures and Senior Debenture Holder Warrants. The Company will
cause such registration statement to be declared effective by the SEC within 130
days after the original issuance of the Senior Debentures. If the registration
statement is either (i) not filed with the SEC within 70 days after the original
issuance date or (ii) not declared effective by the SEC within 170 days after
the original issuance date, the Company shall be subject to liquidated damage
payments of 1% of the Senior Debenture purchase price, or $35,000, per month of
delinquency with a maximum amount of damages of 6% of the Senior Debentures
purchase price, or $210,000.
The Company paid a placement agent fee in connection with the Senior
Debentures in the amount of $140,000 and issued a warrant to purchase 63,636
shares of Common Stock.
The terms of the Senior Debenture may be amended only with the approval of
the Company and not less than a majority of the outstanding principal amount of
the Debentures.
The foregoing description of the Senior Debenture and related agreements
does not purport to be complete and is qualified in its entirety by reference to
the complete text of the form of Securities Purchase Agreement, Senior
Debenture, Senior Debenture Holder Warrant, and Registration Rights Agreement
which are annexed as exhibits hereto.
WARRANTS
We issued five year warrants to purchase 2,555,028 shares of our Common
Stock at an exercise price of $4.50 per share to investors in the Private
Placement discussed under Item 3.02. We issued warrants to purchase 1,272,727
shares of our Common Stock to the purchasers at the Senior Debentures, 50% of
which are exercisable at $4.00 per share and 50% at $6.00 per share. We also
have outstanding warrants to purchase 796,078 shares of our Common Stock at
exercise prices ranging from $0.71 to $2.14.
REGISTRATION RIGHTS
We agreed to file a "resale" registration statement with the SEC covering
all shares of Common Stock sold in the Private Placement and underlying the
warrants issued in the Private Placement, as well as all Common Stock underlying
the Senior Debenture.
We will maintain the effectiveness of the "resale" registration statement
from the effective date until the earlier of (i) 18 months after the date of the
closing of the Private Placement or (ii) the date on which all securities
registered under the registration statement (a) have been sold, or (b) are
otherwise able to be sold pursuant to Rule 144, at which time exempt sales may
be permitted for purchasers of the Units, subject to our right to suspend or
defer the use of the registration statement in certain events.
51
MARKET STAND-OFF
The Registration Rights Agreements contain a "market standoff" provision
pursuant to which in the context of an underwritten public offering in an amount
of at least $20,000,000, investors in the Private Placement and the Senior
Debentures agree not to offer, sell, pledge or otherwise transfer or dispose of
their securities of the Company for a period not to exceed the earlier of (i)
180 days following the date of a final prospectus relating to such public
offering or (ii) the one year anniversary of the closing of the Private
Placement, provided certain conditions, as described in the Registration Rights
Agreements, are satisfied.
The description of registration rights and market standoff rights is
qualified in its entirety by reference to the Form of Unit Registration Rights
Agreement, the Form of Registration Rights Agreement Addendum and the Form of
Senior Debenture Registration Rights Agreement attached hereto as Exhibits 10.2,
10.6 and 10.11 respectively.
LOCK-UP AGREEMENTS
All shares of common stock held by the Company's executive officers,
directors and principal (greater than 10%) stockholders, are subject to two
separate lock-up agreements containing such terms substantially as described
herein, with such modifications as may be determined by the Company and the
Senior Debenture Holders or placement agents, as applicable. The lock-up
agreements provide in general, that such persons may not sell or transfer any of
their shares for a period of one year following the Initial Closing without the
consent of the four placement agents that have participated in the offering of
the Units with the exception of contributions made to non-profit organizations
qualified as charitable organizations under Section 501(c)(3) of the Internal
Revenue Code, or in privately negotiated transactions, in each case, provided
the transferees agree, in writing, to be bound to the terms of the lock-up
agreements for the balance of the lock-up period.
In addition, pursuant to the lock up agreement to be entered with the
holders of the Company's Senior Debentures, without the agreement of the
Required Percentage of Debenture holders (75% of the principal amount
outstanding) all shares of common stock held by the Company's executive
officers, directors and principal (greater than 10%) stockholders will be
subject to lock-up agreements that will provide that such persons may not sell
or transfer any of their shares for a period of 30 days following the
effectiveness of a registration statement as required under the Senior Debenture
Registration Rights Agreement to be entered at the Initial Closing upon the
issuance of the Senior Debenture.
MARKET PRICE AND DIVIDENDS
Towerstream is, and has always been, a privately held company and now is a
wholly-owned subsidiary of the Company. There is not, and never has been, a
public market for the securities of Towerstream. Towerstream has never declared
or paid any cash dividends on its capital stock. In addition, there has never
been any active trading market for the Company's Common Stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides, in
general, that a corporation incorporated under the laws of the State of
Delaware, such as us, may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than a derivative action by or in the right of the
corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable
52
cause to believe such person's conduct was unlawful. In the case of a derivative
action, a Delaware corporation may indemnify any such person against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of Delaware or
any other court in which such action was brought determines such person is
fairly and reasonably entitled to indemnity for such expenses.
Our Certificate of Incorporation and By-Laws provide that we shall
indemnify our directors, officers, employees and agents to the extent and in the
manner permitted by the provisions of the DGCL, as amended from time to time,
subject to any permissible expansion or limitation of such indemnification, as
may be set forth in any stockholders' or directors' resolution or by contract.
Any repeal or modification of these provisions approved by our stockholders
shall be prospective only, and shall not adversely affect any limitation on the
liability of a director or officer existing as of the time of such repeal or
modification.
We are also permitted to apply for insurance on behalf of any director,
officer, employee or other agent for liability arising out of his actions,
whether or not the DGCL would permit indemnification.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW, CERTAIN BY-LAW PROVISIONS
Certain provisions of our By-Laws are intended to strengthen the Board of
Directors' position in the event of a hostile takeover attempt. These provisions
have the following effects:
o they provide that only business brought before an annual meeting by
the board of directors or by a stockholder who complies with the
procedures set forth in the By-Laws may be transacted at an annual
meeting of stockholders; and
o they provide for advance notice or certain stockholder actions, such
as the nomination of directors and stockholder proposals.
We are subject to the provisions of Section 203 of the DGCL, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
voting stock.
TRADING INFORMATION
Our Common Stock is currently approved for quotation on the OTC Bulletin
Board maintained by the National Association of Securities Dealers, Inc. under
the symbol "UGIR.OB," but is not trading. We intend to notify the OTC Bulletin
Board as soon as practicable of our name change and to obtain a new symbol.
The transfer agent for our Common Stock is Pacific Stock Transfer Company,
500 E. Warm Springs Road, Suite 240, Las Vegas, Nevada 89119.
53
ITEM 5.01. CHANGES IN CONTROL OF REGISTRANT.
Reference is made to the disclosure set forth under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
ITEM 5.02. DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS; COMPENSATORY ARRANGEMENTS OF
CERTAIN OFFICERS.
Paul Pedersen, our sole director and sole executive officer, resigned as of
January 12, 2007, immediately prior to the closing of the Merger. Pursuant to
the terms of the Merger Agreement, the new directors and officers of the Company
are as set forth therein. Reference is made to the disclosure set forth under
Item 2.01 of this Current Report on Form 8-K, which disclosure is incorporated
herein by reference.
ITEM 5.06. CHANGE IN SHELL COMPANY STATUS
As a result of the Merger, the Company would not be considered to be a
"shell company."
ITEM 7.01. REGULATION FD DISCLOSURE
Under the terms of the Securities Purchase Agreement dated January 16, 2007
for the Senior Debentures, the Company represented to the purchasers as follows:
"EXCEPT WITH RESPECT TO THE MATERIAL TERMS AND CONDITIONS OF THE
TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS, THE COMPANY
CONFIRMS THAT NEITHER IT NOR ANY OTHER PERSON ACTING ON ITS BEHALF HAS
PROVIDED ANY OF THE PURCHASERS OR THEIR AGENTS OR COUNSEL WITH ANY
INFORMATION THAT IT BELIEVES CONSTITUTES OR MIGHT CONSTITUTE MATERIAL,
NONPUBLIC INFORMATION. THE COMPANY UNDERSTANDS AND CONFIRMS THAT THE
PURCHASERS WILL RELY ON THE FOREGOING REPRESENTATION IN EFFECTING
TRANSACTIONS IN SECURITIES OF THE COMPANY."
We furnished the purchasers of the Senior Debentures and others with a
presentation concerning the Company's business and other information that may
constitute material non-public information. A copy of the presentation is being
furnished as Exhibit 99.7 to this Current Report.
Certain information in this Current Report included at Exhibit 99.7
attached hereto is being furnished and shall not be deemed "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or otherwise subject to the liabilities of such section. The information
in this Current Report under Item 7.01, and at Exhibit 99.6 shall not be
incorporated by reference into any filing under the Securities Act or the
Exchange Act regardless of any incorporation by reference language in any such
filing. This Current Report will not be deemed an admission as to the
materiality of any information in this Current Report that is being disclosed
pursuant to the Item 7.01.
54
The document that is being disclosed pursuant to this Item 7.01 at Exhibit
99.7 to this Current Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act, as amended, Section 21E of the
Exchange Act, and the Private Securities Litigation Reform Act of 1995 that are
not historical facts but rather are based on current expectations, estimates and
projections about the Company's business and industry, the Company's beliefs and
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of these words and similar
expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and other factors, some of which are beyond the Company's
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
These risks and uncertainties include those described in "Risk Factors" and
elsewhere in the Company's reports and filings made with the Securities and
Exchange Commission that are incorporated herein by reference. Persons are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's view only as of the date on which they were made. The
Company undertakes no obligation to update these statements or publicly release
the results of any revisions to the forward-looking statements that appear in
the information disclosed pursuant to this Item 7.01 to reflect events or
circumstances after the date of this Current Report, the date of the
accompanying materials included in Exhibit 99.7, or the date of any documents
incorporated by reference or to reflect the occurrence of unanticipated events.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
In accordance with Item 9.01(a), Towerstream's unaudited financial
statements for the period ended September 30, 2006 and for audited financial
statements the fiscal year ended December 31, 2005 and 2004 are filed in this
Current Report on Form 8-K as Exhibit 99.1 and 99.2, respectively.
(b) Unaudited Pro Forma Financial Information.
In accordance with Item 9.01(b), our unaudited pro forma financial
statements are filed in this Current Report on Form 8-K as Exhibit 99.3
(d) Exhibits.
The exhibits listed in the following Exhibit Index are filed as part of
this Current Report on Form 8-K.
Exhibit No. Description
----------- ------------------------------------------------------------------
2.1 Agreement of Merger and Plan of Reorganization, dated as of
January 12, 2007
2.2 Certificate of Merger
3.1 Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed
January 5, 2007)
3.2 By-laws
3.3 Certificate of Amendment to Certificate of Incorporation dated
January 12, 2007
55
4.1 2007 Equity Compensation Plan
10.1 Form of Private Placement Unit Subscription Agreement
10.2 Form of Unit Registration Rights Agreement
10.3 Form of Unit Warrant
10.4 Form of Unit Lockup Agreement
10.5 Form of Unit Subscription Agreement Addendum
10.6 Form of Unit Registration Rights Agreement Addendum
10.7 Form of Unit Warrant Addendum
10.8 Securities Purchase Agreement for 8% Senior Convertible Debentures
10.9 Form of 8% Convertible Debenture Note due December 31, 2009
10.10 Form of 8% Convertible Debenture Warrant
10.11 Registration Rights Agreement, for 8% Convertible Debenture
10.12 Form of Debenture Lockup Agreement
10.13 Placement Agent Agreement with Granite Financial Group, LLC
10.14 Placement Agent Agreement with Palladium Capital Advisors, LLC
10.15 Placement Agent Agreement with Ardent Advisors
10.16 Placement Agent Agreement with WFG Investments, Inc.
10.17 Form of Directors and Officers Indemnification Agreement
10.18 Form of 2007 Equity Compensation Plan Incentive Stock Option
Agreement
10.19 Form of 2007 Equity Compensation Plan Non-Qualified Stock Option
Agreement
10.20 Purchase Agreement for sale of University Girls Calendar, Ltd., a
Nova Scotia company, to Paul Pederson (Incorporated herein by
reference to Exhibit 2.4 to the Company's Current Report on Form
8-K filed January 5, 2007)
14.1 Code of Ethics
17.1 Letter of Paul Pedersen, dated January 12, 2007
21.1 List of Subsidiaries
56
99.1 Towerstream Corporation audited financial statements for the
fiscal years ended December 31, 2005 and 2004
99.2 Towerstream Corporation (unaudited) financial statements for the
fiscal quarter ended September 30, 2006
99.3 Unaudited pro forma consolidated balance sheet as of September 30,
2006 and unaudited pro forma consolidated statement of operations
for the year ended September 30, 2006
99.4 Charter of the Audit Committee of the Board of Directors
99.5 Charter of the Nominating Committee of the Board of Director
99.6 Charter of the Compensation Committee of the Board of Directors
99.7 Presentation
57
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.
Date: January 19, 2007 Towerstream Corporation
By: /s/ Jeffrey M. Thompson
--------------------------------------
Jeffrey M. Thompson
Chief Executive Officer and President
EXHIBIT 2.1
================================================================================
AGREEMENT OF MERGER AND
PLAN OF REORGANIZATION
among
UNIVERSITY GIRLS CALENDAR, LTD.
TOWERSTREAM ACQUISITION, INC. and
TOWERSTREAM CORPORATION
January 12, 2007
================================================================================
TABLE OF CONTENTS
1. The Merger.................................................................. 1
1.1 Merger................................................................ 1
1.2 Effective Time........................................................ 2
1.3 Certificate of Incorporation, By-laws, Directors and Officers......... 2
1.4 Assets and Liabilities................................................ 2
1.5 Manner and Basis of Converting Shares................................. 2
1.6 Surrender and Exchange of Certificates................................ 3
1.7 Parent Common Stock................................................... 4
1.8 Operation of Surviving Corporation.................................... 4
1.9 Further Assurances.................................................... 4
2. Representations and Warranties of the Company............................... 4
2.1 Organization, Standing, Subsidiaries, Etc............................. 5
2.2 Qualification......................................................... 5
2.3 Capitalization of the Company......................................... 5
2.4 Indebtedness.......................................................... 5
2.5 Company Stockholders.................................................. 5
2.6 Corporate Acts and Proceedings........................................ 6
2.7 Compliance with Laws and Instruments.................................. 6
2.8 Binding Obligations................................................... 6
2.9 Broker's and Finder's Fees............................................ 6
2.10 Financial Statements.................................................. 7
2.11 Absence of Undisclosed Liabilities.................................... 7
2.12 Changes............................................................... 7
2.13 Assets and Contracts.................................................. 8
2.14 Employees............................................................. 9
2.15 Tax Returns and Audits................................................ 10
2.16 Patents and Other Intangible Assets................................... 10
2.17 Employee Benefit Plans; ERISA......................................... 11
2.18 Title to Property and Encumbrances.................................... 12
2.19 Condition of Properties............................................... 12
2.20 Insurance Coverage.................................................... 12
2.21 Litigation............................................................ 12
2.22 Licenses.............................................................. 12
2.23 Interested Party Transactions......................................... 13
2.24 Environmental Matters................................................. 13
2.25 Questionable Payments................................................. 14
2.26 Obligations to or by Stockholders..................................... 14
2.27 Duty to Make Inquiry.................................................. 14
2.28 Disclosure............................................................ 14
3. Representations and Warranties of Parent and Acquisition Corp............... 14
3.1 Organization and Standing............................................. 14
3.2 Corporate Authority................................................... 15
3.3 Broker's and Finder's Fees............................................ 15
3.4 Capitalization of Parent.............................................. 15
i
3.5 Acquisition Corp...................................................... 15
3.6 Validity of Shares.................................................... 16
3.7 SEC Reporting and Compliance.......................................... 16
3.8 Financial Statements.................................................. 16
3.9 Governmental Consents................................................. 17
3.10 Compliance with Laws and Other Instruments............................ 17
3.11 No General Solicitation............................................... 17
3.12 Binding Obligations................................................... 17
3.13 Absence of Undisclosed Liabilities.................................... 17
3.14 Changes............................................................... 18
3.15 Tax Returns and Audits................................................ 18
3.16 Employee Benefit Plans; ERISA......................................... 19
3.17 Litigation............................................................ 20
3.18 Interested Party Transactions......................................... 20
3.19 Questionable Payments................................................. 20
3.20 Obligations to or by Stockholders..................................... 20
3.21 Assets and Contracts.................................................. 20
3.22 Employees............................................................. 21
3.23 Disclosure............................................................ 21
4. Additional Representations, Warranties and Covenants of the Stockholders.... 21
5. Conduct of Businesses Pending the Merger.................................... 22
5.1 Conduct of Business by the Company Pending the Merger................. 22
5.2 Conduct of Business by Parent and Acquisition Corp.................... 23
6. Additional Agreements....................................................... 24
6.1 Access and Information................................................ 24
6.2 Additional Agreements................................................. 25
6.3 Publicity............................................................. 25
6.4 Appointment of Directors and Officers................................. 25
6.5 Parent Name Change and Exchange Listing............................... 25
7. Conditions of Parties' Obligations.......................................... 25
7.1 Parent and Acquisition Corp........................................... 25
7.2 Company Obligations................................................... 27
8. Non-Survival of Representations and Warranties.............................. 28
9. Amendment of Agreement...................................................... 29
10. Definitions................................................................. 29
11. Closing..................................................................... 33
12. Indemnification and Related Matters......................................... 33
12.1 Indemnification by Parent............................................. 33
12.2 Survival.............................................................. 34
12.3 Time Limitations...................................................... 34
12.4 Limitation on Liability............................................... 34
12.5 Notice of Claims...................................................... 34
12.6 Payment of Damages.................................................... 35
13. Termination Prior to Closing................................................ 35
13.1 Termination of Agreement.............................................. 35
13.2 Termination of Obligations............................................ 36
ii
14. Miscellaneous............................................................... 36
14.1 Notices............................................................... 36
14.2 Entire Agreement...................................................... 37
14.3 Expenses.............................................................. 37
14.4 Dispute Resolution.................................................... 37
14.5 Time.................................................................. 38
14.6 Severability.......................................................... 38
14.7 Successors and Assigns................................................ 38
14.8 No Third Parties Benefited............................................ 38
14.9 Counterparts.......................................................... 38
14.10 Recitals, Schedules and Exhibits...................................... 38
14.11 Section Headings and Gender........................................... 38
14.12 Governing Law......................................................... 39
iii
LIST OF EXHIBITS AND SCHEDULES
Exhibits
A Certificate of Merger
B Certificate of Incorporation of the Company
C By-laws of the Company
D Directors and Officers of the Surviving Corporation and Parent
E Form of Opinion of Parent's Counsel
Company Disclosure Schedules
1.5 Holders of Parent Common Stock Post-Merger
1.5A Holders of Parent Common Stock Post-Merger Under the Options and Warrants
iv
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION is made and
entered into on January 12, 2007, by and among UNIVERSITY GIRLS CALANDER, LTD.,
a Delaware corporation ("Parent"), TOWERSTREAM ACQUISITION, INC., a Delaware
corporation ("Acquisition Corp."), which is a wholly-owned subsidiary of Parent,
and TOWERSTREAM CORPORATION, a Delaware corporation (the "Company").
WITNESSETH:
WHEREAS, the Board of Directors of each of Acquisition Corp., Parent
and the Company have each determined that it is fair to and in the best
interests of their respective corporations and stockholders for Acquisition
Corp. to be merged with and into the Company (the "Merger") upon the terms and
subject to the conditions set forth herein; and
WHEREAS, the Board of Directors of each of Parent, Acquisition Corp.
and the Company have approved the Merger in accordance with the Delaware General
Corporation Law (the "DGCL"), and upon the terms and subject to the conditions
set forth herein and in the Certificate of Merger (the "Certificate of Merger")
attached as Exhibit A hereto; and
WHEREAS, the requisite Stockholders (as such term is defined in
Section 10 hereof) have approved by written consent pursuant to Section 228 of
the DGCL this Agreement and the Certificate of Merger and the transactions
contemplated and described hereby and thereby, including, without limitation,
the Merger, and Parent, as the sole stockholder of Acquisition Corp., has
approved this Agreement, the Certificate of Merger and the transactions
contemplated and described hereby and thereby, including, without limitation,
the Merger; and
WHEREAS, immediately following the Closing (as such term is defined
herein), Parent (as it will exist as of the closing of the Merger) will sell up
to a maximum of $11,250,000 of its units with each unit consisting of (i) 50,000
shares of its common stock and (ii) a detachable transferable warrant to
purchase 25,000 shares of its common stock at $4.50 per share, at $112,500 per
unit, in a private placement offering to accredited investors (the "Private
Placement"), pursuant to the terms of Company's Confidential Private Placement
Memorandum, dated December 21, 2006, as supplemented (the "Memorandum"), for the
purpose of financing the ongoing business and operations of the Surviving
Corporation (as defined below) following the Merger; and
WHEREAS, the parties hereto intend that the Merger contemplated herein
shall qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code"), by reason of Section
368(a)(2)(E) of the Code.
NOW, THEREFORE, in consideration of the mutual agreements and
covenants hereinafter set forth, the parties hereto agree as follows:
1. The Merger.
1.1 Merger. Subject to the terms and conditions of this Agreement and
the Certificate of Merger, Acquisition Corp. shall be merged with and into the
Company in
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accordance with Section 251 of the DGCL. At the Effective Time (as
hereinafter defined), the separate legal existence of Acquisition Corp. shall
cease, and the Company shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") and shall
continue its corporate existence under the laws of the State of Delaware under
the name "Towerstream Corporation"
1.2 Effective Time. The Merger shall become effective upon the filing
of the Certificate of Merger with the Delaware Secretary of State in accordance
with Section 251 of the DGCL. The time at which the Merger shall become
effective as aforesaid is referred to hereinafter as the "Effective Time."
1.3 Certificate of Incorporation, By-laws, Directors and Officers.
(a) The Certificate of Incorporation of the Company, as in effect
immediately prior to the Effective Time, attached as Exhibit B hereto, shall be
the Certificate of Incorporation of the Surviving Corporation from and after the
Effective Time until amended in accordance with applicable law and such
Certificate of Incorporation.
(b) The By-laws of the Company, as in effect immediately prior to
the Effective Time, attached as Exhibit C hereto, shall be the By-laws of the
Surviving Corporation from and after the Effective Time until amended in
accordance with applicable law, the Certificate of Incorporation and such
By-laws.
(c) The directors and officers listed in Exhibit D hereto shall
be the directors and officers of the Surviving Corporation, and each shall hold
his respective office or offices from and after the Effective Time until his
successor shall have been elected and shall have qualified in accordance with
applicable law, or as otherwise provided in the Certificate of Incorporation or
By-laws of the Surviving Corporation.
1.4 Assets and Liabilities. At the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises of a
public as well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of Acquisition Corp. and the Company
(collectively, the "Constituent Corporations"); and all the rights, privileges,
powers and franchises of each of the Constituent Corporations, and all property,
real, personal and mixed, and all debts due to any of the Constituent
Corporations on whatever account, as well for stock subscriptions as all other
things in action or belonging to each of the Constituent Corporations, shall be
vested in the Surviving Corporation; and all property, rights, privileges,
powers and franchises, and all and every other interest shall be thereafter as
effectively the property of the Surviving Corporation as they were of the
several and respective Constituent Corporations, and the title to any real
estate vested by deed or otherwise in either of such Constituent Corporations
shall not revert or be in any way impaired by the Merger; but all rights of
creditors and all liens upon any property of any of the Constituent Corporations
shall be preserved unimpaired, and all debts, liabilities and duties of the
Constituent Corporations shall thenceforth attach to the Surviving Corporation,
and may be enforced against it to the same extent as if said debts, liabilities
and duties had been incurred or contracted by it.
1.5 Manner and Basis of Converting Shares.
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(a) At the Effective Time:
(i) each share of common stock, par value $0.001 per share,
of Acquisition Corp. that shall be outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive one (1) share of
common stock, par value $0.001 per share, of the Surviving Corporation, so that
at the Effective Time, Parent shall be the holder of all of the issued and
outstanding shares of the Surviving Corporation;
(ii) the shares of common stock, par value $0.001 per share,
of the Company (the "Company Stock") beneficially owned by the Stockholders
listed in Schedule 1.5 (other than shares of Company Stock as to which appraisal
rights are perfected pursuant to the applicable provisions of the DGCL and not
withdrawn or otherwise forfeited and shares of Company Stock set forth in
Section 1.5(a)(iv) hereof), shall, by virtue of the Merger and without any
action on the part of the holders thereof, be converted into the right to
receive the number of shares of Parent Common Stock specified in Schedule 1.5
for each of the Stockholders, which shall be equal to 0.7007716 of one share of
Parent Common Stock for each share of Company Stock;
(iii) the right to acquire any shares of Company Stock under
any warrants, options and convertible promissory notes (the "Company Convertible
Securities") listed on Schedule 1.5A shall, by virtue of the Merger and without
any action on the part of the holders of such Company Convertible Securities,
the Company, the Surviving Corporation, or the Parent, be converted into the
right to receive 0.7007716 of the number of shares of Parent Common Stock
specified in such Company Convertible Security for each share of Company Stock,
at the exercise price per share stated in such Company Convertible Security of
the Company, including all obligations to issue such shares of Company Stock
upon satisfaction of any and all conditions or agreements affecting such
issuance by the holder thereof or the Company (including, without limitation,
any vesting conditions or other restrictions and the obligation to register such
shares under the Securities Act of 1933, as amended, if any) which conditions,
restrictions, and obligations shall expressly be assumed by the Parent as its
obligation and continued with respect to such holders and the Parent shall
assume all of the obligations of the Company under the Warrants following the
Effective Time; and
(iv) each share of Company Stock held in the treasury of the
Company immediately prior to the Effective Time shall be cancelled in the Merger
and cease to exist.
(b) After the Effective Time, there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Stock that were outstanding immediately
prior to the Effective Time.
1.6 Surrender and Exchange of Certificates. Promptly after the
Effective Time and upon (i) surrender of a certificate or certificates
representing shares of Company Stock that were outstanding immediately prior to
the Effective Time or an affidavit and indemnification in form reasonably
acceptable to counsel for the Parent stating that such Stockholder has lost
their certificate or certificates or that such have been destroyed and (ii)
delivery of a Letter of
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Transmittal (as described in Section 4 hereof), Parent shall issue to each
record holder of Company Stock surrendering such certificate or certificates and
Letter of Transmittal, a certificate or certificates registered in the name of
such Stockholder representing the number of shares of Parent Common Stock that
such Stockholder shall be entitled to receive as set forth in Section 1.5(a)(ii)
hereof. Until the certificate, certificates or affidavit is or are surrendered
together with the Letter of Transmittal as contemplated by this Section 1.6 and
Section 4 hereof, each certificate or affidavit that immediately prior to the
Effective Time represented any outstanding shares of Company Stock shall be
deemed at and after the Effective Time to represent only the right to receive
upon surrender as aforesaid the Parent Common Stock specified in Schedule 1.5
hereof for the holder thereof or to perfect any rights of appraisal which such
holder may have pursuant to the applicable provisions of the DGCL.
1.7 Parent Common Stock. Parent agrees that it will cause the Parent
Common Stock into which the Company Stock is converted at the Effective Time
pursuant to Section 1.5(a)(ii) and which Parent Common Stock may be issued
following the Effective Time pursuant to Section 1.5(a)(iii) pursuant to Company
Convertible Securities to be available for such purposes. Parent further
covenants that immediately following the Effective Time, Parent will effect
cancellations of its outstanding shares of Parent Common Stock and that there
will be no more than 1,900,000 shares of Parent Common Stock issued and
outstanding, and that no other common or preferred stock or equity securities or
any options, warrants, rights or other agreements or instruments convertible,
exchangeable or exercisable into common or preferred stock or other equity
securities shall be issued or outstanding, except as described herein.
1.8 Operation of Surviving Corporation. The Company acknowledges that
upon the effectiveness of the Merger, and the material compliance by the Parent
and Acquisition Corp. with their respective duties and obligations hereunder,
Parent shall have the absolute and unqualified right to deal with the assets and
business of the Surviving Corporation as its own property without limitation on
the disposition or use of such assets or the conduct of such business.
1.9 Further Assurances. From time to time, from and after the
Effective Time, as and when reasonably requested by Parent, the proper officers
and directors of the Company as of the Effective Time shall, for and on behalf
and in the name of the Company or otherwise, execute and deliver all such deeds,
bills of sale, assignments and other instruments and shall take or cause to be
taken such further actions as Parent, Acquisition Corp. or their respective
successors or assigns reasonably may deem necessary or desirable in order to
confirm or record or otherwise transfer to the Surviving Corporation title to
and possession of all of the properties, rights, privileges, powers, franchises
and immunities of the Company or otherwise to carry out fully the provisions and
purposes of this Agreement and the Certificate of Merger.
2. Representations and Warranties of the Company.
The Company hereby represents and warrants to Parent, Acquisition Corp. and
to as follows. Notwithstanding anything to the contrary contained herein,
disclosure of items in the Memorandum (as supplemented on January __, 2007 and
by the draft Current Report on Form 8-K of Towerstream Corporation)
(collectively, the "Disclosures") shall be deemed to be disclosure of such items
for all purposes under this Agreement, including, without limitation, for all
applicable representations and warranties of the Company:
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2.1 Organization, Standing, Subsidiaries, Etc.
(a) The Company is a corporation duly organized and existing in
good standing under the laws of the State of Delaware and has all requisite
power and authority (corporate and other) to carry on its business, to own or
lease its properties and assets, to enter into this Agreement and the
Certificate of Merger and to carry out the terms hereof and thereof. Copies of
the Certificate of Incorporation and By-laws of the Company that have been
delivered to Parent and Acquisition Corp. prior to the execution of this
Agreement are true and complete and have not since been amended or repealed.
(b) The Company has no subsidiaries or direct or indirect
interest (by way of stock ownership or otherwise) in any firm, corporation,
limited liability company, partnership, association or business.
2.2 Qualification. The Company is duly qualified to conduct business
as a foreign corporation and is in good standing in each jurisdiction wherein
the nature of its activities or its properties owned or leased makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the condition (financial or otherwise),
properties, assets, liabilities, business operations, results of operations or
prospects of the Company taken as a whole (the "Condition of the Company").
2.3 Capitalization of the Company. The authorized capital stock of the
Company consists of 30,000,000 shares of Company Stock, of which there are
21,404,977 shares of Company Stock issued and outstanding, all of such shares
are duly authorized, validly issued, fully paid and non-assessable and none of
such shares have been issued in violation of the preemptive rights of any
Person. The offer, issuance and sale of such shares of Company Stock were (a)
exempt from the registration and prospectus delivery requirements of the
Securities Act, (b) registered or qualified (or were exempt from registration or
qualification) under the registration or qualification requirements of all
applicable state securities laws and (c) accomplished in conformity with all
other applicable securities laws. None of such shares of Company Stock are
subject to a right of withdrawal or a right of rescission under any federal or
state securities or blue-sky law. Except as otherwise set forth in this
Agreement or the Disclosures, the Company has no outstanding options, rights or
commitments to issue Company Stock or other securities of the Company, and there
are no outstanding securities convertible or exercisable into or exchangeable
for Company Stock or other securities of the Company.
2.4 Indebtedness. The Company has no Indebtedness for Borrowed Money,
except as otherwise set forth in this Agreement or disclosed on the Balance
Sheet.
2.5 Company Stockholders. Schedule 1.5 and Schedule 1.5A hereto
contain a true and complete list of the names of the record owners of all of the
outstanding shares of Company Stock and other securities of the Company,
together with the number of securities held or to which such Person has rights
to acquire. To the knowledge of the Company, there is no voting trust, agreement
or arrangement among any of the beneficial holders of Company Stock affecting
the nomination or election of directors or the exercise of the voting rights of
Company Stock.
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2.6 Corporate Acts and Proceedings. The execution, delivery and
performance of this Agreement and the Certificate of Merger (together, the
"Merger Documents") have been duly authorized by the Board of Directors of the
Company and have been approved by the requisite vote of the Stockholders, and
all of the corporate acts and other proceedings required for the due and valid
authorization, execution, delivery and performance of the Merger Documents and
the consummation of the Merger have been validly and appropriately taken, except
for the filings referred to in Section 1.2.
2.7 Compliance with Laws and Instruments. The business, products and
operations of the Company have been and are being conducted in compliance in all
material respects with all applicable laws, rules and regulations, except for
such violations thereof for which the penalties, in the aggregate, would not
have a material adverse effect on the Condition of the Company. The execution,
delivery and performance by the Company of the Merger Documents and the
consummation by the Company of the transactions contemplated by this Agreement:
(a) will not require any authorization, consent or approval of, or filing or
registration with, any court or governmental agency or instrumentality, except
such as shall have been obtained prior to the Closing, (b) will not cause the
Company to violate or contravene (i) any provision of law, (ii) any rule or
regulation of any agency or government, (iii) any order, judgment or decree of
any court, or (iv) any provision of the Certificate of Incorporation or By-laws
of the Company, (c) will not violate or be in conflict with, result in a breach
of or constitute (with or without notice or lapse of time, or both) a default
under, any indenture, loan or credit agreement, deed of trust, mortgage,
security agreement or other contract, agreement or instrument to which the
Company is a party or by which the Company or any of its properties is bound or
affected, except as would not have a material adverse effect on the Condition of
the Company, and (d) will not result in the creation or imposition of any Lien
upon any property or asset of the Company. The Company is not in violation of,
or (with or without notice or lapse of time, or both) in default under, any term
or provision of its Certificate of Incorporation or By-laws or of any indenture,
loan or credit agreement, deed of trust, mortgage, security agreement or, except
as would not materially and adversely affect the Condition of the Company, any
other material agreement or instrument to which the Company is a party or by
which the Company or any of its properties is bound or affected.
2.8 Binding Obligations. The Merger Documents constitute the legal,
valid and binding obligations of the Company and are enforceable against the
Company in accordance with their respective terms, except as such enforcement is
limited by bankruptcy, insolvency and other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity.
2.9 Broker's and Finder's Fees. Except for fees paid to the placement
agents as set forth in the Disclosures, no Person has, or as a result of the
transactions contemplated or described herein will have, any right or valid
claim against the Company, Parent, Acquisition Corp. or any Stockholder for any
commission, fee or other compensation as a finder or broker, or in any similar
capacity. Parent and Acquisition Corp., on the one hand, and the Company, on the
other hand, hereby indemnify and hold each other harmless from and against any
and all claims, losses or liabilities for any such commission, fee or other
compensation as a result of the claim by any other Person that the indemnifying
party or parties introduced or assisted them in connection with the transactions
contemplated or described here.
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2.10 Financial Statements. Parent has previously been provided with
the Company's audited balance sheet (the "Balance Sheet") as of December 31,
2006 (the "Balance Sheet Date") and December 31, 2005 and the audited statements
of operations and accumulated deficits and cash flows for the years ended
December 31, 2006 and December 31, 2005. Such financial statements are
collectively referred to as the "Financial Statements". Such financial
statements (i) are in accordance with the books and records of the Company, (ii)
present fairly in all material respects the financial condition of the Company
at the dates therein specified and the results of its operations and changes in
financial position for the periods therein specified and (iii) have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a basis consistent with prior accounting periods.
2.11 Absence of Undisclosed Liabilities. The Company has no material
obligation or liability (whether accrued, absolute, contingent, liquidated or
otherwise, whether due or to become due), arising out of any transaction entered
into at or prior to the Closing, except (a) as disclosed in the Balance Sheet,
(b) to the extent set forth on or reserved against in the Balance Sheet or the
Notes to the Financial Statements, (c) current liabilities incurred and
obligations under agreements entered into in the usual and ordinary course of
business since the Balance Sheet Date, none of which (individually or in the
aggregate) has had or will have a material adverse effect on the Condition of
the Company, and (d) by the specific terms of any written agreement, document or
arrangement identified in the Disclosures.
2.12 Changes. Since the Balance Sheet Date, the Company has not (a)
incurred any debts, obligations or liabilities, absolute, accrued, contingent or
otherwise, whether due or to become due, except for fees, expenses and
liabilities incurred in connection with the Merger and related transactions and
current liabilities incurred in the usual and ordinary course of business, (b)
discharged or satisfied any Liens other than those securing, or paid any
obligation or liability other than, current liabilities shown on the Balance
Sheet and current liabilities incurred since the Balance Sheet Date, in each
case in the usual and ordinary course of business, (c) mortgaged, pledged or
subjected to Lien any of its assets, tangible or intangible other than in the
usual and ordinary course of business, (d) sold, transferred or leased any of
its assets, except in the usual and ordinary course of business, (e) cancelled
or compromised any debt or claim, or waived or released any right, of material
value, (f) suffered any physical damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the Condition of the
Company, (g) entered into any transaction other than in the usual and ordinary
course of business, (h) encountered any labor union difficulties, (i) made or
granted any wage or salary increase or made any increase in the amounts payable
under any profit sharing, bonus, deferred compensation, severance pay,
insurance, pension, retirement or other employee benefit plan, agreement or
arrangement, other than in the ordinary course of business consistent with past
practice or as described in the Disclosures, or entered into any employment
agreement, (j) issued or sold any shares of capital stock, bonds, notes,
debentures or other securities or granted any options (including employee stock
options), warrants or other rights with respect thereto, (k) declared or paid
any dividends on or made any other distributions with respect to, or purchased
or redeemed, any of its outstanding capital stock, (l) suffered or experienced
any change in, or condition affecting, the Condition of the Company other than
changes, events or conditions in the usual and ordinary course of its business,
none of which (either by itself or in conjunction with all such other changes,
events and conditions) has been materially adverse, (m) made any change in the
accounting principles, methods or practices followed by it or depreciation or
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amortization policies or rates theretofore adopted, (n) made or permitted any
amendment or termination of any material contract, agreement or license to which
it is a party, (o) suffered any material loss not reflected in the Balance Sheet
or its statement of income for the period ended on the Balance Sheet Date, (p)
paid, or made any accrual or arrangement for payment of, bonuses or special
compensation of any kind or any severance or termination pay to any present or
former officer, director, employee, stockholder or consultant, (q) made or
agreed to make any charitable contributions or incurred any non-business
expenses in excess of $50,000 in the aggregate, or (r) entered into any
agreement, or otherwise obligated itself, to do any of the foregoing.
2.13 Assets and Contracts.
(a) The Disclosures contain a true and complete list of all real
property leased by the Company, including a brief description of each item
thereof and of the nature of the Company's interest therein, and of all tangible
personal property owned or leased by the Company having a cost or fair market
value of greater than $200,000, including a brief description of each item and
of the nature of the interest of the Company therein. All the real property
listed in the Disclosures is leased by the Company under valid and enforceable
leases having the rental terms, termination dates and renewal and purchase
options described in the Disclosures; such leases are enforceable in accordance
with their terms, and there is not, under any such lease, any existing default
or event of default or event which with notice or lapse of time, or both, would
constitute a default by the Company, and the Company has not received any notice
or claim of any such default. The Company does not own any real property.
(b) Except as expressly set forth in this Agreement, the Balance
Sheet or the notes thereto, the Company is not a party to any written or oral
agreement not made in the ordinary course of business that is material to the
Company. Except as set forth in the Disclosures, the Company is not a party to
or otherwise bound by any written or oral (a) agreement with any labor union,
(b) agreement for the purchase of fixed assets or for the purchase of materials,
supplies or equipment in excess of normal operating requirements, (c) agreement
for the employment of any officer, individual employee or other Person on a
full-time basis or any agreement with any Person for consulting services, (d)
bonus, pension, profit sharing, retirement, stock purchase, stock option,
deferred compensation, medical, hospitalization or life insurance or similar
plan, contract or understanding with respect to any or all of the employees of
the Company or any other Person, (e) indenture, loan or credit agreement, note
agreement, deed of trust, mortgage, security agreement, promissory note or other
agreement or instrument relating to or evidencing Indebtedness for Borrowed
Money or subjecting any asset or property of the Company to any Lien or
evidencing any Indebtedness, (f) guaranty of any Indebtedness, (g) lease or
agreement under which the Company is lessee of or holds or operates any
property, real or personal, owned by any other Person under which payments to
such Person exceed $200,000 per year or with an unexpired term (including any
period covered by an option to renew exercisable by any other party) of more
than 60 days, (h) lease or agreement under which the Company is lessor or
permits any Person to hold or operate any property, real or personal, owned or
controlled by the Company, (i) agreement granting any preemptive right, right of
first refusal or similar right to any Person, (j) agreement or arrangement with
any Affiliate or any "associate" (as such term is defined in Rule 405 under the
Securities Act) of the Company or any present or former officer, director or
stockholder of the Company, (k)
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agreement obligating the Company to pay any royalty or similar charge for the
use or exploitation of any tangible or intangible property, (1) covenant not to
compete or other restriction on its ability to conduct a business or engage in
any other activity, (m) material distributor, dealer, manufacturer's
representative, sales agency, franchise or advertising contract or commitment,
(n) agreement to register securities under the Securities Act, (o) collective
bargaining agreement, or (p) agreement or other commitment or arrangement with
any Person continuing for a period of more than three months from the Closing
Date which involves an expenditure or receipt by the Company in excess of
$200,000. None of the agreements, contracts, leases, instruments or other
documents or arrangements described in the Disclosures requires the consent of
any of the parties thereto other than the Company to permit the contract,
agreement, lease, instrument or other document or arrangement to remain
effective following consummation of the Merger and the transactions contemplated
hereby.
(c) The Disclosures contain a true and complete list of all
patents, patent applications, trade names, trademarks, trademark registrations
and applications, copyrights, copyright registrations and applications, and
grants of licenses, both domestic and foreign, presently owned, possessed, used
or held by the Company; and the Company owns the entire right, title and
interest in and to the same, free and clear of all Liens and restrictions. The
Disclosures also contain a true and complete list of all licenses granted to or
by the Company with respect to the foregoing. All patents, patent applications,
trade names, trademarks, trademark registrations and applications, copyrights,
copyright registrations and applications and grants of licenses set forth (i)
are subject to no pending or, to the Company's knowledge, threatened challenge,
and (ii) can and will be transferred by the Company to the Surviving Corporation
as a result of the Merger and without the consent of any Person other than the
Company. Neither the execution nor delivery of the Merger Documents, nor the
consummation of the transactions contemplated thereby will give any licensor or
licensee of the Company any right to change the terms or provisions of,
terminate or cancel, any license to which the Company is a party.
(d) The Company has made available to Parent and Acquisition
Corp. true and complete copies of all agreements and other documents and a
description of all applicable oral agreements disclosed or referred to in the
Disclosures, as well as any additional agreements or documents, requested by
Parent or Acquisition Corp. The Company has in all material respects performed
all obligations required to be performed by it to date and is not in default in
any respect under any of the contracts, agreements, leases, documents,
commitments or other arrangements to which it is a party or by which it or any
of its property is otherwise bound or affected. To the knowledge of the Company,
all parties having material contractual arrangements with the Company are in
substantial compliance therewith and none are in material default thereunder.
The Company does not have outstanding any power of attorney.
2.14 Employees. The Company has complied in all material respects with
all laws relating to the employment of labor, and the Company has encountered no
material labor union difficulties. Other than pursuant to ordinary arrangements
of employment compensation, the Company is not under any obligation or liability
to any officer, director or employee of the Company.
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2.15 Tax Returns and Audits. All required federal, state and local Tax
Returns of the Company have been accurately prepared and duly and timely filed,
and all federal, state and local Taxes required to be paid with respect to the
periods covered by such returns have been paid. The Company is not and has not
been delinquent in the payment of any Tax. The Company has not had a Tax
deficiency proposed or assessed against it and has not executed a waiver of any
statute of limitations on the assessment or collection of any Tax. None of the
Company's federal income tax returns has been audited by any governmental
authority; and none of the Company's state or local income or franchise tax
returns has been audited by any governmental authority. The reserves for Taxes
reflected on the Balance Sheet are and will be sufficient for the payment of all
unpaid Taxes payable by the Company as of the Balance Sheet Date. Since the
Balance Sheet Date, the Company has made adequate provisions on its books of
account for all Taxes with respect to its business, properties and operations
for such period. The Company has withheld or collected from each payment made to
each of its employees the amount of all taxes (including, but not limited to,
federal, state and local income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and has paid the same to the proper Tax receiving officers or
authorized depositaries. There are no federal, state, local or foreign audits,
actions, suits, proceedings, investigations, claims or administrative
proceedings relating to Taxes or any Tax Returns of the Company now pending, and
the Company has not received any notice of any proposed audits, investigations,
claims or administrative proceedings relating to Taxes or any Tax Returns. The
Company is not obligated to make a payment, nor is it a party to any agreement
that under certain circumstances could obligate it to make a payment that would
not be deductible under Section 280G of the Code. The Company has not agreed,
nor is it required, to make any adjustments under Section 481(a) of the Code (or
any similar provision of state, local and foreign law), whether by reason of a
change in accounting method or otherwise, for any Tax period for which the
applicable statute of limitations has not yet expired. The Company (i) is not a
party to, nor is it bound by or obligated under, any Tax sharing agreement, Tax
indemnification agreement or similar contract or arrangement, whether written or
unwritten (collectively, "Tax Sharing Agreements"), and (ii) does not have any
potential liability or obligation to any Person as a result of, or pursuant to,
any such Tax Sharing Agreements.
2.16 Patents and Other Intangible Assets. (a) The Company (i) owns or
has the right to use, free and clear of all Liens, claims and restrictions, all
patents, trademarks, service marks, trade names, copyrights, licenses and rights
with respect to the foregoing used in or necessary for the conduct of its
business as now conducted or proposed to be conducted without infringing upon or
otherwise acting adversely to the right or claimed right of any Person under or
with respect to any of the foregoing and (ii) is not obligated or under any
liability to make any payments by way of royalties, fees or otherwise to any
owner or licensor of, or other claimant to, any patent, trademark, service mark,
trade name, copyright or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise.
(b) To the best knowledge of the Company, the Company owns and
has the unrestricted right to use all trade secrets, if any, including know-how,
negative know-how, formulas, patterns, programs, devices, methods, techniques,
inventions, designs, processes, computer programs and technical data and all
information that derives independent economic value, actual or potential, from
not being generally known or known by competitors (collectively, "Intellectual
Property") required for or incident to the development, operation and
10
sale of all products and services sold by the Company, free and clear of any
right, Lien or claim of others; provided, however, that the possibility exists
that other Persons, completely independently of the Company or its employees or
agents, could have developed Intellectual Property similar or identical to that
of the Company. The Company is not aware of any such development of
substantially identical trade secrets or technical information by others. All
Intellectual Property can and will be transferred by the Company to the
Surviving Corporation as a result of the Merger and without the consent of any
Person other than the Company.
2.17 Employee Benefit Plans; ERISA. (a) There are no "employee benefit
plans" (within the meaning of Section 3(3) of the ERISA) nor any other employee
benefit or fringe benefit arrangements, practices, contracts, policies or
programs of every type other than programs merely involving the regular payment
of wages, commissions, or bonuses established, maintained or contributed to by
the Company, whether written or unwritten and whether or not funded. The plans
listed in the Disclosures hereto are hereinafter referred to as the "Employee
Benefit Plans."
(b) All current and prior material documents, including all
amendments thereto, with respect to each Employee Benefit Plan have been made
available to Parent and Acquisition Corp. or their advisors.
(c) To the knowledge of the Company, all Employee Benefit Plans
are in material compliance with the applicable requirements of ERISA, the
Internal Revenue Code of 1986, as amended (the "Code") and any other applicable
state, federal or foreign law.
(d) There are no pending claims or lawsuits which have been
asserted or instituted against any Employee Benefit Plan, the assets of any of
the trusts or funds under the Employee Benefit Plans, the plan sponsor or the
plan administrator of any of the Employee Benefit Plans or against any fiduciary
of an Employee Benefit Plan with respect to the operation of such plan, nor does
the Company have any knowledge of any incident, transaction, occurrence or
circumstance which might reasonably be expected to form the basis of any such
claim or lawsuit.
(e) There is no pending or, to the knowledge of the Company,
contemplated investigation, or pending or possible enforcement action by the
Pension Benefit Guaranty Corporation, the Department of Labor, the Internal
Revenue Service or any other government agency with respect to any Employee
Benefit Plan and the Company has no knowledge of any incident, transaction,
occurrence or circumstance which might reasonably be expected to trigger such an
investigation or enforcement action.
(f) No actual or, to the knowledge of the Company, contingent
liability exists with respect to the funding of any Employee Benefit Plan or for
any other expense or obligation of any Employee Benefit Plan, except as
disclosed on the financial statements of the Company, and no contingent
liability exists under ERISA with respect to any "multi-employer plan," as
defined in Section 3(37) or Section 4001(a)(3) of ERISA.
(g) No events have occurred or are expected to occur with respect
to any Employee Benefit Plan that would cause a material change in the costs of
providing benefits
11
under such Employee Benefit Plan or would cause a material change in the cost of
providing for other liabilities of such Employee Benefit Plan.
2.18 Title to Property and Encumbrances. The Company has good, valid
and indefeasible marketable title to all properties and assets used in the
conduct of its business (except for property held under valid and subsisting
leases which are in full force and effect and which are not in default) free of
all Liens and other encumbrances, except Permitted Liens and such ordinary and
customary imperfections of title, restrictions and encumbrances as do not,
individually or in the aggregate, materially detract from the value of the
property or assets or materially impair the use made thereof by the Company in
its business. Without limiting the generality of the foregoing, the Company has
good and indefeasible title to all of its properties and assets reflected in the
Balance Sheet, except for property disposed of in the usual and ordinary course
of business since the Balance Sheet Date and for property held under valid and
subsisting leases which are in full force and effect and which are not in
default.
2.19 Condition of Properties. All facilities, machinery, equipment,
fixtures and other properties owned, leased or used by the Company are in
reasonably good operating condition and repair, subject to ordinary wear and
tear, and are adequate and sufficient for the Company's business.
2.20 Insurance Coverage. There is in full force and effect one or more
policies of insurance issued by insurers of recognized responsibility, insuring
the Company and its properties, products and business against such losses and
risks, and in such amounts, as are customary for corporations of established
reputation engaged in the same or similar business and similarly situated. The
Company has not been refused any insurance coverage sought or applied for, and
the Company has no reason to believe that it will be unable to renew its
existing insurance coverage as and when the same shall expire upon terms at
least as favorable to those currently in effect, other than possible increases
in premiums that do not result from any act or omission of the Company. No suit,
proceeding or action or, to the best current actual knowledge of the Company,
threat of suit, proceeding or action has been asserted or made against the
Company within the last five years due to alleged bodily injury, disease,
medical condition, death or property damage arising out of the function or
malfunction of a product, procedure or service designed, manufactured, sold or
distributed by the Company.
2.21 Litigation. There is no legal action, suit, arbitration or other
legal, administrative or other governmental proceeding pending or, to the best
knowledge of the Company, threatened against or affecting the Company or its
properties, assets or business, and after reasonable investigation, the Company
is not aware of any incident, transaction, occurrence or circumstance that might
reasonably be expected to result in or form the basis for any such action, suit,
arbitration or other proceeding. The Company is not in default with respect to
any order, writ, judgment, injunction, decree, determination or award of any
court or any governmental agency or instrumentality or arbitration authority.
2.22 Licenses. The Company possesses from all appropriate governmental
authorities all licenses, permits, authorizations, approvals, franchises and
rights necessary for the Company to engage in the business currently conducted
by it, all of which are in full force and effect.
12
2.23 Interested Party Transactions. No officer, director or
stockholder of the Company or any Affiliate or "associate" (as such term is
defined in Rule 405 under the Securities Act) of any such Person or the Company
has or has had, either directly or indirectly, (a) an interest in any Person
that (i) furnishes or sells services or products that are furnished or sold or
are proposed to be furnished or sold by the Company or (ii) purchases from or
sells or furnishes to the Company any goods or services, or (b) a beneficial
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected.
2.24 Environmental Matters.
(a) To the knowledge of the Company, the Company has never
generated, used, handled, treated, released, stored or disposed of any Hazardous
Materials on any real property on which it now has or previously had any
leasehold or ownership interest, except in compliance with all applicable
Environmental Laws.
(b) To the knowledge of the Company, the historical and present
operations of the business of the Company are in compliance with all applicable
Environmental Laws, except where any non-compliance has not had and would not
reasonably be expected to have a material adverse effect on the Condition of the
Company.
(c) There are no material pending or, to the knowledge of the
Company, threatened, demands, claims, information requests or notices of
noncompliance or violation against or to the Company relating to any
Environmental Law; and, to the knowledge of the Company, there are no conditions
or occurrences on any of the real property used by the Company in connection
with its business that would reasonably be expected to lead to any such demands,
claims or notices against or to the Company, except such as have not had, and
would not reasonably be expected to have, a material adverse effect on the
Condition of the Company.
(d) To the knowledge of the Company, (i) the Company has not sent
or disposed of, otherwise had taken or transported, arranged for the taking or
disposal of (on behalf of itself, a customer or any other party) or in any other
manner participated or been involved in the taking of or disposal or release of
a Hazardous Material to or at a site that is contaminated by any Hazardous
Material or that, pursuant to any Environmental Law, (A) has been placed on the
"National Priorities List", the "CERCLIS" list, or any similar state or federal
list, or (B) is subject to or the source of a claim, an administrative order or
other request to take "removal", "remedial", "corrective" or any other
"response" action, as defined in any Environmental Law, or to pay for the costs
of any such action at the site; (ii) the Company is not involved in (and has no
basis to reasonably expect to be involved in) any suit or proceeding and has not
received (and has no basis to reasonably expect to receive) any notice, request
for information or other communication from any governmental authority or other
third party with respect to a release or threatened release of any Hazardous
Material or a violation or alleged violation of any Environmental Law, and has
not received (and has no basis to reasonably expect to receive) notice of any
claims from any Person relating to property damage, natural resource damage or
to personal injuries from exposure to any Hazardous Material; and (iii) the
Company has timely filed every report required to be filed, acquired all
necessary certificates, approvals and permits, and generated and maintained all
required data, documentation and records under all Environmental Laws, in all
such instances except where the failure to do so would not
13
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the Condition of the Company.
2.25 Questionable Payments. Neither the Company nor any director,
officer or, to the best knowledge of the Company, agent, employee or other
Person associated with or acting on behalf of the Company, has used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payments to government officials or employees from corporate funds;
established or maintained any unlawful or unrecorded fund of corporate monies or
other assets; made any false or fictitious entries on the books of record of any
such corporations; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment.
2.26 Obligations to or by Stockholders. The Company has no liability
or obligation or commitment to any Stockholder or any Affiliate or "associate"
(as such term is defined in Rule 405 under the Securities Act) of any
Stockholder, nor does any Stockholder or any such Affiliate or associate have
any liability, obligation or commitment to the Company.
2.27 Duty to Make Inquiry. To the extent that any of the
representations or warranties in this Section 2 are qualified by "knowledge" or
"belief," the Company represents and warrants that it has made due and
reasonable inquiry and investigation concerning the matters to which such
representations and warranties relate, including, but not limited to, diligent
inquiry of its directors, officers and key personnel.
2.28 Disclosure. There is no fact relating to the Company that the
Company has not disclosed to Parent and Acquisition Corp. in writing which has
had or is currently having a material and adverse effect or, insofar as the
Company can now foresee, will materially and adversely affect the Condition of
the Company. No representation or warranty by the Company herein and no
information disclosed in the schedules or exhibits hereto by the Company
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained herein or therein not
misleading.
3. Representations and Warranties of Parent and Acquisition Corp.
Parent and Acquisition Corp. represent and warrant to the Company and the
Placement Agent as follows. Notwithstanding anything to the contrary contained
herein, disclosure of items in the Parent SEC Documents (as defined below) shall
be deemed to be disclosure of such items for all purposes under this Agreement,
including, without limitation, for all applicable representations and warranties
of Parent and Acquisition Corp.:
3.1 Organization and Standing. Parent is a corporation duly organized
and existing in good standing under the laws of the State of Delaware.
Acquisition Corp. is a corporation duly organized and existing in good standing
under the laws of the State of Delaware. Parent and Acquisition Corp. have
heretofore delivered to the Company complete and correct copies of their
respective Certificates of Incorporation and By-laws as now in effect. Parent
and Acquisition Corp. have full corporate power and authority to carry on their
respective businesses as they are now being conducted and as now proposed to be
conducted and to own or lease their respective properties and assets. Neither
Parent nor Acquisition Corp. has any subsidiaries (except Parent's ownership of
Acquisition Corp.) or direct or indirect interest (by
14
way of stock ownership or otherwise) in any firm, corporation, limited liability
company, partnership, association or business. Parent owns all of the issued and
outstanding capital stock of Acquisition Corp. free and clear of all Liens, and
Acquisition Corp. has no outstanding options, warrants or rights to purchase
capital stock or other securities of Acquisition Corp., other than the capital
stock owned by Parent. Unless the context otherwise requires, all references in
this Section 3 to the "Parent" shall be treated as being a reference to the
Parent and Acquisition Corp. taken together as one enterprise.
3.2 Corporate Authority. Each of Parent and/or Acquisition Corp. (as
the case may be) has full corporate power and authority to enter into the Merger
Documents and the other agreements to be made pursuant to the Merger Documents,
and to carry out the transactions contemplated hereby and thereby. All corporate
acts and proceedings required for the authorization, execution, delivery and
performance of the Merger Documents and such other agreements and documents by
Parent and/or Acquisition Corp. (as the case may be) have been duly and validly
taken or will have been so taken prior to the Closing. Each of the Merger
Documents constitutes a legal, valid and binding obligation of Parent and/or
Acquisition Corp. (as the case may be), each is enforceable against it and/or
them in accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally and by general principles of equity.
3.3 Broker's and Finder's Fees. No Person is entitled by reason of any
act or omission of Parent or Acquisition Corp. to any broker's or finder's fees,
commission or other similar compensation with respect to the execution and
delivery of this Agreement or the Certificate of Merger, or with respect to the
consummation of the transactions contemplated hereby or thereby, except as set
forth in the Disclosures. Parent and Acquisition Corp. jointly and severally
indemnify and hold the Company harmless from and against any and all loss, claim
or liability arising out of any such claim from any other Person who claims to
have introduced Parent or Acquisition Corp. to the Company, or assisted either
or both of them with the transactions contemplated by or described herein.
3.4 Capitalization of Parent. The authorized capital stock of Parent
consists of (a) 70,000,000 shares of common stock, par value $0.001 per share
(the "Parent Common Stock"), of which not more than 1,900,000 shares will be
issued and outstanding immediately prior to the Effective Time, and (b)
5,000,000 shares of preferred stock, par value $.001 per share, none of which
will be issued and outstanding immediately prior top the Effective Time. Parent
has no outstanding options, rights or commitments to issue shares of Parent
Common Stock or any other security of Parent or Acquisition Corp., and there are
no outstanding securities convertible or exercisable into or exchangeable for
shares of Parent Common Stock or any other security of Parent or Acquisition
Corp. There is no voting trust, agreement or arrangement among any of the
beneficial holders of Parent Common Stock affecting the nomination or election
of directors or the exercise of the voting rights of Parent Common Stock. All
outstanding shares of the capital stock of Parent are validly issued and
outstanding, fully paid and non-assessable, and none of such shares have been
issued in violation of the preemptive rights of any Person.
3.5 Acquisition Corp. Acquisition Corp. is a wholly-owned Delaware
subsidiary of Parent that was formed specifically for the purpose of the Merger
and that has not conducted any business or acquired any property, and will not
conduct any business or acquire any property
15
prior to the Closing Date, except in preparation for and otherwise in connection
with the transactions contemplated by this Agreement, the Certificate of Merger
and the other agreements to be made pursuant to or in connection with this
Agreement and the Certificate of Merger.
3.6 Validity of Shares. The shares of Parent Common Stock to be issued
at the Closing pursuant to Section 1.5(a)(ii) hereof, when issued and delivered
in accordance with the terms hereof and of the Certificate of Merger, shall be
duly and validly issued, fully paid and non-assessable. Based in part on the
representations and warranties of the Stockholder as contemplated by Section 4
hereof and assuming the accuracy thereof, the issuance of the Parent Common
Stock upon consummation of the Merger pursuant to Section 1.5(a)(ii) will be
exempt from the registration and prospectus delivery requirements of the
Securities Act and from the qualification or registration requirements of any
applicable state "Blue Sky" or securities laws.
3.7 SEC Reporting and Compliance. (a) Parent filed a registration
statement on Form SB-2 under the Securities Act, which became effective on or
about May 16, 2006. Since that date, Parent has filed with the Commission on a
timely basis all registration statements, proxy statements, information
statements and reports required to be filed pursuant to the Exchange Act. Parent
has not filed with the Commission a certificate on Form 15 pursuant to Rule
12h-3 of the Exchange Act.
(b) Parent has made available to the Company true and complete
copies of the registration statements, information statements and other reports
(collectively, the "Parent SEC Documents") filed by the Parent with the
Commission. None of the Parent SEC Documents, as of their respective dates,
contained any untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements contained therein not misleading.
(c) Parent has not filed, and nothing has occurred with respect
to which Parent would be required to file, any report on Form 8-K. Prior to and
until the Closing, Parent will provide to the Company copies of any and all
amendments or supplements to the Parent SEC Documents filed with the Commission
and all subsequent registration statements and reports filed by Parent
subsequent to the filing of the Parent SEC Documents with the Commission and any
and all subsequent information statements, proxy statements, reports or notices
filed by Parent with the Commission or delivered to the stockholders of Parent.
(d) Parent is not an investment company within the meaning of
Section 3 of the Investment Company Act.
(e) Between the date hereof and the Closing Date, Parent shall
continue to satisfy the filing requirements of the Exchange Act and all other
requirements of applicable securities laws and of the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc.
(f) To the best knowledge of Parent, Parent has otherwise
complied with the Securities Act, Exchange Act and all other applicable federal
and state securities laws.
3.8 Financial Statements. The balance sheets and statements of
operations, stockholders' equity and cash flows contained in the Parent SEC
Documents (the "Parent
16
Financial Statements") (i) have been prepared in accordance with GAAP applied on
a basis consistent with prior periods (and, in the case of unaudited financial
information, on a basis consistent with year-end audits), (ii) are in accordance
with the books and records of Parent, and (iii) present fairly in all material
respects the financial condition of Parent at the dates therein specified and
the results of its operations and changes in financial position for the periods
therein specified. The financial statements included in the Form SB-2 were
audited by Schumacher & Associates, Inc., Parent's independent registered public
accounting firm. The financial information included in the Quarterly Report on
Form 10-QSB for the quarter ended August 31, 2006 is unaudited, but reflects all
adjustments (including normally recurring accounts) that Parent considers
necessary for a fair presentation of such information and has been prepared in
accordance with generally accepted accounting principles, consistently applied.
3.9 Governmental Consents. All material consents, approvals, orders,
or authorizations of, or registrations, qualifications, designations,
declarations, or filings with any federal or state governmental authority on the
part of Parent or Acquisition Corp. required in connection with the consummation
of the Merger shall have been obtained prior to, and be effective as of, the
Closing.
3.10 Compliance with Laws and Other Instruments. The execution,
delivery and performance by Parent and/or Acquisition Corp. of this Agreement,
the Certificate of Merger and the other agreements to be made by Parent or
Acquisition Corp. pursuant to or in connection with this Agreement or the
Certificate of Merger and the consummation by Parent and/or Acquisition Corp. of
the transactions contemplated by the Merger Documents will not cause Parent
and/or Acquisition Corp. to violate or contravene (i) any provision of law, (ii)
any rule or regulation of any agency or government, (iii) any order, judgment or
decree of any court, or (v) any provision of their respective charters or
By-laws as amended and in effect on and as of the Closing Date and will not
violate or be in conflict with, result in a breach of or constitute (with or
without notice or lapse of time, or both) a default under any material
indenture, loan or credit agreement, deed of trust, mortgage, security agreement
or other agreement or contract to which Parent or Acquisition Corp. is a party
or by which Parent and/or Acquisition Corp. or any of their respective
properties is bound.
3.11 No General Solicitation. In issuing Parent Common Stock in the
Merger hereunder, neither Parent nor anyone acting on its behalf has offered to
sell the Parent Common Stock by any form of general solicitation or advertising.
3.12 Binding Obligations. The Merger Documents constitute the legal,
valid and binding obligations of Parent and Acquisition Corp., and are
enforceable against Parent and Acquisition Corp., in accordance with their
respective terms, except as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally and by general principles of equity.
3.13 Absence of Undisclosed Liabilities. Neither Parent nor
Acquisition Corp. has any material obligation or liability (whether accrued,
absolute, contingent, liquidated or otherwise, whether due or to become due),
arising out of any transaction entered into at or prior to the Closing, except
(a) as disclosed in the Parent SEC Documents, (b) to the extent set forth on or
reserved against in the balance sheet of Parent in the most recent Parent SEC
Document filed
17
by Parent (the "Parent Balance Sheet") or the notes to the Parent Financial
Statements, (c) current liabilities incurred and obligations under agreements
entered into in the usual and ordinary course of business since the date of the
Parent Balance Sheet (the "Parent Balance Sheet Date"), none of which
(individually or in the aggregate) materially and adversely affects the
condition (financial or otherwise), properties, assets, liabilities, business
operations, results of operations or prospects of Parent or Acquisition Corp.
taken as a whole (the "Condition of the Parent"), and (d) by the specific terms
of any written agreement, document or arrangement attached as an exhibit to the
Parent SEC Documents.
3.14 Changes. Since the Parent Balance Sheet Date, except as disclosed
in the Parent SEC Documents, Parent has not (a) incurred any debts, obligations
or liabilities, absolute, accrued or, to Parent's knowledge, contingent, whether
due or to become due, except for current liabilities incurred in the usual and
ordinary course of business, (b) discharged or satisfied any Liens other than
those securing, or paid any obligation or liability other than, current
liabilities shown on the Parent Balance Sheet and current liabilities incurred
since the Parent Balance Sheet Date, in each case in the usual and ordinary
course of business, (c) mortgaged, pledged or subjected to Lien any of its
assets, tangible or intangible, other than in the usual and ordinary course of
business, (d) sold, transferred or leased any of its assets, except in the usual
and ordinary course of business, (e) cancelled or compromised any debt or claim,
or waived or released any right of material value, (f) suffered any physical
damage, destruction or loss (whether or not covered by insurance) which could
reasonably be expected to have a material adverse effect on the Condition of the
Parent, (g) entered into any transaction other than in the usual and ordinary
course of business, (h) encountered any labor union difficulties, (i) made or
granted any wage or salary increase or made any increase in the amounts payable
under any profit sharing, bonus, deferred compensation, severance pay,
insurance, pension, retirement or other employee benefit plan, agreement or
arrangement, other than in the ordinary course of business consistent with past
practice, or entered into any employment agreement, (j) issued or sold any
shares of capital stock, bonds, notes, debentures or other securities or granted
any options (including employee stock options), warrants or other rights with
respect thereto, (k) declared or paid any dividends on or made any other
distributions with respect to, or purchased or redeemed, any of its outstanding
capital stock, (l) suffered or experienced any change in, or condition
affecting, the Condition of the Parent other than changes, events or conditions
in the usual and ordinary course of its business, none of which (either by
itself or in conjunction with all such other changes, events and conditions)
could reasonably be expected to have a material adverse effect on the Condition
of the Parent, (m) made any change in the accounting principles, methods or
practices followed by it or depreciation or amortization policies or rates
theretofore adopted, (n) made or permitted any amendment or termination of any
material contract, agreement or license to which it is a party, (o) suffered any
material loss not reflected in the Parent Balance Sheet or its statement of
income for the year ended on the Parent Balance Sheet Date, (p) paid, or made
any accrual or arrangement for payment of, bonuses or special compensation of
any kind or any severance or termination pay to any present or former officer,
director, employee, stockholder or consultant, (q) made or agreed to make any
charitable contributions or incurred any non-business expenses in excess of
$5,000 in the aggregate, or (r) entered into any agreement, or otherwise
obligated itself, to do any of the foregoing.
3.15 Tax Returns and Audits. All required federal, state and local Tax
Returns of Parent have been accurately prepared in all material respects and
duly and timely filed, and all
18
federal, state and local Taxes required to be paid with respect to the periods
covered by such returns have been paid to the extent that the same are material
and have become due, except where the failure so to file or pay could not
reasonably be expected to have a material adverse effect upon the Condition of
the Parent. Parent is not and has not been delinquent in the payment of any Tax.
Parent has not had a Tax deficiency assessed against it. None of Parent's
federal income, state and local income and franchise tax returns has been
audited by any governmental authority. The reserves for Taxes reflected on the
Parent Balance Sheet are sufficient for the payment of all unpaid Taxes payable
by the Parent with respect to the period ended on the Parent Balance Sheet Date.
There are no federal, state, local or foreign audits, actions, suits,
proceedings, investigations, claims or administrative proceedings relating to
Taxes or any Tax Returns of Parent now pending, and Parent has not received any
notice of any proposed audits, investigations, claims or administrative
proceedings relating to Taxes or any Tax Returns.
3.16 Employee Benefit Plans; ERISA. (a) Except as disclosed in the
Parent SEC Documents, there are no "employee benefit plans" (within the meaning
of Section 3(3) of ERISA) nor any other employee benefit or fringe benefit
arrangements, practices, contracts, policies or programs other than programs
merely involving the regular payment of wages, commissions, or bonuses
established, maintained or contributed to by the Parent. Any plans listed in the
Parent SEC Documents are hereinafter referred to as the "Parent Employee Benefit
Plans."
(b) Any current and prior material documents, including all
amendments thereto, with respect to each Parent Employee Benefit Plan have been
given to the Company or its advisors.
(c) All Parent Employee Benefit Plans are in material compliance
with the applicable requirements of ERISA, the Code and any other applicable
state, federal or foreign law.
(d) There are no pending, or to the knowledge of Parent,
threatened, claims or lawsuits which have been asserted or instituted against
any Parent Employee Benefit Plan, the assets of any of the trusts or funds under
the Parent Employee Benefit Plans, the plan sponsor or the plan administrator of
any of the Parent Employee Benefit Plans or against any fiduciary of a Parent
Employee Benefit Plan with respect to the operation of such plan.
(e) There is no pending, or to the knowledge of Parent,
threatened, investigation or pending or possible enforcement action by the
Pension Benefit Guaranty Corporation, the Department of Labor, the Internal
Revenue Service or any other government agency with respect to any Parent
Employee Benefit Plan.
(f) No actual or, to the knowledge of Parent, contingent
liability exists with respect to the funding of any Parent Employee Benefit Plan
or for any other expense or obligation of any Parent Employee Benefit Plan,
except as disclosed on the financial statements of Parent or the Parent SEC
Documents, and to the knowledge of Parent, no contingent liability exists under
ERISA with respect to any "multi-employer plan," as defined in Section 3(37) or
Section 4001(a)(3) of ERISA.
19
3.17 Litigation. There is no legal action, suit, arbitration or other
legal, administrative or other governmental proceeding pending or, to the
knowledge of Parent, threatened against or affecting Parent or Acquisition Corp.
or any of their respective properties, assets or businesses. To the knowledge of
Parent, neither Parent nor Acquisition Corp. is in default with respect to any
order, writ, judgment, injunction, decree, determination or award of any court
or any governmental agency or instrumentality or arbitration authority.
3.18 Interested Party Transactions. Except as disclosed in the Parent
SEC Documents, no officer, director or stockholder of Parent or any Affiliate or
"associate" (as such term is defined in Rule 405 under the Securities Act) of
any such Person or of Parent has or has had, either directly or indirectly, (a)
an interest in any Person that (i) furnishes or sells services or products that
are furnished or sold or are proposed to be furnished or sold by Parent or (ii)
purchases from or sells or furnishes to Parent any goods or services, or (b) a
beneficial interest in any contract or agreement to which Parent is a party or
by which it or any of its assets may be bound or affected.
3.19 Questionable Payments. Neither Parent, Acquisition Corp. nor, to
the knowledge of Parent, any director, officer, agent, employee or other Person
associated with or acting on behalf of Parent or Acquisition Corp. has used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payments to government officials or employees from corporate funds;
established or maintained any unlawful or unrecorded fund of corporate monies or
other assets; made any false or fictitious entries on the books of record of any
such corporations; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment.
3.20 Obligations to or by Stockholders. Except as disclosed in the
Parent SEC Documents, Parent has no liability or obligation or commitment to any
stockholder of Parent or any Affiliate or "associate" (as such term is defined
in Rule 405 under the Securities Act) of any stockholder of Parent, nor does any
stockholder of Parent or any such Affiliate or associate have any liability,
obligation or commitment to Parent.
3.21 Assets and Contracts. Except as expressly set forth in this
Agreement, the Parent Balance Sheet or the notes thereto, or the Parent SEC
Documents, Parent is not a party to any written or oral agreement not made in
the ordinary course of business that is material to Parent. Parent does not own
any real property. Except as expressly set forth in this Agreement, the Parent
Balance Sheet or the notes thereto, or the Parent SEC Documents, Parent is not a
party to or otherwise barred by any written or oral (a) agreement with any labor
union, (b) agreement for the purchase of fixed assets or for the purchase of
materials, supplies or equipment in excess of normal operating requirements, (c)
agreement for the employment of any officer, individual employee or other Person
on a full-time basis or any agreement with any Person for consulting services,
(d) bonus, pension, profit sharing, retirement, stock purchase, stock option,
deferred compensation, medical, hospitalization or life insurance or similar
plan, contract or understanding with respect to any or all of the employees of
Parent or any other Person, (e) indenture, loan or credit agreement, note
agreement, deed of trust, mortgage, security agreement, promissory note or other
agreement or instrument relating to or evidencing Indebtedness for Borrowed
Money or subjecting any asset or property of Parent to any Lien or evidencing
any Indebtedness, (f) guaranty of any Indebtedness, (g) lease or agreement under
which Parent is
20
lessee of or holds or operates any property, real or personal, owned by any
other Person, (h) lease or agreement under which Parent is lessor or permits any
Person to hold or operate any property, real or personal, owned or controlled by
Parent, (i) agreement granting any preemptive right, right of first refusal or
similar right to any Person, (j) agreement or arrangement with any Affiliate or
any "associate" (as such term is defined in Rule 405 under the Securities Act)
of Parent or any present or former officer, director or stockholder of Parent,
(k) agreement obligating Parent to pay any royalty or similar charge for the use
or exploitation of any tangible or intangible property, (1) covenant not to
compete or other restriction on its ability to conduct a business or engage in
any other activity, (m) distributor, dealer, manufacturer's representative,
sales agency, franchise or advertising contract or commitment, (n) agreement to
register securities under the Securities Act, (o) collective bargaining
agreement, or (p) agreement or other commitment or arrangement with any Person
continuing for a period of more than three months from the Closing Date that
involves an expenditure or receipt by Parent in excess of $1,000. Parent
maintains no insurance policies or insurance coverage of any kind with respect
to Parent, its business, premises, properties, assets, employees and agents. No
consent of any bank or other depository is required to maintain any bank
account, other deposit relationship or safety deposit box of Parent in effect
following the consummation of the Merger and the transactions contemplated
hereby.
3.22 Employees. Other than pursuant to ordinary arrangements of
employment compensation, Parent is not under any obligation or liability to any
officer, director, employee or Affiliate of Parent.
3.23 Disclosure. There is no fact relating to Parent that Parent has
not disclosed to the Company in writing that materially and adversely affects
nor, insofar as Parent can now foresee, will materially and adversely affect,
the condition (financial or otherwise), properties, assets, liabilities,
business operations, results of operations or prospects of Parent. No
representation or warranty by Parent herein and no information disclosed in the
schedules or exhibits hereto by Parent contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained herein or therein not misleading.
4. Additional Representations, Warranties and Covenants of the Stockholders.
Promptly after the Effective Time, Parent shall cause to be mailed to
each holder of record of Company Stock that was converted pursuant to Section
1.5 hereof into the right to receive Parent Common Stock a letter of transmittal
("Letter of Transmittal") which shall contain additional representations,
warranties and covenants of such Stockholder, including without limitation, that
(i) such Stockholder has full right, power and authority to deliver such Company
Stock and Letter of Transmittal, (ii) the delivery of such Company Stock will
not violate or be in conflict with, result in a breach of or constitute a
default under, any indenture, loan or credit agreement, deed of trust, mortgage,
security agreement or other agreement or instrument to which such Stockholder is
bound or affected, (iii) such Stockholder has good, valid and marketable title
to all shares of Company Stock indicated in such Letter of Transmittal and that
such Stockholder is not affected by any voting trust, agreement or arrangement
affecting the voting rights of such Company Stock, (iv) whether such Stockholder
is an "accredited investor," as such term is defined in Regulation D under the
Securities Act and that such Stockholder is acquiring Parent Common Stock for
investment purposes, and not with a view to selling or
21
otherwise distributing such Parent Common Stock in violation of the Securities
Act or the securities laws of any state, and (v) such Stockholder has had an
opportunity to ask and receive answers to any questions such Stockholder may
have had concerning the terms and conditions of the Merger and the Parent Common
Stock and has obtained any additional information that such Stockholder has
requested. Delivery shall be effected, and risk of loss and title to the Company
Stock shall pass, only upon delivery to Parent (or an agent of Parent) of (x)
certificates evidencing ownership thereof as contemplated by Section 1.6 hereof
(or affidavit of lost certificate), and (y) the Letter of Transmittal containing
the representations, warranties and covenants contemplated by this Section 4.
5. Conduct of Businesses Pending the Merger.
5.1 Conduct of Business by the Company Pending the Merger. Prior to
the Effective Time, unless Parent or Acquisition Corp. shall otherwise agree in
writing or as otherwise contemplated by this Agreement:
(i) the business of the Company shall be conducted only in
the ordinary course;
(ii) the Company shall not (A) directly or indirectly
redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of its capital stock; (B) amend its Certificate of
Incorporation or By-laws except to effectuate the transactions contemplated in
the Disclosures or (C) split, combine or reclassify the outstanding Company
Stock or declare, set aside or pay any dividend payable in cash, stock or
property or make any distribution with respect to any such stock;
(iii) the Company shall not (A) issue or agree to issue any
additional shares of, or options, warrants or rights of any kind to acquire any
shares of, Company Stock, except to issue shares of Company Stock in connection
with any matter relating to the Disclosures (B) acquire or dispose of any fixed
assets or acquire or dispose of any other substantial assets other than in the
ordinary course of business; (C) incur additional Indebtedness or any other
liabilities or enter into any other transaction other than in the ordinary
course of business; (D) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing; or (E) except as contemplated
by this Agreement, enter into any contract, agreement, commitment or arrangement
to dissolve, merge, consolidate or enter into any other material business
combination;
(iv) the Company shall use its best efforts to preserve
intact the business organization of the Company, to keep available the service
of its present officers and key employees, and to preserve the good will of
those having business relationships with it;
(v) the Company will not, nor will it authorize any director
or authorize or permit any officer or employee or any attorney, accountant or
other representative retained by it to, make, solicit, encourage any inquiries
with respect to, or engage in any negotiations concerning, any Acquisition
Proposal (as defined below). The Company will promptly advise Parent orally and
in writing of any such inquiries or proposals (or requests for information) and
the substance thereof. As used in this paragraph, "Acquisition Proposal" shall
mean any proposal for a merger or other business combination involving the
Company or for the
22
acquisition of a substantial equity interest in it or any material assets of it
other than as contemplated by this Agreement. The Company will immediately cease
and cause to be terminated any existing activities, discussions or negotiations
with any Person conducted heretofore with respect to any of the foregoing; and
(vi) the Company will not enter into any new employment
agreements with any of its officers or employees or grant any increases in the
compensation or benefits of its officers and employees or amend any employee
benefit plan or arrangement.
5.2 Conduct of Business by Parent and Acquisition Corp. Pending the
Merger. Prior to the Effective Time, unless the Company shall otherwise agree in
writing or as otherwise contemplated by this Agreement:
(i) the business of Parent and Acquisition Corp. shall be
conducted only in the ordinary course; provided, however, that Parent shall take
the steps necessary to have discontinued its existing business without liability
to Parent or Acquisition Corp. as of the Closing Date;
(ii) neither Parent nor Acquisition Corp. shall (A) directly
or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase
or otherwise acquire any shares of its capital stock; (B) amend its charter or
by-laws other than to effectuate the transactions contemplated hereby; or (C)
split, combine or reclassify its capital stock or declare, set aside or pay any
dividend payable in cash, stock or property or make any distribution with
respect to such stock;
(iii) neither Parent nor Acquisition Corp. shall (A) issue
or agree to issue any additional shares of, or options, warrants or rights of
any kind to acquire shares of, its capital stock; (B) acquire or dispose of any
assets other than in the ordinary course of business (except for dispositions in
connection with Section 5.2(i) hereof); (C) incur additional Indebtedness or any
other liabilities or enter into any other transaction except in the ordinary
course of business; (D) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing, or (E) except as contemplated
by this Agreement, enter into any contract, agreement, commitment or arrangement
to dissolve, merge, consolidate or enter into any other material business
contract or enter into any negotiations in connection therewith;
(iv) neither the Parent nor Acquisition Corp. will, nor will
they authorize any director or authorize or permit any officer or employee or
any attorney, accountant or other representative retained by them to, make,
solicit, encourage any inquiries with respect to, or engage in any negotiations
concerning, any Acquisition Proposal (as defined below for purposes of this
paragraph). Parent will promptly advise the Company orally and in writing of any
such inquiries or proposals (or requests for information) and the substance
thereof. As used in this paragraph, "Acquisition Proposal" shall mean any
proposal for a merger or other business combination involving the Parent or
Acquisition Corp. or for the acquisition of a substantial equity interest in
either of them or any material assets of either of them other than as
contemplated by this Agreement. The Parent will immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
Person conducted heretofore with respect to any of the foregoing; and
23
(v) neither Parent nor Acquisition Corp. will enter into any
new employment agreements with any of their officers or employees or grant any
increases in the compensation or benefits of their officers and employees.
6. Additional Agreements.
6.1 Access and Information. The Company, on the one hand, and Parent
and Acquisition Corp., on the other hand, shall each afford to the other and to
the other's accountants, counsel and other representatives full access during
normal business hours throughout the period prior to the Effective Time to all
of its properties, books, contracts, commitments and records (including but not
limited to tax returns) and during such period, each shall furnish promptly to
the other all information concerning its business, properties and personnel as
such other party may reasonably request, provided that no investigation pursuant
to this Section 6.1 shall affect any representations or warranties made herein.
Each party shall hold, and shall cause its employees and agents to hold, in
confidence all such information (other than such information which (i) is
already in such party's possession or (ii) becomes generally available to the
public other than as a result of a disclosure by such party or its directors,
officers, managers, employees, agents or advisors, or (iii) becomes available to
such party on a non-confidential basis from a source other than a party hereto
or its advisors, provided that such source is not known by such party to be
bound by a confidentiality agreement with or other obligation of secrecy to a
party hereto or another party until such time as such information is otherwise
publicly available; provided, however, that (A) any such information may be
disclosed to such party's directors, officers, employees and representatives of
such party's advisors who need to know such information for the purpose of
evaluating the transactions contemplated hereby (it being understood that such
directors, officers, employees and representatives shall be informed by such
party of the confidential nature of such information), (B) any disclosure of
such information may be made as to which the party hereto furnishing such
information has consented in writing, and (C) any such information may be
disclosed pursuant to a judicial, administrative or governmental order or
request; provided, however, that the requested party will promptly so notify the
other party so that the other party may seek a protective order or appropriate
remedy and/or waive compliance with this Agreement and if such protective order
or other remedy is not obtained or the other party waives compliance with this
provision, the requested party will furnish only that portion of such
information which is legally required and will exercise its best efforts to
obtain a protective order or other reliable assurance that confidential
treatment will be accorded the information furnished. If this Agreement is
terminated, each party will deliver to the other all documents and other
materials (including copies) obtained by such party or on its behalf from the
other party as a result of this Agreement or in connection herewith, whether so
obtained before or after the execution hereof.
6.2 Additional Agreements. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its commercially
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including using its commercially reasonable efforts to satisfy
the conditions precedent to the obligations of any of the parties hereto, to
obtain all necessary waivers, and to lift any injunction or other legal bar to
the Merger (and, in such case, to proceed with the Merger as expeditiously as
possible). In order to obtain any necessary governmental or regulatory action
24
or non-action, waiver, consent, extension or approval, each of Parent,
Acquisition Corp. and the Company agrees to take all reasonable actions and to
enter into all reasonable agreements as may be necessary to obtain timely
governmental or regulatory approvals and to take such further action in
connection therewith as may be necessary. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and/or directors of Parent,
Acquisition Corp. and the Company shall take all such necessary action.
6.3 Publicity. No party shall issue any press release or public
announcement pertaining to the Merger that has not been agreed upon in advance
by Parent and the Company, except as Parent reasonably determines to be
necessary in order to comply with the rules of the Commission or of the
principal trading exchange or market for the Parent Common Stock, provided, that
in such case Parent will use its best efforts to allow the Company to review and
reasonably approve any such press release or public announcement prior to its
release.
6.4 Appointment of Directors and Officers. Immediately at the
Effective Time, Parent shall accept the resignations of the current officers and
directors of Parent as provided by Section 7.2(d)(6) hereof, and shall cause the
persons listed as directors in Exhibit D hereto to be elected to the Board of
Directors of Parent. At the first annual meeting of the Parent stockholders and
thereafter, the election of members of Parent's Board of Directors shall be
accomplished in accordance with the by-laws of Parent and the rules of the
Commission.
6.5 Parent Name Change and Exchange Listing. At the Effective Time,
Parent shall take all required legal actions to change its corporate name to
"Towerstream Corporation" Promptly following the Effective Time, Parent shall
take all required actions, upon satisfaction of the original listing
requirements, to list the Parent Common Stock for trading on the American Stock
Exchange or the NASDAQ Stock Market.
6.6 Assumption of Agreements. At the Effective Time, Parent shall
affirmatively assume any all liabilities and obligations of the Company with
respect to the Private Placement and the Merger.
6.7 Resale Registration Statement. Parent shall execute the
registration rights agreement in the form annexed to the Memorandum.
7. Conditions to Parties' Obligations.
7.1 Conditions to Parent and Acquisition Corp. Obligations. The
obligations of Parent and Acquisition Corp. under this Agreement and the
Certificate of Merger are subject to the fulfillment, at or prior to the
Closing, of the following conditions, any of which may be waived in whole or in
part by Parent.
(a) No Errors, etc. The representations and warranties of the
Company under this Agreement shall be deemed to have been made again on the
Closing Date and shall then be true and correct in all material respects.
25
(b) Compliance with Agreement. The Company shall have performed
and complied in all material respects with all agreements and conditions
required by this Agreement to be performed or complied with by it on or before
the Closing Date.
(c) No Default or Adverse Change. There shall not exist on the
Closing Date any Default or Event of Default or any event or condition that,
with the giving of notice or lapse of time or both, would constitute a Default
or Event of Default and, since the Balance Sheet Date, there shall have been no
material adverse change in the Condition of the Company.
(d) No Restraining Action. No action or proceeding before any
court, governmental body or agency shall have been threatened, asserted or
instituted to restrain or prohibit, or to obtain substantial damages in respect
of, this Agreement or the Certificate of Merger or the carrying out of the
transactions contemplated by the Merger Documents.
(e) Supporting Documents. Parent and Acquisition Corp. shall have
received the following:
(1) Copies of resolutions of the Board of Directors and the
Stockholders of the Company, certified by the Secretary of the Company,
authorizing and approving the execution, delivery and performance of the Merger
Documents and all other documents and instruments to be delivered pursuant
hereto and thereto.
(2) A certificate of incumbency executed by the Secretary of
the Company certifying the names, titles and signatures of the officers
authorized to execute any documents referred to in this Agreement and further
certifying that the Certificate of Incorporation and By-laws of the Company
delivered to Parent and Acquisition Corp. at the time of the execution of this
Agreement have been validly adopted and have not been amended or modified.
(3) A certificate, dated the Closing Date, executed by the
President and Chief Financial Officer of the Company certifying that the
undersigned officers have no knowledge of any plan to issue any securities of
the Company, and the Company has not entered into any agreement, written or
oral, to issue any securities of the Company except as described in the
Memorandum or the Merger Agreement.
(4) Evidence as of a recent date of the good standing and
corporate existence of the Company issued by the Secretary of State of the State
of Delaware and evidence that the Company is qualified to transact business as a
foreign corporation and is in good standing in each state of the United States
and in each other jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary.
(5) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as Parent and
Acquisition Corp. may reasonably request.
(f) Proceedings and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates,
26
opinions, agreements, instruments and documents mentioned herein or incident to
any such transactions shall be reasonably satisfactory in form and substance to
Parent and Acquisition Corp. The Company shall furnish to Parent and Acquisition
Corp. such supporting documentation and evidence of the satisfaction of any or
all of the conditions precedent specified in this Section 7.1 as Parent or its
counsel may reasonably request.
7.2 Conditions to the Company's Obligations. The obligations of the
Company under this Agreement and the Certificate of Merger are subject to the
fulfillment, at or prior to the Closing, of the conditions precedent specified
in paragraph (d) of Section 7.1 hereof, and the following additional conditions:
(a) No Errors, etc. The representations and warranties of Parent
and Acquisition Corp. under this Agreement shall be deemed to have been made
again on the Closing Date and shall then be true and correct in all material
respects.
(b) Compliance with Agreement. Parent and Acquisition Corp. shall
have performed and complied in all material respects with all agreements and
conditions required by this Agreement and the Certificate of Merger to be
performed or complied with by them on or before the Closing Date.
(c) No Default or Adverse Change. There shall not exist on the
Closing Date any Default or Event of Default or any event or condition that,
with the giving of notice or lapse of time or both, would constitute a Default
or Event of Default and, since the Parent Balance Sheet Date, there shall have
been no material adverse change in the Condition of the Parent.
(d) Supporting Documents. The Company shall have received the
following:
(1) Copies of resolutions of Parent's and Acquisition
Corp.'s respective boards of directors and the sole stockholder of Acquisition
Corp., certified by their respective Secretaries, authorizing and approving, to
the extent applicable, the execution, delivery and performance of this
Agreement, the Certificate of Merger and all other documents and instruments to
be delivered by them pursuant hereto and thereto.
(2) A certificate of incumbency executed by the respective
Secretaries of Parent and Acquisition Corp. certifying the names, titles and
signatures of the officers authorized to execute the documents referred to in
this Agreement and further certifying that the certificates of incorporation and
by-laws of Parent and Acquisition Corp. appended thereto have not been amended
or modified.
(3) A certificate, dated the Closing Date, executed by the
President and Chief Financial Officer of each of the Parent and Acquisition
Corp., certifying that (i) except for the filing of the Certificate of Merger,
all consents, authorizations, orders and approvals of, and filings and
registrations with, any court, governmental body or instrumentality that are
required for the execution and delivery of this Agreement and the Certificate of
Merger and the consummation of the Merger shall have been duly made or obtained,
and all material consents by third parties required for the Merger have been
obtained; and (ii) no action or proceeding before
27
any court, governmental body or agency has been threatened, asserted or
instituted to restrain or prohibit, or to obtain substantial damages in respect
of, this Agreement or the Certificate of Merger or the carrying out of the
transactions contemplated by any of the Merger Documents.
(4) A certificate of Pacific Stock Transfer Company,
Parent's transfer agent and registrar, certifying, as of the business day prior
to the Closing Date, a true and complete list of the names and addresses of the
record owners of all of the outstanding shares of Parent Common Stock, together
with the number of shares of Parent Common Stock held by each record owner and
the total number of shares of Parent Common Stock then outstanding.
(5) The executed resignations of all directors and officers
of Parent, with the director resignations to take effect at the Closing Date.
(6) Evidence as of a recent date and within five (5) days of
the Effective Date of the good standing and corporate existence of each of
Parent and Acquisition Corp. issued by the Secretary of State of Delaware and
evidence that Parent and Acquisition Corp. are qualified to transact business as
foreign corporations and are in good standing in each state of the United States
and in each other jurisdiction where the character of the property owned or
leased by them or the nature of their activities makes such qualification
necessary.
(7) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as the Company
may reasonably request.
(e) Opinion of Parent and Acquisition Corp's Counsel. The Company
and the Placement Agent shall have received from Cane Clark LLP, counsel for
Parent and Acquisition Corp., an opinion dated the Closing Date to the effect
set forth in Exhibit E hereto
(f) Proceedings and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transactions shall be satisfactory in
form and substance to the Company. Parent and Acquisition Corp. shall furnish to
the Company such supporting documentation and evidence of satisfaction of any or
all of the conditions specified in this Section 7.2 as the Company may
reasonably request.
(g) No Restraining Action. No action or proceeding before any
court, governmental body or agency shall have been threatened, asserted or
instituted to restrain or prohibit, or to obtain substantial damages in respect
of, this Agreement or the Certificate of Merger or the carrying out of the
transactions contemplated by the Merger Documents.
The Company may waive compliance with any of the conditions precedent
specified in this Section 7.2.
8. Non-Survival of Representations and Warranties.
Except as provided in Section 12, the representations and warranties
of the parties made in Sections 2 and 3 of this Agreement (including the
Schedules to this Agreement, which
28
are hereby incorporated by reference) shall not survive beyond the Effective
Time. This Section 8 shall not limit any claim in any way based upon any
certificate, opinion, covenant, or agreement which by its terms is relied upon
by a party or contemplates performance after the Effective Time or pursuant to
any other certificate, statement or agreement or any claim for fraud.
9. Amendment of Agreement.
This Agreement and the Certificate of Merger may be amended or
modified at any time in all respects by an instrument in writing executed by the
parties thereto.
10. Definitions.
Unless the context otherwise requires, the terms defined in this
Section 10 shall have the meanings herein specified for all purposes of this
Agreement, applicable to both the singular and plural forms of any of the terms
herein defined.
"Acquisition Corp." means Towerstream Acquisition, Inc., a Delaware
corporation.
"Affiliate" shall mean any Person that directly or indirectly
controls, is controlled by, or is under common control with, the indicated
Person.
"Agreement" shall mean this Agreement.
"Balance Sheet" and "Balance Sheet Date" shall have the meanings
assigned to such terms in Section 2.10 hereof.
"DGCL" shall mean the General Corporation Law of the State of
Delaware.
"Certificate of Merger" shall have the meaning assigned to it in the
second recital of this Agreement.
"Closing" and "Closing Date" shall have the meanings assigned to such
terms in Section 11 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" or "SEC" shall mean the U.S. Securities and Exchange
Commission.
"Company" shall mean Towerstream Corporation, a Delaware corporation.
"Company Stock" shall mean the Common Stock of the Company.
"Company Stock" shall have the meaning assigned to it in Section
1.5(a)(iii).
"Condition of the Company" shall have the meaning assigned to it in
Section 2.2 hereof.
29
"Condition of the Parent" shall have the meaning assigned to it in
Section 3.13 hereof.
"Default" shall mean a default or failure in the due observance or
performance of any covenant, condition or agreement on the part of a party to be
observed or performed under the terms of this Agreement or the Certificate of
Merger, if such default or failure in performance shall remain un-remedied for
five (5) days.
"Determination Date" shall have the meaning set forth in Section 12.6
hereof.
"Effective Time" shall have the meaning assigned to it in Section 1.2
hereof.
"Employee Benefit Plans" shall have the meaning assigned to it in
Section 2.17 hereof.
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Sections 9601, et seq.; the Emergency
Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Sections 11001, et
seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901, et
seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the
Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Sections 136, et
seq. and comparable state statutes dealing with the registration, labeling and
use of pesticides and herbicides; the Clean Air Act, 42 U.S.C. Sections 7401 et
seq.; the Clean Water Act (Federal Water Pollution Control Act), 33 U.S.C.
Sections 1251 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f, et
seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801, et
seq.; as any of the above statutes have been amended as of the date hereof, all
rules, regulations and policies promulgated pursuant to any of the above
statutes, and any other foreign, federal, state or local law, statute,
ordinance, rule, regulation or policy governing environmental matters, as the
same have been amended as of the date hereof.
"ERISA" shall mean the Employee Retirement Income Securities Act of
1974, as amended.
"Event of Default" shall mean (a) the failure of the Company to pay
any Indebtedness for Borrowed Money, or any interest or premium thereon, within
five (5) days after the same shall become due, whether such Indebtedness shall
become due by scheduled maturity, by required prepayment, by acceleration, by
demand or otherwise, (b) an event of default under any agreement or instrument
evidencing or securing or relating to any such Indebtedness, or (c) the failure
of the Company to perform or observe any material term, covenant, agreement or
condition on its part to be performed or observed under any agreement or
instrument evidencing or securing or relating to any such Indebtedness when such
term, covenant or agreement is required to be performed or observed.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall mean, with respect to a share of Common
Stock on any Determination Date, the average of the daily closing prices for the
10 consecutive business days prior to such date. The closing price for each day
shall be the last sales price or in case no sale takes place on such day, the
average of the closing high bid and low asked prices, in either case
30
(a) as officially quoted on the OTC Bulletin Board, the NASDAQ Stock Market or
such other market on which the Common Stock is then listed for trading or
quoted, or (b) if, in the reasonable judgment of the Board of Directors of
Parent, the OTC Bulletin Board or the NASDAQ Stock Market is no longer the
principal United States market for the Common Stock, then as quoted on the
principal United States market for the Common Stock as determined by the Board
of Directors of Parent, or (c) if, in the reasonable judgment of the Board of
Directors of the Parent, there exists no principal United States market for the
Common Stock, then as reasonably determined in good faith by the Board of
Directors of Parent.
"GAAP" shall mean generally accepted accounting principles in the
United States, as in effect from time to time.
"Hazardous Material" means any substance or material meeting any one
or more of the following criteria: (a) it is or contains a substance designated
as or meeting the characteristics of a hazardous waste, hazardous substance,
hazardous material, pollutant, contaminant or toxic substance under any
Environmental Law; (b) its presence at some quantity requires investigation,
notification or remediation under any Environmental Law; or (c) it contains,
without limiting the foregoing, asbestos, polychlorinated biphenyls, petroleum
hydrocarbons, petroleum derived substances or waste, pesticides, herbicides,
crude oil or any fraction thereof, nuclear fuel, natural gas or synthetic gas.
"Indebtedness" shall mean any obligation of the Company which, under
generally accepted accounting principles, is required to be shown on the balance
sheet of the Company as a liability. Any obligation secured by a Lien on, or
payable out of the proceeds of production from, property of the Company shall be
deemed to be Indebtedness, even though such obligation is not assumed by the
Company.
"Indebtedness for Borrowed Money" shall mean (a) all Indebtedness in
respect of money borrowed including, without limitation, Indebtedness which
represents the unpaid amount of the purchase price of any property and is
incurred in lieu of borrowing money or using available funds to pay such amounts
and not constituting an account payable or expense accrual incurred or assumed
in the ordinary course of business of the Company, (b) all Indebtedness
evidenced by a promissory note, bond or similar written obligation to pay money,
or (c) all such Indebtedness guaranteed by the Company or for which the Company
is otherwise contingently liable.
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"knowledge" and "know" means, when referring to any person or entity,
the actual knowledge of such person or entity of a particular matter or fact,
and what that person or entity would have reasonably known after due inquiry. An
entity will be deemed to have "knowledge" of a particular fact or other matter
if any individual who is serving, or who has served, as an executive officer of
such entity has actual "knowledge" of such fact or other matter, or had actual
"knowledge" during the time of such service of such fact or other matter, or
would have had "knowledge" of such particular fact or matter after due inquiry.
31
"Letter of Transmittal" shall have the meaning assigned to it in
Section 4 hereof.
"Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind, including, without limitation, any
conditional sale or other title retention agreement, any lease in the nature
thereof and the filing of or agreement to give any financing statement under the
Uniform Commercial Code of any jurisdiction and including any lien or charge
arising by statute or other law.
"Merger" shall have the meaning assigned to it in the first recital
hereof.
"Merger Documents" shall have the meaning assigned to it in Section
2.6 hereof.
"Parent" shall mean University Girls Calendar, Ltd., a Delaware
corporation.
"Parent Balance Sheet Date" shall have the meaning assigned to it in
Section 3.13 hereof.
"Parent Common Stock" shall mean the common stock, par value $0.001
per share, of Parent.
"Parent Employee Benefit Plans" shall have the meaning assigned to it
in Section 3.16 hereof.
"Parent Financial Statements" shall have the meaning assigned to it in
Section 3.8 hereof.
"Parent SEC Documents" shall have the meaning assigned to it in
Section 3.7 hereof.
"Permitted Liens" shall mean (a) Liens for taxes and assessments or
governmental charges or levies not at the time due or in respect of which the
validity thereof shall currently be contested in good faith by appropriate
proceedings; (b) Liens in respect of pledges or deposits under workmen's
compensation laws or similar legislation, carriers', warehousemen's, mechanics',
laborers' and materialmens' and similar Liens, if the obligations secured by
such Liens are not then delinquent or are being contested in good faith by
appropriate proceedings; and (c) Liens incidental to the conduct of the business
of the Company that were not incurred in connection with the borrowing of money
or the obtaining of advances or credits and which do not in the aggregate
materially detract from the value of its property or materially impair the use
made thereof by the Company in its business.
"Person" shall include all natural persons, corporations, business
trusts, associations, limited liability companies, partnerships, joint ventures
and other entities and governments and agencies and political subdivisions.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stockholders" shall mean all of the stockholders of the Company.
32
"Surviving Corporation" shall have the meaning assigned to it in
Section 1.1 hereof.
"Tax" or "Taxes" shall mean (a) any and all taxes, assessments,
customs, duties, levies, fees, tariffs, imposts, deficiencies and other
governmental charges of any kind whatsoever (including, but not limited to,
taxes on or with respect to net or gross income, franchise, profits, gross
receipts, capital, sales, use, ad valorem, value added, transfer, real property
transfer, transfer gains, transfer taxes, inventory, capital stock, license,
payroll, employment, social security, unemployment, severance, occupation, real
or personal property, estimated taxes, rent, excise, occupancy, recordation,
bulk transfer, intangibles, alternative minimum, doing business, withholding and
stamp), together with any interest thereon, penalties, fines, damages costs,
fees, additions to tax or additional amounts with respect thereto, imposed by
the United States (Federal, state or local) or other applicable jurisdiction;
(b) any liability for the payment of any amounts described in clause (a) as a
result of being a member of an affiliated, consolidated, combined, unitary or
similar group or as a result of transferor or successor liability, including,
without limitation, by reason of Regulation section 1.1502-6; and (c) any
liability for the payments of any amounts as a result of being a party to any
Tax Sharing Agreement or as a result of any express or implied obligation to
indemnify any other Person with respect to the payment of any amounts of the
type described in clause (a) or (b).
"Tax Return" shall include all returns and reports (including
elections, declarations, disclosures, schedules, estimates and information
returns (including Form 1099 and partnership returns filed on Form 1065)
required to be supplied to a Tax authority relating to Taxes.
11. Closing.
The closing of the Merger (the "Closing") shall occur concurrently
with the Effective Time (the "Closing Date"). The Closing shall occur at the
offices of Haynes and Boone, LLP referred to in Section 14.1 hereof. At the
Closing, all of the documents, certificates, agreements, opinions and
instruments referenced in Section 7 will be executed and delivered as described
therein. At the Effective Time, all actions to be taken at the Closing shall be
deemed to be taken simultaneously.
12. Indemnification and Related Matters.
12.1 Indemnification by Parent. Parent shall indemnify and hold
harmless the Company and the Stockholders (collectively, the "Company
Indemnified Parties"), and shall reimburse the Company Indemnified Parties for,
any loss, liability, claim, damage, expense (including, but not limited to,
costs of investigation and defense and reasonable attorneys' fees) or diminution
of value (collectively, "Damages") arising from or in connection with (a) any
inaccuracy, in any material respect, in any of the representations and
warranties of Parent and Acquisition Corp. in this Agreement or in any
certificate delivered by Parent and Acquisition Corp. to the Company pursuant to
this Agreement, or any actions, omissions or statements of fact inconsistent
with any such representation or warranty, (b) any failure by Parent or
Acquisition Corp. to perform or comply in any material respect with any covenant
or agreement in this Agreement, (c) any claim for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such party with
33
Parent or Acquisition Corp. in connection with any of the transactions
contemplated by this Agreement, (d) taxes attributable to any transaction or
event occurring on or prior to the Closing, (e) any claim relating to or arising
out of any liabilities reflected on the Parent Balance Sheet or with respect to
accounting fees arising thereafter, or (f) any litigation, action, claim,
proceeding or investigation by any third party relating to or arising out of the
business or operations of Parent, or the actions of Parent or any holder of
Parent capital stock prior to the Effective Time.
12.2 Survival. All representations, warranties, covenants and
agreements of Parent and Acquisition Corp. contained in this Agreement or in any
certificate delivered pursuant to this Agreement shall survive the Closing for
the time period set forth in Section 12.3 notwithstanding any investigation
conducted with respect thereto. The representations and warranties of the
Company contained in this Agreement or in any certificate delivered pursuant to
this Agreement shall not survive the Closing.
12.3 Time Limitations. Neither Parent nor Acquisition Corp. shall have
any liability (for indemnification or otherwise) with respect to any
representation or warranty, or agreement to be performed and complied with prior
to the Effective Time, unless on or before the one-year anniversary of the
Effective Time (the "Claims Deadline"), Parent is given notice of a claim with
respect thereto, in accordance with Section 12.5, specifying the factual basis
therefor in reasonable detail to the extent then known by the Company
Indemnified Parties.
12.4 Limitation on Liability. The obligations of Parent and
Acquisition Corp. to the Company Indemnified Parties set forth in Section 12.1
shall be subject to the following limitations:
(a) The aggregate liability of Parent and Acquisition Corp. to
the Company Indemnified Parties under this Agreement shall not exceed the gross
proceeds of the sale of any shares of Parent Common Stock effected in
contemplation of the Merger and shall be payable by the issuance of additional
shares of Parent Common Stock pursuant to Section 12.6.
(b) Other than claims based on fraud or for specific performance,
injunctive or other equitable relief, the indemnity provided in this Section 12
shall be the sole and exclusive remedy of the Company Indemnified Parties
against Parent and Acquisition Corp. at law or equity for any matter covered by
Section 12.1.
12.5 Notice of Claims.
(a) If, at any time on or prior to the Claims Deadline, Company
Indemnified Parties shall assert a claim for indemnification pursuant to Section
12.1, such Company Indemnified Parties shall submit to Parent a written claim in
good faith signed by an authorized officer of the Company or other Company
Indemnified Parties, as applicable, stating: (i) that a Company Indemnified
Party incurred or reasonably believes it may incur Damages and the reasonable
estimate of the amount of any such Damages; (ii) in reasonable detail, the facts
alleged as the basis for such claim and the section or sections of this
Agreement alleged as the basis or bases for the claim; and (iii) if the Damages
have actually been incurred, the number of additional shares of Parent Common
Stock to which the Stockholders are entitled with respect to such Damages, which
shall be determined as provided in Section 12.6 below. If the claim is for
34
Damages which the Company Indemnified Parties reasonably believe may be incurred
or are otherwise un-liquidated, the written claim of the applicable Company
Indemnified Parties shall state the reasonable estimate of such Damages, in
which event a claim shall be deemed to have been asserted under this Article 12
in the amount of such estimated Damages, but no distribution of additional
shares of Parent Common Stock to the Stockholders pursuant to Section 12.6 below
shall be made until such Damages have actually been incurred.
(b) In the event that any action, suit or proceeding is brought
against any Company Indemnified Party with respect to which Parent may have
liability under this Section 12, Parent shall have the right, at its cost and
expense, to defend such action, suit or proceeding in the name and on behalf of
the Company Indemnified Party; provided, however, that a Company Indemnified
Party shall have the right to retain its own counsel, with fees and expenses
paid by Parent, if representation of the Company Indemnified Party by counsel
retained by Parent would be inappropriate because of actual or potential
differing interests between Parent and the Company Indemnified Party. In
connection with any action, suit or proceeding subject to the Section 12 hereof,
Parent and each Company Indemnified Party agree to render to each other such
assistance as may reasonably be required in order to ensure proper and adequate
defense of such action, suit or proceeding. Parent shall not, without the prior
written consent of the applicable Company Indemnified Parties, which consent
shall not be unreasonably withheld or delayed, settle or compromise any claim or
demand if such settlement or compromise does not include an irrevocable and
unconditional release of such Company Indemnified Parties for any liability
arising out of such claim or demand.
12.6 Payment of Damages. In the event that the Company Indemnified
Parties shall be entitled to indemnification pursuant to this Section 12 for
actual Damages incurred by them, Parent shall, within thirty (30) days after the
final determination of the amount of such Damages, issue to the Stockholders
that number of additional shares of Parent Common Stock in an aggregate amount
equal to the quotient obtained by dividing (x) the amount of such Damages by (y)
the Fair Market Value per share of the Parent Common Stock as of the date (the
"Determination Date") of the submission of the notice of claim to Parent
pursuant to Section 12.5. Such shares of Parent Common Stock shall be issued to
the Stockholders pro rata, in proportion to the number of shares of Parent
Common Stock issued (or issuable) to the Stockholders at the Effective Time and
under the Private Placement.
13. Termination Prior to Closing.
13.1 Termination of Agreement. This Agreement may be terminated at any
time prior to the Closing:
(a) By the mutual written consent of the Company, Acquisition
Corp. and Parent;
(b) By the Company, if Parent or Acquisition Corp. (i) fails to
perform in any material respect any of its agreements contained herein required
to be performed by it on or prior to the Closing Date, or (ii) materially
breaches any of its representations, warranties or covenants contained herein,
which failure or breach is not cured within thirty (30) days after the Company
has notified Parent and Acquisition Corp. of its intent to terminate this
Agreement pursuant to this paragraph (b);
35
(c) By Parent and Acquisition Corp., if the Company (i) fails to
perform in any material respect any of its agreements contained herein required
to be performed by it on or prior to the Closing Date, or (ii) materially breach
any of its representations, warranties or covenants contained herein, which
failure or breach is not cured within thirty (30) days after Parent or
Acquisition Corp. has notified the Company of its intent to terminate this
Agreement pursuant to this paragraph (c);
(d) By either the Company, on the one hand, or Parent and
Acquisition Corp., on the other hand, if there shall be any order, writ,
injunction or decree of any court or governmental or regulatory agency binding
on Parent, Acquisition Corp. or the Company, which prohibits or materially
restrains any of them from consummating the transactions contemplated hereby,
provided that the parties hereto shall have used their best efforts to have any
such order, writ, injunction or decree lifted and the same shall not have been
lifted within ninety (90) days after entry by any such court or governmental or
regulatory agency; or
(e) By either the Company, on the one hand, or Parent and
Acquisition Corp., on the other hand, if the Closing has not occurred on or
prior to January 31, 2007 for any reason other than delay or nonperformance of
the party seeking such termination.
13.2 Termination of Obligations. Termination of this Agreement
pursuant to this Section 13 shall terminate all obligations of the parties
hereunder, except for the obligations under Sections 6.1, 14.3 and 14.12;
provided, however, that termination pursuant to paragraphs (b) or (c) of Section
13.1 shall not relieve the defaulting or breaching party or parties from any
liability to the other parties hereto.
14. Miscellaneous.
14.1 Notices. Any notice, request or other communication hereunder
shall be given in writing and shall be served either personally, by overnight
delivery or delivered by mail, certified return receipt and addressed to the
following addresses:
36
If to Parent
or Acquisition Corp.: University Girls Calendar, Ltd.
1881 Brunswick St, Suite 311
Halifax, Nova Scotia, Canada, B3J 3L8
Attention: Paul Pedersen, President, Secretary,
Treasurer
With a copy to: Cane Clark LLP
3273 East Warm Springs
Las Vegas, Nevada 89120
Attention: Kyleen Cane, Esq.
If to the Company: Towerstream Corporation
55 Hammerlund Way
Middletown, Rhode Island 02842
Attention: Jeff Thompson, President and Chief
Executive Officer
With a copy to: Haynes and Boone, LLP
153 East 53rd Street
Suite 4900
New York, New York 10022
Attention: Harvey J. Kesner, Esq.
Notices shall be deemed received at the earlier of actual receipt or
three (3) business days following mailing. Counsel for a party (or any
authorized representative) shall have authority to accept delivery of any notice
on behalf of such party.
14.2 Entire Agreement. This Agreement, including the schedules and
exhibits attached hereto and other documents referred to herein, contains the
entire understanding of the parties hereto with respect to the subject matter
hereof. This Agreement supersedes all prior agreements and undertakings between
the parties with respect to such subject matter.
14.3 Expenses. Each party shall bear and pay all of the legal,
accounting and other expenses incurred by it in connection with the transactions
contemplated by this Agreement;.
14.4 Dispute Resolution. The Parties agree to attempt initially to
solve all claims, disputes or controversies arising under, out of or in
connection with this Agreement by conducting good faith negotiations. If the
Parties are unable to settle the matter between themselves, the matter shall
thereafter be resolved by alternative dispute resolution, starting with
mediation and including, if necessary, a final and binding arbitration. Whenever
a Party shall decide to institute arbitration proceedings, it shall give written
notice to that effect to the other Party. The Party giving such notice shall
refrain from instituting the arbitration proceedings for a period of sixty (60)
days following such notice. During such period, the Parties shall make good
faith efforts to amicably resolve the dispute without arbitration. Any
arbitration hereunder shall
37
be conducted under the rules of the American Arbitration Association. Each such
arbitration shall be conducted by a panel of three arbitrators: one arbitrator
shall be appointed by each of Parent and Company and the third shall be
appointed by the American Arbitration Association. Any such arbitration shall be
held in New York, New York. The arbitrators shall have the authority to grant
specific performance. Judgment upon the award so rendered may be entered in any
court having jurisdiction or application may be made to such court for judicial
acceptance of any award and an order of enforcement, as the case may be. In no
event shall a demand for arbitration be made after the date when institution of
a legal or equitable proceeding based on such claim, dispute or other matter in
question would be barred under this Agreement or by the applicable statute of
limitation. The prevailing party in any such arbitration shall be entitled to
recover from the other party, in addition to any other remedies, all reasonable
costs, attorneys' fees and other expenses incurred by such prevailing party.
14.5 Time. Time is of the essence in the performance of the parties'
respective obligations herein contained.
14.6 Severability. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
14.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns and heirs; provided, however, that neither party shall directly or
indirectly transfer or assign any of its rights hereunder in whole or in part
without the written consent of the others, which may be withheld in its sole
discretion, and any such transfer or assignment without said consent shall be
void.
14.8 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and benefit of the parties hereto, their
successors, assigns and heirs, and no other Person shall have any right or
action under this Agreement. Notwithstanding the foregoing, the Placement Agent
is a third party beneficiary of the representations and warranties made by the
Company in Section 2 hereof and Parent and Acquisition Corp. in Section 3.
14.9 Counterparts. This Agreement may be executed in one or more
counterparts, with the same effect as if all parties had signed the same
document. Each such counterpart shall be an original, but all such counterparts
together shall constitute a single agreement.
14.10 Recitals, Schedules and Exhibits. The Recitals, Schedules and
Exhibits to this Agreement are incorporated herein and, by this reference, made
a part hereof as if fully set forth herein.
14.11 Section Headings and Gender. The Section headings used herein
are inserted for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement. All personal pronouns used in this
Agreement shall include the other
38
genders, whether used in the masculine, feminine or neuter gender, and the
singular shall include the plural, and vice versa, whenever and as often as may
be appropriate.
14.12 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to principles of conflicts of laws, except that the applicable
terms of Section 1 shall be governed by the DGCL.
39
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be binding and effective as of the day and year first above written.
PARENT:
UNIVERSITY GIRLS CALENDAR, LTD.
By: /s/ Paul Pedersen
-------------------------------
Name: Paul Pedersen
Title: President
ACQUISITION CORP:
TOWERSTREAM ACQUISITION, INC.
By: /s/ Paul Pedersen
-------------------------------
Name: Paul Pedersen
Title: President
THE COMPANY:
TOWERSTREAM CORPORATION
By: /s/ Jeffrey M. Thompson
-------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
[SIGNATURE PAGE TO AGREEMENT OF MERGER AND PLAN OF REORGANIZATION]
EXHIBIT 2.2
CERTIFICATE OF MERGER
OF
TOWERSTREAM ACQUISITION, INC.
A DELAWARE CORPORATION
WITH AND INTO
TOWERSTREAM CORPORATION
A DELAWARE CORPORATION
(PURSUANT TO TITLE 8, SECTION 251(c) OF THE
DELAWARE GENERAL CORPORATION LAW)
The undersigned corporations, each organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, do hereby
certify:
FIRST: Towerstream Acquisition, Inc. is being merged into Towerstream
Corporation and the name of the surviving corporation is Towerstream Corporation
SECOND: That an agreement of merger and plan of reorganization (the "Merger
Agreement"), whereby Towerstream Acquisition, Inc. is merged with and into
Towerstream Corporation, has been approved, adopted, certified, executed and
acknowledged by each of the constituent corporations in accordance with the
requirements of Title 8, Section 251(c) of the General Corporation Law of the
State of Delaware.
THIRD: That the Certificate of Incorporation of Towerstream Corporation
shall be the Certificate of Incorporation of the surviving corporation.
FOURTH: That the merger is to become effective upon filing.
FIFTH: That the executed Merger Agreement is on file at the principal place
of business of the surviving corporation located at Towerstream Corporation, 55
Hammerlund Way, Middletown, Rhode Island 02842.
SIXTH: That a copy of the Merger Agreement will be furnished by the
surviving corporation, on request and without cost, to any stockholder of any
constituent corporation.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the undersigned has executed this certificate as of the
12th day of January, 2007.
TOWERSTREAM CORPORATION
By: /s/ Jeffrey M. Thompson
------------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
TOWERSTREAM ACQUISITION, INC.
By: /s/ Paul Pedersen
------------------------------------
Name: Peter Pedersen
Title: President, Treasurer and Secretary
EXHIBIT 3.2
BY-LAWS
OF
TOWERSTREAM CORPORATION
(Effective January 3, 2007)
(A Delaware Corporation)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK.
Every holder of stock in the corporation shall be entitled to have a
certificate signed by, or in the name of, the corporation by the Chairman or
Vice-Chairman of the Board of Directors, if any, or by the President or a
Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the corporation representing the number of shares
owned by him in the corporation. If such certificate is countersigned by a
transfer agent other than the corporation or its employee or by a registrar
other than the corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Whenever the corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock in place of any
certificate theretofore issued by it, alleged to have been lost, stolen, or
destroyed, and the Board of Directors may require the owner of any lost, stolen,
or destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged loss, theft, or destruction of any such
certificate or the issuance of any such new certificate.
2. FRACTIONAL SHARE INTERESTS.
The corporation may, but shall not be required to, issue fractions of a
share.
3. STOCK TRANSFERS.
Upon compliance with provisions restricting the transfer or registration of
transfer of shares of stock, if any, transfers or registration of transfer of
shares of stock of the corporation shall be made only on the stock ledger of the
corporation by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the corporation or with a transfer agent or a
registrar, if any, and on surrender of the certificate or certificates for such
shares of stock properly endorsed and the payment of all taxes due thereon.
4. RECORD DATE FOR STOCKHOLDERS.
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
the board of directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the board of directors, and which record date shall not be more than sixty nor
less than ten days before the date of such meeting. If no record date has been
fixed by the board of directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; providing, however, that the board of directors may
fix a new record date for the adjourned meeting.
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date has been fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the board of directors adopts the resolution relating
thereto.
5. MEANING OF CERTAIN TERMS.
As used herein in respect of the right to notice of a meeting of
stockholders or a waiver thereof or to participate or vote thereat or to consent
or dissent in writing in lieu of a meeting, as the case may be, the term "share"
or "shares" or "share of stock" or "shares of stock" or "stockholder" or
"stockholders" refers to an outstanding share or shares of stock and to a holder
or holders of record of outstanding shares of stock when the corporation is
authorized to issue only one class of shares of stock, and said reference is
also intended to include any outstanding share or shares of stock and any holder
or holders of record of outstanding shares of stock of any class upon which or
upon whom the Certificate of Incorporation confers such rights where there are
two or more classes or series of shares of stock or upon which or upon whom the
General Corporation Law confers such rights notwithstanding that the Certificate
of Incorporation may provide for more than one class or series of shares of
stock, one or more of which are limited or denied such rights thereunder;
provided, however, that no such right shall vest in the event of an increase or
a decrease in the authorized number of shares of stock of any class or series
which is otherwise denied voting rights under the provisions of the Certificate
of Incorporation, including any Preferred Stock which is denied voting rights
under the provisions of the resolution or resolutions adopted by the Board of
Directors with respect to the issuance thereof.
6. STOCKHOLDER MEETINGS.
TIME. The annual meeting shall be held on the date and at the time fixed,
from time to time, by the directors. A special meeting shall be held on the date
and at the time fixed by the directors.
PLACE. Annual meetings and special meetings shall be held at such place,
within or without the State of Delaware, as the directors may, from time to
time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
CALL. Annual meetings and special meetings may be called by the directors
or by any officer instructed by the directors to call the meeting.
NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given,
stating the place, date, and hour of the meeting. The notice of an annual
meeting shall state that the meeting is called for the election of directors and
for the transaction of other business which may properly come before the
meeting, and shall (if any other action which could be taken at a special
meeting is to be taken at such annual meeting), state such other action or
actions as are known at the time of such notice. The notice of a special meeting
shall in all instances state the purpose or purposes for which the meeting is
called. If any action is proposed to be taken which would, if taken, entitle
stockholders to receive payment for their shares of stock, the notice shall
include a statement of that purpose and to that effect. Except as otherwise
provided by the General Corporation Law, a copy of the notice of any meeting
shall be given, personally or by mail, not less than ten days nor more than
sixty days before the date of the meeting, unless the lapse of the prescribed
period of time shall have been waived, and directed to each stockholder at
his address as it appears on the records of the corporation. Notice by mail
shall be deemed to be given when deposited, with postage thereon prepaid, in the
United States mail. If a meeting is adjourned to another time, not more than
thirty days hence, and/or to another place, and if an announcement of the
adjourned time and place is made at the meeting, it shall not be necessary to
give notice of the adjourned meeting unless the directors, after adjournment,
fix a new record date for the adjourned meeting. Notice need not be given to any
stockholder who submits a written waiver of notice by him before or after the
time stated therein. Attendance of a person at a meeting of stockholders shall
constitute a waiver of notice of such meeting, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the stockholders need be specified in any
written waiver of notice.
STOCKHOLDER LIST. There shall be prepared and made, at least ten days
before every meeting of stockholders, a complete list of the stockholders,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by this section or the books of the corporation, or to
vote at any meeting of stockholders.
CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by
one of the following officers in the order of seniority and if present and
acting: the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, a Vice President, a chairman for the meeting chosen by the
Board of Directors, or, if none of the foregoing is in office and present and
acting, by a chairman to be chosen by the stockholders. The Secretary of the
corporation, or, in his absence, an Assistant Secretary, shall act as secretary
of every meeting, but if neither the Secretary nor an Assistant Secretary is
present the Chairman for the meeting shall appoint a secretary of the meeting.
PROXY REPRESENTATION. Every stockholder may authorize another person or
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and, if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A proxy may
be made irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the corporation generally.
INSPECTORS AND JUDGES. The directors, in advance of any meeting, may, but
need not, appoint one or more inspectors of election or judges of the vote, as
the case may be, to act at the meeting or any adjournment thereof. If an
inspector or inspectors or judge or judges are not appointed, the person
presiding at the meeting may, but need not, appoint one or more inspectors or
judges. In case any person who may be appointed as an inspector or judge fails
to appear or act, the vacancy may be filled by appointment made by the person
presiding thereat. Each inspector or judge, if any, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector or judge at such meeting with strict impartiality and
according to the best of his ability. The inspectors or judges, if any, shall
determine the number of shares of stock outstanding and the voting power of
each, the shares of stock represented at the meeting, the existence of a quorum,
the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. On request of the person presiding at
the meeting, the inspector or inspectors or judge or judges, if any, shall make
a report in writing of any challenge, question or matter determined by him or
them and execute a certificate of any fact found by him or them.
QUORUM. Except as the General Corporation Law or these By-Laws may
otherwise provide, the holders of a majority of the outstanding shares of stock
entitled to vote shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a
quorum. When a quorum is once present to organize a meeting, it is not broken by
the subsequent withdrawal of any shareholders.
VOTING. Each stockholder entitled to vote in accordance with the terms of
the Certificate of Incorporation and of these By-Laws, or, with respect to the
issuance of Preferred Stock, in accordance with the terms of a resolution or
resolutions of the Board of Directors, shall be entitled to one vote, in person
or by proxy, for each share of stock entitled to vote held by such stockholder.
In the election of directors, a plurality of the votes present at the meeting
shall elect. Any other action shall be authorized by a majority of the votes
cast except where the Certificate of Incorporation or the General Corporation
Law prescribes a different percentage of votes and/or a different exercise of
voting power. Voting by ballot shall not be required for corporate action except
as otherwise provided by the General Corporation Law.
7. STOCKHOLDER ACTION WITHOUT MEETINGS.
Any action required to be taken, or any action which may be taken, at any
annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of the
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing and shall
be delivered to the corporation by delivery to its registered office in
Delaware, its principal place of business, or an officer or agent of the
corporation having custody of the book in
which proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
8. NOTICE OF STOCKHOLDER BUSINESS.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this By-law, who
shall be entitled to vote at such meeting and who complies with the notice
procedures set forth in this By-law.
For business to be properly brought before an annual meeting by a
stockholder pursuant to clause (c) of paragraph 1 of this By-law, the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the meeting is changed by more than 30 days from such anniversary date,
notice by the stockholder to be timely must be received no later than the close
of business on the 10th day following the earlier of the day on which notice of
the date of the meeting was mailed or public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to brought before the meeting, (b) the name and address, as
they appear on the corporation's books, of the stockholder
proposing such business, and the name and address of the beneficial owner, if
any, on whose behalf the proposal is made, (c) the class and number of shares of
the corporation which are owned beneficially and of record by such stockholder
of record and by the beneficial owner, if any, on whose behalf the proposal is
made and (d) any material interest of such stockholder of record and the
beneficial owner, if any, on whose behalf the proposal is made in such business.
Notwithstanding anything in these By-laws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this By-law. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the procedures prescribed by
these By-laws, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this By-law, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this By-law.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION.
The business and affairs of the corporation shall be managed by or under
the direction of the Board of Directors of the corporation. The use of the
phrase "whole board" herein refers to the total number of directors which the
corporation would have if there were no vacancies.
2. QUALIFICATIONS AND NUMBER.
A director need not be a stockholder, a citizen of the United States, or a
resident of the State of Delaware. The number of directors constituting the
entire Board of Directors shall be the number, not less than one nor more than
15, fixed from time to time by a majority of the total number of directors which
the Corporation would have, prior to any increase or decrease, if there were no
vacancies, provided, however, that no decrease shall shorten the term of an
incumbent director. The number of directors may be increased or decreased by
action of the stockholders or of the directors.
3. ELECTION AND TERM.
The first Board of Directors, unless the members thereof shall have been
named in the Certificate of Incorporation, shall be elected by the incorporator
or incorporators and shall hold office until the first annual meeting of
stockholders and until their successors have been elected and qualified or until
their earlier resignation or removal. Any director may resign at any time upon
written notice to the corporation. Thereafter, directors who are elected at an
annual meeting of stockholders, and directors who are elected in the interim to
fill vacancies and newly created directorships, shall hold office until the next
annual meeting of stockholders and until their successors have been elected and
qualified or until their earlier resignation or removal. In the interim between
annual meetings of stockholders or of special meetings of stockholders called
for the election of directors and/or for the removal of one or more directors
and for the filling of any vacancies in the Board of Directors, including
vacancies resulting from the removal of directors for cause or without cause,
any vacancy in the Board of Directors may be filled by the vote of a
majority of the remaining directors then in office, although less than a quorum,
or by the sole remaining director.
4. MEETINGS.
TIME. Meetings shall be held at such time as the Board shall fix.
FIRST MEETING. The first meeting of each newly elected Board may be held
immediately after each annual meeting of the stockholders at the same place at
which the meeting is held, and no notice of such meeting shall be necessary to
call the meeting, provided a quorum shall be present. In the event such first
meeting is not so held immediately after the annual meeting of the stockholders,
it may be held at such time and place as shall be specified in the notice given
as hereinafter provided for special meetings of the Board of Directors, or at
such time and place as shall be fixed by the consent in writing of all of the
directors.
PLACE. Meetings, both regular and special, shall be held at such place
within or without the State of Delaware as shall be fixed by the Board.
CALL. No call shall be required for regular meetings for which the time and
place have been fixed. Special meetings may be called by or at the direction of
the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, or
the President, or of a majority of the directors in office.
NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for
regular meetings for which the time and place have been fixed. Written, oral, or
any other mode of notice of the time and place shall be given for special
meetings
at least twenty-four hours prior to the meeting. The notice of any meeting need
not specify the purpose of the meeting. Any requirement of furnishing a notice
shall be waived by any director who signs a written waiver of such notice before
or after the time stated therein.
Attendance of a director at a meeting of the Board shall constitute a
waiver of notice of such meeting, except when the director attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum
except when a vacancy or vacancies prevents such majority, whereupon a majority
of the directors in office shall constitute a quorum, provided that such
majority shall constitute at least one-third (1/3) of the whole Board. Any
director may participate in a meeting of the Board by means of a conference
telephone or similar communications equipment by means of which all directors
participating in the meeting can hear each other, and such participation in a
meeting of the Board shall constitute presence in person at such meeting. A
majority of the directors present, whether or not a quorum is present, may
adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
act of the Board shall be the act by vote of a majority of the directors present
at a meeting, a quorum being present. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these By-Laws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board.
CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present
and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the
Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
THE CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of
Directors, and any Vice-Chairman of the Board, may be elected by a majority vote
of the Board of Directors and shall serve until the meeting of the Board of
Directors next following the Annual Meeting of the Stockholders at which a
Chairman, and any Vice-Chairman, shall be newly elected or re-elected from
amongst the Directors then in office.
5. REMOVAL OF DIRECTORS.
Any or all of the directors may be removed for cause or without cause by
the stockholders.
6. COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to the
extent provided in the resolution of the Board, shall have and may exercise the
powers of the Board of Directors in the management of the business and affairs
of the corporation, and may authorize the seal of the corporation to be affixed
to all papers which may require it. In
the absence or disqualification of any member of any such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
7. ACTION IN WRITING.
Any action required or permitted to be taken at any meeting of the Board of
Directors or any committee thereof may be taken without a meeting if all members
of the Board or committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
8. NOMINATION.
Only persons who are nominated in accordance with the procedures set forth
in these By-laws shall be eligible to serve as Directors. Nominations of persons
for election to the Board of Directors of the corporation may be made at a
meeting of stockholders (a) by or at the direction of the Board of Directors or
(b) by any stockholder of the corporation who is a stockholder of record at the
time of giving of notice provided for in this By-law, who shall be entitled to
vote for the election of directors at the meeting and who complies with the
notice procedures set forth in this By-law.
Nominations by stockholders shall be made pursuant to timely notice in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the corporation (a) in the case of an annual meeting, not less than
60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is changed by more than 30 days
from such anniversary date, notice by the stockholder to be timely must be so
received not later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure was made, and (b) in the case of a special meeting at which
directors are to be elected, not later than the close of business on the 10th
day following the earlier of the day on which notice of the date of the meeting
was mailed or public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to the stockholder giving the notice
(i) the name and address, as they appear on the corporation's books, of such
stockholder and (ii) the class and number of shares of the corporation which are
beneficially owned by such stockholder and also which are owned of record by
such stockholder; and (c) as to the beneficial owner, if any, on whose behalf
the nomination is made, (i) the name and address of such person and (ii) the
class and number of shares of the corporation which are beneficially owned by
such person. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee.
No person shall be eligible to serve as a director of the corporation
unless nominated in accordance with the procedures set forth in this By-law. The
Chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by these By-laws, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this By-law, a stockholder shall
also comply with all applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder with respect to the
matters set forth in this By-law.
ARTICLE III
OFFICERS
1. EXECUTIVE OFFICERS.
The directors may elect or appoint a Chairman of the Board of Directors, a
Chief Executive Officer, a President, one or more Vice Presidents (one or more
of whom may be denominated "Executive Vice President"), a Secretary, one or more
Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, and such
other officers as they may determine. Any number of offices may be held by the
same person.
2. TERM OF OFFICE: REMOVAL.
Unless otherwise provided in the resolution of election or appointment,
each officer shall hold office until the meeting of the Board of Directors
following the next annual meeting of stockholders and until his successor has
been elected and qualified or until his earlier resignation or removal. The
Board of Directors may remove any officer for cause or without cause.
3. AUTHORITY AND DUTIES.
All officers, as between themselves and the corporation, shall have such
authority and perform such duties in the management of the corporation as may be
provided in these By-Laws, or, to the extent not so provided, by the Board of
Directors.
4. CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall, subject to the discretion of the Board
of Directors, have general supervision and control of the Corporation's business
such duties as may from time to time be prescribed by the Board of Directors.
5. THE PRESIDENT.
The President shall preside at all meetings of the Stockholders and in the
absence of the Chairman of the Board of Directors, at the meeting of the Board
of Directors, shall, subject to the discretion of the Board of Directors, have
general supervision and control of the Corporation's business and shall see that
all orders and resolutions of the Board of Directors are carried into effect.
6. VICE PRESIDENTS.
Any Vice President that may have been appointed, in the absence or
disability of the President, shall perform the duties and exercise the powers of
the President, in the order of their seniority, and shall perform such other
duties as the Board of Directors shall prescribe.
7. THE SECRETARY.
The Secretary shall keep in safe custody the seal of the corporation and
affix it to any instrument when authorized by the Board of Directors, and shall
perform such other
duties as may be prescribed by the Board of Directors. The Secretary (or in his
absence, an Assistant Secretary, but if neither is present another person
selected by the Chairman for the meeting) shall have the duty to record the
proceedings of the meetings of the stockholders and directors in a book to be
kept for that purpose.
8. CHIEF FINANCIAL OFFICER AND TREASURER.
The Chief Financial Officer shall be the Treasurer, unless the Board of
Directors shall elect another officer to be the Treasurer. The Treasurer shall
have the care and custody of the corporate funds, and other valuable effects,
including securities, and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the corporation as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the President
and directors, at the regular meetings of the Board, or whenever they may
require it, an account of all his transactions as Treasurer and of the financial
condition of the corporation. If required by the Board of Directors, the
Treasurer shall give the corporation a bond for such term, in such sum and with
such surety or sureties as shall be satisfactory to the Board for the faithful
performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
ARTICLE IV
CORPORATE SEAL
AND
CORPORATE BOOKS
The corporate seal shall be in such form as the Board of Directors shall
prescribe.
The books of the corporation may be kept within or without the State of
Delaware, at such place or places as the Board of Directors may, from time to
time, determine.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
ARTICLE VI
INDEMNITY
Any person who was or is a party or threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including employee benefit plans) (hereinafter an "indemnitee"), shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the General Corporation Law, as the same exists or may hereafter
be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification than permitted prior thereto),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such indemnitee in connection
with such action, suit or proceeding, if the indemnitee acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe such conduct was unlawful. The
termination of the proceeding, whether by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe such conduct was unlawful.
Any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including employee benefit plans) shall be indemnified and
held harmless by the corporation to the fullest extent authorized by the General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification than permitted prior thereto),
against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court in which such suit or action was brought, shall determine upon
application, that despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such Court shall deem proper.
All reasonable expenses incurred by or on behalf of the indemnitee in
connection with any suit, action or proceeding, may be advanced to the
indemnitee by the corporation.
The rights to indemnification and to advancement of expenses conferred in
this section shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, the certificate of incorporation,
by-law, agreement, vote of stockholders or disinterested directors or otherwise.
ARTICLE VII
AMENDMENTS
The By-Laws may be amended, added to, rescinded or repealed at any meeting
of the Board of Directors or of the stockholders, provided that notice of the
proposed change was given in the notice of the meeting.
EXHIBIT 3.3
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
The corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware does hereby certify:
FIRST: That by written consent of the Board of Directors of: University Girls
Calendar, Ltd. resolutions were duly adopted setting forth a proposed amendment
of the Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be amended
by changing the Article thereof numbered "FIRST" so that, as amended, said
Article shall be and read as follows:
FIRST: The name of this Corporation is Towerstream Corporation
SECOND: That thereafter, pursuant to resolution of its Board of Directors and in
accordance with Section 228(a) of the General Corporation Law of the State of
Delaware, a written consent of the stockholders of said corporation was adopted,
in which consent the necessary number of shares as required by statute were
voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, said corporation has caused this certificate to be signed
this 12th day of January, 2007
BY: /s/ Jeffrey M. Thompson
------------------------------------
Authorized Officer
TITLE: Chief Executive Officer
NAME: Jeffrey M. Thompson
----------------------------------
Print or Type
EXHIBIT 4.1
TOWERSTREAM CORPORATION
2007 EQUITY COMPENSATION PLAN
TABLE OF CONTENTS
PAGE
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SECTION 1 - PURPOSE................................................... 1
SECTION 2 - DEFINITIONS............................................... 1
SECTION 3 - ADMINISTRATION............................................ 4
SECTION 4 - STOCK..................................................... 4
SECTION 5 - GRANTING OF AWARDS........................................ 5
SECTION 6 - TERMS AND CONDITIONS OF OPTIONS........................... 5
SECTION 7 - SARS...................................................... 8
SECTION 8 - RESTRICTED STOCK.......................................... 9
SECTION 9 - RSUs...................................................... 10
SECTION 10 - OTHER AWARDS.............................................. 11
SECTION 11 - AWARD AGREEMENTS.......................................... 11
SECTION 12 - ADJUSTMENT IN CASE OF CHANGES IN COMMON SHARES............ 11
SECTION 13 - CHANGE IN CONTROL......................................... 12
SECTION 14 - CERTAIN CORPORATE TRANSACTIONS............................ 13
SECTION 15 - AMENDMENT OF THE PLAN AND OUTSTANDING AWARDS.............. 13
SECTION 16 - TERMINATION OF PLAN; CESSATION OF ISO GRANTS.............. 14
SECTION 17 - MISCELLANEOUS............................................. 14
UNIVERSITY GIRLS CALENDAR, LTD.
2007 EQUITY COMPENSATION PLAN
Effective as of the Effective Date set forth in Section 17, University
Girls Calendar, Ltd. (the "Company") hereby adopts the University Girls
Calendar, Ltd. 2007 Equity Compensation Plan (the "Plan"):
SECTION 1 - PURPOSE
The Plan is intended to provide a means whereby the Company may, through
the grant of Awards to Employees, Consultants and Non-Employee Directors,
attract and retain such individuals, who are considered by the Company to be
persons of experience and ability and whose services are considered valuable,
and to encourage them to exercise their best efforts to enhance the growth of
the Company and of any Related Corporation.
SECTION 2 - DEFINITIONS
The following terms, when used herein, shall have the following meanings
unless otherwise required by the context:
(a) "AWARD" shall mean an ISO, NQSO, Performance Share, PSU, SAR,
Restricted Stock, RSU, Bonus Share, or Dividend Equivalents, awarded under the
Plan by the Company to an Employee, a Consultant or a Non-Employee Director.
(b) "AWARD AGREEMENT" shall mean a written document evidencing the grant of
an Award, as described in Section 11.
(c) "BOARD" shall mean the Board of Directors of the Company.
(d) "BONUS SHARES" shall mean a grant of unrestricted Common Shares
pursuant to Section 10(a).
(e) "CODE" shall mean the United States Internal Revenue Code of 1986, as
amended.
(f) "COMMITTEE" shall mean a committee designated by the Board, which shall
have the authority required by a compensation committee pursuant to Treas. Reg.
Section 1.162-27(c)(4) and which shall consist solely of not fewer than two
directors of the Company, each of whom shall be appointed by and serve at the
pleasure of the Board, taking into consideration the rules under section 16b of
the Exchange Act, the requirements of section 162(m) of the Code, and the
requirements of the exchange or market on which the Company's Common Shares are
traded.
(g) "COMMON SHARES" shall mean the shares of common stock of the Company,
par value $0.001 per share.
(h) "COMPANY" shall mean University Girls Calendar, Ltd., a Delaware
corporation.
(i) "CONSULTANT" shall mean an individual who is not an Employee or a
Non-Employee Director and who provides bona fide services to the Company or a
Related Corporation that (i) are not in connection with the offer or sale of
securities in a capital-raising transaction, and (ii) do not directly or
indirectly promote or maintain a market for the Company's securities.
(j) "DIVIDEND EQUIVALENTS" shall mean the right to receive an amount equal
to the regular cash dividends paid by the Company upon one Common Share which is
awarded to a Grantee in accordance with Section 9(e) or Section 10(b) of the
Plan.
(k) "EMPLOYEE" shall mean an officer or other employee of the Company or a
Related Corporation.
(l) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" shall mean the following, arrived at by a good
faith determination of the Committee:
(1) the closing price of the Common Shares on a registered securities
exchange or an over-the-counter market on the applicable date; or
(2) such other method of determining fair market value that complies
with Code Sections 422 and 409A and that is adopted by the Committee.
(n) "GRANTEE" shall mean an Employee, a Consultant or a Non-Employee
Director who has been granted an Award under the Plan.
(o) "ISO" shall mean an Option which, at the time such Option is granted,
qualifies as an incentive stock option within the meaning of Code Section 422
unless the Award Agreement states that the Option will not be treated as an ISO.
(p) "NON-EMPLOYEE DIRECTOR" shall mean a director of the Company who is not
an Employee.
(q) "NQSO" shall mean an Option which, at the time such Option is granted,
does not qualify as an ISO (whether or not it is designated as an ISO in the
applicable Award Agreement).
(r) "OPTIONS" shall mean ISOs and NQSOs which entitle the Grantee on
exercise thereof to purchase Common Shares at a specified exercise price.
(s) "PERFORMANCE GOALS" shall mean the goal or goals applicable to a
Grantee's Performance Stock or PSUs that are deemed by the Committee to be
important to the success of the Company or any of its Related Corporations. The
Committee shall establish the specific measures for each applicable goal for a
performance period, which need not be uniform with respect to each Grantee. In
creating these measures, the Committee shall use one or more of the following
business criteria: sales, revenues, profit, return on sales, net operating
profit after
taxes, investment turnover, customer service indices, funds from operations,
income from operations, return on assets, return on net assets, return on
equity, return on capital, market price appreciation of Common Shares, economic
value added, total shareholder return, net income, pre-tax income, earnings per
share, operating profit margin, net income margin, sales margin, cash flow,
market share, inventory turnover, asset turnover, sales growth, revenue growth,
net revenue growth, capacity utilization, new stores opened, customer
penetration, increase in customer base, net income growth, expense control and
hiring of personnel. The business criteria may apply to the individual, a
division, or to the Company and/or one or more Related Corporations and may be
weighted and expressed in absolute terms or relative to the performance of other
individuals or companies or an index. The Committee shall determine the
performance period and the Performance Goals and measures (and weighting
thereof) applicable to such period not later than the earlier of (i) 90 days
after the commencement of the performance period, or (ii) the expiration of 25%
of the performance period.
(t) "PERFORMANCE STOCK" shall mean a type of Restricted Stock, where the
lapse of restrictions is based on the actual achievement of Performance Goals.
(u) "PLAN" shall mean the University Girls Calendar, Ltd. 2007 Equity
Incentive Plan, as set forth herein and as amended from time to time.
(v) "PSU" shall mean a performance stock unit which is a type of RSU, the
vesting of which is based on the actual achievement of Performance Goals.
(w) "RELATED CORPORATION" shall mean either a "subsidiary corporation" of
the Company, as defined in Code Section 424(f), or the "parent corporation" of
the Company, as defined in Code Section 424(e).
(x) "RESTRICTED STOCK" shall mean Common Shares subject to restrictions
determined by the Committee pursuant to Section 8.
(y) "RSU" shall mean a restricted stock unit granted pursuant to Section 9.
(z) "SAR" shall mean an Award entitling the recipient on exercise to
receive an amount, in cash or Common Shares or in a combination thereof (such
form to be determined by the Committee), determined by reference to appreciation
in the value of Common Shares.
(aa) "SHORT-TERM DEFERRAL DATE" shall mean, with respect to an amount
(including Common Shares) payable pursuant to an Award, the later of (a) the
15th day of the third month following the Grantee's first taxable year in which
the amount is no longer subject to a substantial risk of forfeiture, or (b) the
15th day of the third month following the Company's first taxable year in which
the amount is no longer subject to a substantial risk of forfeiture. Payment
shall be treated as made on the Short-Term Deferral Date if payment is made on
such Date or on a later date that is as soon as practicable after such Date and
within the same calendar year. A Grantee shall have no right to interest as a
result of payment on such later date.
(bb) "TERMINATION OF SERVICE" shall mean (i) with respect to an Award
granted to an Employee, the termination of the employment relationship between
the Employee and the
Company and all Related Corporations; (ii) with respect to an Award granted to a
Consultant, the termination of the consulting or advisory relationship between
the Consultant and the Company and all Related Corporations; and (iii) with
respect to an Award granted to a Non-Employee Director, the cessation of the
provision of services as a director of the Company and all Related Corporations;
provided, however, that if the Grantee's status changes from Employee,
Consultant or Non-Employee Director to any other status eligible to receive an
Award under the Plan, the Committee (subject to Section 15) may provide that no
Termination of Service occurs for purposes of the Plan until the Grantee's new
status with the Company and all Related Corporations terminates. For purposes of
this paragraph, if a Grantee is an Employee, Consultant or Non-Employee Director
of a Related Corporation and not the Company, the Grantee shall incur a
Termination of Service when such corporation ceases to be a Related Corporation,
unless the Committee determines otherwise. A Termination of Service shall not be
deemed to have resulted by reason of a bona fide leave of absence approved by
the Committee.
SECTION 3 - ADMINISTRATION
The Plan shall be administered by the Committee. Each member of the
Committee, while serving as such, shall be deemed to be acting in his or her
capacity as a director of the Company. The Committee shall have full authority,
subject to the terms of the Plan, to select the Employees, Consultants and
Non-Employee Directors to be granted Awards under the Plan, to grant Awards on
behalf of the Company, and to set the date of grant and the other terms of such
Awards in accordance with the terms of the Plan. The Committee may correct any
defect, supply any omission, and reconcile any inconsistency in the Plan and in
any Award granted hereunder, in the manner and to the extent it deems desirable.
The Committee also shall have the authority (1) to establish such rules and
regulations, not inconsistent with the provisions of the Plan, for the proper
administration of the Plan, and to amend, modify, or rescind any such rules and
regulations, (2) to adopt modifications, amendments, procedures, sub-plans and
the like, which may be inconsistent with the provisions of the Plan, as are
necessary to comply with the laws and regulations of other countries in which
the Company operates in order to assure the viability of Awards granted under
the Plan to individuals in such other countries, and (3) to make such
determinations and interpretations under, or in connection with, the Plan, as it
deems necessary or advisable. All such rules, regulations, determinations, and
interpretations shall be binding and conclusive upon the Company, its
shareholders, and all Grantees, upon their respective legal representatives,
beneficiaries, successors, and assigns, and upon all other persons claiming
under or through any of them. Except as otherwise required by the bylaws of the
Company or by applicable law, no member of the Board or the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Award granted under it.
SECTION 4 - STOCK
The maximum aggregate number of Common Shares that may be delivered under
the Plan is 2,403,922 shares (which is also the maximum aggregate number of
shares that may be issued under the Plan through ISOs). Shares delivered under
the Plan may be authorized but unissued shares or reacquired shares, and the
Company may purchase shares required for this purpose, from time to time, if it
deems such purchase to be advisable.
If any Award expires, terminates for any reason, is cancelled, is forfeited
or is settled in cash rather than Common Shares, the number of Common Shares
with respect to which such Award expired, terminated, was cancelled, was
forfeited or was settled in cash, shall continue to be available for future
Awards granted under the Plan. However, if an Option or SAR is cancelled, a PSU
is settled for cash, or Performance Stock is forfeited, the Common Shares
covered by the cancelled Option or SAR, the cash-settled PSU, and the forfeited
Performance Stock shall be counted against the maximum number of shares
specified above for Options, SARS, PSUs, or Performance Stock, in each case,
that may be granted to a single Employee. If any Option is exercised by
surrendering Common Shares to the Company as full or partial payment or if tax
withholding requirements are satisfied by withholding Common Shares to the
Company, only the number of shares issued net of Common Shares withheld or
surrendered shall be deemed delivered for purposes of determining the maximum
number of shares available for grant under the Plan.
SECTION 5 - GRANTING OF AWARDS
The Committee may, on behalf of the Company, grant to Employees,
Consultants and Non-Employee Directors such Awards as it, in its sole
discretion, determines are warranted. If the Board adopts a resolution in
accordance with section 157 of Delaware General Corporation Law, the Company's
chief executive officer may award Options to key employees of the Company or a
Related Corporation (other than to himself or any other employee subject to the
deduction limit of section 162(m) of the Code); provided, however, that the
aggregate number of Common Shares subject to such Options that the chief
executive officer may award shall be limited in accordance with the
aforementioned Board resolution. Grants of ISOs shall be separate and not in
tandem, and Consultants and Non-Employee Directors shall not be eligible to
receive ISOs under the Plan. More than one Award may be granted to an Employee,
Consultant or Non-Employee Director under the Plan.
SECTION 6 - TERMS AND CONDITIONS OF OPTIONS
Options shall include expressly or by reference the following terms and
conditions as well as such other provisions as the Committee shall deem
desirable that are not inconsistent with the provisions of the Plan, Code
Section 409A and, for ISOs, Code Section 422(b).
(a) NUMBER OF SHARES. The Award Agreement shall state the number of Common
Shares to which the Option pertains.
(b) EXERCISE PRICE. The Award Agreement shall state the exercise price
which shall be determined and fixed by the Committee in its discretion, but the
exercise price shall not be less than the higher of 100 percent (110 percent in
the case of an ISO granted to a more-than-ten-percent shareholder, as provided
in subsection (i) below) of the Fair Market Value of the Common Shares subject
to the Option on the date the Option is granted or the par value thereof.
(c) TERM. The term of each Option shall be determined by the Committee, in
its discretion; provided, however, that the term of each ISO shall be not more
than ten years (five years in the case of a more-than-ten-percent shareholder,
as provided in subsection (i) below)
from the date of grant of the ISO. Each Option shall be subject to earlier
termination as provided in subsections (f), (g), and (h) below and in Section
14.
(d) EXERCISE. An Option shall be exercisable in such installments, upon
fulfillment of such conditions (such as performance-based requirements), or on
such dates as the Committee may specify. The Committee may accelerate the
exercise date of an outstanding Option, in its discretion, if the Committee
deems such acceleration to be desirable.
Any exercisable Option may be exercised at any time up to the expiration or
termination of the Option. Exercisable Options may be exercised, in whole or in
part and from time to time, by giving notice of exercise to the Company at its
principal office, specifying the number of shares to be purchased and
accompanied by payment in full of the aggregate exercise price for such shares
(except that, in the case of an exercise arrangement approved by the Committee
and described in paragraph (4) below, payment may be made as soon as practicable
after the exercise). Only full shares shall be issued, and any fractional share
which might otherwise be issuable upon exercise of an Option shall be forfeited.
The Committee, in its sole discretion, shall determine from the
alternatives set forth in paragraphs (1) through (5) the methods by which the
exercise price may be paid. To the extent an Award Agreement does not include
one or more alternative, the Committee hereby specifically reserves the right to
exercise its discretion to allow the Grantee to pay the exercise price using
such alternative:
(1) in cash or, if permitted by the Committee, its equivalent;
(2) in Common Shares previously acquired by the Grantee;
(3) in Common Shares newly acquired by the Grantee upon exercise of
such Option (which shall constitute a disqualifying disposition in the case
of an ISO);
(4) by delivering a properly executed notice of exercise of the Option
to the Company and a broker, with irrevocable instructions to the broker
promptly to deliver to the Company the amount necessary to pay the exercise
price of the Option; or
(5) in any combination of paragraphs (1), (2), (3) and (4) above.
In the event the exercise price is paid, in whole or in part, with Common
Shares, the portion of the exercise price so paid shall be equal to the
aggregate Fair Market Value (determined as of the date of exercise of the
Option) of the Common Shares used to pay the exercise price.
(e) ISO ANNUAL LIMIT. The aggregate Fair Market Value (determined as of the
date the ISO is granted) of the Common Shares with respect to which ISOs are
exercisable for the first time by an Employee during any calendar year (counting
ISOs under this Plan and under any other stock option plan of the Company or a
Related Corporation) shall not exceed $100,000. If an Option intended as an ISO
is granted to an Employee and the Option may not be treated in whole or in part
as an ISO pursuant to the $100,000 limit, the Option shall be treated as
an ISO to the extent it may be so treated under the limit and as an NQSO as to
the remainder. For purposes of determining whether an ISO would cause the
limitation to be exceeded, ISOs shall be taken into account in the order
granted.
(f) TERMINATION OF SERVICE FOR A REASON OTHER THAN DEATH OR DISABILITY. If
a Grantee's Termination of Service occurs prior to the expiration date fixed for
his or her Option for any reason other than death or disability, such Option may
be exercised by the Grantee at any time prior to the earlier of (i) the
expiration date specified in the Award Agreement, or (ii) three months after the
date of such Termination of Service (unless the Award Agreement provides a
different expiration date in the case of such a Termination). Such Option may be
exercised to the extent of the number of shares with respect to which the
Grantee could have exercised it on the date of such Termination of Service, or
to any greater extent permitted by the Committee, and shall terminate with
respect to the remaining shares.
(g) DISABILITY. If a Grantee becomes disabled (within the meaning of Code
Section 22(e)(3)) prior to the expiration date fixed for his or her Option, and
the Grantee's Termination of Service occurs as a consequence of such disability,
such Option may be exercised by the Grantee at any time prior to the earlier of
(i) the expiration date specified in the Award Agreement, or (ii) one year after
the date of such Termination of Service (unless the Award Agreement provides a
different expiration date in the case of such a Termination). Such Option may be
exercised to the extent of the number of shares with respect to which the
Grantee could have exercised it on the date of such Termination of Service, or
to any greater extent permitted by the Committee, and shall terminate with
respect to the remaining shares. In the event of the Grantee's legal disability,
such Option may be exercised by the Grantee's legal representative.
(h) DEATH. If a Grantee's Termination of Service occurs as a result of
death, prior to the expiration date fixed for his or her Option, or if the
Grantee dies following his or her Termination of Service but prior to the
expiration of the period determined under subsections (f) or (g) above
(including any extension of such period provided in the Award Agreement), such
Option may be exercised by the Grantee's estate, personal representative, or
beneficiary who acquired the right to exercise such Option by bequest or
inheritance or by reason of the death of the Grantee. Such post-death exercise
may occur at any time prior to the earlier of (i) the expiration date specified
in the Award Agreement, or (ii) one year after the date of the Grantee's death
(unless the Award Agreement provides a different expiration date in the case of
such a Termination). Such Option may be exercised to the extent of the number of
shares with respect to which the Grantee could have exercised it on the date of
his or her death, or to any greater extent permitted by the Committee, and shall
terminate with respect to the remaining shares.
(i) MORE-THAN-TEN-PERCENT SHAREHOLDER. If, after applying the attribution
rules of Code Section 424(d), the Grantee owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company or of a Related Corporation immediately before an ISO is granted to him
or her, the exercise price for the ISO shall be not less than 110 percent of the
Fair Market Value of the optioned Common Shares on the date the ISO is granted,
and such ISO, by its terms, shall not be exercisable after the expiration of
five years from the date the ISO is granted. The conditions set forth in this
subsection shall not apply to NQSOs.
SECTION 7 - SARS
(a) NATURE OF SARS. An SAR entitles the Grantee to receive, with respect to
each Common Share as to which the SAR is exercised, the excess of the share's
Fair Market Value on the date of exercise over its Fair Market Value on the date
the SAR was granted. Such excess shall be paid in cash, Common Shares, or a
combination thereof, as determined by the Committee. SARs may be granted to any
Employee, Consultant or Non-Employee Director, all Employees, Consultants or
Non-Employee Directors or any class of Employees, Consultants or Non-Employee
Directors at such time or times as shall be determined by the Committee. SARs
may be granted in tandem with an NQSO or on a freestanding basis, not related to
any other Award. A grant of a SAR shall be evidenced in writing, whether as part
of the agreement governing the terms of the NQSO, if any, to which such SARs
relate or pursuant to a separate Award Agreement with respect to freestanding
SARs, in each case containing such provisions not inconsistent with the Plan as
the Committee shall approve.
(b) EXERCISE OF SARS. An SAR shall become exercisable in such installments,
upon fulfillment of conditions (such as performance-based requirements), or on
such dates as the Committee may specify in the Award Agreement. The Committee
may at any time accelerate the time at which all or any part of the SAR may be
exercised. Any exercise of an SAR must be in writing, signed by the proper
person, and delivered or mailed to the Company, accompanied by any other
documents required by the Committee.
(c) OTHER TERMS OF TANDEM SARS. Unless the Committee shall otherwise
determine, the terms and conditions (including, without limitation, the exercise
period of the SAR, the vesting schedule applicable thereto and the impact of any
termination of service on the Grantee's rights with respect to the SAR)
applicable with respect to SARs granted in tandem with a NQSO shall be
substantially identical (to the extent possible taking into account the
differences related to the character of the SAR) to the terms and conditions
applicable to the tandem NQSOs. SARs that are granted in tandem with a NQSO may
only be exercised upon the surrender of the right to exercise such NQSO for an
equivalent number of shares and may be exercised only with respect to the shares
of Stock for which the related Award is then exercisable.
(d) TERMINATION OF SERVICE. If a Grantee's Termination of Service occurs
prior to the expiration date fixed for his or her SAR, Section 6(f), (g) and (h)
shall be applied to determine the extent to which, and the period during which,
the SAR may be exercised. For purposes of this Section 7(d), the term "SAR"
shall replace the term "Option" in each place such term appears in Section 6(f),
(g) and (h).
SECTION 8 - RESTRICTED STOCK
(a) GENERAL REQUIREMENTS. Restricted Stock may be issued or transferred for
consideration or for no consideration, as determined by the Committee. If for
consideration, payment may be in cash or check (acceptable to the Committee),
bank draft, or money order payable to the order of the Company. At the time
Restricted Stock is granted, the Committee shall determine whether the
Restricted Stock is Performance Stock (where the lapse of
restrictions is based on Performance Goals), or Restricted Stock that is not
Performance Stock (where the lapse of restrictions is based on times and/or
conditions determined by the Committee).
(b) SHAREHOLDER RIGHTS. Each Grantee who receives Restricted Stock shall
have all of the rights of a shareholder with respect to such shares, subject to
the restrictions set forth in subsection (c), including the right to vote the
shares and receive dividends and other distributions. Any Common Shares or other
securities of the Company received by a Grantee with respect to a share of
Restricted Stock, as a stock dividend, or in connection with a stock split or
combination, share exchange or other recapitalization, shall have the same
status and be subject to the same restrictions as such Restricted Stock Any cash
dividends with respect to a Grantee's Restricted Stock shall be paid to the
Grantee at the same time as such dividends are paid to other shareholders.
Unless the Committee determines otherwise, certificates evidencing shares of
Restricted Stock will remain in the possession of the Company until such shares
are free of all restrictions under the Plan and the Grantee has satisfied any
federal, state and local tax withholding obligations applicable to such shares.
(c) RESTRICTIONS. Except as otherwise specifically provided in the Plan,
Restricted Stock may not be sold, assigned, transferred, pledged, or otherwise
encumbered or disposed of, and if the Grantee incurs a Termination of Service
for any reason, must be offered to the Company for purchase for the amount paid
for the shares of Common Stock, or forfeited to the Company if nothing was so
paid.
(d) LAPSE OF RESTRICTIONS.
(1) IN GENERAL. Upon the lapse of all restrictions in accordance with
this subsection (d) or Section 13, Common Shares shall cease to be
Restricted Stock for purposes of the Plan.
(2) RESTRICTED STOCK OTHER THAN PERFORMANCE STOCK. With respect to
Restricted Stock that is not Performance Stock, the restrictions described
in subsection (c) shall lapse at such time or times, and on such conditions
(such as performance-based requirements), as the Committee may specify in
the Award Agreement. The Committee may at any time accelerate the time at
which the restrictions on all or any part of the shares of Restricted Stock
(other than Performance Stock) will lapse.
(3) PERFORMANCE STOCK. With respect to Performance Stock, the
restrictions described in subsection (c) shall lapse at the end of the
applicable performance period, to the extent determined by the Committee,
based on the Performance Goals established (in accordance with Section
2(s)) and achieved for such period. Except as provided in Section 13, the
extent to which such restrictions lapse shall be based solely on the
Performance Goals; the Committee shall not have the discretion to increase
the extent to which such restrictions lapse. Except as provided in Section
13, if the Grantee's Termination of Service occurs for any reason prior to
the end of the performance period, the Grantee shall forfeit all
Performance Stock granted with respect to such performance period.
(e) NOTICE OF TAX ELECTION. Any Grantee making an election under section
83(b) of the Code for the immediate recognition of income attributable to the
award of Restricted Stock must provide a copy thereof to the Company within 10
days of the filing of such election with the Internal Revenue Service.
SECTION 9 - RSUs
(a) NATURE OF RSUS. An RSU entitles the Grantee to receive, with respect to
each RSU that vests in accordance with subsection (c) or Section 13, one Common
Share, cash equal to the Fair Market Value of a Common Share on the date of
vesting, or a combination thereof as determined by the Committee and set forth
in the Award Agreement. Any fractional RSU shall be payable in cash.
(b) GRANT OF RSUS. At the time of grant, the Committee shall determine (a)
the number of RSUs subject to the Award, (b) whether or not the RSU is a PSU,
and (c) when such RSUs shall vest in accordance with subsection (c). The Company
shall establish a bookkeeping account in the Grantee's name which reflects the
number and type of RSUs standing to the credit of the Grantee.
(c) VESTING.
(1) RSUS OTHER THAN PSUS. With respect to RSUs that are not PSUs, the
Committee shall determine when such RSUs shall vest and any conditions
(such as continued employment or performance measures) that must be met in
order for such RSUs to vest at the end of the applicable restriction
period. The Committee may at any time accelerate the time at which RSUs
(other than PSUs) shall vest.
(2) PSUS. The Committee shall determine the extent to which PSUs vest
at the end of the applicable performance period based on the Performance
Goals established (in accordance with Section 2(s)) and achieved for such
period. Except as provided in Section 13, the extent to which PSUs vest
shall be based solely on the Performance Goals; the Committee shall not
have the discretion to increase the extent to which such PSUs vest. Except
as provided in Section 13, if the Grantee's Termination of Service occurs
for any reason prior to the end of the performance period, the Grantee
shall forfeit all PSUs granted with respect to such performance period.
(3) PAYMENT. Upon the vesting of an RSU in accordance with this
subsection (c) or Section 13, payment, in Common Shares or cash (as
applicable), shall be made on the Short-Term Deferral Date.
(d) DIVIDEND EQUIVALENTS. The Company shall credit to the Grantee's
bookkeeping account, on each date that the Company pays a cash dividend to
holders of Common Shares generally, an additional number of RSUs equal to the
total number of RSUs credited to the Grantee's bookkeeping account on such date,
multiplied by the dollar amount of the per share cash dividend, and divided by
the Fair Market Value of a Common Share on such date. RSUs attributable to such
dividend equivalent rights shall be subject to the same terms and conditions as
the RSUs to which such dividend equivalent rights relate.
SECTION 10 - OTHER AWARDS
(a) BONUS SHARES. The Committee may grant Bonus Shares under this Plan.
Such Bonus Shares shall be fully vested on the date made.
(b) DIVIDEND EQUIVALENTS. The Committee, in its sole discretion, may make
Awards to Grantees of Dividend Equivalents as a separate Award and not in
connection with any other Award, except as otherwise specifically provided
herein. The Committee shall determine, at the time of grant, the date through
which such Dividend Equivalents shall accumulate and vest. Upon vesting, such
accumulated Dividend Equivalents shall be paid on the Short-Term Deferral Date
and shall thereafter, prior to the earlier of the expiration date of such Award
or the Grantee's Termination of Service, be paid to the Grantee at the same time
as the corresponding cash dividends are paid to shareholders.
(c) AUTOMATIC AWARDS FOR NEW EMPLOYEE DIRECTORS.
(1) Each Non-Employee Director shall be entitled to receive an annual
cash retainer of $25,000 pro-rated for any partial year of service;
(2) Each Non-Employee Director shall receive a fee of $1,000, payable
in cash, for each meeting of the Board of Directors that he or she attends
in person or by telephone, and a fee of $500 for each meeting of a
committee of the Board of Directors that he or she attends in person or by
telephone, as reimbursement for the fees and expenses of attendance and
participation in such meeting;
(3) Each person who is newly elected or appointed as an Non-Employee
Director on or after the Effective Date shall be granted an Option on the
day of such initial election or appointment (and not upon any future
re-election or appointment) to purchase ten thousand (10,000) Common Share;
(4) Each person who remains a Non-Employee Director shall be granted
an Option to purchase ten thousand (10,000) Common Shares upon such
Non-Employee Director's reelection as a director of the Company; and
(5) Each Non-Employee Director who is newly-elected or appointed
Chairman of the Board of Directors or Chairman of a committee of the Board
of Directors on or after the Effective Date shall at the time first elected
as Chairman receive an Option to purchase two thousand five hundred (2,500)
Common Shares. No Option Agreement shall be issued prior to stockholder
approval of this Plan, and if not so approved the award provided hereby
shall be of no effect and the Chairman Option shall be cancelled.
SECTION 11 - AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by Award Agreements in
such form as the
Committee shall from time to time approve, and containing such provisions, as
the Committee shall deem advisable that are not inconsistent with the provisions
of the Plan, Code Section 409A and, for ISOs, Code Section 422(b). The Award
Agreements shall specify the type of Award granted. Each Grantee shall enter
into, and be bound by, an Award Agreement as soon as practicable after the grant
of an Award.
SECTION 12 - ADJUSTMENT IN CASE OF CHANGES IN COMMON SHARES
The following shall be adjusted, as deemed appropriate by the Committee, to
reflect any stock dividend, stock split, reverse stock split, spin-off,
distribution, recapitalization, share combination or reclassification, or
similar change in the capitalization of the Company:
(a) The maximum number and type of shares under the limits set forth in
Section 4; and
(b) The number and type of shares issuable upon exercise or vesting of
outstanding Options, SARs, and RSUs under the Plan (as well as the option price
per share under outstanding Options and the Fair Market Value of a share on the
date an outstanding SAR was granted); provided, however, that (i) no such
adjustment shall be made to an outstanding ISO if such adjustment would
constitute a modification under Code Section 424(h), unless the Grantee consents
to such adjustment, and (ii) no such adjustment shall be made to an outstanding
Option or SAR if such adjustment would constitute a modification under Code
Section 409A.
In the event any such change in capitalization cannot be reflected in a
straight mathematical adjustment of the number of shares issuable upon the
exercise or vesting of outstanding Options, SARs and RSUs (and a straight
mathematical adjustment of the exercise price or Fair Market Value on the date
of grant of a SAR), the Committee shall make such adjustments as are appropriate
to reflect most nearly such straight mathematical adjustment. Such adjustments
shall be made only as necessary to maintain the proportionate interest of
Grantees, and preserve, without exceeding, the value of Awards.
SECTION 13 - CHANGE IN CONTROL
(a) FULL VESTING. Notwithstanding any other provision of this Plan, if
during the 18-month period immediately following a Change in Control, a Grantee
incurs an involuntary Termination of Service that is not for Cause, all
outstanding Awards shall become fully vested and exercisable upon such
termination; provided, however, that this Section 13 shall not increase the
extent to which an Award is vested or exercisable if the Grantee's Termination
of Service is for Cause, occurs prior to the Change in Control, or occurs after
the last day of such 18-month period.
(b) DEFINITIONS.
(1) For purposes of this Plan, a "Change in Control" with respect to
the Company shall mean any of the following events:
(A) a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation resulting in the
voting power of the securities (as described in clause (D) below) of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting stock of the surviving entity) more than a majority of the
combined voting power of the securities of the Company (or such
surviving entity) outstanding immediately after such merger of
consolidation;
(B) any sale, lease, exchange, or other transfer (in one
transaction or in a series of related transactions) of all, or
substantially all, of the assets of the Company;
(C) the dissolution and liquidation of the Company; or
(D) any person or "group" (other than a benefit plan sponsored by
either the Company or a subsidiary of the Company becoming the
"beneficial owner," directly or indirectly, of securities representing
a majority of the combined voting power of the then outstanding
securities of the Company ordinarily (and apart from the rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in paragraph (d) of Rule
13d 3 in the case of rights to acquire such securities).
For purposes hereof, the terms "group" and "beneficial owner" shall have the
meanings given to them in Rule 13d 3; and Rule 13d 3 shall mean Rule 13d 3 of
the Securities and Exchange Commission promulgated under the Exchange Act.
(2) For purposes of the Plan, "Cause" shall mean: (a) fraud or
dishonesty that results in a material injury to the Company or any Related
Corporation, (b) conviction or plea of nolo contendre of any felony or (c)
any act or omission detrimental to the conduct of the business of the
Company or any Related Corporation in any way.
SECTION 14 - CERTAIN CORPORATE TRANSACTIONS
In the event of a corporate transaction (such as, for example, a merger,
consolidation, acquisition of property or stock, separation, reorganization, or
liquidation), the surviving or successor corporation shall assume each
outstanding Award or substitute a new award of the same type for each
outstanding Award; provided, however, that, in the event of a proposed corporate
transaction, the Committee may terminate all or a portion of the outstanding
Awards, effective upon the closing of the corporate transaction, if it
determines that such termination is in the best interests of the Company. If the
Committee decides so to terminate outstanding Options and SARs, the Committee
shall give each Grantee holding an Option or SAR to be terminated
not fewer than seven days' notice prior to any such termination, and any Option
or SAR which is to be so terminated may be exercised (if and only to the extent
that it is then exercisable under the terms of the Award Agreement and Section
13) up to, and including the date immediately preceding such termination.
Further, as provided in Sections 6(d), 7(b), 8(d)(2) and 9(c)(1), the Committee
may in its discretion accelerate, in whole or in part, the date on which any or
all Awards become exercisable or vested (to the extent such Award is not fully
exercisable or vested pursuant to the Award Agreement or Section 13).
The Committee also may, in its discretion, change the terms of any
outstanding Award to reflect any such corporate transaction, provided that (i)
in the case of ISOs, such change would not constitute a "modification" under
Code Section 424(h), unless the Grantee consents to the change, and (ii) no such
adjustment shall be made to an outstanding Option or SAR if such adjustment
would constitute a modification under Code Section 409A.
SECTION 15 - AMENDMENT OF THE PLAN AND OUTSTANDING AWARDS
The Board, pursuant to resolution, may at any time and from time to time
amend, modify or suspend the Plan, in whole or in part, without notice to or
consent of any Employee, Consultant or Non-Employee Director and the Committee
may amend an outstanding Award in any respect whatsoever and at any time, in
whole or in part, without notice to or consent of any Grantee, provided,
however, that the following amendments shall require the approval of
shareholders:
(1) a change in the class of employees eligible to participate in the
Plan with respect to ISOs;
(2) except as permitted under Section 12, an increase in the maximum
number of Common Shares with respect to which ISOs may be granted under the
Plan;
(3) a modification of the material terms of the "performance goal,"
within the meaning of Treas. Reg. Section 1.162-27(e)(4)(vi) or any
successor thereto (to the extent compliance with section 162(m) of the Code
is desired); and
(4) any amendment for which shareholder approval is required under the
rules of the exchange or market on which the Common Shares are listed or
traded.
Except as provided in Section 14, no amendment or suspension of an
outstanding Award shall (i) adversely affect the rights of the Grantee or cause
the modification (within the meaning of Code Section 424(h)) of an ISO, without
the consent of the Grantee affected thereby, or (ii) cause the modification
(within the meaning of Code Section 409A) of an Option or SAR.
SECTION 16 - TERMINATION OF PLAN; CESSATION OF ISO GRANTS
The Board, pursuant to resolution, may terminate the Plan at any time and
for any reason. No ISOs shall be granted hereunder after 10th anniversary of the
Effective Date, as set forth in Section 17. Nothing contained in this Section,
however, shall terminate or affect the continued
existence of rights created under Awards granted hereunder which are outstanding
on the date the Plan is terminated and which by their terms extend beyond such
date.
SECTION 17 - MISCELLANEOUS
(a) EFFECTIVE DATE. This Plan shall become effective on the earlier of the
date the Plan is adopted by the Board or the date the Plan is approved by
shareholders (the "Effective Date"); provided, however, that if the Plan is not
approved by the shareholders of the Company within 12 months before or after the
date the Plan was adopted, the Plan and all Awards granted hereunder shall be
null and void and no additional Awards shall be granted hereunder.
(b) RIGHTS. Neither the adoption of the Plan nor any action of the Board or
the Committee shall be deemed to give any individual any right to be granted an
Award, or any other right hereunder, unless and until the Committee shall have
granted such individual an Award, and then his or her rights shall be only such
as are provided in the Award Agreement. Notwithstanding any provisions of the
Plan or the Award Agreement with an Employee, the Company and any Related
Corporation shall have the right, in its discretion but subject to any
employment contract entered into with the Employee, to retire the Employee at
any time pursuant to its retirement rules or otherwise to terminate his or her
employment at any time for any reason whatsoever, or for no reason. A Grantee
shall have no rights as a shareholder with respect to any shares covered by his
or her Award until the issuance of a stock certificate to him or her for such
shares, except as otherwise provided under Section 8(b) (regarding Restricted
Stock).
(c) INDEMNIFICATION OF BOARD AND COMMITTEE. Without limiting any other
rights of indemnification which they may have from the Company and any Related
Corporation, the members of the Board and the members of the Committee shall be
indemnified by the Company against all costs and expenses reasonably incurred by
them in connection with any claim, action, suit, or proceeding to which they or
any of them may be a party by reason of any action taken or failure to act
under, or in connection with, the Plan, or any Award granted hereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit, or proceeding, except a
judgment based upon a finding of willful misconduct or recklessness on their
part. Upon the making or institution of any such claim, action, suit, or
proceeding, the Board or Committee member shall notify the Company in writing,
giving the Company an opportunity, at its own expense, to handle and defend the
same before such Board or Committee member undertakes to handle it on his or her
own behalf. The provisions of this Section shall not give members of the Board
or the Committee greater rights than they would have under the Company's by-laws
or Delaware law.
(d) TRANSFERABILITY; REGISTRATION. No ISO, Restricted Stock or RSU shall be
assignable or transferable by the Grantee other than by will or by the laws of
descent and distribution. During the lifetime of the Grantee, an ISO shall be
exercisable only by the Grantee or, in the event of the Grantee's legal
disability, by the Grantee's guardian or legal representative. Except as
provided in a Grantee's Award Agreement, such limits on assignment, transfer and
exercise shall also apply to NQSOs and SARs. If the Grantee so requests at the
time
of exercise of an Option or an SAR, or at the time of grant of Restricted Stock
or vesting of an RSU, the certificate(s) shall be registered in the name of the
Grantee and the Grantee's spouse jointly, with right of survivorship.
(e) LISTING AND REGISTRATION OF SHARES. Each Award shall be subject to the
requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration, or qualification of the Common
Shares covered thereby upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such Award or the purchase of Common Shares thereunder, or that action by the
Company, its shareholders, or the Grantee should be taken in order to obtain an
exemption from any such requirement or to continue any such listing,
registration, or qualification, no such Award may be exercised, in whole or in
part, and no Restricted Stock, RSU or Bonus Shares may be awarded, unless and
until such listing, registration, qualification, consent, approval, or action
shall have been effected, obtained, or taken under conditions acceptable to the
Committee. Without limiting the generality of the foregoing, each Grantee or his
or her legal representative or beneficiary may also be required to give
satisfactory assurance that such person is an eligible purchaser under
applicable securities laws, and that the shares purchased or granted pursuant to
the Award shall be for investment purposes and not with a view to distribution;
certificates representing such shares may be legended accordingly.
(f) WITHHOLDING AND USE OF SHARES TO SATISFY TAX OBLIGATIONS. The
obligation of the Company to deliver Common Shares upon the exercise of any
Award upon the vesting of Restricted Stock or RSU, or upon awarding Bonus Shares
shall be subject to applicable federal, state, and local tax withholding
requirements. If the exercise of any Award, the vesting of Restricted Stock or
RSU, or the awarding of Bonus Shares is subject to the withholding requirements
of applicable federal, state or local tax law, the Committee, in its discretion,
may permit or require the Grantee to satisfy the federal, state and/or local
withholding tax, in whole or in part, by electing to have the Company withhold
Common Shares (or by returning previously acquired Common Shares to the
Company); provided, however, that the Company may limit the number of shares
withheld to satisfy the tax withholding requirements with respect to any Award
to the extent necessary to avoid adverse accounting consequences. Shares of
Common Stock shall be valued, for purposes of this subsection, at their Fair
Market Value (determined as of the date the amount attributable to the exercise
or vesting of the Award is includible in income by the Grantee under section 83
of the Code). The Committee shall adopt such withholding rules as it deems
necessary to carry out the provisions of this subsection.
(g) ACQUISITIONS. Notwithstanding any other provision of this Plan, Awards
may be granted hereunder in substitution for awards held by employees,
consultants or directors of other entities who are about to, or have, become
Employees, Consultants or Non-Employee Directors as a result of a merger,
consolidation, acquisition of assets or similar transaction by the Company or
Related Corporation. The terms of the substitute Awards so granted may vary from
the terms set forth in this Plan to such extent the Committee may deem
appropriate to conform, in whole or in part, to the provisions of the awards in
substitution for which they are granted; provided, however, that no substitute
Award shall be granted which will subject the Award to section 409A of the Code
(if it previously was not subject to such Code section).
(h) APPLICATION OF FUNDS. Any cash received in payment for shares pursuant
to an Award shall be added to the general funds of the Company. Any Common
Shares received in payment for shares shall become treasury stock.
(i) NO OBLIGATION TO EXERCISE AWARD. The granting of an Award shall impose
no obligation upon a Grantee to exercise such Award.
(j) GOVERNING LAW. The Plan shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the State of
Delaware (without reference to principles of conflicts of laws) shall govern the
operation of, and the rights of Grantees under, the Plan, and Awards granted
thereunder.
(k) UNFUNDED PLAN. The Plan, insofar as it provides for Awards, shall be
unfunded, and the Company shall not be required to segregate any assets that may
at any time be represented by Awards under the Plan. Any liability of the
Company to any person with respect to any Award under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to the
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
EXHIBIT 10.1
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT made as of this ___ day of ___________, 2006,
between Towerstream Corporation, a Delaware corporation (the "COMPANY"), with
offices at 55 Hammerlund Way, Middletown, Rhode Island 02842, and the
undersigned (the "SUBSCRIBER"). The term "Company," as used herein, is defined
as set forth in the PPM (as defined below).
WHEREAS, pursuant to a Confidential Offering Memorandum dated December
21, 2006 (the "PPM"), the Company is offering in a private placement (the
"OFFERING") to accredited investors up to 100 Units at a purchase price of
$112,500 per Unit for a maximum aggregate purchase price of $11,250,000 (the
"MAXIMUM OFFERING"). Each Unit consists of 50,000 shares of the Company's common
stock, par value $0.001 per share (the "COMMON STOCK") and a five-year warrant
to purchase 25,000 shares of Common Stock at $4.50 per share (the "WARRANTS") As
used herein, the term "Units" means such Units, and all Common Stock and
Warrants underlying the Units). and
WHEREAS, the Subscriber desires to subscribe for the number of Units
set forth on the signature page hereof, on the terms and conditions hereinafter
set forth.
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants hereinafter set forth, the parties hereto do hereby agree as
follows:
I. SUBSCRIPTION FOR AND REPRESENTATIONS AND COVENANTS OF SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter set forth, the
Subscriber hereby subscribes for and agrees to purchase from the Company such
number of Units set forth upon the signature page hereof, at a price equal to
$112,500 per Unit, and the Company agrees to sell such to the Subscriber for
said purchase price, subject to the Company's right to sell to the Subscriber
such lesser number of (or no) Units as the Company may, in its sole discretion,
deem necessary or desirable. The purchase price is payable by wire transfer of
immediately available funds, pursuant to the wire instructions attached as
Exhibit D to the PPM or by check payable to Signature Bank, as Escrow Agent to
Towerstream Corporation.
1.2 The Subscriber recognizes that the purchase of Units involves a
high degree of risk in that (i) an investment in the Company is highly
speculative and only investors who can afford the loss of their entire
investment should consider investing in the Company and the Units; (ii) the
Units are not registered under the Securities Act of 1933, as amended (the
"ACT"), or any state securities law; (iii) there is no trading market for the
Units, none is likely ever to develop, and the Subscriber may not be able to
liquidate his, her or its investment; (iv) transferability of the Units is
extremely limited; and (v) an investor could suffer the loss of his, her or its
entire investment.
1.3 The Subscriber is an "accredited investor," as such term in
defined in Rule 501 of Regulation D promulgated under the Act, and the
Subscriber is able to bear the economic risk of an investment in the Units.
1.4 The Subscriber has prior investment experience (including
investment in non-listed and non-registered securities), and has read and
evaluated, or has employed the services of an investment advisor, attorney or
accountant to read and evaluate, all of the documents furnished or made
available by the Company to the Subscriber and to all other prospective
investors in the Units, including the PPM, as well as the merits and risks of
such an investment by the Subscriber. The Subscriber's overall commitment to
investments which are not readily marketable is not disproportionate to the
Subscriber's net worth, and the Subscriber's investment in the will not cause
such overall commitment to become excessive. The Subscriber, if an individual,
has adequate means of providing for his or her current needs and personal and
family contingencies and has no need for liquidity in his or her investment in
the Common Stock. The Subscriber is financially able to bear the economic risk
of this investment, including the ability to afford holding the for an
indefinite period or a complete loss of this investment.
1.5 The Subscriber acknowledges receipt and careful review of the PPM,
all supplements to the PPM, and all other documents furnished in connection with
this transaction by the Company (collectively, the "OFFERING DOCUMENTS") and has
been furnished by the Company during the course of this transaction with all
information regarding the Company which the Subscriber has requested or desires
to know; and the Subscriber has been afforded the opportunity to ask questions
of and receive answers from duly authorized officers or other representatives of
the Company concerning the terms and conditions of the Offering, and any
additional information which the Subscriber has requested.
1.6 The Subscriber acknowledges that the purchase of the Units may
involve tax consequences to the Subscriber and that the contents of the Offering
Documents do not contain tax advice. The Subscriber acknowledges that the
Subscriber must retain his, her or its own professional advisors to evaluate the
tax and other consequences to the Subscriber of an investment in the Units. The
Subscriber acknowledges that it is the responsibility of the Subscriber to
determine the appropriateness and the merits of a corporate entity to own the
Subscribers Units and the corporate structure of such entity.
1.7 The Subscriber acknowledges that this Offering has not been
reviewed by the Securities and Exchange Commission (the "SEC") or any state
securities commission, and that no federal or state agency has made any finding
or determination regarding the fairness or merits of the Offering. The
Subscriber represents that the Units are being purchased for his, her or its own
account, for investment only, and not with a view toward distribution or resale
to others. The Subscriber agrees that he, she or it will not sell or otherwise
transfer the Units unless they are registered under the Act or unless an
exemption from such registration is available.
1.8 The Subscriber understands that the provisions of Rule 144 under
the Act are not available for at least one (1) year to permit resales of the
Units or the Common Stock and Warrants comprising the Units and there can be no
assurance that the conditions necessary to permit such sales under Rule 144 will
ever be satisfied. The Subscriber understands that the Company is under no
obligation to comply with the conditions of Rule 144 or take any other
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action necessary in order to make available any exemption from registration for
the sale of the Units or the Common Stock and Warrants comprising the Units.
1.9 The Subscriber understands that the Units have not been registered
under the Act by reason of a claimed exemption under the provisions of the Act
which depends, in part, upon his, her or its investment intention. In this
connection, the Subscriber understands that it is the position of the SEC that
the statutory basis for such exemption would not be present if his, her or its
representation merely meant that his, her or its present intention was to hold
such securities for a short period, such as the capital gains period of tax
statutes, for a deferred sale, for a market rise, assuming that a market
develops, or for any other fixed period. The Subscriber realizes that, in the
view of the SEC, a purchase now with an intent to resell would represent a
purchase with an intent inconsistent with his, her or its representation to the
Company and the SEC might regard such a sale or disposition as a deferred sale,
for which such exemption is not available.
1.10 The Subscriber agrees to indemnify and hold the Company, its
directors, officers and controlling persons and their respective heirs,
representatives, successors and assigns harmless against all liabilities, costs
and expenses incurred by them as a result of any misrepresentation made by the
Subscriber contained herein or any sale or distribution by the Subscriber in
violation of the Act (including, without limitation, the rules promulgated
thereunder), any state securities laws, or the Company's Certificate of
Incorporation or By-laws, as amended from time to time.
1.11 The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Units stating that such securities
have not been registered under the Act and setting forth or referring to the
restrictions on transferability and sale thereof.
1.12 The Subscriber understands that the Company will review and rely
on this Subscription Agreement without making any independent investigation; and
it is agreed that the Company reserves the unrestricted right to reject or limit
any subscription and to withdraw the Offering at any time.
1.13 The Subscriber hereby represents that the address of the
Subscriber furnished at the end of this Subscription Agreement is the
undersigned's principal residence, if the Subscriber is an individual, or its
principal business address if it is a corporation or other entity.
1.14 The Subscriber acknowledges that if the Subscriber is a
Registered Representative of a National Association of Securities Dealers, Inc.
("NASD") member firm, the Subscriber must give such firm the notice required by
the NASD's Conduct Rules, receipt of which must be acknowledged by such firm on
the signature page hereof.
1.15 The Subscriber hereby acknowledges that neither the Company nor
any persons associated with the Company who may provide assistance or advice in
connection with the Offering (other than the placement agent, if one is engaged
by the Company) are or are expected to be members or associated persons of
members of the NASD or registered broker-dealers under any federal or state
securities laws.
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1.16 The Subscriber understands that, pursuant to the terms of the
Offering as set forth in the PPM, the Company must receive subscriptions for 60
Units for an aggregate purchase price of $6,750,000 (the "MINIMUM OFFERING") in
order to close on the sale of any Units and that persons affiliated with the
Company or its consultants, advisors, or placement agents may subscribe for
Common Stock, in which case the Company may accept subscriptions from such
affiliated parties in order to reach the Minimum Offering; and that,
accordingly, no investor should conclude that achieving the Minimum Offering is
the result of any independent assessment of the merits or advantages of the
Offering or the Company made by Subscribers in the Minimum Offering.
1.17 The Subscriber hereby represents that, except as expressly set
forth in the Offering Documents, no representations or warranties have been made
to the Subscriber by the Company or any agent, employee or affiliate of the
Company and, in entering into this transaction, the Subscriber is not relying on
any information other than that contained in the Offering Documents and the
results of independent investigation by the Subscriber.
1.18 All information provided by the Subscriber in the Investor
Questionnaire attached as Exhibit B to the PPM is true and accurate in all
respects, and the Subscriber acknowledges that the Company will be relying on
such information to its possible detriment in deciding whether the Company can
sell these securities to the Subscriber without giving rise to the loss of the
exemption from registration under applicable securities laws.
II. REPRESENTATIONS BY THE COMPANY
The Company represents and warrants to the Subscriber that as of the
date of the closing of this Offering (the "CLOSING DATE"):
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power to conduct the business which it conducts and proposes to
conduct.
(b) The execution, delivery and performance of this Subscription
Agreement by the Company have been duly authorized by the Company and all other
corporate action required to authorize and consummate the offer and sale of the
Units has been duly taken and approved.
(c) The Units and the underlying Common Stock have been duly and
validly authorized and issued.
(d) The Company has obtained, or is in the process of obtaining,
all licenses, permits and other governmental authorizations necessary for the
conduct of its business, except where the failure to so obtain such licenses,
permits and authorizations would not have a material adverse effect on the
Company. Such licenses, permits and other governmental authorizations which have
been obtained are in full force and effect, except where the failure to be so
would not have a material adverse effect on the Company, and the Company is in
all material respects complying therewith.
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(e) The Company knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which would materially
adversely affect the business, financial condition or operations of the Company.
(f) The Company is not in violation of or default under, nor will
the execution and delivery of this Subscription Agreement or the issuance of the
Common Stock, or the consummation of the transactions herein contemplated,
result in a violation of, or constitute a default under, the Company's
Certificate of Incorporation or By-laws, any material obligations, agreements,
covenants or conditions contained in any bond, debenture, note or other evidence
of indebtedness or in any material contract, indenture, mortgage, loan
agreement, lease, joint venture or other agreement or instrument to which the
Company is a party or by which it or any of its properties may be bound or any
material order, rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality or court, domestic or foreign.
III. COVENANTS BY THE COMPANY
The Company agrees that the Subscriber shall have certain registration
rights with respect to the shares of Common Stock underlying the Units issued to
Subscribers pursuant to the terms of the Registration Rights Agreement attached
as Exhibit C to the PPM.
IV. TERMS OF SUBSCRIPTION
4.1 Subject to Section 4.2 hereof, the subscription period will begin
as of the date of the PPM and will terminate at 11:59 PM Eastern Time, on the
earlier of the date on which the Maximum Offering is sold or the Offering is
terminated by the Company (the "TERMINATION DATE"). The minimum subscription
amount is $112,500, although the Company may, in its discretion, accept
subscriptions for less than $112,500.
4.2 The Subscriber has effected a wire transfer in the full amount of
the purchase price for the Units to the Company's escrow account in accordance
with the wire instructions attached as Exhibit D to the PPM or has delivered a
check in payment of the purchase price for the Units.
4.3 Pending the sale of the Units, all funds paid hereunder shall be
deposited by the Company in escrow with the Company's escrow agent. If the
Company shall not have obtained subscriptions (including this subscription) for
purchases of 60 Units for an aggregate purchase price of $6,750,000 on or before
the Termination Date (as such date may be extended by the Company), then this
subscription shall be void and all funds paid hereunder by the Subscriber shall
be promptly returned without interest to the Subscriber, to the same account
from which the funds were drawn. If subscriptions are received and accepted and
payment tendered for the Minimum Offering on or prior to the Termination Date,
then all subscription proceeds (less fees and expenses) shall be paid over to
the Company within ten (10) days thereafter or such earlier date that is one
business day after the amount of good funds in escrow equals or exceeds
$6,750,000. In such event, sales of the Units may continue thereafter until the
earlier of the date on which the Maximum Offering is sold and the Termination
Date, with subsequent releases of funds from time to time at the discretion of
the Company.
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4.4 The Subscriber hereby authorizes and directs the Company and its
escrow agent to deliver any certificates or other written instruments
representing the Units to be issued to such Subscriber pursuant to this
Subscription Agreement to the address indicated on the signature page hereof.
4.5 The Subscriber hereby authorizes and directs the Company and its
escrow agent to return any funds, without interest, for unaccepted subscriptions
to the same account from which the funds were drawn.
4.6 The Subscriber hereby authorizes and directs the Company and its
escrow agent to return any funds, without interest, for unaccepted subscriptions
to the same account from which the funds were drawn. 4.6 If the Subscriber is
not a United States person, such Subscriber shall immediately notify the Company
and the Subscriber hereby represents that the Subscriber is satisfied as to the
full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Units or any use of this Subscription Agreement,
including (i) the legal requirements within its jurisdiction for the purchase of
the Units, (ii) any foreign exchange restrictions applicable to such purchase,
(iii) any governmental or other consents that may need to be obtained, and (iv)
the income tax and other tax consequences, if any, that may be relevant to the
purchase, holding, redemption, sale or transfer of the Units. Such Subscriber's
subscription and payment for, and continued beneficial ownership of, the Units
will not violate any applicable securities or other laws of the Subscriber's
jurisdiction.
V. MISCELLANEOUS
5.1 Any notice or other communication given hereunder shall be deemed
sufficient if in writing and sent by reputable overnight courier, facsimile
(with receipt of confirmation) or registered or certified mail, return receipt
requested, addressed to the Company, at the address set forth in the first
paragraph hereof, Attention: Chief Executive Officer, facsimile: (401) 848-5130,
and to the Subscriber at the address or facsimile number indicated on the
signature page hereof. Notices shall be deemed to have been given on the date
when mailed or sent by facsimile transmission or overnight courier, except
notices of change of address, which shall be deemed to have been given when
received.
5.2 This Subscription Agreement shall not be changed, modified or
amended except by a writing signed by the parties against whom such modification
or amendment is to be charged, and this Subscription Agreement may not be
discharged except by performance in accordance with its terms or by a writing
signed by the party to be charged.
5.3 This Subscription Agreement shall be binding upon and inure to the
benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Subscription Agreement sets forth
the entire agreement and understanding between the parties as to the subject
matter hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
5.4 Notwithstanding the place where this Subscription Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed in accordance with and governed
by the laws of the State of Delaware. The parties hereby agree that any dispute
which may arise between them arising out of or in connection with this
Subscription Agreement shall be adjudicated only before a Federal court
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located in the State of Delaware and they hereby submit to the exclusive
jurisdiction of the federal courts of the State of Delaware with respect to any
action or legal proceeding commenced by any party, and irrevocably waive any
objection they now or hereafter may have respecting the venue of any such action
or proceeding brought in such a court or respecting the fact that such court is
an inconvenient forum, relating to or arising out of this Subscription Agreement
or any acts or omissions relating to the sale of the securities hereunder, and
consent to the service of process in any such action or legal proceeding by
means of registered or certified mail, return receipt requested, in care of the
address set forth below or such other address as the undersigned shall furnish
in writing to the other. The parties further agree that in the event of any
dispute, action, suit or other proceeding arising out of or in connection with
this Subscription Agreement, the PPM, the Registration Rights Agreement or other
matters related to this subscription brought by a Subscriber (or transferee),
the Company (and each other defendant) shall recover all of such party's
attorneys' fees and costs incurred in each and every action, suit or other
proceeding, including any and all appeals or petitions therefrom. As used
herein, attorney's fees shall be deemed to mean the full and actual costs of any
investigation and of legal services actually performed in connection with the
matters involved, calculated on the basis of the usual fee charged by the
attorneys performing such services.
5.5 This Subscription Agreement may be executed in counterparts. Upon
the execution and delivery of this Subscription Agreement by the Subscriber,
this Subscription Agreement shall become a binding obligation of the Subscriber
with respect to the purchase of Units as herein provided; subject, however, to
the right hereby reserved by the Company to (i) enter into the same agreements
with other subscribers, (ii) add and/or delete other persons as subscribers and
(iii) reduce the amount of or reject any subscription.
5.6 The holding of any provision of this Subscription Agreement to be
invalid or unenforceable by a court of competent jurisdiction shall not affect
any other provision of this Subscription Agreement, which shall remain in full
force and effect.
5.7 It is agreed that a waiver by either party of a breach of any
provision of this Subscription Agreement shall not operate or be construed as a
waiver of any subsequent breach by that same party.
5.8 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further actions as
may be necessary or appropriate to carry out the purposes and intent of this
Subscription Agreement.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties have executed this Subscription
Agreement as of the day and year first written above.
______________________________ X $112,500 for each Unit = $____________________.
Number of Units subscribed for Aggregate Purchase Price
MANNER IN WHICH TITLE IS TO BE HELD (PLEASE CHECK ONE):
1. ___ Individual
2. ___ Joint Tenants with Right of Survivorship
3. ___ Community Property
4. ___ Tenants in Common
5. ___ Corporation/Partnership/ Limited Liability Company
6. ___ IRA
7. ___ Trust/Estate/Pension or Profit Sharing Plan
Date Opened:______________
8. ___ As a Custodian for
_______________________________________________________________________
Under the Uniform Gift to Minors Act of the State of
_______________________________________________________________________
9. ___ Married with Separate Property
10. ___ Keogh
11. ___ Tenants by the Entirety
12. ___ Foundation described in Section 501(c)(3) of the Internal Revenue Code
of 1986, as amended.
IF MORE THAN ONE SUBSCRIBER, EACH SUBSCRIBER MUST SIGN.
INDIVIDUAL SUBSCRIBERS MUST COMPLETE PAGE 9
SUBSCRIBERS WHICH ARE ENTITIES MUST COMPLETE PAGE 10.
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EXECUTION BY NATURAL PERSONS
________________________________________________________________________________
Exact Name in Which Title is to be Held
______________________________________ _______________________________________
Name (Please Print) Name of Additional Subscriber
______________________________________ _______________________________________
Residence: Number and Street Address of Additional Subscriber
______________________________________ _______________________________________
City, State and Zip Code City, State and Zip Code
______________________________________ _______________________________________
Social Security Number Social Security Number
______________________________________ _______________________________________
Telephone Number Telephone Number
______________________________________ _______________________________________
Fax Number (if available) Fax Number (if available)
______________________________________ _______________________________________
E-Mail (if available) E-Mail (if available)
-------------------------------------- ---------------------------------------
(Signature) (Signature of Additional Subscriber)
ACCEPTED this ___ day of _________
20__, on behalf of Towerstream
Corporation
By:
-----------------------------------
Name:
Title:
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EXECUTION BY SUBSCRIBER WHICH IS AN ENTITY
(Corporation, Partnership, Trust, Etc.)
________________________________________________________________________________
Name of Entity (Please Print)
Date of Incorporation or Organization:
State of Principal Office:
Federal Taxpayer Identification Number: ________________________________________
______________________________________
Office Address
______________________________________
City, State and Zip Code
______________________________________
Telephone Number
______________________________________
Fax Number (if available)
______________________________________
E-Mail (if available)
[seal] By:
-----------------------------------
Name:
Attest: ______________________________ Title:
(If Entity is a Corporation)
*IF SUBSCRIBER IS A REGISTERED REPRESENTATIVE WITH AN NASD MEMBER FIRM, HAVE THE
FOLLOWING ACKNOWLEDGEMENT SIGNED BY THE APPROPRIATE PARTY:
The undersigned NASD member firm acknowledges receipt of the notice required by
Rule 3050 of the NASD Conduct Rules
ACCEPTED this ____ day of __________
-------------------------------------- 20__, on behalf of Towerstream
Name of NASD Firm Corporation
By: By:
---------------------------------- -----------------------------------
Name: Name:
Title: Title:
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EXHIBIT 10.2
TOWERSTREAM CORPORATION
REGISTRATION RIGHTS AGREEMENT
DECEMBER __, 2006
1. Registration Rights................................................... C-2
1.1 Definitions...................................................... C-2
1.2 Company Registration............................................. C-3
1.3 Obligations of the Company....................................... C-4
1.4 Furnish Information.............................................. C-5
1.5 Delay of Registration............................................ C-5
1.6 Indemnification.................................................. C-6
1.7 Reports Under Securities Exchange Act............................ C-7
1.8 Transfer or Assignment of Registration Rights.................... C-8
1.9 "Market Stand-Off" Agreement..................................... C-8
2. Covenants of the Company to the Investors............................. C-9
2.1 Information Rights............................................... C-9
2.2 Confidentiality.................................................. C-9
3. Legend................................................................ C-9
4. Miscellaneous......................................................... C-10
4.1 Governing Law.................................................... C-10
4.2 Waivers and Amendments........................................... C-10
4.3 Successors and Assigns........................................... C-11
4.4 Entire Agreement................................................. C-11
4.5 Notices.......................................................... C-11
4.6 Interpretation................................................... C-11
4.7 Severability..................................................... C-11
4.8 Counterparts..................................................... C-11
4.9 Telecopy Execution and Delivery.................................. C-12
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
December __, 2006, among Towerstream Corporation, a Delaware corporation (the
"Company"), and the individuals and entities listed on Schedule A hereto (each,
an "Investor" and collectively, the "Investors").
RECITALS
WHEREAS, the Company and the Investors are parties to Subscription
Agreements (the "Subscription Agreements") pursuant to a Private Placement
Memorandum dated December 21, 2006 (the "PPM");
WHEREAS, the Investors' obligations under the Subscription Agreements are
conditioned upon certain registration rights under the Securities Act of 1933,
as amended (the "Securities Act"), as described in the Subscription Agreements;
and
WHEREAS, the Investors and the Company desire to provide for the rights of
registration under the Securities Act as are provided herein upon the execution
and delivery of this Agreement by such Investors and the Company.
NOW, THEREFORE, in consideration of the promises, covenants and conditions
set forth herein, the parties hereto hereby agree as follows:
1. Registration Rights.
1.1 Definitions. As used in this Agreement, the following terms shall have
the meanings set forth below:
(a) "Commission" means the United States Securities and Exchange
Commission.
(b) "Common Stock" means the Company's common stock, par value $0.001
per share.
(c) "Effectiveness Date" means the 60th day following the initial
filing date of the registration statement hereunder or the 90th day following
the initial filing date of the registration statement provided that the
registration statement is subject to SEC review.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(e) "Fair Market Value" means the average of the high and low prices
of publicly traded shares of Common Stock, rounded to the nearest cent, on the
principal national securities exchange on which shares of Common Stock are
listed (if the shares of Common Stock are so listed), or on The NASDAQ Capital
Market (if the shares of Common Stock are regularly quoted on the Nasdaq Stock
Market), or, if not so listed or regularly quoted, the mean between the closing
bid and asked prices of publicly traded shares of Common Stock in the
over-the-counter market, or, if such bid and asked prices shall not be
available, as reported by any
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nationally recognized quotation service selected by the Company, or as
determined by the Board of Directors of the Company in a manner consistent with
the provisions of the Internal Revenue Code, as amended.
(f) "Filing Date" means, with respect to the registration statement
required to be filed hereunder, a date no later than 60 days following the final
Closing Date as defined in the PPM.
(g) "Investor" means any person owning Registrable Securities.
(h) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(i) "Registrable Securities" means any of the Shares or any securities
issued or issuable as (or any securities issued or issuable upon the conversion
or exercise of any warrant, right or other security that is issued as) a
dividend or other distribution with respect to, or in exchange for, or in
replacement of, the Shares; provided, however, that Registrable Securities shall
not include any securities of the Company that have previously been registered
or which have been sold to the public either pursuant to a registration
statement or Rule 144, or which have been sold in a private transaction in which
the transferor's rights under this Section 1 are not assigned, or which may be
sold immediately without registration under the Securities Act and without
volume restrictions pursuant to Rule 144(k).
(j) "Rule 144" means Rule 144 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(k) "Senior Note" means that certain instrument evidencing up to
$3,160,000 of senior convertible debt of the Company that is due 36 months
following its date of issuance, and as further described in the PPM.
(l) "Shares" means the shares of the Common Stock issued pursuant to
the Subscription Agreements and issuable upon exercise of the Warrants or
conversion of the Senior Note.
(m) "Warrants" means the warrants to purchase Common Stock issued
pursuant to the Subscription Agreements.
1.2 Company Registration.
(a) On or prior to the Filing Date the Company shall prepare and file
with the Commission a registration statement covering the Registrable Securities
for an offering to be made on a continuous basis pursuant to Rule 415. The
registration statement shall be on Form SB-2 or Form S-3 (except if the Company
is not then eligible to register for resale the Registrable Securities on Form
SB-2 or Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith). The Company shall cause the
registration
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statement to become effective and remain effective as provided herein. The
Company shall use its best efforts to cause the registration statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event no later than the Effectiveness Date. The
Company shall use its best efforts to keep the registration statement
continuously effective under the Securities Act until the date which is the
earliest to occur of: (i) the date that is 18 months after the date hereof or
(ii) the date of which all Registrable Securities have been sold (the
"Effectiveness Period").
(b) If: (i) the registration statement is not filed on or prior to the
Filing Date; or (ii) the Company fails to use its best efforts to cause the
registration statement to be declared effective by the Effectiveness Date (any
such failure or breach being referred to as an "Event," and the date on which
such Event occurs being referred to as the "Event Date"), then, until the
applicable Event is cured, the Company shall pay to each Investor, in cash or in
Common Stock at Fair Market Value at the Company's option, as liquidated damages
and not as a penalty, an amount equal to 1.0% of the aggregate purchase price
paid by such Investor pursuant to the Subscription Agreement executed by such
Investor for each thirty (30) day period (prorated for partial periods), up to a
maximum of 6.0%, during which such Event continues uncured. While such Event
continues, such liquidated damages shall be paid not less often than every
thirty (30) days. Any unpaid liquidated damages as of the date when an Event has
been cured by the Company shall be paid within three (3) business days following
the date on which such Event has been cured by the Company. Notwithstanding
anything herein to the contrary, to the extent that the registration of any or
all of the Registrable Securities by the Company on a registration statement is
prohibited (the "Non-Registered Shares") as a result of rules, regulations,
positions or releases issued or actions taken by the SEC pursuant to its
authority with respect to Rule 415 and the Company has registered at such time
the maximum number of Registrable Securities permissible upon consultation with
the SEC, then the liquidated damages described in this Section 1.2(b) shall not
be applicable to such Non-Registered Shares.
(c) The Company shall bear and pay all expenses incurred in connection
with any registration, filing or qualification of Registrable Securities with
respect to the registrations pursuant to this Section 1.2 for each Investor,
including (without limitation) all registration, filing and qualification fees,
printer's fees, accounting fees and fees and disbursements of counsel for the
Company, but excluding underwriting discounts and commissions relating to
Registrable Securities and fees and disbursements of counsel for the Investors.
1.3 Obligations of the Company. Whenever required under this Section 1 to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective and, upon the request of
the Investors of at least a majority of the Registrable Securities registered
thereunder, keep such registration statement effective during the Effectiveness
Period;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration
C-4
statement as may be necessary to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish to the Investors such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them (provided
that the Company would not be required to print such prospectuses if readily
available to Investors from any electronic service, such as on the EDGAR filing
database maintained at www.sec.gov);
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities'
or blue sky laws of such jurisdictions as shall be reasonably requested by the
Investors; 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;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering (each Investor
participating in such underwriting shall also enter into and perform its
obligations under such an agreement);
(f) Notify each Investor of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(g) Cause all such Registrable Securities registered pursuant hereto
to be listed on each securities exchange or nationally recognized quotation
system on which similar securities issued by the Company are then listed; and
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
1.4 Furnish Information. It shall be a condition precedent to the Company's
obligations to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Investor that such Investor shall furnish
to the Company such information regarding such Investor, the Registrable
Securities held by such Investor, and the intended method of disposition of such
securities as shall be required by the Company or the managing underwriters, if
any, to effect the registration of such Investor's Registrable Securities.
1.5 Delay of Registration. No Investor shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
C-5
1.6 Indemnification.
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor, any underwriter (as defined in the Securities Act)
for such Investor and each person, if any, who controls such Investor or
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities (joint or several) to which
any of the foregoing persons may become subject under the Securities Act, the
Exchange Act or other federal or state securities law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in a registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto (collectively, the "Filings"), (ii) the
omission or alleged omission to state in the Filings a material fact required to
be stated therein, or necessary to make the statements therein not misleading,
or (iii) any violation or alleged violation by the Company of the Securities
Act, the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any state securities
law; and the Company will pay any legal or other expenses reasonably incurred by
any person to be indemnified pursuant to this Section 1.6(a) in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 1.6(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 shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation that
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Investor,
underwriter or controlling person.
(b) To the extent permitted by law, each Investor will indemnify and
hold harmless the Company, each of its directors, each of its officers who has
signed the registration statement, each person, if any, who controls the Company
within the meaning of the Securities Act or the Exchange Act, any underwriter,
any other Investor selling securities in such registration statement and any
controlling person of any such underwriter or other Investor, against any
losses, claims, damages or liabilities (joint or several) to which any of the
foregoing persons may become subject under the Securities Act, the Exchange Act
or other federal or state securities law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Investor expressly for use in connection with such
registration; and each such Investor will pay any legal or other expenses
reasonably incurred by any person to be indemnified pursuant to this Section
1.6(b) in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
contained in this Section 1.6(b) 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 Investor (which consent shall not be
unreasonably withheld); provided, however, in no event shall any indemnity under
this subsection 1.6(b) exceed the gross proceeds from the offering received by
such Investor.
C-6
(c) Promptly after receipt by an indemnified party under this Section
1.6 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 1.6, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.6.
(d) If the indemnification provided for in Sections 1.6(a) and (b) is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, claim, damage or expense referred to herein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or expense in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions or alleged statements or omissions that resulted in such
loss, liability, claim or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. In no event shall any Investor
be required to contribute an amount in excess of the gross proceeds from the
offering received by such Investor.
(e) The obligations of the Company and Investors under this Section
1.6 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.7 Reports Under Securities Exchange Act. With a view to making available
the benefits of certain rules and regulations of the Commission, including Rule
144, that may at any time permit an Investor to sell securities of the Company
to the public without registration or pursuant to a registration on Form SB-2,
the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times after ninety (90) days after
the effective date of the registration statement;
C-7
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is necessary to enable the
Investors to utilize Form SB-2 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the registration statement is declared effective;
(c) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(d) furnish to any Investor, so long as the Investor owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at any
time after ninety (90) calendar days after the effective date of the
registration statement), the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form SB-2
(at any time after it so qualifies), (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 in
availing any Investor of any rule or regulation of the Commission that permits
the selling of any such securities without registration or pursuant to such
form.
1.8 Transfer or Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
transferred or assigned, but only with all related obligations, by an Investor
to a transferee or assignee who (a) acquires both at least 25,000 Shares and
Warrants to acquire at least 12,500 Shares (all subject to appropriate
adjustment for stock splits, stock dividends and combinations) from such
transferring Investor or (b) holds Registrable Securities immediately prior to
such transfer or assignment; provided, that in the case of (a), (i) prior to
such transfer or assignment, the Company is furnished with written notice
stating the name and address of such transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned, (ii) such transferee or assignee agrees in writing to be bound by
and subject to the terms and conditions of this Agreement including, without
limitation, the provisions of Section 1.9 hereof and (iii) such transfer or
assignment shall be effective only if immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act.
1.9 "Market Stand-Off" Agreement. Each Investor hereby agrees that it will
not, without the prior written consent of the Company and the managing
underwriter (if a managing or lead underwriter is appointed), during the period
commencing on the date of the final prospectus relating to the initial
underwritten public offering of the Company and ending on the date specified by
the Company and the managing underwriter (such period not to exceed one hundred
eighty (180) calendar days) (i) lend, offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any securities of the Company, including
(without limitation) shares of Common Stock or any securities convertible into
or
C-8
exercisable or exchangeable for Common Stock (whether now owned or hereafter
acquired) or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
any securities of the Company, including (without limitation) shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (whether now owned or hereafter acquired), whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of securities, in cash or otherwise. The foregoing covenants shall not apply to
the sale of any shares by an Investor to an underwriter pursuant to an
underwriting agreement and shall only be applicable to the Investors if all the
Company's executive officers, directors and greater than five percent (5%)
stockholders enter into similar agreements. Each Investor agrees to execute an
agreement(s) reflecting (i) and (ii) above as may be requested by the managing
or lead underwriters at the time of the underwritten public offering, and
further agrees that the Company may impose stop transfer instructions with its
transfer agent in order to enforce the covenants in (i) and (ii) above. The
underwriters in connection with the Company's initial underwritten public
offering are intended third party beneficiaries of the covenants in this Section
1.9 and shall have the right, power and authority to enforce such covenants as
though they were a party hereto.
2. Covenants of the Company to the Investors.
2.1 Information Rights. The Company shall deliver to each Investor who
holds (and continues to hold) at least 250,000 Shares (subject to appropriate
adjustment for stock splits, stock dividends and combinations), upon the request
of such Investor (which may be satisfied by filing of Company quarterly and
annual reports under the Exchange Act):
(a) as soon as practicable, but in any event within one hundred twenty
(120) calendar days after the end of each fiscal year of the Company,
consolidated balance sheets of the Company and its subsidiaries, if any, as of
the end of such fiscal year, and consolidated statements of income and
consolidated statements of cash flows of the Company and its subsidiaries, if
any, for such year, prepared in accordance with generally accepted accounting
principles ("GAAP"), all in reasonable detail; and
(b) as soon as practicable, but in any event within forty-five (45)
calendar days after the end of each of the first three (3) quarters of each
fiscal year of the Company, consolidated balance sheets of the Company and its
subsidiaries, if any, as of the end of such quarter, and consolidated statements
of income and consolidated statements of cash flows of the Company and its
subsidiaries, if any, for such quarter prepared in accordance with GAAP, all in
reasonable detail.
2.2 Confidentiality. Each Investor receiving any non-public information of
the Company hereby agrees to hold in confidence and trust and to act in a
fiduciary manner with respect to all information so provided; provided, however,
that notwithstanding the foregoing, an Investor may include summary financial
information concerning the Company and general statements concerning the nature
and progress of the Company's business in an Investor's reports to its
affiliates.
3. Legend.
(a) Each certificate representing Shares of Common Stock held by the
Investors shall be endorsed with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES
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ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT,
(B) AN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO THE COMPANY, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (C) REASONABLE
ASSURANCE HAVING BEEN PROVIDED TO THE COMPANY THAT SUCH OFFER, SALE,
ASSIGNMENT OR TRANSFER IS BEING MADE PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID ACT.
(b) The legend set forth above shall be removed, and the Company shall
issue a certificate without such legend to the transferee of the Shares
represented thereby, if, unless otherwise required by state securities laws, (i)
such Shares have been sold under an effective registration statement under the
Securities Act, (ii) in connection with a sale, assignment or other transfer,
such holder provides the Company with an opinion of counsel, reasonably
acceptable to the Company, to the effect that such sale, assignment or transfer
is being made pursuant to an exemption from the registration requirements of the
Securities Act, or (iii) such holder provides the Company with reasonable
assurance that the Shares are being sold, assigned or transferred pursuant to
Rule 144 or Rule 144A under the Securities Act.
4. Miscellaneous.
4.1 Governing Law. The parties hereby agree that any dispute which may
arise between them arising out of or in connection with this Agreement shall be
adjudicated only before a Federal court located in the State of Delaware and
they hereby submit to the exclusive jurisdiction of the federal and state courts
of the State of Delaware with respect to any action or legal proceeding
commenced by any party, and irrevocably waive any objection they now or
hereafter may have respecting the venue of any such action or proceeding brought
in such a court or respecting the fact that such court is an inconvenient forum,
relating to or arising out of this Agreement or any acts or omissions relating
to the registration of the securities hereunder, and consent to the service of
process in any such action or legal proceeding by means of registered or
certified mail, return receipt requested, in care of the address set forth below
or such other address as the undersigned shall furnish in writing to the other.
The parties further agree that in the event of any dispute, action, suit or
other proceeding arising out of or in connection with this Agreement brought by
a Subscriber (or transferee), the Company (and each other defendant) shall
recover all of such party's attorneys' fees and costs incurred in each and every
action, suit or other proceeding, including any and all appeals or petitions
therefrom. As used herein, attorney's fees shall be deemed to mean the full and
actual costs of any investigation and of legal services actually performed in
connection with the matters involved, calculated on the basis of the usual fee
charged by the attorneys performing such services.
4.2 Waivers and Amendments. This Agreement may be terminated and any term
of this Agreement may be amended or waived (either generally or in a particular
instance and either
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retroactively or prospectively) with the written consent of the Company and
Investors holding at least a majority of the Registrable Securities then
outstanding (the "Majority Investors"). Notwithstanding the foregoing,
additional parties may be added as Investors under this Agreement with the
written consent of the Company and the Majority Investors. No such amendment or
waiver shall reduce the aforesaid percentage of the Registrable Securities, the
holders of which are required to consent to any termination, amendment or waiver
without the consent of the record holders of all of the Registrable Securities.
Any termination, amendment or waiver effected in accordance with this Section
4.2 shall be binding upon each holder of Registrable Securities then
outstanding, each future holder of all such Registrable Securities and the
Company.
4.3 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions of this Agreement shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
4.4 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement among the parties with regard to the subject matter
hereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants except as specifically set forth
herein.
4.5 Notices. All notices and other communications required or permitted
under this Agreement shall be in writing and shall be delivered personally by
hand or by overnight courier, mailed by United States first-class mail, postage
prepaid, sent by facsimile or sent by electronic mail directed (a) if to an
Investor, at such Investor's address, facsimile number or electronic mail
address set forth in the Company's records, or at such other address, facsimile
number or electronic mail address as such Investor may designate by ten (10)
days' advance written notice to the other parties hereto or (b) if to the
Company, to its address, facsimile number or electronic mail address set forth
on its signature page to this Agreement and directed to the attention of the
Chief Executive Officer, or at such other address, facsimile number or
electronic mail address as the Company may designate by ten (10) days' advance
written notice to the other parties hereto. All such notices and other
communications shall be effective or deemed given upon delivery, on the date of
mailing, upon confirmation of facsimile transfer or upon confirmation of
electronic mail delivery.
4.6 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The titles and subtitles used in this Agreement are used for
convenience only and are not considered in construing or interpreting this
Agreement.
4.7 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement, and the balance of the Agreement shall be interpreted as if such
provision were so excluded, and shall be enforceable in accordance with its
terms.
4.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
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4.9 Telecopy Execution and Delivery. A facsimile, telecopy or other
reproduction of this Agreement may be executed by one or more parties hereto,
and an executed copy of this Agreement may be delivered by one or more parties
hereto by facsimile or similar electronic transmission device pursuant to which
the signature of or on behalf of such party can be seen, and such execution and
delivery shall be considered valid, binding and effective for all purposes. At
the request of any party hereto, all parties hereto agree to execute an original
of this Agreement as well as any facsimile, telecopy or other reproduction
hereof.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day,
month and year first set forth above.
"Company"
TOWERSTREAM CORPORATION
By:
------------------------------------
Name:
Title:
Address:
Towerstream Corporation
55 Hammerlund Way
Middletown, Rhode Island 02842
Telephone: (401) 848-5848
Telecopy: (401) 848-5130
E-mail: jeff@towerstream.com
Attention: Chief Executive Officer
[COMPANY SIGNATURE PAGE TO REGISTATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, the parties have executed this Agreement on the day,
month and year first set forth above.
"Investor"
________________________________________
By:
------------------------------------
Name
Title:
Address:
________________________________________
________________________________________
________________________________________
Telephone:
_____________________________
Facsimile:
_____________________________
Email:
_________________________________
[INVESTOR SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
SCHEDULE A
INVESTORS
EXHIBIT 10.3
WARRANT
NO. TWS-001 TOWERSTREAM CORPORATION ________ SHARES
WARRANT TO PURCHASE COMMON STOCK
VOID AFTER 5:30 P.M., EASTERN
TIME, ON THE EXPIRATION DATE
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE
FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
FOR VALUE RECEIVED, TOWERSTREAM CORPORATION, a Delaware corporation
(the "Company"), hereby agrees to sell upon the terms and on the conditions
hereinafter set forth, but no later than 5:30 p.m., Eastern Time, on the
Expiration Date (as hereinafter defined) to ________________ or registered
assigns (the "Holder"), under the terms as hereinafter set forth,
__________________ (_____________) fully paid and non-assessable shares of the
Company's Common Stock, par value $0.001 per share (the "Warrant Stock"), at a
purchase price of FOUR DOLLARS AND FIFTY CENTS ($4.50) per share (the "Warrant
Price"), pursuant to this warrant (this "Warrant"). The number of shares of
Warrant Stock to be so issued and the Warrant Price are subject to adjustment in
certain events as hereinafter set forth. The term "Common Stock" shall mean,
when used herein, unless the context otherwise requires, the stock and other
securities and property at the time receivable upon the exercise of this
Warrant.
1. Exercise of Warrant.
a. The Holder may exercise this Warrant according to its terms by
surrendering this Warrant to the Company at the address set forth in Section 9,
the subscription form attached hereto having then been duly executed by the
Holder, accompanied by cash, certified check or bank draft in payment of the
purchase price, in lawful money of the United States of America, for the number
of shares of the Warrant Stock specified in the subscription form, or as
otherwise provided in this Warrant, prior to 5:30 p.m., Eastern Time, on
__________________, 2012 (the "Expiration Date").
b. This Warrant may be exercised in whole or in part so long as any
exercise in part hereof would not involve the issuance of fractional shares of
Warrant Stock. If exercised in part, the Company shall deliver to the Holder a
new Warrant, identical in form, in the name of
the Holder, evidencing the right to purchase the number of shares of Warrant
Stock as to which this Warrant has not been exercised, which new Warrant shall
be signed by the Chairman, Chief Executive Officer or President and the
Secretary or Assistant Secretary of the Company. The term Warrant as used herein
shall include any subsequent Warrant issued as provided herein.
c. No fractional shares or scrip representing fractional shares shall
be issued upon the exercise of this Warrant. The Company shall pay cash in lieu
of fractions with respect to the Warrants based upon the fair market value of
such fractional shares of Common Stock (which shall be the closing price of such
shares on the exchange or market on which the Common Stock is then traded) at
the time of exercise of this Warrant.
d. In the event of any exercise of the rights represented by this
Warrant, a certificate or certificates for the Warrant Stock so purchased,
registered in the name of the Holder, shall be delivered to the Holder within a
reasonable time after such rights shall have been so exercised. The person or
entity in whose name any certificate for the Warrant Stock is issued upon
exercise of the rights represented by this Warrant shall for all purposes be
deemed to have become the holder of record of such shares immediately prior to
the close of business on the date on which the Warrant was surrendered and
payment of the Warrant Price and any applicable taxes was made, irrespective of
the date of delivery of such certificate, except that, if the date of such
surrender and payment is a date when the stock transfer books of the Company are
closed, such person shall be deemed to have become the holder of such shares at
the opening of business on the next succeeding date on which the stock transfer
books are open. The Company shall pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock on exercise of this Warrant.
2. Disposition of Warrant Stock and Warrant.
a. The Holder hereby acknowledges that this Warrant and any Warrant
Stock purchased pursuant hereto are, as of the date hereof, not registered: (i)
under the Securities Act of 1933, as amended (the "Act"), on the ground that the
issuance of this Warrant is exempt from registration under Section 4(2) of the
Act as not involving any public offering or (ii) under any applicable state
securities law because the issuance of this Warrant does not involve any public
offering; and that the Company's reliance on the Section 4(2) exemption of the
Act and under applicable state securities laws is predicated in part on the
representations hereby made to the Company by the Holder that it is acquiring
this Warrant and will acquire the Warrant Stock for investment for its own
account, with no present intention of dividing its participation with others or
reselling or otherwise distributing the same, subject, nevertheless, to any
requirement of law that the disposition of its property shall at all times be
within its control.
The Holder hereby agrees that it will not sell or transfer all or any
part of this Warrant and/or Warrant Stock unless and until it shall first have
given notice to the Company describing such sale or transfer and furnished to
the Company either (i) an opinion, reasonably satisfactory to counsel for the
Company, of counsel (skilled in securities matters, selected by the Holder and
reasonably satisfactory to the Company) to the effect that the proposed sale or
transfer may be made without registration under the Act and without registration
or qualification under any state law, or (ii) an interpretative letter from the
Securities and Exchange Commission
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to the effect that no enforcement action will be recommended if the proposed
sale or transfer is made without registration under the Act.
b. If, at the time of issuance of the shares issuable upon exercise of
this Warrant, no registration statement is in effect with respect to such shares
under applicable provisions of the Act, the Company may at its election require
that the Holder provide the Company with written reconfirmation of the Holder's
investment intent and that any stock certificate delivered to the Holder of a
surrendered Warrant shall bear legends reading substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT."
In addition, so long as the foregoing legend may remain on any stock certificate
delivered to the Holder, the Company may maintain appropriate "stop transfer"
orders with respect to such certificates and the shares represented thereby on
its books and records and with those to whom it may delegate registrar and
transfer functions.
3. Reservation of Shares. The Company hereby agrees that at all times there
shall be reserved for issuance upon the exercise of this Warrant such number of
shares of its Common Stock as shall be required for issuance upon exercise of
this Warrant. The Company further agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will be duly
authorized and will, upon issuance and against payment of the exercise price, be
validly issued, fully paid and non-assessable, free from all taxes, liens,
charges and preemptive rights with respect to the issuance thereof, other than
taxes, if any, in respect of any transfer occurring contemporaneously with such
issuance and other than transfer restrictions imposed by federal and state
securities laws.
4. Exchange, Transfer or Assignment of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations, entitling the
Holder or Holders thereof to purchase in the aggregate the same number of shares
of Common Stock purchasable hereunder. Upon surrender of this Warrant to the
Company or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Warrant in the name of the assignee named in such instrument of assignment and
this Warrant shall promptly be canceled. This Warrant may be divided or combined
with other Warrants that carry the same rights upon presentation hereof at the
office of the Company or at the office of its stock transfer agent, if any,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued and signed by the Holder hereof.
-3-
5. Capital Adjustments. This Warrant is subject to the following further
provisions:
a. Adjustment Upon Issuance of Common Stock. If and whenever on or
after the date hereof and through the first anniversary of the later to occur of
(i) the date hereof and (ii) the final Closing (as defined in the Company's
Private Placement Memorandum dated December 21, 2006, as supplemented to date
(the "Private Placement Memorandum"), the Company issues or sells any shares of
Common Stock or securities convertible into Common Stock, other than Excluded
Securities (as defined below), for a consideration per share of Common Stock
(the "New Issuance Price") less than a price equal to $2.25, then immediately
after such Dilutive Issuance, the Warrant Price then in effect shall be reduced
to an amount equal to the product of (i) the New Issuance Price and (ii) 2.0.
Upon each such adjustment of the Warrant Price hereunder, the number of shares
of Warrant Stock shall be adjusted to the number of shares of Common Stock
determined by multiplying the Warrant Price in effect immediately prior to such
adjustment by the number of shares of Warrant Stock acquirable upon exercise of
this Warrant immediately prior to such adjustment and dividing the product
thereof by the New Issuance Price (the "Adjusted Warrant Stock"). To the extent
this Warrant has been exercised in whole or in part prior to such a dilutive
issuance, the Company shall promptly issue to the Holder such number of shares
of Common Stock equal to the difference of the Adjusted Warrant Stock and number
of shares of Warrant Stock acquirable upon exercise of this Warrant immediately
prior to such adjustment. For purposes of this Warrant, "Excluded Securities"
shall mean (i) shares of Common Stock or securities convertible into shares of
Common Stock that may be issued pursuant to the transactions described in the
Private Placement Memorandum, (ii) shares of Common Stock issued or deemed
issued to employees, consultants, officers or directors (if in transactions with
primarily non-financing purposes) of this Company directly or pursuant to any
stock incentive plan approved by the Company's board of directors and (iii)
shares of Common Stock issued or issuable in connection with a bona fide
business combination by the Company, whether by merger, consolidation, sale of
assets, sale or exchange of stock or otherwise, in which a portion of the
consideration payable is in Common Stock or securities convertible into Common
Stock and the business combination partner is in substantially the same line of
business as the Company.
b. Recapitalization, Reclassification and Succession. If any
recapitalization of the Company or reclassification of its Common Stock or any
merger or consolidation of the Company into or with a corporation or other
business entity, or the sale or transfer of all or substantially all of the
Company's assets or of any successor corporation's assets to any other
corporation or business entity (any such corporation or other business entity
being included within the meaning of the term "successor corporation") shall be
effected, at any time while this Warrant remains outstanding and unexpired,
then, as a condition of such recapitalization, reclassification, merger,
consolidation, sale or transfer, lawful and adequate provision shall be made
whereby the Holder of this Warrant thereafter shall have the right to receive
upon the exercise hereof as provided in Section 1 and in lieu of the shares of
Common Stock immediately theretofore issuable upon the exercise of this Warrant,
such shares of capital stock, securities or other property as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
Common Stock equal to the number of shares of Common Stock immediately
theretofore issuable upon the exercise of this Warrant had such
recapitalization, reclassification, merger, consolidation, sale or transfer not
taken place, and in each such case, the
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terms of this Warrant shall be applicable to the shares of stock or other
securities or property receivable upon the exercise of this Warrant after such
consummation.
c. Subdivision or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the number of shares of Warrant Stock purchasable upon
exercise of this Warrant and the Warrant Price shall be proportionately
adjusted.
d. Stock Dividends and Distributions. If the Company at any time while
this Warrant is outstanding and unexpired shall issue or pay the holders of its
Common Stock, or take a record of the holders of its Common Stock for the
purpose of entitling them to receive, a dividend payable in, or other
distribution of, Common Stock, then (i) the Warrant Price shall be adjusted in
accordance with Section 5(f) and (ii) the number of shares of Warrant Stock
purchasable upon exercise of this Warrant shall be adjusted to the number of
shares of Common Stock that the Holder would have owned immediately following
such action had this Warrant been exercised immediately prior thereto.
e. Stock and Rights Offering to Shareholders. If the Company shall at
any time after the date of issuance of this Warrant distribute to all holders of
its Common Stock any shares of capital stock of the Company (other than Common
Stock) or evidences of its indebtedness or assets (excluding cash dividends or
distributions paid from retained earnings or current year's or prior year's
earnings of the Company) or rights or warrants to subscribe for or purchase any
of its securities (excluding those referred to in the immediately preceding
paragraph) (any of the foregoing being hereinafter in this paragraph called the
"Securities"), then in each such case, the Company shall reserve shares or other
units of such securities for distribution to the Holder upon exercise of this
Warrant so that, in addition to the shares of the Common Stock to which such
Holder is entitled, such Holder will receive upon such exercise the amount and
kind of such Securities which such Holder would have received if the Holder had,
immediately prior to the record date for the distribution of the Securities,
exercised this Warrant.
f. Warrant Price Adjustment. Except as otherwise provided herein,
whenever the number of shares of Warrant Stock purchasable upon exercise of this
Warrant is adjusted, as herein provided, the Warrant Price payable upon the
exercise of this Warrant shall be adjusted to that price determined by
multiplying the Warrant Price immediately prior to such adjustment by a fraction
(i) the numerator of which shall be the number of shares of Warrant Stock
purchasable upon exercise of this Warrant immediately prior to such adjustment,
and (ii) the denominator of which shall be the number of shares of Warrant Stock
purchasable upon exercise of this Warrant immediately thereafter.
g. Certain Shares Excluded. The number of shares of Common Stock
outstanding at any given time for purposes of the adjustments set forth in this
Section 5 shall exclude any shares then directly or indirectly held in the
treasury of the Company.
h. Deferral and Cumulation of De Minimis Adjustments. The Company
shall not be required to make any adjustment pursuant to this Section 5 if the
amount of such adjustment would be less than one percent (1%) of the Warrant
Price in effect immediately before the event that would otherwise have given
rise to such adjustment. In such case, however,
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any adjustment that would otherwise have been required to be made shall be made
at the time of and together with the next subsequent adjustment which, together
with any adjustment or adjustments so carried forward, shall amount to not less
than one percent (1%) of the Warrant Price in effect immediately before the
event giving rise to such next subsequent adjustment.
i. Duration of Adjustment. Following each computation or readjustment
as provided in this Section 5, the new adjusted Warrant Price and number of
shares of Warrant Stock purchasable upon exercise of this Warrant shall remain
in effect until a further computation or readjustment thereof is required.
6. Notice to Holders.
a. Notice of Record Date. In case:
(i) the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the exercise of
this Warrant) for the purpose of entitling them to receive any dividend (other
than a cash dividend payable out of earned surplus of the Company) or other
distribution, or any right to subscribe for or purchase any shares of stock of
any class or any other securities, or to receive any other right;
(ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation with or
merger of the Company into another corporation, or any conveyance of all or
substantially all of the assets of the Company to another corporation; or
(iii) of any voluntary dissolution, liquidation or winding-up of
the Company;
then, and in each such case, the Company will mail or cause to be mailed to the
Holder hereof at the time outstanding a notice specifying, as the case may be,
(i) the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the date on which such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up is to take place, and the time, if any, is to be fixed, as of which
the holders of record of Common Stock (or such stock or securities at the time
receivable upon the exercise of this Warrant) shall be entitled to exchange
their shares of Common Stock (or such other stock or securities) for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, conveyance, dissolution or winding-up. Such notice shall
be mailed at least thirty (30) days prior to the record date therein specified,
or if no record date shall have been specified therein, at least thirty (30)
days prior to such specified date, provided, however, failure to provide any
such notice shall not affect the validity of such transaction.
b. Certificate of Adjustment. Whenever any adjustment shall be made
pursuant to Section 5 hereof, the Company shall promptly make a certificate
signed by its Chairman, Chief Executive Officer, President, Vice President,
Chief Financial Officer or Treasurer, setting forth in reasonable detail the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated and the Warrant Price and number of shares
of Warrant Stock purchasable upon exercise of this Warrant after giving effect
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to such adjustment, and shall promptly cause copies of such certificates to be
mailed (by first class mail, postage prepaid) to the Holder of this Warrant.
7. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
evidence satisfactory to it, in the exercise of its reasonable discretion, of
the ownership and the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to the Company and, in the case of mutilation, upon surrender and
cancellation thereof, the Company will execute and deliver in lieu thereof,
without expense to the Holder, a new Warrant of like tenor dated the date
hereof.
8. Warrant Holder Not a Stockholder. The Holder of this Warrant, as such,
shall not be entitled by reason of this Warrant to any rights whatsoever as a
stockholder of the Company.
9. Notices. Any notice required or contemplated by this Warrant shall be
deemed to have been duly given if transmitted by registered or certified mail,
return receipt requested, or nationally recognized overnight delivery service,
to the Company at its principal executive offices located at 55 Hammarlund Way,
Middletown, Rhode Island 02842, Attention: Jeffrey M. Thompson, Chief Executive
Officer, or to the Holder at the name and address set forth in the Warrant
Register maintained by the Company.
10. Choice of Law. THIS WARRANT IS ISSUED UNDER AND SHALL FOR ALL PURPOSES
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE
OF DELAWARE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
11. Jurisdiction and Venue. The Company and Holder hereby agree that any
dispute which may arise between them arising out of or in connection with this
Warrant shall be adjudicated before a court located in New York County, New York
and they hereby submit to the exclusive jurisdiction of the federal and state
courts of the State of York located in New York County with respect to any
action or legal proceeding commenced by any party, and irrevocably waive any
objection they now or hereafter may have respecting the venue of any such action
or proceeding brought in such a court or respecting the fact that such court is
an inconvenient forum, relating to or arising out of this Warrant or any acts or
omissions relating to the sale of the securities hereunder, and consent to the
service of process in any such action or legal proceeding by means of registered
or certified mail, return receipt requested, in care of the address set forth
herein or such other address as either party shall furnish in writing to the
other.
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IN WITNESS WHEREOF, the Company has duly caused this Warrant to be
signed on its behalf, in its corporate name and by its duly authorized officers,
as of this __ day of _____________________, 2007.
TOWERSTREAM CORPORATION
By:
------------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
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FORM OF EXERCISE
(to be executed by the registered holder hereof)
The undersigned hereby exercises the right to purchase _________ shares of
common stock, par value $0.001 per share ("Common Stock"), of Towerstream
Corporation evidenced by the within Warrant Certificate for an Applicable
Exercise Price of $4.50 per share and herewith makes payment of the purchase
price in full of $__________. Kindly issue certificates for shares of Common
Stock (and for the unexercised balance of the Warrants evidenced by the within
Warrant Certificate, if any) in accordance with the instructions given below.
Dated:____________________ , 20__ .
______________________________
Instructions for registration of stock
______________________________
Name (Please Print)
Social Security or other identifying Number:
Address:__________________________________
City/State and Zip Code
Instructions for registration of certificate representing
the unexercised balance of Warrants (if any)
______________________________
Name (Please Print)
Social Security or other identifying Number: ___________
Address:____________________________________
City, State and Zip Code
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EXHIBIT 10.4
FORM OF UNIT OFFERING LOCK-UP AGREEMENT
January __, 2007
Ladies and Gentlemen:
The undersigned is a director, executive officer or beneficial owner of
shares of capital stock, or securities convertible into or exercisable or
exchangeable for the capital stock (each, a "Company Security") of Towerstream
Corporation, a Delaware corporation (the "Company"). The undersigned understands
that the Company will merge with a wholly-owned subsidiary of a publicly traded
company (the "Parent"), concurrently with a private placement by the Parent of
up to 100 units (the "Units") of the Parent, each Unit consisting of 50,000
shares of common stock, par value $0.001 per share, of the Parent and a
detachable transferable warrant to purchase 25,000 shares of common stock of the
Parent at an exercise price of $4.50 per share (the "Funding Transaction"). The
undersigned also understands that WFG Investments, Inc., Granite Financial
Group, LLC, Ardent Advisors and Palladium Capital Advisors, LLC have acted as
placement agents with respect to the Funding Transaction (the "Placement
Agents"). The undersigned understands that the Company, the Parent and the
Placement Agents will proceed with the Funding Transaction in reliance on this
agreement.
In recognition of the benefit that the Funding Transaction will confer upon
the undersigned, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees, for the
benefit of the Company, the Parent, the Placement Agents and each investor in
the Funding Transaction, that, during the period beginning on the initial
closing of the Funding Transaction (the "Closing Date") and ending twelve (12)
months after such date, the undersigned will not, without the prior written
consent of the Placement Agents, directly or indirectly, (i) offer, sell, offer
to sell, contract to sell, hedge, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or sell (or announce any offer, sale, offer of sale,
contract of sale, hedge, pledge, sale of any option or contract to purchase,
purchase of any option or contract of sale, grant of any option, right or
warrant to purchase or other sale or disposition), or otherwise transfer or
dispose of (or enter into any transaction or device that is designed to, or
could be expected to, result in the disposition by any person at any time in the
future), any Company Security or securities of the Parent into or for which a
Company Security may be converted, exercised or exchanged, whether by operation
of law or otherwise (each, a "Parent Security"), beneficially owned, within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), by the undersigned on the date hereof or hereafter acquired or
(ii) enter into any swap or other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of any Company Security or Parent Security, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of any Company Security or Parent Security.
The undersigned further agrees that the undersigned will not for so long as
the lock-up in the immediately preceding paragraph shall be in effect, without
the prior written consent of the
Parent and the managing underwriter (if a managing or lead underwriter is
appointed), during the period commencing on the date of the final prospectus
relating to the initial underwritten public offering of the Parent and ending on
the date specified by the Parent and the managing underwriter (such period not
to exceed one hundred eighty (180) calendar days) (i) lend, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any securities of the
Parent, including (without limitation) shares of common stock of Parent or any
securities convertible into or exercisable or exchangeable for shares of Parent
common stock (whether now owned or hereafter acquired) or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of any securities of the Parent,
including (without limitation) shares of Parent common stock or any securities
convertible into or exercisable or exchangeable for shares of Parent common
stock (whether now owned or hereafter acquired), whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of
securities, in cash or otherwise.
In furtherance of the foregoing, the Company, the Parent and the transfer
agent of each are hereby authorized to decline to make any transfer of any
Company Security or Parent Security if such transfer would constitute a
violation or breach of this agreement.
Notwithstanding the foregoing, the undersigned (and any transferee of the
undersigned) may transfer any shares of a Company Security or a Parent Security
(i) as a bona fide gift or gifts, provided that prior to such transfer the donee
or donees thereof agree in writing to be bound by the restrictions set forth
herein, (ii) to any trust, partnership, corporation or other entity formed for
the direct or indirect benefit of the undersigned or the immediate family of the
undersigned, provided that prior to such transfer a duly authorized officer,
representative or trustee of such transferee agrees in writing to be bound by
the restrictions set forth herein, and provided further that any such transfer
shall not involve a disposition for value, (iii) to non-profit organizations
qualified as charitable organizations under Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended, or (iv) if such transfer occurs by operation
of law, such as rules of descent and distribution, statutes governing the
effects of a merger or a qualified domestic order, provided that prior to such
transfer the transferee executes an agreement stating that the transferee is
receiving and holding any Company Security or Parent Security subject to the
provisions of this agreement. For purposes hereof, "immediate family" shall mean
any relationship by blood, marriage or adoption, not more remote than first
cousin. In addition, the foregoing shall not prohibit privately negotiated
transactions, provided the transferees agree, in writing, to be bound to the
terms of the lock-up agreements for the balance of the lock-up period.
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The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this agreement and that, upon request,
the undersigned will execute any additional documents necessary or desirable in
connection with the enforcement hereof. Any obligations of the undersigned shall
be binding upon the heirs, personal representatives, successors and assigns of
the undersigned.
Very truly yours,
Signature:
-----------------------------
Print Name:
----------------------------
Date: January ___, 2007
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EXHIBIT 10.5
ADDENDUM TO SUBSCRIPTION AGREEMENT
Reference is made to each of those Subscription Agreements, dated as of
January 12, 2007, between Towerstream Corporation, a Delaware corporation (the
"Company") and each of the subscribers (the "Subscribers") for Units (as defined
in the Company's Confidential Private Placement Memorandum (the "PPM") dated
December 21, 2006, as supplemented to date) (the "Subscription Agreements"). The
Company hereby provides the following Addendum (this "Addendum") to the
Subscription Agreements for the benefit of each Subscriber. Capitalized terms
used herein but not otherwise defined shall have the meanings ascribed to them
in the Subscription Agreements or the PPM.
1. The paragraph appearing under the heading "Anti-Dilution Price Protection"
in the PPM shall be deleted and is replaced in its entirety with the
following:
For a period of twelve (12) months following the Closing Date (the "Adjustment
Period"), in the event that the Company sells or grants any option to purchase
or sells or grants any right to reprice, or otherwise disposes of or issues (or
announces any sale, grant or any option to purchase or other disposition), any
Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock at an effective price per share that is lower than $2.25 per
share (such lower price, the "Base Price" and such issuances, collectively, a
"Dilutive Issuance") (if the holder of the Common Stock or Common Stock
Equivalents so issued shall at any time, whether by operation of purchase price
adjustments, reset provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights per share which are issued
in connection with such issuance, be entitled to receive shares of Common Stock
at an effective price per share that is lower than $2.25 per share, such
issuance shall be deemed to have occurred for less than the $2.25 per share on
such date of the Dilutive Issuance), then the purchase price of $2.25 per share
as of the Closing Date shall be reduced to equal the Base Price. Such adjustment
shall be made whenever such Common Stock or Common Stock Equivalents are issued
within the Adjustment Period. Notwithstanding the foregoing, no adjustment will
be made under this Paragraph in respect of an Exempt Issuance. The Company shall
notify the purchaser in writing, no later than 1 Business Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this
Paragraph, indicating therein the applicable issuance price, or applicable reset
price, exchange price, conversion price and other pricing terms (such notice,
the "Dilutive Issuance Notice"). For purposes of clarification, whether or not
the Company provides a Dilutive Issuance Notice pursuant to this Paragraph, upon
the occurrence of any Dilutive Issuance, the purchaser is entitled to receive a
number of shares based upon the Base Price on or after the date of such Dilutive
Issuance, regardless of whether the purchaser accurately refers to the Base
Price in any notice. The exercise price of all unexercised Warrants issued to
Unit purchasers shall be reduced to 200% of the Base Price upon any Dilutive
Issuance during the Adjustment Period. Such Warrant adjustment shall be made
successively whenever a Dilutive Issuance requiring an adjustment to the Base
Price is made during the Adjustment Period. Notwithstanding anything herein or
in any related document to the contrary, the foregoing does not convey to the
purchaser any right to participation in any future financings or offerings now
or in the future contemplated or undertaken by the Company and any provision of
the Debentures related thereto are not included in the additional benefits for
purchasers of Units referred to herein or in any other document related hereto
and are specifically excluded from any of the benefits provided to
purchasers pursuant to an investment in the Units. The Company reserves the
right to establish procedures, in consultation with the purchasers, in order to
effectuate the issuance of additional shares in the event of any dilutive
issuance requiring an adjustment to the Base Price, including any shares that
are required to be issued to any buyers of shares from the original purchasers
from the Company, which include any right to receive shares upon a dilutive
issuance, in its sole discretion, including delivery of such shares to the
purchasers in full and complete satisfaction of the Company's obligation upon a
dilutive issuance.
"Common Stock Equivalents" means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
"Exempt Issuance" means: (A) any issuance resulting from the availability or
effectiveness of any anti-dilution or price protection rights under the
Debenture or related to the Debenture, such as any warrants or purchase
agreements); and (B) the issuance of: (a) shares of Common Stock or options to
employees, officers, directors, or consultants of the Company pursuant to any
stock or option plan duly adopted for such purpose by a majority of the
non-employee members of the Board of Directors of the Company or a majority of
the members of a committee of non-employee directors established (provided,
however, any such issuances to consultants shall not exceed 750,000 shares of
Common Stock and Common Stock Equivalents, in the aggregate, in any 12 month
period), (b) securities upon the exercise or exchange of or conversion of any
Securities issued hereunder and/or other securities exercisable or exchangeable
for or convertible into shares of Common Stock issued and outstanding on the
date of this Agreement, provided that such securities have not been amended
since the date of this Agreement to increase the number of such securities or to
decrease the exercise, exchange or conversion price of such securities; and (c)
securities issued pursuant to acquisitions or strategic transactions approved by
a majority of the disinterested directors of the Company, provided that any such
issuance shall only be to a Person which is either an owner of, or an entity
that is, itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities.
2. Legal Opinion. The Company shall deliver or cause to be delivered to
each purchaser of Units a legal opinion of Haynes and Boone, LLP, counsel to the
Company, addressed to such purchaser, dated as of the date of closing on the
purchase of Units, in standard form, covering such matters as are contained in
the opinion to be delivered to the Debenture purchasers, and subject to the same
caveats and limitations as set forth in such opinion.
3. Additional Representations and Warranties. The Company hereby makes the
following representations and warranties:(references to the Subsidiaries shall
include the Towerstream and its business and its direct and indirect
subsidiaries)(References to all Schedules herein shall mean any and all
information and disclosures included on the same or equivalent schedule to the
Debenture Securitas Purchase Agreement which disclosures are hereby incorporated
by reference and are not repeated herein; further any and all amendments,
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modifications, waivers, consents, or agreements approved by the Debentureholders
in accordance with the Debentures, with respect to such representations and
warranties, will be binding upon all beneficiaries of the representations and
warranties provided in this paragraph without further action or consent by any
Unit purchasers):
(a) Subsidiaries. All of the direct and indirect subsidiaries of the
Company are set forth on Schedule 3(a). The Company owns, directly or
indirectly, all of the capital stock or other equity interests of each
Subsidiary free and clear of any Liens, and all of the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and are fully
paid, non-assessable and free of preemptive and similar rights to subscribe for
or purchase securities.
(b) Organization and Qualification. The Company and each of the
Subsidiaries is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
or default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the
Company and the Subsidiaries is duly qualified to conduct business and is in
good standing as a foreign corporation or other entity in each jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not have or reasonably be expected to result
in (i) a material adverse effect on the legality, validity or enforceability of
any Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or condition (financial or otherwise) of
the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company's ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a "Material Adverse Effect") and no Proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.
(c) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations hereunder and hereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals. Each Transaction Document
has been (or upon delivery will have been) duly executed by the Company and,
when delivered in accordance with the terms hereof and thereof, will constitute
the valid and binding obligation of the Company enforceable against the Company
in accordance with its terms except (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.
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(d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
other transactions contemplated hereby and thereby do not and will not: (i)
conflict with or violate any provision of the Company's or any Subsidiary's
certificate or articles of incorporation, bylaws or other organizational or
charter documents, or (ii) conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, result
in the creation of any Lien upon any of the properties or assets of the Company
or any Subsidiary, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) subject to the Required Approvals,
conflict with or result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as would not have or reasonably be expected to
result in a Material Adverse Effect.
(e) Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction Documents,
other than (i) the filing with the Commission of a Current Report on Form 8-K
disclosing the material terms of the transactions contemplated by the PPM and
attaching the Transaction Documents thereto, (ii) the filing with the Commission
of the Registration Statement, (iii) the notice and/or application(s) to each
applicable Trading Market for the issuance and sale of the Securities and the
listing of the Underlying Shares for trading thereon in the time and manner
required thereby, and (iv) the filing of Form D with the Commission and such
filings as are required to be made under applicable state securities laws
(collectively, the "Required Approvals").
(f) Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens imposed by the Company other than restrictions on
transfer provided for in the Transaction Documents. The Underlying Shares, when
issued in accordance with the terms of the Transaction Documents, will be
validly issued, fully paid and nonassessable, free and clear of all Liens
imposed by the Company. The Company has reserved from its duly authorized
capital stock a number of shares of Common Stock for issuance of the Underlying
Shares at least equal to the Required Minimum on the date hereof.
(g) Capitalization. The capitalization of the Company is as set forth
on Schedule 3(g), which schedule shall also include the number of shares of
Common Stock owned beneficially, and of record, by Affiliates of the Company as
of the date hereof. The Company has not issued any capital stock since its most
recently filed periodic report under the Exchange Act, other than pursuant to
(i) the Merger, (ii) any transactions disclosed in the PPM or (iii) the exercise
of employee stock options under the Company's stock option plans, the issuance
of
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shares of Common Stock to employees pursuant to the Company's employee stock
purchase plan and pursuant to the conversion or exercise of Common Stock
Equivalents outstanding as of the date of the most recently filed periodic
report under the Exchange Act. Each of the following representations and
warranties is qualified in its entirety to Schedule 3(g), and with respect to
any contracts, agreements, events, or obligations relating to periods prior to
the date of the Merger, each of such representations and warranties is qualified
to the extent of the actual knowledge of the Company: (i) no Person has any
right of first refusal, preemptive right, right of participation, or any similar
right to participate in the transactions contemplated by the Transaction
Documents, (ii) except as a result of the purchase and sale of the Securities,
there are no outstanding options, warrants, scrip rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common Stock
or Common Stock Equivalents, (iii) the issuance and sale of the Securities will
not obligate the Company to issue shares of Common Stock or other securities to
any Person (other than the Subscribers) and will not result in a right of any
holder of Company securities to adjust the exercise, conversion, exchange or
reset price under any of such securities and (iv) all of the outstanding shares
of capital stock of the Company are validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, and none of such outstanding shares was issued in violation of
any preemptive rights or similar rights to subscribe for or purchase securities.
There are no stockholders agreements, voting agreements or other similar
agreements with respect to the Company's capital stock to which the Company is a
party or, to the knowledge of the Company, between or among any of the Company's
stockholders.
(h) SEC Reports; Financial Statements. As of the date of the Merger,
to the knowledge of the Company, the Company has filed all reports, schedules,
forms, statements and other documents required to be filed by the Company
through the date of the Merger under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Company was required by
law or regulation to file such material), (the foregoing materials, including
the exhibits thereto and documents incorporated by reference therein, being
collectively referred to herein as the "SEC Reports") on a timely basis or has
received a valid extension of such time of filing and has filed any such SEC
Reports prior to the expiration of any such extension. As of their respective
dates, the SEC Reports complied in all material respects with the requirements
of the Securities Act and the Exchange Act, as applicable, and none of the SEC
Reports, when filed, 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 the light of the circumstances under
which they were made, not misleading. The audited financial statements of the
Towerstream Subsidiary and its direct and indirect subsidiaries for the past two
fiscal years and unaudited financial statements for the most recent fiscal
quarter are attached hereto as Schedule 3(h). Such financial statements comply
in all material respects with applicable accounting requirements and the rules
and regulations of the Commission with respect thereto as in effect at the time
of filing. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis during the periods involved ("GAAP"), except as may be otherwise specified
in such financial statements or the
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notes thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Towerstream Subsidiary and its consolidated
Subsidiaries as of and for 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, immaterial, year-end audit adjustments.
(i) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
a subsequent SEC Report filed prior to the date hereof and except for
consummation of the Merger and the transactions disclosed in the PPM, (i) there
has been no event, occurrence or development that has had or that could
reasonably be expected to result in a Material Adverse Effect, (ii) the Company
has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company's financial statements pursuant to GAAP or disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option plans.
The Company does not have pending before the Commission any request for
confidential treatment of information. Except for the issuance of the Securities
contemplated by the Subscription Agreements or as set forth on Schedule 3(i), no
event, liability or development has occurred or exists with respect to the
Company or its Subsidiaries or their respective business, properties, operations
or financial condition, that would be required to be disclosed by the Company
under applicable securities laws at the time this representation is made that
has not been publicly disclosed at least one Trading Day prior to the date that
this representation is made. The representations and warranties in this Section
3(i) as they relate to the Company prior to consummation of the Merger are
qualified to the extent of the actual knowledge of the Company.
(j) Litigation. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an "Action") which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. Neither the
Company nor any Subsidiary, nor any director or officer thereof, is or has been
the subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty. There
has not been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company or any
current or former director or officer of the Company. The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act. The representations and warranties in this Section
3(j) as they relate to the Company prior to consummation of the Merger are
qualified to the extent of the actual knowledge of the Company.
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(k) Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect. None of the Company's or its Subsidiaries' employees is a member of a
union that relates to such employee's relationship with the Company, and neither
the Company or any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their relationships
with their employees are good. No executive officer, to the knowledge of the
Company, is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement or non-competition agreement, or any other contract or agreement or
any restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any liability
with respect to any of the foregoing matters. The Company and its Subsidiaries
are in compliance with all U.S. federal, state, local and foreign laws and
regulations relating to employment and employment practices, terms and
conditions of employment and wages and hours, except where the failure to be in
compliance could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect. The representations and warranties in this
Section 3(k) as they relate to the Company prior to consummation of the Merger
are qualified to the extent of the actual knowledge of the Company.
(l) Compliance. Neither the Company nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws applicable to its business and all such laws that affect the
environment, except in each case as could not have or reasonably be expected to
result in a Material Adverse Effect. The representations and warranties in this
Section 3(l) as they relate to the Company prior to consummation of the Merger
are qualified to the extent of the actual knowledge of the Company.
(m) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not have or reasonably be expected to result in a
Material Adverse Effect ("Material Permits"), and neither the Company nor any
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any Material Permit. The representations and warranties in this
Section 3(m) as they relate to the Company prior to the consummation of the
Merger are qualified to the extent of the actual knowledge of the Company.
(n) Title to Assets. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case
-7-
free and clear of all Liens, except for Liens as do not materially affect the
value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and the Subsidiaries and
Liens for the payment of federal, state or other taxes, the payment of which is
neither delinquent nor subject to penalties. Any real property and facilities
held under lease by the Company and the Subsidiaries are held by them under
valid, subsisting and enforceable leases with which the Company and the
Subsidiaries are in compliance. The representations and warranties in this
Section 3(n) as they relate to the Company prior to the consummation of the
Merger are qualified to the extent of the actual knowledge of the Company.
(o) Patents and Trademarks. The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could have a Material Adverse
Effect (collectively, the "Intellectual Property Rights"). Neither the Company
nor any Subsidiary has received a notice (written or otherwise) that the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. To the knowledge of the Company, all
such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights. The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties,
except where failure to do so could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. The representations
and warranties in this Section 3(o) as they relate to the Company prior to the
consummation of the Merger are qualified to the extent of the actual knowledge
of the Company.
(p) Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are engaged, including, but not limited to,
directors and officers insurance coverage at least equal to the aggregate
Subscription Amount. Neither the Company nor any 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.
(q) Transactions with Affiliates and Employees. Except as set forth in
the SEC Reports, none of the officers or directors of the Company and, to the
knowledge of the Company, none of the employees of the Company is presently a
party to any transaction with the Company or any Subsidiary (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 entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $60,000 other than for (i) payment of salary
or consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) other employee benefits, including
stock option agreements under any stock option plan of the Company. The
representations and
-8-
warranties in this Section 3(q) as they relate to the Company prior to
consummation of the Merger are qualified to the extent of the actual knowledge
of the Company.
(r) Certain Fees. Any brokerage or finder's fees or commissions that
are or will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other Person
with respect to the transactions contemplated by the Transaction Documents, if
any, are as set forth in the PPM. The Subscribers shall have no obligation with
respect to any fees or with respect to any claims made by or on behalf of other
Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by the Transaction Documents.
(s) Private Placement. Assuming the accuracy of the Subscribers
representations and warranties set forth in the Subscription Agreement, no
registration under the Securities Act is required for the offer and sale of the
Securities by the Company to the Subscribers as contemplated by the PPM. The
issuance and sale of the Securities hereunder does not contravene the rules and
regulations of the Trading Market.
(t) Investment Company. The Company is not, and is not an Affiliate
of, and immediately after receipt of payment for the Securities, will not be or
be an Affiliate of, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended. The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act of 1940,
as amended.
(u) Registration Rights. Other than each of the Subscribers or as set
forth in Schedule 3(u) and in the PPM, no Person has any right to cause the
Company to effect the registration under the Securities Act of any securities of
the Company.
(v) Listing and Maintenance Requirements. The Company has not, in the
12 months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with all such
listing and maintenance requirements.
(w) Application of Takeover Protections. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company's certificate of incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Subscribers as a result of the Subscribers and
the Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company's
issuance of the Securities and the Subscribers' ownership of the Securities.
(x) Disclosure. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Subscribers or their agents or
-9-
counsel with any information that it believes constitutes or might constitute
material, nonpublic information. The Company understands and confirms that the
Subscribers will rely on the foregoing representation in effecting transactions
in securities of the Company. Attached hereto as Schedule 3(x) is a copy of a
substantially final Current Report on Form 8-K (the "Merger 8-K") that the
Company will file with the Commission in connection with the Merger on or prior
to the 4th Trading Day immediately following the date hereof (which Current
Report contains, among other information, risk factors concerning the Company
and financial statements required to be filed therewith). All disclosure
furnished by or on behalf of the Company to the Subscribers regarding the
Company, its business and the transactions contemplated hereby, including the
Disclosure Schedules to this Addendum, is true and correct in all material
respects and does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading such
that it would be reasonably anticipated to result in a Material Adverse Effect.
The Company acknowledges and agrees that no Subscriber makes or has made any
representations or warranties with respect to the transactions contemplated by
the PPM other than those specifically set forth in the Subscription Agreements.
(y) No Integrated Offering. Assuming the accuracy of the Subscribers'
representations and warranties set forth in the Subscription Agreements, neither
the Company, nor any of its Affiliates, nor any Person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would cause
this offering of the Securities to be integrated with prior offerings by the
Company for purposes of the Securities Act or any applicable shareholder
approval provision of any Trading Market on which any of the securities of the
Company are listed or designated.
(z) Indebtedness. Schedule 3(z) sets forth as of the dates thereof all
outstanding secured and unsecured Indebtedness of the Company or any Subsidiary,
or for which the Company or any Subsidiary has commitments. For the purposes of
this Addendum, "Indebtedness" means (a) any liabilities for borrowed money or
amounts owed in excess of $50,000 (other than trade accounts payable incurred in
the ordinary course of business), (b) all guaranties, endorsements and other
contingent obligations in respect of Indebtedness of others, whether or not the
same are or should be reflected in the Company's balance sheet (or the notes
thereto), except guaranties by endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of business; and
(c) the present value of any lease payments in excess of $50,000 due under
leases required to be capitalized in accordance with GAAP. Neither the Company
nor any Subsidiary is in default with respect to any Indebtedness.
(aa) Tax Status. Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which
has been asserted or threatened against the Company or any Subsidiary.
(bb) No General Solicitation. Neither the Company nor any person
acting on behalf of the Company has offered or sold any of the Securities by any
form of general
-10-
solicitation or general advertising. The Company has offered the Securities for
sale only to the Subscribers and certain other "accredited investors" within the
meaning of Rule 501 under the Securities Act.
(cc) Foreign Corrupt Practices. Neither the Company, nor to the
knowledge of the Company, any agent or other person acting on behalf of the
Company, has (i) directly or indirectly, used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related to
foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed to
disclose fully any contribution made by the Company (or made by any person
acting on its behalf of which the Company is aware) which is in violation of
law, or (iv) violated in any material respect any provision of the Foreign
Corrupt Practices Act of 1977, as amended. The representations and warranties in
this Section 3(cc) as they relate to the Company prior to consummation of the
Merger are qualified to the extent of the actual knowledge of the Company.
(dd) Accountants. The Company's accounting firm is set forth on
Schedule 3.1(dd) of the Disclosure Schedule. To the knowledge and belief of the
Company, such accounting firm (i) is a registered public accounting firm as
required by the Exchange Act and (ii) shall express its opinion with respect to
the financial statements to be included in the Company's Annual Report on Form
10-KSB for the year ended November 30, 2006.
(ee) Intentionally omitted.
(ff) No Disagreements with Accountants and Lawyers. To the Company's
knowledge, there are no disagreements of any kind presently existing, or
reasonably anticipated by the Company to arise, between the Company and the
accountants and lawyers formerly or presently employed by the Company and the
Company is current with respect to any fees owed to its accountants and lawyers.
(gg) Acknowledgment Regarding Subscribers' Purchase of Securities. The
Company acknowledges and agrees that each of the Subscribers is acting solely in
the capacity of an arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated thereby. The Company further
acknowledges that no Subscriber is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
Subscriber or any of their respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated thereby is
merely incidental to the Subscribers' purchase of the Securities. The Company
further represents to each Subscriber that the Company's decision to enter into
the Transaction Documents has been based solely on the independent evaluation of
the transactions contemplated hereby by the Company and its representatives.
(hh) Intentionally omitted.
(ii) Regulation M Compliance. The Company has not, and to its
knowledge no one acting on its behalf has, (i) taken, directly or indirectly,
any action designed to cause or to
-11-
result in the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Securities, (ii) sold,
bid for, purchased, or paid any compensation for soliciting purchases of, any of
the securities of the Company or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchase any other securities of the
Company, other than, in the case of clauses (ii) and (iii), compensation paid to
the Company's placement agent in connection with the placement of the
Securities.
4. Definitions. In addition to the terms defined elsewhere in this
Addendum, the following terms have the meanings set forth in this Section 4:
(a) "Affiliate" means any Person that, directly or indirectly through
one or more intermediaries, controls or is controlled by or is under common
control with a Person, as such terms are used in and construed under Rule 144
under the Securities Act. With respect to a Subscriber, any investment fund or
managed account that is managed on a discretionary basis by the same investment
manager as such Subscriber will be deemed to be an Affiliate of such Subscriber.
(b) "Commission" means the Securities and Exchange Commission.
(c) "Common Stock" means the common stock of the Company, par value
$.001 per share, and any other class of securities into which such securities
may hereafter be reclassified or changed into.
(d) "Common Stock Equivalents" means any securities of the Company or
the Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
(e) "Debentures" means, the 8% Convertible Debentures due December 31,
2009, issued by the Company to the purchasers pursuant to that certain
Securities Purchase Agreement, dated as of January 12, 2007, among the Company
and each purchaser identified on the signature pages thereto.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
(g) "Liens" means a lien, charge, security interest, encumbrance,
right of first refusal, preemptive right or other restriction.
(h) "Merger" means the closing of the acquisition of 100% of the
issued and outstanding capital stock of Towerstream I, Inc. (f/k/a Towerstream
Corporation) (the "Towerstream Subsidiary"), a Delaware corporation, by the
Company pursuant to that certain Agreement of Merger and Plan of Reorganization
among the Company (f/k/a University Calendar Girls, Ltd.), Towerstream
Acquisition, Inc. and the Towerstream Subsidiary, of even date herewith.
-12-
(i) "Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
(j) "Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
(k) "Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof, among the Company and the Subscribers.
(l) "Registration Statement" means a registration statement meeting
the requirements set forth in the Registration Rights Agreement and covering the
resale of the Underlying Shares by each Subscriber as provided for in the
Registration Rights Agreement.
(m) "Required Minimum" means, as of any date, the maximum aggregate
number of shares of Common Stock then issued or potentially issuable in the
future pursuant to the Transaction Documents, including any Underlying Shares
issuable upon exercise in full of all Warrants, ignoring any conversion or
exercise limits set forth therein.
(n) "Rule 144" means Rule 144 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
(o) "Securities" means the Common Stock, the Warrants and the
Underlying Shares.
(p) "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated hereunder.
(q) "Short Sales" means all "short sales" as defined in Rule 200 of
Regulation SHO under the Exchange Act (but shall not be deemed to include the
location and/or reservation of borrowable shares of Common Stock).
(r) "Subscription Amount" means, as to each Subscriber, the aggregate
amount to be paid for Common Stock and Warrants purchased under such
Subscriber's Subscription Agreement in United States dollars and in immediately
available funds.
(s) "Subsidiary" means any subsidiary of the Company as set forth on
Schedule 3(a).
(t) "Trading Day" means a day on which the Common Stock is traded on a
Trading Market.
(u) "Trading Market" means the following markets or exchanges on which
the Common Stock is listed or quoted for trading: the American Stock Exchange,
the Nasdaq Capital
-13-
Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York
Stock Exchange or the OTC Bulletin Board.
(v) "Transaction Documents" means the Subscription Agreements, the
Warrants, the Registration Rights Agreement, all exhibits and schedules hereto
and thereto and any other documents or agreements executed in connection with
the transactions contemplated thereunder.
(w) "Underlying Shares" means the shares of Common Stock issued and
issuable upon exercise of the Warrants.
(x) "Warrants" means collectively the Common Stock purchase warrants
delivered to the Subscribers in accordance with the Subscription Agreements and
the PPM.
IN WITNESS WHEREOF, the Company has executed this Addendum as of the __th
day of January, 2007.
TOWERSTREAM CORPORATION
By:
------------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
-14-
EXHIBIT 10.6
ADDENDUM TO REGISTRATION RIGHTS AGREEMENT
Reference is made to each of those Registration Rights Agreements, dated as
of January 12, 2007 (the "Registration Rights Agreements"), between Towerstream
Corporation, a Delaware corporation (the "Company") and each of the subscribers
(the "Subscribers") issued to Subscribers for Units (as defined in the Company's
Confidential Private Placement Memorandum (the "PPM") dated December 21, 2006,
as supplemented to date). The Company hereby provides the following Addendum
(this "Addendum") to the Registration Rights Agreements for the benefit of each
Subscriber. Capitalized terms used herein but not otherwise defined shall have
the meanings ascribed to them in the Subscription Agreements or the PPM.
The Company hereby covenants and agrees that notwithstanding anything to
the contrary contained in the Registration Rights Agreements, each Registration
Rights Agreement shall be, without any further action by the Investors or the
Company, amended such that the Investors shall receive the benefit of any more
favorable terms contained in that certain Registration Rights Agreement, dated
as of January 12, 2007, by and among the Company and the purchasers of the
Company's 8% Convertible Debentures due December 31, 2009, provided the
Investors shall also agree to any further terms or conditions of such more
favorable terms as a condition thereof. For the absence of doubt, the
Registration Rights Agreements issued in connection with the Units shall provide
the following further terms and provisions::
1. The definition of "Registrable Securities" is hereby deleted and
replaced with the following:
(a) "REGISTRABLE SECURITIES" MEANS (i) all of the Shares of Common
Stock issuable upon purchase of the Units, (ii) all shares of Common Stock
issuable upon exercise of the Warrants issued to a purchaser of Units, (iii) any
additional shares of Common Stock issuable in connection with any anti-dilution
provisions in the Subscription Addendum dated January 15, 2007 of which this
Registration Rights Addendum is a part (the "Subscription Addendum") or the
Warrants (in each case, without giving effect to any limitations on conversion
set forth in the Warrants or limitations on exercise set forth in the Warrants)
other than as a result of any "ratchet-type" provision, and (iv) any securities
issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the foregoing.
2. The liquidated damages provision set forth in Section 1.2(b) of the
Registration Rights Agreement is hereby deleted and replaced with the following:
Except in accordance with Section 1.9, if: (i) the Registration
Statement is not filed on or prior to the Filing Date; or (ii) the
Company fails to file with the Commission a request for acceleration
in accordance with Rule 461 promulgated under the Securities Act,
within five Trading Days of the date that the Company is notified
(orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed," or not subject to
further review (provided the filed Registration Statement otherwise
complies with the Securities Act); or (iii) a Registration Statement
filed or required to be filed
hereunder is not declared effective by the Commission by its
Effectiveness Date; or (iv) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously
effective as to all Registrable Securities for which it is required to
be effective, or the Investors are otherwise not permitted to utilize
the Prospectus therein to resell such Registrable Securities, for more
than 10 consecutive calendar days or more than an aggregate of 40
calendar days during any 12-month period (which need not be
consecutive calendar days), (any such failure or breach being referred
to as an "Event", and for purposes of clause (i) or (iii) the date on
which such Event occurs, or for purposes of clause (ii) the date on
which such five Trading Day period is exceeded, or for purposes of
clause (iv) the date on which such 10 or 40 calendar day period, as
applicable, is exceeded, each being referred being referred to as
"Event Date"), then, in addition to any other rights the Investors may
have hereunder or under applicable law, on each such Event Date and on
each monthly anniversary of each such Event Date (if the applicable
Event shall not have been cured by such date) until the applicable
Event is cured, the Company shall pay to each Investor an amount in
cash, as partial liquidated damages and not as a penalty, an amount
equal to 1.0% of the aggregate purchase price paid by such Investor
pursuant to the Purchase Agreement, up to a maximum of 6.0%, during
which such Event continues uncured. While such Event continues, such
liquidated damages shall be paid not less often than every thirty (30)
days. Any unpaid liquidated damages as of the date when an Event has
been cured by the Company shall be paid within three (3) business days
following the date on which such Event has been cured by the Company.
The partial liquidated damages pursuant to the terms hereof shall
apply on a daily pro-rata basis for any portion of a month prior to
the cure of an Event.
3. The following provision is hereby incorporated into the Registration
Rights Agreement:
Not less than five Trading Days prior to the filing of each
Registration Statement and not less than one Trading Day prior to the
filing of any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed
to be incorporated therein by reference), the Company shall (i)
furnish to each Unit purchaser copies of all such documents proposed
to be filed, which documents (other than those incorporated or deemed
to be incorporated by reference) will be subject to the review of such
Investors and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries
as shall be necessary, in the reasonable
opinion of respective counsel to each Unit purchaser, to conduct a
reasonable investigation within the meaning of the Securities Act. The
Company shall not file a Registration Statement or any such Prospectus
or any amendments or supplements thereto to which all of the Unit
purchasers shall reasonably object in good faith, provided that the
Company is notified of such objection in writing no later than 5
Trading Days after the Unit purchasers have been so furnished copies
of a Registration Statement or 1 Trading Day after the Unit purchasers
have been so furnished copies of any related Prospectus or amendments
or supplements thereto. Each Unit purchaser agrees to furnish to the
Company a completed questionnaire in the form attached to the
Debenture Agreement as Annex B (a "Selling Shareholder Questionnaire")
not less than two Trading Days prior to the Filing Date or by the end
of the fourth Trading Day following the date on which such Unit
purchasers receives draft materials in accordance with this paragraph.
In the event of the occurrence or existence of any pending corporate
development with respect to the Company that the Company believes may
be material and that, in the determination of the Company, makes it
not in the best interest of the Company to allow continued
availability of a Registration Statement or Prospectus, and the
Company is required to provide such development or information to any
Unit Purchaser, it shall do so provided that any and all of such
information shall remain confidential to each recipient thereof until
such information otherwise becomes public, unless disclosure by such
person is required by law; provided, further, that notwithstanding
each agreement to keep such information confidential, the Unit
purchasers make no acknowledgement that any such information is
material, non-public information.
4. The following provision is hereby incorporated into the Registration
Rights Agreement:
If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 100% of the number of Shares then
registered in a Registration Statement, then the Company shall file as
soon as reasonably practicable, but in any case prior to the
applicable Filing Date, an additional Registration Statement covering
the resale by the Investors of not less than the number of such
Registrable Securities.
5. Section 1.9 of the Registration Rights Agreement, "Market Stand-Off
Agreement" is hereby deleted and replaced with the following:
Each Investor hereby agrees that during the Effectiveness Period it
will not, without the prior written consent of the Company and the
managing underwriter (if a managing or lead underwriter is appointed),
during the period commencing on the date of the final prospectus
relating to a firm commitment underwritten public offering of the
Company offering a minimum of $20 million of securities and ending on
the date specified by the Company and the managing underwriter (such
period not to exceed one hundred eighty (180) calendar days) (i) lend,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any securities of the Company, including
(without limitation) shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock
(whether now owned or hereafter acquired) or (ii) enter into any swap
or other arrangement that transfers to another, in whole or in part,
any of the economic consequences of ownership of any securities of the
Company, including (without limitation) shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common
Stock (whether now owned or hereafter acquired), whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of securities, in cash or otherwise. The foregoing covenants
shall not apply to the sale of any shares by an Investor to an
underwriter pursuant to an underwriting agreement and shall only be
applicable to the Investors if all the Company's executive officers,
directors and greater than five percent (5%) stockholders enter into
similar agreements. Each Investor agrees to execute an agreement(s)
reflecting (i) and (ii) above as may be requested by the managing or
lead underwriters at the time of the underwritten public offering, and
further agrees that the Company may impose stop transfer instructions
with its transfer agent in order to enforce the covenants in (i) and
(ii) above. The underwriters in connection with the Company's initial
underwritten public offering are intended third party beneficiaries of
the covenants of this provision and shall have the right, power and
authority to enforce such covenants as though they were a party
hereto.
6. In addition to the terms defined elsewhere in this Addendum, the
following terms shall have the meanings set forth in this Paragraph 6:
(a) "Common Stock Equivalents" means any securities of the Company
which would entitle the holder thereof to acquire at any time Common Stock,
including, without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or exercisable
or exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.
(b) "Prospectus" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by a Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
(c) "Trading Day" means a day on which the Common Stock is traded on
the following markets or exchanges on which the Common Stock is listed or quoted
for trading: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq
Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or
the OTC Bulletin Board.
IN WITNESS WHEREOF, the Company has executed this Addendum as of the __th
day of January, 2007.
TOWERSTREAM CORPORATION
By:
------------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
EXHIBIT 10.7
ADDENDUM TO WARRANT TO PURCHASE COMMON STOCK
Reference is made to each of those Warrant Agreements, dated as of January
12, 2007, (the "Warrant Agreements") between Towerstream Corporation, a Delaware
corporation (the "Company") and each of the subscribers (the "Subscribers"),
issued to Subscribers for Units (as defined in the Company's Confidential
Private Placement Memorandum (the "PPM") dated December 21, 2006, as
supplemented to date). The Company hereby provides the following Addendum (this
"Addendum") to the Warrant Agreements for the benefit of each Subscriber.
Capitalized terms used herein but not otherwise defined shall have the meanings
ascribed to them in the Warrant Agreements or the PPM.
The Company hereby covenants and agrees that notwithstanding anything to
the contrary contained in the Warrants, each Warrant shall be, without any
further action by the Investors or the Company, amended such that the Investors
shall receive the benefit of any more favorable terms contained in those certain
Common Stock Purchase Warrants, dated January 12, 2007, by and among the Company
and the purchasers of the Company's 8% Convertible Debentures due December 31,
2009, provided the Investors shall also agree to any further terms or conditions
of such more favorable terms as a condition thereof. Notwithstanding anything
herein to the contrary, the amendments provided herein shall not be deemed to
amend the following: (i) the definition of "Warrant Price" in the preamble to
the Warrant (ii) the number of shares of Warrant Stock, or (iii) the "Adjustment
Upon Issuance of Common Stock" set forth in Section 5(a) of the Warrant. For the
absence of doubt, the Warrants issued in connection with the Units shall provide
the following further terms and provisions:
1. The following provisions are hereby incorporated into each Warrant:
Exercise of the purchase rights represented by this Warrant may be
made, in whole or in part, at any time or times on or after the fate
hereof and on or before the Expiration Date by delivery to the Company
of a duly executed facsimile copy of the Form of Exercise annexed
hereto (or such other office or agency of the Company as it may
designate by notice in writing to the registered Holder at the address
of such Holder appearing on the books of the Company) ; and, within 3
Trading Days of the date said Form of Exercise is delivered to the
Company, the Company shall have received payment of the aggregate
Warrant Price of the shares thereby purchased by wire transfer or
cashier's check drawn on a United States bank of immediately available
funds. Notwithstanding anything herein to the contrary, the Holder
shall not be required to physically surrender this Warrant to the
Company until the Holder has purchased all of the Warrant Shares
available hereunder and the Warrant has been exercised in full, in
which case, the Holder shall surrender this Warrant to the Company for
cancellation within 3 Trading Days of the date the final Form of
Exercise is delivered to the Company. Partial exercises of this
Warrant resulting in purchases of a portion of the total number of
shares of Warrant Stock available hereunder shall
have the effect of lowering the outstanding number of shares of
Warrant Stock purchasable hereunder in an amount equal to the
applicable number of shares of Warrant Stock purchased. The Holder and
the Company shall maintain records showing the number of Warrant
Shares purchased and the date of such purchases. The Company shall
deliver any objection to any Form of Notice within 2 Business Days of
receipt of such notice. The Holder and any assignee, by acceptance of
this Warrant, acknowledge and agree that, by reason of the provisions
of this paragraph, following the purchase of a portion of the shares
of Warrant Stock hereunder, the number of shares of Warrant Stock
available for purchase hereunder at any given time may be less than
the amount stated on the face hereof.
If at any time after one year from the date of issuance of this
Warrant there is no effective Registration Statement registering, or
no current prospectus available for, the resale of the Warrant Stock
by the Holder, then this Warrant may also be exercised at such time by
means of a "cashless exercise" in which the Holder shall be entitled
to receive a certificate for the number of shares of Warrant Stock
equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day immediately preceding the date of
such election;
(B) = the Warrant Price of this Warrant, as adjusted; and
(X) = the number of shares of Warrant Stock issuable upon exercise of
this Warrant in accordance with the terms of this Warrant by means of
a cash exercise rather than a cashless exercise.
Notwithstanding anything herein to the contrary, on the Expiration
Date, this Warrant shall be automatically exercised via cashless
exercise.
Certificates for shares purchased hereunder shall be transmitted by
the transfer agent of the Company to the Holder by crediting the
account of the Holder's prime broker with the Depository Trust Company
through its Deposit Withdrawal Agent Commission system if the Company
is a participant in such system, and otherwise by physical delivery to
the address specified by the Holder in the Form of Exercise within 3
Trading Days from the delivery to the Company of the Form of Exercise,
surrender of this Warrant (if required) and payment of the aggregate
Warrant Price as set forth above ("Warrant Share Delivery Date"). This
Warrant
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shall be deemed to have been exercised on the date the Warrant Price
is received by the Company. The Warrant Stock shall be deemed to have
been issued, and the Holder or any other person so designated to be
named therein shall be deemed to have become a holder of record of
such shares for all purposes, as of the date the Warrant has been
exercised by payment to the Company of the Warrant Price (or by
cashless exercise, if permitted). If the Company fails for any reason
to take all actions within the Company's control required to cause
there to be delivered to the Holder certificates evidencing the
Warrant Stock subject to a Form of Exercise by the Warrant Share
Delivery Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $1,000 of Warrant
Stock subject to such exercise (based on the VWAP of the Common Stock
on the date of the applicable Form of Exercise), $5 per Trading Day
for each Trading Day after the fourth Trading Day following such
Warrant Share Delivery Date until such certificates are delivered.
If the Company fails to cause its transfer agent to transmit to the
Holder a certificate or certificates representing the Warrant Shares
by the Warrant Share Delivery Date, then the Holder will have the
right to rescind such exercise.
2. In addition to the terms defined elsewhere in this Addendum, the following
terms shall have the meanings set forth herein:
(a) "Business Day" means any day except Saturday, Sunday, any day
which shall be a federal legal holiday in the United States or any day on which
banking institutions in the State of New York are authorized or required by law
or other governmental action to close.
(b) "Trading Day" means a day on which the Common Stock is traded on
the following markets or exchanges on which the Common Stock is listed or quoted
for trading: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq
Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or
the OTC Bulletin Board.
(c) "Trading Market" means the following markets or exchanges on which
the Common Stock is listed or quoted for trading: the American Stock Exchange,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange or the OTC Bulletin Board.
(d) "VWAP" means, for any date, the price determined by the first of
the following clauses that applies: (a) if the Common Stock is then listed or
quoted on a Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the Trading Market
on which the Common Stock is then listed or quoted as reported by Bloomberg L.P.
(based on a Trading Day from 9:30 a.m. New York City time to 4:02 p.m. New York
City time); (b) if the OTC Bulletin Board is not a Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding
-3-
date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or
quoted on the OTC Bulletin Board and if prices for the Common Stock are then
reported in the "Pink Sheets" published by Pink Sheets, LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (d) in all
other cases, the fair market value of a share of Common Stock as determined by
an independent appraiser selected in good faith by the Investors and reasonably
acceptable to the Company, the fees and expenses of which shall be paid by the
Company.
IN WITNESS WHEREOF, the Company has executed this Addendum as of the ___
day of January, 2007.
TOWERSTREAM CORPORATION
By:
------------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
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EXHIBIT 10.8
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is dated as of
January 16, 2007 among Towerstream Corporation, a Delaware corporation (the
"Company"), and each purchaser identified on the signature pages hereto (each,
including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").
WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings set forth in this Section 1.1:
"Action" shall have the meaning ascribed to such term in Section
3.1(j).
"Affiliate" means any Person that, directly or indirectly through one
or more intermediaries, controls or is controlled by or is under common
control with a Person, as such terms are used in and construed under Rule
144 under the Securities Act. With respect to a Purchaser, any investment
fund or managed account that is managed on a discretionary basis by the
same investment manager as such Purchaser will be deemed to be an Affiliate
of such Purchaser.
"Business Day" means any day except Saturday, Sunday, any day which
shall be a federal legal holiday in the United States or any day on which
banking institutions in the State of New York are authorized or required by
law or other governmental action to close.
"Closing" means the closing of the purchase and sale of the Securities
pursuant to Section 2.1.
"Closing Date" means the Trading Day when all of the Transaction
Documents have been executed and delivered by the applicable parties
thereto, and all conditions
precedent to (i) the Purchasers' obligations to pay the Subscription Amount
and (ii) the Company's obligations to deliver the Securities have been
satisfied or waived.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock of the Company, par value
$[.001] per share, and any other class of securities into which such
securities may hereafter be reclassified or changed into.
"Common Stock Equivalents" means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock,
rights, options, warrants or other instrument that is at any time
convertible into or exercisable or exchangeable for, or otherwise entitles
the holder thereof to receive, Common Stock.
"Common Stock Transaction" means the issuance by the Company of units
to "accredited investors", pursuant to the Private Placement Memorandum to
be consummated within 2 weeks of consummation of the Merger, with each unit
consisting of (i) 50,000 shares of Common Stock and (ii) a five-year
detachable warrant to purchase 25,000 shares of Common Stock at $4.50 per
share of Common Stock, at a purchase price of $112,500 per unit.
"Company Counsel" means Haynes and Boone, LLP, with offices located at
153 East 53rd Street, New York, New York, 10022.
"Conversion Price" shall have the meaning ascribed to such term in the
Debentures.
"Debentures" means, the 8% Convertible Debentures due December 31,
2009, issued by the Company to the Purchasers hereunder, in the form of
Exhibit A attached hereto.
"Disclosure Schedules" shall have the meaning ascribed to such term in
Section 3.1.
"Effective Date" means the date that the initial Registration
Statement filed by the Company pursuant to the Registration Rights
Agreement is first declared effective by the Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exempt Issuance" means the issuance of (a) shares of Common Stock or
options to employees, officers, directors, or consultants of the Company
pursuant to any stock or option plan duly adopted for such purpose by a
majority of the non-employee members of the Board of Directors of the
Company or a majority of the members of a committee of non-employee
directors established (provided, however, any such issuances to
2
consultants shall not exceed 750,000 shares of Common Stock and Common
Stock Equivalents, in the aggregate, in any 12 month period), (b)
securities upon the exercise or exchange of or conversion of any Securities
issued hereunder and/or other securities exercisable or exchangeable for or
convertible into shares of Common Stock issued and outstanding on the date
of this Agreement and set forth on Schedule 3.1(g), provided that such
securities have not been amended since the date of this Agreement to
increase the number of such securities or to decrease the exercise,
exchange or conversion price of such securities, (c) shares of Common Stock
and warrants (and shares of Common Stock underlying such warrants) issued
or issuable pursuant to the Common Stock Transaction) and (d) securities
issued pursuant to acquisitions or strategic transactions approved by a
majority of the disinterested directors of the Company, provided that any
such issuance shall only be to a Person which is either an owner of, or an
entity that is, itself or through its subsidiaries, an operating company in
a business synergistic with the business of the Company and in which the
Company receives benefits in addition to the investment of funds, but shall
not include a transaction in which the Company is issuing securities
primarily for the purpose of raising capital or to an entity whose primary
business is investing in securities.
"FWS" means Feldman Weinstein & Smith LLP with offices located at 420
Lexington Avenue, Suite 2620, New York, New York 10170-0002.
"GAAP" shall have the meaning ascribed to such term in Section 3.1(h).
"Indebtedness" shall have the meaning ascribed to such term in Section
3.1(aa).
"Intellectual Property Rights" shall have the meaning ascribed to such
term in Section 3.1(o).
"Legend Removal Date" shall have the meaning ascribed to such term in
Section 4.1(c).
"Liens" means a lien, charge, security interest, encumbrance, right of
first refusal, preemptive right or other restriction.
"Material Adverse Effect" shall have the meaning assigned to such term
in Section 3.1(b).
"Material Permits" shall have the meaning ascribed to such term in
Section 3.1(m).
"Maximum Rate" shall have the meaning ascribed to such term in Section
5.17.
"Merger" means the closing of the acquisition of 100% of the issued
and outstanding capital stock of Towerstream I, Inc. (f/k/a Towerstream
Corporation) (the "Towerstream Subsidiary"), a Delaware corporation, by the
Company pursuant to that certain Agreement of Merger and Plan of
Reorganization among the Company (f/k/a
3
University Calendar Girls, Ltd.), Towerstream Acquisition Inc. and the
Towerstream Subsidiary, of even date herewith.
"Merger 8-K" shall have the meaning ascribed to such term in Section
3.1(y).
"Participation Maximum" shall have the meaning ascribed to such term
in Section 4.13.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
"Pre-Notice" shall have the meaning ascribed to such term in Section
4.13.
"Private Placement Memorandum" means that certain Confidential Private
Placement Memorandum of Towerstream Corporation dated December 21, 2006, as
supplemented to date.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding,
such as a deposition), whether commenced or threatened.
"Purchaser Party" shall have the meaning ascribed to such term in
Section 4.11.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof, among the Company and the Purchasers, in
the form of Exhibit B attached hereto.
"Registration Statement" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering
the resale of the Underlying Shares by each Purchaser as provided for in
the Registration Rights Agreement.
"Required Approvals" shall have the meaning ascribed to such term in
Section 3.1(e).
"Required Minimum" means, as of any date, the maximum aggregate number
of shares of Common Stock then issued or potentially issuable in the future
pursuant to the Transaction Documents, including any Underlying Shares
issuable upon exercise or conversion in full of all Warrants and Debentures
(including Underlying Shares issuable as payment of interest), ignoring any
conversion or exercise limits set forth therein, and assuming that the
Conversion Price is at all times on and after the date of determination
equal to the then Conversion Price on the Trading Day immediately prior to
the date of determination.
"Requisite Percentage" means the Purchasers holding a majority in
interest of the Securities then outstanding as of the date of such
determination.
4
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SEC Reports" shall have the meaning ascribed to such term in Section
3.1(h).
"Securities" means the Debentures, the Warrants, the Warrant Shares
and the Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated hereunder.
"Short Sales" means all "short sales" as defined in Rule 200 of
Regulation SHO under the Exchange Act (but shall not be deemed to include
the location and/or reservation of borrowable shares of Common Stock).
"Subscription Amount" means, as to each Purchaser, the aggregate
amount to be paid for Debentures and Warrants purchased hereunder as
specified below such Purchaser's name on the signature page of this
Agreement and next to the heading "Subscription Amount", in United States
dollars and in immediately available funds.
"Subsequent Financing" shall have the meaning ascribed to such term in
Section 4.13.
"Subsequent Financing Notice" shall have the meaning ascribed to such
term in Section 4.13.
"Subsidiary" means any subsidiary of the Company as set forth on
Schedule 3.1(a).
"Trading Day" means a day on which the Common Stock is traded on a
Trading Market.
"Trading Market" means the following markets or exchanges on which the
Common Stock is listed or quoted for trading: the American Stock Exchange,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global
Select Market, the New York Stock Exchange or the OTC Bulletin Board.
"Transaction Documents" means this Agreement, the Debentures, the
Warrants, the Registration Rights Agreement, all exhibits and schedules
hereto and thereto and any other documents or agreements executed in
connection with the transactions contemplated hereunder.
"Transfer Agent" means Pacific Stock Transfer Company, with a mailing
address of 500 East Warm Strings Road, Suite 240, Las Vegas, NC 89119, and
a facsimile number of (702) 433-1979, and any successor transfer agent of
the Company.
5
"Underlying Shares" means the shares of Common Stock issued and
issuable upon conversion or redemption of the Debentures and upon exercise
of the Warrants and issued and issuable in lieu of the cash payment of
interest on the Debentures in accordance with the terms of the Debentures.
"Variable Rate Transaction" shall have the meaning ascribed to such
term in Section 4.14(b).
"VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or
quoted on a Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the Trading
Market on which the Common Stock is then listed or quoted as reported by
Bloomberg L.P. (based on a Trading Day from 9:30 a.m. New York City time to
4:02 p.m. New York City time); (b) if the OTC Bulletin Board is not a
Trading Market, the volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if
the Common Stock is not then listed or quoted on the OTC Bulletin Board and
if prices for the Common Stock are then reported in the "Pink Sheets"
published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price
per share of the Common Stock so reported; or (d) in all other cases, the
fair market value of a share of Common Stock as determined by an
independent appraiser selected in good faith by the Purchaser and
reasonably acceptable to the Company, the fees and expenses of which shall
be paid by the Company.
"Warrants" means collectively the Common Stock purchase warrants
delivered to the Purchasers at the Closing in accordance with Section
2.2(a) hereof, which Warrants shall be exercisable immediately and have a
term of exercise equal to 5 years, in the form of Exhibit C attached
hereto.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, substantially concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and each Purchaser, severally and not jointly, agrees to purchase an aggregate
of $3,500,000 in principal amount of the Debentures. Each Purchaser shall
deliver to the Company, via wire transfer or a certified check, immediately
available funds equal to its Subscription Amount and the Company shall deliver
to each Purchaser its respective Debenture and a Warrant, as determined pursuant
to Section 2.2(a), and the Company and each Purchaser shall deliver the other
items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction of
the conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of FWS or such other location as the parties shall mutually agree.
6
2.2 Deliveries.
(a) On the Closing Date, the Company shall deliver or cause to be
delivered to each Purchaser the following:
(i) this Agreement duly executed by the Company;
(ii) a legal opinion of Company Counsel, in the form of Exhibit D
attached hereto;
(iii) a Debenture with a principal amount equal to such
Purchaser's Subscription Amount, registered in the name of such
Purchaser;
(iv) a Warrant registered in the name of such Purchaser to
purchase up to a number of shares of Common Stock equal to 50% of such
Purchaser's Subscription Amount divided by the Conversion Price, with
an exercise price equal to $4.00, subject to adjustment therein;
(v) a Warrant registered in the name of such Purchaser to
purchase up to a number of shares of Common Stock equal to 50% of such
Purchaser's Subscription Amount divided by the Conversion Price, with
an exercise price equal to $6.00, subject to adjustment therein;
(vi) Lockup agreements from each officer and director of the
Company and of the Towerstream Subsidiary in the form of Exhibit E
hereto; and
(vii) the Registration Rights Agreement duly executed by the
Company.
(b) On the Closing Date, each Purchaser shall deliver or cause to be
delivered to the Company the following:
(i) this Agreement duly executed by such Purchaser;
(ii) such Purchaser's Subscription Amount by wire transfer to the
account as specified in writing by the Company; and
(iii) the Registration Rights Agreement duly executed by such
Purchaser.
2.3 Closing Conditions.
(a) The obligations of the Company hereunder in connection with the
Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Purchasers
contained herein;
(ii) all obligations, covenants and agreements of the Purchasers
7
required to be performed at or prior to the Closing Date shall have
been performed;
(iii) the Merger shall have occurred; and
(iv) the delivery by the Purchasers of the items set forth in
Section 2.2(b) of this Agreement.
(b) The respective obligations of the Purchasers hereunder in
connection with the Closing are subject to the following conditions being
met:
(i) the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Company
contained herein;
(ii) all obligations, covenants and agreements of the Company
required to be performed at or prior to the Closing Date shall have
been performed;
(iii) the delivery by the Company of the items set forth in
Section 2.2(a) of this Agreement;
(iv) the Merger shall have occurred and the Company shall have
(A) delivered the Purchasers (x) evidence thereof and (y) a copy of
the legal opinion issued in connection therewith, which legal opinion
and certificate shall provide that the Purchasers are third party
beneficiaries thereof and (B) provided evidence that the Company is
prepared to file the Merger 8-K with the Commission on or before the
4th Trading Day following the consummation of the Merger;
(v) there shall have been no Material Adverse Effect with respect
to the Company since the date hereof; and
(vi) from the date hereof to the Closing Date, trading in the
Common Stock shall not have been suspended by the Commission or the
Company's principal Trading Market (except for any suspension of
trading of limited duration agreed to by the Company, which suspension
shall be terminated prior to the Closing), and, at any time prior to
the Closing Date, trading in securities generally as reported by
Bloomberg L.P. shall not have been suspended or limited, or minimum
prices shall not have been established on securities whose trades are
reported by such service, or on any Trading Market, nor shall a
banking moratorium have been declared either by the United States or
New York State authorities nor shall there have occurred any material
outbreak or escalation of hostilities or other national or
international calamity of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each case,
in the reasonable judgment of each Purchaser, makes it impracticable
or inadvisable to purchase the Debentures at the Closing.
8
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "Disclosure Schedules"), which Disclosure
Schedules shall be deemed a part hereof and to qualify any representation or
warranty otherwise made herein to the extent of such disclosure, the Company
hereby makes the following representations and warranties to each Purchaser. For
clarity all references to the Subsidiaries shall include the Towerstream
Subsidiary and its business and its direct and indirect subsidiaries:
(a) Subsidiaries. All of the direct and indirect subsidiaries of the
Company are set forth on Schedule 3.1(a). The Company owns, directly or
indirectly, all of the capital stock or other equity interests of each
Subsidiary free and clear of any Liens, and all of the issued and
outstanding shares of capital stock of each Subsidiary are validly issued
and are fully paid, non-assessable and free of preemptive and similar
rights to subscribe for or purchase securities.
(b) Organization and Qualification. The Company and each of the
Subsidiaries is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its
business as currently conducted. Neither the Company nor any Subsidiary is
in violation or default of any of the provisions of its respective
certificate or articles of incorporation, bylaws or other organizational or
charter documents. Each of the Company and the Subsidiaries is duly
qualified to conduct business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing,
as the case may be, could not have or reasonably be expected to result in
(i) a material adverse effect on the legality, validity or enforceability
of any Transaction Document, (ii) a material adverse effect on the results
of operations, assets, business, prospects or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii)
a material adverse effect on the Company's ability to perform in any
material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a "Material Adverse Effect") and no
Proceeding has been instituted in any such jurisdiction revoking, limiting
or curtailing or seeking to revoke, limit or curtail such power and
authority or qualification.
(c) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations hereunder and thereunder. The
execution and delivery of each of the Transaction Documents by the Company
and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary action on the part of
the Company and no further action is required by the Company, its board of
directors or its
9
stockholders in connection therewith other than in connection with the
Required Approvals. Each Transaction Document has been (or upon delivery
will have been) duly executed by the Company and, when delivered in
accordance with the terms hereof and thereof, will constitute the valid and
binding obligation of the Company enforceable against the Company in
accordance with its terms except (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions
may be limited by applicable law.
(d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of
the other transactions contemplated hereby and thereby do not and will not:
(i) conflict with or violate any provision of the Company's or any
Subsidiary's certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become
a default) under, result in the creation of any Lien upon any of the
properties or assets of the Company or any Subsidiary, or give to others
any rights of termination, amendment, acceleration or cancellation (with or
without notice, lapse of time or both) of, any agreement, credit facility,
debt or other instrument (evidencing a Company or Subsidiary debt or
otherwise) or other understanding to which the Company or any Subsidiary is
a party or by which any property or asset of the Company or any Subsidiary
is bound or affected, or (iii) subject to the Required Approvals, conflict
with or result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by which
any property or asset of the Company or a Subsidiary is bound or affected;
except in the case of each of clauses (ii) and (iii), such as would not
have or reasonably be expected to result in a Material Adverse Effect.
(e) Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to,
or make any filing or registration with, any court or other federal, state,
local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) filings required pursuant to Section 4.6, (ii)
the filing with the Commission of the Registration Statement, (iii) the
notice and/or application(s) to each applicable Trading Market for the
issuance and sale of the Securities and the listing of the Underlying
Shares for trading thereon in the time and manner required thereby, and
(iv) the filing of Form D with the Commission and such filings as are
required to be made under applicable state securities laws (collectively,
the "Required Approvals").
(f) Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable,
free and clear of all Liens imposed
10
by the Company other than restrictions on transfer provided for in the
Transaction Documents. The Underlying Shares, when issued in accordance
with the terms of the Transaction Documents, will be validly issued, fully
paid and nonassessable, free and clear of all Liens imposed by the Company.
The Company has reserved from its duly authorized capital stock a number of
shares of Common Stock for issuance of the Underlying Shares at least equal
to the Required Minimum on the date hereof.
(g) Capitalization. The capitalization of the Company is as set forth
on Schedule 3.1(g), which schedule shall also include the number of shares
of Common Stock owned beneficially, and of record, by Affiliates of the
Company as of the date hereof. The Company has not issued any capital stock
since its most recently filed periodic report under the Exchange Act, other
than pursuant to (i) the Merger, (ii) the Common Stock Transaction, (iii)
any transactions disclosed in the Private Placement Memorandum or (iv) the
exercise of employee stock options under the Company's stock option plans,
the issuance of shares of Common Stock to employees pursuant to the
Company's employee stock purchase plan and pursuant to the conversion or
exercise of Common Stock Equivalents outstanding as of the date of the most
recently filed periodic report under the Exchange Act. Each of the
following representations and warranties is qualified in its entirety to
Schedule 3.1(g), and with respect to any contracts, agreements, events, or
obligations relating to periods prior to the date of the Merger, each of
such representations and warranties is qualified to the extent of the
actual knowledge of the Company: (i) no Person has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction Documents,
(ii) except as a result of the purchase and sale of the Securities, there
are no outstanding options, warrants, scrip rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities,
rights or obligations convertible into or exercisable or exchangeable for,
or giving any Person any right to subscribe for or acquire, any shares of
Common Stock, or contracts, commitments, understandings or arrangements by
which the Company or any Subsidiary is or may become bound to issue
additional shares of Common Stock or Common Stock Equivalents, (iii) the
issuance and sale of the Securities will not obligate the Company to issue
shares of Common Stock or other securities to any Person (other than the
Purchasers) and will not result in a right of any holder of Company
securities to adjust the exercise, conversion, exchange or reset price
under any of such securities and (iv) all of the outstanding shares of
capital stock of the Company are validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities. There are no stockholders agreements, voting
agreements or other similar agreements with respect to the Company's
capital stock to which the Company is a party or, to the knowledge of the
Company, between or among any of the Company's stockholders.
(h) SEC Reports; Financial Statements. As of the date of the Merger,
to the knowledge of the Company, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by
the Company through the date of the Merger under the Securities Act and the
Exchange Act, including pursuant to Section
11
13(a) or 15(d) thereof, for the two years preceding the date hereof (or
such shorter period as the Company was required by law or regulation to
file such material), (the foregoing materials, including the exhibits
thereto and documents incorporated by reference therein, being collectively
referred to herein as the "SEC Reports") on a timely basis or has received
a valid extension of such time of filing and has filed any such SEC Reports
prior to the expiration of any such extension. As of their respective
dates, the SEC Reports complied in all material respects with the
requirements of the Securities Act and the Exchange Act, as applicable, and
none of the SEC Reports, when filed, 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 the light
of the circumstances under which they were made, not misleading. The
audited financial statements of the Towerstream Subsidiary and its direct
and indirect subsidiaries for the past two fiscal years and unaudited
financial statements for the most recent fiscal quarter are attached hereto
as Schedule 3.1(h). Such financial statements comply in all material
respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time
of filing. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles applied on a
consistent basis during the periods involved ("GAAP"), except as may be
otherwise specified in such financial statements or the notes thereto and
except that unaudited financial statements may not contain all footnotes
required by GAAP, and fairly present in all material respects the financial
position of the Towerstream Subsidiary and its consolidated Subsidiaries as
of and for 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, immaterial, year-end audit adjustments.
(i) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically
disclosed in a subsequent SEC Report filed prior to the date hereof and
except for consummation of the Merger, the Common Stock Transaction and the
transactions disclosed in the Private Placement Memorandum, (i) there has
been no event, occurrence or development that has had or that could
reasonably be expected to result in a Material Adverse Effect, (ii) the
Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables and accrued expenses incurred in the ordinary
course of business consistent with past practice and (B) liabilities not
required to be reflected in the Company's financial statements pursuant to
GAAP or disclosed in filings made with the Commission, (iii) the Company
has not altered its method of accounting, (iv) the Company has not declared
or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock and (v) the Company has not issued
any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans. The Company does not have
pending before the Commission any request for confidential treatment of
information. Except for the issuance of the Securities contemplated by this
Agreement or as set forth on Schedule 3.1(i), no event, liability or
development has occurred or exists with respect to the Company or its
Subsidiaries or their respective business, properties, operations or
financial condition, that would be required to be disclosed by the Company
under applicable securities laws at the time this representation is made
that has not been
12
publicly disclosed at least one Trading Day prior to the date that this
representation is made. The representations and warranties in this Section
3.1(i) as they relate to the Company prior to consummation of the Merger
are qualified to the extent of the actual knowledge of the Company.
(j) Litigation. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any
of their respective properties before or by any court, arbitrator,
governmental or administrative agency or regulatory authority (federal,
state, county, local or foreign) (collectively, an "Action") which (i)
adversely affects or challenges the legality, validity or enforceability of
any of the Transaction Documents or the Securities or (ii) could, if there
were an unfavorable decision, have or reasonably be expected to result in a
Material Adverse Effect. Neither the Company nor any Subsidiary, nor any
director or officer thereof, is or has been the subject of any Action
involving a claim of violation of or liability under federal or state
securities laws or a claim of breach of fiduciary duty. There has not been,
and to the knowledge of the Company, there is not pending or contemplated,
any investigation by the Commission involving the Company or any current or
former director or officer of the Company. The Commission has not issued
any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act. The representations and warranties in
this Section 3.1(j) as they relate to the Company prior to consummation of
the Merger are qualified to the extent of the actual knowledge of the
Company.
(k) Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees
of the Company which could reasonably be expected to result in a Material
Adverse Effect. None of the Company's or its Subsidiaries' employees is a
member of a union that relates to such employee's relationship with the
Company, and neither the Company or any of its Subsidiaries is a party to a
collective bargaining agreement, and the Company and its Subsidiaries
believe that their relationships with their employees are good. No
executive officer, to the knowledge of the Company, is, or is now expected
to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters. The Company and its
Subsidiaries are in compliance with all U.S. federal, state, local and
foreign laws and regulations relating to employment and employment
practices, terms and conditions of employment and wages and hours, except
where the failure to be in compliance could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. The
representations and warranties in this Section 3.1(k) as they relate to the
Company prior to consummation of the Merger are qualified to the extent of
the actual knowledge of the Company.
(l) Compliance. Neither the Company nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not
been waived that, with
13
notice or lapse of time or both, would result in a default by the Company
or any Subsidiary under), nor has the Company or any Subsidiary received
notice of a claim that it is in default under or that it is in violation
of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties
is bound (whether or not such default or violation has been waived), (ii)
is in violation of any order of any court, arbitrator or governmental body,
or (iii) is or has been in violation of any statute, rule or regulation of
any governmental authority, including without limitation all foreign,
federal, state and local laws applicable to its business and all such laws
that affect the environment, except in each case as could not have or
reasonably be expected to result in a Material Adverse Effect. The
representations and warranties in this Section 3.1(l) as they relate to the
Company prior to consummation of the Merger are qualified to the extent of
the actual knowledge of the Company.
(m) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the
failure to possess such permits could not have or reasonably be expected to
result in a Material Adverse Effect ("Material Permits"), and neither the
Company nor any Subsidiary has received any notice of proceedings relating
to the revocation or modification of any Material Permit. The
representations and warranties in this Section 3.1(m) as they relate to the
Company prior to the consummation of the Merger are qualified to the extent
of the actual knowledge of the Company.
(n) Title to Assets. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to
the business of the Company and the Subsidiaries, in each case free and
clear of all Liens, except for Liens as do not materially affect the value
of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and the Subsidiaries
and Liens for the payment of federal, state or other taxes, the payment of
which is neither delinquent nor subject to penalties. Any real property and
facilities held under lease by the Company and the Subsidiaries are held by
them under valid, subsisting and enforceable leases with which the Company
and the Subsidiaries are in compliance. The representations and warranties
in this Section 3.1(n) as they relate to the Company prior to the
consummation of the Merger are qualified to the extent of the actual
knowledge of the Company.
(o) Patents and Trademarks. The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions,
copyrights, licenses and other intellectual property rights and similar
rights necessary or material for use in connection with their respective
businesses as described in the SEC Reports and which the failure to so have
could have a Material Adverse Effect (collectively, the "Intellectual
Property Rights"). Neither the Company nor any Subsidiary has received a
notice (written or otherwise) that
14
the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. To the knowledge of
the Company, all such Intellectual Property Rights are enforceable and
there is no existing infringement by another Person of any of the
Intellectual Property Rights. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and
value of all of their intellectual properties, except where failure to do
so could not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect. The representations and warranties in this
Section 3.1(o) as they relate to the Company prior to the consummation of
the Merger are qualified to the extent of the actual knowledge of the
Company.
(p) Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged, including, but not
limited to, directors and officers insurance coverage at least equal to the
aggregate Subscription Amount. Neither the Company nor any 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.
(q) Transactions with Affiliates and Employees. Except as set forth in
the SEC Reports, none of the officers or directors of the Company and, to
the knowledge of the Company, none of the employees of the Company is
presently a party to any transaction with the Company or any Subsidiary
(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 entity in which
any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of
$60,000 other than for (i) payment of salary or consulting fees for
services rendered, (ii) reimbursement for expenses incurred on behalf of
the Company and (iii) other employee benefits, including stock option
agreements under any stock option plan of the Company. The representations
and warranties in this Section 3.1(q) as they relate to the Company prior
to consummation of the Merger are qualified to the extent of the actual
knowledge of the Company.
(r) [RESERVED]
(s) Certain Fees. Any brokerage or finder's fees or commissions that
are or will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other
Person with respect to the transactions contemplated by the Transaction
Documents, if any, are as set forth in the Private Placement Memorandum.
The Purchasers shall have no obligation with respect to any fees or with
respect to any claims made by or on behalf of other Persons for fees of a
type
15
contemplated in this Section that may be due in connection with the
transactions contemplated by the Transaction Documents.
(t) Private Placement. Assuming the accuracy of the Purchasers'
representations and warranties set forth in Section 3.2, no registration
under the Securities Act is required for the offer and sale of the
Securities by the Company to the Purchasers as contemplated hereby. The
issuance and sale of the Securities hereunder does not contravene the rules
and regulations of the Trading Market.
(u) Investment Company. The Company is not, and is not an Affiliate
of, and immediately after receipt of payment for the Securities, will not
be or be an Affiliate of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended. The Company shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act of 1940, as amended.
(v) Registration Rights. Other than each of the Purchasers or as set
forth in Schedule 3.1(v) and in the Private Placement Memorandum, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.
(w) Listing and Maintenance Requirements. The Company has not, in the
12 months preceding the date hereof, received notice from any Trading
Market on which the Common Stock is or has been listed or quoted to the
effect that the Company is not in compliance with the listing or
maintenance requirements of such Trading Market. The Company is, and has no
reason to believe that it will not in the foreseeable future continue to
be, in compliance with all such listing and maintenance requirements.
(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 control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company's certificate of incorporation
(or similar charter documents) or the laws of its state of incorporation
that is or could become applicable to the Purchasers as a result of the
Purchasers and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including without limitation as a
result of the Company's issuance of the Securities and the Purchasers'
ownership of the Securities.
(y) Disclosure. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents,
the Company confirms that neither it nor any other Person acting on its
behalf has provided any of the Purchasers or their agents or counsel with
any information that it believes constitutes or might constitute material,
nonpublic information. The Company understands and confirms that the
Purchasers will rely on the foregoing representation in effecting
transactions in securities of the Company. Attached hereto as Schedule
3.1(y) is a copy of a substantially final Current Report on Form 8-K (the
"Merger 8-K") that the Company will file with the Commission in connection
with the Merger on or prior to the 4th
16
Trading Day immediately following the date hereof (which Current Report
contains, among other information, risk factors concerning the Company and
financial statements required to be filed therewith). All disclosure
furnished by or on behalf of the Company to the Purchasers regarding the
Company, its business and the transactions contemplated hereby, including
the Disclosure Schedules to this Agreement, is true and correct in all
material respects and does not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading such that it would be reasonably anticipated to
result in a Material Adverse Effect. The Company acknowledges and agrees
that no Purchaser makes or has made any representations or warranties with
respect to the transactions contemplated hereby other than those
specifically set forth in Section 3.2 hereof.
(z) No Integrated Offering. Assuming the accuracy of the Purchasers'
representations and warranties set forth in Section 3.2, neither the
Company, nor any of its Affiliates, nor any Person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances
that would cause this offering of the Securities to be integrated with
prior offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provision of any Trading Market on which
any of the securities of the Company are listed or designated.
(aa) Indebtedness. Schedule 3.1(aa) sets forth as of the dates thereof
all outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments. For
the purposes of this Agreement, "Indebtedness" means (a) any liabilities
for borrowed money or amounts owed in excess of $50,000 (other than trade
accounts payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected
in the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value
of any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any Subsidiary
is in default with respect to any Indebtedness.
(bb) Tax Status. Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material
Adverse Effect, the Company and each Subsidiary has filed all necessary
federal, state and foreign income and franchise tax returns and has paid or
accrued all taxes shown as due thereon, and the Company has no knowledge of
a tax deficiency which has been asserted or threatened against the Company
or any Subsidiary.
(cc) No General Solicitation. Neither the Company nor any person
acting on behalf of the Company has offered or sold any of the Securities
by any form of general solicitation or general advertising. The Company has
offered the Securities for sale only
17
to the Purchasers and certain other "accredited investors" within the
meaning of Rule 501 under the Securities Act.
(dd) Foreign Corrupt Practices. Neither the Company, nor to the
knowledge of the Company, any agent or other person acting on behalf of the
Company, has (i) directly or indirectly, used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related to
foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed
to disclose fully any contribution made by the Company (or made by any
person acting on its behalf of which the Company is aware) which is in
violation of law, or (iv) violated in any material respect any provision of
the Foreign Corrupt Practices Act of 1977, as amended. The representations
and warranties in this Section 3.1(dd) as they relate to the Company prior
to consummation of the Merger are qualified to the extent of the actual
knowledge of the Company.
(ee) Accountants. The Company's accounting firm is set forth on
Schedule 3.1(ee) of the Disclosure Schedule. To the knowledge and belief of
the Company, such accounting firm (i) is a registered public accounting
firm as required by the Exchange Act and (ii) shall express its opinion
with respect to the financial statements to be included in the Company's
Annual Report on Form 10-KSB for the year ended November 30, 2006.
(ff) Seniority. As of the Closing Date, no Indebtedness or other claim
against the Company is senior to the Debentures in right of payment,
whether with respect to interest or upon liquidation or dissolution, or
otherwise, other than indebtedness secured by purchase money security
interests (which is senior only as to underlying assets covered thereby)
and capital lease obligations (which is senior only as to the property
covered thereby) and any materialman's or other statutory liens arising by
operation of law.
(gg) No Disagreements with Accountants and Lawyers. To the Company's
knowledge, there are no disagreements of any kind presently existing, or
reasonably anticipated by the Company to arise, between the Company and the
accountants and lawyers formerly or presently employed by the Company and
the Company is current with respect to any fees owed to its accountants and
lawyers.
(hh) Acknowledgment Regarding Purchasers' Purchase of Securities. The
Company acknowledges and agrees that each of the Purchasers is acting
solely in the capacity of an arm's length purchaser with respect to the
Transaction Documents and the transactions contemplated 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 transactions contemplated
thereby and any advice given by any Purchaser or any of their respective
representatives or agents in connection with the Transaction Documents and
the transactions contemplated thereby is merely incidental to the
Purchasers' purchase of the Securities. The Company further represents to
each Purchaser that the Company's decision to enter
18
into this Agreement and the other Transaction Documents has been based
solely on the independent evaluation of the transactions contemplated
hereby by the Company and its representatives.
(ii) Acknowledgment Regarding Purchasers' Trading Activity. Anything
in this Agreement or elsewhere herein to the contrary notwithstanding
(except for Sections 3.2(f) and 4.16 hereof), it is understood and
acknowledged by the Company (i) that none of the Purchasers have been asked
to agree, nor has any Purchaser agreed, to desist from purchasing or
selling, long and/or short, securities of the Company, or "derivative"
securities based on securities issued by the Company or to hold the
Securities for any specified term; (ii) that past or future open market or
other transactions by any Purchaser, including Short Sales, and
specifically including, without limitation, Short Sales or "derivative"
transactions, before or after the closing of this or future private
placement transactions, may negatively impact the market price of the
Company's publicly-traded securities; (iii) that any Purchaser, and
counter-parties in "derivative" transactions to which any such Purchaser is
a party, directly or indirectly, presently may have a "short" position in
the Common Stock, and (iv) that each Purchaser shall not be deemed to have
any affiliation with or control over any arm's length counter-party in any
"derivative" transaction. The Company further understands and acknowledges
that (a) one or more Purchasers may engage in hedging activities at various
times during the period that the Securities are outstanding, including,
without limitation, during the periods that the value of the Underlying
Shares deliverable with respect to Securities are being determined and (b)
such hedging activities (if any) could reduce the value of the existing
stockholders' equity interests in the Company at and after the time that
the hedging activities are being conducted. The Company acknowledges that
such aforementioned hedging activities do not constitute a breach of any of
the Transaction Documents.
(jj) Regulation M Compliance. The Company has not, and to its
knowledge no one acting on its behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result in the stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of any of the Securities, (ii) sold, bid for, purchased,
or paid any compensation for soliciting purchases of, any of the securities
of the Company or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchase any other securities of the
Company, other than, in the case of clauses (ii) and (iii), compensation
paid to the Company's placement agent in connection with the placement of
the Securities.
3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:
(a) Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise
19
to carry out its obligations hereunder and thereunder. The execution,
delivery and performance by such Purchaser of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate or
similar action on the part of such Purchaser. Each Transaction Document to
which it is a party has been duly executed by such Purchaser, and when
delivered by such Purchaser in accordance with the terms hereof, will
constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, except (i) as limited
by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.
(b) Own Account. Such Purchaser understands that the Securities are
"restricted securities" and have not been registered under the Securities
Act or any applicable state securities law and is acquiring the Securities
as principal for its own account and not with a view to or for distributing
or reselling such Securities or any part thereof in violation of the
Securities Act or any applicable state securities law, has no present
intention of distributing any of such Securities in violation of the
Securities Act or any applicable state securities law and has no direct or
indirect arrangement or understandings with any other persons to distribute
or regarding the distribution of such Securities (this representation and
warranty not limiting such Purchaser's right to sell the Securities
pursuant to the Registration Statement or otherwise in compliance with
applicable federal and state securities laws) in violation of the
Securities Act or any applicable state securities law. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.
(c) Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which
it exercises any Warrants or converts any Debentures it will be either: (i)
an "accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3),
(a)(7) or (a)(8) under the Securities Act or (ii) a "qualified
institutional buyer" as defined in Rule 144A(a) under the Securities Act.
Such Purchaser is not required to be registered as a broker-dealer under
Section 15 of the Exchange Act.
(d) Experience of Such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.
Such Purchaser is able to bear the economic risk of an investment in the
Securities and, at the present time, is able to afford a complete loss of
such investment.
(e) General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine
or similar media or broadcast over television or radio or presented at any
seminar or any other general solicitation or general advertisement.
20
(f) Short Sales and Confidentiality Prior To The Date Hereof. Other
than the transaction contemplated hereunder, such Purchaser has not
directly or indirectly, nor has any Person acting on behalf of or pursuant
to any understanding with such Purchaser, executed any transaction,
including Short Sales, in the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet
(written or oral) from the Company or any other Person setting forth the
material terms of the transactions contemplated hereunder until the date
hereof ("Discussion Time"). Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser's assets and
the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Purchaser's
assets, the representation set forth above shall only apply with respect to
the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement.
Other than to other Persons party to this Agreement, such Purchaser has
maintained the confidentiality of all disclosures made to it in connection
with this transaction (including the existence and terms of this
transaction).
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state
and federal securities laws. In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144, to
the Company or to an Affiliate of a Purchaser or in connection with a
pledge as contemplated in Section 4.1(b), the Company may require the
transferor thereof to provide to the Company an opinion of counsel selected
by the transferor and reasonably acceptable to the Company, the form and
substance of which opinion shall be reasonably satisfactory to the Company,
to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act. As a condition of
transfer, any such transferee shall agree in writing to be bound by the
terms of this Agreement and shall have the rights of a Purchaser under this
Agreement and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by
this Section 4.1, of a legend on any of the Securities in the following
form:
[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS
[EXERCISABLE] [CONVERTIBLE]] HAS 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,
21
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT,
THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS
SECURITY AND THE SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from time to
time pledge pursuant to a bona fide margin agreement with a registered
broker-dealer or grant a security interest in some or all of the Securities
to a financial institution that is an "accredited investor" as defined in
Rule 501(a) under the Securities Act and who agrees to be bound by the
provisions of this Agreement and the Registration Rights Agreement and, if
required under the terms of such arrangement, such Purchaser may transfer
pledged or secured Securities to the pledgees or secured parties. Such a
pledge or transfer would not be subject to approval of the Company and no
legal opinion of legal counsel of the pledgee, secured party or pledgor
shall be required in connection therewith. Further, no notice shall be
required of such pledge. At the appropriate Purchaser's expense, the
Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including, if the Securities are
subject to registration pursuant to the Registration Rights Agreement, the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the
Securities Act to appropriately amend the list of Selling Stockholders
thereunder.
(c) Certificates evidencing the Underlying Shares shall not contain
any legend (including the legend set forth in Section 4.1(b) hereof): (i)
following any sale of such Underlying Shares pursuant to Rule 144 or
pursuant to a sale made in accordance with an effective registration
statement and delivery of a current prospectus, or (ii) if such Underlying
Shares are eligible for sale under Rule 144(k), or (iii) if such legend is
not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue a legal opinion
to the Transfer Agent promptly after the Effective Date if required by the
Transfer Agent to effect the removal of the legend hereunder. If all or any
portion of a Debenture or Warrant is converted or exercised (as applicable)
at a time when there is an effective registration statement to cover the
resale of the Underlying Shares, or if such Underlying Shares may be sold
under Rule 144(k) or if such legend is not otherwise required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission)
then such Underlying Shares shall be issued free of all legends. The
Company agrees that following the Effective Date or at such time as such
legend is no longer required under this Section 4.1(c), it will, no later
than three Trading Days following the delivery by a Purchaser to the
Company or the Transfer
22
Agent of a certificate representing Underlying Shares, as applicable,
issued with a restrictive legend (such third Trading Day, the "Legend
Removal Date"), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive and
other legends. The Company may not make any notation on its records or give
instructions to the Transfer Agent that enlarge the restrictions on
transfer set forth in this Section. Certificates for Underlying Shares
subject to legend removal hereunder shall be transmitted by the Transfer
Agent to the Purchasers by crediting the account of the Purchaser's prime
broker with the Depository Trust Company System.
(d) In addition to such Purchaser's other available remedies, if the
Company fails for any reason to take all actions within the Company's
control required to cause a restrictive legend to be removed pursuant to
Section 4.1(c), the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $1,000 of Underlying
Shares (based on the VWAP of the Common Stock on the date such Securities
are submitted to the Transfer Agent) delivered for removal of the
restrictive legend and subject to Section 4.1(c), $5 per Trading Day for
each Trading Day after the 4th Trading Day following the Legend Removal
Date until such certificate is delivered without a legend. Nothing herein
shall limit such Purchaser's right to pursue actual damages for the
Company's failure to deliver certificates representing any Securities as
required by the Transaction Documents, and such Purchaser shall have the
right to pursue all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or injunctive
relief.
(e) Each Purchaser, severally and not jointly with the other
Purchasers, agrees that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company's reliance that the Purchaser will sell any
Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements,
or an exemption therefrom, and that if Securities are sold pursuant to a
Registration Statement, they will be sold in compliance with the plan of
distribution set forth therein.
4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance
of the Securities may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions. The
Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
4.3 Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the
23
Purchasers and make publicly available in accordance with Rule 144(c) such
information as is required for the Purchasers to sell the Securities under Rule
144. The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, to the extent required from time to
time to enable such Person to sell such Securities without registration under
the Securities Act within the requirements of the exemption provided by Rule
144.
4.4 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market.
4.5 Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.
4.6 Securities Laws Disclosure; Publicity. The Company shall, by 5:30 p.m.
New York City time on the 4th Trading Day following the date hereof, issue a
Current Report on Form 8-K disclosing the material terms of the transactions
contemplated hereby and attaching the Transaction Documents thereto. The Company
and each Purchaser shall consult with each other in issuing any other press
releases with respect to the transactions contemplated hereby, and neither the
Company nor any Purchaser shall issue any such press release or otherwise make
any such public statement without the prior consent of the Company, with respect
to any press release of any Purchaser, or without the prior consent of each
Purchaser, with respect to any press release of the Company, which consent shall
not unreasonably be withheld or delayed, except if such disclosure is required
by law, in which case the disclosing party shall promptly provide the other
party with prior notice of such public statement or communication.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Purchaser, or include the name of any Purchaser in any filing with the
Commission or any regulatory agency or Trading Market, without the prior written
consent of such Purchaser, except (i) as required by federal securities law in
connection with (A) any registration statement contemplated by the Registration
Rights Agreement and (B) the filing of final Transaction Documents (including
signature pages thereto) with the Commission and (ii) to the extent such
disclosure is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure
permitted under this subclause (ii).
4.7 Shareholder Rights Plan. No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an "Acquiring Person" under any control share acquisition, business
combination, poison pill (including any distribution
24
under a rights agreement) or similar anti-takeover plan or arrangement in effect
or hereafter adopted by the Company, or that any Purchaser could be deemed to
trigger the provisions of any such plan or arrangement, by virtue of receiving
Securities under the Transaction Documents or under any other agreement between
the Company and the Purchasers.
4.8 Non-Public Information. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information. The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations
in effecting transactions in securities of the Company.
4.9 Use of Proceeds. Except as set forth on Schedule 4.9 attached hereto,
the Company shall use the net proceeds from the sale of the Securities hereunder
for working capital purposes and shall not use such proceeds for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables in the ordinary course of the Company's business and prior practices),
or to redeem any Common Stock or Common Stock Equivalents or to settle any
outstanding litigation.
4.10 [RESERVED]
4.11 Indemnification of Purchasers. Subject to the provisions of this
Section 4.11, the Company will indemnify and hold each Purchaser and its
directors, officers, shareholders, members, partners, employees and agents (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each, a
"Purchaser Party") harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys' fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser's representations, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance).
If any action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the
25
right to assume the defense thereof with counsel of its own choosing reasonably
acceptable to the Purchaser Party. Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of such
separate counsel, a material conflict on any material issue between the position
of the Company and the position of such Purchaser Party, in which case the
Company shall be responsible for the reasonable fees and expenses of no more
than one such separate counsel. The Company will not be liable to any Purchaser
Party under this Agreement (i) for any settlement by a Purchaser Party effected
without the Company's prior written consent, which shall not be unreasonably
withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Purchaser Party's breach of
any of the representations, warranties, covenants or agreements made by such
Purchaser Party in this Agreement or in the other Transaction Documents.
4.12 Reservation and Listing of Securities.
(a) The Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction Documents
in such amount as may be required to fulfill its obligations in full under
the Transaction Documents.
(b) If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required
Minimum on such date, then the Board of Directors of the Company shall use
commercially reasonable efforts to amend the Company's certificate or
articles of incorporation to increase the number of authorized but unissued
shares of Common Stock to at least the Required Minimum at such time, as
soon as possible and in any event not later than the 120th day after such
date.
(c) The Company shall, if applicable: (i) in the time and manner
required by the principal Trading Market, prepare and file with such
Trading Market an additional shares listing application covering a number
of shares of Common Stock at least equal to the Required Minimum on the
date of such application, (ii) take all steps necessary to cause such
shares of Common Stock to be approved for listing on such Trading Market as
soon as possible thereafter, (iii) provide to the Purchasers evidence of
such listing, and (iv) maintain the listing of such Common Stock on any
date at least equal to the Required Minimum on such date on such Trading
Market or another Trading Market.
4.13 Participation in Future Financing.
(a) From the date hereof until the date that is the 12 month
anniversary of the Closing Date, upon any issuance by the Company or any of
its Subsidiaries of Common Stock or Common Stock Equivalents (a "Subsequent
Financing"), each Purchaser shall have the right to participate in any
Subsequent Financing, subject to the terms, conditions and price provided
for in the Subsequent Financing, with such participation percentage
26
being expressed by a fraction, the numerator of which is $3,500,000 and the
denominator of which is the sum of $3,500,000 and the proceeds received by
the Company pursuant to the Common Stock Transaction (the "Participation
Maximum").
(b) At least 15 Trading Days following the determination to pursue the
Subsequent Financing, the Company shall deliver to each Purchaser a written
notice of its intention to effect a Subsequent Financing ("Pre-Notice"),
which Pre-Notice shall ask such Purchaser if it wants to review the details
of such financing (such additional notice, a "Subsequent Financing
Notice"). Upon receipt by a Purchaser of a Subsequent Financing Notice, the
Purchaser may be deemed to be in possession of material non-public
information and shall thereupon suspend all trading in the securities of
the Company until such date that is the earlier of (i) the date such
Subsequent Financing is consummated or (ii) such date as the Purchaser
determines receipt of such Subsequent Financing Notice does not constitute
material non-public information. Upon the request of a Purchaser, and only
upon a request by such Purchaser, for a Subsequent Financing Notice, the
Company shall promptly, but no later than 1 Trading Day after such request,
deliver a Subsequent Financing Notice to such Purchaser. The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of
such Subsequent Financing, the amount of proceeds intended to be raised
thereunder and the Person or Persons through or with whom such Subsequent
Financing is proposed to be effected and shall include a term sheet or
similar document relating thereto as an attachment.
(c) Any Purchaser desiring to participate in such Subsequent Financing
must provide written notice to the Company by not later than 5:30 p.m. (New
York City time) on the 15th Trading Day after all of the Purchasers have
received the Pre-Notice that the Purchaser is willing to participate in the
Subsequent Financing, the amount of the Purchaser's participation, and that
the Purchaser has such funds ready, willing, and available for investment
on the terms set forth in the Subsequent Financing Notice. If the Company
receives no notice from a Purchaser as of such 15th Trading Day, such
Purchaser shall be deemed to have notified the Company that it does not
elect to participate.
(d) If by 5:30 p.m. (New York City time) on the 15th Trading Day after
all of the Purchasers have received the Pre-Notice, notifications by the
Purchasers of their willingness to participate in the Subsequent Financing
(or to cause their designees to participate) is, in the aggregate, less
than the total amount of the Subsequent Financing, then the Company may
effect the remaining portion of such Subsequent Financing on the terms and
with the Persons set forth in the Subsequent Financing Notice.
(e) If by 5:30 p.m. (New York City time) on the 15th Trading Day after
all of the Purchasers have received the Pre-Notice, the Company receives
responses to a Subsequent Financing Notice from Purchasers seeking to
purchase more than the aggregate amount of the Participation Maximum, each
such Purchaser shall have the right to purchase the greater of (a) their
Pro Rata Portion (as defined below) of the Participation Maximum and (b)
the difference between the Participation Maximum and the aggregate amount
of participation by all other Purchasers. "Pro Rata Portion" is the
27
ratio of (x) the Subscription Amount of Securities purchased on the Closing
Date by a Purchaser participating under this Section 4.13 and (y) the sum
of the aggregate Subscription Amounts of Securities purchased on the
Closing Date by all Purchasers participating under this Section 4.13.
(f) The Company must provide the Purchasers with a second Subsequent
Financing Notice, and the Purchasers will again have the right of
participation set forth above in this Section 4.13, if the Subsequent
Financing subject to the initial Subsequent Financing Notice is not
consummated for any reason on the terms set forth in such Subsequent
Financing Notice within 60 Trading Days after the date of the initial
Subsequent Financing Notice.
(g) Notwithstanding the foregoing, this Section 4.13 shall not apply
in respect of (i) the Common Stock Transaction, (ii) an Exempt Issuance or
(iii) an underwritten public offering of Common Stock.
4.14 Subsequent Equity Sales.
(a) [RESERVED]
(b) From the date hereof until the one year anniversary of the Closing
Date, absent prior written approval from the Requisite Percentage, the
Company shall be prohibited from effecting or entering into an agreement to
effect any Subsequent Financing involving a Variable Rate Transaction. The
term "Variable Rate Transaction" means a transaction in which the Company
issues or sells (i) 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 (A) 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 shares of Common Stock at any time
after the initial issuance of such debt or equity securities, or (B) with a
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 or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may sell securities at a
future determined price.
4.15 Equal Treatment of Purchasers. No consideration shall be offered or
paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal or interest on the Debentures in
amounts which are disproportionate to the respective principal amounts
outstanding on the Debentures at any applicable time. For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended for
the Company to treat the Purchasers as a class and shall not in any way be
construed as the Purchasers acting in concert or as a group with respect to the
purchase, disposition or voting of Securities or otherwise.
28
4.16 Short Sales and Confidentiality After The Date Hereof. Each Purchaser
severally and not jointly with the other Purchasers covenants that neither it
nor any Affiliate acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period commencing at the Discussion Time
and ending at the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.6. Each Purchaser, severally
and not jointly with the other Purchasers, covenants that until such time as the
transactions contemplated by this Agreement are publicly disclosed by the
Company as described in Section 4.6, such Purchaser will maintain the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction). Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser, that the Commission currently takes the position that coverage of
short sales of shares of the Common Stock "against the box" prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the
Manual of Publicly Available Telephone Interpretations, dated July 1997,
compiled by the Office of Chief Counsel, Division of Corporation Finance.
Notwithstanding the foregoing, no Purchaser makes any representation, warranty
or covenant hereby that it will not engage in Short Sales in the securities of
the Company after the time that the transactions contemplated by this Agreement
are first publicly announced as described in Section 4.6. Notwithstanding the
foregoing, in the case of a Purchaser that is a multi-managed investment vehicle
whereby separate portfolio managers manage separate portions of such Purchaser's
assets and the portfolio managers have no direct knowledge of the investment
decisions made by the portfolio managers managing other portions of such
Purchaser's assets, the covenant set forth above shall only apply with respect
to the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement.
4.17 Form D; Blue Sky Filings. The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser. The Company shall take
such action as the Company shall reasonably determine is necessary in order to
obtain an exemption for, or to qualify the Securities for, sale to the
Purchasers at the Closing under applicable securities or "Blue Sky" laws of the
states of the United States, and shall provide evidence of such actions promptly
upon request of any Purchaser.
ARTICLE V.
MISCELLANEOUS
5.1 Termination. This Agreement may be terminated by any Purchaser, as to
such Purchaser's obligations hereunder only and without any effect whatsoever on
the obligations between the Company and the other Purchasers, by written notice
to the other parties, if the Closing has not been consummated on or before
January 17, 2007; provided, however, that such termination will not affect the
right of any party to sue for any breach by the other party (or parties).
5.2 Fees and Expenses. At the Closing, the Company has agreed to reimburse
DKR SoundShore Oasis Holding Fund Ltd. ("DKR") the non-accountable sum of
$25,000, for its legal fees and expenses, none of which has been paid prior to
the Closing. Accordingly, in lieu of the
29
foregoing payments, the aggregate amount that DKR is to pay for the Securities
at the Closing shall be reduced by $25,000 in lieu thereof. The Company shall
deliver to each Purchaser, prior to the Closing, a completed and executed copy
of the Closing Statement attached hereto as Annex A. Except as expressly set
forth in the Transaction Documents to the contrary, each party shall pay the
fees and expenses of its advisers, counsel, accountants and other experts, if
any, and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all transfer agent fees, stamp taxes and other taxes and duties levied
in connection with the delivery of any Securities to the Purchasers.
5.3 Entire Agreement. The Transaction Documents, together with the exhibits
and schedules thereto, contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
5.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the 2nd Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.
5.5 Amendments; Waivers. No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and Purchasers holding the Requisite
Percentage or, in the case of a waiver, by the party against whom enforcement of
any such waived provision is sought. No waiver 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 subsequent default 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.
5.6 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
5.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser (other than by merger). Any
Purchaser may assign any or all of its rights under this Agreement to any Person
to whom such Purchaser assigns or transfers any Securities, provided
30
such transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions of the Transaction Documents that apply to the
"Purchasers".
5.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.
5.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of 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 for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), 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 improper
or is an inconvenient venue for such proceeding. 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 via registered or
certified mail or overnight delivery (with evidence of delivery) 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 contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by law. The parties hereby waive
all rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys' fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.
5.10 Survival. The representations and warranties shall survive the Closing
and the delivery of the Securities for the applicable statue of limitations.
5.11 Execution. This Agreement may be executed in two or more counterparts,
all of which when taken together 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, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a ".pdf" format data file, such
signature shall create a valid and binding obligation of the party executing (or
on whose behalf such signature is executed) with the same force and effect as if
such facsimile or ".pdf" signature page were an original thereof.
31
5.12 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
5.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) any of
the other Transaction Documents, whenever any Purchaser exercises 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
such Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock delivered in connection with any such rescinded conversion or exercise
notice.
5.14 Replacement of Securities. If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction. The applicant
for a new certificate or instrument under such circumstances shall also pay any
reasonable third-party costs (including customary indemnity) associated with the
issuance of such replacement Securities.
5.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive
and not to assert in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.
5.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof
32
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
5.17 Usury. To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner whatsoever claim, and will resist
any and all efforts to be compelled to take the benefit or advantage of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document. Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the "Maximum Rate"),
and, without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Company to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Company, the manner of handling such excess
to be at such Purchaser's election.
5.18 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance or non-performance of the obligations
of any other Purchaser under any Transaction Document. Nothing contained herein
or in any other Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser shall be entitled to independently protect
and enforce its rights, including without limitation the rights arising out of
this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. Each Purchaser has been represented by its own
separate legal counsel in their review and negotiation of the Transaction
Documents. For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through FWS. FWS
does not represent all of the Purchasers but only DKR. The Company has elected
to provide all Purchasers with the same terms and Transaction Documents for the
convenience of the Company and not because it was required or requested to do so
by the Purchasers.
5.19 Liquidated Damages. The Company's obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of
33
the Company and shall not terminate until all unpaid partial liquidated damages
and other amounts have been paid notwithstanding the fact that the instrument or
security pursuant to which such partial liquidated damages or other amounts are
due and payable shall have been canceled.
5.20 Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.
(Signature Pages Follow)
34
IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
TOWERSTREAM CORPORATION Address for Notice:
By: /s/ Jeffrey M. Thompson
----------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
With a copy to (which shall not constitute notice):
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
35
[PURCHASER SIGNATURE PAGES TO TS SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
Name of Purchaser: _____________________________________________________________
Signature of Authorized Signatory of Purchaser: ________________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Email Address of Purchaser: ____________________________________________________
Facsimile Number of Purchaser: _________________________________________________
Address for Notice of Purchaser:
Address for Delivery of Securities for Purchaser (if not same as above):
Subscription Amount: _____________
Warrant Shares: _________________
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
36
EXHIBIT 10.9
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE 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 AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: January 18, 2007
Original Conversion Price (subject to adjustment herein): $2.75 PER SHARE
$________________
8% CONVERTIBLE DEBENTURE
DUE DECEMBER 31, 2009
THIS 8% CONVERTIBLE DEBENTURE is one of a series of duly authorized and
validly issued 8% Convertible Debentures of Towerstream Corporation, a Delaware
corporation, (the "Company"), having its principal place of business at 55
Hammarlund Way, Middletown, Rhode Island 02842, designated as its 8% Convertible
Debenture due December 31, 2009 (this debenture, the "Debenture" and,
collectively with the other such series of debentures, the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to ________________________
or its registered assigns (the "Holder"), or shall have paid pursuant to the
terms hereunder, the principal sum of $_______________ on December 31, 2009 (the
"Maturity Date") or such earlier date as this Debenture is required or permitted
to be repaid as provided hereunder, and to pay interest to the Holder on the
aggregate unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof. This Debenture is subject to the
following additional provisions:
Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture, (a) capitalized terms not otherwise defined
herein shall have the meanings set forth in the Purchase Agreement and (b) the
following terms shall have the following meanings:
1
"Alternate Consideration" shall have the meaning set forth in Section
5(e).
"Bankruptcy Event" means any of the following events: (a) the Company
or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of
Regulation S-X) thereof 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 Significant Subsidiary thereof;
(b) there is commenced against the Company or any Significant Subsidiary
thereof any such case or proceeding that is not dismissed within 60 days
after commencement; (c) the Company or any Significant Subsidiary thereof
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
Significant Subsidiary thereof 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 calendar days after such appointment; (e)
the Company or any Significant Subsidiary thereof makes a general
assignment for the benefit of creditors; (f) the Company or any Significant
Subsidiary thereof calls a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or (g)
the Company or any Significant Subsidiary thereof, 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.
"Base Conversion Price" shall have the meaning set forth in Section
5(b).
"Business Day" means any day except Saturday, Sunday, any day which
shall be a federal legal holiday in the United States or any day on which
banking institutions in the State of New York are authorized or required by
law or other governmental action to close.
"Buy-In" shall have the meaning set forth in Section 4(d)(v).
"Change of Control Transaction" means the occurrence after the date
hereof of any of (i) an acquisition after the date hereof by an individual
or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated
under the Exchange Act) of effective control (whether through legal or
beneficial ownership of capital stock of the Company, by contract or
otherwise) of in excess of 50% of the voting securities of the Company
(other than by means of conversion or exercise of the Debentures and the
Securities issued together with the Debentures), or (ii) the Company merges
into or consolidates with any other Person, or any Person merges into or
consolidates with the Company and, after giving effect to such transaction,
the stockholders of the Company immediately prior to such transaction own
less than 66% of the aggregate voting power of the Company or the successor
entity of such transaction, or (iii) the Company sells or transfers all or
substantially all of its assets to another Person and the stockholders of
the Company immediately prior to such transaction own less than 66% of the
aggregate voting power of the acquiring entity immediately after the
transaction, or (iv) a
2
replacement at one time or within a three year period of more than one-half
of the members of the Company's board of directors which is not approved by
a majority of those individuals who are members of the board of directors
on the date hereof (or by those individuals who are serving as members of
the board of directors on any date whose nomination to the board of
directors was approved by a majority of the members of the board of
directors who are members on the date hereof), or (v) the execution by the
Company of an agreement to which the Company is a party or by which it is
bound, providing for any of the events set forth in clauses (i) through
(iv) above. Notwithstanding the foregoing, the Merger (as defined in the
Purchase Agreement) shall not be deemed a Change in Control transaction.
"Common Stock" means the common stock, par value $.001 per share, of
the Company and stock of any other class of securities into which such
securities may hereafter be reclassified or changed into.
"Conversion Date" shall have the meaning set forth in Section 4(a).
"Conversion Price" shall have the meaning set forth in Section 4(b).
"Conversion Shares" means, collectively, the shares of Common Stock
issuable upon conversion of this Debenture in accordance with the terms
hereof.
"Debenture Register" shall have the meaning set forth in Section 2(c).
"Dilutive Issuance" shall have the meaning set forth in Section 5(b).
"Dilutive Issuance Notice" shall have the meaning set forth in Section
5(b).
"Effectiveness Period" shall have the meaning set forth in the
Registration Rights Agreement.
"Equity Conditions" means, during the period in question, (i) the
Company shall have duly honored all conversions and redemptions scheduled
to occur or occurring by virtue of one or more Notices of Conversion of the
Holder, if any, (ii) the Company shall have paid all liquidated damages and
other amounts owing to the Holder in respect of this Debenture, (iii) there
is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the shares
issuable pursuant to the Transaction Documents (and the Company believes,
in good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on a Trading Market
and all of the shares issuable pursuant to the Transaction Documents are
listed or quoted for trading on such Trading Market (and the Company
believes, in good faith, that trading of the Common Stock on a Trading
Market will continue uninterrupted for the foreseeable future), (v) there
is a sufficient number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all of the shares issuable
pursuant to the Transaction Documents, (vi) there is no existing Event of
Default or no existing event which, with the passage of time
3
or the giving of notice, would constitute an Event of Default, (vii) the
issuance of the shares in question to the Holder would not violate the
limitations set forth in Section 4(c) herein, (viii) there has been no
public announcement of a pending or proposed Fundamental Transaction or
Change of Control Transaction that has not been consummated and (ix) the
Holder is not in possession of any information provided by the Company that
constitutes, or may constitute, material non-public information.
"Event of Default" shall have the meaning set forth in Section 8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Forced Conversion" shall have the meaning set forth in Section 6(a).
"Forced Conversion Date" shall have the meaning set forth in Section
6(a).
"Forced Conversion Notice" shall have the meaning set forth in Section
6(a).
"Forced Conversion Notice Date" shall have the meaning set forth in
Section 6(a).
"Fundamental Transaction" shall have the meaning set forth in Section
5(e).
"Interest Conversion Rate" means 90% of the average of the VWAPs for
the 10 consecutive Trading Days ending on the Trading Day that is
immediately prior to the applicable Interest Payment Date.
"Interest Notice Period" shall have the meaning set forth in Section
2(a).
"Interest Payment Date" shall have the meaning set forth in Section
2(a).
"Interest Share Amount" shall have the meaning set forth in Section
2(a).
"Late Fees" shall have the meaning set forth in Section 2(d).
"Mandatory Default Amount" means the sum of (i) the greater of (A)
115% of the outstanding principal amount of this Debenture, plus all
accrued and unpaid interest hereon, or (B) the outstanding principal amount
of this Debenture, plus all accrued and unpaid interest hereon, divided by
the Conversion Price on the date the Mandatory Default Amount is either (a)
demanded (if demand or notice is required to create an Event of Default) or
otherwise due or (b) paid in full, whichever has a lower Conversion Price,
multiplied by the VWAP on the date the Mandatory Default Amount is either
(x) demanded or otherwise due or (y) paid in full, whichever has a higher
VWAP, and (ii) all other amounts, costs, expenses and liquidated damages
due in respect of this Debenture.
"New York Courts" shall have the meaning set forth in Section 9(d).
4
"Notice of Conversion" shall have the meaning set forth in Section
4(a).
"Original Issue Date" means the date of the first issuance of the
Debentures, regardless of any transfers of any Debenture and regardless of
the number of instruments which may be issued to evidence such Debentures.
"Permitted Indebtedness" means (a) the Indebtedness existing on the
Original Issue Date and set forth on Schedule 3.1(aa) attached to the
Purchase Agreement, (b) lease obligations and purchase money indebtedness
of up to $2,000,000, in the aggregate, incurred in connection with the
acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets, (c) all lease obligations with respect to
antennas, towers, base stations, related equipment and locations, and
network infrastructure wherever located or howsoever acquired and (d)
additional Indebtedness incurred by the Company following the date hereof,
provided that such additional Indebtedness ranks expressly on par with, or
junior to, the Debentures, pursuant to a written agreement with the
Purchasers that is acceptable to the Requisite Percentage of the
Purchasers.
"Permitted Lien" means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges
or levies not yet due or Liens for taxes, assessments and other
governmental charges or levies being contested in good faith and by
appropriate proceedings for which adequate reserves (in the good faith
judgment of the management of the Company) have been established in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Company's business, such as carriers',
warehousemen's and mechanics' Liens, statutory landlords' Liens, and other
similar Liens arising in the ordinary course of the Company's business, and
which (x) do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof
in the operation of the business of the Company and its consolidated
Subsidiaries or (y) are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing for the
foreseeable future the forfeiture or sale of the property or asset subject
to such Lien and (c) Liens incurred in connection with Permitted
Indebtedness under clause (b) or (c) thereunder, provided that such Liens
are not secured by assets of the Company or its Subsidiaries other than the
assets so acquired or leased.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
"Purchase Agreement" means the Securities Purchase Agreement, dated as
of January 12, 2007, among the Company and the original Holders, as
amended, modified or supplemented from time to time in accordance with its
terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, among the
Company and the original Holders, as amended, modified or supplemented from
time to time in accordance with its terms.
5
"Registration Statement" means a registration statement that registers
the resale of all Conversion Shares (including shares of Common Stock
issuable in lieu of cash as payment of accrued but unpaid interest pursuant
to the terms hereunder) of the Holder, names such Holder as a "selling
stockholder" therein, and meets the requirements of the Registration Rights
Agreement.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Share Delivery Date" shall have the meaning set forth in Section
4(d).
"Subsidiary" shall have the meaning set forth in the Purchase
Agreement.
"Trading Day" means a day on which the principal Trading Market is
open for business.
"Trading Market" means the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the
American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global
Market, the Nasdaq Global Select Market, the New York Stock Exchange or the
OTC Bulletin Board.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or
quoted on a Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the Trading
Market on which the Common Stock is then listed or quoted for trading as
reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York
City time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board
is not a Trading Market, the volume weighted average price of the Common
Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the
"Pink Sheets" published by Pink Sheets, LLC (or a similar organization or
agency succeeding to its functions of reporting prices), the most recent
bid price per share of the Common Stock so reported; or (d) in all other
cases, the fair market value of a share of Common Stock as determined by an
independent appraiser selected in good faith by the Holder and reasonably
acceptable to the Company.
Section 2. Interest.
a) Payment of Interest in Cash or Kind. The Company shall pay interest
to the Holder on the aggregate unconverted and then outstanding principal
amount of this Debenture at the rate of 8% per annum, payable quarterly on
January 1, April 1, July 1
6
and October 1, beginning on January 1, 2008, and on the Maturity Date (each
such date, an "Interest Payment Date") (if any Interest Payment Date is not
a Business Day, then the applicable payment shall be due on the next
succeeding Business Day), in cash or duly authorized, validly issued, fully
paid and non-assessable shares of Common Stock at the Interest Conversion
Rate (the dollar amount to be paid in shares, the "Interest Share Amount")
or a combination thereof; provided, however, that payment in shares of
Common Stock may only occur if (i) all of the Equity Conditions have been
met (unless waived by the Holder in writing) during the 20 Trading Days
immediately prior to the applicable Interest Payment Date (the "Interest
Notice Period") and through and including the date such shares of Common
Stock are issued to the Holder and (ii) the Company shall have given the
Holder notice in accordance with the notice requirements set forth below.
Notwithstanding the foregoing, as to each Interest Payment Date pursuant to
this Section, in the event that (y) all of the Equity Conditions have been
met (unless waived by the Holder in writing) during the 20 Trading Days
immediately prior to the applicable Interest Payment Date and (z) the
average of the closing bid prices of the Common Stock on the principal
Trading Market for the 10 Trading Days immediately prior to the applicable
Interest Payment Date exceeds 125% of the then effective Conversion Price,
the Company shall not be required to pay accrued but unpaid interest
through and including such Interest Payment Date and the Holder shall be
deemed to have waived the requirement that the Company pay such accrued but
unpaid interest through and including such Interest Payment Date (it being
understood that interest shall continue to accrue following any such
Interest Payment Date that the Company is not required to make an interest
payment pursuant to this sentence, which interest shall be due and payable
on the next succeeding Interest Payment Date unless the Company satisfies
the conditions set forth in clauses (y) and (z) of this sentence as to such
successive Interest Payment Date). For clarity, the determination as to
whether or not the Company satisfies the conditions in the preceding
sentence with respect to the payment of interest shall be made on each
Interest Payment Date (i.e., if the Company satisfies such conditions as to
the January 1, 2008 Interest Payment Date, it shall not be required to pay
interest accrued through January 1, 2008, but will be required to pay
interest on all Interest Payment Dates following such date if the
conditions in the preceding sentence are not satisfied as to such Interest
Payment Dates).
b) Company's Election to Pay Interest in Kind. Subject to the terms
and conditions herein, the decision whether to pay interest hereunder in
cash, shares of Common Stock or a combination thereof shall be at the
discretion of the Company. Prior to the commencement of any Interest Notice
Period, the Company shall deliver to the Holder a written notice of its
election to pay interest hereunder on the applicable Interest Payment Date
either in cash, shares of Common Stock or a combination thereof and the
Interest Share Amount as to the applicable Interest Payment Date, provided
that the Company may indicate in such notice that the election contained in
such notice shall apply to future Interest Payment Dates until revised by a
subsequent notice. During any Interest Notice Period, the Company's
election (whether specific to an Interest Payment Date or continuous) shall
be irrevocable as to such Interest Payment Date. Subject to the
aforementioned conditions, failure to timely deliver such written notice to
the Holder shall be deemed an election by the Company to pay the interest
on such Interest Payment
7
Date in cash. At any time the Company delivers a notice to the Holder of
its election to pay the interest in shares of Common Stock, the Company
shall timely file a prospectus supplement pursuant to Rule 424 disclosing
such election.
c) Interest Calculations. Interest shall be calculated on the basis of
a 360-day year, consisting of twelve 30 calendar day periods, and shall
accrue daily commencing on the Original Issue Date until payment in full of
the principal sum, together with all accrued and unpaid interest,
liquidated damages and other amounts which may become due hereunder, has
been made. Payment of interest in shares of Common Stock shall otherwise
occur pursuant to Section 4(d)(ii) herein and, solely for purposes of the
payment of interest in shares, the Interest Payment Date shall be deemed
the Conversion Date. Interest shall cease to accrue with respect to any
principal amount converted, provided that the Company actually delivers the
Conversion Shares within the time period required by Section 4(d)(ii)
herein. Interest hereunder will be paid to the Person in whose name this
Debenture is registered on the records of the Company regarding
registration and transfers of this Debenture (the "Debenture Register").
Except as otherwise provided herein, if at any time the Company pays
interest partially in cash and partially in shares of Common Stock to the
holders of the Debentures, then such payment of cash shall be distributed
ratably among the holders of the then-outstanding Debentures based on their
(or their predecessor's) initial purchases of Debentures pursuant to the
Purchase Agreement.
d) Late Fee. All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at an interest rate equal to the lesser
of 18% per annum or the maximum rate permitted by applicable law ("Late
Fees") which shall accrue daily from the date such interest is due
hereunder through and including the date of payment in full.
Notwithstanding anything to the contrary contained herein, if on any
Interest Payment Date the Company has elected to pay accrued interest in
the form of Common Stock but the Company is not permitted to pay accrued
interest in Common Stock because it fails to satisfy the conditions for
payment in Common Stock set forth in Section 2(a) herein, then, at the
option of the Holder, the Company, in lieu of delivering either shares of
Common Stock pursuant to this Section 2 or paying the regularly scheduled
interest payment in cash, shall deliver, within three Trading Days of each
applicable Interest Payment Date, an amount in cash equal to the product of
(x) the number of shares of Common Stock otherwise deliverable to the
Holder in connection with the payment of interest due on such Interest
Payment Date multiplied by (y) the highest VWAP during the period
commencing on the Interest Payment Date and ending on the Trading Day prior
to the date such payment is made.
e) Prepayment. Except as otherwise set forth in this Debenture, the
Company may not prepay any portion of the principal amount of this
Debenture without the prior written consent of the Purchasers holding at
least a majority of the principal amount of Debentures then outstanding.
Section 3. Registration of Transfers and Exchanges.
8
a) Different Denominations. This Debenture is exchangeable for an
equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same. No service
charge will be payable for such registration of transfer or exchange.
b) Investment Representations. This Debenture has been issued subject
to certain investment representations of the original Holder set forth in
the Purchase Agreement and may be transferred or exchanged only in
compliance with the Purchase Agreement and applicable federal and state
securities laws and regulations.
c) Reliance on Debenture Register. Prior to due presentment for
transfer to the Company of this Debenture, the Company and any agent of the
Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or
not this Debenture is overdue, and neither the Company nor any such agent
shall be affected by notice to the contrary.
Section 4. Conversion.
a) Voluntary Conversion. At any time after the Original Issue Date
until this Debenture is no longer outstanding, this Debenture shall be
convertible, in whole or in part, into shares of Common Stock at the option
of the Holder, at any time and from time to time (subject to the conversion
limitations set forth in Section 4(c) hereof). The Holder shall effect
conversions by delivering to the Company a Notice of Conversion, the form
of which is attached hereto as Annex A (a "Notice of Conversion"),
specifying therein the principal amount of this Debenture to be converted
and the date on which such conversion shall be effected (such date, the
"Conversion Date"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of
Conversion is deemed delivered hereunder. To effect conversions hereunder,
the Holder shall not be required to physically surrender this Debenture to
the Company unless the entire principal amount of this Debenture, plus all
accrued and unpaid interest thereon, has been so converted. Conversions
hereunder shall have the effect of lowering the outstanding principal
amount of this Debenture in an amount equal to the applicable conversion.
The Holder and the Company shall maintain records showing the principal
amount(s) converted and the date of such conversion(s). The Company may
deliver an objection to any Notice of Conversion within 2 Business Days of
delivery of such Notice of Conversion. THE HOLDER, AND ANY ASSIGNEE BY
ACCEPTANCE OF THIS DEBENTURE, ACKNOWLEDGE AND AGREE THAT, BY REASON OF THE
PROVISIONS OF THIS PARAGRAPH, FOLLOWING CONVERSION OF A PORTION OF THIS
DEBENTURE, THE UNPAID AND UNCONVERTED PRINCIPAL AMOUNT OF THIS DEBENTURE
MAY BE LESS THAN THE AMOUNT STATED ON THE FACE HEREOF.
b) Conversion Price. The conversion price in effect on any Conversion
Date shall be equal to $2.75 per share, subject to adjustment herein (the
"Conversion Price").
9
c) Conversion Limitations. The Company shall not effect any conversion
of this Debenture, and a Holder shall not have the right to convert any
portion of this Debenture, to the extent that after giving effect to the
conversion set forth on the applicable Notice of Conversion, such Holder
(together with such Holder's Affiliates, and any other person or entity
acting as a group together with such Holder or any of such Holder's
Affiliates) would beneficially own in excess of the Beneficial Ownership
Limitation (as defined below). For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by such Holder and its
Affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Debenture with respect to which such determination is
being made, but shall exclude the number of shares of Common Stock which
are issuable upon (A) conversion of the remaining, unconverted principal
amount of this Debenture beneficially owned by such Holder or any of its
Affiliates and (B) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company subject to a limitation on
conversion or exercise analogous to the limitation contained herein
(including, without limitation, any other Debentures or the Warrants)
beneficially owned by such Holder or any of its Affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 4(c),
beneficial ownership shall be calculated in accordance with Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder.
To the extent that the limitation contained in this Section 4(c) applies,
the determination of whether this Debenture is convertible (in relation to
other securities owned by such Holder together with any Affiliates) and of
which principal amount of this Debenture is convertible shall be in the
sole discretion of such Holder, and the submission of a Notice of
Conversion shall be deemed to be such Holder's determination of whether
this Debenture may be converted (in relation to other securities owned by
such Holder together with any Affiliates) and which principal amount of
this Debenture is convertible, in each case subject to such aggregate
percentage limitations. To ensure compliance with this restriction, each
Holder will be deemed to represent to the Company each time it delivers a
Notice of Conversion that such Notice of Conversion has not violated the
restrictions set forth in this paragraph and the Company shall have no
obligation to verify or confirm the accuracy of such determination. In
addition, a determination as to any group status as contemplated above
shall be determined in accordance with Section 13(d) of the Exchange Act
and the rules and regulations promulgated thereunder. For purposes of this
Section 4(c), in determining the number of outstanding shares of Common
Stock, a Holder may rely on the number of outstanding shares of Common
Stock as stated in the most recent of the following: (A) the Company's most
recent Form 10-QSB or Form 10-KSB, as the case may be; (B) a more recent
public announcement by the Company; or (C) a more recent notice by the
Company or the Company's transfer agent setting forth the number of shares
of Common Stock outstanding. Upon the written or oral request of a Holder,
the Company shall within two Trading Days confirm orally and in writing to
such Holder the number of shares of Common Stock then outstanding. In any
case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the
Company, including this Debenture, by such Holder or its Affiliates since
the date as of which such number of outstanding shares of Common Stock was
reported. The "Beneficial Ownership Limitation" shall be 4.99% of the
number of shares of the Common Stock outstanding immediately after giving
10
effect to the issuance of shares of Common Stock issuable upon conversion
of this Debenture held by the Holder. The Beneficial Ownership Limitation
provisions of this Section 4(c) may be waived by such Holder, at the
election of such Holder, upon not less than 61 days' prior notice to the
Company, to change the Beneficial Ownership Limitation to 9.99% of the
number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock upon conversion of this
Debenture held by the Holder and the provisions of this Section 4(c) shall
continue to apply. Upon such a change by a Holder of the Beneficial
Ownership Limitation from such 4.99% limitation to such 9.99% limitation,
the Beneficial Ownership Limitation may not be further waived by such
Holder. The provisions of this paragraph shall be construed and implemented
in a manner otherwise than in strict conformity with the terms of this
Section 4(c) to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable
to properly give effect to such limitation. The limitations contained in
this paragraph shall apply to a successor holder of this Debenture.
d) Mechanics of Conversion.
i. Conversion Shares Issuable Upon Conversion of Principal
Amount. The number of shares of Common Stock issuable upon a
conversion hereunder shall be determined by the quotient obtained by
dividing (x) the outstanding principal amount of this Debenture to be
converted by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the "Share Delivery Date"),
the Company shall deliver, or cause to be delivered, to the Holder a
certificate or certificates representing the Conversion Shares which,
on or after the Effective Date, shall be free of restrictive legends
and trading restrictions (other than those which may then be required
by the Purchase Agreement) representing the number of shares of Common
Stock being acquired upon the conversion of this Debenture. On or
after the Effective Date, the Company shall use its best efforts to
deliver any certificate or certificates required to be delivered by
the Company under this Section 4 electronically through the Depository
Trust Company or another established clearing corporation performing
similar functions.
iii. Failure to Deliver Certificates. If in the case of any
Notice of Conversion such certificate or certificates are not
delivered to or as directed by the applicable Holder by the third
Trading Day after the Conversion Date, the Holder shall be entitled to
elect by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the
Holder any original Debenture delivered to the Company and the Holder
shall promptly return the Common Stock certificates representing the
principal amount of this Debenture tendered for conversion to the
Company.
11
iv. Obligation Absolute; Partial Liquidated Damages. The
Company's obligations to issue and deliver the Conversion Shares upon
conversion of this Debenture in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by
the Holder 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 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 in
connection with the issuance of such Conversion Shares; provided,
however, that such delivery shall not operate as a waiver by the
Company of any such action the Company may have against the Holder. In
the event the Holder of this Debenture shall elect to convert any or
all of the outstanding principal amount hereof, the Company may not
refuse conversion based on any claim that the Holder or anyone
associated or affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an
injunction from a court, on notice to Holder, restraining and or
enjoining conversion of all or part of this Debenture shall have been
sought and obtained, and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the outstanding
principal amount of this Debenture, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of
which shall be payable to such Holder to the extent it obtains
judgment. In the absence of such injunction, the Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed
conversion. If the Company fails for any reason to take all actions
within the Company's control required to cause the delivery to the
Holder of such certificate or certificates pursuant to Section
4(d)(ii) by the seventh Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and
not as a penalty, for each $1000 of principal amount being converted,
$5 per Trading Day for each Trading Day after such seventh Trading Day
until such certificates are delivered. Nothing herein shall limit a
Holder's right to pursue actual damages or declare an Event of Default
pursuant to Section 8 hereof for the Company's failure to deliver
Conversion Shares within the period specified herein and such Holder
shall have the right to pursue all remedies available to it hereunder,
at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The exercise of any
such rights shall not prohibit the Holder from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.
v. [RESERVED].
vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of
its authorized
12
and unissued shares of Common Stock for the sole purpose of issuance
upon conversion of this Debenture and payment of interest on this
Debenture, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of Persons other than the
Holder (and the other holders of the Debentures), not less than such
aggregate number of shares of the Common Stock as shall (subject to
the terms and conditions set forth in the Purchase Agreement) be
issuable (taking into account the adjustments and restrictions of
Section 5) upon the conversion of the outstanding principal amount of
this Debenture and payment of interest hereunder. The Company
covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly authorized, validly issued, fully paid and
nonassessable and, if the Registration Statement is then effective
under the Securities Act, shall be registered for public sale in
accordance with such Registration Statement.
vii. Fractional Shares. 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 VWAP 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, 1 whole share of Common Stock.
viii. Transfer Taxes. The issuance of certificates for shares of
the Common Stock on conversion of this Debenture shall be made without
charge to the Holder hereof for any documentary stamp or similar taxes
that may be payable in respect of the issue or delivery of such
certificates, provided that the Company shall not be required to pay
any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a
name other than that of the Holder of this Debenture so converted and
the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax
or shall have established to the satisfaction of the Company that such
tax has been paid.
Section 5. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any time while
this Debenture is outstanding: (A) pays a stock dividend or otherwise makes
a distribution or distributions payable in shares of Common Stock on shares
of Common Stock or any Common Stock Equivalents (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by the Company
upon conversion of, or payment of interest on, the Debentures); (B)
subdivides outstanding shares of Common Stock into a larger number of
shares; (C) combines (including by way of a reverse stock split)
outstanding shares of Common Stock into a smaller number of shares; or (D)
issues, in the event of a reclassification of shares of the Common Stock,
any shares of capital stock of the Company, then the Conversion Price shall
be multiplied by a fraction of which the
13
numerator shall be the number of shares of Common Stock (excluding any
treasury shares of the Company) outstanding immediately before such event
and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event. Any adjustment made pursuant to
this Section 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, combination or re-classification.
b) Subsequent Equity Sales. If, at any time while this Debenture is
outstanding, the Company or any Subsidiary, as applicable, sells or grants
any option to purchase or sells or grants any right to reprice, or
otherwise disposes of or issues (or announces any sale, grant or any option
to purchase or other disposition), any Common Stock or Common Stock
Equivalents entitling any Person to acquire shares of Common Stock at an
effective price per share that is lower than the then Conversion Price
(such lower price, the "Base Conversion Price" and such issuances,
collectively, a "Dilutive Issuance") (if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by operation
of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or
rights per share which are issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price per share
that is lower than the Conversion Price, such issuance shall be deemed to
have occurred for less than the Conversion Price on such date of the
Dilutive Issuance), then the Conversion Price shall be reduced to equal the
Base Conversion Price. Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued. Notwithstanding the
foregoing, no adjustment will be made under this Section 5(b) in respect of
an Exempt Issuance. The Company shall notify the Holder in writing, no
later than 1 Business Day following the issuance of any Common Stock or
Common Stock Equivalents subject to this Section 5(b), indicating therein
the applicable issuance price, or applicable reset price, exchange price,
conversion price and other pricing terms (such notice, the "Dilutive
Issuance Notice"). For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b),
upon the occurrence of any Dilutive Issuance, the Holder is entitled to
receive a number of Conversion Shares based upon the Base Conversion Price
on or after the date of such Dilutive Issuance, regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of
Conversion.
c) Subsequent Rights Offerings. If the Company, at any time while the
Debenture is outstanding, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to subscribe
for or purchase shares of Common Stock at a price per share that is lower
than the VWAP on the record date referenced below, then the Conversion
Price shall be multiplied by a fraction of which the denominator shall be
the number of shares of the Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of the Common Stock outstanding on
the date of issuance of such rights
14
or warrants plus the number of shares which the aggregate offering price of
the total number of shares so offered (assuming delivery to the Company in
full of all consideration payable upon exercise of such rights, options or
warrants) would purchase at such VWAP. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights, options or warrants.
d) Pro Rata Distributions. If the Company, at any time while this
Debenture is outstanding, distributes to all holders of Common Stock (and
not to the Holders) evidences of its indebtedness or assets (including cash
and cash dividends) or rights or warrants to subscribe for or purchase any
security (other than the Common Stock, which shall be subject to Section
5(b)), then in each such case the Conversion Price shall be adjusted by
multiplying such Conversion Price in effect immediately prior to the record
date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP
determined as of the record date mentioned above, and of which the
numerator shall be such VWAP on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good faith.
In either case the adjustments shall be described in a statement delivered
to the Holder describing the portion of assets or evidences of indebtedness
so distributed or such subscription rights applicable to 1 share of Common
Stock. Such adjustment shall be made whenever any such distribution is made
and shall become effective immediately after the record date mentioned
above.
e) Fundamental Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the
Company with or into another Person, (B) the Company effects any sale of
all or substantially all of its assets in one transaction or a series of
related transactions, (C) any tender offer or exchange offer (whether by
the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
"Fundamental Transaction"), then, upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Conversion
Share that would have been issuable upon such conversion immediately prior
to the occurrence of such Fundamental Transaction, the same kind and amount
of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of 1 share of
Common Stock (the "Alternate Consideration"). For purposes of any such
conversion, the determination of the Conversion Price shall be
appropriately adjusted to apply to such Alternate Consideration based on
the amount of Alternate Consideration issuable in respect of 1 share of
Common Stock in such Fundamental Transaction, and the Company shall
apportion the Conversion Price among the Alternate Consideration in
15
a reasonable manner reflecting the relative value of any different
components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this
Debenture following such Fundamental Transaction. To the extent necessary
to effectuate the foregoing provisions, any successor to the Company or
surviving entity in such Fundamental Transaction shall issue to the Holder
a new debenture consistent with the foregoing provisions and evidencing the
Holder's right to convert such debenture into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is
effected shall include terms requiring any such successor or surviving
entity to comply with the provisions of this Section 5(e) and insuring that
this Debenture (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.
f) Calculations. All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 5, the number of shares of Common Stock deemed
to be issued and outstanding as of a given date shall be the sum of the
number of shares of Common Stock (excluding any treasury shares of the
Company) issued and outstanding.
g) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion Price
is adjusted pursuant to any provision of this Section 5, the Company
shall promptly mail to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. If the Company
enters into a Variable Rate Transaction, despite the prohibition
thereon in the Purchase Agreement, the Company shall be deemed to have
issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or
exercised.
ii. Notice to Allow Conversion by Holder. If (A) the Company
shall declare a dividend (or any other distribution in whatever form)
on the Common Stock, (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (C)
the Company shall authorize the granting to all holders of the Common
Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, 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 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, then, in each case, the Company shall cause to
be filed at each office or agency maintained for the purpose of
conversion of this
16
Debenture, and shall cause to be delivered to the Holder at its last
address as it shall appear upon the Debenture Register, at least 20
calendar days prior to the 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 the 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 the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share
exchange, provided that the failure to deliver such notice or any
defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such
notice. The Holder is entitled to convert this Debenture during the
20-day period commencing on the date of such notice through the
effective date of the event triggering such notice.
Section 6. Forced Conversion.
a) Forced Conversion. Notwithstanding anything herein to the contrary,
if after the Effective Date, the VWAP for each of any 10 consecutive
Trading Days, which period shall have commenced only after the Effective
Date (such period the "Threshold Period"), exceeds $5.50 (subject to
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur
after the Original Issue Date), the Company may, within 2 Trading Days
after the end of any such Threshold Period, deliver a written notice to the
Holder (a "Forced Conversion Notice" and the date such notice is delivered
to the Holder, the "Forced Conversion Notice Date") to cause the Holder to
convert all or part of the then outstanding principal amount of this
Debenture plus, if so specified in the Forced Conversion Notice, accrued
but unpaid interest, liquidated damages and other amounts owing to the
Holder under this Debenture, it being agreed that the "Conversion Date" for
purposes of Section 4 shall be deemed to occur on the tenth Trading Day
following the Forced Conversion Notice Date (such tenth Trading Day, the
"Forced Conversion Date"). The Company may not deliver a Forced Conversion
Notice, and any Forced Conversion Notice delivered by the Company shall not
be effective, unless all of the Equity Conditions are met (unless waived in
writing by the Holder) on each Trading Day occurring during the applicable
Threshold Period through and including the later of the Forced Conversion
Date and the Trading Day after the date such Conversion Shares pursuant to
such conversion are delivered to the Holder. Any Forced Conversion shall be
applied ratably to all Holders based on their initial purchases of
Debentures pursuant to the Purchase Agreement, provided that any voluntary
conversions by a Holder shall be applied against such Holder's pro-rata
allocation, thereby decreasing the aggregate amount forcibly converted
hereunder if only a portion of this Debenture is forcibly converted. For
purposes of clarification, a Forced Conversion shall be subject to all of
17
the provisions of Section 4, including, without limitation, the provision
requiring payment of liquidated damages and limitations on conversions.
Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, the Company shall not, and shall not permit any of its
subsidiaries (whether or not a Subsidiary on the Original Issue Date) without
the prior written consent of the Holders of at least a majority of the principal
amount of Debentures then outstanding to, directly or indirectly:
a) until such time that 85% of the original aggregate principal amount
of Debentures has been paid or converted, other than Permitted
Indebtedness, enter into, create, incur, assume, guarantee or suffer to
exist any indebtedness for borrowed money of any kind, including but not
limited to, a guarantee, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any
income or profits therefrom;
b) until such time that 85% of the original aggregate principal amount
of Debentures has been paid or converted, other than Permitted Liens, enter
into, create, incur, assume or suffer to exist any Liens of any kind, on or
with respect to any of its property or assets now owned or hereafter
acquired or any interest therein or any income or profits therefrom;
c) amend its charter documents, including, without limitation, the
certificate of incorporation and bylaws, in any manner that materially and
adversely affects any rights of the Holder;
d) repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its Common Stock or
Common Stock Equivalents other than as to (a) the Conversion Shares or
Warrant Shares as permitted or required under the Transaction Documents and
(b) repurchases of Common Stock or Common Stock Equivalents of departing
officers and directors of the Company, provided that such repurchases shall
not exceed an aggregate of $250,000 for all officers and directors during
the term of this Debenture;
e) pay cash dividends or distributions on any equity securities of the
Company (it being understood that this Section 7(e) shall not prohibit a
wholly-owned subsidiary of the Company from paying a cash dividend or
making a cash distribution to the Company);
f) enter into any transaction with any Affiliate of the Company which
would be required to be disclosed in any public filing with the Commission
unless such transaction has been approved by a majority of the independent
members of the Board of Directors of the Company or committee thereof; or
g) enter into any agreement with respect to any of the foregoing
prohibited matters.
18
Section 8. Events of Default.
a) "Event of Default" means, wherever used herein, any of the
following events (whatever the reason for such event and whether such event
shall be voluntary or involuntary or effected by operation of law or
pursuant to any judgment, decree or order of any court, or any order, rule
or regulation of any administrative or governmental body):
i. any default in the payment of (A) the principal amount of any
Debenture or (B) interest, liquidated damages and other amounts owing
to a Holder on any Debenture, as and when the same shall become due
and payable (whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default, solely in the case of an
interest payment or other default under clause (B) above, is not cured
within 3 Trading Days;
ii. the Company shall fail to observe or perform any other
covenant or agreement contained in the Debentures (other than a breach
by the Company of its obligations to deliver shares of Common Stock to
the Holder upon conversion, which breach is addressed in clause (xi)
below) which failure is not cured, if possible to cure, within the
earlier to occur of (A) 5 Trading Days after notice of such failure
sent by the Holder or by any other Holder and (B) 10 Trading Days
after the Company has become or should have become aware of such
failure;
iii. a default or event of default (subject to any grace or cure
period provided in the applicable agreement, document or instrument)
shall occur under (A) any of the Transaction Documents or (B) any
other material agreement, lease, document or instrument to which the
Company or any Subsidiary is obligated (and not covered by clause (vi)
below);
iv. any representation or warranty made in this Debenture, any
other Transaction Documents, any written statement pursuant hereto or
thereto or any other report, financial statement or certificate made
or delivered to the Holder or any other Holder shall be untrue or
incorrect in any material respect as of the date when made or deemed
made;
v. the Company or any Significant Subsidiary shall be subject to
a Bankruptcy Event;
vi. the Company or any Subsidiary shall default on any of its
obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under
which there may be issued, or by which there may be secured or
evidenced, any indebtedness for borrowed money or money due under any
long term leasing or factoring arrangement that (a) involves an
obligation greater than $250,000, whether such
19
indebtedness now exists or shall hereafter be created, and (b) results
in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise become due and payable;
vii. the Common Stock shall not be eligible for listing or
quotation for trading on a Trading Market and shall not be eligible to
resume listing or quotation for trading thereon within five Trading
Days;
viii. the Company shall be a party to any Change of Control
Transaction or Fundamental Transaction or shall agree to sell or
dispose of all or in excess of 33% of its assets in one transaction or
a series of related transactions (whether or not such sale would
constitute a Change of Control Transaction);
ix. a Registration Statement shall not have been declared
effective by the Commission on or prior to the 210th calendar day
after the Closing Date;
x. if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), either (a) the effectiveness of the
Registration Statement lapses for any reason or (b) the Holder shall
not be permitted to resell Registrable Securities (as defined in the
Registration Rights Agreement) under the Registration Statement for a
period of more than 30 consecutive Trading Days or 45 non-consecutive
Trading Days during any 12 month period; provided, however, that if
the Company is negotiating a merger, consolidation, acquisition or
sale of all or substantially all of its assets or a similar
transaction and, in the written opinion of counsel to the Company, the
Registration Statement would be required to be amended to include
information concerning such pending transaction(s) or the parties
thereto which information is not available or may not be publicly
disclosed at the time, the Company shall be permitted an additional 20
consecutive Trading Days during any 12 month period pursuant to this
Section 8(a)(x);
xi. the Company shall fail for any reason to deliver certificates
to a Holder prior to the seventh Trading Day after a Conversion Date
pursuant to Section 4(d) or the Company shall provide at any time
notice to the Holder, including by way of public announcement, of the
Company's intention to not honor requests for conversions of any
Debentures in accordance with the terms hereof;
xii. any monetary judgment, writ or similar final process shall
be entered or filed against the Company, any Subsidiary or any of
their respective property or other assets for more than $250,000, and
such judgment, writ or similar final process shall remain unvacated,
unbonded or unstayed for a period of 45 calendar days.
20
b) Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Debenture, plus accrued but unpaid
interest, liquidated damages and other amounts owing in respect thereof
through the date of acceleration, shall become, at the Holder's election,
immediately due and payable in cash at the Mandatory Default Amount.
Commencing 5 days after the occurrence of any Event of Default that results
in the eventual acceleration of this Debenture, the interest rate on this
Debenture shall accrue at an interest rate equal to the lesser of 18% per
annum or the maximum rate permitted under applicable law. Upon the payment
in full of the Mandatory Default Amount, the Holder shall promptly
surrender this Debenture to or as directed by the Company. In connection
with such acceleration described herein, the Holder need not provide, and
the Company hereby waives, any presentment, demand, protest or other notice
of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such acceleration
may be rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a holder of the Debenture
until such time, if any, as the Holder receives full payment pursuant to
this Section 8(b). No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.
Section 9. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries
to be provided by the Holder hereunder, including, without limitation, any
Notice of Conversion, shall be in writing and delivered personally, by
facsimile, or sent by a nationally recognized overnight courier service,
addressed to the Company, at the address set forth above, facsimile number
______________, ATTN: JEFFREY THOMPSON, CEO, WITH A COPY TO HAYNES AND
BOONE LLP, 153 EAST 53RD STREET, NEW YORK, NEW YORK 10022 (212) 884-8233
(FAX) ATTN: HARVEY KESNER, ESQ. or such other facsimile number or address
as the Company may specify for such purpose by notice to the Holder
delivered in accordance with this Section 9. 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 sent by a
nationally recognized overnight courier service addressed to each Holder at
the facsimile number or address of such Holder appearing on the books of
the Company, or if no such facsimile number or address appears, at the
principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified
in this Section 9 prior to 5:30 p.m. (New York City time), (ii) the date
immediately following the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified
in this Section 9 between 5:30 p.m. (New York City time) and 11:59 p.m.
(New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
21
b) Absolute Obligation. Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of,
liquidated damages and accrued interest, as applicable, on this Debenture
at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct debt obligation of the Company. This
Debenture ranks pari passu with all other Debentures now or hereafter
issued under the terms set forth herein.
c) Lost or Mutilated Debenture. If this Debenture shall be mutilated,
lost, stolen or destroyed, the Company shall execute and deliver, in
exchange and substitution for and upon cancellation of a mutilated
Debenture, or in lieu of or in substitution for a lost, stolen or destroyed
Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed, but only upon receipt of evidence of
such loss, theft or destruction of such Debenture, and of the ownership
hereof, reasonably satisfactory to the Company.
d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflict of laws thereof.
Each party agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its
respective Affiliates, directors, officers, shareholders, employees or
agents) shall be commenced in the state and federal courts sitting in the
City of New York, Borough of Manhattan (the "New York Courts"). Each party
hereto hereby irrevocably submits to the exclusive jurisdiction of the New
York Courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction
Documents), 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 such New York Courts, or such New York Courts are
improper or inconvenient venue for such proceeding. 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 via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to
it under this Debenture and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in
any other manner permitted by applicable law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
and all right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If
either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees
and other costs and expenses incurred in the investigation, preparation and
prosecution of such action or proceeding.
22
e) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other
term of this Debenture. Any waiver by the Company or the Holder must be in
writing.
f) Severability. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is inapplicable to any Person or circumstance,
it shall nevertheless remain applicable to all other Persons and
circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates the applicable law governing usury,
the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum rate of interest permitted under applicable
law. The Company covenants (to the extent that it may lawfully do so) that
it shall not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay, extension or usury law
or other law which would prohibit or forgive the Company from paying all or
any portion of the principal of or interest on this Debenture as
contemplated herein, wherever enacted, now or at any time hereafter in
force, or which may affect the covenants or the performance of this
indenture, and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefits or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impeded the
execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been enacted.
g) Next Business Day. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
h) Headings. The headings contained herein are for convenience only,
do not constitute a part of this Debenture and shall not be deemed to limit
or affect any of the provisions hereof.
i) Assumption. Any successor to the Company or any surviving entity in
a Fundamental Transaction shall (i) assume, prior to such Fundamental
Transaction, all of the obligations of the Company under this Debenture and
the other Transaction Documents pursuant to written agreements in form and
substance satisfactory to the Holder (such approval not to be unreasonably
withheld or delayed) and (ii) issue to the Holder a new debenture of such
successor entity evidenced by a written instrument substantially similar in
form and substance to this Debenture, including, without limitation, having
a principal amount and interest rate equal to the principal amount and the
interest rate of this Debenture and having similar ranking to this
Debenture, which shall be satisfactory to the Holder (any such approval not
to be unreasonably withheld or delayed). The provisions of this Section
9(i) shall apply similarly and equally to
23
successive Fundamental Transactions and shall be applied without regard to
any limitations of this Debenture.
*********************
24
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
TOWERSTREAM CORPORATION
By:
------------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
25
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 8% Convertible
Debenture due December 31, 2009 of Towerstream Corporation, a Delaware
corporation (the "Company"), into shares of common stock, par value $.001 per
share (the "Common Stock"), of the Company according to the conditions hereof,
as of the date written below. If shares of Common Stock are to be issued in the
name of a person other than the 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.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Common Stock does not exceed
the amounts specified under Section 4 of this Debenture, as determined in
accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements
under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debenture to be
Converted:
Payment of Interest in Common Stock
__ yes __ no
If yes, $_____ of Interest Accrued on
Account of Conversion at Issue.
Number of shares of Common Stock to be
issued:
Signature:
-----------------------------
Name:
Address:
26
SCHEDULE 1
CONVERSION SCHEDULE
The 8% Convertible Debentures due on December 31, 2009 in the aggregate
principal amount of $3,500,000 are issued by Towerstream Corporation. This
Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.
Dated:
Aggregate Principal
Amount Remaining
Date of Conversion Subsequent to Conversion
(or for first entry, Amount of (or original Principal
Original Issue Date) Conversion Amount) Company Attest
-------------------- ---------- ------------------------ --------------
27
EXHIBIT 10.10
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE 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 AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
TOWERSTREAM CORPORATION
Warrant Shares: _______ Initial Exercise Date: January 18, 2007
THIS COMMON STOCK PURCHASE WARRANT (the "Warrant") certifies that, for
value received, _____________ (the "Holder"), is entitled, upon the terms and
subject to the limitations on exercise and the conditions hereinafter set forth,
at any time on or after the date hereof (the "Initial Exercise Date") and on or
prior to the close of business on the five year anniversary of the Initial
Exercise Date (the "Termination Date") but not thereafter, to subscribe for and
purchase from Towerstream Corporation, a Delaware corporation (the "Company"),
up to ______ shares (the "Warrant Shares") of common stock, par value $.001 per
share, of the Company (the "Common Stock"). The purchase price of one share of
Common Stock under this Warrant shall be equal to the Exercise Price, as defined
in Section 2(b).
Section 1. Definitions. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth in that certain Securities Purchase
Agreement (the "Purchase Agreement"), dated January __, 2007, among the Company
and the purchasers signatory thereto.
Section 2. Exercise.
a) Exercise of Warrant. Exercise of the purchase rights represented by
this Warrant may be made, in whole or in part, at any time or times on or
after the Initial Exercise Date and on or before the Termination Date by
delivery to the Company of a duly executed facsimile copy of the Notice of
Exercise Form annexed hereto (or such other office or agency of the Company
as it may designate by notice in writing to the
1
registered Holder at the address of such Holder appearing on the books of
the Company) ; and, within 3 Trading Days of the date said Notice of
Exercise is delivered to the Company, the Company shall have received
payment of the aggregate Exercise Price of the shares thereby purchased by
wire transfer or cashier's check drawn on a United States bank of
immediately available funds. Notwithstanding anything herein to the
contrary, the Holder shall not be required to physically surrender this
Warrant to the Company until the Holder has purchased all of the Warrant
Shares available hereunder and the Warrant has been exercised in full, in
which case, the Holder shall surrender this Warrant to the Company for
cancellation within 3 Trading Days of the date the final Notice of Exercise
is delivered to the Company. Partial exercises of this Warrant resulting in
purchases of a portion of the total number of Warrant Shares available
hereunder shall have the effect of lowering the outstanding number of
Warrant Shares purchasable hereunder in an amount equal to the applicable
number of Warrant Shares purchased. The Holder and the Company shall
maintain records showing the number of Warrant Shares purchased and the
date of such purchases. The Company shall deliver any objection to any
Notice of Exercise Form within 2 Business Days of receipt of such notice.
The Holder and any assignee, by acceptance of this Warrant, acknowledge and
agree that, by reason of the provisions of this paragraph, following the
purchase of a portion of the Warrant Shares hereunder, the number of
Warrant Shares available for purchase hereunder at any given time may be
less than the amount stated on the face hereof.
b) Exercise Price. The exercise price per share of the Common Stock
under this Warrant shall be $_____[50% AT $4.00 AND 50% AT $6.00], subject
to adjustment hereunder (the "Exercise Price").
c) Cashless Exercise. If at any time after one year from the date of
issuance of this Warrant there is no effective Registration Statement
registering, or no current prospectus available for, the resale of the
Warrant Shares by the Holder, then this Warrant may also be exercised at
such time by means of a "cashless exercise" in which the Holder shall be
entitled to receive a certificate for the number of Warrant Shares equal to
the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day immediately preceding the date of
such election;
(B) = the Exercise Price of this Warrant, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise of this
Warrant in accordance with the terms of this Warrant by means of
a cash exercise rather than a cashless exercise.
Notwithstanding anything herein to the contrary, on the Termination
Date, this Warrant shall be automatically exercised via cashless exercise
pursuant to this Section 2(c).
2
d) Exercise Limitations. The Company shall not effect any exercise of
this Warrant, and a Holder shall not have the right to exercise any portion
of this Warrant, pursuant to Section 2(c) or otherwise, to the extent that
after giving effect to such issuance after exercise as set forth on the
applicable Notice of Exercise, such Holder (together with such Holder's
Affiliates, and any other person or entity acting as a group together with
such Holder or any of such Holder's Affiliates), as set forth on the
applicable Notice of Exercise, would beneficially own in excess of the
Beneficial Ownership Limitation (as defined below). For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned
by such Holder and its Affiliates shall include the number of shares of
Common Stock issuable upon exercise of this Warrant with respect to which
such determination is being made, but shall exclude the number of shares of
Common Stock which would be issuable upon (A) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by such Holder or
any of its Affiliates and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including,
without limitation, any other Debentures or Warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by such Holder or any of its affiliates. Except
as set forth in the preceding sentence, for purposes of this Section 2(d),
beneficial ownership shall be calculated in accordance with Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder,
it being acknowledged by a Holder that the Company is not representing to
such Holder that such calculation is in compliance with Section 13(d) of
the Exchange Act and such Holder is solely responsible for any schedules
required to be filed in accordance therewith. To the extent that the
limitation contained in this Section 2(d) applies, the determination of
whether this Warrant is exercisable (in relation to other securities owned
by such Holder together with any Affiliates) and of which a portion of this
Warrant is exercisable shall be in the sole discretion of a Holder, and the
submission of a Notice of Exercise shall be deemed to be each Holder's
determination of whether this Warrant is exercisable (in relation to other
securities owned by such Holder together with any Affiliates) and of which
portion of this Warrant is exercisable, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation
to verify or confirm the accuracy of such determination. In addition, a
determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder. For purposes of this Section
2(d), in determining the number of outstanding shares of Common Stock, a
Holder may rely on the number of outstanding shares of Common Stock as
reflected in (x) the Company's most recent Form 10-QSB or Form 10-KSB, as
the case may be, (y) a more recent public announcement by the Company or
(z) any other notice by the Company or the Company's Transfer Agent setting
forth the number of shares of Common Stock outstanding. Upon the written or
oral request of a Holder, the Company shall within two Trading Days confirm
orally and in writing to such Holder the number of shares of Common Stock
then outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise
of securities of the Company, including this Warrant, by such Holder or its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The "Beneficial Ownership Limitation" shall be
4.99% of the number of shares of the
3
Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock issuable upon exercise of this Warrant. The
Beneficial Ownership Limitation provisions of this Section 2(d) may be
waived by such Holder, at the election of such Holder, upon not less than
61 days' prior notice to the Company to change the Beneficial Ownership
Limitation to 9.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock
upon exercise of this Warrant, and the provisions of this Section 2(d)
shall continue to apply. Upon such a change by a Holder of the Beneficial
Ownership Limitation from such 4.99% limitation to such 9.99% limitation,
the Beneficial Ownership Limitation may not be further waived by such
Holder. The provisions of this paragraph shall be construed and implemented
in a manner otherwise than in strict conformity with the terms of this
Section 2(d) to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable
to properly give effect to such limitation. The limitations contained in
this paragraph shall apply to a successor holder of this Warrant.
e) Mechanics of Exercise.
i. Authorization of Warrant Shares. The Company covenants
that all Warrant Shares which may be issued upon the exercise of
the purchase rights represented by this Warrant will, upon
exercise of the purchase rights represented by this Warrant, be
duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges created by the Company in
respect of the issue thereof (other than taxes in respect of any
transfer occurring contemporaneously with such issue).
ii. Delivery of Certificates Upon Exercise. Certificates for
shares purchased hereunder shall be transmitted by the transfer
agent of the Company to the Holder by crediting the account of
the Holder's prime broker with the Depository Trust Company
through its Deposit Withdrawal Agent Commission ("DWAC") system
if the Company is a participant in such system, and otherwise by
physical delivery to the address specified by the Holder in the
Notice of Exercise within 3 Trading Days from the delivery to the
Company of the Notice of Exercise Form, surrender of this Warrant
(if required) and payment of the aggregate Exercise Price as set
forth above ("Warrant Share Delivery Date"). This Warrant shall
be deemed to have been exercised on the date the Exercise Price
is received by the Company. The Warrant Shares shall be deemed to
have been issued, and Holder or any other person so designated to
be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the
Exercise Price (or by cashless exercise, if permitted) and all
taxes required to be paid by the Holder, if any, pursuant to
Section 2(e)(vii) prior to the issuance of such shares, have been
paid. If the Company fails for any reason to take all actions
within the Company's
4
control required to cause there to be delivered to the Holder
certificates evidencing the Warrant Shares subject to a Notice of
Exercise by the Warrant Share Delivery Date, the Company shall
pay to such Holder, in cash, as liquidated damages and not as a
penalty, for each $1,000 of Warrant Shares subject to such
exercise (based on the VWAP of the Common Stock on the date of
the applicable Notice of Exercise), $5 per Trading Day for each
Trading Day after the fourth Trading Day following such Warrant
Share Delivery Date until such certificates are delivered.
iii. Delivery of New Warrants Upon Exercise. If this Warrant
shall have been exercised in part, the Company shall, at the
request of a Holder and upon surrender of this Warrant
certificate, at the time of delivery of the certificate or
certificates representing Warrant Shares, deliver to Holder a new
Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new
Warrant shall in all other respects be identical with this
Warrant.
iv. Rescission Rights. If the Company fails to cause its
transfer agent to transmit to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this
Section 2(e)(iv) by the Warrant Share Delivery Date, then the
Holder will have the right to rescind such exercise.
v. [RESERVED].
vi. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the
exercise of this Warrant. As to any fraction of a share which
Holder would otherwise be entitled to purchase upon such
exercise, the Company shall at its election, either pay a cash
adjustment in respect of such final fraction in an amount equal
to such fraction multiplied by the Exercise Price or round up to
the next whole share.
vii. Charges, Taxes and Expenses. Issuance of certificates
for Warrant Shares shall be made without charge to the Holder 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 or in such name or
names as may be directed by the Holder; provided, however, that
in the event certificates for Warrant Shares are to be issued in
a name other than the name of the Holder, this Warrant when
surrendered for exercise shall be accompanied by the Assignment
Form attached hereto duly executed by the Holder; and the Company
may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental
thereto.
5
viii. Closing of Books. The Company will not close its
stockholder books or records in any manner which prevents the
timely exercise of this Warrant, pursuant to the terms hereof.
Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while
this Warrant is outstanding: (A) pays a stock dividend or otherwise
makes a distribution or distributions on shares of its Common Stock or
any other equity or equity equivalent securities payable in shares of
Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company upon exercise of this
Warrant), (B) subdivides outstanding shares of Common Stock into a
larger number of shares, (C) combines (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller number
of shares, or (D) issues by reclassification of shares of the Common
Stock any shares of capital stock of the Company, then in each case
the Exercise Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding immediately before such event and
of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event and the number of shares
issuable upon exercise of this Warrant shall be proportionately
adjusted. Any adjustment made pursuant to this Section 3(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, combination or
re-classification.
b) Subsequent Equity Sales. If the Company or any Subsidiary
thereof, as applicable, at any time while the Debentures are
outstanding, shall sell or grant any option to purchase, or sell or
grant any right to reprice its securities, or otherwise dispose of or
issue (or announce any offer, sale, grant or any option to purchase or
other disposition) any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock, at an
effective price per share less than $2.75 (subject to adjustment for
forward and reverse stock splits, stock dividends, recapitalizations
and the like) (such lower price, the "Base Share Price" and such
issuances collectively, a "Dilutive Issuance") (if the holder of the
Common Stock or Common Stock Equivalents so issued shall at any time,
whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due
to warrants, options or rights per share which are issued in
connection with such issuance, be entitled to receive shares of Common
Stock at an effective price per share which is less than the Exercise
Price, such issuance shall be deemed to have occurred for less than
the Exercise Price on such date of the Dilutive Issuance), then the
Exercise Price shall be reduced and only reduced to equal
[__________(1). For clarity, the Exercise Price can only be adjusted
downward pursuant to this Section 3(b) (if ___(2) of such Base Share
Price is not less than the then Exercise Price immediately prior to
such Dilutive Issuance, no
----------
(1) 145% of such Base Share Price as to the $4.00 warrants and 218% of such
Base Share Price as to the $6.00 warrants.
(2) 145% as to $4 warrants and 218% as to $6 warrants
6
adjustment to the Exercise Price shall be made). By way of an example,
if the Base Share Price in connection with a Dilutive Issuance is
$2.00, the Exercise Price of this Warrant would be reduced to
_____.(3) Such adjustment shall be made whenever such Common Stock or
Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustments shall be made, paid or issued under this Section 3(b) in
respect of an Exempt Issuance. The Company shall notify the Holder in
writing, no later than the Trading Day following the issuance of any
Common Stock or Common Stock Equivalents subject to this Section 3(b),
indicating therein the applicable issuance price, or applicable reset
price, exchange price, conversion price and other pricing terms (such
notice the "Dilutive Issuance Notice"). For purposes of clarification,
whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 3(b), upon the occurrence of any Dilutive
Issuance, after the date of such Dilutive Issuance the Holder is
entitled to receive a number of Warrant Shares based upon the Base
Share Price regardless of whether the Holder accurately refers to the
Base Share Price in the Notice of Exercise.
c) Subsequent Rights Offerings. If the Company, at any time while
the Warrant is outstanding, shall issue rights, options or warrants to
all holders of Common Stock (and not to Holders) entitling them to
subscribe for or purchase shares of Common Stock at a price per share
less than the VWAP at the record date mentioned below, then the
Exercise Price shall be multiplied by a fraction, of which the
denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus
the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the
number of shares of the Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered
(assuming receipt by the Company in full of all consideration payable
upon exercise of such rights, options or warrants) would purchase at
such VWAP. Such adjustment shall be made whenever such rights or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive
such rights, options or warrants.
d) Pro Rata Distributions. If the Company, at any time prior to
the Termination Date, shall distribute to all holders of Common Stock
(and not to Holders of the Warrants) evidences of its indebtedness or
assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security other than the Common Stock
(which shall be subject to Section 3(b)), then in each such case the
Exercise Price shall be adjusted by multiplying the Exercise Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of
which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on
such record date less the then per share fair market value at such
record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of the Common Stock
as determined by the Board of Directors in good faith. In either case
the adjustments shall be described in a statement provided to the
Holder of the portion of
----------
(3) $2.90 as to the $4.00 warrants and $4.36 as to the $6.00 warrants.
7
assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned
above.
e) Fundamental Transaction. If, at any time while this Warrant is
outstanding, (A) the Company effects any merger or consolidation of
the Company with or into another Person, (B) the Company effects any
sale of all or substantially all of its assets in one or a series of
related transactions, (C) any tender offer or exchange offer (whether
by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their
shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property
(each "Fundamental Transaction"), then, upon any subsequent exercise
of this Warrant, the Holder shall have the right to receive, for each
Warrant Share that would have been issuable upon such exercise
immediately prior to the occurrence of such Fundamental Transaction,
the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and
any additional consideration (the "Alternate Consideration")
receivable as a result of such merger, consolidation or disposition of
assets by a Holder of the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to such event. For
purposes of any such exercise, the determination of the Exercise Price
shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable
in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Exercise Price among
the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to
the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the
Alternate Consideration it receives upon any exercise of this Warrant
following such Fundamental Transaction. To the extent necessary to
effectuate the foregoing provisions, any successor to the Company or
surviving entity in such Fundamental Transaction shall issue to the
Holder a new warrant consistent with the foregoing provisions and
evidencing the Holder's right to exercise such warrant into Alternate
Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of
this Section 3(e) and insuring that this Warrant (or any such
replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction. Notwithstanding
anything to the contrary, in the event of a Fundamental Transaction
that is (1) an all cash transaction, (2) a "Rule 13e-3 transaction" as
defined in Rule 13e-3 under the Securities Exchange Act of 1934, as
amended, or (3) a Fundamental Transaction involving a person or entity
not traded on a national securities exchange, the Nasdaq Global Select
Market, the Nasdaq Global Market, the Nasdaq Capital Market, the
Company or any successor entity shall pay at the Holder's option,
exercisable at any time concurrently with or within 30 days after the
consummation of the Fundamental Transaction, an amount of cash equal
to the value of this Warrant as determined in accordance with the
Black-
8
Scholes option pricing formula using an expected volatility equal to
the 100 day historical price volatility obtained from the HVT function
on Bloomberg L.P. as of the trading day immediately prior to the
public announcement of the Fundamental Transaction.
f) Calculations. 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. For purposes of this Section 3, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date
shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.
g) Voluntary Adjustment By Company. The Company may at any time
during the term of this Warrant reduce the then current Exercise Price
to any amount and for any period of time deemed appropriate by the
Board of Directors of the Company.
h) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise
Price is adjusted pursuant to any provision of this Section
3, the Company shall promptly mail to the Holder a notice
setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment. If the Company enters into a Variable Rate
Transaction (as defined in the Purchase Agreement) despite
the prohibition thereon in the Purchase Agreement, the
Company shall be deemed to have issued Common Stock or
Common Stock Equivalents at the lowest possible conversion
or exercise price at which such securities may be converted
or exercised.
ii. Notice to Allow Exercise by Holder. If (A) the
Company shall declare a dividend (or any other distribution
in whatever form) on the Common Stock; (B) the Company shall
declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (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; (D) the
approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock, 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 exchange whereby the Common Stock is
converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be
mailed to the Holder at its last address as it shall appear
upon the Warrant Register of the Company, at least 20
calendar days prior to the 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
9
to be taken, the date as of which the holders of the 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 the Common Stock of
record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation,
merger, sale, transfer or share exchange; provided that the
failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
The Holder is entitled to exercise this Warrant during the
20-day period commencing on the date of such notice to the
effective date of the event triggering such notice.
Section 4. Transfer of Warrant.
a) Transferability. Subject to compliance with any applicable
securities laws and the conditions set forth in Section 4(d) hereof and to
the provisions of Section 4.1 of the Purchase Agreement, this Warrant and
all rights hereunder (including, without limitation, any registration
rights) are transferable, in whole or in part, upon surrender of this
Warrant at the principal office of the Company or its designated agent,
together with a written assignment of this Warrant substantially in the
form attached hereto duly executed by the Holder or its agent or attorney
and funds sufficient to pay any transfer taxes payable upon the making of
such transfer. Upon such surrender and, if required, such payment, the
Company shall execute and deliver a new Warrant or Warrants in the name of
the assignee or assignees and in the denomination or denominations
specified in such instrument of assignment, and shall issue to the assignor
a new Warrant evidencing the portion of this Warrant not so assigned, and
this Warrant shall promptly be cancelled. A Warrant, if properly assigned,
may be exercised by a new holder for the purchase of Warrant Shares without
having a new Warrant issued.
b) New Warrants. This Warrant may be divided or combined with other
Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in
which new Warrants are to be issued, signed by the Holder or its agent or
attorney. Subject to compliance with Section 4(a), as to any transfer which
may be involved in such division or combination, the Company shall execute
and deliver a new Warrant or Warrants in exchange for the Warrant or
Warrants to be divided or combined in accordance with such notice.
c) Warrant Register. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), 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, absent actual
notice to the contrary.
10
d) Transfer Restrictions. If, at the time of the surrender of this
Warrant in connection with any transfer of this Warrant, the transfer of
this Warrant shall not be registered pursuant to an effective registration
statement under the Securities Act and under applicable state securities or
blue sky laws, the Company may require, as a condition of allowing such
transfer, that (i) the Holder or transferee of this Warrant, as the case
may be, furnish to the Company a written opinion of counsel (which opinion
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that such transfer may be made
without registration under the Securities Act and under applicable state
securities or blue sky laws, and (ii) the Holder or transferee execute and
deliver to the Company an investment letter in form and substance
acceptable to the Company, and (iii) the transferee be an "accredited
investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8)
promulgated under the Securities Act or a "qualified institutional buyer"
as defined in Rule 144A(a) promulgated under the Securities Act.
Section 5. Miscellaneous.
a) No Rights as Shareholder Until Exercise. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder of
the Company prior to the exercise hereof as set forth in Section 2(e)(ii).
b) Loss, Theft, Destruction or Mutilation of Warrant. The Company
covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant or any stock certificate relating to the Warrant Shares, and in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it (which, in the case of the Warrant, shall not include
the posting of any bond), and upon surrender and cancellation of such
Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of
such cancellation, in lieu of such Warrant or stock certificate.
c) 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 not be a Business Day, then such action may be taken or such
right may be exercised on the next succeeding Business Day.
d) Authorized Shares.
The Company covenants that during the period the Warrant is
outstanding, 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 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
11
issued as provided herein without violation of any applicable law or
regulation, or of any requirements of the Trading Market upon which
the Common Stock may be listed.
Except and to the extent as waived or consented to by the Holder,
the Company shall not by any action, including, without limitation,
amending 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 will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of
Holder as set forth in this Warrant against impairment. Without
limiting the generality of the foregoing, the Company will (a) not
increase the par value of any Warrant Shares above the amount payable
therefor upon such exercise immediately prior to such increase in par
value, (b) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable Warrant Shares upon the exercise of this Warrant, and
(c) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company
to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in
the number of Warrant Shares for which this Warrant is exercisable or
in the Exercise Price, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having
jurisdiction thereof.
e) Jurisdiction. All questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be determined in
accordance with the provisions of the Purchase Agreement.
f) Restrictions. The Holder acknowledges that the Warrant Shares
acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.
g) Nonwaiver and Expenses. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate
as a waiver of such right or otherwise prejudice Holder's rights, powers or
remedies, notwithstanding the fact that all rights hereunder terminate on
the Termination Date. If the Company willfully and knowingly fails to
comply with any provision of this Warrant, which results in any material
damages to the Holder, the Company shall pay to Holder such amounts as
shall be sufficient to cover any costs and expenses including, but not
limited to, reasonable attorneys' fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant
hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.
12
h) Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder by the Company shall be
delivered in accordance with the notice provisions of the Purchase
Agreement.
i) Limitation of Liability. No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant to purchase Warrant
Shares, and no enumeration herein of the rights or privileges of Holder,
shall give rise to any liability of Holder for the purchase price of any
Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
j) Remedies. Holder, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees
that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Warrant and
hereby agrees to waive and not to assert the defense in any action for
specific performance that a remedy at law would be adequate.
k) Successors and Assigns. Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant
are intended to be for the benefit of all Holders from time to time of this
Warrant and shall be enforceable by any such Holder or holder of Warrant
Shares.
l) Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the
Holder.
m) Severability. Wherever 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 shall be prohibited by
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the
remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience
of reference only and shall not, for any purpose, be deemed a part of this
Warrant.
********************
13
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized as of the date first above indicated.
TOWERSTREAM CORPORATION
By:
------------------------------------
Name:
Title:
14
NOTICE OF EXERCISE
TO: [_______________________
(1) The undersigned hereby elects to purchase ________ Warrant Shares
of the Company pursuant to the terms of the attached Warrant (only if exercised
in full), and tenders herewith payment of the exercise price in full, together
with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[_] in lawful money of the United States; or
[_] [if permitted] the cancellation of such number of Warrant
Shares as is necessary, in accordance with the formula set forth
in subsection 2(c), to exercise this Warrant with respect to the
maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 2(c).
(3) Please issue a certificate or certificates representing said
Warrant Shares in the name of the undersigned or in such other name as is
specified below:
_______________________________________
The Warrant Shares shall be delivered to the following DWAC Account Number or by
physical delivery of a certificate to:
_______________________________________
_______________________________________
_______________________________________
(4) Accredited Investor. The undersigned is an "accredited investor"
as defined in Regulation D promulgated under the Securities Act of 1933, as
amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ______________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Date: __________________________________________________________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing
Warrant 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 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 a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
EXHIBIT 10.11
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of January
16, 2007, among Towerstream Corporation, a Delaware corporation (the "Company"),
and the entities listed on Schedule A hereto (each, a "Purchaser" and
collectively, the "Purchasers").
RECITALS
WHEREAS, the Company and the Purchasers are parties to a Securities
Purchase Agreement (the "Purchase Agreement") dated as of the date hereof;
WHEREAS, the Purchasers' obligations under the Purchase Agreement are
conditioned upon certain registration rights under the Securities Act of 1933,
as amended (the "Securities Act"), as described in the Purchase Agreement; and
WHEREAS, the Purchasers and the Company desire to provide for the rights of
registration under the Securities Act as are provided herein upon the execution
and delivery of this Agreement by such Purchasers and the Company.
NOW, THEREFORE, in consideration of the promises, covenants and conditions
set forth herein, the parties hereto hereby agree as follows:
1. Registration Rights.
1.1 Definitions. Capitalized terms used and not otherwise defined herein
that are defined in the Purchase Agreement shall have the meanings given such
terms in the Purchase Agreement. As used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Commission" means the United States Securities and Exchange
Commission.
(b) "Common Stock" means the Company's common stock, par value $0.001
per share.
(c) "Debentures" shall have the meaning set forth in the Purchase
Agreement.
(d) "Effectiveness Date" means, with respect to the initial
Registration Statement required to be filed hereunder, the 130th calendar day
following the date hereof and, with respect to any additional Registration
Statements which may be required pursuant to Section 1.3(m), the 90th calendar
day following the date on which the Company first knows, or reasonably should
have known, that such additional Registration Statement is required hereunder;
provided, however, that in the event the Company is notified by the Commission
that one of the above Registration Statements will not be reviewed or is no
longer subject to further review and comments, the Effectiveness Date as to such
Registration Statement shall be the fifth
Trading Day following the date on which the Company is so notified if such date
precedes the dates required above.
(e) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(f) "Filing Date" means, with respect to the initial Registration
Statement required hereunder, the 70th calendar day following the date hereof
and, with respect to any additional Registration Statements which may be
required pursuant to Section 1.3(m), the 30th calendar day following the date on
which the Company first knows, or reasonably should have known, that such
additional Registration Statement is required hereunder.
(g) "Purchaser" means each original Purchaser signatory hereto,
together with any person owning Registrable Securities.
(h) "Prospectus" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by a Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus
(i) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(j) "Registrable Securities" means (i) all of the shares of Common
Stock issuable upon conversion in full of the Debentures, (ii) all shares of
Common Stock issuable as interest on the Debentures assuming all permissible
interest payments are made in shares of Common Stock and the Debentures are held
until maturity, (iii) all Warrant Shares, (iv) any additional shares of Common
Stock issuable in connection with any anti-dilution provisions in the Debentures
or the Warrants (in each case, without giving effect to any limitations on
conversion set forth in the Debenture or limitations on exercise set forth in
the Warrant), (v) any other shares of Common Stock (and shares of Common Stock
underlying Common Stock Equivalents) held by a Purchaser and (vi) any securities
issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the foregoing.
(k) "Rule 144" means Rule 144 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(l) "Warrants" means the warrants to purchase Common Stock issued
pursuant to the Purchase Agreement.
1.2 Company Registration.
2
(a) On or prior to each Filing Date the Company shall prepare and file
with the Commission a registration statement covering the Registrable Securities
for an offering to be made on a continuous basis pursuant to Rule 415. The
registration statement shall be on Form SB-2 or Form S-3 (except if the Company
is not then eligible to register for resale the Registrable Securities on Form
SB-2 or Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith) and shall contain (unless otherwise
directed by at least a majority in interest of the Purchasers) a "Plan of
Distribution" in a customary form that is reasonably acceptable to the Company
and the Majority Purchasers (as defined in Section 4.2 below). The Company shall
cause the registration statement to become effective and remain effective as
provided herein. The Company shall use its best efforts to cause the
registration statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event no later than
the Effectiveness Date. The Company shall use its best efforts to keep the
registration statement continuously effective under the Securities Act until the
date which is the earliest to occur of: (i) the date that is 18 months after the
date such registration statement is declared effective by the Commission or (ii)
the date of which all Registrable Securities have been sold (the "Effectiveness
Period"). The Company shall promptly issue a press release to notify all holders
or Registrable Securities of the effectiveness of a Registration Statement
within one Trading Day that the Company receives notification of the
effectiveness of the Registration Statement from the Commission. The Company
shall, as soon as practicable after the Effective Date (as defined in the
Purchase Agreement), file a final Prospectus with the Commission as required by
Rule 424.
(b) Except in accordance with Section 1.9 hereof, if: (i) the
registration statement is not filed on or prior to the Filing Date; or (ii) the
Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be "reviewed," or not subject to further review (provided the filed Registration
Statement otherwise complies with the Act); or (iii) a Registration Statement
filed or required to be filed hereunder is not declared effective by the
Commission by its Effectiveness Date; or (iv) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously effective as
to all Registrable Securities for which it is required to be effective, or the
Holders are otherwise not permitted to utilize the Prospectus therein to resell
such Registrable Securities, for more than 10 consecutive calendar days or more
than an aggregate of 40 calendar days during any 12-month period (which need not
be consecutive calendar days), (any such failure or breach being referred to as
an "Event", and for purposes of clause (i) or (iii) the date on which such Event
occurs, or for purposes of clause (ii) the date on which such five Trading Day
period is exceeded, or for purposes of clause (vv) the date on which such 10 or
40 calendar day period, as applicable, is exceeded, each being referred being
referred to as "Event Date"), then, in addition to any other rights the
Purchasers may have hereunder or under applicable law, on each such Event Date
and on each monthly anniversary of each such Event Date (if the applicable Event
shall not have been cured by such date) until the applicable Event is cured, the
Company shall pay to each Purchaser an amount in cash, as partial liquidated
damages and not as a penalty, an amount equal to 1.0% of the aggregate purchase
price paid by such Purchaser pursuant to the Purchase Agreement, up to a maximum
of 6.0%, during which such Event continues uncured. While such Event continues,
such liquidated damages shall be paid not less often than every thirty (30)
days. Any unpaid liquidated damages as of the date when an Event has been cured
by the Company shall be paid within three (3) business days following the date
on which such Event has been cured by
3
the Company. The partial liquidated damages pursuant to the terms hereof shall
apply on a daily pro-rata basis for any portion of a month prior to the cure of
an Event.
(c) The Company shall bear and pay all expenses incurred in connection
with any registration, filing or qualification of Registrable Securities with
respect to the registrations pursuant to this Section 1.2 for each Purchaser,
including (without limitation) all registration, filing and qualification fees,
printer's fees, accounting fees and fees and disbursements of counsel for the
Company, but excluding underwriting discounts and commissions relating to
Registrable Securities and fees and disbursements of counsel for the Purchasers.
1.3 Obligations of the Company. Whenever required under this Section 1 to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Not less than five Trading Days prior to the filing of each
Registration Statement and not less than one Trading Day prior to the filing of
any related Prospectus or any amendment or supplement thereto (including any
document that would be incorporated or deemed to be incorporated therein by
reference), the Company shall (i) furnish to each Purchaser copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of such
Purchasers and (ii) cause its officers and directors, counsel and independent
certified public accountants to respond to such inquiries as shall be necessary,
in the reasonable opinion of respective counsel to each Purchasers, to conduct a
reasonable investigation within the meaning of the Securities Act. The Company
shall not file a Registration Statement or any such Prospectus or any amendments
or supplements thereto to which all of the Purchasers shall reasonably object in
good faith, provided that the Company is notified of such objection in writing
no later than 5 Trading Days after the Purchasers have been so furnished copies
of a Registration Statement or 1 Trading Day after the Purchasers have been so
furnished copies of any related Prospectus or amendments or supplements thereto.
Each Purchaser agrees to furnish to the Company a completed questionnaire in the
form attached to this Agreement as Annex A (a "Selling Shareholder
Questionnaire") not less than two Trading Days prior to the Filing Date or by
the end of the fourth Trading Day following the date on which such Purchaser
receives draft materials in accordance with this Section;
(b) Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective and, to keep such registration
statement continuously effective during the Effectiveness Period;
(c) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(d) Furnish to the Purchasers such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act,
4
and such other documents as they may reasonably request in order to facilitate
the disposition of Registrable Securities owned by them (provided that the
Company would not be required to print such prospectuses if readily available to
Purchasers from any electronic service, such as on the EDGAR filing database
maintained at www.sec.gov);
(e) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities'
or blue sky laws of such jurisdictions as shall be reasonably requested by the
Purchasers; 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;
(f) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering (each Purchaser
participating in such underwriting shall also enter into and perform its
obligations under such an agreement);
(g) Notify the Purchaser of Registrable Securities to be sold (which
notice shall, pursuant to clauses (iii) through (vi) hereof, be accompanied by
an instruction to suspend the use of the Prospectus until the requisite changes
have been made) as promptly as reasonably possible (and, in the case of (i)(A)
below, not less than one Trading Day prior to such filing) and (if requested by
any such Person) confirm such notice in writing no later than one Trading Day
following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to a Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement; and (C) with respect to a Registration Statement or
any post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other federal or state governmental authority
for amendments or supplements to a Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the
effectiveness of a Registration Statement covering any or all of the Registrable
Securities or the initiation of any Proceedings for that purpose; (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; (v) of the occurrence of any event or passage of
time that makes the financial statements included in a Registration Statement
ineligible for inclusion therein or any statement made in a Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus, as
the case may be, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (vi) the occurrence or existence of any pending
corporate development with respect to the Company that the Company believes may
be material and that, in the determination of the Company, makes it not in the
best interest of the Company to allow continued availability of a Registration
Statement or Prospectus, provided that any and all of such information shall
remain confidential to each Purchaser until such information otherwise
5
becomes public, unless disclosure by a Purchaser is required by law; provided,
further, that notwithstanding each Purchasers' agreement to keep such
information confidential, the Purchasers make no acknowledgement that any such
information is material, non-public information;
(h) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of a
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment;
(i) The Company shall effect a filing with respect to the public
offering contemplated by the Registration Statement (an "Issuer Filing") with
the National Association of Securities Dealers, Inc. ("NASD") Corporate
Financing Department pursuant to NASD Rule 2710(b)(10)(A)(i) within one Trading
Day of the date that the Registration Statement is first filed with the
Commission and pay the filing fee required by such Issuer Filing. The Company
shall use commercially reasonable efforts to pursue the Issuer Filing until the
NASD issues a letter confirming that it does not object to the terms of the
offering contemplated by the Registration Statement. A copy of the Issuer Filing
and all related correspondence with respect thereto shall be provided to FWS;
(j) Upon the occurrence of any event contemplated by this Section 1.3,
as promptly as reasonably possible under the circumstances taking into account
the Company's good faith assessment of any adverse consequences to the Company
and its stockholders of the premature disclosure of such event, prepare a
supplement or amendment, including a post-effective amendment, to a Registration
Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither a Registration Statement nor
such Prospectus will contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If the Company notifies the Purchasers in accordance with
clauses (iii) through (vi) of Section 1.3(f) above to suspend the use of any
Prospectus until the requisite changes to such Prospectus have been made, then
the Purchasers shall suspend use of such Prospectus. The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed as promptly
as is practicable;
(k) Cause all such Registrable Securities registered pursuant hereto
to be listed on each securities exchange or nationally recognized quotation
system on which similar securities issued by the Company are then listed;
(l) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration; and
(m) If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 100% of the number of shares of Common Stock then
registered in a Registration Statement, then the Company shall file as soon as
reasonably practicable, but in any
6
case prior to the applicable Filing Date, an additional Registration Statement
covering the resale by the Purchasers of not less than the number of such
Registrable Securities.
1.4 Furnish Information. The Company may require each Purchaser to furnish
to the Company a certified statement as to the number of shares of Common Stock
beneficially owned by such Purchaser and, if required by the Commission, the
natural persons thereof that have voting and dispositive control over the Common
Stock held by such Purchaser. During any periods that the Company is unable to
meet its obligations hereunder with respect to the registration of the
Registrable Securities solely because any Purchaser fails to furnish such
information within three Trading Days of the Company's request, any liquidated
damages that are accruing at such time as to such Purchaser only shall be tolled
and any Event that may otherwise occur solely because of such delay shall be
suspended as to such Purchaser only, until such information is delivered to the
Company.
1.5 [RESERVED]
1.6 Indemnification.
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Purchaser, any underwriter (as defined in the Securities Act)
for such Purchaser and each person, if any, who controls such Purchaser or
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities (joint or several) to which
any of the foregoing persons may become subject under the Securities Act, the
Exchange Act or other federal or state securities law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in a registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto (collectively, the "Filings"), (ii) the
omission or alleged omission to state in the Filings a material fact required to
be stated therein, or necessary to make the statements therein not misleading,
or (iii) any violation or alleged violation by the Company of the Securities
Act, the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any state securities
law; and the Company will pay any legal or other expenses reasonably incurred by
any person to be indemnified pursuant to this Section 1.6(a) in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 1.6(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 shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation that
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Purchaser,
underwriter or controlling person.
(b) To the extent permitted by law, each Purchaser, severally and not
jointly will indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the registration statement, each person, if
any, who controls the Company within the
7
meaning of the Securities Act or the Exchange Act, any underwriter, any other
Purchaser selling securities in such registration statement and any controlling
person of any such underwriter or other Purchaser, against any losses, claims,
damages or liabilities (joint or several) to which any of the foregoing persons
may become subject under the Securities Act, the Exchange Act or other federal
or state securities law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Purchaser expressly for use in connection with such registration; and each such
Purchaser will pay any legal or other expenses reasonably incurred by any person
to be indemnified pursuant to this Section 1.6(b) in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 1.6(b)
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
Purchaser (which consent shall not be unreasonably withheld); provided, however,
in no event shall any indemnity under this subsection 1.6(b) exceed the net
proceeds from the offering received by such Purchaser.
(c) Promptly after receipt by an indemnified party under this Section
1.6 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 1.6, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.6.
(d) If the indemnification provided for in Sections 1.6(a) and (b) is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, claim, damage or expense referred to herein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or expense in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions or alleged statements or omissions that resulted in such
loss, liability, claim or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact relates to
information supplied by the indemnifying
8
party or by the indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. In no event shall any Purchaser be required to contribute an amount in
excess of the net proceeds from the offering received by such Purchaser.
(e) The obligations of the Company and Purchasers under this Section
1.6 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.7 Reports Under Securities Exchange Act. With a view to making available
the benefits of certain rules and regulations of the Commission, including Rule
144, that may at any time permit a Purchaser to sell securities of the Company
to the public without registration or pursuant to a registration on Form SB-2,
the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times after ninety (90) days after
the effective date of the registration statement;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is necessary to enable the
Purchasers to utilize Form SB-2 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the registration statement is declared effective;
(c) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(d) furnish to any Purchaser, so long as the Purchaser owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at any
time after ninety (90) calendar days after the effective date of the
registration statement), the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form SB-2
(at any time after it so qualifies), (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 in
availing any Purchaser of any rule or regulation of the Commission that permits
the selling of any such securities without registration or pursuant to such
form.
1.8 Transfer or Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
transferred or assigned, but only with all related obligations, by a Purchaser
to a transferee or assignee who (a) acquires at least 25,000 Registrable
Securities (subject to appropriate adjustment for stock splits, stock dividends
and combinations) from such transferring Purchaser or (b) holds Registrable
Securities immediately prior to such transfer or assignment; provided, that in
the case of (a), (i) prior to such transfer or assignment, the Company is
furnished with written notice stating the name and address of such transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, (ii) such transferee or assignee
agrees in writing to be bound by and subject to the terms and conditions of this
Agreement including,
9
without limitation, the provisions of Section 1.9 hereof and (iii) such transfer
or assignment shall be effective only if immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act.
1.9 Market Stand-Off" Agreement. Each Purchaser hereby agrees that during
the Effectiveness Period it will not, without the prior written consent of the
Company and the managing underwriter (if a managing or lead underwriter is
appointed), during the period commencing on the date of the final prospectus
relating to a firm commitment underwritten public offering of the Company
offering a minimum of $20 million of securities and ending on the date specified
by the Company and the managing underwriter (such period not to exceed one
hundred eighty (180) calendar days) (i) lend, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any securities of the Company, including
(without limitation) shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock (whether now owned or hereafter
acquired) or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
any securities of the Company, including (without limitation) shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (whether now owned or hereafter acquired), whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of securities, in cash or otherwise. The foregoing covenants shall not apply to
the sale of any shares by a Purchaser to an underwriter pursuant to an
underwriting agreement and shall only be applicable to the Purchasers if all the
Company's executive officers, directors and greater than five percent (5%)
stockholders enter into similar agreements. Each Purchaser agrees to execute an
agreement(s) reflecting (i) and (ii) above as may be requested by the managing
or lead underwriters at the time of the underwritten public offering, and
further agrees that the Company may impose stop transfer instructions with its
transfer agent in order to enforce the covenants in (i) and (ii) above. The
underwriters in connection with the Company's initial underwritten public
offering are intended third party beneficiaries of the covenants in this Section
1.9 and shall have the right, power and authority to enforce such covenants as
though they were a party hereto.
2. [RESERVED].
3. [RESERVED]
4. Miscellaneous.
4.1 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of 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 for the adjudication of any dispute hereunder or in
connection
10
herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), 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 improper
or is an inconvenient venue for such proceeding. 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 via registered or
certified mail or overnight delivery (with evidence of delivery) 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 contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by law. The parties hereby waive
all rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys' fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.
4.2 Waivers and Amendments. This Agreement may be terminated and any term
of this Agreement may be amended or waived (either generally or in a particular
instance and either retroactively or prospectively) with the written consent of
the Company and Purchasers holding at least a majority of the principal amount
of the Debentures then outstanding (the "Majority Purchasers"). Notwithstanding
the foregoing, additional parties may be added as Purchasers under this
Agreement with the written consent of the Company and the Majority Purchasers.
No such amendment or waiver shall reduce the aforesaid percentage of the
Registrable Securities, the holders of which are required to consent to any
termination, amendment or waiver without the consent of the record holders of
all of the Registrable Securities. Any termination, amendment or waiver effected
in accordance with this Section 4.2 shall be binding upon each holder of
Registrable Securities then outstanding, each future holder of all such
Registrable Securities and the Company.
4.3 No Piggyback on Registrations. Except for any registration rights
described in or as set forth in the Private Placement Memorandum, neither the
Company nor any of its security holders (other than the Purchasers in such
capacity pursuant hereto) may include securities of the Company in the
Registration Statements other than the Registrable Securities. The Company shall
not file any other registration statements until all Registrable Securities are
registered pursuant to a Registration Statement that is declared effective by
the Commission, provided that this Section 4.3 shall not prohibit the Company
from filing amendments to registration statements filed prior to the date of
this Agreement.
4.4 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions of this Agreement shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
4.5 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement among the parties with regard to the subject matter
hereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants except as specifically set forth
herein.
11
4.6 Notices. All notices and other communications required or permitted
under this Agreement shall be in writing and shall be delivered personally by
hand or by overnight courier, mailed by United States first-class mail, postage
prepaid, sent by facsimile or sent by electronic mail directed (a) if to a
Purchaser, at such Purchaser's address, facsimile number or electronic mail
address set forth in the Company's records, or at such other address, facsimile
number or electronic mail address as such Purchaser may designate by ten (10)
days' advance written notice to the other parties hereto or (b) if to the
Company, to its address, facsimile number or electronic mail address set forth
on its signature page to this Agreement and directed to the attention of the
Chief Executive Officer, or at such other address, facsimile number or
electronic mail address as the Company may designate by ten (10) days' advance
written notice to the other parties hereto. All such notices and other
communications shall be effective or deemed given upon delivery, on the date of
mailing, upon confirmation of facsimile transfer or upon confirmation of
electronic mail delivery.
4.7 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The titles and subtitles used in this Agreement are used for
convenience only and are not considered in construing or interpreting this
Agreement.
4.8 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement, and the balance of the Agreement shall be interpreted as if such
provision were so excluded, and shall be enforceable in accordance with its
terms.
4.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
4.10 Telecopy Execution and Delivery. A facsimile, telecopy or other
reproduction of this Agreement may be executed by one or more parties hereto,
and an executed copy of this Agreement may be delivered by one or more parties
hereto by facsimile or similar electronic transmission device pursuant to which
the signature of or on behalf of such party can be seen, and such execution and
delivery shall be considered valid, binding and effective for all purposes. At
the request of any party hereto, all parties hereto agree to execute an original
of this Agreement as well as any facsimile, telecopy or other reproduction
hereof.
4.11 Piggy-Back Registrations. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Purchaser a written notice of
such determination and, if within fifteen days after the date of such notice,
any such Purchaser shall so request in writing, the Company shall include in
such registration statement all or any part of such Registrable Securities such
Purchaser requests to be registered; provided, however, that the Company shall
not be required to register any Registrable
12
Securities pursuant to this Section 4.11 that are eligible for resale pursuant
to Rule 144(k) promulgated under the Securities Act or that are the subject of a
then effective Registration Statement.
4.12 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder are several and not joint with the
obligations of any other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.
[SIGNATURE PAGE FOLLOWS]
13
IN WITNESS WHEREOF, the parties have executed this Agreement on the day,
month and year first set forth above.
"Company"
TOWERSTREAM CORPORATION
By:
-------------------------------------
Name:
Title:
Address:
Towerstream Corporation
55 Hammerlund Way
Middletown, Rhode Island 02842
Telephone: (401) 848-5848
Telecopy: (401) 848-5130
E-mail: jeff@towerstream.com
Attention: Chief Executive Officer
[COMPANY SIGNATURE PAGE TO REGISTATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, the parties have executed this Agreement on the day,
month and year first set forth above.
"Purchaser"
________________________________________
By:
-------------------------------------
Name
Title:
Address:
________________________________________
________________________________________
________________________________________
Telephone:______________________________
Facsimile:______________________________
Email:__________________________________
[INVESTOR SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
EXHIBIT 10.12
LOCK-UP AGREEMENT
January __, 2007
Each Purchaser referenced below:
Re: Securities Purchase Agreement, dated as of January __, 2007 (the
"Purchase Agreement"), between Towerstream Corporation, a Delaware
corporation (the "Company") and the purchasers signatory thereto
(each, a "Purchaser" and, collectively, the "Purchasers")
Ladies and Gentlemen:
Defined terms not otherwise defined in this letter agreement (the "Letter
Agreement") shall have the meanings set forth in the Purchase Agreement.
Pursuant to Section 2.2(a)(vi) of the Purchase Agreement and in satisfaction of
a condition of the Company's obligations under the Purchase Agreement, the
undersigned irrevocably agrees with the Company that, from the date hereof until
the 30th Trading Day after the Effective Date (such period, the "Restriction
Period"), the undersigned will not offer, sell, contract to sell, hypothecate,
pledge or otherwise dispose of (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the undersigned or any Affiliate of the undersigned or any person
in privity with the undersigned or any Affiliate of the undersigned), directly
or indirectly, including the filing (or participation in the filing) of a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Exchange Act with respect to,
any shares of Common Stock or Common Stock Equivalents beneficially owned, held
or hereafter acquired by the undersigned (the "Securities") without the prior
written approval of the Requisite Percentage, as defined in the Purchase
Agreement. In addition, in the context of an underwritten public offering at any
time that the market stand-off provision in Section 1.9 of the Registration
Rights Agreement is effective, the undersigned agrees, without the prior written
consent of the Company and the managing underwriter (if a managing or lead
underwriter is appointed), during the period commencing on the date of the final
prospectus relating to the Company's initial underwritten public offering (firm
commitment or best-efforts) and ending on the date specified by the Company and
the managing underwriter (such period not to exceed 180 calendar days) not to:
(i) lend, offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any securities of the Company, including (without limitation) shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether now owned or hereafter acquired), or (ii)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of any securities of the
Company, including (without limitation) shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (whether now
owned or hereafter acquired); whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of securities, in cash or otherwise.
Beneficial ownership shall be calculated in accordance with Section 13(d)
of the Exchange Act. In order to enforce this covenant, the Company shall impose
irrevocable stop-transfer instructions preventing the Transfer Agent from
effecting any actions in violation of this Letter Agreement.
The undersigned acknowledges that the execution, delivery and performance
of this Letter Agreement is a material inducement to each Purchaser to complete
the transactions contemplated by the Purchase Agreement and that each Purchaser
(which shall be a third party beneficiary of this Letter Agreement) and the
Company shall be entitled to specific performance of the undersigned's
obligations hereunder. The undersigned hereby represents that the undersigned
has the power and authority to execute, deliver and perform this Letter
Agreement, that the undersigned has received adequate consideration therefor and
that the undersigned will indirectly benefit from the closing of the
transactions contemplated by the Purchase Agreement.
This Letter Agreement may not be amended or otherwise modified in any
respect without the written consent of each of the Company, each Purchaser and
the undersigned. This Letter Agreement shall be construed and enforced in
accordance with the laws of the State of New York without regard to the
principles of conflict of laws. The undersigned hereby irrevocably submits to
the exclusive jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
Manhattan, for the purposes of any suit, action or proceeding arising out of or
relating to this Letter Agreement, and hereby waives, and agrees not to assert
in any such suit, action or proceeding, any claim that (i) it is not personally
subject to the jurisdiction of such court, (ii) the suit, action or proceeding
is brought in an inconvenient forum, or (iii) the venue of the suit, action or
proceeding is improper. The undersigned hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under the Purchase Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. The undersigned hereby waives any right to a trial by jury. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. The undersigned agrees and understands that this
Letter Agreement does not intend to create any relationship between the
undersigned and each Purchaser and that each Purchaser is not entitled to cast
any votes on the matters herein contemplated and that no issuance or sale of the
Securities is created or intended by virtue of this Letter Agreement.
By its signature below, the Company's Transfer Agent hereby acknowledges
and agrees that, reflecting this Letter Agreement, it has placed an irrevocable
stop transfer instruction on all Securities beneficially owned by the
undersigned until the end of the Restriction Period. This Letter Agreement shall
be binding on successors and assigns of the undersigned with respect to the
Securities and any such successor or assign shall enter into a similar agreement
for the benefit of the Purchasers.
SIGNATURE PAGE FOLLOWS
2
This Letter Agreement may be executed in two or more counterparts, all of
which when taken together may be considered one and the same agreement.
-------------------------
Signature
_________________________
Print Name
_________________________
Position in Company
Address for Notice:
________________________________________
________________________________________
________________________________________
Number of shares of Common Stock
________________________________________________________________________________
Number of shares of Common Stock underlying subject to warrants, options,
debentures or other convertible securities
By signing below, the Company agrees to enforce the restrictions on
transfer set forth in this Letter Agreement.
________________________________________
By:
------------------------------------
Name:
Title:
Acknowledged and agreed to
as of the date set forth above:
Pacific Stock Transfer Company
By:
------------------------------------
Name:
Title:
3
EXHIBIT 10.13
TOWERSTREAM CORPORATION
55 Hammerlund Way
Middletown, Rhode Island 02842
January 5, 2007
Dan Schreiber
Granite Financial Group, LLC
12220 El Camino Real, Suite 400
San Diego, CA 92130
RE: Selling Agreement
Dear Mr. Schreiber:
The undersigned, Towerstream Corporation, a Delaware Corporation
("Corporation"), by this letter confirms its agreement (the "Agreement") with
Granite Financial Group, LLC, a Delaware limited liability company (the
"Broker-Dealer"), regarding the Broker-Dealer acting as a placement agent in
connection with an offering of up to $15 million of units consisting of shares
of common stock and warrants to purchase common stock (the "Units") under the
terms set forth in the Confidential Private Placement Memorandum dated December
21, 2006 and all exhibits and supplements thereto (the "Memorandum") prepared by
Corporation and delivered to you for distribution to the offerees. The Units are
to be offered on a "Best Efforts, Minimum- Maximum" basis with respect to all
Units. The Units will be offered and sold in accordance with 17 CFR 203.506
("Rule 506"), promulgated under Regulation D of the Securities Act 1933, as
amended.
Upon execution and delivery of subscription documents (the "Subscription
Documents"), which shall be in the form of the Subscription Documents included
in the Memorandum, the subscribers for Units shall, upon acceptance thereof by
Corporation (which acceptance shall be in Corporation's sole discretion), become
Unit Holders pursuant to the terms set forth in the Memorandum. The offering of
the Units shall begin when the Memorandum is first made available to you by
Corporation and shall continue until the termination date, and through the end
of any extension, unless the offering has been terminated as of any earlier time
(the "Subscription Period").
SECTION 1. APPOINTMENT OF AGENT. On the basis of the representations,
warranties and covenants contained in this Agreement, but subject to the terms
and conditions herein set forth, you are hereby appointed as non-exclusive
selling agent of Corporation for the Units offered under the Memorandum. The
appointment shall continue until the earliest of (i) 120 days from the date of
this Agreement, or (ii) the termination of the Subscription Period, or (iii) the
sale of all of the Units, or (iv) the termination of the offering of Units by
Corporation for any reason, whichever occurs first. Subject to the performance
by Corporation of all of its obligations under this Agreement, and to the
completeness and accuracy of all of its representations and warranties contained
in this Agreement, you agree to use your best efforts during the Subscription
Period to find subscribers for the Units.
SECTION 2. DEFINITIONS. Certain terms used herein are defined in the
Memorandum and shall have the same meanings given therein.
Selling Agreement
Page 2
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CORPORATION.
Corporation represents, warrants and covenants, to the best of its knowledge,
that:
a. Corporation is a corporation duly and validly organized and in good
standing under the laws of the State of Delaware and has full power and
authority to conduct the business described in the Memorandum.
b. Corporation will deliver to you a reasonable number of copies of the
Memorandum, and the information made available to each offeree pursuant to
subsection 3(i) hereof shall be sufficient to comply with, and conform to,
the requirements of Rule 506.
c. All action required to be taken by Corporation to offer and sell the
Units to qualified subscribers has been or will be taken.
d. Upon payment of the subscription amount specified in the Subscription
Documents, acceptance by Corporation of the subscriptions from qualified
subscribers (which acceptance shall be at the sole discretion of
Corporation), and delivery by the subscribers for Units of such additional
documents as may reasonably be required by Corporation, such subscribers
will become Unit Holders.
e. During the Subscription Period, the Memorandum will not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not materially misleading.
f. This Agreement has been duly and validly authorized, executed, and
delivered by or on behalf of Corporation and constitutes a valid and
binding agreement of Corporation.
g. Execution by Corporation of a subscriber's Subscription Documents will
be duly and validly authorized by or on behalf of Corporation and will
constitute a valid and binding agreement of Corporation.
h. The execution and delivery of this Agreement and the incurrence of the
obligations set forth herein and the consummation of the transactions
contemplated in this Agreement and the Memorandum will not constitute a
breach or default under:
(i) any instruments by which Corporation is bound; or
Selling Agreement
Page 3
(ii) any order, rule or regulation (applicable to Corporation) issued
by any court, governmental body or administrative agency having
jurisdiction over Corporation.
i. Corporation shall make available, during the Subscription Period and
prior to the sale of any Units, to each purchaser or his purchaser
representative(s) or both:
(i) such information (in addition to that contained in the Memorandum)
concerning the offering of Units, Corporation, and any other relevant
matters, as Corporation possesses or can acquire without unreasonable
effort or expense; and
(ii) the opportunity to ask questions of, and receive answers from,
Corporation concerning the terms and conditions of the offering of the
Units, and to obtain any additional information, to the extent
Corporation possesses the same or can acquire it without unreasonable
effort or expense, necessary to verify the accuracy of the information
furnished to the purchaser or his purchaser representative(s).
j. With respect to those activities undertaken by it, Corporation has
endeavored to ensure that the offering and sale of Units complies, in all
respects, with the requirements of the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, and the securities or
"blue sky" laws of any state or jurisdiction in which an offer and/or sale
takes place.
k. There is no litigation or proceeding at law or in equity before any
federal or state authority against Corporation wherein an unfavorable
decision, ruling, or finding would materially and adversely affect the
business, operations or financial condition or income of Corporation or any
proposed Corporation investment, and neither the execution and delivery of
this Agreement, the consummation of the transactions herein contemplated,
nor the fulfillment of or compliance with the terms hereof will conflict
with, or result in a breach of, any of the terms, provisions, or conditions
of any agreement or instrument to which Corporation is a party.
l. Corporation will endeavor in good faith to qualify, or assist you in
qualifying, the Units for offer and sale, or to establish, or assist you in
establishing, the exemption of the offer and sale of the Units from
qualification or registration under the applicable securities or "blue sky"
laws of such jurisdictions as you may reasonably designate, and will
promptly notify you, orally or in writing (but if orally then prompt
written confirmation shall be delivered to you), as each jurisdiction is so
qualified or as an exemption from registration or qualification is
established therein; provided, however, that Corporation shall not be
Selling Agreement
Page 4
obligated to do business or to qualify as a dealer in any jurisdiction in
which it is not so qualified.
m. Corporation will pay all expenses in connection with the printing and
delivery to you in reasonable quantities of copies of the Memorandum and
the qualification of the Units under the securities or "blue sky" laws.
n. As compensation for your services, Corporation will pay you a sales
commission equal to (i) seven percent (7%) of the gross proceeds received
by Corporation from the Units placed by you and (ii) warrants to purchase a
number of shares of common stock equal to five percent (5%) of the number
of shares included within the Units placed by you, payable pursuant to the
terms of the Memorandum.
o. If any event relating to or affecting Corporation shall occur during the
Subscription Period, as a result of which it is necessary, in the opinion
of your counsel and counsel to Corporation, to amend or supplement the
Memorandum so that it will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading, Corporation shall forthwith prepare and furnish to
you a reasonable number of copies of an amendment or amendments of, or
supplement or supplements to, the Memorandum, which you shall promptly
deliver to all offerees then being solicited. For purposes of this
subsection o., Corporation will furnish such information with respect to
Corporation as you may from time to time reasonably request.
p. Corporation will deliver to you such reports and documents as
Corporation is required, under the terms of the Memorandum or any document
referred to therein, to furnish to its prospective investors.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BROKER-DEALER.
The Broker-Dealer represents, warrants and covenants, to the best of its
knowledge, that:
a. It, or any person acting on its behalf, will not offer any of the Units
for sale, or solicit any offers to subscribe for or buy any Units, or
otherwise negotiate with any person with respect to the Units, on the basis
of any communications or documents, except the Memorandum, the information
provided by Corporation pursuant to Section 3(i), or any other documents
and any transmittal letter reasonably satisfactory in form and substance to
Corporation and counsel to Corporation.
b. It, or any person acting on its behalf, shall not use any form of
general solicitation or general advertising in the course of any offer or
sale of the Units including, but not limited
Selling Agreement
Page 5
to:
(i) any advertisement, article, notice or other communication
published in any newspaper, magazine, website, or similar media or
broadcast over television or radio; and
(ii) any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
c. It, or any person acting on its behalf, shall solely make offers to sell
Units to, solicit offers to subscribe for or purchase any Units from, or
otherwise negotiate with respect to the Units with, persons whom it has
reasonable grounds to believe and does believe are "accredited investors"
within the meaning of 17 CFR 230.501(a).
In making or soliciting such offers, or so negotiating, Broker-Dealer
will comply with the provisions of the Securities Act of 1933, as amended,
the Securities Exchange Act of 1934, as amended, and the securities or
"blue sky" laws of the jurisdiction in which it makes or solicits such
offers, or so negotiates.
d. It will exercise reasonable care to assure that the purchasers are not
underwriters within the meaning of Section 2(11) of the Securities Act of
1933, as amended. In that connection, it will:
(i) Make reasonable inquiry to determine that each purchaser is
acquiring the Units for his own account; and
(ii) Obtain from the purchaser a signed written agreement (contained
in the Subscription Documents) that the Units will not be sold without
registration under the Securities Act of 1933, as amended, unless an
opinion of counsel that an exemption therefrom is available,
satisfactory in form and substance to Corporation or counsel, is
delivered in accordance with such agreement.
e. It shall furnish Corporation with information in sufficient detail (in
the form of the Investor Questionnaire, a copy of which is included in the
Memorandum), with respect to each purchaser of Units, in order to
demonstrate to Corporation that such purchaser satisfies the requirements
of Rule 506, as outlined in Section 4(c) above.
f. If a prospective purchaser uses or consults a purchaser representative
(as that term is defined in 17 CFR 230.501(h)) in connection with the
offering of the Units, it will obtain and deliver to Corporation, prior to
the closing of the offering of the Units, the prospective
Selling Agreement
Page 6
purchaser's written acknowledgment that he has used such person(s) in
connection with evaluating the merits and risks of the prospective
investment and such representative's written consent so to act, as well as
a description of the education and experience of such representative(s).
g. It will offer and sell the Units only in those jurisdictions in which
it, or any other person or entity acting in its behalf, is properly
registered, and it will comply with all laws, rules and regulations related
to its activities on behalf of Corporation pursuant to this Agreement.
h. It is a securities broker-dealer registered and in good standing with
the Securities and Exchange Commission and is a member of the NASD.
i. This Agreement has been duly and validly authorized, executed, and
delivered by or on behalf of the Broker-Dealer and constitutes a valid and
binding agreement of the Broker-Dealer.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF CORPORATION. The obligations of
Corporation under this Agreement are subject to the accuracy of and compliance
with your representations, warranties and covenants set forth in Section 4, and
to the performance by you of your obligations hereunder.
SECTION 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements by either Corporation or
Broker-Dealer contained in this Agreement shall remain operative and in full
force and effect, and shall survive the closing of the offering of the Units.
Upon termination of this Agreement, Corporation shall have no further
obligations to Broker-Dealer other than with respect to fees payable to
Broker-Dealer as provided herein.
SECTION 7. INDEMNIFICATION.
(a) Corporation agrees to indemnify, defend and hold Broker-Dealer
harmless against any and all loss, liability, damage and expense
whatsoever, whether or not resulting in any liability, that may be incurred
under applicable securities laws, at common law, or otherwise and which is
based upon or arises out of:
(1) any untrue statement or alleged untrue statement of a
material fact contained in the Memorandum or the omission or alleged
omission from the Memorandum of a material fact necessary in order to
make the statements
Selling Agreement
Page 7
made therein, in light of the circumstances under which they were
made, not misleading;
(2) the offer and/or sale by Corporation, or anyone acting on its
behalf, of Units (unless due to the bad faith or gross negligence of
the Broker-Dealer); or
(3) any breach of any representation, warranty or covenant made
by Corporation in this Agreement.
(b) The Broker-Dealer agrees to indemnify, defend and hold Corporation
and its officers, directors, shareholders and agents harmless against any
and all loss, liability, damage and expense whatsoever, whether or not
resulting in any liability, that may be incurred under applicable
securities laws, at common law, or otherwise and which is based upon or
arises out of:
(1) any violation by Broker-Dealer or its agents of the
Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, or any state securities statutes, unless such
violation is attributable to actions, misrepresentations or omissions
of Corporation; or
(2) any breach of any representation, warranty or covenant made
by Broker-Dealer in this Agreement.
(c) In any legal or regulatory action or claim brought against
Corporation or Broker-Dealer or their agents, Corporation and the
Broker-Dealer shall have the rights and duties set forth in this Section 7.
The indemnification provisions included in this Section 7 shall include,
but not be limited to, recovery of and payment of reasonable legal or other
expenses incurred by Broker-Dealer or Corporation in connection with
defending such actions and claims.
(d) Within fourteen (14) calendar days after a claim or action is
brought or asserted against Corporation or the Broker-Dealer or both, which
in the opinion of either is subject to the indemnification provisions
contained in this Section 7., the party seeking indemnification (the
"Indemnitee") shall notify, in writing, the party from whom indemnification
is sought (the "Indemnitor") of the existence of the claim or action.
Indemnitor shall assume the defense of the claim or action by employing
counsel for the Indemnitee, and shall thereafter be responsible for the
payment of all legal fees and expenses incurred in connection with such
defense. In the event that a claim or action is brought or asserted against
Corporation and the Broker-Dealer, jointly, Corporation and the Broker-
Selling Agreement
Page 8
Dealer shall make a good faith effort determine whether the claim or action
can be defended jointly or if potential conflicts exist which require that
separate legal counsel be employed for Broker-Dealer and Corporation. In
such case, if Corporation and the Broker-Dealer seek indemnification from
the other, each shall employ separate counsel to represent them and shall
be responsible for the payment of all expenses associated with employment
of such counsel, subject to the right of recovery of such expenses as set
forth below in this subparagraph (d). IF EITHER CORPORATION OR
BROKER-DEALER SEEK INDEMNIFICATION FROM THE OTHER UNDER THE PROVISIONS OF
THIS SECTION 7., AND THE PARTY FROM WHOM INDEMNIFICATION IS SOUGHT DECLINES
TO ASSUME DEFENSE OF THE ACTION OR CLAIM, THE PARTY SEEKING INDEMNIFICATION
SHALL HAVE A RIGHT OF RECOVERY AGAINST THE PARTY FROM WHOM INDEMNIFICATION
IS SOUGHT FOR ALL LOSSES, LIABILITIES, DAMAGES AND EXPENSES INCURRED IN THE
DEFENSE OF THE ACTION OR CLAIM, INCLUDING ALL ACTUAL ATTORNEYS' FEES AND
COSTS INCURRED, IN THE EVENT THAT THE DEFENSE OF THE ACTION OR CLAIM IS
SUCCESSFUL AND THERE ARE NO FINDINGS OF WRONGDOING ON THE PART OF THE PARTY
SEEKING INDEMNIFICATION.
SECTION 8. RELIEF. The Broker-Dealer agrees that a breach or threatened
breach on its part of any agreement contained in this Agreement will cause such
damage to Corporation as will be irreparable, and, for that reason, the
Broker-Dealer further agrees that Corporation shall be entitled as a matter of
right to an injunction, by any court of competent jurisdiction, restraining any
further violation of such covenants by the Broker-Dealer or its employees,
partners, officers or agents. The right of injunction shall be cumulative and in
addition to whatever other remedies Corporation may have, including,
specifically, recovery of damages. The Broker-Dealer also agrees to pay
reasonable attorney's fees incurred by Corporation in successfully proving that
the Broker-Dealer breached any of the terms of this Agreement.
SECTION 9. NOTICES. All communications under this Agreement shall be in
writing, and, if sent to you, shall be mailed, delivered or telegraphed and
confirmed to you at the address initially set forth above or as changed by you
in a written notice to Corporation, or if sent to Corporation, shall be mailed,
delivered or telegraphed and confirmed to it at the address set out in the
letterhead above, with a copy to Harvey Kesner, Esq., Haynes and Boone, LLP, 153
East 53rd Street, New York, New York 10022.
SECTION 10. PARTIES. This Agreement shall inure to the benefit of, and be
binding upon, you, any person which controls you, and your successors, and upon
Corporation and its representatives and successors. This Agreement and its
conditions and provisions are for the sole and exclusive benefit of the parties
and their representatives and successors, and for the benefit of no other
person, firm or corporation.
SECTION 11. RELATIONSHIP OF PARTIES. It is not the intention of the parties
to create, nor shall this Agreement be construed as creating, a partnership,
joint venture, agency relationship or
Selling Agreement
Page 9
association other than as specifically set forth herein, or to render the
parties liable as partners, co-venturers, or principals. In their relations with
each other under this Agreement, the parties shall not be considered fiduciaries
or to have established a confidential relationship other than as specifically
set forth herein but rather shall be free to act on an arm's length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.
SECTION 12. ENTIRE AGREEMENT. This Agreement evidences the entire agreement
between Corporation and the Broker-Dealer, and represents a merger of all
preceding agreements between the parties hereto pertaining to the subject matter
hereof.
SECTION 13. SEVERABILITY OF PROVISIONS. If one or more of the provisions of
this Agreement or any application thereof shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions hereof and any application thereof shall in no way be
affected or impaired.
SECTION 14. GOVERNING LAW; JURISDICTION. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware,
without regard to conflicts of laws or principles thereof. Each of the parties
hereto agrees irrevocably consents to the jurisdiction and venue of the federal
and state courts located in New York City.
SECTION 15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
Selling Agreement
Page 10
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us one copy of this Agreement, whereupon this
instrument will become a binding agreement upon you and Corporation in
accordance with its terms.
Very truly yours,
TOWERSTREAM CORPORATION,
a Delaware Corporation
By: /s/ Jeff Thompson
------------------------------------
Name: Jeff Thompson
Title: President
The foregoing Agreement is hereby confirmed and accepted as of the date
first set out above.
GRANITE FINANCIAL GROUP, LLC
By: /s/ Daniel J. Schreiber
------------------------------------
Name: Daniel J. Schreiber
Title: CEO
Address: _______________________________
_______________________________
_______________________________
EXHIBIT 10.14
PALLADIUM CAPITAL ADVISORS, LLC
230 PARK AVENUE, SUITE 539
NEW YORK, NEW YORK 10169
Tel (646) 485-7297 Fax (646) 390-6328
Email jp@palladiumcapital.com
January 4, 2007
Jeff Thompson
President and CEO
Towerstream Corporation
55 Hammerlund Way
Middletown, Rhode Island 02842
Re: Placement Agent Agreement
Dear Jeff:
This letter agreement (the "Agreement") confirms our understanding with respect
to the engagement by Towerstream Corporation (the "Company") of Palladium
Capital Advisors, LLC ("PCA") as placement agent in connection with the sale of
up to $20 million of equity or equity-linked securities on a best efforts basis
through a private placement or similar unregistered transaction on terms that
have been or will be determined by Company and its advisors as set forth in the
Company's Confidential Private Placement memorandum dated December 21, 2006, as
may be revised by the Company from time to time (the "Transaction") to investors
(the "Investors"). For purposes hereof, the term "Transaction" also includes a
convertible loan or other type of investment convertible into or exchangeable
for or otherwise linked to the equity of the Company. The term of the Agreement
(the "Term") shall be for a period of twelve (12) months from the date hereof or
until earlier terminated by either party as described below (see Section 7
(Termination)).
1. Scope. The Company hereby engages PCA to act as placement agent ("Placement
Agent") during the Term in connection with the Transaction(s). The goal of
the engagement is to raise up to $20 million in capital for the Company to
be used for growth opportunities and general working capital purposes. PCA
shall assist the Company and shall, on behalf of the Company, contact such
potential investors as PCA and the Company agree in advance. PCA shall
assist the Company in effecting the Transaction(s), and shall use its best
efforts to offer and sell the securities in accordance with this Agreement.
PCA will market to those, and only those, investors as included in Addendum
A, as may be amended by mutual agreement of the parties from time to time,
and the Company shall retain the right, in its sole discretion, to accept
or reject investors identified by PCA. PCA's engagement by the Company
shall be exclusive solely as to the potential investors included in
Addendum A. PCA shall receive written approval from the Company prior to
marketing to any other investors who have not been included on Addendum A.
It is anticipated that the Company shall also engage its own legal counsel
and may require the services of an accounting firm.
2. Company Information. The Company shall cooperate with PCA in connection
with its financial review and analysis of the Company and shall provide PCA
with such information concerning the
Towerstream Corporation
January __, 2007
Page 2 of 6
Company as PCA deems necessary or appropriate for such review and analysis
(collectively, the "Information").
PCA shall keep in confidence and shall use only for the purposes of
performing its obligations pursuant to this Agreement, and shall not,
without the Company's consent, disclose to any person any non-public
Information furnished by the Company to PCA except (a) its own counsel and
other advisors on a confidential basis, (b) to the Investors approved by
the Company in accordance with the terms hereof and (c) to such other
persons as such counsel has advised is required by applicable law, and then
only after informing the Company of such legal requirement and providing
the Company sufficient time to seek a protective order or otherwise prevent
or restrict such disclosure.
All Information provided by the Company shall be accurate and complete in
all material respects and shall not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not false or misleading. PCA does not assume responsibility for the
accuracy or completeness of the Information, including but not limited to
any disclosure materials related to the Transaction(s) except for such
information that is provided in writing by PCA to the Company that is
independently produced by PCA and not based on Information provided by the
Company or information available from generally recognized public sources.
The Company acknowledges and agrees that PCA will rely primarily on the
Information and on information available from generally recognized public
sources in performing its services hereunder, without having any obligation
to independently verify the same and that PCA has no obligation to
undertake an independent evaluation, appraisal or physical inspection of
any assets or liabilities of the Company. If at any time prior to the
completion of a Transaction an event occurs which would cause the
Information (as supplemented or amended) to contain an untrue statement of
a material fact or to omit to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading, the Company will notify PCA immediately of such
event.
3. Fees. The Company shall pay PCA the following amounts:
a. Private Placement Fee. PCA shall be paid upon consummation of the
Transaction(s) a transaction fee, payable in cash, of 7.0% of the
Gross Proceeds (as defined below) from the capital received, directly
or indirectly, by the Company solely from investors identified on
Addendum A, as may be amended by mutual agreement of the parties from
time to time, with respect to a Transaction (the "Transaction Fee"),
provided that in the event that any portion of such Transaction(s)
consists of debt (or similar) financing, then the foregoing
Transaction Fee with respect to such debt financing shall be adjusted
to 4.0% of the Gross Proceeds. For purposes hereof, "Gross Proceeds"
shall mean the fair market value of all of the consideration
(including, without limitation, cash, securities, other assets and
contingent payment amounts actually paid, plus debt and liabilities
assumed (including, without limitation, indebtedness for borrowed
money, pension liabilities and guarantees), license fees, royalty
fees, joint venture interests or other property, obligations or
services, but excluding payments made to exercise any convertible
securities) received by the Company or any of its security holders in
connection with any Transaction, directly or indirectly, from the sale
or exchange of the Company's equity securities issued in a Transaction
before the deduction of expenses related to such Transaction,
including the fee payable to PCA.
b. Placement Warrants. Upon consummation of a Transaction, the Company
will issue to PCA five-year stock purchase warrants (the "Placement
Agent Warrants"), equivalent to 5% of the shares issued in the
Transaction to investors included in Addendum A, taking into
Towerstream Corporation
January __, 2007
Page 3 of 6
consideration any increase in shares under a ratchet or similar
provision pursuant to which the number of shares initially purchased
is subsequently increased, with an "exercise price" equal to 100% of
the purchase price of the shares issued in the Transaction. The
exercise price is defined as the price at which PCA may convert the
Placement Agent Warrants into common shares of the Company. In
addition to the exercise price, PCA shall pay a "warrant cost" of
$0.001 per share (one-tenth of a cent) to the Company upon issuance of
the Placement Agent Warrants.
A separate Placement Agent Warrant Agreement shall be prepared after
consummation of the Transaction, and shall take the form of PCA's
standard warrant agreement, but shall be acceptable to the Company,
which contains the following terms, among others: the Placement Agent
Warrants are not transferable by the warrantholder other than to a
limited number of employees and affiliates of PCA subject to
compliance with all applicable securities laws; the Placement Agent
Warrants may be exercised as to all or any lesser number of shares of
equity securities commencing immediately after the date of the
consummation of the Transaction; the Placement Agent Warrants may be
exercised on a cash-less basis if not registered within 1 year of the
closing of the Transaction and be redeemable on the same terms as the
Transaction warrants; and the warrant agreement will contain
provisions for change of control, weighted average based anti-dilution
and customary piggy-back registration rights.
c. In the event consideration is to be paid in whole or in part by
installment payments, the portion of PCA's fee relating thereto shall
be calculated and paid when and as such installment payments are made.
d. Consideration received by the Company paid in whole or in part in the
form of securities or other noncash consideration will be valued at
its fair market value, as reasonably determined by an independent
third party to be mutually agreed upon by the Company and PCA, as of
the day prior to the closing of the Transaction (or later date on
which a contingent payment is made), provided, however, that if such
consideration consists of securities with an existing trading market,
such securities will be valued at the average of the last sales price
for such securities on the five trading days prior to the date of the
closing (or later date on which a contingent payment is made).
e. The foregoing fees (including the Placement Agent Warrants) are
payable for any Transaction that occurs during the Term or within 12
months thereafter with respect to investors included in Addendum A.
4. Expenses. In addition to the Transaction Fee and the Warrants, the Company
agrees to reimburse PCA, for its reasonable expenses incurred in connection
with this engagement approved in advance in writing by Company. These
expenses generally include travel costs and other customary expenses for
this type of transaction. Such expenses shall not exceed $25,000 in the
aggregate without the prior written consent of the Company. Legal fees
incurred by PCA to prepare, review and finalize this letter agreement will
not be reimbursable by the Company.
5. Advertisements. Upon a closing of a Transaction, the Company agrees that
PCA has the right to place advertisements in financial and other newspapers
and journals (whether in print or on the internet) at its own expense
describing its services to the Company hereunder, provided that the Company
has the right to review, comment on and approve all such advertisements
prior to publication.
Towerstream Corporation
January __, 2007
Page 4 of 6
6. Indemnification. The Company shall indemnify PCA, its agents and affiliates
in accordance with Annex A.
7. Termination. This Agreement may be terminated at any time by either party
upon 5 days written notice to the other party, effective upon receipt of
written notice to that effect by the other party, or automatically upon
consummation of the Transaction. Upon termination, the Company shall have
no further obligation to PCA other than with respect to fees payable to PCA
as provided herein, provided that the provisions of Sections 3 through 9,
inclusive, and PCA's obligation to preserve the confidential information
provided to it by Company for an indefinite period, shall survive any such
termination.
8. Venue. The Company and PCA agree that any legal suit, action, or proceeding
arising out of or relating to this Agreement and/or the transactions
contemplated by this Agreement shall be instituted exclusively in the state
or federal courts located in New York County, New York. The parties further
irrevocably consent to the service of any complaint, summons, notice or
other process relating to any such action or proceeding by delivery thereof
to such party by hand or by registered or certified mail in the manner
prescribed in Section 9(f) hereof. The parties further irrevocably consent
that any judgment rendered by such court in the State of New York may be
entered in other courts having competent jurisdiction thereof. Without in
any way limiting the indemnification provisions in Annex A below, the
prevailing party shall have the right to recover any costs, including
attorneys' fees, in the event of any action brought to enforce any of the
terms or provisions of this Agreement. The parties agree that service may
be made by overnight mail at its address set forth herein in any action to
enforce any of the provisions herein. Without in any way limiting the
indemnification provisions in Annex A below, any action arising under or
related to this Agreement for compensation must be brought prior to 6
months following the later of (i) the closing of the Transaction, (ii)
notice of the claim giving rise to such action, or (iii) termination of
this Agreement, or such action shall be barred as untimely.
9. Miscellaneous.
a. Successors and Assigns. This Agreement shall be binding on and inure
to the benefit of each party's agents, affiliates, successors and
assigns, but may not be assigned without the prior written consent of
the other party.
b. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without
regard to conflicts of laws or principles thereof.
c. Amendment. This Agreement may not be modified or amended except in
writing signed by the parties hereto.
d. PCA's Obligations. The obligations of PCA and the Company hereunder
are solely corporate obligations, and no officer, director, employee,
agent, member, shareholder, or controlling person shall be subject to
any personal liability whatsoever to any person, nor will any such
claim be asserted by or on behalf of PCA or the Company or any of
their respective affiliates. The Company acknowledges and agrees that
PCA is acting as an independent contractor under this Agreement and
that the engagement of PCA is not intended to confer rights on any
person or entity other than the Company and PCA. Nothing contained in
this Agreement shall limit or restrict the
Towerstream Corporation
January __, 2007
Page 5 of 6
right of PCA or of any member, employee, agent or representative of
PCA, to be a member, shareholder, partner, director, officer,
employee, agent or representative of, or to engage in, any other
business, whether of a similar nature or not, nor to limit or restrict
the right of PCA to render services of any kind to any other
corporation, company, firm, individual or association. PCA is a
registered broker-dealer in good standing with the SEC under the
Securities Act of 1934 and in all jurisdictions in which the nature of
its activities or the substance of its actions would require such
registration or qualification pursuant to the blue-sky laws of such
jurisdiction. PCA will comply with all laws, rules and regulations
related to its activities on behalf of Company pursuant to this
Agreement. All consents, authorizations, and approvals necessary or
appropriate for PCA to undertake its obligations set forth in this
Agreement have been obtained by PCA prior to execution of this
Agreement and PCA shall immediately use its best efforts to secure
investors for the Company as set forth herein upon the expectation for
a closing on or prior to January 30, 2007.
e. Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties hereto with respect to the subject matter
hereof and supersedes any and all prior agreements, arrangements and
understandings whether written or oral, relating to matters provided
herein. This Agreement is entered into by each of the parties hereto
without reliance on any statement, representation, promise, inducement
or agreement not expressly contained within this Agreement. Except as
set forth in Annex A hereof, nothing in this Agreement is intended to
confer upon any other person (including the stockholders, employees or
creditors of the Company) any rights or remedies hereunder or by
reason hereof. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Agreement shall not
in any way be affected or impaired thereby.
f. Notices. All notices or communications hereunder shall be in writing
and mailed, delivered or telegraphed as follows:
If to the Company: Jeff Thompson
Tower Stream Corp
32 Sixth Ave.
New York, NY 10013
with a copy to: Harvey Kesner, Esq.
Haynes and Boone LLP
153 East 53 Street
New York, NY 10022
If to PCA: Palladium Capital Advisors, LLC
230 Park Avenue, Suite 539
New York, NY 10169
Attn: Joel Padowitz, Chief Executive Officer
g. Opinions and Advice. PCA is acting as financial advisor and is not an
expert on, and cannot render opinions regarding, legal, accounting,
regulatory or tax matters. The Company should
Towerstream Corporation
January __, 2007
Page 6 of 6
consult with its other professional advisors concerning these matters
before undertaking the proposed Transaction. PCA will not have any
rights or obligations in connection with the sale and purchase of the
securities contemplated by this Agreement except as expressly provided
in this Agreement. In no event will PCA be obligated to purchase the
securities for its own account or for the accounts of its customers.
[signature page follows]
Towerstream Corporation
January __, 2007
Page 7 of 6
If the foregoing correctly sets forth your understanding and intentions, please
so indicate by signing and returning to us the enclosed copy of this letter.
Sincerely,
Palladium Capital Advisors, LLC
By: /s/ Joel Padowitz
------------------------------------
Joel Padowitz,
Chief Executive Officer
APPROVED AND ACCEPTED
ON ________________, 2007:
Towerstream Corporation
By: /s/ Jeff Thompson
----------------------------------
Print name: Jeff Thompson
Title: President
[Addendum A and Annex A follow]
Towerstream Corporation
January __, 2007
Page 8 of 6
ADDENDUM A -
ADAR
Alexandra
Alpha Capital
Axiom
BA Ventures
Bain Capital
Baker Brothers
Citadel
Citigroup
CMS Capital
Cramer Rosenthal
CrossLink
Crosslink
CS Asset Management
DKR Capital
Empire Capital
Harborview
Highbridge Capital
Insight Capital
J Goldman
Kayne Anderson
Langley
MicroCapital
Och-Ziff
Perry Capital
RH Capital
Sandell
SC Fundamental
SDS
SF Capital
Tracer Capital
Trafalette
Walden VC
Walker Smith
Westmont Capital
Xerion Capital
Towerstream Corporation
January __, 2007
Page 9 of 6
ANNEX A
The Company agrees that it will indemnify and hold harmless PCA, its affiliates,
and their respective directors, members, officers, employees, agents,
representatives and controlling persons (collectively "PCA" and each such entity
or person being an "INDEMNIFIED PARTY") from and against any and all losses,
claims, damages and liabilities, joint or several, as incurred, to which such
Indemnified Party may become subject, and related to or arising out of the
engagement of PCA hereunder, the activities performed or omitted by or on behalf
of an Indemnified Party pursuant to this Agreement, the Transactions
contemplated thereby or PCA's role in connection therewith; provided that the
Company will not be liable to the extent that any loss, claim, damage or
liability is found in a final judgment (not subject to further appeal) by a
court to have resulted primarily from actions taken or omitted to be taken by
PCA in bad faith or from PCA's gross negligence or willful misconduct in
performing the services described above. The Company also agrees to reimburse
any Indemnified Party for all expenses (including reasonable counsel fees and
disbursements) as they are incurred in connection with the investigation of,
preparation for or defense of any pending or threatened claim, or any action,
investigation, suit or proceeding arising therefrom, whether or not such
Indemnified Party is a party, whether or not liability resulted and whether or
not such claim, action or proceeding is initiated or brought by or on behalf of
the Company. The Company also agrees that no Indemnified Party shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company or its security holders or creditors related to or arising out of the
engagement of PCA pursuant to, or the performance by PCA of the services
contemplated by, this Agreement except to the extent that any loss, claim,
damage or liability is found in a final judgment (not subject to further appeal)
by a court to have resulted primarily from actions taken or omitted to be taken
by PCA in bad faith or from PCA's gross negligence or willful misconduct.
If the indemnification provided for in this Agreement is for any reason held
unenforceable, the Company agrees to contribute to the losses, claims, damages
and liabilities, as incurred by any Indemnified Person, for which such
indemnification is held unenforceable in such proportion as is appropriate to
reflect the relative benefits to the Company, on the one hand, and PCA, on the
other hand, of the Transaction (whether or not the Transaction is consummated).
The Company agrees that for the purposes of this paragraph the relative benefits
to the Company and PCA of the Transaction shall be deemed to be in the same
proportion that the total value of the Transaction or contemplated Transaction
by the Company as a result of or in connection with the proposed Transaction
bears to the Fee paid or to be paid to PCA under this Agreement; provided that,
to the extent permitted by applicable law, in no event shall the Indemnified
Parties be required to contribute an aggregate amount in excess of the aggregate
fees actually paid to PCA under this Agreement.
Promptly after receipt by an Indemnified Party of notice of any claim or the
commencement of any action, suit or proceeding with respect to which an
Indemnified Party may be entitled to indemnity hereunder, such Indemnified Party
will notify the Company in writing of such claim or of the commencement of such
action or proceeding, and the Company will assume the defense of such action,
suit or proceeding and will employ counsel satisfactory to the Indemnified
Parties and will pay the fees and disbursements of such counsel, as incurred.
Notwithstanding the preceding sentence, any Indemnified Party will be entitled
to employ counsel separate from counsel for the Company and from any other party
in such action if such Indemnified Party reasonably
Towerstream Corporation
January __, 2007
Page 10 of 6
determines that a conflict of interest exists which makes representation by
counsel chosen by the Company not advisable or if such Indemnified Party
reasonably determines that the Company's assumption of the defense does not
adequately represent its interest. In such event, the fees and disbursements of
such separate counsel will be paid by the Company, but in no event shall the
Company be liable for the fees and disbursements of more than one counsel (in
addition to local counsel) for all Indemnified Parties in connection with any
one action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances.
The Company agrees that, without PCA's prior written consent, it will not
settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding in respect of which indemnification could
be sought under the indemnification provision of this Agreement (whether or not
PCA or any other Indemnified Party is an actual or potential party to such
claim, action or proceeding), unless such settlement, compromise or consent
includes an unconditional release of each Indemnified Party from all liability
arising out of such claim, action or proceeding. PCA agrees that, without the
Company's prior written consent, it will not settle, compromise or consent to
the entry of any judgment in any pending or threatened claim, action or
proceeding in respect of which indemnification could be sought under the
indemnification provision of this Agreement (whether or not the Company is an
actual or potential party to such claim, action or proceeding), unless such
settlement, compromise or consent includes an unconditional release of each
Indemnified Party from all liability arising out of such claim, action or
proceeding.
In the event any Indemnified Party is requested or required to appear as a
witness in any action, suit or proceeding brought by or on behalf of or against
the Company or any affiliate or any participant in a Transaction covered hereby
in which such Indemnified Party is not named as a defendant, the Company agrees
to reimburse PCA and such Indemnified Party for all reasonable disbursements
incurred by them in connection with such Indemnified Party's appearing and
preparing to appear as a witness, including, without limitation, the reasonable
fees and disbursements of their legal counsel, and to compensate PCA and such
Indemnified Party in an amount to be mutually agreed upon.
In the event that any amounts due under these indemnification provisions
contained in this Annex A are not paid within thirty days after written notice
of such event giving rise to the indemnification obligations, such amounts shall
bear interest at a rate of 1.5% per month or at the highest rate permitted under
the laws of the State of New York, whichever rate is lower.
The provisions of Annex A shall be in addition to any liability which the
Company may otherwise have. These provisions shall be governed by the law of the
State of New York and shall be operative, in full force and in full effect,
regardless of any termination or expiration of this agreement.
PALLADIUM CAPITAL TOWERSTREAM CORP.
ADVISORS, LLC
By: By:
---------------------------------- -------------------------------------
Joel Padowitz, CEO Jeff Thompson, President
EXHIBIT 10.15
TOWERSTREAM CORPORATION
55 Hammerlund Way
Middletown, Rhode Island 02842
January 8, 2007
Brian Corbman
Ardent Advisors, LLC
1637 Oakwood Drive Unit S222
Narberth, PA 19072
RE: Selling Agreement
Dear Mr. Corbman:
The undersigned, Towerstream Corporation, a Delaware Corporation
("Corporation"), by this letter confirms its agreement (the "Agreement") with
Ardent Advisors, LLC, a Delaware limited liability company (the
"Broker-Dealer"), regarding the Broker-Dealer acting as a placement agent in
connection with an offering of up to $15 million of units consisting of shares
of common stock and warrants to purchase common stock (the "Units") under the
terms set forth in the Confidential Private Placement Memorandum dated December
21, 2006 and all exhibits and supplements thereto (the "Memorandum") prepared by
Corporation and delivered to you for distribution to the offerees. The Units are
to be offered on a "Best Efforts, Minimum- Maximum" basis with respect to all
Units. The Units will be offered and sold in accordance with 17 CFR 203.506
("Rule 506"), promulgated under Regulation D of the Securities Act 1933, as
amended.
Upon execution and delivery of subscription documents (the "Subscription
Documents"), which shall be in the form of the Subscription Documents included
in the Memorandum, the subscribers for Units shall, upon acceptance thereof by
Corporation (which acceptance shall be in Corporation's sole discretion), become
Unit Holders pursuant to the terms set forth in the Memorandum. The offering of
the Units shall begin when the Memorandum is first made available to you by
Corporation and shall continue until the termination date, and through the end
of any extension, unless the offering has been terminated as of any earlier time
(the "Subscription Period").
SECTION 1. APPOINTMENT OF AGENT. On the basis of the representations,
warranties and covenants contained in this Agreement, but subject to the terms
and conditions herein set forth, you are hereby appointed as non-exclusive
selling agent of Corporation for the Units offered under the Memorandum. The
appointment shall continue until the earliest of (i) 120 days from the date of
this Agreement, or (ii) the termination of the Subscription Period, or (iii) the
sale of all of the Units, or (iv) the termination of the offering of Units by
Corporation for any reason, whichever occurs first. Subject to the performance
by Corporation of all of its obligations under this Agreement, and to the
completeness and accuracy of all of its representations and warranties contained
in this Agreement, you agree to use your best efforts during the Subscription
Period to find subscribers for the Units.
SECTION 2. DEFINITIONS. Certain terms used herein are defined in the
Memorandum and shall have the same meanings given therein.
Selling Agreement
Page 2
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CORPORATION.
Corporation represents, warrants and covenants, to the best of its knowledge,
that:
a. Corporation is a corporation duly and validly organized and in good
standing under the laws of the State of Delaware and has full power and
authority to conduct the business described in the Memorandum.
b. Corporation will deliver to you a reasonable number of copies of the
Memorandum, and the information made available to each offeree pursuant to
subsection 3(i) hereof shall be sufficient to comply with, and conform to,
the requirements of Rule 506.
c. All action required to be taken by Corporation to offer and sell the
Units to qualified subscribers has been or will be taken.
d. Upon payment of the subscription amount specified in the Subscription
Documents, acceptance by Corporation of the subscriptions from qualified
subscribers (which acceptance shall be at the sole discretion of
Corporation), and delivery by the subscribers for Units of such additional
documents as may reasonably be required by Corporation, such subscribers
will become Unit Holders.
e. During the Subscription Period, the Memorandum will not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not materially misleading.
f. This Agreement has been duly and validly authorized, executed, and
delivered by or on behalf of Corporation and constitutes a valid and
binding agreement of Corporation.
g. Execution by Corporation of a subscriber's Subscription Documents will
be duly and validly authorized by or on behalf of Corporation and will
constitute a valid and binding agreement of Corporation.
h. The execution and delivery of this Agreement and the incurrence of the
obligations set forth herein and the consummation of the transactions
contemplated in this Agreement and the Memorandum will not constitute a
breach or default under:
(i) any instruments by which Corporation is bound; or
Selling Agreement
Page 3
(ii) any order, rule or regulation (applicable to Corporation) issued
by any court, governmental body or administrative agency having
jurisdiction over Corporation.
i. Corporation shall make available, during the Subscription Period and
prior to the sale of any Units, to each purchaser or his purchaser
representative(s) or both:
(i) such information (in addition to that contained in the Memorandum)
concerning the offering of Units, Corporation, and any other relevant
matters, as Corporation possesses or can acquire without unreasonable
effort or expense; and
(ii) the opportunity to ask questions of, and receive answers from,
Corporation concerning the terms and conditions of the offering of the
Units, and to obtain any additional information, to the extent
Corporation possesses the same or can acquire it without unreasonable
effort or expense, necessary to verify the accuracy of the information
furnished to the purchaser or his purchaser representative(s).
j. With respect to those activities undertaken by it, Corporation has
endeavored to ensure that the offering and sale of Units complies, in all
respects, with the requirements of the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, and the securities or
"blue sky" laws of any state or jurisdiction in which an offer and/or sale
takes place.
k. There is no litigation or proceeding at law or in equity before any
federal or state authority against Corporation wherein an unfavorable
decision, ruling, or finding would materially and adversely affect the
business, operations or financial condition or income of Corporation or any
proposed Corporation investment, and neither the execution and delivery of
this Agreement, the consummation of the transactions herein contemplated,
nor the fulfillment of or compliance with the terms hereof will conflict
with, or result in a breach of, any of the terms, provisions, or conditions
of any agreement or instrument to which Corporation is a party.
l. Corporation will endeavor in good faith to qualify, or assist you in
qualifying, the Units for offer and sale, or to establish, or assist you in
establishing, the exemption of the offer and sale of the Units from
qualification or registration under the applicable securities or "blue sky"
laws of such jurisdictions as you may reasonably designate, and will
promptly notify you, orally or in writing (but if orally then prompt
written confirmation shall be delivered to you), as each jurisdiction is so
qualified or as an exemption from registration or qualification is
established therein; provided, however, that Corporation shall not be
Selling Agreement
Page 4
obligated to do business or to qualify as a dealer in any jurisdiction in
which it is not so qualified.
m. Corporation will pay all expenses in connection with the printing and
delivery to you in reasonable quantities of copies of the Memorandum and
the qualification of the Units under the securities or "blue sky" laws.
n. As compensation for your services, Corporation will pay you a sales
commission equal to (i) seven percent (7%) of the gross proceeds received
by Corporation from the Units placed by you and (ii) warrants to purchase a
number of shares of common stock equal to five percent (5%) of the number
of shares included within the Units placed by you, payable pursuant to the
terms of the Memorandum.
o. If any event relating to or affecting Corporation shall occur during the
Subscription Period, as a result of which it is necessary, in the opinion
of your counsel and counsel to Corporation, to amend or supplement the
Memorandum so that it will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading, Corporation shall forthwith prepare and furnish to
you a reasonable number of copies of an amendment or amendments of, or
supplement or supplements to, the Memorandum, which you shall promptly
deliver to all offerees then being solicited. For purposes of this
subsection o., Corporation will furnish such information with respect to
Corporation as you may from time to time reasonably request.
p. Corporation will deliver to you such reports and documents as
Corporation is required, under the terms of the Memorandum or any document
referred to therein, to furnish to its prospective investors.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BROKER-DEALER.
The Broker-Dealer represents, warrants and covenants, to the best of its
knowledge, that:
a. It, or any person acting on its behalf, will not offer any of the Units
for sale, or solicit any offers to subscribe for or buy any Units, or
otherwise negotiate with any person with respect to the Units, on the basis
of any communications or documents, except the Memorandum, the information
provided by Corporation pursuant to Section 3(i), or any other documents
and any transmittal letter reasonably satisfactory in form and substance to
Corporation and counsel to Corporation.
b. It, or any person acting on its behalf, shall not use any form of
general solicitation or general advertising in the course of any offer or
sale of the Units including, but not limited
Selling Agreement
Page 5
to:
(i) any advertisement, article, notice or other communication
published in any newspaper, magazine, website, or similar media or
broadcast over television or radio; and
(ii) any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
c. It, or any person acting on its behalf, shall solely make offers to sell
Units to, solicit offers to subscribe for or purchase any Units from, or
otherwise negotiate with respect to the Units with, persons whom it has
reasonable grounds to believe and does believe are "accredited investors"
within the meaning of 17 CFR 230.501(a).
In making or soliciting such offers, or so negotiating, Broker-Dealer
will comply with the provisions of the Securities Act of 1933, as amended,
the Securities Exchange Act of 1934, as amended, and the securities or
"blue sky" laws of the jurisdiction in which it makes or solicits such
offers, or so negotiates.
d. It will exercise reasonable care to assure that the purchasers are not
underwriters within the meaning of Section 2(11) of the Securities Act of
1933, as amended. In that connection, it will:
(i) Make reasonable inquiry to determine that each purchaser is
acquiring the Units for his own account; and
(ii) Obtain from the purchaser a signed written agreement (contained
in the Subscription Documents) that the Units will not be sold without
registration under the Securities Act of 1933, as amended, unless an
opinion of counsel that an exemption therefrom is available,
satisfactory in form and substance to Corporation or counsel, is
delivered in accordance with such agreement.
e. It shall furnish Corporation with information in sufficient detail (in
the form of the Investor Questionnaire, a copy of which is included in the
Memorandum), with respect to each purchaser of Units, in order to
demonstrate to Corporation that such purchaser satisfies the requirements
of Rule 506, as outlined in Section 4(c) above.
f. If a prospective purchaser uses or consults a purchaser representative
(as that term is defined in 17 CFR 230.501(h)) in connection with the
offering of the Units, it will obtain and deliver to Corporation, prior to
the closing of the offering of the Units, the prospective
Selling Agreement
Page 6
purchaser's written acknowledgment that he has used such person(s) in
connection with evaluating the merits and risks of the prospective
investment and such representative's written consent so to act, as well as
a description of the education and experience of such representative(s).
g. It will offer and sell the Units only in those jurisdictions in which
it, or any other person or entity acting in its behalf, is properly
registered, and it will comply with all laws, rules and regulations related
to its activities on behalf of Corporation pursuant to this Agreement.
h. It is a securities broker-dealer registered and in good standing with
the Securities and Exchange Commission and is a member of the NASD.
i. This Agreement has been duly and validly authorized, executed, and
delivered by or on behalf of the Broker-Dealer and constitutes a valid and
binding agreement of the Broker-Dealer.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF CORPORATION. The obligations of
Corporation under this Agreement are subject to the accuracy of and compliance
with your representations, warranties and covenants set forth in Section 4, and
to the performance by you of your obligations hereunder.
SECTION 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements by either Corporation or
Broker-Dealer contained in this Agreement shall remain operative and in full
force and effect, and shall survive the closing of the offering of the Units.
Upon termination of this Agreement, Corporation shall have no further
obligations to Broker-Dealer other than with respect to fees payable to
Broker-Dealer as provided herein.
SECTION 7. INDEMNIFICATION.
(a) Corporation agrees to indemnify, defend and hold Broker-Dealer
harmless against any and all loss, liability, damage and expense
whatsoever, whether or not resulting in any liability, that may be incurred
under applicable securities laws, at common law, or otherwise and which is
based upon or arises out of:
(1) any untrue statement or alleged untrue statement of a
material fact contained in the Memorandum or the omission or alleged
omission from the Memorandum of a material fact necessary in order to
make the statements
Selling Agreement
Page 7
made therein, in light of the circumstances under which they were
made, not misleading;
(2) the offer and/or sale by Corporation, or anyone acting on its
behalf, of Units (unless due to the bad faith or gross negligence of
the Broker-Dealer); or
(3) any breach of any representation, warranty or covenant made
by Corporation in this Agreement.
(b) The Broker-Dealer agrees to indemnify, defend and hold Corporation
and its officers, directors, shareholders and agents harmless against any
and all loss, liability, damage and expense whatsoever, whether or not
resulting in any liability, that may be incurred under applicable
securities laws, at common law, or otherwise and which is based upon or
arises out of:
(1) any violation by Broker-Dealer or its agents of the
Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, or any state securities statutes, unless such
violation is attributable to actions, misrepresentations or omissions
of Corporation; or
(2) any breach of any representation, warranty or covenant made
by Broker-Dealer in this Agreement.
(c) In any legal or regulatory action or claim brought against
Corporation or Broker-Dealer or their agents, Corporation and the
Broker-Dealer shall have the rights and duties set forth in this Section 7.
The indemnification provisions included in this Section 7 shall include,
but not be limited to, recovery of and payment of reasonable legal or other
expenses incurred by Broker-Dealer or Corporation in connection with
defending such actions and claims.
(d) Within fourteen (14) calendar days after a claim or action is
brought or asserted against Corporation or the Broker-Dealer or both, which
in the opinion of either is subject to the indemnification provisions
contained in this Section 7., the party seeking indemnification (the
"Indemnitee") shall notify, in writing, the party from whom indemnification
is sought (the "Indemnitor") of the existence of the claim or action.
Indemnitor shall assume the defense of the claim or action by employing
counsel for the Indemnitee, and shall thereafter be responsible for the
payment of all legal fees and expenses incurred in connection with such
defense. In the event that a claim or action is brought or asserted against
Corporation and the Broker-
Selling Agreement
Page 8
Dealer, jointly, Corporation and the Broker-Dealer shall make a good faith
effort determine whether the claim or action can be defended jointly or if
potential conflicts exist which require that separate legal counsel be
employed for Broker-Dealer and Corporation. In such case, if Corporation
and the Broker-Dealer seek indemnification from the other, each shall
employ separate counsel to represent them and shall be responsible for the
payment of all expenses associated with employment of such counsel, subject
to the right of recovery of such expenses as set forth below in this
subparagraph (d). IF EITHER CORPORATION OR BROKER-DEALER SEEK
INDEMNIFICATION FROM THE OTHER UNDER THE PROVISIONS OF THIS SECTION 7., AND
THE PARTY FROM WHOM INDEMNIFICATION IS SOUGHT DECLINES TO ASSUME DEFENSE OF
THE ACTION OR CLAIM, THE PARTY SEEKING INDEMNIFICATION SHALL HAVE A RIGHT
OF RECOVERY AGAINST THE PARTY FROM WHOM INDEMNIFICATION IS SOUGHT FOR ALL
LOSSES, LIABILITIES, DAMAGES AND EXPENSES INCURRED IN THE DEFENSE OF THE
ACTION OR CLAIM, INCLUDING ALL ACTUAL ATTORNEYS' FEES AND COSTS INCURRED,
IN THE EVENT THAT THE DEFENSE OF THE ACTION OR CLAIM IS SUCCESSFUL AND
THERE ARE NO FINDINGS OF WRONGDOING ON THE PART OF THE PARTY SEEKING
INDEMNIFICATION.
SECTION 8. RELIEF. The Broker-Dealer agrees that a breach or threatened
breach on its part of any agreement contained in this Agreement will cause such
damage to Corporation as will be irreparable, and, for that reason, the
Broker-Dealer further agrees that Corporation shall be entitled as a matter of
right to an injunction, by any court of competent jurisdiction, restraining any
further violation of such covenants by the Broker-Dealer or its employees,
partners, officers or agents. The right of injunction shall be cumulative and in
addition to whatever other remedies Corporation may have, including,
specifically, recovery of damages. The Broker-Dealer also agrees to pay
reasonable attorney's fees incurred by Corporation in successfully proving that
the Broker-Dealer breached any of the terms of this Agreement.
SECTION 9. NOTICES. All communications under this Agreement shall be in
writing, and, if sent to you, shall be mailed, delivered or telegraphed and
confirmed to you at the address initially set forth above or as changed by you
in a written notice to Corporation, or if sent to Corporation, shall be mailed,
delivered or telegraphed and confirmed to it at the address set out in the
letterhead above, with a copy to Harvey Kesner, Esq., Haynes and Boone, LLP, 153
East 53rd Street, New York, New York 10022.
SECTION 10. PARTIES. This Agreement shall inure to the benefit of, and be
binding upon, you, any person which controls you, and your successors, and upon
Corporation and its representatives and successors. This Agreement and its
conditions and provisions are for the sole and exclusive benefit of the parties
and their representatives and successors, and for the benefit of no other
person, firm or corporation.
SECTION 11. RELATIONSHIP OF PARTIES. It is not the intention of the parties
to create, nor shall this Agreement be construed as creating, a partnership,
joint venture, agency relationship or
Selling Agreement
Page 9
association other than as specifically set forth herein, or to render the
parties liable as partners, co-venturers, or principals. In their relations with
each other under this Agreement, the parties shall not be considered fiduciaries
or to have established a confidential relationship other than as specifically
set forth herein but rather shall be free to act on an arm's length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.
SECTION 12. ENTIRE AGREEMENT. This Agreement evidences the entire agreement
between Corporation and the Broker-Dealer, and represents a merger of all
preceding agreements between the parties hereto pertaining to the subject matter
hereof.
SECTION 13. SEVERABILITY OF PROVISIONS. If one or more of the provisions of
this Agreement or any application thereof shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions hereof and any application thereof shall in no way be
affected or impaired.
SECTION 14. GOVERNING LAW; JURISDICTION. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware,
without regard to conflicts of laws or principles thereof. Each of the parties
hereto agrees irrevocably consents to the jurisdiction and venue of the federal
and state courts located in New York City.
SECTION 15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
Selling Agreement
Page 10
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us one copy of this Agreement, whereupon this
instrument will become a binding agreement upon you and Corporation in
accordance with its terms.
Very truly yours,
TOWERSTREAM CORPORATION,
a Delaware Corporation
By: /s/ Jeff Thompson
------------------------------------
Name: Jeff Thompson
Title: President
The foregoing Agreement is hereby confirmed and accepted as of the date
first set out above.
[ARDENT]
By: /s/ Brian Gorbman
------------------------------------
Name: Brian Gorbman
Title: Managing Partner
Address: _______________________________
_______________________________
_______________________________
EXHIBIT 10.16
TOWERSTREAM CORPORATION
55 Hammerlund Way
Middletown, Rhode Island 02842
January 3, 2007
Mr. Wilson Williams
WFG Investments, Inc.
12221 Merit Drive, Suite 300
Dallas, Texas 75251
RE: Selling Agreement
Dear Mr. Williams:
The undersigned, Towerstream Corporation, a Delaware Corporation
("Corporation"), by this letter confirms its agreement (the "Agreement") with
WFG Investments, Inc., a Texas Corporation (the "Broker-Dealer"), regarding the
Broker-Dealer acting as a placement agent in connection with an offering of up
to $15 million of units consisting of shares of common stock and warrants to
purchase common stock (the "Units") under the terms set forth in the
Confidential Private Placement Memorandum dated December 21, 2006 and all
exhibits and supplements thereto (the "Memorandum") prepared by Corporation and
delivered to you for distribution to the offerees. The Units are to be offered
on a "Best Efforts, Minimum- Maximum" basis with respect to all Units. The Units
will be offered and sold in accordance with 17 CFR 203.506 ("Rule 506"),
promulgated under Regulation D of the Securities Act 1933, as amended.
Upon execution and delivery of subscription documents (the "Subscription
Documents"), which shall be in the form of the Subscription Documents included
in the Memorandum, the subscribers for Units shall, upon acceptance thereof by
Corporation (which acceptance shall be in Corporation's sole discretion), become
Unit Holders pursuant to the terms set forth in the Memorandum. The offering of
the Units shall begin when the Memorandum is first made available to you by
Corporation and shall continue until the termination date, and through the end
of any extension, unless the offering has been terminated as of any earlier time
(the "Subscription Period").
SECTION 1. APPOINTMENT OF AGENT. On the basis of the representations,
warranties and covenants contained in this Agreement, but subject to the terms
and conditions herein set forth, you are hereby appointed as non-exclusive
selling agent of Corporation for the Units offered under the Memorandum. The
appointment shall continue until the earliest of (i) 120 days from the date of
this Agreement, or (ii) the termination of the Subscription Period, or (iii) the
sale of all of the Units, or (iv) the termination of the offering of Units by
Corporation for any reason, whichever occurs first. Subject to the performance
by Corporation of all of its obligations under this Agreement, and to the
completeness and accuracy of all of its representations and warranties contained
in this Agreement, you agree to use your best efforts during the Subscription
Period to find subscribers for the Units.
SECTION 2. DEFINITIONS. Certain terms used herein are defined in the
Memorandum and shall have the same meanings given therein.
Selling Agreement
Page 2
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CORPORATION.
Corporation represents, warrants and covenants, to the best of its knowledge,
that:
a. Corporation is a corporation duly and validly organized and in good
standing under the laws of the State of Delaware and has full power and
authority to conduct the business described in the Memorandum.
b. Corporation will deliver to you a reasonable number of copies of the
Memorandum, and the information made available to each offeree pursuant to
subsection 3(i) hereof shall be sufficient to comply with, and conform to,
the requirements of Rule 506.
c. All action required to be taken by Corporation to offer and sell the
Units to qualified subscribers has been or will be taken.
d. Upon payment of the subscription amount specified in the Subscription
Documents, acceptance by Corporation of the subscriptions from qualified
subscribers (which acceptance shall be at the sole discretion of
Corporation), and delivery by the subscribers for Units of such additional
documents as may reasonably be required by Corporation, such subscribers
will become Unit Holders.
e. During the Subscription Period, the Memorandum will not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not materially misleading.
f. This Agreement has been duly and validly authorized, executed, and
delivered by or on behalf of Corporation and constitutes a valid and
binding agreement of Corporation.
g. Execution by Corporation of a subscriber's Subscription Documents will
be duly and validly authorized by or on behalf of Corporation and will
constitute a valid and binding agreement of Corporation.
h. The execution and delivery of this Agreement and the incurrence of the
obligations set forth herein and the consummation of the transactions
contemplated in this Agreement and the Memorandum will not constitute a
breach or default under:
(i) any instruments by which Corporation is bound; or
Selling Agreement
Page 3
(ii) any order, rule or regulation (applicable to Corporation) issued
by any court, governmental body or administrative agency having
jurisdiction over Corporation.
i. Corporation shall make available, during the Subscription Period and
prior to the sale of any Units, to each purchaser or his purchaser
representative(s) or both:
(i) such information (in addition to that contained in the Memorandum)
concerning the offering of Units, Corporation, and any other relevant
matters, as Corporation possesses or can acquire without unreasonable
effort or expense; and
(ii) the opportunity to ask questions of, and receive answers from,
Corporation concerning the terms and conditions of the offering of the
Units, and to obtain any additional information, to the extent
Corporation possesses the same or can acquire it without unreasonable
effort or expense, necessary to verify the accuracy of the information
furnished to the purchaser or his purchaser representative(s).
j. With respect to those activities undertaken by it, Corporation has
endeavored to ensure that the offering and sale of Units complies, in all
respects, with the requirements of the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, and the securities or
"blue sky" laws of any state or jurisdiction in which an offer and/or sale
takes place.
k. There is no litigation or proceeding at law or in equity before any
federal or state authority against Corporation wherein an unfavorable
decision, ruling, or finding would materially and adversely affect the
business, operations or financial condition or income of Corporation or any
proposed Corporation investment, and neither the execution and delivery of
this Agreement, the consummation of the transactions herein contemplated,
nor the fulfillment of or compliance with the terms hereof will conflict
with, or result in a breach of, any of the terms, provisions, or conditions
of any agreement or instrument to which Corporation is a party.
l. Corporation will endeavor in good faith to qualify, or assist you in
qualifying, the Units for offer and sale, or to establish, or assist you in
establishing, the exemption of the offer and sale of the Units from
qualification or registration under the applicable securities or "blue sky"
laws of such jurisdictions as you may reasonably designate, and will
promptly notify you, orally or in writing (but if orally then prompt
written confirmation shall be delivered to you), as each jurisdiction is so
qualified or as an exemption from registration or qualification is
established therein; provided, however, that Corporation shall not be
Selling Agreement
Page 4
obligated to do business or to qualify as a dealer in any jurisdiction in
which it is not so qualified.
m. Corporation will pay all expenses in connection with the printing and
delivery to you in reasonable quantities of copies of the Memorandum and
the qualification of the Units under the securities or "blue sky" laws.
n. As compensation for your services, Corporation will pay you a sales
commission equal to (i) seven percent (7%) of the gross proceeds received
by Corporation from the Units placed by you and (ii) warrants to purchase a
number of shares of common stock equal to five percent (5%) of the number
of shares included within the Units placed by you, payable pursuant to the
terms of the Memorandum.
o. If any event relating to or affecting Corporation shall occur during the
Subscription Period, as a result of which it is necessary, in the opinion
of your counsel and counsel to Corporation, to amend or supplement the
Memorandum so that it will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading, Corporation shall forthwith prepare and furnish to
you a reasonable number of copies of an amendment or amendments of, or
supplement or supplements to, the Memorandum, which you shall promptly
deliver to all offerees then being solicited. For purposes of this
subsection o., Corporation will furnish such information with respect to
Corporation as you may from time to time reasonably request.
p. Corporation will deliver to you such reports and documents as
Corporation is required, under the terms of the Memorandum or any document
referred to therein, to furnish to its prospective investors.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BROKER-DEALER.
The Broker-Dealer represents, warrants and covenants, to the best of its
knowledge, that:
a. It, or any person acting on its behalf, will not offer any of the Units
for sale, or solicit any offers to subscribe for or buy any Units, or
otherwise negotiate with any person with respect to the Units, on the basis
of any communications or documents, except the Memorandum, the information
provided by Corporation pursuant to Section 3(i), or any other documents
and any transmittal letter reasonably satisfactory in form and substance to
Corporation and counsel to Corporation.
b. It, or any person acting on its behalf, shall not use any form of
general solicitation or general advertising in the course of any offer or
sale of the Units including, but not limited
Selling Agreement
Page 5
to:
(i) any advertisement, article, notice or other communication
published in any newspaper, magazine, website, or similar media or
broadcast over television or radio; and
(ii) any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
c. It, or any person acting on its behalf, shall solely make offers to sell
Units to, solicit offers to subscribe for or purchase any Units from, or
otherwise negotiate with respect to the Units with, persons whom it has
reasonable grounds to believe and does believe are "accredited investors"
within the meaning of 17 CFR 230.501(a).
In making or soliciting such offers, or so negotiating, Broker-Dealer
will comply with the provisions of the Securities Act of 1933, as amended,
the Securities Exchange Act of 1934, as amended, and the securities or
"blue sky" laws of the jurisdiction in which it makes or solicits such
offers, or so negotiates.
d. It will exercise reasonable care to assure that the purchasers are not
underwriters within the meaning of Section 2(11) of the Securities Act of
1933, as amended. In that connection, it will:
(i) Make reasonable inquiry to determine that each purchaser is
acquiring the Units for his own account; and
(ii) Obtain from the purchaser a signed written agreement (contained
in the Subscription Documents) that the Units will not be sold without
registration under the Securities Act of 1933, as amended, unless an
opinion of counsel that an exemption therefrom is available,
satisfactory in form and substance to Corporation or counsel, is
delivered in accordance with such agreement.
e. It shall furnish Corporation with information in sufficient detail (in
the form of the Investor Questionnaire, a copy of which is included in the
Memorandum), with respect to each purchaser of Units, in order to
demonstrate to Corporation that such purchaser satisfies the requirements
of Rule 506, as outlined in Section 4(c) above.
f. If a prospective purchaser uses or consults a purchaser representative
(as that term is defined in 17 CFR 230.501(h)) in connection with the
offering of the Units, it will obtain and deliver to Corporation, prior to
the closing of the offering of the Units, the prospective
Selling Agreement
Page 6
purchaser's written acknowledgment that he has used such person(s) in
connection with evaluating the merits and risks of the prospective
investment and such representative's written consent so to act, as well as
a description of the education and experience of such representative(s).
g. It will offer and sell the Units only in those jurisdictions in which
it, or any other person or entity acting in its behalf, is properly
registered, and it will comply with all laws, rules and regulations related
to its activities on behalf of Corporation pursuant to this Agreement.
h. It is a securities broker-dealer registered and in good standing with
the Securities and Exchange Commission and is a member of the NASD.
i. This Agreement has been duly and validly authorized, executed, and
delivered by or on behalf of the Broker-Dealer and constitutes a valid and
binding agreement of the Broker-Dealer.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF CORPORATION. The obligations of
Corporation under this Agreement are subject to the accuracy of and compliance
with your representations, warranties and covenants set forth in Section 4, and
to the performance by you of your obligations hereunder.
SECTION 6. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements by either Corporation or
Broker-Dealer contained in this Agreement shall remain operative and in full
force and effect, and shall survive the closing of the offering of the Units.
Upon termination of this Agreement, Corporation shall have no further
obligations to Broker-Dealer other than with respect to fees payable to
Broker-Dealer as provided herein.
SECTION 7. INDEMNIFICATION.
(a) Corporation agrees to indemnify, defend and hold Broker-Dealer
harmless against any and all loss, liability, damage and expense
whatsoever, whether or not resulting in any liability, that may be incurred
under applicable securities laws, at common law, or otherwise and which is
based upon or arises out of:
(1) any untrue statement or alleged untrue statement of a
material fact contained in the Memorandum or the omission or alleged
omission from the Memorandum of a material fact necessary in order to
make the statements
Selling Agreement
Page 7
made therein, in light of the circumstances under which they were
made, not misleading;
(2) the offer and/or sale by Corporation, or anyone acting on its
behalf, of Units (unless due to the bad faith or gross negligence of
the Broker-Dealer); or
(3) any breach of any representation, warranty or covenant made
by Corporation in this Agreement.
(b) The Broker-Dealer agrees to indemnify, defend and hold Corporation
and its officers, directors, shareholders and agents harmless against any
and all loss, liability, damage and expense whatsoever, whether or not
resulting in any liability, that may be incurred under applicable
securities laws, at common law, or otherwise and which is based upon or
arises out of:
(1) any violation by Broker-Dealer or its agents of the
Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, or any state securities statutes, unless such
violation is attributable to actions, misrepresentations or omissions
of Corporation; or
(2) any breach of any representation, warranty or covenant made
by Broker-Dealer in this Agreement.
(c) In any legal or regulatory action or claim brought against
Corporation or Broker-Dealer or their agents, Corporation and the
Broker-Dealer shall have the rights and duties set forth in this Section 7.
The indemnification provisions included in this Section 7 shall include,
but not be limited to, recovery of and payment of reasonable legal or other
expenses incurred by Broker-Dealer or Corporation in connection with
defending such actions and claims.
(d) Within fourteen (14) calendar days after a claim or action is
brought or asserted against Corporation or the Broker-Dealer or both, which
in the opinion of either is subject to the indemnification provisions
contained in this Section 7., the party seeking indemnification (the
"Indemnitee") shall notify, in writing, the party from whom indemnification
is sought (the "Indemnitor") of the existence of the claim or action.
Indemnitor shall assume the defense of the claim or action by employing
counsel for the Indemnitee, and shall thereafter be responsible for the
payment of all legal fees and expenses incurred in connection with such
defense. In the event that a claim or action is brought or asserted against
Corporation and the Broker-
Selling Agreement
Page 8
Dealer, jointly, Corporation and the Broker-Dealer shall make a good faith
effort determine whether the claim or action can be defended jointly or if
potential conflicts exist which require that separate legal counsel be
employed for Broker-Dealer and Corporation. In such case, if Corporation
and the Broker-Dealer seek indemnification from the other, each shall
employ separate counsel to represent them and shall be responsible for the
payment of all expenses associated with employment of such counsel, subject
to the right of recovery of such expenses as set forth below in this
subparagraph (d). IF EITHER CORPORATION OR BROKER-DEALER SEEK
INDEMNIFICATION FROM THE OTHER UNDER THE PROVISIONS OF THIS SECTION 7., AND
THE PARTY FROM WHOM INDEMNIFICATION IS SOUGHT DECLINES TO ASSUME DEFENSE OF
THE ACTION OR CLAIM, THE PARTY SEEKING INDEMNIFICATION SHALL HAVE A RIGHT
OF RECOVERY AGAINST THE PARTY FROM WHOM INDEMNIFICATION IS SOUGHT FOR ALL
LOSSES, LIABILITIES, DAMAGES AND EXPENSES INCURRED IN THE DEFENSE OF THE
ACTION OR CLAIM, INCLUDING ALL ACTUAL ATTORNEYS' FEES AND COSTS INCURRED,
IN THE EVENT THAT THE DEFENSE OF THE ACTION OR CLAIM IS SUCCESSFUL AND
THERE ARE NO FINDINGS OF WRONGDOING ON THE PART OF THE PARTY SEEKING
INDEMNIFICATION.
SECTION 8. RELIEF. The Broker-Dealer agrees that a breach or threatened
breach on its part of any agreement contained in this Agreement will cause such
damage to Corporation as will be irreparable, and, for that reason, the
Broker-Dealer further agrees that Corporation shall be entitled as a matter of
right to an injunction, by any court of competent jurisdiction, restraining any
further violation of such covenants by the Broker-Dealer or its employees,
partners, officers or agents. The right of injunction shall be cumulative and in
addition to whatever other remedies Corporation may have, including,
specifically, recovery of damages. The Broker-Dealer also agrees to pay
reasonable attorney's fees incurred by Corporation in successfully proving that
the Broker-Dealer breached any of the terms of this Agreement.
SECTION 9. NOTICES. All communications under this Agreement shall be in
writing, and, if sent to you, shall be mailed, delivered or telegraphed and
confirmed to you at the address initially set forth above or as changed by you
in a written notice to Corporation, or if sent to Corporation, shall be mailed,
delivered or telegraphed and confirmed to it at the address set out in the
letterhead above, with a copy to Harvey Kesner, Esq., Haynes and Boone, LLP, 153
East 53rd Street, New York, New York 10022.
SECTION 10. PARTIES. This Agreement shall inure to the benefit of, and be
binding upon, you, any person which controls you, and your successors, and upon
Corporation and its representatives and successors. This Agreement and its
conditions and provisions are for the sole and exclusive benefit of the parties
and their representatives and successors, and for the benefit of no other
person, firm or corporation.
SECTION 11. RELATIONSHIP OF PARTIES. It is not the intention of the parties
to create, nor shall this Agreement be construed as creating, a partnership,
joint venture, agency relationship or
Selling Agreement
Page 9
association other than as specifically set forth herein, or to render the
parties liable as partners, co-venturers, or principals. In their relations with
each other under this Agreement, the parties shall not be considered fiduciaries
or to have established a confidential relationship other than as specifically
set forth herein but rather shall be free to act on an arm's length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.
SECTION 12. ENTIRE AGREEMENT. This Agreement evidences the entire agreement
between Corporation and the Broker-Dealer, and represents a merger of all
preceding agreements between the parties hereto pertaining to the subject matter
hereof.
SECTION 13. SEVERABILITY OF PROVISIONS. If one or more of the provisions of
this Agreement or any application thereof shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions hereof and any application thereof shall in no way be
affected or impaired.
SECTION 14. GOVERNING LAW; JURISDICTION. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware,
without regard to conflicts of laws or principles thereof. Each of the parties
hereto agrees irrevocably consents to the jurisdiction and venue of the federal
and state courts located in New York City.
SECTION 15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
Selling Agreement
Page 10
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us one copy of this Agreement, whereupon this
instrument will become a binding agreement upon you and Corporation in
accordance with its terms.
Very truly yours,
TOWERSTREAM CORPORATION,
a Delaware Corporation
By: /s/ Jeff Thompson
------------------------------------
Name: Jeff Thompson
Title: President
The foregoing Agreement is hereby confirmed and accepted as of the date
first set out above.
WFG INVESTMENTS, INC.
By: /s/ Wilson Williams
------------------------------------
Wilson Williams, President
Address: 12221 Merit Drive, Suite 300
Dallas, Texas 75251
EXHIBIT 10.17
TOWERSTREAM CORPORATION
DIRECTOR AND OFFICER INDEMNIFICATION AGREEMENT
This Director and Officer Indemnification Agreement, dated as of January
___, 2007 (this "AGREEMENT"), is made by and between Towerstream Corporation., a
Delaware corporation (the "COMPANY"), and __________ (the "INDEMNITEE").
RECITALS:
A. Section 141 of the Delaware General Corporation Law provides that the
business and affairs of a corporation shall be managed by or under the direction
of its board of directors.
B. By virtue of the managerial prerogatives vested in the directors and
officers of a Delaware corporation, directors and officers act as fiduciaries of
the corporation and its stockholders.
C. Thus, it is critically important to the Company and its stockholders
that the Company be able to attract and retain the most capable persons
reasonably available to serve as directors and officers of the Company.
D. In recognition of the need for corporations to be able to induce capable
and responsible persons to accept positions in corporate management, Delaware
law authorizes (and in some instances requires) corporations to indemnify their
directors and officers, and further authorizes corporations to purchase and
maintain insurance for the benefit of their directors and officers.
E. The Delaware courts have recognized that indemnification by a
corporation serves the dual policies of (1) allowing corporate officials to
resist unjustified lawsuits, secure in the knowledge that, if vindicated, the
corporation will bear the expense of litigation, and (2) encouraging capable
women and men to serve as corporate directors and officers, secure in the
knowledge that the corporation will absorb the costs of defending their honesty
and integrity.
F. The number of lawsuits challenging the judgment and actions of directors
and officers of Delaware corporations, the costs of defending those lawsuits and
the threat to personal assets have all materially increased over the past
several years, chilling the willingness of capable women and men to undertake
the responsibilities imposed on corporate directors and officers.
G. Recent federal legislation and rules adopted by the Securities and
Exchange Commission and the national securities exchanges have exposed such
directors and officers to new and substantially broadened civil liabilities.
H. Under Delaware law, a director's or officer's right to be reimbursed for
the costs of defense of criminal actions, whether such claims are asserted under
state or federal law, does
not depend upon the merits of the claims asserted against the director or
officer and is separate and distinct from any right to indemnification the
director may be able to establish.
I. Indemnitee is, or will be, a director and/or officer of the Company and
his or her willingness to serve in such capacity is predicated, in substantial
part, upon the Company's willingness to indemnify him or her in accordance with
the principles reflected above, to the fullest extent permitted by the laws of
the State of Delaware, and upon the other undertakings set forth in this
Agreement.
J. Therefore, in recognition of the need to provide Indemnitee with
substantial protection against personal liability, in order to procure
Indemnitee's continued service as a director and/or officer of the Company and
to enhance Indemnitee's ability to serve the Company in an effective manner, and
in order to provide such protection pursuant to express contract rights
(intended to be enforceable irrespective of, among other things, any amendment
to the Company's certificate of incorporation or bylaws (collectively, the
"CONSTITUENT DOCUMENTS"), any change in the composition of the Company's Board
of Directors (the "BOARD") or any change-in-control or business combination
transaction relating to the Company), the Company wishes to provide in this
Agreement for the indemnification and advancement of Expenses to Indemnitee on
the terms, and subject to the conditions, set forth in this Agreement.
K. In light of the considerations referred to in the preceding recitals, it
is the Company's intention and desire that the provisions of this Agreement be
construed liberally, subject to their express terms, to maximize the protections
to be provided to Indemnitee hereunder.
AGREEMENT:
NOW, THEREFORE, the parties hereby agree as follows:
1. Certain Definitions. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "CHANGE IN CONTROL" shall have occurred at such time, if any, as
Incumbent Directors cease for any reason to constitute a majority of Directors.
For purposes of this Section 1(a), "INCUMBENT DIRECTORS" means the individuals
who, as of the date hereof, are Directors of the Company and any individual
becoming a Director subsequent to the date hereof whose election, nomination for
election by the Company's stockholders, or appointment, was approved by a vote
of at least a majority of the then Incumbent Directors (either by a specific
vote or by approval of the proxy statement of the Company in which such person
is named as a nominee for director, without objection to such nomination);
provided, however, that an individual shall not be an Incumbent Director if such
individual's election or appointment to the Board occurs as a result of an
actual or threatened election contest (as described in Rule 14a-12(c) of the
Securities Exchange Act of 1934, as amended) with respect to the election or
removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board.
2
(b) "CLAIM" means (i) any threatened, asserted, pending or completed
claim, demand, action, suit or proceeding, whether civil, criminal,
administrative, arbitrative, investigative or other, and whether made pursuant
to federal, state or other law; and (ii) any inquiry or investigation, whether
made, instituted or conducted by the Company or any other Person, including,
without limitation, any federal, state or other governmental entity, that
Indemnitee reasonably determines might lead to the institution of any such
claim, demand, action, suit or proceeding. For the avoidance of doubt, the
Company intends indemnity to be provided hereunder in respect of acts or failure
to act prior to, on or after the date hereof.
(c) "CONTROLLED AFFILIATE" means any corporation, limited liability
company, partnership, joint venture, trust or other entity or enterprise,
whether or not for profit, that is directly or indirectly controlled by the
Company. For purposes of this definition, "CONTROL" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of an entity or enterprise, whether through the ownership
of voting securities, through other voting rights, by contract or otherwise;
provided that direct or indirect beneficial ownership of capital stock or other
interests in an entity or enterprise entitling the holder to cast 15% or more of
the total number of votes generally entitled to be cast in the election of
directors (or persons performing comparable functions) of such entity or
enterprise shall be deemed to constitute control for purposes of this
definition.
(d) "DISINTERESTED DIRECTOR" means a director of the Company who is
not and was not a party to the Claim in respect of which indemnification is
sought by Indemnitee.
(e) "EXPENSES" means attorneys' and experts' fees and expenses and all
other costs and expenses paid or payable in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to investigate, defend, be a witness in or participate in (including
on appeal), any Claim.
(f) "INDEMNIFIABLE CLAIM" means any Claim based upon, arising out of
or resulting from (i) any actual, alleged or suspected act or failure to act by
Indemnitee in his or her capacity as a director, officer, employee or agent of
the Company or as a director, officer, employee, member, manager, trustee or
agent of any other corporation, limited liability company, partnership, joint
venture, trust or other entity or enterprise, whether or not for profit, as to
which Indemnitee is or was serving at the request of the Company, (ii) any
actual, alleged or suspected act or failure to act by Indemnitee in respect of
any business, transaction, communication, filing, disclosure or other activity
of the Company or any other entity or enterprise referred to in clause (i) of
this sentence, or (iii) Indemnitee's status as a current or former director,
officer, employee or agent of the Company or as a current or former director,
officer, employee, member, manager, trustee or agent of the Company or any other
entity or enterprise referred to in clause (i) of this sentence or any actual,
alleged or suspected act or failure to act by Indemnitee in connection with any
obligation or restriction imposed upon Indemnitee by reason of such status. In
addition to any service at the actual request of the Company, for purposes of
this Agreement, Indemnitee shall be deemed to be serving or to have served at
the request of the Company as a director, officer, employee, member, manager,
trustee or agent of another entity or enterprise if Indemnitee is or was serving
as a director, officer, employee, member, manager, agent, trustee or other
fiduciary of such entity or enterprise and (i)
3
such entity or enterprise is or at the time of such service was a Controlled
Affiliate, (ii) such entity or enterprise is or at the time of such service was
an employee benefit plan (or related trust) sponsored or maintained by the
Company or a Controlled Affiliate, or (iii) the Company or a Controlled
Affiliate (by action of the Board, any committee thereof or the Company's Chief
Executive Officer ("CEO") (other than as the CEO him or herself)) caused or
authorized Indemnitee to be nominated, elected, appointed, designated, employed,
engaged or selected to serve in such capacity.
(g) "INDEMNIFIABLE LOSSES" means any and all Losses relating to,
arising out of or resulting from any Indemnifiable Claim; provided, however,
that Indemnifiable Losses shall not include Losses incurred by Indemnitee in
respect of any Indemnifiable Claim (or any matter or issue therein) as to which
Indemnitee shall have been adjudged liable to the Company, unless and only to
the extent that the Delaware Court of Chancery or the court in which such
Indemnifiable Claim was brought shall have determined upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, Indemnitee is fairly and reasonably entitled to indemnification for
such Expenses as the court shall deem proper.
(h) "INDEPENDENT COUNSEL" means a nationally recognized law firm, or a
member of a nationally recognized law firm, that is experienced in matters of
Delaware corporate law and neither presently is, nor in the past five years has
been, retained to represent: (i) the Company (or any subsidiary) or Indemnitee
in any matter material to either such party (other than with respect to matters
concerning the Indemnitee under this Agreement, or of other indemnitees under
similar indemnification agreements) or (ii) any other named (or, as to a
threatened matter, reasonably likely to be named) party to the Indemnifiable
Claim giving rise to a claim for indemnification hereunder. Notwithstanding the
foregoing, the term "Independent Counsel" shall not include any person who,
under the applicable standards of professional conduct then prevailing, would
have a conflict of interest in representing either the Company or Indemnitee in
an action to determine Indemnitee's rights under this Agreement.
(i) "LOSSES" means any and all Expenses, damages, losses, liabilities,
judgments, fines, penalties (whether civil, criminal or other) and amounts paid
or payable in settlement, including, without limitation, all interest,
assessments and other charges paid or payable in connection with or in respect
of any of the foregoing.
(j) "PERSON" means any individual, entity or group, within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended.
(k) "STANDARD OF CONDUCT" means the standard for conduct by Indemnitee
that is a condition precedent to indemnification of Indemnitee hereunder against
Indemnifiable Losses relating to, arising out of or resulting from an
Indemnifiable Claim. The Standard of Conduct is (i) good faith and a reasonable
belief by Indemnitee that his action was in or not opposed to the best interests
of the Company and, with respect to any criminal action or proceeding, that
Indemnitee had no reasonable cause to believe that his conduct was unlawful, or
(ii) any other applicable standard of conduct that may hereafter be substituted
under Section 145(a) or (b) of the Delaware General Corporation Law or any
successor to such provision(s).
4
2. Indemnification Obligation. Subject only to Section 7 and to the proviso
in this Section, the Company shall indemnify, defend and hold harmless
Indemnitee, to the fullest extent permitted or required by the laws of the State
of Delaware in effect on the date hereof or as such laws may from time to time
hereafter be amended to increase the scope of such permitted indemnification,
against any and all Indemnifiable Claims and Indemnifiable Losses; provided,
however, that, except as provided in Section 5, Indemnitee shall not be entitled
to indemnification pursuant to this Agreement in connection with (i) any Claim
initiated by Indemnitee against the Company or any director or officer of the
Company unless the Company has joined in or consented to the initiation of such
Claim, or (ii) the purchase and sale by Indemnitee of securities in violation of
Section 16(b) of the Securities Exchange Act of 1934, as amended. The Company
acknowledges that the foregoing obligation may be broader than that now provided
by applicable law and the Company's Constituent Documents and intends that it be
interpreted consistently with this Section and the recitals to this Agreement.
3. Advancement of Expenses. Indemnitee shall have the right to advancement
by the Company prior to the final disposition of any Indemnifiable Claim of any
and all actual and reasonable Expenses relating to, arising out of or resulting
from any Indemnifiable Claim paid or incurred by Indemnitee. Without limiting
the generality or effect of any other provision hereof, Indemnitee's right to
such advancement is not subject to the satisfaction of any Standard of Conduct.
Without limiting the generality or effect of the foregoing, within five business
days after any request by Indemnitee that is accompanied by supporting
documentation for specific reasonable Expenses to be reimbursed or advanced, the
Company shall, in accordance with such request (but without duplication), (a)
pay such Expenses on behalf of Indemnitee, (b) advance to Indemnitee funds in an
amount sufficient to pay such Expenses, or (c) reimburse Indemnitee for such
Expenses; provided that Indemnitee shall repay, without interest, any amounts
actually advanced to Indemnitee that, at the final disposition of the
Indemnifiable Claim to which the advance related, were in excess of amounts paid
or payable by Indemnitee in respect of Expenses relating to, arising out of or
resulting from such Indemnifiable Claim. In connection with any such payment,
advancement or reimbursement, at the request of the Company, Indemnitee shall
execute and deliver to the Company an undertaking, which need not be secured and
shall be accepted without reference to Indemnitee's ability to repay the
Expenses, by or on behalf of the Indemnitee, to repay any amounts paid, advanced
or reimbursed by the Company in respect of Expenses relating to, arising out of
or resulting from any Indemnifiable Claim in respect of which it shall have been
determined, following the final disposition of such Indemnifiable Claim and in
accordance with Section 7, that Indemnitee is not entitled to indemnification
hereunder.
4. Indemnification for Additional Expenses. Without limiting the generality
or effect of the foregoing, the Company shall indemnify and hold harmless
Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee
for, or advance to Indemnitee, within five business days of such request
accompanied by supporting documentation for specific Expenses to be reimbursed
or advanced, any and all actual and reasonable Expenses paid or incurred by
Indemnitee in connection with any Claim made, instituted or conducted by
Indemnitee for (a) indemnification or reimbursement or advance payment of
Expenses by the Company under any provision of this Agreement, or under any
other agreement or provision of the Constituent Documents now or hereafter in
effect relating to Indemnifiable Claims, and/or (b) recovery under any
directors' and officers' liability insurance policies maintained by the Company;
provided, however, if it is ultimately determined that the Indemnitee is not
entitled to such indemnification,
5
reimbursement, advance or insurance recovery, as the case may be, then the
Indemnitee shall be obligated to repay any such Expenses to the Company;
provided further, that, regardless in each case of whether Indemnitee ultimately
is determined to be entitled to such indemnification, reimbursement, advance or
insurance recovery, as the case may be, Indemnitee shall return, without
interest, any such advance of Expenses (or portion thereof) which remains
unspent at the final disposition of the Claim to which the advance related.
5. Partial Indemnity. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of any
Indemnifiable Loss but not for all of the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled.
6. Procedure for Notification. To obtain indemnification under this
Agreement in respect of an Indemnifiable Claim or Indemnifiable Loss, Indemnitee
shall submit to the Company a written request therefore, including a brief
description (based upon information then available to Indemnitee) of such
Indemnifiable Claim or Indemnifiable Loss. If, at the time of the receipt of
such request, the Company has directors' and officers' liability insurance in
effect under which coverage for such Indemnifiable Claim or Indemnifiable Loss
is potentially available, the Company shall give prompt written notice of such
Indemnifiable Claim or Indemnifiable Loss to the applicable insurers in
accordance with the procedures set forth in the applicable policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of the Indemnitee, all Indemnifiable Claims and Indemnifiable
Losses in accordance with the terms of such policies. The Company shall provide
to Indemnitee a copy of such notice delivered to the applicable insurers,
substantially concurrently with the delivery thereof by the Company. The failure
by Indemnitee to timely notify the Company of any Indemnifiable Claim or
Indemnifiable Loss shall not relieve the Company from any liability hereunder
unless, and only to the extent that, the Company did not otherwise learn of such
Indemnifiable Claim or Indemnifiable Loss and to the extent that such failure
results in forfeiture by the Company of substantial defenses, rights or
insurance coverage.
7. Determination of Right to Indemnification.
(a) To the extent that Indemnitee shall have been successful on the
merits or otherwise in defense of any Indemnifiable Claim or any portion thereof
or in defense of any issue or matter therein, including, without limitation,
dismissal without prejudice, Indemnitee shall be indemnified against all
Indemnifiable Losses relating to, arising out of or resulting from such
Indemnifiable Claim in accordance with Section 2 and no Standard of Conduct
Determination (as defined in Section 7(b)) shall be required.
(b) To the extent that the provisions of Section 7(a) are inapplicable
to an Indemnifiable Claim that shall have been finally disposed of, any
determination of whether Indemnitee has satisfied the applicable Standard of
Conduct (a "STANDARD OF CONDUCT DETERMINATION") shall be made as follows: (i) if
a Change in Control shall not have occurred, or if a Change in Control shall
have occurred but Indemnitee shall have requested that the Standard of Conduct
Determination be made pursuant to this clause (i), (A) by a majority vote of the
Disinterested Directors, even if less than a quorum of the Board, (B) if such
Disinterested Directors so direct, by a majority vote of a committee of
Disinterested Directors designated by a
6
majority vote of all Disinterested Directors, or (C) if there are no such
Disinterested Directors, or if a majority of the Disinterested Directors so
direct, by Independent Counsel in a written opinion addressed to the Board, a
copy of which shall be delivered to Indemnitee; and (ii) if a Change in Control
shall have occurred and Indemnitee shall not have requested that the Standard of
Conduct Determination be made pursuant to clause (i) above, by Independent
Counsel in a written opinion addressed to the Board, a copy of which shall be
delivered to Indemnitee.
(c) If (i) Indemnitee shall be entitled to indemnification hereunder
against any Indemnifiable Losses pursuant to Section 7(a), (ii) no determination
of whether Indemnitee has satisfied any applicable standard of conduct under
Delaware law is a legally required condition precedent to indemnification of
Indemnitee hereunder against any Indemnifiable Losses, or (iii) Indemnitee has
been determined or deemed pursuant to Section 7(b) to have satisfied the
applicable Standard of Conduct, then the Company shall pay to Indemnitee, within
five business days after the later of (x) the Notification Date in respect of
the Indemnifiable Claim or portion thereof to which such Indemnifiable Losses
are related, out of which such Indemnifiable Losses arose or from which such
Indemnifiable Losses resulted, and (y) the earliest date on which the applicable
criterion specified in clause (i), (ii) or (iii) above shall have been
satisfied, an amount equal to the amount of such Indemnifiable Losses. Nothing
herein is intended to mean or imply that the Company is intending to use Section
145(f) of the Delaware General Corporation Law to dispense with a requirement
that Indemnitee meet the applicable Standard of Conduct where it is otherwise
required by such statute.
(d) If a Standard of Conduct Determination is required to be, but has
not been, made by Independent Counsel pursuant to Section 7(b)(i), the
Independent Counsel shall be selected by the Board or a committee of the Board,
and the Company shall give written notice to Indemnitee advising him or her of
the identity of the Independent Counsel so selected. If a Standard of Conduct
Determination is required to be, or to have been, made by Independent Counsel
pursuant to Section 7(b)(ii), the Independent Counsel shall be selected by
Indemnitee, and Indemnitee shall give written notice to the Company advising it
of the identity of the Independent Counsel so selected. In either case,
Indemnitee or the Company, as applicable, may, within five business days after
receiving written notice of selection from the other, deliver to the other a
written objection to such selection; provided, however, that such objection may
be asserted only on the ground that the Independent Counsel so selected does not
satisfy the criteria set forth in the definition of "Independent Counsel" in
Section 1(h), and the objection shall set forth with particularity the factual
basis of such assertion. Absent a proper and timely objection, the Person so
selected shall act as Independent Counsel. If such written objection is properly
and timely made and substantiated, (i) the Independent Counsel so selected may
not serve as Independent Counsel unless and until such objection is withdrawn or
a court has determined that such objection is without merit and (ii) the
non-objecting party may, at its option, select an alternative Independent
Counsel and give written notice to the other party advising such other party of
the identity of the alternative Independent Counsel so selected, in which case
the provisions of the two immediately preceding sentences and clause (i) of this
sentence shall apply to such subsequent selection and notice. If applicable, the
provisions of clause (ii) of the immediately preceding sentence shall apply to
successive alternative selections. If no Independent Counsel that is permitted
under the foregoing provisions of this Section 7(d) to make the Standard of
Conduct Determination shall have been selected within 30 calendar days after the
Company gives its initial notice pursuant to the first sentence of this Section
7(d) or
7
Indemnitee gives its initial notice pursuant to the second sentence of this
Section 7(d), as the case may be, either the Company or Indemnitee may petition
the Court of Chancery of the State of Delaware for resolution of any objection
which shall have been made by the Company or Indemnitee to the other's selection
of Independent Counsel and/or for the appointment as Independent Counsel of a
person or firm selected by the Court or by such other person as the Court shall
designate, and the person or firm with respect to whom all objections are so
resolved or the person or firm so appointed will act as Independent Counsel. In
all events, the Company shall pay all of the actual and reasonable fees and
expenses of the Independent Counsel incurred in connection with the Independent
Counsel's determination pursuant to Section 7(b).
8. Cooperation. Indemnitee shall cooperate with reasonable requests of the
Company in connection with any Indemnifiable Claim and any individual or firm
making such Standard of Conduct Determination, including providing to such
Person documentation or information which is not privileged or otherwise
protected from disclosure and which is reasonably available to Indemnitee and
reasonably necessary to defend the Indemnifiable Claim or make any Standard of
Conduct Determination without incurring any unreimbursed cost in connection
therewith. The Company shall indemnify and hold harmless Indemnitee against and,
if requested by Indemnitee, shall reimburse Indemnitee for, or advance to
Indemnitee, within five business days of such request accompanied by supporting
documentation for specific costs and expenses to be reimbursed or advanced, any
and all costs and expenses (including attorneys' and experts' fees and expenses)
actually and reasonably incurred by Indemnitee in so cooperating with the Person
defending the Indemnifiable Claim or making such Standard of Conduct
Determination.
9. Presumption of Entitlement. Notwithstanding any other provision hereof,
in making any Standard of Conduct Determination, the Person making such
determination shall presume that Indemnitee has satisfied the applicable
Standard of Conduct.
10. No Other Presumption. For purposes of this Agreement, the termination
of any Claim by judgment, order, settlement (whether with or without court
approval) or conviction, or upon a plea of nolo contendere or its equivalent,
will not create a presumption that Indemnitee did not meet any applicable
Standard of Conduct or that indemnification hereunder is otherwise not
permitted.
11. Non-Exclusivity. The rights of Indemnitee hereunder will be in addition
to any other rights Indemnitee may have under the Constituent Documents, or the
substantive laws of the Company's jurisdiction of incorporation, any other
contract or otherwise (collectively, "OTHER INDEMNITY PROVISIONS"); provided,
however, that (a) to the extent that Indemnitee otherwise would have any greater
right to indemnification under any Other Indemnity Provision, Indemnitee will
without further action be deemed to have such greater right hereunder, and (b)
to the extent that any change is made to any Other Indemnity Provision which
permits any greater right to indemnification than that provided under this
Agreement as of the date hereof, Indemnitee will be deemed to have such greater
right hereunder. The Company may not, without the consent of Indemnitee, adopt
any amendment to any of the Constituent Documents the effect of which would be
to deny, diminish or encumber Indemnitee's right to indemnification under this
Agreement.
8
12. Liability Insurance and Funding. For the duration of Indemnitee's
service as a director and/or officer of the Company and for a reasonable period
of time thereafter, which such period shall be determined by the Company in its
sole discretion, the Company shall use commercially reasonable efforts (taking
into account the scope and amount of coverage available relative to the cost
thereof) to cause to be maintained in effect policies of directors' and
officers' liability insurance providing coverage for directors and/or officers
of the Company, and, if applicable, that is substantially comparable in scope
and amount to that provided by the Company's current policies of directors' and
officers' liability insurance. Upon reasonable request, the Company shall
provide Indemnitee or his or her counsel with a copy of all directors' and
officers' liability insurance applications, binders, policies, declarations,
endorsements and other related materials. In all policies of directors' and
officers' liability insurance obtained by the Company, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits, subject to the same limitations, as are accorded to the Company's
directors and officers most favorably insured by such policy. Notwithstanding
the foregoing, (i) the Company may, but shall not be required to, create a trust
fund, grant a security interest or use other means, including, without
limitation, a letter of credit, to ensure the payment of such amounts as may be
necessary to satisfy its obligations to indemnify and advance expenses pursuant
to this Agreement and (ii) in renewing or seeking to renew any insurance
hereunder, the Company will not be required to expend more than 2.0 times the
premium amount of the immediately preceding policy period (equitably adjusted if
necessary to reflect differences in policy periods).
13. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the related rights
of recovery of Indemnitee against other Persons (other than Indemnitee's
successors), including any entity or enterprise referred to in clause (i) of the
definition of "Indemnifiable Claim" in Section 1(f). Indemnitee shall execute
all papers reasonably required to evidence such rights (all of Indemnitee's
reasonable Expenses, including attorneys' fees and charges, related thereto to
be reimbursed by or, at the option of Indemnitee, advanced by the Company).
14. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment to Indemnitee in respect of any Indemnifiable
Losses to the extent Indemnitee has otherwise already actually received payment
(net of Expenses incurred in connection therewith) under any insurance policy,
the Constituent Documents and Other Indemnity Provisions or otherwise (including
from any entity or enterprise referred to in clause (i) of the definition of
"Indemnifiable Claim" in Section 1(f)) in respect of such Indemnifiable Losses
otherwise indemnifiable hereunder.
15. Defense of Claims. Subject to the provisions of applicable policies of
directors' and officers' liability insurance, if any, the Company shall be
entitled to participate in the defense of any Indemnifiable Claim or to assume
or lead the defense thereof with counsel reasonably satisfactory to the
Indemnitee; provided that if Indemnitee determines, after consultation with
counsel selected by Indemnitee, that (a) the use of counsel chosen by the
Company to represent Indemnitee would present such counsel with an actual or
potential conflict, (b) the named parties in any such Indemnifiable Claim
(including any impleaded parties) include both the Company and Indemnitee and
Indemnitee shall conclude that there may be one or more legal defenses available
to him or her that are different from or in addition to
9
those available to the Company, (c) any such representation by such counsel
would be precluded under the applicable standards of professional conduct then
prevailing, or (d) Indemnitee has interests in the claim or underlying subject
matter that are different from or in addition to those of other Persons against
whom the Claim has been made or might reasonably be expected to be made, then
Indemnitee shall be entitled to retain separate counsel (but not more than one
law firm plus, if applicable, local counsel in respect of any particular
Indemnifiable Claim for all indemnitees in Indemnitee's circumstances) at the
Company's expense. The Company shall not be liable to Indemnitee under this
Agreement for any amounts paid in settlement of any threatened or pending
Indemnifiable Claim effected without the Company's prior written consent. The
Company shall not, without the prior written consent of the Indemnitee, effect
any settlement of any threatened or pending Indemnifiable Claim which the
Indemnitee is or could have been a party unless such settlement solely involves
the payment of money and includes a complete and unconditional release of the
Indemnitee from all liability on any claims that are the subject matter of such
Indemnifiable Claim. Neither the Company nor Indemnitee shall unreasonably
withhold its consent to any proposed settlement; provided that Indemnitee may
withhold consent to any settlement that does not provide a complete and
unconditional release of Indemnitee.
16. Mutual Acknowledgment. Both the Company and the Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company may be
required in the future to undertake to the Securities and Exchange Commission to
submit the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify Indemnitee
and, in that event, the Indemnitee's rights and the Company's obligations
hereunder shall be subject to that determination.
17. Successors and Binding Agreement.
(a) This Agreement shall be binding upon and inure to the benefit of
the Company and any successor to the Company, including, without limitation, any
Person acquiring directly or indirectly all or substantially all of the business
or assets of the Company whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor will thereafter be deemed the
"Company" for purposes of this Agreement), but shall not otherwise be assignable
or delegatable by the Company.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Indemnitee's personal or legal representatives, executors, administrators,
heirs, distributees, legatees and other successors.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
Sections 17(a) and 17(b). Without limiting the generality or effect of the
foregoing, Indemnitee's right to receive payments hereunder shall not be
assignable, whether by pledge, creation of a security interest or otherwise,
other than by a transfer by the Indemnitee's will or by the laws of descent and
distribution, and,
10
in the event of any attempted assignment or transfer contrary to this Section
17(c), the Company shall have no liability to pay any amount so attempted to be
assigned or transferred.
18. Notices. For all purposes of this Agreement, all communications,
including without limitation notices, consents, requests or approvals, required
or permitted to be given hereunder must be in writing and shall be deemed to
have been duly given when hand delivered or dispatched by electronic facsimile
transmission (with receipt thereof orally confirmed), or one business day after
having been sent for next-day delivery by a nationally recognized overnight
courier service, addressed to the Company (to the attention of the Secretary of
the Company) and to Indemnitee at the applicable address shown on the signature
page hereto, or to such other address as any party may have furnished to the
other in writing and in accordance herewith, except that notices of changes of
address will be effective only upon receipt.
19. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by and construed in accordance
with the substantive laws of the State of Delaware, without giving effect to the
principles of conflict of laws of such State. The Company and Indemnitee each
hereby irrevocably consent to the jurisdiction of the Chancery Court of the
State of Delaware for all purposes in connection with any action or proceeding
which arises out of or relates to this Agreement, waive all procedural
objections to suit in that jurisdiction, including, without limitation,
objections as to venue or inconvenience, agree that service in any such action
may be made by notice given in accordance with Section 18 and also agree that
any action instituted under this Agreement shall be brought only in the Chancery
Court of the State of Delaware.
20. Validity. If any provision of this Agreement or the application of any
provision hereof to any Person or circumstance is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other Person or circumstance shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent, and only to the extent, necessary to make it
enforceable, valid or legal. In the event that any court or other adjudicative
body shall decline to reform any provision of this Agreement held to be invalid,
unenforceable or otherwise illegal as contemplated by the immediately preceding
sentence, the parties thereto shall take all such action as may be necessary or
appropriate to replace the provision so held to be invalid, unenforceable or
otherwise illegal with one or more alternative provisions that effectuate the
purpose and intent of the original provisions of this Agreement as fully as
possible without being invalid, unenforceable or otherwise illegal.
21. Miscellaneous. No provision of this Agreement may be waived, modified
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by Indemnitee and the Company. No waiver by either party hereto
at any time of any breach by the other party hereto or compliance with any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, expressed or implied with respect to the subject matter
hereof have been made by either party that are not set forth expressly in this
Agreement.
11
22. Certain Interpretive Matters. Unless the context of this Agreement
otherwise requires, (1) "it" or "its" or words of any gender include each other
gender, (2) words using the singular or plural number also include the plural or
singular number, respectively, (3) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement, (4) the terms
"Article," "Section," "Annex" or "Exhibit" refer to the specified Article,
Section, Annex or Exhibit of or to this Agreement, (5) the terms "include,"
"includes" and "including" will be deemed to be followed by the words "without
limitation" (whether or not so expressed), and (6) the word "or" is disjunctive
but not exclusive. Whenever this Agreement refers to a number of days, such
number will refer to calendar days unless business days are specified and
whenever action must be taken (including the giving of notice or the delivery of
documents) under this Agreement during a certain period of time or by a
particular date that ends or occurs on a non-business day, then such period or
date will be extended until the immediately following business day. As used
herein, "BUSINESS DAY" means any day other than Saturday, Sunday or a United
States federal holiday.
23. Entire Agreement. This Agreement constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties hereto with respect to the subject matter of this Agreement.
Any prior agreements or understandings between the parties hereto with respect
to indemnification are hereby terminated and of no further force or effect. This
Agreement is not the exclusive means of securing indemnification rights of
Indemnitee and is in addition to any rights Indemnitee may have under any
Constituent Documents.
24. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
12
IN WITNESS WHEREOF, Indemnitee has executed and the Company has caused its
duly authorized representative to execute this Agreement as of the date first
above written.
TOWERSTREAM CORPORATION
By:
------------------------------------
Name: Jeffrey M. Thompson
Title: Chief Executive Officer
INDEMNITEE:
----------------------------------------
Name:
Address:
_______________________________
________________________________________
________________________________________
SIGNATURE PAGE TO DIRECTOR AND OFFICER INDEMNIFICATION AGREEMENT
EXHIBIT 10.18
TOWERSTREAM CORPORATION
2007 EQUITY COMPENSATION PLAN
INCENTIVE STOCK OPTION AGREEMENT
This INCENTIVE STOCK OPTION AGREEMENT (the "Option Agreement"), dated
as of the ___ day of ______, 20__ (the "Grant Date"), is between Towerstream
Corporation, a Delaware corporation (the "Company"), and _________ (the
"Optionee"), a key employee of the Company or of a "Related Corporation," as
defined in the Towerstream Corporation 2007 Equity Compensation Plan (the
"Plan").
WHEREAS, the Company desires to give the Optionee the opportunity to
purchase shares of common stock of the Company, par value $0. 001 ("Common
Shares") in accordance with the provisions of the Plan, a copy of which is
attached hereto;
NOW THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the parties hereto,
intending to be legally bound hereby, agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the
right and option (the "Option") to purchase all or any part of an aggregate of
_____ Common Shares. The Option is in all respects limited and conditioned as
hereinafter provided, and is subject in all respects to the terms and conditions
of the Plan now in effect and as it may be amended from time to time (but only
to the extent that such amendments apply to outstanding options). Such terms and
conditions are incorporated herein by reference, made a part hereof, and shall
control in the event of any conflict with any other terms of this Option
Agreement. The Option granted hereunder is intended to be an incentive stock
option ("ISO") meeting the requirements of the Plan and section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and not a nonqualified
stock option ("NQSO").
2. Exercise Price. The exercise price of the Common Shares covered by
this Option shall be $_____ per share. It is the determination of the committee
administering the Plan (the "Committee") that on the Grant Date the exercise
price was not less than the greater of (i) 100% (110% for an Optionee who owns
more than 10% of the total combined voting power of all shares of stock of the
Company or of a Related Corporation - a "More-Than-10% Owner") of the "Fair
Market Value" (as defined in the Plan) of a Common Share, or (ii) the par value
of a Common Share.
3. Term. Unless earlier terminated pursuant to any provision of the
Plan or of this Option Agreement, this Option shall expire on _____ __, 20__
(the "Expiration Date"), which date is not more than 10 years (five years in the
case of a More-Than-10% Owner) from the Grant Date. This Option shall not be
exercisable on or after the Expiration Date.
4. Exercise of Option. The Optionee shall have the right to purchase
from the Company, on and after the following dates, the following number of
Common Shares, provided the Optionee has not terminated his or her service as of
the applicable vesting date:
Date Installment Becomes
Exercisable Number of Common Shares
------------------------ --------------------------
________________________ _____ Shares
________________________ an additional _____ Shares
________________________ an additional _____ Shares
________________________ an additional _____ Shares
The Committee may accelerate any exercise date of the Option, in its discretion,
if it deems such acceleration to be desirable. Once the Option becomes
exercisable, it will remain exercisable until it is exercised or until it
terminates.
5. Method of Exercising Option. Subject to the terms and conditions of
this Option Agreement and the Plan, the Option may be exercised by written
notice to the Company at its principal office, which is presently located at 55
Hammerlund Way, Middletown Rhode Island 02842. The form of such notice is
attached hereto and shall state the election to exercise the Option and the
number of whole shares with respect to which it is being exercised; shall be
signed by the person or persons so exercising the Option; and shall be
accompanied by payment of the full exercise price of such shares. Only full
shares will be issued.
[THE COMMITTEE SHOULD SELECT WHICH OF THE FOLLOWING METHODS OF PAYMENT WILL BE
PERMITTED:]
The exercise price shall be paid to the Company -
(a) in cash, or by certified check, bank draft, or postal or express
money order;
(b) through the delivery of Common Shares previously acquired by the
Optionee;
(c) by delivering a properly executed notice of exercise of the Option
to the Company and a broker, with irrevocable instructions to the broker
promptly to deliver to the Company the amount necessary to pay the exercise
price of the Option;
(d) in Common Shares newly acquired by the Optionee upon exercise of
the Option (which shall constitute a disqualifying disposition with respect to
this ISO);
(e) in any combination of (a), (b), (c), or (d) above.
-2-
[In the event the exercise price is paid, in whole or in part, with Common
Shares, the portion of the exercise price so paid shall be equal to the Fair
Market Value of the Common Shares surrendered on the date of exercise.]
Upon receipt of notice of exercise and payment, the Company shall
deliver a certificate or certificates representing the Common Shares with
respect to which the Option is so exercised. The Optionee shall obtain the
rights of a shareholder upon receipt of a certificate(s) representing such
Common Shares.
Such certificate(s) shall be registered in the name of the person so
exercising the Option (or, if the Option is exercised by the Optionee and if the
Optionee so requests in the notice exercising the Option, shall be registered in
the name of the Optionee and the Optionee's spouse, jointly, with right of
survivorship), and shall be delivered as provided above to, or upon the written
order of, the person exercising the Option. In the event the Option is exercised
by any person after the death or disability (as determined in accordance with
Section 22(e)(3) of the Code) of the Optionee, the notice shall be accompanied
by appropriate proof of the right of such person to exercise the Option. All
Common Shares that are purchased upon exercise of the Option as provided herein
shall be fully paid and non-assessable.
6. Non-Transferability of Option. This Option is not assignable or
transferable, in whole or in part, by the Optionee other than by will or by the
laws of descent and distribution. During the lifetime of the Optionee, the
Option shall be exercisable only by the Optionee or, in the event of his or her
disability, by his or her guardian or legal representative.
7. Termination of Employment. If the Optionee's employment with the
Company and all Related Corporations is terminated for any reason (other than
death or disability) prior to the Expiration Date, this Option may be exercised,
to the extent of the number of Common Shares with respect to which the Optionee
could have exercised it on the date of such termination of employment by the
Optionee at any time prior to the earlier of (i) the Expiration Date, or (ii)
three months after such termination of employment. Any part of the Option that
was not exercisable immediately before the Optionee's termination of employment
shall terminate at that time.
8. Disability. If the Optionee becomes disabled (as determined in
accordance with section 22(e)(3) of the Code) during his or her employment and,
prior to the Expiration Date, the Optionee's employment is terminated as a
consequence of such disability, this Option may be exercised, to the extent of
the number of Common Shares with respect to which the Optionee could have
exercised it on the date of such termination of employment by the Optionee or by
the Optionee's legal representative at any time prior to the earlier of (i) the
Expiration Date or (ii) one year after such termination of employment. Any part
of the Option that was not exercisable immediately before the Optionee's
termination of employment shall terminate at that time.
9. Death. If the Optionee dies during his or her employment and prior
to the Expiration Date, or if the Optionee's employment is terminated for any
reason (as described in Paragraphs 7 and 8) and the Optionee dies following his
or her termination of employment but
-3-
prior to the earliest of (i) the Expiration Date, or (ii) the expiration of the
period determined under Paragraph 7 or 8 (as applicable to the Optionee) this
Option may be exercised, to the extent of the number of Common Shares with
respect to which the Optionee could have exercised it on the date of his or her
death by the Optionee's estate, personal representative or beneficiary who
acquired the right to exercise this Option by bequest or inheritance or by
reason of the Optionee's death, at any time prior to the earlier of (i) the
Expiration Date or (ii) one year after the date of the Optionee's death. Any
part of the Option that was not exercisable immediately before the Optionee's
death shall terminate at that time.
10. Disqualifying Disposition of Option Shares. The Optionee agrees to
give written notice to the Company, at its principal office, if a "disposition"
of the Common Shares acquired through exercise of the Option granted hereunder
occurs at any time within two years after the Grant Date or within one year
after the transfer to the Optionee of such shares. Optionee acknowledges that if
such disposition occurs, the Optionee generally will recognize ordinary income
as of the date the Option was exercised in an amount equal to the lesser of (i)
the Fair Market Value of the Common Shares on the date of exercise minus the
exercise price, or (ii) the amount realized on disposition of such shares minus
the exercise price. For purposes of this Paragraph, the term "disposition" shall
have the meaning assigned to such term by section 424(c) of the Code.
11. Governing Law. This Option Agreement shall be governed by the
applicable Code provisions to the maximum extent possible. Otherwise, the laws
of the State of Delaware (without reference to the principles of conflict of
laws) shall govern the operation of, and the rights of the Optionee under, the
Plan and Options granted thereunder.
IN WITNESS WHEREOF, the Company has caused this Incentive Stock Option
Agreement to be duly executed by its duly authorized officer, and the Optionee
has hereunto set his or her hand and seal, all as of the ______ day of
_____________, 20__.
TOWERSTREAM CORPORATION
----------------------------------------
By:
----------------------------------------
Optionee
-4-
TOWERSTREAM CORPORATION
2007 EQUITY COMPENSATION PLAN
Notice of Exercise of Incentive Stock Option
I hereby exercise the incentive stock option granted to me pursuant to
the Incentive Stock Option Agreement dated as of _____________ __, 20__, by
Towerstream corporation (the "Company"), with respect to the following number of
shares of the Company's common stock ("Shares"), par value $0. 001 per Share,
covered by said option:
Number of Shares to be purchased: _______
Purchase price per Share: $_______
Total purchase price: $_______
___ A. Enclosed is cash or my certified check, bank draft, or postal or
express money order in the amount of $________ in full/partial [CIRCLE
ONE] payment for such Shares;
and/or
___ B. Enclosed is/are ________ Share(s) with a total fair market value of
$_______ on the date hereof in full/partial [CIRCLE ONE] payment for
such Shares;
and/or
___ C. I have provided notice to __________ [INSERT NAME OF BROKER], a
broker, who will render full/partial [CIRCLE ONE] payment for such
Shares. [OPTIONEE SHOULD ATTACH TO THE NOTICE OF EXERCISE PROVIDED TO
SUCH BROKER A COPY OF THIS NOTICE OF EXERCISE AND IRREVOCABLE
INSTRUCTIONS TO PAY TO THE COMPANY THE FULL/PARTIAL (AS ELECTED ABOVE)
EXERCISE PRICE.]
and/or
___ D. I elect to satisfy the payment for Shares purchased hereunder by
having the Company withhold newly acquired Shares pursuant to the
exercise of the Option. I understand that this will result in a
"disqualifying disposition," as described in Section 10 of my
Incentive Stock Option Agreement.
Please have the certificate or certificates representing the purchased
Shares registered in the following name or names*: ________________
_______________; and sent to _________________________.
DATED: ________ __, 20__ ----------------------
Optionee's Signature
----------
* Certificates may be registered in the name of the Optionee alone or in the
joint names (with right of survivorship) of the Optionee and his or her
spouse.
-2-
EXHIBIT 10.19
TOWERSTREAM CORPORATION
2007 EQUITY COMPENSATION PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
This NONQUALIFIED STOCK OPTION AGREEMENT (the "Option Agreement"),
dated as of the __ day of ______, 20___ (the "Grant Date"), is between
Towerstream Corporation, a Delaware corporation (the "Company"), and __________
(the "Optionee"), a [CHOOSE ONE] [key employee, director and/or consultant] of
the Company or of a "Related Corporation," as defined in the Towerstream
Corporation 2007 Equity Compensation Plan (the "Plan").
WHEREAS, the Company desires to give the Optionee the opportunity to
purchase shares of common stock of the Company, par value $0. 001 ("Common
Shares") in accordance with the provisions of the Plan, a copy of which is
attached hereto;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the parties hereto,
intending to be legally bound hereby, agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the
right and option (the "Option") to purchase all or any part of an aggregate of
________ Common Shares. The Option is in all respects limited and conditioned as
hereinafter provided, and is subject in all respects to the terms and conditions
of the Plan now in effect and as it may be amended from time to time (but only
to the extent that such amendments apply to outstanding options). Such terms and
conditions are incorporated herein by reference, made a part hereof, and shall
control in the event of any conflict with any other terms of this Option
Agreement. The Option granted hereunder is intended to be a nonqualified stock
option ("NQSO") and not an incentive stock option ("ISO") as such term is
defined in section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Exercise Price. The exercise price of the Common Shares covered by
this Option shall be $_______ per share. It is the determination of the
committee administering the Plan (the "Committee") that on the Grant Date the
exercise price was not less than the greater of (i) 100% of the "Fair Market
Value" (as defined in the Plan) of a Common Share, or (ii) the par value of a
Common Share.
3. Term. Unless earlier terminated pursuant to any provision of the
Plan or of this Option Agreement, this Option shall expire on ______ ___, 20__
(the "Expiration Date"), which date is not more than 10 years from the Grant
Date. This Option shall not be exercisable on or after the Expiration Date.
4. Exercise of Option. The Optionee shall have the right to purchase
from the Company, on and after the following dates, the following number of
Common Shares, provided the Optionee has not terminated his or her service as of
the applicable vesting date:
Date Installment Becomes
Exercisable Number of Option Shares
------------------------------- -----------------------------
_______________________________ ________ Shares
_______________________________ an additional ________ Shares
_______________________________ an additional ________ Shares
_______________________________ an additional ________ Shares
The Committee may accelerate any exercise date of the Option, in its discretion,
if it deems such acceleration to be desirable. Once the Option becomes
exercisable, it will remain exercisable until it is exercised or until it
terminates.
5. Method of Exercising Option. Subject to the terms and conditions of
this Option Agreement and the Plan, the Option may be exercised by written
notice to the Company at its principal office, which is presently located at 55
Hammerlund, Middletown, Rhode Island 02842. The form of such notice is attached
hereto and shall state the election to exercise the Option and the number of
whole shares with respect to which it is being exercised; shall be signed by the
person or persons so exercising the Option; and shall be accompanied by payment
of the full exercise price of such shares. Only full shares will be issued.
[THE COMMITTEE SHOULD SELECT WHICH OF THE FOLLOWING METHODS OF PAYMENT WILL BE
PERMITTED:]
The exercise price shall be paid to the Company -
(a) in cash, or by certified check, bank draft, or postal or express
money order;
(b) through the delivery of Common Shares;
(c) by delivering a properly executed notice of exercise of the Option
to the Company and a broker, with irrevocable instructions to the broker
promptly to deliver to the Company the amount necessary to pay the exercise
price of the Option;
(d) in Common Shares newly acquired by the Optionee upon the exercise
of the Option; or
(e) in any combination of (a), (b), (c), or (d) above.
[In the event the exercise price is paid, in whole or in part, with Common
Shares, the portion of the exercise price so paid shall be equal to the Fair
Market Value of the Common Shares surrendered on the date of exercise.]
Upon receipt of notice of exercise and payment, the Company shall
deliver a certificate or certificates representing the Common Shares with
respect to which the Option is so exercised. The Optionee shall obtain the
rights of a shareholder upon receipt of a certificate(s) representing such
Common Shares.
Such certificate(s) shall be registered in the name of the person so
exercising the Option (or, if the Option is exercised by the Optionee and if the
Optionee so requests in the notice exercising the Option, shall be registered in
the name of the Optionee and the Optionee's spouse, jointly, with right of
survivorship) and shall be delivered as provided above to, or upon the written
order of, the person exercising the Option. In the event the Option is exercised
by any person or persons after the death or disability (as determined in
accordance with section 22(e)(3) of the Code) of the Optionee, the notice shall
be accompanied by appropriate proof of the right of such person or persons to
exercise the Option. All Common Shares that are purchased upon exercise of the
Option as provided herein shall be fully paid and non-assessable.
6. Transferability of Option. This Option is not assignable or
transferable, in whole or in part, by the Optionee other than by will or by the
laws of descent and distribution. During the lifetime of the Optionee, the
Option shall be exercisable only by the Optionee or, in the event of his or her
disability, by his or her guardian or legal representative.
7. Termination of Service. If the Optionee's service with the Company
and all Related Corporations is terminated for any reason other than death or
disability prior to the Expiration Date, this Option may be exercised, to the
extent of the number of Common Shares with respect to which the Optionee could
have exercised it on the date of such termination of service by the Optionee at
any time prior to the earlier of (i) the Expiration Date or (ii) _____ months
after the date of such termination of service. [THE PLAN PROVIDES FOR A MINIMUM
THREE MONTH EXERCISE PERIOD FOR NQSOS. YOU MAY PROVIDE FOR AN EXERCISE PERIOD
LONGER THAN THREE MONTHS.] Any part of the Option that was not exercisable
immediately before the Optionee's termination of service shall terminate at that
time.
8. Disability. If the Optionee becomes disabled (as determined in
accordance with section 22(e)(3) of the Code) during his or her service and,
prior to the Expiration Date, the Optionee's service is terminated as a
consequence of such disability, this Option may be exercised, to the extent of
the number of Common Shares with respect to which the Optionee could have
exercised it on the date of such termination of service by the Optionee or by
the optionee's legal representative, at any time prior to the earlier of (i) the
Expiration Date or (ii) one year after such termination of service. Any part of
the Option that was not exercisable immediately before the Optionee's
termination of service shall terminate at that time.
9. Death. If the Optionee dies during his or her service and prior to
the Expiration Date, or if the Optionee's service is terminated for any reason
(as described in Paragraphs 7 and 8) and the Optionee dies following his or her
termination of service but prior to the earlier of the Expiration Date or the
expiration of the period determined under Paragraph 7 or
8 (as applicable to the Optionee), this Option may be exercised, to the extent
of the number of Common Shares with respect to which the Optionee could have
exercised it on the date of his or her death by the Optionee's estate, personal
representative or beneficiary who acquired the right to exercise this Option by
bequest or inheritance or by reason of the Optionee's death, at any time prior
to the earlier of (i) the Expiration Date or (ii) one year after the date of the
Optionee's death. Any part of the Option that was not exercisable immediately
before the Optionee's death shall terminate at that time.
10. Withholding of Taxes. The obligation of the Company to deliver
Common Shares upon the exercise of this Option shall be subject to applicable
federal, state and local tax withholding requirements. [IF THE COMMITTEE DESIRES
TO PERMIT THE OPTIONEE TO SATISFY THE WITHHOLDING REQUIREMENTS THROUGH THE USE
OF COMMON SHARES, THE BRACKETED PROVISIONS SHOULD BE INSERTED.] [If the exercise
of the Option is subject to the withholding requirements of applicable federal,
state and/or local tax law, the Optionee, subject to the provisions of the Plan
and such additional withholding rules (the "Withholding Rules") as shall be
adopted by the Committee, may satisfy the withholding tax, in whole or in part,
by electing to have the Company withhold (or by returning to the Company) Common
Shares, which shares shall be valued, for this purpose, at their Fair Market
Value on the date the amount attributable to the exercise of the Option is
includable in income by the Optionee under section 83 of the Code. Such election
must be made in compliance with and subject to the Withholding Rules, and the
Company may limit the number of withheld shares to the extent necessary to avoid
adverse accounting consequences.]
11. Governing Law. This Option Agreement shall be governed by the
applicable Code provisions to the maximum extent possible. Otherwise, the laws
of the State of Delaware (without reference to the principles of conflict of
laws) shall govern the operation of, and the rights of the Optionee under, the
Plan and Options granted thereunder.
IN WITNESS WHEREOF, the Company has caused this Nonqualified Stock
Option Agreement to be duly executed by its duly authorized officer, and the
Optionee has hereunto set his or her hand and seal, all as of the ____ day of
______________, 20__.
TOWERSTREAM CORPORATION
----------------------------------------
By:
----------------------------------------
Optionee
TOWERSTREAM CORPORATION
2007 EQUITY COMPENSATION PLAN
Notice of Exercise of Nonqualified Stock Option
I hereby exercise the nonqualified stock option granted to me pursuant
to the Nonqualified Stock Option Agreement dated as of ___________ __, 20__, by
Towerstream Corporation (the "Company"), with respect to the following number of
shares of the Company's common stock ("Shares"), par value $0. 001 per Share,
covered by said option:
Number of Shares to be purchased: _______
Purchase price per Share: $_______
Total purchase price: $_______
___ A. Enclosed is cash or my certified check, bank draft, or postal or
express money order in the amount of $__________ in full/partial
[CIRCLE ONE] payment for such Shares;
and/or
___ B. Enclosed is/are Share(s) with a total fair market value of $_________
on the date hereof in full/partial [CIRCLE ONE] payment for such
Shares;
and/or
___ C. I have provided notice to _____________ [INSERT NAME OF BROKER], a
broker, who will render full/partial [CIRCLE ONE] payment for such
Shares. [OPTIONEE SHOULD ATTACH TO THE NOTICE OF EXERCISE PROVIDED TO
SUCH BROKER A COPY OF THIS NOTICE OF EXERCISE AND IRREVOCABLE
INSTRUCTIONS TO PAY TO THE COMPANY THE FULL EXERCISE PRICE.]
and/or
___ D. I elect to satisfy the payment for Shares purchased hereunder by
having the Company withhold newly acquired Shares pursuant to the
exercise of the Option.
Please have the certificate or certificates representing the purchased
Shares registered in the following name or names*:________________ ; and sent to
___________________________
DATED: _____________ ___, 20__ ----------------------------------------
Optionee's Signature
----------
* Certificates may be registered in the name of the Optionee alone or in the
joint names (with right of survivorship) of the Optionee and his or her
spouse.
EXHIBIT 14.1
CODE OF ETHICS AND BUSINESS CONDUCT
FOR OFFICERS, DIRECTORS AND EMPLOYEES OF
TOWERSTREAM CORPORATION
1. INTRODUCTION
The purpose of this Code of Ethics and Business Conduct (this "Code") is to
describe standards of ethical conduct expected of directors, officers and
employees (the "Covered Persons") of Towerstream Corporation ("Towerstream") and
its subsidiaries (collectively with Towerstream, the "Company"). All Covered
Persons will be required to attest annually to their awareness and acceptance of
the provisions of the Code and to affirm their compliance with such provisions.
The Company has formulated this Code to help to ensure that Covered Persons act
in accordance with applicable laws and observe the highest ethical standards in
their business dealings, and believes it is fundamental to the reputation and
continuing success of the Company that Covered Persons adhere to the rules and
procedures set forth in this Code.
While this Code is intended to provide guidelines for ethical and professional
conduct, ultimately, Covered Persons must exercise good judgment and common
sense in interpreting and applying these procedures in any given situation. In
cases of doubt, Covered Persons should consult with the Chairman of the Audit
Committee.
2. TREAT IN AN ETHICAL MANNER THOSE TO WHOM THE COMPANY HAS AN OBLIGATION
The Company and all Covered Persons are committed to honesty, just management,
fairness, providing a safe and healthy environment free from the fear of
retribution, and respecting the dignity due everyone. For the communities in
which we live and work we are committed to act as concerned and responsible
neighbors, reflecting all aspects of good citizenship. For our stockholders we
are committed to pursuing sound growth and earnings objectives and to exercising
prudence in the use of our assets and resources. For our suppliers and partners
we are committed to fair competition and the sense of responsibility required of
a good customer and teammate.
3. PROMOTE A POSITIVE WORK ENVIRONMENT
The Company is committed to the recruitment, training, development and retention
of competent staff. All employment decisions, including selection for
employment, promotion and transfer, must be made solely on merit, experience and
other work-related criteria.
All employees want and deserve a workplace where they feel respected, satisfied,
and appreciated. We respect cultural diversity and will not tolerate harassment
or discrimination of
any kind -- especially involving race, color, religion, gender, age, national
origin, disability, and veteran or marital status.
Providing an environment that supports honesty, integrity, respect, trust,
responsibility, and citizenship permits us the opportunity to achieve excellence
in our workplace. While everyone who works for the Company must contribute to
the creation and maintenance of such an environment, our executives and
management personnel assume special responsibility for fostering a work
environment that is free from the fear of retribution and will bring out the
best in all of us. Supervisors must be careful in words and conduct to avoid
placing, or seeming to place, pressure on subordinates that could cause them to
deviate from acceptable ethical behavior.
4. PROTECT YOURSELF, YOUR FELLOW EMPLOYEES, AND THE WORLD WE LIVE IN
We are committed to providing a drug-free, safe and healthy work environment,
and to observing sound business practices. Covered Persons are expected to
report to work free from the influence of drugs and alcohol. We will strive, at
a minimum, to do no harm and where possible, to make the communities in which we
work a better place to live. Each of us is responsible for compliance with
environmental, health and safety laws and regulations.
5. KEEP ACCURATE AND COMPLETE RECORDS
We must maintain accurate and complete Company records. The Company applies the
highest ethical standards in its financial and non-financial reporting and
follows the rules and regulations of the Securities and Exchange Commission's
and other applicable rules regarding financial reporting.
Covered Persons may not manipulate financial accounts, records or reports or
take any action or cause any person to take any action to influence, coerce,
manipulate or mislead auditors for the purpose of rendering financial statements
misleading.
All transactions must be approved and executed in accordance with internal
control procedures established by the Company and must be recorded in such a
manner as to permit the preparation of accurate financial statements for the
Company.
Covered Persons may not knowingly alter, destroy, mutilate, conceal, cover up,
falsify or make a false entry in any record, document or tangible object with
the intent either to impair the object's integrity or availability for use in an
official proceeding or to obstruct, impede, direct or influence the
investigation or proper administration of any matter within the jurisdiction of
any department or agency of the United States or any bankruptcy case, or in
relation to or contemplation of any such matter or case.
Covered Persons who prepare, maintain or have custody of the Company's records
and reports should endeavor to ensure that these documents are: (i) accurate and
complete and clearly reflect the assets and transactions of the Company; (ii)
safeguarded from loss or destruction; (iii)
2
retained for specified periods of time in accordance with the Company's document
retention policy; and (iv) maintained in confidence.
Covered Persons involved in the Company's disclosure process, including the
Chief Executive Officer and all senior financial officers, including the Chief
Financial Officer and Principal Accounting Officer, are required to be familiar
with and comply with the Company's internal reporting practices. This includes
the Company's disclosure controls and procedures and internal controls over
financial reporting, to the extent relevant to his or her area of responsibility
so that the Company's public reports with the SEC comply in all material
respects with the applicable federal securities laws and SEC rules. In addition,
such persons with supervisory authority regarding SEC filings should, to the
extent appropriate within his or her area of responsibility, consult with other
Company officers and employees and take other appropriate steps regarding these
disclosures with the goal of making full, fair, accurate, timely and
understandable disclosure.
Each Covered Person who is involved in the Company's disclosure process must:
o Familiarize himself or herself with the disclosure requirements
applicable to the Company as well as the business and financial
operations of the Company;
o Not knowingly misrepresent, or cause others to misrepresent,
facts about the Company to others, whether within or outside the
Company, including to the Company's independent auditors,
governmental regulators and self-regulatory organizations; and
o Properly review and critically analyze proposed disclosure for
accuracy and completeness (or, where appropriate, delegate this
task to others).
6. OBEY THE LAW
We will conduct our business in accordance with all applicable laws, rules and
regulations of the countries, states and cities where we do business. Ignorance
of the applicable laws, rules or regulations will not serve as a defense should
such laws, rules or regulations be contravened. Compliance with the law does not
comprise our entire ethical responsibility. Rather, it is a minimum, absolutely
essential condition for performance of our duties. In conducting business, we
shall:
A. STRICTLY ADHERE TO ALL ANTITRUST LAWS
Officer, directors and employees must strictly adhere to all antitrust
laws. These laws prohibit practices in restraint of trade such as price
fixing and boycotting suppliers or customers. They also bar pricing
intended to run a competitor out of business; disparaging, misrepresenting,
or harassing a competitor; stealing trade secrets; bribery; and kickbacks.
3
B. STRICTLY COMPLY WITH ALL SECURITIES LAWS
In our role as a publicly owned company, we must always be alert to and
comply with the securities laws and regulations of the United States and
other countries.
I. DO NOT ENGAGE IN SPECULATIVE OR INSIDER TRADING
Federal law and Company policy prohibits Covered Persons, directly or
indirectly through their families or others, from purchasing or selling
Company stock while in the possession of material, non-public information
concerning the Company. This same prohibition applies to trading in the
stock of other publicly held companies on the basis of material, non-public
information. To avoid even the appearance of impropriety, Company policy
also prohibits Covered Persons from trading options on the open market in
Company stock under any circumstances.
Material, non-public information is any information that could reasonably
be expected to affect the price of a stock. If a Covered Person is
considering buying or selling a stock because of inside information they
possess, they should assume that such information is material. It is also
important for the Covered Person to keep in mind that if any trade they
make becomes the subject of an investigation by the government, the trade
will be viewed after-the-fact with the benefit of hindsight. Consequently,
Covered Persons should always carefully consider how their trades would
look from this perspective.
Two simple rules can help protect you in this area: (1) Do not use
non-public information for personal gain. (2) Do not pass along such
information to someone else who has no need to know.
This guidance also applies to the securities of other companies for which
you receive information in the course of your employment at the Company.
II. BE TIMELY AND ACCURATE IN ALL PUBLIC REPORTS
As a public company, the Company must be fair and accurate in all reports
filed with the Securities and Exchange Commission. Officers, directors and
management of the Company are responsible for ensuring that all reports are
filed in a timely manner and that they fairly present the financial
condition and operating results of the Company.
Securities laws are vigorously enforced. Violations may result in severe
penalties including forced sales of parts of the business and significant
fines against the Company. There may also be sanctions against Covered
Persons including substantial fines and prison sentences.
The Chief Executive Officer and Chief Financial Officer will certify to the
accuracy of reports filed with the SEC in accordance with the
Sarbanes-Oxley Act of 2002. Officers and directors who knowingly or
willingly make false
4
certifications may be subject to criminal penalties or sanctions including
fines and imprisonment.
7. AVOID CONFLICTS OF INTEREST
Covered Persons have an obligation to give their complete loyalty to the best
interests of the Company. They should avoid any action that may involve, or may
appear to involve, a conflict of interest with the Company. A "conflict of
interest" exists when a person's private interest interferes in any way with the
interests of the Company. Covered Persons should not have any financial or other
business relationships with suppliers, customers or competitors that might
impair, or even appear to impair, the independence of any judgment they may need
to make on behalf of the Company.
HERE ARE SOME WAYS A CONFLICT OF INTEREST COULD ARISE:
o Employment by a competitor, or potential competitor, regardless of the
nature of the employment, while employed by the Company.
o Acceptance of gifts, payment, or services from those seeking to do
business with the Company.
o Placement of business with a firm owned or controlled by a Covered
Person or his/her family.
o Ownership of, or substantial interest in, a company that is a
competitor, client or supplier.
o Acting as a consultant to a customer, client or supplier.
o Seeking the services or advice of an accountant or attorney who has
provided services to the Company.
Covered Persons must report in writing to an appropriate person in the Company
(i.e., Chief Executive Officer or Chairman of the Audit Committee) the existence
or discovery of any circumstances, relating to such Covered Person or other
Covered Persons, which constitute a conflict of interest or could create a
potential conflict of interest, including any financial or other business
relationships, transactions, arrangements or other interests or activities with
the Company's suppliers, customers, competitors or other persons that could
create a potential conflict of interest.
If a potential conflict of interest would constitute a "related party
transaction" that would be required to be disclosed pursuant to the securities
laws, the terms of the proposed transaction must be reported in writing to the
Company's Chief Executive Officer or Chairman of the Audit Committee who will
refer, if necessary, the matter to the Audit Committee for approval. Generally,
a related party transaction is a transaction that includes (a) a director or
executive officer and the Company that exceeds $60,000 in amount; or (b)
entities related to a director or executive officer and the Company which exceed
$200,000 in amount. If a Covered Person has
5
any questions as to whether a proposed transaction is a "related party
transaction," the Covered Person should contact the Chief Executive Officer or
Chairman of the Audit Committee for clarification.
8. CERTAIN INTERESTS
Each Covered Person must report in writing to the Company's Chief Executive
Officer any service as an officer, director, member, manager, partner or trustee
of or any investment in a company that is a customer, supplier, contractor,
competitor or any person or organization having dealings with the Company where
the Company's relationship with such organization is significant. For the
purposes of this Code, the term "investment" means any investment beneficially
owned by the Covered Person, his or her family member, nominee, or other person
through which the Covered Person derives an economic benefit; provided, however,
the term "investment" shall not mean any beneficial ownership of up to five
percent (5%) of the outstanding securities of a publicly-held company that is a
customer, supplier, contractor, or competitor of the Company.
9. CORPORATE OPPORTUNITY
Covered Persons should not (i) take for themselves personally opportunities that
are discovered through the use of Company property, information or position;
(ii) use Company property, information, or position for personal gain; or (iii)
directly compete with the Company. Covered Persons owe a duty to the Company to
advance its legitimate interests when the opportunity to do so arises.
10. ACTING AS A SUPPLIER
A Covered Person may not enter into an agreement with the Company as a supplier
of products and services to the Company unless he or she receives a prior
written approval in accordance with this Code. This policy extends to any
prospective supplier that is controlled or actively influenced by a Covered
Person. Selection of a supplier, including a Covered Person, must be made in
accordance with the Company's procedures and policies.
11. OUTSIDE ACTIVITIES
Officers and employees should avoid outside employment or activities that impair
effective performance of their obligations to the Company, either because of
excessive demands on their time or because the outside commitments constitute a
drain away from the Company of their talents and creative energies.
Of course, reasonable participation in the activities of a trade association,
professional society or charitable institution on an uncompensated basis will
not be deemed to violate the Conflicts of Interest provisions of this Code.
6
12. COMPETE ETHICALLY AND FAIRLY FOR BUSINESS OPPORTUNITIES
The Company seeks to outperform its competitors fairly and honestly. Collecting
information on the Company's competitors from legitimate sources to evaluate the
relative merit of their products, services, and marketing methods is proper and
often necessary. However, there are limits to the ways information should be
acquired. Practices such as industrial espionage and stealing are obviously
wrong. But so is seeking confidential information from a new employee who
recently worked for a competitor, or misrepresenting your identity in the hopes
of getting confidential information from a competitor. Any form of questionable
intelligence gathering is strictly against this Code.
Covered Persons should endeavor to respect the rights of and deal fairly with
the Company's customers, suppliers and competitors. No Covered person should
take unfair advantage of anyone through manipulation, concealment, abuse of
privileged information, misrepresentation of material facts or any other
intentional unfair-dealing practice.
13. AVOID ILLEGAL AND QUESTIONABLE GIFTS OR FAVORS
The purpose of business entertainment and gifts in a commercial setting is to
create good will and sound working relationships, not to gain unfair advantage
with customers. The sale and marketing of our products and services should
always be free from even the perception that favorable treatment was sought,
received, or given in exchange for the furnishing or receipt of business
courtesies. Covered Persons will neither give nor accept business courtesies
that constitute, or could be reasonably perceived as constituting, unfair
business inducements or that would violate law, regulation or policies of the
Company, or could cause embarrassment to or reflect negatively on the Company's
reputation. No gift or entertainment should ever be offered, given, provided or
accepted by any Covered Person, his or her family members or agents unless it:
(1) is not a cash gift, (2) is consistent with customary business practices, (3)
is not excessive in value, (4) cannot be construed as a bribe or payoff and (5)
does not violate any laws or regulations. Covered Persons may accept small gifts
or favors that would be considered common business courtesies, however, no
Covered Person should accept a gift or favor that might be intended to
influence, or appears to influence, a business decision. Covered Persons must
report to his or her supervisor the receipt of any gifts or favors.
In general, Covered Persons should not solicit entertainment, but are allowed to
accept entertainment if the following criteria are met:
(a) it occurs infrequently;
(b) it arises in the normal course of business and would be considered a
common business courtesy;
(c) it involves reasonable expenditures; and
(d) it takes place in settings that are appropriate and fitting.
7
A Covered Person shall not accept travel, vacation arrangements or similar
favors or gratuities. Attending sports or theatrical events with and as a guest
of a supplier or receiving sports or theatre tickets for personal use is
acceptable and considered a normal business practice if kept within reasonable
limits.
What is acceptable practice in the commercial business environment may be
against the law or the policies of federal, state or local governments.
Therefore, no gifts or business entertainment of any kind may be given to any
government employee except for items of nominal value (i.e., pens, coffee mugs,
etc.).
In addition, the Foreign Corrupt Practices Act (FCPA) prohibits the Company or
anyone acting on its behalf from making a payment or giving a gift to a non-U.S.
government official for purposes of obtaining or retaining business. The FCPA
applies to the Company everywhere in the world where we do business and even
applies to you if you are not a U.S. citizen.
14. MAINTAIN THE INTEGRITY OF CONSULTANTS, AGENTS, AND REPRESENTATIVES
Business integrity is a key standard for the selection and retention of those
who represent the Company. Agents, representatives and consultants must certify
their willingness to comply with the Company's policies and procedures and must
never be retained to circumvent our values and principles. Paying bribes or
kickbacks, engaging in industrial espionage, obtaining the proprietary data of a
third party without authority, or gaining inside information or influence are
just a few examples of what could give us an unfair competitive advantage and
could result in violations of law.
15. PROTECT PROPRIETARY INFORMATION
The Company's policy is that all information developed or shared as the result
of business processes is proprietary to the Company and an important asset in
the operation of the Company's business, and the unauthorized use or disclosure
of this information is prohibited. Keep proprietary documents protected and
secure. In the course of normal business activities, suppliers, customers and
competitors may sometimes divulge to you information that is proprietary to
their business. Respect these confidences.
All information about the Company, its business, stockholders, customers and
suppliers should be considered confidential unless the information is already
known to the public. This includes, but is not limited to, confidential
technology, proprietary information, trade secrets, business plans, documents,
pricing and records. Covered Persons should not, without prior written
authorization from the appropriate authority, acquire, use, access, copy,
remove, modify, alter or disclose to any third parties, any confidential
information for any purpose other than to perform their job responsibilities or
in furtherance of expressly stated Company-sponsored activities.
Similarly, all Covered Persons must respect the confidentiality of their former
employer's trade secrets. As a result, Covered Persons should not divulge such
information to any Company's personnel or use the information while associated
with the Company, unless explicit written permission by the former employer has
been obtained.
8
Confidential information or materials in the possession of a Covered Person must
be returned to the Company upon termination of employment or association with
the Company. Since the Company views the protection of its confidential
information as highly critical to its business, unauthorized disclosure of such
information by the Covered Persons will result in disciplinary action that may
include termination of employment or prosecution under applicable law.
16. OBTAIN AND USE COMPANY ASSETS WISELY
Personal use of Company property must always be in accordance with corporate
policy. Proper use of Company property, information resources, material,
facilities and equipment is your responsibility. Use and maintain these assets
with the utmost care and respect, guarding against waste and abuse, and never
borrow or remove Company property without management's permission. Any assets of
the Company in the possession of a Covered Person must be returned to the
Company upon the termination of such Covered Person's employment or association
with the Company.
Any discovery, improvement, or invention made or conceived by an officer or
employee, either solely or jointly with others, during the time he or she is
employed by the Company which pertains or relates to the products or business in
which the Company is engaged shall be the exclusive property of the Company
whether or not patentable or copyrightable.
17. FOLLOW THE LAW AND USE COMMON SENSE IN POLITICAL CONTRIBUTIONS AND
ACTIVITIES
The Company encourages its employees to become involved in civic affairs and to
participate in the political process. Employees must understand, however, that
their involvement and participation must be on an individual basis, on their own
time and at their own expense. Contacts with governmental officials, whether
direct or indirect, shall at all times be maintained as proper business
relationships. Federal law prohibits corporations from donating corporate funds,
goods, or services, directly or indirectly, to candidates for federal offices --
this includes employees' work time. Local and state laws also govern political
contributions and activities as they apply to their respective jurisdictions.
18. BOARD COMMITTEES
The Audit Committee is empowered to enforce this Code of Ethics. The Audit
Committee will report to the Board of Directors at least once each year
regarding the general effectiveness of the Company's Code of Ethics, the
Company's controls and reporting procedures and the Company's business conduct.
19. REPORTING AND COMPLIANCE WITH THE CODE'S STANDARDS
A. REPORTING OF VIOLATIONS
Any Covered Person having knowledge of any actions prohibited by this Code
must report such activity immediately to the Chairman of the Audit
Committee. Prohibited actions involving directors or executive officers
should be reported to the Chairman of
9
the Audit Committee. Suspected violations or good faith concerns regarding
accounting, internal accounting controls or auditing matters should be reported
directly to the Audit Committee. Covered Persons are expected to cooperate in
internal investigations of misconduct.
B. PROHIBITION AGAINST RETALIATION
It is the Company's policy not to allow retaliation against any Covered
Person for reports of misconduct or suspected violation of this Code by
another person made in good faith, for providing to a law enforcement
officer any truthful information relating to the commission or possible
commission of any offense, or for proving information on actions such
Covered Person reasonably believes to be violations of securities laws,
rules of the Securities and Exchange Commission, or other laws.
C. ENFORCEMENT
The Company must ensure prompt and consistent action against violations of
this Code and reporting of violators to the appropriate authorities. All
management personnel of the Company shall be responsible for the
enforcement of this Code. The management shall periodically review the
rules and procedures contained herein with the Covered Persons to ensure
that the Covered Persons understand and comply with this Code.
In some situations it is difficult to determine if a violation occurred. In
order to afford a fair process by which to determine violations of the
Code, the Covered Persons should keep the following in mind:
(a) make sure that the reporting person has all the facts available to him
or her;
(b) use judgment and common sense in determining whether an act seems
unethical or improper;
(c) discuss the situation with the supervisor or manager; and
(d) if one is unsure of what to do in any situation, he or she should ask
for a guidance before acting.
D. WAIVERS
Any waiver of this Code for any director, executive officer or senior
financial officer of the Company may be granted only upon approval by the
Board of Directors and must be disclosed according to the applicable
securities laws and the rules of any national securities exchange on which
the Company's shares are listed. A waiver of this Code for other officers
or employees may be granted only by the Chief Executive Officer of the
Company in writing. For purpose of this Code, a "senior financial officer"
means the Company's principal financial officer, principal accounting
officer, controller, and other persons performing similar functions.
10
E. INTERPRETATION
All questions regarding the interpretation, scope, and application of the
policies set forth in this Code should be referred to the Chairman of the
Audit Committee.
F. ACKNOWLEDGMENT
Each Covered Person will be required to sign an acknowledgment annually
certifying that he or she has read, understands and agrees to abide by the
policies set forth in this Code.
G. DISCIPLINARY MEASURES
The Company shall consistently enforce the Code through appropriate means
of discipline. Violations of the Code shall be promptly reported to the
Chairman of the Audit Committee. Prohibited actions involving directors or
executive officers should be reported to the Chairman of the Audit
Committee. Pursuant to procedures adopted by it, the Audit Committee shall
determine whether violations of the Code have occurred and, if so, shall
determine the disciplinary measures to be taken against any employee or
agent of the Company who has so violated the Code.
The disciplinary measures, which may be invoked at the discretion of the
Audit Committee, include, but are not limited to, counseling, oral or
written reprimands, warnings, probation or suspension without pay,
demotions, reductions in salary, termination of employment and restitution.
Persons subject to disciplinary measures shall include, in addition to the
violator, others involved in the wrongdoing such as (i) persons who fail to
use reasonable care to detect a violation, (ii) persons who if requested to
divulge information withhold material information regarding a violation,
and (iii) supervisors who approve or condone the violations or attempt to
retaliate against employees or agents for reporting violations or
violators.
11
CODE OF ETHICS AND BUSINESS CONDUCT
ACKNOWLEDGMENT
By signing below, I acknowledge and certify that I have received, read, and
understand Towerstream Corporation's Code of Ethics and Business Conduct (the
"Code").
I acknowledge that my employment relationship with the Company is terminable at
will, by the Company or me, at any time, for any reason, with or without cause.
I agree (i) to comply with the Code and conduct the business of the Company in
keeping with the highest ethical standards and (ii) to comply with federal,
state and local laws applicable to the Company's businesses. I understand that
failure to comply with the Code will lead to disciplinary action by the Company,
which may include termination of my employment and/or the reduction of
compensation or demotion.
(Please Print)
Name __________________________________________________________________________
Business Unit/Location ________________________________________________________
Position Title ________________________________________________________________
Signature _____________________________________________________________________
Date __________________________________________________________________________
PLEASE SIGN AND RETURN ENTIRE DOCUMENT TO THE CORPORATE SECRETARY AND KEEP A
COPY HEREOF FOR YOUR OWN FILES.
EXHIBIT 17.1
RESIGNATION
I, Paul Pedersen, hereby resign from all executive officer and director
positions that I hold with University Girls Calendar, Ltd. and any of its direct
or indirect subsidiaries effective immediately.
/s/ Paul Pedersen
------------------------------------
Paul Pedersen
Dated: January 12, 2007
EXIHIBIT 21.1
SUBSIDIARIES OF TOWERSTREAM CORPORATION
The subsidiaries of Towerstream Corporation (the "Registrant") as of
January 18, 2007, are listed below:
SUBSIDIARY OWNERSHIP JURISDICTION
---------------------- ------------------------ ------------
1. Towerstream I, Inc. 100% owned by Registrant Delaware
TOWERSTREAM CORPORATION
FINANCIAL STATEMENTS
For the Years Ended December 31, 2005 and 2004
TOWERSTREAM CORPORATION
CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
FINANCIAL STATEMENTS
Balance Sheet 2-3
Statements of Operations 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6-7
NOTES TO FINANCIAL STATEMENTS 8-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
TowerStream Corporation
Middletown, Rhode Island
We have audited the accompanying balance sheet of TowerStream Corporation (the
"Company") as of December 31, 2005, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2005 and
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor we engaged to perform, an audit of its internal control over financial
reporting. Our audits include consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principals used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TowerStream Corporation as of
December 31, 2005, and the results of its operations and its cash flows for the
years ended December 31, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Marcum & Kliegman LLP
New York, New York
December 7, 2006, except for Note 17 (o),(p),(q), (r), (s) and (t) as to which
the date is January 17, 2007
1
TOWERSTREAM CORPORATION
BALANCE SHEET
December 31, 2005
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ASSETS
CURRENT ASSETS
Cash $203,050
Accounts receivable, less allowance for doubtful
accounts of $45,000 173,650
Advances to officers 35,533
Prepaid expenses 8,821
--------
Total Current Assets $ 421,054
PROPERTY AND EQUIPMENT, Net 3,720,514
OTHER ASSETS
Security deposits and other assets 64,185
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TOTAL ASSETS $4,205,753
==========
The accompanying notes are an integral part of these financial statements.
2
TOWERSTREAM CORPORATION
BALANCE SHEET
December 31, 2005
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving note, stockholder $ 250,000
Current maturities of long-term debt, net of
deferred debt discount of $19,831 551,982
Current maturities of capital lease obligations 18,861
Current maturities of notes payable, stockholders 866,643
Accounts payable and accrued expenses 479,476
Deferred compensation 125,000
Deferred revenues 452,322
-----------
Total Current Liabilities $2,744,284
OTHER LIABILITIES
Long-term debt, net of current maturities 9,322
Capital lease obligations, net of current maturities 29,079
Notes payable, stockholders, net of current maturities 347,011
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Total Other Liabilities 385,412
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TOTAL LIABILITIES 3,129,696
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value; 30,000,000 shares
authorized; 21,070,310 shares issued 21,070
Additional paid in capital 8,491,456
Accumulated deficit (7,401,469)
-----------
1,111,057
Less treasury stock, at cost, 32,000 shares (35,000)
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TOTAL STOCKHOLDERS' EQUITY 1,076,057
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,205,753
==========
The accompanying notes are an integral part of these financial statements.
3
TOWERSTREAM CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 and 2004
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2005 2004
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REVENUES $ 5,397,510 $ 4,602,109
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OPERATING EXPENSES
Cost of revenues (exclusive of depreciation of $933,557
and $742,636, respectively, shown separately below) 1,509,505 1,026,068
Depreciation 933,557 742,636
Customer support services 419,356 378,767
Selling, general and administrative expenses 3,265,352 2,980,400
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TOTAL OPERATING EXPENSES 6,127,770 5,127,871
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OPERATING LOSS (730,260) (525,762)
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OTHER EXPENSE (INCOME)
Interest expense, net 216,945 214,740
Other income -- (40,838)
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TOTAL OTHER EXPENSE 216,945 173,902
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NET LOSS $ (947,205) $ (699,664)
=========== ===========
Net loss per common share - basic and diluted $ (0.05) $ (0.04)
=========== ===========
Weighted average common shares outstanding 20,776,874 19,548,257
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
TOWERSTREAM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2005 and 2004
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Common stock Treasury Stock Additional
-------------------- ------------------ Paid in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ------- ------- -------- ---------- ----------- ----------
Balance at January 1, 2004 17,880,969 $17,881 (32,000) $(35,000) $6,085,299 $(5,754,600) $ 313,580
Sale of common stock 1,667,500 1,667 -- -- 938,333 -- 940,000
Issuance of common stock upon conversion
of deferred compensation 386,000 386 -- -- 385,614 -- 386,000
Issuance of common stock upon conversion
of stockholder notes 92,229 92 -- -- 92,137 -- 92,229
Fair value of warrants issued in connection
with convertible notes -- 7 -- -- 6,804 -- 6,811
Net loss -- -- -- -- -- (699,664) (699,664)
---------- ------- ------- -------- ---------- ----------- ----------
Balance at December 31, 2004 20,026,698 7,528 (32,000) (35,000) 7,520,692 (6,454,264) 1,038,956
Sale of common stock 925,000 925 -- -- 924,075 -- 925,000
Issuance of common stock upon conversion
of stockholder notes 118,612 119 -- -- 59,187 -- 59,306
Net loss -- -- -- -- -- (947,205) (947,205)
---------- ------- ------- -------- ---------- ----------- ----------
Balance at December 31, 2005 21,070,310 $21,070 (32,000) $(35,000) $8,491,456 $(7,401,469) $1,076,057
========== ======= ======= ======== ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
5
TOWERSTREAM CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
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2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (947,205) $ (699,664)
----------- -----------
Adjustments to reconcile net loss to net cash provided by
operating activities
Provision for doubtful accounts 114,293 15,000
Depreciation 933,557 742,636
Amortization of deferred debt discount 12,292 10,589
Employee stock-based compensation -- 465,000
Changes in operating assets and liabilities:
Accounts receivable (77,204) (123,830)
Advances to officers (5,775) (1,449)
Prepaid expenses 4,331 (11,263)
Accounts payable and accrued expenses 128,229 (329,318)
Deferred compensation 202,312 118,000
Deferred revenues 114,455 98,685
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TOTAL ADJUSTMENTS 1,426,490 984,050
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NET CASH PROVIDED BY OPERATING ACTIVITIES 479,285 284,386
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,369,527) (995,262)
Additional security deposits (8,500) (28,136)
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NET CASH USED IN INVESTING ACTIVITIES (1,378,027) (1,023,398)
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CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (29,407) 29,407
Proceeds from revolving note, stockholder -- 250,000
Proceeds from notes payable, stockholders 500,000 350,000
Principal repayment of notes payable, stockholders (106,237) (294,955)
Principal repayment of capital lease obligations (13,344) (11,337)
Principal repayment of long-term debt (174,220) (205,842)
Proceeds from sale of common stock 925,000 475,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,101,792 $ 592,273
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The accompanying notes are an integral part of these financial statements.
6
TOWERSTREAM CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
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2005 2004
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NET INCREASE (DECREASE) IN CASH $203,050 $(146,739)
CASH - Beginning -- 146,739
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CASH - Ending $203,050 $ --
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $176,900 $ 197,292
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Non-cash investing and financing activities:
Conversion of notes payable, stockholders into common
stock $ 59,306 $ 92,229
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Conversion of deferred compensation into common stock $ -- $ 386,000
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Conversion of deferred compensation into notes payable $195,312 $ --
======== =========
Fair value of warrants granted in connection with debt $ -- $ 6,811
======== =========
The accompanying notes are an integral part of these financial statements.
7
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 1 - Organization and Nature of Business
TowerStream Corporation (herein after referred to as the "Company") was
formed on December 17, 1999 and was incorporated in Delaware. The Company
operates as a Sub Chapter S corporation with its corporate headquarters
located in Rhode Island.
The Company is a fixed wireless broadband provider. The Company serves
several major U.S. markets including: Los Angeles, San Francisco, New York
City, Chicago, Boston, Providence and Newport, Rhode Island.
NOTE 2 - Summary of Significant Accounting Policies
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. The allowance for bad debts reflects management's best
estimate of probable losses inherent in the accounts receivable balance.
Periodically, management evaluates its accounts receivable and establishes
an allowance for doubtful accounts, based on the history of past
write-offs, collections, and current credit conditions. The allowance for
uncollectible accounts at December 31, 2005 was $45,000 and bad debt
expense for 2005 and 2004 was approximately $114,000 and $15,000,
respectively.
Property and Equipment
Property and equipment are stated at cost. The costs associated with the
construction of the network and subscriber installations are capitalized.
Costs include equipment, installation costs and materials. Depreciation is
computed by the straight-line method over the following estimated useful
lives:
Years
-----
Furniture, fixtures and equipment 5-7
Computer equipment 5
Systems software 3
Network and base station equipment 5-7
Customer premise equipment 5-7
Expenditures for maintenance and repairs, which do not generally extend the
useful life of the assets, are charged to operations as incurred. Gains or
losses on disposal of property and equipment are reflected in the statement
of operations in the period of the disposal.
8
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Deferred Revenues
Deferred revenues consisted of two categories. One category is regular
monthly billing, billed one month in advance. The second category includes
revenues billed in advance for either the 12th or 24th month of the initial
contract. As of April 2005 the Company no longer bills under the term of
second category.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
costs for the years ended December 31, 2005 and 2004 were approximately
$240,000 and $180,000, respectively.
Income Tax Status
The Company, with the consent of its stockholders, has elected to be taxed
under sections of the federal and the state of Rhode Island income tax law,
which provide that, in lieu of corporation income taxes, the stockholders
separately account for their pro rata shares of the Company's items of
income, deductions, losses and credits. As a result of this election, no
provision or liability for income taxes has been recognized in the
accompanying financial statements.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs for the years ended December 31, 2005 and 2004 were
approximately $129,500 and $122,700, respectively. These costs have been
recorded in the statement of operations as part of selling, general and
administrative expenses.
9
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Long-Lived Assets
Long-lived assets consist primarily of property and equipment. Long-lived
assets are reviewed annually for impairment or whenever events or
circumstances indicate their carrying value may not be recoverable. When
such events or circumstances arise, an estimate of the future undiscounted
cash flows produced by the asset, or the appropriate grouping of assets, is
compared to the asset's carrying value to determine if impairment exists
pursuant to the requirements of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". If the asset is determined to be impaired, the impairment loss is
measured based on the excess of its carrying value over its fair value.
Assets to be disposed of are reported at the lower of their carrying value
or net realizable value.
Management has determined there was no impairment of its property and
equipment during the years ended December 31, 2005 and 2004.
Revenue Recognition
Revenues are recognized at the time access to the Company's internet
services is made available to its customers. Contractual arrangements range
from one to three years. Deferred revenues are recognized as a liability
when billings are received in advance of the date when revenues are earned.
Company revenue arrangements with multiple deliverables under Emerging
Issues Task Force Issue ("EITF") No. 00-21 are deemed to be immaterial.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values of financial
instruments. The carrying amounts reported in the statement of financial
position for current assets and current liabilities qualifying as financial
instruments are reasonable estimates of fair value. The fair value of
long-term debt is estimated to approximate fair market value based on the
current rates offered to the Company for debt of the same remaining
maturities. The fair value of the Company's notes payable to stockholders
are not reasonably determinable based on the related party nature of the
transactions.
Stock-Based Compensation
The Company accounts for stock-based compensation under the intrinsic value
method in accordance with the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Under APB
Opinion No. 25, compensation expense is based upon the difference, if any,
generally on the date of grant, between the fair value of our stock and the
exercise price of the option. In December 2002, the Financial Accounting
Standard Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148, which amends SFAS
No. 123, requires the measurement of the fair value of stock options or
warrants to be included in the statement of operations or disclosed in the
notes to financial statements. The Company records its stock-based
compensation under the Accounting Principles Board (APB) No. 25 and has
elected the disclosure-only alternative under SFAS No. 123.
10
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Stock-Based Compensation, continued
The Company has computed the pro forma disclosures under SFAS No. 148 for
options and warrants granted (the "grants") using the Black-Scholes option
pricing model. The assumptions used during the years ended December 31,
2005 and 2004 are as follows:
December 31,
---------------------------
2005 2004
------------ ------------
Risk free interest rate 3.6% - 4.4% 2.2% - 3.1%
Expected dividend yield -- --
Expected lives 6 - 10 years 6 - 10 years
Expected volatility 55.8% 66.8%
If the Company had elected to recognize compensation costs for the
Company's options and warrants plans using the fair value method at the
grant dates, the effect on the Company's net loss and loss per share for
the periods shown below would have been as follows:
For the Years Ended
December 31,
-------------------------
2005 2004
----------- -----------
Net loss as reported $ (947,205) $ (699,664)
Add: stock based employee compensation expense,
included in reported loss. -- 465,000
Less: stock-based employee compensation as
determined under fair value based method for
all awards (457,153) (886,819)
----------- -----------
Pro Forma Net Loss $(1,404,358) $(1,121,483)
=========== ===========
Net Loss Per Share:
Basic and diluted loss - as reported $ (0.05) $ (0.04)
Basic and diluted loss - pro forma $ (0.07) $ (0.06)
11
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Basic and Diluted Loss Per Share
Net loss per share is computed in accordance with Statement of Financial
Standards No. 128, "Earning Per Share" ("SFAS No. 128"). SFAS No. 128
requires the presentation of both basic and diluted earnings per share.
Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted loss per
share reflects the potential dilution that could occur through the
potential effect of common shares issuable upon the exercise of stock
options, warrants and convertible securities. The calculation assumes (i)
the exercise of stock options and warrants based on the treasury stock
method; and (ii) the conversion of convertible preferred stock only if an
entity records earnings from continuing operations, as such adjustments
would otherwise be anti-dilutive to earnings per share from continuing
operations. As a result of the Company recording a loss during each of the
years ended December 31, 2005 and 2004, the average number of common shares
used in the calculation of basic and diluted loss per share is identical
and has not been adjusted for the effects of the following items: (i)
3,827,000 and 3,024,000 potential common shares from unexercised stock
options and warrants for each of the years ended December 31, 2005 and
2004, respectively, and (ii) 1,339,139 and 650,657 shares convertible under
stockholders' notes at December 31, 2005 and 2004, respectively. Such
potential common shares may dilute earnings per share in the future.
Convertible Notes Payable
The Company accounts for conversion options embedded in convertible notes
in accordance with Statement of Financial Accounting Standard ("SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF
00-19"). SFAS 133 generally requires Companies to bifurcate conversion
options embedded in convertible notes and preferred shares from their host
instruments and to account for them as free standing derivative financial
instruments in accordance with EITF 00-19. SFAS 133 provides for an
exception to this rule when convertible notes are deemed to be conventional
as that term is described in the implementation guidance provided in
paragraph 61 (k) of Appendix A to SFAS 133 and further clarified in EITF
05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue
No. 00-19. SFAS 133 provides for an additional exception to this rule when
the economic characteristics and risks of the embedded derivative
instrument are clearly and closely related to the economic characteristics
and risks of the host instrument.
12
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Convertible Notes Payable, continued
The Company accounts for convertible notes (deemed conventional) and
non-conventional convertible debt instruments classified as equity under
EITF 00-19 "Accounting for Derivative Financial Investments indexed to, and
potentially settled in, a Company's own stock " ("EITF 00-19") and in
accordance with the provisions of Emerging Issues Task Force Issue ("EITF")
98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features," ("EITF 98-5"), EITF 00-27 "Application of EITF 98-5 to Certain
Convertible Instruments." Accordingly, the Company records, as a discount
to convertible notes, the intrinsic value of such conversion options based
upon the differences between the fair value of the underlying common stock
at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are
amortized over the term of the related debt to their earliest date of
redemption.
NOTE 3 - Cash
The Company maintains its cash in bank deposit accounts, which at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash. The amount on deposit at December 31, 2005
exceeded the insurance limits by approximately $363,000.
NOTE 4 - Advances to Officers
Advances to officers as of December 31, 2005 in the amount of approximately
$35,500 are non-interest bearing and have no definitive repayment terms.
NOTE 5 - Property and Equipment, net
As of December 31, 2005, the Company's property and equipment, net is
comprised of:
Network and base station equipment $3,513,147
Customer premise equipment 2,520,638
Furniture, fixtures and equipment 170,506
Computer equipment 166,949
System Software 135,209
----------
6,506,449
Less: accumulated depreciation 2,785,935
----------
$3,720,514
==========
13
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 5 - Property and Equipment, net, continued
Depreciation expense for the years ended December 31, 2005 and 2004 was
$933,557 and $742,636.
NOTE 6 - Revolving Note, Stockholder
The Company has a $250,000 secured revolving note with a trust, which is
also a stockholder in the Company. The note provides for revolving credit
through April 2006. The note is due on demand and bears interest at 10% per
annum. Management is presently negotiating with the stockholder to extend
the repayment terms of the note. The note is principally secured by all the
assets of the Company.
NOTE 7 - Notes Payable, Stockholders
As of January 1, 2004, the Company owed an officer who is also a
stockholder ("Stockholder One") principal and interest of approximately
$220,000. On November 30, 2004, the Company converted $100,000 of deferred
compensation liability due to such stockholder into a note payable. The
notes payable to Stockholder One are unsecured, payable in monthly
installments at an interest rate of 10% per annum. In 2004, the Company
repaid approximately $95,000 of principal under the note payable of
approximately $220,000. As of December 31, 2004, the Company owed
Stockholder One an aggregate of approximately $225,000 under both notes
payable.
On August 1, 2005, the Company borrowed approximately $195,000 from
Stockholder One. As part of the borrowing arrangement, the Company and
Stockholder One agreed to combine the new and prior borrowings into one
note agreement. The note is unsecured bearing interest at the rate of 5%
per annum with monthly installments of principal and interest of $10,806.
The note contains an option for Stockholder One to convert up to 50% of the
outstanding principal balance into shares of common stock at the rate of
$1.00 per share, the market price as of August 1, 2005. At December 31,
2005 the Company owed Stockholder One approximately $314,000. The note
matures in August 2008.
On December 7, 2005, the Company borrowed an additional $250,000 under a
demand note from Stockholder One. The note is unsecured, payable in monthly
installments of interest only at a rate of 10% per annum. The note matures
on the earlier of the occurrence of certain events as defined or December
6, 2006. As of December 31, 2005, no such events have occurred. Stockholder
One has the right to convert the principal and interest into shares of
common stock at the rate of $1.00 per share, the market price as of
December 7, 2005.
14
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - Notes Payable, Stockholders, continued
On September 7, 2004, the Company borrowed $150,000 under a note payable to
another officer and stockholder ("Stockholder Two"). The note is unsecured,
and is payable in monthly installments of interest only at an interest rate
of 10% per annum. The note matures September 2007. The note contains an
option for Stockholder Two to convert to shares of common stock at $0.80
per common share, the market price as of September 7, 2004. The note shall
immediately become due and payable if certain events, as defined under the
note agreement, occur. As of December 31, 2005, no such events have
occurred.
On June 9, 2003, the Company borrowed $50,000 under a note payable from a
stockholder ("Stockholder Three"). During the year ended 2005, Stockholder
Three elected, as defined in the note agreement, to convert the principal
and interest of $59,306 into 118,612 shares of common stock.
On November 10, 2005, the Company borrowed $250,000 under another note
payable due to Stockholder Three. The note is unsecured, payable in monthly
installments of interest only at a rate of 10% per annum. The note matures
if certain events occur as defined or on November 9, 2006. As of December
31, 2005, no such events have occurred. Stockholder Three has the right to
convert the principal and interest into shares of common stock at the rate
of $1.00 per share, the market price as of November 10, 2005.
On August 2, 2002, the Company borrowed $250,000 under a demand note
payable due to a fourth stockholder ("Stockholder Four"). The note is
payable within sixty days upon notice from Stockholder Four. The note is
unsecured bearing an interest rate of 10% per annum.
A summary of the outstanding debt as of December 31, 2005 due each
stockholder is:
Stockholder One $ 563,654
Stockholder Two 150,000
Stockholder Three 250,000
Stockholder Four 250,000
----------
$1,213,654
==========
As of December 31, 2005, aggregate maturities of notes payable,
stockholders due in future years are as follows:
Year Ending December 31,
2006 $ 866,643
2007 272,611
2008 74,400
----------
$1,213,654
==========
15
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 8 - Long-Term Debt
As of December 31, 2005, long-term debt consists of:
7% equipment financing note, due in monthly installments of
principal and interest of $879 through November 2007. Certain
equipment is collateralized under the note agreement. $ 18,858
16% equipment financing note, due in monthly installments of
principal and interest of $12,159 through September 2006. The
holder of the note received 75,000 warrants as part of the debt
agreement and has the right to convert the total principal and
interest outstanding into common stock. As of December 31, 2005,
the debt balance is net of unamortized debt discount of $3,392.
On January 15, 2006, the note was settled prematurely in cash at
a discount (see Note 17). 99,090
16% equipment financing note, due in monthly installments of
principal and interest of $9,729 through March 2008. The holder
of the note received 72,000 warrants as part of the debt
agreement and has the right to convert the total principal and
interest outstanding into common stock. As of December 31, 2005,
the debt balance is net of unamortized debt discount of $7,693.
On January 15, 2006, the note was settled prematurely in cash at
a discount (see Note 17). 261,365
10% equipment financing note, principal and interest due in May
2006. The note holder received 36,000 warrants as part of the
debt agreement. As of December 31, 2005, the debt balance is net
of unamortized debt discount of $4,124. On March 30, 2006, the
principal of the note and related accrued interest were
converted into 126,859 shares of common stock (see Note 17). 86,613
10% equipment financing note, principal and interest due in May
2006. The note holder received 18,000 warrants as part of the
debt agreement. As of December 31, 2005, the debt balance is net
of unamortized debt discount of $4,622. On March 30, 2006, the
principal of the note and related accrued interest were
converted into 139,808 shares of common stock (see Note 17). 95,378
--------
$561,304
========
16
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - Long-Term Debt, continued
As of December 31, 2005 aggregate maturities of long-term debt due in
future years are as follows:
Year Ending December 31,
2006 $551,982
2007 9,322
--------
$561,304
========
The fair value of the warrants granted under the above debt agreements was
calculated using the Black-Scholes model and such amount was recorded as a
debt discount and a corresponding increase to paid-in-capital. The discount
is being amortized over the life of the respective loans. The Company
recorded $12,292 and $10,589 as additional interest expense related to the
debt discount for the years ended December 31, 2005 and 2004, respectively.
As of December 31, 2005, the total amount of unamortized debt discount is
$19,831.
NOTE 9 - Capital Leases
The Company is the lessee of network base station equipment under various
capital leases expiring in 2008. The assets and liabilities under capital
leases are recorded at the fair market value of the assets. The assets are
depreciated over the lease term, which approximates their useful lives,
using the straight-line method. Depreciation of assets under capital leases
charged to expense in 2005 and 2004 was approximately $14,500.
Property held under capital leases as of December 31, 2005 consists of the
following:
Network base station equipment $ 72,621
Less: accumulated depreciation (29,048)
--------
$ 43,573
========
As of December 31, 2005, the minimum future lease payments under these
capital leases are:
17
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - Capital Leases, continued
Year Ending December 31,
-----------------------------------------------------
2006 $ 31,331
2007 31,331
2008 3,942
--------
Total minimum lease payments 66,604
Less: amount representing imputed interest (18,664)
--------
Present Value of Minimum Capital Lease Payments $ 47,940
========
Note 10 - Employee Benefit Plan
The Company had a 401(k) retirement plan covering all eligible employees
who had attained the age of twenty-one and had completed one year of
service with the Company. The Company could elect to match up to a certain
amount of employees' contributions to the 401(k) plan. For the year ended
December 31, 2004, the Company elected to contribute approximately $11,700
toward the 401(k) plan. As of December 31, 2004, the 401(k) plan was
terminated.
Effective January 1, 2005, the Company established a new 401(k) retirement
plan. The plan covers all eligible employees who have attained the age of
twenty-one and have completed a half year of service with the Company. The
Company could elect to match up to a certain amount of employees'
contributions to the 401(k) plan. Total employee and employer contributions
are limited for 2005 to 100% of compensation per participant or $42,000,
whichever is less. For the year ended December 31, 2005, no employer
contributions were made toward the 401(k) plan.
NOTE 11 - Capital Stock
On February 10, 2005, the Board of Directors approved an increase in common
shares authorized from 20.0 million to 30.0 million.
In 2005, pursuant to the terms of a private placement under the exempt
rules of the Securities Act of 1933, as amended (the "Private Placement"),
the Company sold 925,000 shares of common stock for net proceeds of
$925,000.
18
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Capital Stock, continued
In 2004, pursuant to the terms of the Private Placement, the Company sold
337,500 shares of common stock for net proceeds of $275,000. In addition,
during the year ended December 31, 2004, the Company sold 1,330,000 shares
of common stock for net proceed of $200,000 to a member of the management
of the Company. As part of this related party stock transaction, the
Company recorded a stock-based compensation charge of $465,000 which has
been recorded in the statement of operations as part of selling, general
and administrative expenses in year 2004 for book purpose.
NOTE 12 - Stock Option Plan
The Company adopted a stock option plan during the year ended December 31,
2000 (the "2000 Plan"). Under the 2000 Plan, the Company can issue up to
1.5 million stock options. On February 10, 2005, the Board of Directors
approved the increase in the number of stock options that can be granted
under the 2000 Plan from 1.5 million to 3.0 million. The 2000 Plan is
intended to provide incentives: (i) to officers and other employees of the
Company by providing them with opportunities to purchase common stock in
the Company pursuant to options granted, which qualify as incentive stock
options; (ii) to directors, officers and employees of, and consultants and
advisors of the Company, by providing them with opportunities to purchase
common stock in the Company pursuant to options granted which do not
qualify as incentive stock options ("nonqualified options"); and (iii) to
directors, officers and employees of, and consultants and advisors to the
Company, by providing them with awards of common stock in the Company
("stock awards").
The purchase price per share of common stock deliverable upon the exercise
of an option shall be determined by the Board of Directors; however,
pursuant to the 2000 Plan it shall not be below fair market value on the
date of issuance. Each option and all rights shall expire on such date as
shall be set forth in the applicable Stock Rights Agreement, except that,
in the case of an incentive stock option, such date shall not be later than
ten (10) years after the date on which the option is granted and, in all
cases, options shall be subject to earlier termination as provided in the
2000 Plan.
Options granted under the 2000 Plan shall be exercisable either in full or
in installments, and shares issued pursuant to stock awards granted under
the 2000 Plan shall vest either in full or in installments, at such time or
times during such period as shall be set forth in the Stock Rights
Agreement evidencing such stock rights, subject to the provisions of the
2000 Plan, provided that no option granted shall be exercisable during the
first twelve (12) months after the date of grant. In addition, the 2000
Plan limits the right of the holder of outstanding options to exercise such
vested options within a limited timetable as defined under the 2000 Plan
upon a Participant's death, becoming disabled or terminating employment.
19
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - Stock Option Plan, continued
A summary of the status of the 2000 Plan and changes are as follows:
2005 2004
----------- -----------
Options outstanding - Beginning of year 1,318,000 1,586,000
Granted 870,000 485,000
Expired (72,000) (753,000)
----------- -----------
Options outstanding - End of year 2,116,000 1,318,000
=========== ===========
Options exercisable - End of year 1,541,667 496,000
=========== ===========
Weighted average fair value of the options
granted during the years. $ 0.27 $ 0.46
=========== ===========
Weighted average remaining contractual life
of the outstanding options - End of year 8.03 years 8.11 years
=========== ===========
The options were granted to employees at exercisable prices ranging from
$0.55 to $1.50 per common share expiring at various periods through
December 2015.
NOTE 13 - Stock Warrants
The Company has issued warrants to purchase shares of common stock
following the exercise of the warrant. The warrants were granted to
employees and certain non-employees at exercisable prices ranging from
$0.50 to $1.50 per common share expiring at various periods through March
2010. Warrants granted to non-employees were in connection with certain
loan borrowings. The fair value of the warrants granted to non-employees
was calculated using the Black-Scholes model and estimated to have a fair
value of approximately $90,000, which has been amortized over the term of
the debt agreements.
A summary of the status of the warrants for the years ended December 31, is
as follows:
2005 2004
----------- -----------
Warrants outstanding - Beginning of year 1,706,000 1,173,000
Granted 5,000 543,000
Expired -- (10,000)
----------- -----------
Warrants outstanding - End of year 1,711,000 1,706,000
=========== ===========
Warrants exercisable - End of year -- --
=========== ===========
Weighted average fair value of the warrants
granted during the years $ 0.49 $ 0.41
=========== ===========
Weighted average remaining contractual life
of the outstanding options - End of year 3.06 years 4.07 years
=========== ===========
20
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - Deferred Compensation
On January 1, 2004, the Company entered into a deferred compensation
agreement with one of its officers, who is also a principal stockholder. On
November 30, 2004, the Company agreed to convert $100,000 of deferred
compensation liability into a note payable.
On January 1, 2005, the Company entered into a deferred compensation
agreement with another officer, who is also a stockholder. The officer
agreed to defer $125,000 of his salary for 2005. The agreement allows for
the accrual of interest at 10% compounded monthly. The amount deferred is
due and payable upon either 1) the change of control of the Company's
voting stock or sale of substantially all the assets of the Company; 2)
December 31, 2006; or 3) an earlier date if so elected by the Board of
Directors. The officer has the right to convert the deferred compensation
costs into shares of common stock at $1.00 per share. Interest accrued but
not paid as of December 31, 2005 was $6,665.
NOTE 15 - Recent Accounting Pronouncements
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB"):
In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, and establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosure about fair value measurements. SFAS 157
is effective for the Company for Fiscal Periods beginning subsequent to
November 15, 2007. The Company does not expect the new standard to have a
material impact on the Company's financial position, results of operations
or cash flows.
In September 2006, the staff of the SEC issued Staff Accounting Bulletin
No. 108 ("SAB 108") which provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB 108 is effective
for year 2006. Adoption of SAB 108 is not expected to have a material
impact on the Company's consolidated financial position, results of
operations or cash flows.
In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
140" ("SFAS 155"). SFAS 155 clarifies certain issues relating to embedded
derivatives and beneficial interests in securitized financial assets. The
provisions of SFAS 155 are effective for all financial instruments acquired
or issued after fiscal years beginning after September 15, 2006. The
Company does not expect this pronouncement to have a material impact on the
Company's financial position, results of operations or cash flows.
In September 2005, the FASB ratified the following consensus reached in
EITF Issue 05-8: a) The issuance of convertible debt with a beneficial
conversion feature results in a basis difference in applying FASB Statement
of Financial Accounting Standards SFAS No. 109. Recognition of such a
feature effectively creates a debt instrument and a separate equity
instrument for book purposes, whereas the convertible debt is treated
entirely as a debt instrument for income tax purposes. b) The resulting
basis difference should be deemed a temporary difference because it will
result in a taxable amount when the recorded amount of the liability is
recovered or settled. c) Recognition of deferred taxes for the temporary
difference should be reported as an adjustment to additional paid-in
capital. This consensus is effective in the first interim or annual
reporting period commencing after December 15, 2005, with early application
permitted. The effect of applying the consensus should be accounted for
retroactively to all debt instruments containing a beneficial conversion
feature that are subject to EITF Issue 00-27 (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are
still presented in the financial statements). The adoption of this
pronouncement is not expected to have a material impact on the Company's
financial statements.
21
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - Recent Accounting Pronouncements, continued
In June 2005, the EITF reached consensus on Issue No. 05-6 ("EITF 05-6").
EITF 05-6 provides guidance on determining the amortization period for
leasehold improvements acquired in a business combination or acquired
subsequent to lease inception. The guidance in EITF 05-6 will be applied
prospectively and is effective for periods beginning after June 29, 2005.
The adoption of EITF 05-6 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF No. 00-19, `Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock" ("EITF No. 05-2"), which addresses when a
convertible debt instrument should be considered `conventional' for the
purpose of applying the guidance in EITF No. 00-19. EITF No. 05-2 also
retained the exemption under EITF No. 00-19 for conventional convertible
debt instruments and indicated that convertible preferred stock having a
mandatory redemption date may qualify for the exemption provided under EITF
No. 00-19 for conventional convertible debt if the instrument's economic
characteristics are more similar to debt than equity. EITF No. 05-2 is
effective for new instruments entered into and instruments modified in
periods beginning after June 29, 2005. The adoption of this pronouncement
did not have a material impact on the Company's financial position, results
of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction." This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for
and reporting of a change in accounting principle. The statements apply to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions
should be followed. This statement is effective for accounting changes and
corrections of errors made in the fiscal years beginning after December 15,
2005. Management does not believe this pronouncement will have a material
impact on the Company's financial position or results of operations.
22
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - Recent Accounting Pronouncements, continued
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by Statement 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. Further, the amendments eliminate
the narrow exception for nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. Previously, Opinion 29 required that
the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the asset
relinquished. Opinion 29 provided an exception to its basic measurement
principle (fair value) for exchanges of similar productive assets.
The Statement is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 153, and does not believe the impact will be significant
on the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,".
This statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." Statement 123R supersedes Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and its
related implementation guidance. Generally, the approach in Statement 123R
is similar to the approach described in Statement 123. However, Statement
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation cost in the
historical financial statements. This Statement is effective for public
entities that file as small business issuers - as of the beginning of the
first annual reporting period beginning after December 15, 2005. The
Company will adopt Statement 123R beginning January 1, 2006 using the
modified prospective method. The impact of this Statement will require the
Company to record a charge for the fair value of its stock options over the
vesting period in the financial statements. The Company expects this
pronouncement will have a material impact on the Company's financial
position and results of operations. As of December 31, 2005, the Company
had unvested employee stock options valued using the Black-Scholes model at
approximately $217,000.
23
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - Recent Accounting Pronouncements, continued
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional financial support from other parties. FIN 46
is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after December 15, 2003. In
December 2003, the FASB issued Interpretation No. 46(R) ("FIN 46R") which
revised certain provisions of FIN 46. Publicly reporting entities that are
small business issuers must apply FIN 46R to all entities subject to FIN
46R no later than the end of the first reporting period that ends after
December 15, 2004 (as of December 31, 2004, for a calendar year enterprise)
The effective date includes those entities to which FIN 46 had previously
been applied. However, prior to the application of FIN 46R, a public entity
that is a small business issuer shall apply FIN 46 or FIN 46R to those
entities that are considered special-purpose entities no later than as of
the end of the first reporting period that ends after December 15, 2003.
The adoption of FIN 46 or FIN 46R did not have material effect on the
Company's consolidated financial position or results of operations.
NOTE 16 - Commitments
Lease Obligations
The Company leases roof top rights, cellular towers and office space under
various non-cancelable agreements expiring through December 2019. As of
December 31, 2005, the total future lease payments are as follows:
Year Ending December 31,
------------------------
2006 $ 823,100
2007 698,700
2008 529,700
2009 441,600
2010 385,300
Thereafter 892,100
----------
$3,770,500
==========
Rent expense for the years ended December 31, 2005 and 2004 totaled
approximately $863,000 and $683,000, respectively.
24
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16 - Commitments, continued
On August 26, 2006 the Company entered into a License Purchase Agreement
for certain spectrum in southern Florida. The purchase price is comprised
of five annual cash payments of $50,000 plus 100,000 shares of Towerstream
stock. The first payment of $50,000 and the 100,000 shares are to be issued
upon FCC approval of the transfer of the license (see Note 17).
NOTE 17 - Subsequent Events
a) On January 12, 2006, Stockholder One loaned the Company $250,000. The
note is unsecured, payable in monthly installments of interest only
computed at 10% per annum. The note matures sixty days after payee demand.
Proceeds of the note were used to pay-off approximately $244,000 of certain
equipment financing notes, prior to their maturity dates. The early
extinguishment of debt resulted in approximately $115,000 of gain on
extinguishment of debt.
b) During the first six months of 2006, the Company entered into two
separate capital lease arrangements for equipment. The assets and
liabilities under these capital leases shall be recorded at the fair market
value of the assets which aggregate approximately $86,000. The lease terms
require monthly rental payments of approximately $3,100 over the lease term
of three years, which approximates their estimated useful lives.
c) On March 15, 2006 the Board of Directors issued 80,000 incentive stock
options to certain employees under the 2000 Plan at an exercise price of
$1.00. Also, the Board of Directors approved the repricing of 201,000
incentive stock options previously granted in prior years. These stock
options originally had exercise prices ranging from $1.25 to $1.50 per
common share and were repriced to $1.00 per common share, the estimated
market price on March 15, 2006. The Company will assign a fair value to
each of these stock option transactions in accordance with FAS 123R and
record a stock-based compensation charge in 2006.
d) On March 30, 2006, two equipment finance notes in the principal amounts
of $90,737 and $100,000 and related accrued interest were converted into
266,667 shares of common stock of the Company at the option of the debtor.
e) On June 22, 2006, the Board of Directors issued 15,000 incentive stock
options to an employee under the 2000 Plan at an exercise price of $1.00,
the estimated market price of the common stock on the date of the issuance.
25
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 17 - Subsequent Events, continued
f) On July 12, 2006, Stockholder One loaned the Company $50,000. The note
is unsecured, payable in monthly installments of interest only computed at
10% per annum. The note matures sixty days after demand for repayment.
g) On September 30, 2006, the Company borrowed an additional $150,000 under
a demand note from an officer who is also a stockholder. The note is
secured by the assets of the Company, payable in monthly installments of
interest only computed at 10% per annum. The note matures sixty days after
payee demand. Proceeds of the note were used for general working capital
purposes.
h) On September 30, 2006, the Company borrowed an additional $125,000 under
a demand note from an officer who is also a stockholder. The note is
secured by the assets of the Company, payable in monthly installments of
interest only computed at 10% per annum. The note matures sixty days after
payee demand. Proceeds of the note were used for general working capital
purposes.
i) On October 1, 2006 the Company repaid in full and terminated its
$250,000 revolving credit facility with a trust, who is also a stockholder.
j) On October 1, 2006 the Board of Directors issued 45,000 incentive stock
options to employees under the 2000 Plan at an exercise price of $1.00, the
estimated market price of the common stock on the date of issuance.
k) On October 24, 2006 the Board of Directors issued 50,000 incentive stock
options to a director under the 2000 Plan at an exercise price of $1.00,
the estimated market price of the common stock on the date of issuance.
l) On November 2, 2006, an individual loaned the Company $250,000. The note
is unsecured, bears interest at 6% per annum, and all principal and accrued
interest is due on April 23, 2007. Subsequent to November 2, 2006, the
individual provided Towerstream with consulting services. As consideration
therefore, on January 4, 2007, Towerstream amended and restated the note in
order to make such note convertible into shares of common stock of the
Company immediately following the Merger at a conversion price of $1.60 per
share.
m) On November 21, 2006 the Company received FCC approval on that certain
southern Florida spectrum license transfer. Accordingly, the Company issued
100,000 shares of Towerstream stock and made its first installment payment
of $50,000 on said date.
26
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 17 - Subsequent Events, continued
n) On November 30, 2006 the Company entered into an Asset Purchase
Agreement to purchase a fixed wireless network in Seattle, WA. The purchase
included fixed wireless equipment and related assets at five points of
presence, as well as, the assumption of certain operating leases at those
locations. No customer contracts were purchased or assumed in the
transaction. In total, assets with a Net Book Value of $236,000 were
acquired for a purchase price of $200,000 in cash.
o) On December 28, 2006, the Company entered into a capital lease
arrangement for equipment. The assets and liabilities under these capital
leases shall be recorded at the fair market value of the assets which
aggregate approximately $37,000. The lease terms require monthly rental
payments of approximately $1,247 over the lease term of three years, which
approximates their estimated useful lives.
p) On January 4, 2007, certain stockholders collectively transferred an
aggregate of $1,616,753 in outstanding promissory notes and other payables
due from Towerstream to a group of third party investors. In connection
with these note transfers, Towerstream issued a new promissory note of
approximately $1.6 million and cancelled the aforementioned obligations. As
part of the arrangement, Towerstream granted to the investors the right to
automatically convert the note into shares of common stock of a publicly
traded shell company (University Girls Calendar, Ltd. "UGC") into which
Towerstream was merged (see "q" below) at a conversion price of $1.50 per
share. The note has a maturity date of January 4, 2008 with interest at the
rate of 10% per annum. The note is having a maturity date of January 4,
2008, and accruing interest at the rate of 10% per annum. In conjunction
with the above transaction, the Company will record a charge of
approximately $460,000 for the beneficial conversion feature granted to the
holders of approximately $924,000 of the stockholders' notes at $1.50 per
share which did not originally have conversion rights and were converted
into share of common stock in connection with the Merger. In addition, a
stockholder with a $250,000 convertible note exercised his right to convert
the note into shares of common stock at $1.43 per share in conjunction with
the merger.
q) On January 12, 2007, Towerstream merged into a newly formed subsidiary
of UGC. In connection with the merger 1,900,000 of UGC common shares will
remain outstanding and all other shares of UGC outstanding were cancelled.
Also, in connection with the merger, UGC issued 15,000,000 shares of its
common stock for all the outstanding common stock of Towerstream. As a
result of the transaction, the former owners of Towerstream became the
controlling stockholders of UGC and UGC changed its name to Towerstream
Corporation. Accordingly, the merger of Towerstream and UGC (the "Merger")
is a reverse merger that has been accounted for as a recapitalization of
Towerstream.
27
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 17 - Subsequent Events, continued
r) Concurrent with the Merger, UGC sold 5,110,056 shares of common stock
for gross proceeds of $11,497,625 (at $2.25 per share). In addition, these
investors received warrants to purchase 2,555,028 shares of common stock
for a period of five years at an exercise price of $4.50 per share,
collectively (the "Private Placement"). In connection with the Private
Placement, UGC incurred placement agent fees totaling approximately
$446,400, and issued 140,917 warrants with an estimated fair value of
approximately $77,000 to the placement agent at an exercise price of $4.50
per share for a period of five years. In addition, UGC incurred other
professional fees and expenses totaling approximately $522,300 in
connection with the Merger.
s) On January 18, 2007, UGC sold $3,500,000 of senior convertible
debentures (the "Debentures"). The Debentures require quarterly interest
only payments of 8% per annum and mature on December 31, 2009. The
Debentures are convertible into shares of common stock of UGC at $2.75 per
share subject to limitations as defined and registration rights. In
addition, holders of the Debentures received warrants to purchase 636,364
shares of common stock at an exercise price of $4.00 per share and warrants
to purchase 63,636 shares of common stock at an exercise price of $6.00
per share, for a period of five years. In conjunction with these warrants,
the Company will record an additional debt discount of approximately
$527,000.
In connection with the Debentures, UGC incurred placement agent fees
totaling approximately $140,000, and issued 63,634 warrants with an
estimated fair value of $34,750 to the placement agent at an exercise price
of $4.50 per share for a period of five years.
In conjunction with the merger on January 12, 2007 Towerstream
Corporation, formerly UGC, adopted the 2007 Equity Compensation Plan (the
"2007 Plan"). The Plan provides a means for our Company to award specific
equity-based benefits to officers and other employees, consultants and
directors, of our Company and our related companies and to encourage them
to exercise their best efforts to enhance the growth of our Company and our
related companies. Under the Merger agreement all options and warrants and
their respective rights and obligations, that were outstanding prior to the
merger were transferred into the 2007 Plan and totaled 2,645,062. The total
number of shares of Common Stock that can be delivered under the 2007 Plan
is 3,200,000. As of January 12, 2007, the date of the Merger, 554,938
shares remained available for issuance pursuant to the Plan.
28
TOWERSTREAM CORPORATION
UNAUDITED CONDENSED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2006
TOWERSTREAM CORPORATION
CONTENTS
--------------------------------------------------------------------------------
Page
------
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Balance Sheet as of September 30, 2006 2
Statements of Operations for the nine months ended September 30, 2006 and 2005 3
Statement of Stockholders' Equity for the nine months ended September 30, 2006 4
Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 5
NOTES TO FINANCIAL STATEMENTS 6 - 14
1
TOWERSTREAM CORPORATION
UNAUDITED CONDENSED BALANCE SHEET
September 30, 2006
--------------------------------------------------------------------------------
Assets
------
Current Assets
Cash $ 405,640
Accounts receivable, net of allowance for doubtful accounts of $114,271 172,643
Prepaid expenses 19,386
-----------
Total Current Assets 597,669
Property and equipment, net 3,578,282
Other assets and security deposits 64,185
-----------
TOTAL ASSETS $ 4,240,136
===========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Revolving note, stockholder $ 250,000
Current maturities of long-term debt 11,784
Current maturities of capital lease obligations 31,407
Current maturities of notes payable, stockholders 1,471,352
Accounts payable and accrued expenses 464,854
Deferred compensation 180,000
Deferred revenues 386,127
-----------
Total Current Liabilities 2,795,524
Other Liabilities
Capital lease obligations, net of current maturities 80,136
Notes payable, stockholders, net of current maturities 230,368
-----------
TOTAL LIABILITIES 3,106,028
-----------
Commitments
Stockholders' Equity
Common stock, $0.001 par value; 30,000,000 shares authorized;
21,336,977 issued 21,337
Additional paid-in capital 8,786,139
Accumulated deficit (7,638,368)
-----------
1,169,108
Less treasury stock, at cost, 32,000 shares (35,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 1,134,108
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,240,136
===========
The accompanying (unaudited) notes are an integral part of these condensed
financial statements.
2
TOWERSTREAM CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
Nine Months Ended
-----------------------------
September 30, September 30,
2006 2005
------------- -------------
Revenues $ 4,732,678 $ 3,995,550
------------ ------------
Operating Expenses
Cost of revenues (exclusive of depreciation of $876,792 and
$686,908, respectively, shown separately below) 1,246,482 1,080,937
Depreciation 876,792 686,908
Customer support services 406,643 315,219
Selling, general and administrative expenses (includes stock-based
compensation expense of $61,298 in 2006) 2,384,145 2,334,246
------------ ------------
TOTAL OPERATING EXPENSES 4,914,062 4,417,311
------------ ------------
OPERATING LOSS (181,384) (421,761)
------------ ------------
Other Expense/(Income)
Interest expense, net 169,853 157,221
Gain on extinguishment of debt (114,339) --
------------ ------------
TOTAL OTHER EXPENSE 55,514 157,221
------------ ------------
NET LOSS $ (236,898) $ (578,982)
============ ============
Net loss per common share - basic and diluted $ (0.01) $ (0.03)
============ ============
Weighted average common shares outstanding 21,245,717 20,689,729
============ ============
The accompanying (unaudited) notes are an integral part of these condensed
financial statements.
3
TOWERSTREAM CORPORATION
UNAUDITED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2006
--------------------------------------------------------------------------------
Common Stock Treasury Stock Additional
Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------------------------------------------------------------------------
Balance as of January 1, 2006 21,070,310 $21,070 32,000 ($35,000) $8,491,455 ($7,401,470) $1,076,055
Issuance of common stock upon conversion
of notes payable 266,667 267 233,386 233,653
Amortization of deferred compensation
expense 61,298 61,298
Net Loss (236,898) (236,898)
---------- ------- ------ -------- ---------- ----------- ----------
Balance at September 30, 2006 21,336,977 $21,337 32,000 ($35,000) $8,786,139 ($7,638,368) $1,134,108
========== ======= ====== ======== ========== =========== ==========
The accompanying (unaudited) notes are an integral part of these condensed
financial statements.
4
TOWERSTREAM CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Nine Months Ended
-----------------------------
September 30, September 30,
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net loss $(236,898) $ (578,982)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts receivable 65,983 41,554
Depreciation 876,792 686,908
Employee stock-based compensation 61,298 --
Changes in operating assets and liabilities:
Accounts receivable (64,976) (64,378)
Advances, net to officers 35,533 250
Prepaid expenses and other current assets (10,565) (13,222)
Bank overdraft -- (29,407)
Accounts payable and accrued expenses (12,956) 467,017
Deferred compensation 55,000 (23,000)
Deferred revenues (66,195) 89,624
--------- ----------
TOTAL ADJUSTMENTS 889,914 1,155,346
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 703,016 576,364
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Capital expenditures (734,560) (986,075)
Additional security deposits -- (8,500)
--------- ----------
NET CASH USED IN INVESTING ACTIVITIES (734,560) (994,575)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Proceeds from notes payable, stockholders 575,000 (150,000)
Repayment of notes payable, stockholders (86,935) 220,120
Additional capital lease obligations 63,603 4,850
Principal repayments of long-term debt (317,533) (144,571)
Proceeds from sales of common stock -- 984,306
--------- ----------
NET CASH PROVIDED BY FINANCING ATIVITIES 234,135 914,705
--------- ----------
NET INCREASE IN CASH 202,590 496,493
CASH - BEGINNING OF PERIOD 203,050 --
-------------------------- --------- ----------
CASH - END OF PERIOD $ 405,640 $ 496,493
-------------------- ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-------------------------------------------------
Cash paid during the period for:
Interest $ 170,505 $ 159,091
========= ==========
Non-cash investing and financing activities:
Conversion of deferred compensation into notes payable $ -- $ 195,312
Conversion of notes payable into common stock $ 233,653 $ 59,306
The accompanying (unaudited) notes are an integral part of these condensed
financial statements.
5
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1 - Basis of Presentation
---------------------
The accompanying condensed financial statements are unaudited and have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. They should be read
in conjunction with the financial statements and related notes to the financial
statements of Towerstream Corporation (the "Company") included elsewhere in this
Form 8-K. The September 30, 2006 unaudited condensed interim financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and note
disclosures normally included in the annual financial statements haven been
condensed or omitted pursuant to those rules and regulations, although the
Company's management believes the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
statement of the result of operations for the interim periods presented have
been reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire year.
Note 2 - Organization and Nature of Business
-----------------------------------
TowerStream Corporation (herein after referred to as the "Company") was formed
on December 17, 1999 and was incorporated in Delaware. The Company operates as a
Sub Chapter S corporation with its corporate headquarters located in Rhode
Island.
The Company is a fixed wireless broadband provider. The Company serves several
major U.S. markets including: Los Angeles, San Francisco, New York City,
Chicago, Boston, Providence and Newport, Rhode Island.
Note 3 - Summary of Significant Accounting Policies
------------------------------------------
Revenue Recognition
-------------------
Revenues are recognized at the time access to the Company's internet services is
made available to its customers. Contractual arrangements range from one to
three years. Deferred revenues are recognized as a liability when billings are
received in advance of the date when revenues are earned. Company revenue
arrangements with multiple deliverables under Emerging Issues Task Force Issue
("EITF") No. 00-21 are deemed to be immaterial.
Stock-Based Compensation
------------------------
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
(Revised 2004), "Share-Based Payment," ("SFAS 123(R)"), using the
modified-prospective-transition method. For the nine months ended September 30,
2006, the Company recognized $61,298, of stock compensation expense. As of
September 30, 2006, there was $82,687 of total unrecognized compensation cost
related to non-vested stock-based compensation arrangements granted. The
deferred compensation is expected to be recognized over a weighted-average
period of 1.7 years.
Prior to January 1, 2006, the Company's stock-based employee compensation plans
were accounted for under the recognition and measurement provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and related Interpretations, as permitted by
6
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 3 - Summary of Significant Accounting Policies, continued
-----------------------------------------------------
financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123").
For the nine months ended September 30, 2005, as was permitted under SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company elected to continue to follow the intrinsic value method in accounting
for its stock-based employee compensation arrangements as defined by APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB No. 25." The following
table illustrates the effect on net loss per share as if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation for the nine months ended September 30, 2005:
Nine Months Ended
September 30, 2005
-------------------------------------------------------------------------
Loss from operations $ (578,982)
Add: Stock-based employee compensation as
determined under the intrinsic value based method
and included in the statement of operations --
Deduct: Stock-based employee compensation as
determined under fair value based method (423,799)
-----------------------------------------------------------------------
Pro forma loss from operations $(1,002,761)
=======================================================================
Amounts per share of common stock:
Loss from continuing operations - Basic and diluted: $ (.05)
===========
As reported $ (.03)
===========
The assumptions used during the nine months ended September 30, 2006 were as
follows:
---------------------------------------
Risk free interest rate 4.74% - 5.09%
Expected Dividend Yield --
Expected Lives 10 years
Expected Volatility 40.7%
A summary of the status of the Company's non-vested shares as of September 30,
2006 and changes during the nine months ended September 30, 2006 is presented as
follows:
7
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 3 - Summary of Significant Accounting Policies, continued
-----------------------------------------------------
Weighted Average
Grant-Date
Shares Fair Value
----------------------------------------------------------------
Non-vested-beginning of period
12/31/05 289,917 $0.39
Granted 95,000 0.51
Vested (169,958) 0.36
Forfeited/Expired (37,792) 0.46
-----------------------------------------------------------
Non-vested-end of period 9/30//06 177,167 $0.47
===========================================================
As of September 30, 2006, there remains approximately $83,000 of deferred
compensation costs related to the foregoing non-vested shares which will be
expensed over a weighted average period of 1.7 years.
Basic and Diluted Loss Per Share
--------------------------------
Net loss per share is computed in accordance with Statement of Financial
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 requires
the presentation of both basic and diluted earnings per share.
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted loss per share reflects the
potential dilution that could occur through the potential effect of common
shares issuable upon the exercise of stock options, warrants and convertible
securities. The calculation assumes (i) the exercise of stock options and
warrants based on the treasury stock method; and (ii) the conversion of
convertible preferred stock only if an entity records earnings from continuing
operations, as such adjustments would otherwise be anti-dilutive to earnings per
share from continuing operations. As a result of the Company recording a loss
during each of the nine months ended September 30 2006 and 2005, the average
number of common shares used in the calculation of basic and diluted loss per
share is identical and has not been adjusted for the effects of 3,892,500 and
3,754,000 potential common shares from unexercised stock options and warrants
for each of the nine months ended September 30, 2006 and 2005, respectively, or
for the potential issuance of 999,283 and 650,657 shares convertible under
stockholders' notes at September 30, 2006 and 2005, respectively. Such potential
common shares may dilute earnings per share in the future.
Note 4 - Revolving Note, Stockholder
---------------------------
The Company has a $250,000 secured revolving note with a trust, which is also a
stockholder in the Company. The note provides for revolving credit through April
2006. The note is due on demand and bears interest at 10% per annum. This note
was repaid in its entirety on October 1, 2006 (see Note 12).
8
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 5 - Notes Payable, Stockholders
---------------------------
On January 12, 2006, the Company borrowed an additional $250,000 under a demand
note from an officer who is also a stockholder. The note is unsecured, payable
in monthly installments of interest only computed at 10% per annum. The note
matures sixty days after payee demand. Proceeds of the note were used to pay-off
approximately $244,000 of certain equipment financing notes, prior to their
maturity dates. The early extinguishment of debt resulted in a gain of
approximately $114,000.
On July 12, 2006, the Company borrowed an additional $50,000 under a demand note
from an officer who is also a stockholder. The note is unsecured, payable in
monthly installments of interest only computed at 10% per annum. The note
matures sixty days after payee demand. Proceeds of the note were used for
general working capital purposes.
On September 30, 2006, the Company borrowed an additional $150,000 under a
demand note from an officer who is also a stockholder. The note is secured by
the assets of the Company, payable in monthly installments of interest only
computed at 10% per annum. The note matures sixty days after payee demand.
Proceeds of the note were used for general working capital purposes.
On September 30, 2006, the Company borrowed an additional $125,000 under a
demand note from an officer who is also a stockholder. The note is secured by
the assets of the Company, payable in monthly installments of interest only
computed at 10% per annum. The note matures sixty days after payee demand.
Proceeds of the note were used for general working capital purposes.
As of September 30, 2006, aggregate maturities of notes payable, stockholders
due in future years are as follows:
Year ending December 31,
-------------------------------------
2006 $1,354,709
2007 272,611
2008 74,400
----------
$1,701,720
==========
Note 6 - Capital Leases
--------------
The Company is the lessee of network base station equipment under various
capital leases expiring in 2008. The assets and liabilities under capital leases
are recorded at the fair market value of the assets. The assets are depreciated
over the lease term, which approximates their useful lives, using the
straight-line method. Depreciation of assets under capital leases charged to
expense in 2006 was approximately $36,000.
9
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 6 - Capital Leases, continued
-------------------------
Property held under capital leases as of September 30, 2006 consists of the
following:
Network base station equipment $158,143
Less accumulated depreciation (50,632)
--------
$107,512
========
As of September 30, 2006, the minimum future lease payments under these capital
leases are:
Year ending December 31,
------------------------
2006 (three months) $ 16,636
2007 66,542
2008 40,432
2009 14,095
--------
Total minimum lease payments 137,705
Less amount representing imputed interest (26,162)
--------
Present value of minimum capital lease
payments $111,543
========
Note 7 - Property and Equipment, net
---------------------------
As of September 30, 2006, the Company's property and equipment, net is comprised
of:
Network and base station equipment $3,761,913
Customer premise equipment 2,981,811
Furniture, fixtures and equipment 185,151
Computer equipment 176,926
System Software 135,209
----------
7,241,009
Less accumulated depreciation 3,662,726
----------
$3,578,282
==========
Depreciation expense for the nine months ended September 30, 2006 and 2005 was
$876,792 and $686,908, respectively.
Note 8 - Stock Option Plan
-----------------
During the nine month period ended September 30, 2006, the Board of Directors
issued 95,000 incentive stock options to employees under the 2000 Plan at an
exercise price of $1.00, the estimated market price of the common stock on the
date of the issuance.
10
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 8 - Stock Option Plan, continued
----------------------------
A summary of the status of the 2000 Plan and changes are as follows:
Options outstanding, January 1, 2006 2,116,000
Granted 95,000
Expired/Forfeited (157,500)
----------
Options outstanding, September 30, 2006 2,053,500
----------
Options exercisable - September 30, 2006 1,768,333
----------
Weighted average fair value of the options granted during the period $ 0.51
----------
Weighted average remaining contractual life of options outstanding
- September 30, 2006 7.42 Years
==========
The options were given to employees at exercisable prices ranging from $0.55 to
$1.00 per common share expiring at various periods through December 2016.
Note 9 - Common Stock
------------
On March 30, 2006, two equipment finance notes in the principal amounts of
$90,737 and $100,000 and related accrued interest of $42,916 were converted into
266,667 shares of common stock of the Company at the option of the debtor.
Note 10 - Deferred Compensation
---------------------
On January 1, 2005, the Company entered into a deferred compensation agreement
with another officer, who is also a stockholder. The officer agreed to defer
$125,000 of his salary for 2005 and $45,000 of his salary for 2006. The
agreement allows for the accrual of interest at 10% compounded monthly. The
amount deferred is due and payable upon either 1) the change of control of the
Company's voting stock or sale of substantially all the assets of the Company;
2) December 31, 2006; or 3) an earlier date if so elected by the Board of
Directors. The officer has the right to convert the deferred compensation costs
into shares of common stock at $1.00 per share. Interest accrued but not paid as
of September 30, 2006 was $18,385.
11
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 11 - Commitments
-----------
Lease Obligations:
The Company leases roof top rights, cellular towers and office space under
various non-cancelable agreements expiring through December 2019. As of
September 30, 2006, the total future lease payments are as follows:
Year ending December 31,
------------------------
2006 $ 267,069
2007 698,700
2008 529,700
2009 441,600
2010 385,300
Thereafter 892,100
----------
$3,214,469
==========
Rent expense for the nine months ended September 30, 2006 and 2005 totaled
approximately $556,000 and $515,000, respectively.
On August 26, 2006 the Company entered into a License Purchase Agreement for
certain spectrum in southern Florida. The purchase price is comprised of five
annual cash payments of $50,000 plus 100,000 shares of Towerstream stock. The
first payment of $50,000 and the 100,000 shares are to be issued upon FCC
approval of the transfer of the license (see Note 12).
Note 12 - Subsequent Events
-----------------
a) On October 1, 2006 the Company repaid in full and terminated its $250,000
revolving credit facility with a trust, who is also a stockholder.
b) On October 1, 2006 the Board of Directors issued 45,000 incentive stock
options to employees under the 2000 Plan at an exercise price of $1.00, the
estimated market price of the common stock on the date of issuance.
c) On October 24, 2006 the Board of Directors issued 50,000 incentive stock
options to a director under the 2000 Plan at an exercise price of $1.00, the
estimated market price of the common stock on the date of issuance.
12
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 12 - Subsequent Events, continued
----------------------------
d) On November 2, 2006, an individual loaned the Company $250,000. The note is
unsecured, bears interest at 6% per annum, and all principal and accrued
interest is due on April 23, 2007. Subsequent to November 2, 2006, the
individual provided Towerstream with consulting services. As consideration
therefore, on January 4, 2007, Towerstream amended and restated the note in
order to make such note convertible into shares of common stock of the Company
immediately following the Merger at a conversion price of $1.60 per share.
e) On November 21, 2006 the Company received FCC approval on that certain
southern Florida spectrum license transfer. Accordingly, the Company issued
100,000 shares of Towerstream stock and made its first installment payment of
$50,000 on said date.
f) On November 30, 2006 the Company entered into an Asset Purchase Agreement to
purchase a fixed wireless network in Seattle, WA. The purchase included fixed
wireless equipment and related assets at five points of presence, as well as,
the assumption of certain operating leases at those locations. No customer
contracts were purchased or assumed in the transaction. In total, assets with a
Net Book Value of $236,000 were acquired for a purchase price of $200,000 in
cash.
g) On December 28, 2006, the Company entered into a capital lease arrangement
for equipment. The assets and liabilities under these capital leases shall be
recorded at the fair market value of the assets which aggregate approximately
$37,000. The lease terms require monthly rental payments of approximately $1,247
over the lease term of three years, which approximates their estimated useful
lives.
h) On January 4, 2007, certain stockholders collectively transferred an
aggregate of $1,616,753 in outstanding promissory notes and other payables due
from Towerstream to a group of third party investors. In connection with these
note transfers, Towerstream issued a new promissory note of approximately $1.6
million and cancelled the aforementioned obligations. As part of the
arrangement, Towerstream granted to the investors the right to automatically
convert the note into shares of common stock of a publicly traded shell company
(University Girls Calendar, Ltd. "UGC") into which Towerstream was merged (see i
below) at a conversion price of $1.50 per share. The note has a maturity date of
January 4, 2008 with interest at the rate of 10% per annum. In conjunction with
the above transaction, the Company will record a charge of approximately
$460,000 for the beneficial conversion feature granted to the holders of
approximately $924,000 of the stockholders' notes at $1.50 per share which did
not originally have conversion rights and were converted into shares of common
stock upon such merger. In addition, a stockholder with a $250,000 convertible
note exercised his right to convert the note into shares of common stock at
$1.43 per share in conjunction with the merger.
i) On January 12, 2007, Towerstream merged into a newly formed subsidiary of
UGC. In connection with the merger 1,900,000 of UGC common shares will remain
outstanding and all other shares of UGC outstanding were cancelled. Also, in
connection with the merger, UGC issued 15,000,000 shares of its common stock for
all the outstanding common stock of Towerstream. As a result of the transaction,
the former owners of Towerstream became the controlling stockholders of UGC and
UGC changed its name to Towerstream Corporation. Accordingly, the merger of
Towerstream and UGC (the "Merger") is a reverse merger that has been accounted
for as a recapitalization of Towerstream.
13
TOWERSTREAM CORPORATION
(UNAUDITED) NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 12 - Subsequent Events, continued
----------------------------
j) Concurrent with the Merger, UGC sold 5,110,056 shares of common stock for
gross proceeds of $11,497,625 (at $2.25 per share). In addition, these investors
received warrants to purchase 2,555,028 shares of common stock for a period of
five years at an exercise price of $4.50 per share, collectively (the "Private
Placement"). In connection with the Private Placement, UGC incurred placement
agent fees totaling approximately $446,400, and issued 140,917 warrants with an
estimated fair value of approximately $77,000 to the placement agent at an
exercise price of $4.50 per share for a period of five years. In addition, UGC
incurred other professional fees and expenses totaling approximately $522,300 in
connection with the Merger.
k) On January 18, 2007, UGC sold $3,500,000 of senior convertible debentures
(the "Debentures"). The Debentures require quarterly interest only payments of
8% per annum and mature on December 31, 2009. The Debentures are convertible
into shares of common stock of UGC at $2.75 per share subject to limitations as
defined and registration rights. In addition, holders of the Debentures received
warrants to purchase 636,364 shares of common stock at an exercise price of
$4.00 per share and warrants to purchase 636,364 shares of common stock at an
exercise price of $6.00 per share, for a period of five years. In conjunction
with these warrants, the Company will record an additional debt discount of
approximately $527,000.
In connection with the Debentures, UGC incurred placement agent fees totaling
approximately $140,000, and issued 63,634 warrants with an estimated fair value
of $34,750 to the placement agent at an exercise price of $4.50 per share for a
period of five years.
In conjunction with the merger, on January 12, 2007 Towerstream Corporation,
formerly UGC, adopted the 2007 Equity Compensation Plan (the "2007 Plan"). The
Plan provides a means for our Company to award specific equity-based benefits to
officers and other employees, consultants and directors, of our Company and our
related companies and to encourage them to exercise their best efforts to
enhance the growth of our Company and our related companies. Under the Merger
agreement all options and warrants and their respective rights and obligations,
that were outstanding prior to the merger were transferred into the 2007 Plan
and totaled 2,645,062. The total number of shares of Common Stock that can be
delivered under the 2007 Plan is 3,200,000. As of January 12, 2007, the date of
the Merger, 554,938 shares remained available for issuance pursuant to the Plan.
14
TOWERSTREAM CORPORATION AND SUBSIDIARY
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
TOWERSTREAM CORPORATION AND SUBSIDIARY
INTRODUCTION TO PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma condensed combined financial statements give
effect to the merger transaction between Towerstream Corporation ("Towerstream")
and University Girls Calendar, Ltd. ("UGC").
On January 12, 2007, Towerstream merged into a newly formed subsidiary of UGC, a
publicly traded shell company. In connection with the merger 1,900,000 of UGC
common shares will remain outstanding and all other shares of UGC outstanding
were cancelled. Also, in connection with the merger, UGC issued 15,000,000
shares of its common stock for all the outstanding common stock of Towerstream.
As a result of the transaction, the former owners of Towerstream became the
controlling stockholders of UGC and UGC changed its name to Towerstream
Corporation. Accordingly, the merger of Towerstream and UGC (the "Merger") is a
reverse merger that has been accounted for as a recapitalization of Towerstream.
Concurrent with the merger, certain stockholders collectively transferred an
aggregate of $1,616,753 in outstanding promissory notes and other payables due
from Towerstream to a group of third party investors. In connection with these
notes transfers, Towerstream issued a new promissory note of approximately $1.6
million and cancelled the aforementioned obligations. As part of the
arrangement, Towerstream granted to the investors the right to automatically
convert the note into shares of common stock of UGC in conjunction with the
Merger at a conversion price of $1.50 per share. In addition, a stockholder with
a $250,000 convertible note exercised his right to convert the note into shares
of common stock at $1.43 per share in conjunction with the Merger.
Concurrent with the Merger, UGC sold 5,110,056 shares of common stock for gross
proceeds of $11,497,625 (at $2.25 per share) through a Private Placement. In
addition, these investors received warrants to purchase 2,555,028 shares of
common stock for a period of five years at an exercise price of $4.50 per share.
In connection with the Private Placement, UGC incurred placement agent fees
totaling approximately $446,400, and issued 140,917 warrants to the placement
agent at an exercise price of $4.50 per share for a period of five years. In
addition, UGC incurred other professional fees and expenses totaling
approximately $522,300 in connection with the Merger transaction.
In conjunction with the Merger, UGC sold $3,500,000 of senior convertible
debentures (the "Debentures"). The Debentures require quarterly interest only
payments of 8% per annum and mature on December 31, 2009. The Debentures are
convertible into shares of common stock of UGC at $2.75 per share. In addition,
holders of the Debentures received warrants to purchase 636,364 shares of common
stock at an exercise price of $4.00 per share and warrants to purchase 636,364
shares of common stock at an exercise price of $6.00 per share, for a period of
five years. The holders of the Debentures have certain conversion limitation and
registration rights as defined under the agreement.
In connection with the Debentures, UGC incurred placement agent fees totaling
approximately $140,000, and issued 63,634 warrants with an estimated fair value
of $34,750 to the placement agent at an exercise price of $4.50 per share for a
period of five years.
1
The following unaudited pro forma condensed combined balance sheet combines the
balance sheet of Towerstream with UGC as of September 30, 2006, as if the
recapitalization of Towerstream occurred on that date.
The unaudited pro forma condensed combined balance sheet and earnings per share
data should be read in conjunction with the separate historical financial
statements of Towerstream, appearing elsewhere herein, and the historical
financial statements of UGC, as filed and included in form 10-QSB for the
quarterly period ended August 30, 2006 and Form SB-2 for the period April 27,
2005 (date of inception) through the year ended November 30, 2005. The fiscal
year of Towerstream and UGC is December 31, and November 30, respectively. The
unaudited pro forma condensed combined balance sheet is not necessarily
indicative of the combined financial position had the acquisition occurred on
September 30, 2006. The unaudited pro forma earnings per share data are not
necessarily indicative as if the merger occurred at the beginning of the
respective periods.
2
TOWERSTREAM CORPORATION AND SUBSIDIARY
(UNAUDITED) PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 2006
Pro Forma Adjustments
-------------------------------
University University
Towerstream Girls Towerstream Girls Pro Forma
Corporation Calendar, Ltd. Corporation Calendar, Ltd. Combined
----------- -------------- ----------- -------------- ------------
(a) (b)
Assets
Current Assets
Cash and cash equivalents $ 405,640 $ 36,179 $ $14,411,237(j) $14,853,056
Accounts receivable, net 172,643 686 173,329
Prepaid expenses 19,386 19,386
---------- -------- ----------- -----------
Total Current Assets 597,669 36,865 14,411,237 15,045,771
Property and equipment, net 3,578,282 3,578,282
Other assets 64,185 140,000(j) 238,935
34,750(k)
---------- -------- ----------- ----------- -----------
TOTAL ASSETS $4,240,136 $ 36,865 $ $14,585,987 $18,862,988
========== ======== =========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Revolving note, stockholder $ 250,000 $ $ $ $ 250,000
Current maturities of long-term debt 11,784 11,784
Current maturities of capital lease obligations 31,407 31,407
Current maturities of notes payable, stockholders 1,471,352 (1,471,352)(c)
Accounts payable and accrued expenses 446,470 6,728 522,256(d) 975,454
Deferred compensation 180,000 (170,000)(c) 10,000
Deferred compensation accrued interest 18,384 (18,384)(c)
Deferred revenues 386,127 386,127
---------- -------- ----------- -----------
Total Current Liabilities 2,795,524 6,728 (1,137,480) 1,664,772
Other Liabilities
Capital lease obligations, net of current
maturities 80,136 80,136
Senior convertible debentures 3,500,000(j) 2,973,073
(526,927)(l)
Notes payable, stockholders, net of current
maturities 230,368 (230,368)(c)
---------- -------- ----------- ----------- -----------
TOTAL LIABILITIES 3,106,028 6,728 (1,367,848) 2,973,073 4,717,981
---------- -------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $0.001 (none issued)
Common stock, par value $0.001 21,337 4,450 (21,337)(e) (2,550)(m) 23,313
15,000(n)
1,303(f) 5,110(o)
Additional paid-in capital 8,786,139 70,558 21,337(e) 11,046,127(j,o) 14,121,694
(1,303)(f) 2,550(m)
1,890,104(c) (15,000)(n)
(35,000)(g) 34,750(k)
461,752(h) 526,927(l)
(8,622,376)(i) (49,037)(q)
4,166(p)
Accumulated other comprehensive income 4,166 (4,166)(p)
Accumulated deficit (7,638,368) (49,037) (461,752)(h) 49,037(q)
(522,256)(d)
8,622,376(i)
---------- -------- ----------- ----------- -----------
1,169,108 30,137 1,332,848 11,612,914 14,145,007
Less treasury stock, at cost (35,000) 35,000(g)
---------- -------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,134,108 30,137 1,367,848 11,612,914 14,145,007
---------- -------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,240,136 $ 36,865 $ $14,585,987 $18,862,988
========== ======== =========== =========== ===========
See accompanying (unaudited) notes to pro forma condensed combined
financial statements.
3
TOWERSTREAM CORPORATION AND SUBSIDIARY
(Unaudited) Notes to Pro Forma Condensed Combined Financial Statements
NOTE 1 - Merger Transaction
On January 12, 2007, Towerstream merged into a newly formed subsidiary of UGC, a
publicly traded shell company. In connection with the merger 1,900,000 of UGC
common shares will remain outstanding and all other shares of UGC outstanding
were cancelled. Also, in connection with the merger, UGC issued 15,000,000
shares of its common stock for all the outstanding common stock of Towerstream.
As a result of the transaction, the former owners of Towerstream became the
controlling stockholders of UGC and UGC changed its name to Towerstream
Corporation. Accordingly, the merger of Towerstream and UGC (the "Merger") is a
reverse merger that has been accounted for as a recapitalization of Towerstream.
NOTE 2 - Pro forma Adjustments
The pro forma adjustments to the unaudited condensed combined balance sheet
give effect to the recapitalization of Towerstream as if the transactions
had occurred on September 30, 2006.
Balance Sheet - September 30, 2006
a. Derived from the unaudited balance sheet of Towerstream as of
September 30, 2006.
b. Derived from the unaudited balance sheet of UGC as of August 31, 2006.
c. To record as of September 30, 2006, the conversion of $1,890,104 of
stockholders' obligations for the issuance of 1,302,583 common shares.
The debt converted is as follows:
Notes payable, stockholders $1,701,720
Deferred compensation 170,000
Accrued interest on deferred compensation 18,384
----------
Total amount of stockholder obligations converted into shares of common stock $1,890,104
==========
d. To record professional fees and other expenses of approximately
$522,300 related to the Merger.
e. Elimination of Towerstream common stock upon closing of the Merger.
f. To record par value for issuance of 1,302,583 shares of common stock
related to conversion of stockholders' obligations into shares of
common stock.
g. Elimination of Towerstream treasury stock upon closing of the Merger.
h. To record the beneficial conversion feature granted to the holders of
$923,505 of stockholders' obligations at $1.50 per share which did not
originally have conversion rights and were converted into shares of
common stock in connection with the Merger.
i. Reclassification of accumulated deficit due to conversion from "S"
corporation to "C" corporation.
4
TOWERSTREAM CORPORATION AND SUBSIDIARY
(Unaudited) Notes to Pro Forma Condensed Combined Financial Statements
NOTE 2 - Pro forma Adjustments, continued
j. Concurrent with the Merger, UGC sold 5,110,056 shares of common stock
for gross proceeds of $11,497,625 (at $2.25 per share). In addition,
these investors received warrants to purchase 2,555,028 shares of
common stock for a period of five years at an exercise price of $4.50
per share, collectively the ("Private Placement").
In connection with the Private Placement, UGC incurred placement agent
fees totaling approximately $446,400, and issued 140,917 warrants to
the placement agent at an exercise price of $4.50 per share for a
period of five years. In addition, UGC incurred other professional
fees and expenses totaling approximately $522,300 in connection with
the Merger transaction.
In conjunction with the Merger, UGC sold $3,500,000 of senior
convertible debentures (the "Debentures"). The Debentures require
quarterly interest only payments of 8% per annum and mature on
December 31, 2009. The Debentures are convertible into shares of
common stock of UGC at $2.75 per share. In addition, holders of the
Debentures received warrants to purchase 636,364 shares of common
stock at an exercise price of $4.00 per share and warrants to purchase
636,364 shares of common stock at an exercise price of $6.00 per
share, for a period of five years.
In connection with the Debentures, UGC incurred placement agent fees
totaling approximately $140,000, and issued 63,634 warrants with an
estimated fair value of $34,750 to the placement agent at an exercise
price of $4.50 per share for a period of five years.
The above equity and debt offerings generated net proceeds of
$14,411,237 as computed below:
Gross proceeds received on sale of common stock $11,497,625
Less: placement agent fees on sale of Private Placement 446,388
-----------
$11,051,237
Gross proceeds received from issuance of Debentures $ 3,500,000
Less: placement agent fees on sale of Debentures 140,000
-----------
3,360,0000
-----------
Net Proceeds $14,411,237
===========
k. To record fair value of placement agent warrants associated with
issuance of Debentures.
l. To record a debt discount associated with warrants issued in
connection with the issuance of Debentures.
m. To reflect the reduction of 2,550,010 shares of UGC common stock, par
value $0.001.
n. Issuance of 15,000,000 shares of UGC common stock to former
Towerstream shareholders, par value $0.001.
o. Issuance of 5,110,056 shares of UGC common stock in connection with
Private Placement, par value $0.001.
p. Elimination of UGC accumulated other comprehensive income.
q. Elimination of UGC accumulated deficit.
5
TOWERSTREAM CORPORATION AND SUBSIDIARY
(Unaudited) Notes to Pro Forma Condensed Combined Financial Statements
NOTE 2 - Pro forma Adjustments, continued
The 23,312,639 shares of common stock issued and outstanding post merger
consist of 15,000,000 shares issued to the former owners of Towerstream,
1,900,000 shares held by the shareholders of UGC, 1,302,583 shares issued
upon the conversion of stockholders' obligation and 5,110,056 shares issued
in connection with the Private Placement.
NOTE 3 - Basic and diluted earnings per share for the nine months ended
September 30, 2006
The computation of pro forma basic and diluted earnings per share for the
nine months ended September 30, 2006, is calculated as if the Merger
occurred at the beginning of the period.
Pro Forma Adjustments
(a) (b) -------------------------------
Towerstream University Girls Towerstream University Girls Pro Forma
NINE MONTHS ENDED SEPTEMBER 30, 2006: Corporation Calendar, Ltd. Corporation Calendar, Ltd. Combined
------------------------------------- ----------- ---------------- ----------- ---------------- -----------
$ 105,274 (c) $ (35,000)(e)
(8,688)(f)
(131,732)(g)
(522,256)(j) (210,000)(h)
(461,752)(d) 39,816 (i)
---------- ---------- --------- ----------- -----------
Net Loss $ (236,898) $ (39,816) $(878,734) $ (345,604) $(1,501,052)
========== ========== ========= =========== ===========
Earnings per common and common equivalent
share:
Basic and Diluted: $ (0.01) $ (0.07)
========== ===========
Weighted average shares used in computing
earnings per common and common equivalent share:
Basic 4,450,010 (2,550,010)(k) 22,989,065
========== =========== ===========
14,898,777 (l)
===========
5,110,056 (m)
===========
1,080,232 (n)
===========
a. Derived from the unaudited statement of operations of Towerstream for
the nine months ended September 30, 2006.
b. Derived from the unaudited statement of operations of UGC for the nine
months ended August 30, 2006.
c. To eliminate interest expense on stockholders' obligations which were
converted to shares of common stock as part of the Merger for the nine
months ended September 30 2006.
d. To record additional interest expense related to the beneficial
conversion feature granted to the holders of the stockholders'
obligations in consideration for converting such debt to shares of
common stock upon the Merger.
e. Amortization of placement agent fees paid in connection with placement
of Debentures.
6
TOWERSTREAM CORPORATION AND SUBSIDIARY
(Unaudited) Notes to Pro Forma Condensed Combined Financial Statements
NOTE 3 - Pro forma Adjustments, continued
f. Amortization of fair value of placement agent warrants issued in
connection with placement of Debentures.
g. Amortization of debt discount associated with warrants issued in
connection with the Debentures.
h. To record interest expense associated with issuance of the Debentures
for the nine months ended September 30, 2006.
i. Elimination of net loss of UGC, the public shell company.
j. To record professional fees and other expenses of $522,256 related to
the Merger.
k. Reduction of 2,550,010 shares of UGC common stock from 4,450,010 to
1,900,000 shares in connection with the Merger.
l. 14,898777 shares - weighted average calculation of 15,000,000 shares
issued by UGC for 100% of the outstanding stock of Towerstream in
connection with the Merger.
m. Issuance of 5,110,056 shares of UGC in connection with the Private
Placement resulting in gross proceeds of $11,497,625.
n. 1,080,232 shares - weighted average calculation of 1,302,583 shares of
UGC in settlement of stockholders' obligations that resulted in the
retirement and payment in full of $1,890,104 of debt upon the Merger.
7
TOWERSTREAM CORPORATION AND SUBSIDIARY
(Unaudited) Notes to Pro Forma Condensed Combined Financial Statements
NOTE 4 - Basic and diluted earnings per share for the year ended December 31,
2005
The computation of pro forma basic and diluted earnings per share for the
year ended December 31, 2005, is calculated as if the Merger occurred at
the beginning of the period.
Pro Forma Adjustments
(a) (b) -------------------------------
Towerstream University Girls Towerstream University Girls Pro Forma
YEAR ENDED DECEMBER 31, 2005: Corporation Calendar, Ltd. Corporation Calendar, Ltd. Combined
----------------------------- ----------- ---------------- ----------- ---------------- -----------
$ 70,084 (c) $ (46,666)(e)
(11,583)(f)
(175,642)(g)
(522,256)(j) (280,000)(h)
(461,752)(d) 9,221 (i)
---------- ---------- --------- ----------- -----------
Net Loss $ (947,205) $ (9,221) $(913,924) $ (504,670) $(2,375,020)
========== ========== ========= =========== ===========
Earnings per common and common equivalent
share:
Basic and Diluted: $ (0.00) $ (0.11)
========== ===========
Weighted average shares used in
computing earnings per common and
common equivalent share:
Basic and Diluted: 3,378,671 (1,478,671)(k) 22,150,928
========== =========== ===========
14,559,843 (l)
===========
5,110,056 (m)
===========
581,029 (n)
===========
a. Derived from the audited statement of operations of Towerstream for
the year ended December 31, 2005.
b. Derived from the audited statement of operations of UGC for the year
ended November 30, 2005.
c. To eliminate interest expense on stockholders' obligations which were
converted to shares of common stock as part of the Merger for the
twelve months ended December 31, 2005.
d. To record additional interest expense related to the beneficial
conversion feature granted to the holders of the stockholders'
obligations in consideration for converting such debt to shares of
common stock upon the Merger.
e. Amortization of placement agent fees paid in connection with placement
of Debentures.
f. Amortization of fair value of placement agent warrants issued in
connection with placement of Debentures.
g. Amortization of debt discount associated with warrants issued in
connection with the Debentures.
h. To record interest expense associated with issuance of the Debentures
for the twelve months ended December 31, 2005.
8
TOWERSTREAM CORPORATION AND SUBSIDIARY
(Unaudited) Notes to Pro Forma Condensed Combined Financial Statements
NOTE 4 - Pro forma Adjustments, continued
i. Elimination of net loss of UGC, the public shell company.
j. To record professional fees and other expenses of $522,256 related to
the Merger.
k. Reduction of 1,478,671 shares of UGC common stock, from 3,378,671 to
1,900,000 shares of common stock in connection with the Merger.
l. 14,559,843 - weighted average calculation of 15,000,000 shares issued
by UGC for 100% of the outstanding stock of Towerstream in connection
with the Merger.
m. Issuance of 5,110,056 shares of UGC in connection with the Private
Placement resulting in gross proceeds of $11,497,625.
n. 581,029 shares - weighted average calculation of 1,302,583 shares of
UGC in settlement of stockholders' obligations that resulted in the
retirement and payment in full of $1,890,104 of debt upon the Merger.
9
EXHIBIT 99.4
TOWERSTREAM CORPORATION
AUDIT COMMITTEE CHARTER
PURPOSE
The role of the Audit Committee is to assist the Board of Directors
(the "Board") in fulfilling its oversight responsibilities related to:
o the accounting, reporting, and financial practices of the Company
and its subsidiaries, including the integrity of the Company's
financial statements;
o the surveillance of administration, disclosure and financial
controls;
o the Company's compliance with legal and regulatory requirements;
o the Company's monitoring and enforcement of its Code of Business
Conduct and Ethics;
o the qualifications and independence of any independent auditor of
the Company; and
o the performance of the Company's internal audit function and the
Company's independent auditor(s).
The Audit Committee shall also prepare the report required by the
rules of the SEC to be included in the Company's annual proxy statement.
COMPOSITION
The Audit Committee shall be comprised of at least three directors
each of whom (i) is "independent" under the rules of the NASDAQ Stock Market,
Inc., except as provided by NASDAQ Rule 4350(d), and the Sarbanes-Oxley Act of
2002, and the rules promulgated thereunder, (ii) does not accept any consulting
fee, advisory or other compensatory fee from the Company other than in his or
her capacity as a Member of the Board, and (iii) is not an "affiliate" of the
Company or any subsidiary of the Company, as such term is defined in Rule 10A-3
under the Securities Exchange Act of 1934, as amended (the "Act"). Members of
the Audit Committee shall be appointed by the Board upon the recommendation of a
majority of the independent directors and may be removed by the Board in its
discretion. All members of the Audit Committee must be able to read and
understand financial statements prepared in accordance with U.S. generally
accepted accounting principles ("GAAP") at the time of their appointment. In
addition the Audit Committee must have at least one committee member that meets
the requirements of an "Audit Committee Financial Expert," as such term is
defined in Item 401(e) of Regulation S-B and Item 401(h) of Regulation S-K.
Notwithstanding the immediately preceding paragraph, one director who
is not "independent" under the rules of the NASDAQ Stock Market, Inc., who does
not accept any consulting,
advisory or other compensatory fee from the Company other than in his or her
capacity as a Member of the Board, who is not an "affiliate" of the Company or
any subsidiary of the Company, as such term is defined in Rule 10A-3 under the
Act, and who is not a current officer or employee, or a spouse, parent, child,
sibling, whether by blood, marriage or adoption, or a person who has the same
residence as any current officer or employee may be appointed to the Audit
Committee if the Board, under exceptional and limited circumstances, shall have
determined that such person's membership on the Audit Committee is required by
the best interests of the Company and its stockholders, and the Board discloses,
in the next annual meeting proxy statement or Annual Report subsequent to such
determination, the nature of the relationship, and the reasons for the
determination. Any such member appointed to the Audit Committee may only serve
up to two years and may not chair the Audit Committee.
MEETINGS
The Audit Committee shall meet as often as it determines but no less
than once per quarter, either in person or telephonically, and at such times and
places as the Audit Committee shall determine. The Audit Committee should have
unrestricted access to and meet regularly with each of management, the principal
internal auditor of the Company and the principal outside auditing firm to
discuss any matters that the Audit Committee or either of these groups believes
should be discussed. In addition, the Audit Committee or its chairperson should
meet with the independent auditors and management quarterly to review the
Company's financial statements. A majority of the members of the Audit Committee
present in person or by telephone shall constitute a quorum. The Audit Committee
shall report regularly to the full Board with respect to its activities.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The Audit Committee shall be directly responsible, in its capacity as
a committee of the Board, for the appointment, compensation, retention and
oversight of the work of any registered public accounting firm engaged for the
purpose of preparing or issuing an audit report or performing other audit,
review or attest services for the Company. In this regard, the Audit Committee
shall have the sole authority to (A) appoint and retain, (B) determine the
funding for, and (C) when appropriate, terminate the outside auditing firm,
which shall report directly to the Audit Committee. The Audit Committee will be
responsible for resolving any disputes between the outside auditing firms and
the Company's management.
RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
A. Financial Reporting Processes and Documents/Reports Review
1. Evaluate annually the performance of the Audit Committee and the
adequacy of the Audit Committee charter.
2. Review and discuss with the independent auditor(s): (A) the scope
of the audit, the results of the annual audit examination by the auditor and any
accompanying management letters, and any difficulties the auditor encountered in
the course of their audit work, including any restrictions on the scope of the
outside auditing firm's activities or on access
2
to requested information, and any significant disagreements with management; (B)
any reports of the outside auditing firms with respect to interim periods, as
deemed appropriate by the Audit Committee; and (C) any other matters required to
be discussed by Statement on Auditing Standards No. 61 relating to the conduct
of the audit.
3. Review and discuss with management and the independent auditor(s)
the annual audited and quarterly unaudited financial statements of the Company,
including (A) an analysis of the auditor's judgment as to the quality of the
Company's accounting principles, setting forth significant financial reporting
issues and judgments made in connection with the preparation of the financial
statements; (B) the Company's disclosures under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including the
development, selection and reporting of accounting policies that may be regarded
as critical; and (C) major issues regarding the Company's accounting principles
and financial statement presentations, including any significant changes in the
Company's selection or application of accounting principles and financial
statement presentations.
4. Recommend to the Board whether the financial statements should be
included in the Annual Report on Form 10-K or Form 10-KSB, as the case may be.
5. Evaluate whether management is setting the appropriate tone at the
top by communicating the importance of strong control systems.
6. Review and discuss the adequacy of the Company's internal controls,
any significant deficiencies and material weaknesses if any in internal
controls, and any significant changes in such controls with the Company's
independent auditors, internal auditors and management, and the adequacy of
disclosures about changes in internal control over financial reporting.
7. Review with the Company's independent auditors, internal auditors
and management the adequacy and effectiveness of the Company's information
management systems.
8. Periodically review and discuss with the Company's principal
internal auditor the scope of the internal audit plan, results of the audits
conducted by the Company's internal auditors, inclusive of findings,
recommendations, management's response and any significant difficulties
encountered during the course of the audit.
9. Periodically review and discuss the adequacy and effectiveness of
the Company's disclosure controls and procedures and management reports thereon.
10. Review disclosures made to the Audit Committee by the Company's
Chief Executive Officer and Chief Financial Officer during their certification
process for the Form 10-K and 10-Q, or Form 10-KSB and 10-QSB, as the case may
be, about any significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving management or
other employees who have a significant role in the Company's internal controls.
Review and discuss with management (including the senior internal audit
executive) and the independent auditor the Company's internal controls report
and
3
the independent auditor's attestation of the report prior to the filing of
the Company's Form 10-K or Form 10-KSB, as the case may be.
11. Review and timely discuss with management and the principal
outside auditors any material financial or non-financial arrangements of the
Company which do not appear on the financial statements of the Company.
12. Discuss with management any matters that could have a material
impact on the Company's financial statements.
13. Review annually reports of fees for audit, non-audit and legal
fees for services rendered.
14. Review and discuss with the independent auditors their report
regarding (A) all critical accounting policies and practices to be used; (B) all
alternative treatments of financial information within generally accepted
accounting principles that have been discussed with management officials of the
Company, ramifications of the use of such alternative disclosures and
treatments, and the treatment preferred by the principal independent auditors;
and (C) other material written communications between the independent auditors
and Company management, such as any management letter comments and schedule of
unadjusted differences.
15. Review with financial management and the principal outside
auditing firm the Company's filings with the SEC prior to their filing or prior
to the release of earnings reports. Discuss with management the Company's
earnings press releases, including the use of "pro forma" or "adjusted" non-GAAP
information, as well as financial information and earnings guidance provided to
analysts and rating agencies. Such discussion may be done generally (consisting
of discussing the types of information to be disclosed and the types of
presentations to be made). The Chair of the Audit Committee may represent the
entire Audit Committee for purposes of this review.
16. Discuss with management and the independent auditor the effect of
regulatory and accounting initiatives on the Company's financial statements.
17. Ensure that a public announcement of the Company's receipt of an
audit opinion that contains a going concern qualification is made promptly.
B. Independent Accountants
18. Approve in advance all auditing services and internal
control-related services to be provided by the principal outside auditing firm,
including any written engagement letter related thereto.
19. Establish policies and procedures for the engagement of the
principal outside auditing firm to provide permissible non-audit services, which
shall require preapproval by the Audit Committee of all permissible non-audit
services to be provided by the outside auditing firm (other than with respect to
de minimis exceptions described in Section 10A(i)(1)(B) of the Act that are
approved by the Audit Committee prior to the
4
completion of the audit). Ensure that approval of non-audit services are
disclosed to investors in periodic reports required by Section 13(a) of the Act.
20. The authority to grant preapproval of audit and non-audit services
may be delegated to one or more designated members of the audit committee who
are independent directors. Any such delegation shall be presented to the full
Audit Committee at its next scheduled meeting.
21. Consider, at least annually, the independence of the principal
outside auditing firm, including whether the outside auditing firm's performance
of permissible non-audit services is compatible with the auditor's independence;
obtain and review a written report by the outside auditing firm describing any
relationships between the outside auditing firm and the Company or any
relationships between the outside auditing firm and the Company or any other
relationships that may adversely affect the independence of the auditor; discuss
with the outside auditing firm any disclosed relationship or services that may
impact the objectivity and independence of the auditor; and present to the Board
the Audit Committee's conclusions with respect to the independence of the
outside auditing firm.
22. Ensure rotation of the audit partners as required by law.
23. Review the experience and qualifications of the senior members of
the independent auditor team and the quality control procedures of the
independent auditors.
24. Establish policies for the hiring of employees and former
employees of the outside auditing firm.
C. Outside Advisors
The Audit Committee shall have the authority to retain such outside
counsel, accountants, experts and other advisors as it determines appropriate to
assist the Audit Committee in the performance of its functions. The Audit
Committee shall have sole authority to approve related fees and retention terms
and shall receive funding for these appointments and ordinary administrative
expenses from the Company.
D. Oversight of the Company's Internal Audit Function
25. Review the appointment and replacement of the senior internal
auditing executive.
26. Review the significant reports to management prepared by the
internal auditing department and management's responses.
27. Discuss with the independent auditor and management the internal
audit department responsibilities, budget and staffing and any recommended
changes in the planned scope of the internal audit.
E. Ethical and Legal Compliance
5
28. Review and update periodically the Code of Business Conduct and
Ethics and ensure that management has established a system to enforce the Code
of Business Conduct and Ethics.
29. Approve, if the duty is not delegated to a comparable body of the
Board, all related party transactions, which refers to transactions required to
be disclosed under Item 404 of Regulation S-K or Item 404 of Regulation S-B, as
the case may be.
30. Review with the Company's counsel any legal, tax or regulatory
matter that could have a significant impact on the Company's financial
statements.
31. Establish procedures for the receipt, retention, treatment and
communication to the Audit Committee of complaints received by the Company
regarding violations of the Code of Business Conduct and Ethics (including
suspected fraud), accounting, internal accounting controls or auditing matters.
32. Establish procedures for the confidential, anonymous submission by
employees of concerns, including concerns regarding questionable accounting or
auditing matters.
33. Approve all material related party transactions.
34. Obtain from the independent auditor assurance that Section 10A(b)
of the Exchange Act has not be implicated.
35. Perform any other activities consistent with this Charter, the
Company's bylaws and governing law, as the Audit Committee or the Board deems
necessary or appropriate.
LIMITATION OF AUDIT COMMITTEE'S ROLE
While the Audit Committee has the responsibilities and powers set
forth in this Charter, it is not the duty of the Audit Committee to plan or
conduct audits or to determine that the Company's financial statements and
disclosures are complete and accurate and are in accordance with generally
accepted accounting principles and applicable rules and regulations. These are
the responsibilities of management and the independent auditor. Further, it is
not the duty of the Audit Committee to conduct investigations or to ensure the
Company and its employees comply with laws and regulations or the Company's Code
of Business Conduct and Ethics.
Adopted by Resolution of the Board of Directors
January 12, 2007
6
EXHIBIT 99.5
TOWERSTREAM CORPORATION
CHARTER OF THE NOMINATING COMMITTEE
A. PURPOSE
The purpose of the Nominating Committee (the "Committee") of the Board of
Directors (the "Board") will be to (i) identify, review and evaluate candidates
to serve on the Board; (ii) serve as a focal point for communication between
Board candidates, non-committee Board members and the Company's management; and
(iii) recommend such candidates to the Board.
B. ORGANIZATION
The Committee shall consist of two or more directors, each of whom shall
satisfy the applicable independence requirements of the NASDAQ Stock Market,
Inc. and any other regulatory requirements.
The Committee members shall be elected by the Board; members shall serve
until their successors shall be duly elected and qualified. The Committee's
chairperson shall be designated by the full Board or, if it does not do so, the
Committee members shall elect a Chairman by vote of a majority of the full
Committee.
The Committee may form and delegate authority to subcommittees when
appropriate.
C. MEETINGS
The Committee will meet no less than two times a year. Special meetings may
be convened as required. The chairperson of the Committee will preside at each
meeting and, in consultation with the other members of the Committee, will set
the frequency and length of each meeting and the agenda of items to be addressed
at each meeting. The chairperson of the Committee shall ensure that the agenda
for each meeting is circulated to each Committee member in advance of the
meeting.
D. DUTIES AND RESPONSIBILITIES
The Committee has the following duties:
1. Identify potential candidates for membership on the Board, and the
Committee shall have the sole authority to retain and terminate any
search firm used to identify candidates for the Board;
2. Gather information on such candidates, conduct inquiries into the
backgrounds and qualifications of such candidates, and conduct
interviews and meetings with such candidates or their references;
3. Make recommendations to the Board regarding overall Board composition
and makeup, including having a majority of independent directors on
the Board;
4. Make recommendations to the Board regarding the composition and size
of the Board, with the goal of ensuring that the Board has the proper
expertise and its membership consists of persons with sufficiently
diverse backgrounds;
5. Make recommendations to the Board with regard to the criteria for
selection of Board members;
6. Assist the Board in planning for continuity on the Board as existing
Board members retire or rotate off the Board;
7. Review and recommend to the Board an appropriate course of action upon
the resignation of current Board members;
8. Recommend to the Board persons to be members of Board committees;
9. Have the authority to obtain advice and assistance from internal or
external legal, accounting or other advisors in connection with the
performance of its duties and responsibilities; and
10. Take such other action within the Committee's scope of duties, that
are in the best interests of the Company and its stockholders, as the
Committee shall deem appropriate.
2
EXHIBIT 99.6
TOWERSTREAM CORPORATION
COMPENSATION COMMITTEE CHARTER
----------
A. PURPOSE
The primary purposes of the Compensation Committee (the "Committee") are to
(i) assist the Board of Directors (the "Board") in discharging its
responsibilities with respect to compensation and benefits of the Company's
executive officers and directors, (ii) produce an annual report on executive
compensation for inclusion in the Company's proxy statement in accordance with
the applicable rules and regulations and (iii) administer the Company's stock
option plans.
B. COMMITTEE MEMBERSHIP AND QUALIFICATIONS
The Committee shall consist of no fewer than two persons, each of whom
shall be a member of the Board. Except as permitted by applicable rules of The
NASDAQ Stock Market, Inc. (the "NASDAQ"), each member of the Committee shall
qualify as an independent director under criteria established by the applicable
listing standards of the NASDAQ and other applicable laws and regulations.
Committee members shall be elected by the Board at a meeting of the Board;
members shall serve until their successors shall be duly elected and qualified.
The Board may, at any time, remove any member of the Committee and fill the
vacancy created by such removal. The Committee's chairman shall be designated by
the full Board, comprising a majority of independent directors, or the full
Committee.
C. COMMITTEE AUTHORITY AND RESPONSIBILITIES
The Committee shall have the power and authority of the Board to perform
the following duties and to fulfill the following responsibilities:
1. Determine all compensation for the Chief Executive Officer, including
incentive-based and equity-based compensation;
2. Review and approve corporate goals relevant to the compensation of the
Chief Executive Officer and evaluate the Chief Executive Officer's
performance in light of these goals and objectives;
3. Consider, in determining the long-term incentive component of
compensation for the Chief Executive Officer, the Company's
performance and relative stockholder return, the value of similar
incentive awards to chief executive officers at comparable companies,
and the awards given to the Company's Chief Executive Officer in past
years;
4. Review and approve incentive-based or equity-based compensation plans
in which the Company's executive officers participate, and review and
approve salaries, incentive and equity awards for other executive
officers;
5. Approve all employment, severance, or change-in-control agreements,
special or supplemental benefits, or provisions including the same,
applicable to executive officers;
6. Periodically review and advise the Board concerning both regional and
industry-wide compensation practices and trends in order to assess the
adequacy and competitiveness of the Company's compensation programs
for the Chief Executive Officer, other executive officers and
directors relative to comparable companies in the Company's industry;
7. Develop guidelines and review the compensation and performance of
executive officers of the Company;
8. Review and propose to the Board, from time to time, changes in
director compensation;
9. Prepare an annual report on executive compensation for inclusion in
the Company's proxy statement for the annual meeting of stockholders,
in accordance with applicable rules and regulations;
10. Administer the Company's various stock option plans;
11. Review and establish appropriate coverage for the Company's D&O
insurance;
12. Update and advise the Board regarding potential and upcoming changes
in SEC requirements and/or disclosures;
13. Annually review and reassess the adequacy of this charter and
recommend any proposed changes to the Board for approval; and
14. Perform any other activities under this charter, the Company's by-laws
or governing law as the Committee or the Board deems appropriate.
D. MEETINGS
The Committee will meet no less than once a year. Special meetings may be
convened as required. A majority of the members of the Committee shall
constitute a quorum for the transaction of business, and, if a quorum is
present, any action approved by at least a majority of the members present shall
represent the valid action of the Committee. The chairman of the Committee will
preside at each meeting and, in consultation with the other members of the
Committee, will set the frequency and length of each meeting and the agenda of
items to be addressed at each meeting. The Committee may form subcommittees and
delegate authority to them or to one or more of its members when appropriate.
2
The Chief Executive Officer may not be present during voting or
deliberations relating to his or her compensation.
E. COMMITTEE RESOURCES
The Committee shall have the authority to obtain advice and seek assistance
from consultants, legal counsel, accounting or other advisors as appropriate to
perform its duties hereunder and to determine the terms, costs and fees for such
engagements. Without limitation, the Committee shall have the authority to
retain or terminate any consulting firm used to evaluate director, Chief
Executive Officer or other executive compensation, and to determine and approve
the terms of engagement and the fees and costs for such engagements. The fees
and costs of any consultant or advisor engaged by the Committee to assist in it
in performing any duties hereunder shall be borne by the Company.
F. MINUTES
The Committee shall maintain written minutes of its meetings, which minutes
will be filed with the minutes of the meetings of the Board.
3
Tower
Stream
Investor
Presentation 2006
2005
Excellence in Technology
Safe
Harbor Statement
Safe Harbor
Statement under the U.S. Private Securities Litigation
Reform Act of 1995:
Statements made in this presentation that
relate to future plans, events or
performances are forward-looking
statements. Any statement
containing words such as "believes,
"anticipates," "plans," "projections," "expects,"
and similar words,
is forward looking, and these statements
involve risks and
uncertainties and are based on current expectations.
Consequently, actual results could differ materially from the
expectations expressed in these forward-looking
statements.
2
tower
stream®
TowerStream delivers
high
speed wireless internet
access to businesses
3
Investment
Highlights
Disruptive wireless
broadband pure-play (WiMAX) targeting SME's with
high-speed services at
lower cost and higher bandwidth than the RBOCs
"Cookie-cutter" proven,
recurring revenue model with six markets launched
(NYC, LA, SF, Chicago,
Boston, Rhode Island).
70%+
gross margins, EBITDA+ since 2004, success-based capex model with
rapid
time to market.
Typical
market ramps to EBITDA+ within 12 months. Market expected to
generate
$4.6MN revenues and $2.7MN EBITDA contribution within three
years.
Use of
proceeds includes ramping telesales from 18 today to 200, launch four
more
markets and purchase spectrum – Long-term goal of 30 markets
nationwide.
Comparable transactions
suggest considerable upside, including
Fibertower (acquired for
$1.5BN by First Avenue Networks; $6MN in annual
revenues)
Clearwire
(sold 38% of $12MN run rate services business to Intel for $600MN,
suggesting a $1.6BN valuation).
Experienced management
team
4
TowerStream
Overview and History
TowerStream is the
recognized leader in the fixed wireless and WiMAX
industry and is an
established trusted provider of quality service
TowerStream is a provider
of low-cost broadband access utilizing
wireless technology
History
Company
founded in Rhode Island
Service
launched in Boston and Providence
Service
launched in New York
Service
launched in Chicago
Service
launched in Los Angeles
Successful completion of
Mobile VOIP over Wi-Fi
Service
launched in San Francisco
January
2000
April
2001
June
2003
March
2004
December
2004
March
2005
October
2005
5
Experienced
Management Team
Founder
& Vice President, eFortress; B.S.
Engineering, University of
Massachusetts
Founder,
President &
CEO
Jeff
Thompson
Director
of Engineering, Sockeye Networks;
Director, Navisite; Director, Digital
Broadband;
Engineer, Bell Atlantic
VP
Engineering
& Operations
Arthur
Giftakis
CFO &
Director, Stratos Global Corporation
(SGB.TO); VP, Fleet Investment
Banking, AVP,
Bank of Boston; B.S Hartford University; MBA
University
of Chicago
CFO
George E.
Kilguss, III
Founder,
eFortress; Founder, MCF
Communications; B.A. Northwestern University
Founder
&
Chairman
Phillip
Urso
Experience
Title
Name
6
TowerStream
Solution
TowerStream provides an
affordable, capital efficient, rapid time to market
alternative to
traditional land based solutions
WiMAX technology
advantages:
Not
limited by existing telco infrastructure
Legacy T1
infrastructure has physical limitations
1.5 Mbps
per circuit
Distance-based tariffs
can become cost prohibitive
Service
delivery average in U.S. is 26 business days
Supports
last mile Quality of Service (“QOS”)
DSL is
not a reliable way to deliver real time applications and does not support
QOS
Distance
restrictions limit addressable market
Legacy
copper infrastructure can be unreliable
Bypasses
existing monopoly infrastructures
RBOCs
control last mile and no longer have to offer high speed access at cost to
competitors
Cable
MSOs remain deregulated
7
TowerStream
Wins on Features and Price
TowerStream can
deliver broadband solutions in any increment from 1-100MB
at 20-40% off
RBOC pricing for comparable bandwidth
DS3
(45MB)
$4,500/month
4xT1
(6MB)
$2,500/month
Five
9’s product
not available
from RBOC
Not
available
from RBOC
T1
(1.5MB)
$550-
$650/month
Two
T1’s connected
to different WiMAX
base stations
Industry
First “five
9’s” SLA
Hi-VI
T1+
$600/month
SLA
guarantees 1.5
Mbit/s of duplex
1.5 MB
with
additional traffic
flow set at best effort
3 MB
for
$500/month
Dynamic
bandwidth
allocation
QOS
allows users to
run VOIP
Low cost
IP solution
for Data and/or
Voice
Full
Duplex T1
w/ QOS
$398/month
Full
duplex service
Upgradeable in
minutes using same
equipment
Mid-range
product
not offered or
available from
RBOC
6MB
scalable to
10MB
starting
at
$1,650/month
RBOCs
only
required to offer
tariff rates up to
45MB
Same
cost, twice the
speed and delivered
in days
10MB
to
100MB from
$3,600
to
$5,000/month
8
TowerStream
WiMAX Products (cont.)
High-Speed SME
Broadband Solutions
512K
– 4MB using point to multipoint base
stations
5Mbps
– 25MB using high capacity point to
multipoint base stations
Enterprise Broadband
10MB -
1GB using high capacity point to
point connections
Fiber
equivalent speeds at much lower cost
and quicker deployment
9
Rapid
installation
: can install
in 3-5 business days, compared with
approximately 30 days with land based
solutions
Value
: 25-40%
discount to embedded landline base
Single
solution
: TDM, Voice, Data and
Video over a single
connection
Speed and
scalability
: Can offer
bandwidth from 512k to 1 Gbps
Reliability:
TowerStream delivers the
most reliable last mile
solution in the marketplace today
First
provider to offer “five 9’s” guarantee
Why
Customers Choose Towerstream
Better
– Faster – Cheaper
10
Existing
WiMAX Installations
11
TowerVision
– Effective Customer Sales Tool
Provisioning
Real time
monitoring
Web based
troubleshooting
tools
Full customer care
support tools
12
Addressable
Market Opportunity Today
Source: Gartner
Research and Towerstream estimates.
Businesses
with 5-249
Rank
Metro Area
Employees
1
Los Angeles
176,989
2
New York
127,089
3
Chicago
96,240
4
San Francisco
73,877
5
Washington DC
70,149
6
Miami
67,478
7
Dallas - Ft.
Worth
65,671
8
Philadelphia
59,433
9
Atlanta
56,868
10
Detroit
51,284
11
Houston
51,110
12
Newark
49,424
13
Boston
48,036
14
Denver
42,795
15
Minneapolis
38,215
16
Phoenix
36,405
17
San Diego
33,017
18
Seattle
32,212
19
St. Louis
31,878
20
Baltimore
30,564
Total
1,238,734
IT
services market is expected to grow from
$628.8BN in 2005 to $855.6BN in
2010
worldwide
U.S. T1
market $13BN+; wireless backhaul
market $2BN+
Source: Dunn and
Bradstreet.
13
Nationwide
Expansion Plan
Successfully rolled out
six cities thus far:
New York,
L.A., Chicago, Boston, San Francisco and Providence
Three
phases of business plan will position Towerstream as the market leader in
WiMAX business services
Targeting
1-2 new markets per year during Phase I, with accelerated rollout of organic
growth plan thereafter
New
cities projected EBITDA positive within 12 months
Mature
market generates annual revenues of $6MM and EBITDA of $3.5MM
Phase
I: 10 cities; Phase II: 20 cities; Phase III: 30 cities
Build
world class sales organization to drive revenue
Hire head
of sales
Expand
inside salesforce
Continue
securing the most desirable tower locations
First
mover advantage allows the company to secure optimal locations with long term
leases; better locations, lower network OPEX and CAPEX
14
Cookie-Cutter
Proven Model
Identify
strategic rooftop locations in metropolitan area
Negotiations typically
last 6-9 months
Rent per
rooftop ranges from $2-8K per month
Deploy
gigabit mesh metro backbone including multiple points
of presence
CapEx of
$175K per POP
Total
cost averages $700 thousand
Hire
20-30 salespeople per market to target the Small and
Medium sized
enterprise (SME) market
Telesales
model allows TowerStream to staff up quickly and prospect
for customers
immediately after network deployment
Outsourced installation
crews provide service/support
15
Target
Market Operating Goals
Assume
$700k in fixed cost to enter any given market
Target
market operating goals within 36 months
EBITDA
(1)
positive 12 months from
market entry
1.2
New Midsize
product
$3.4
Existing WiMAX
products
4.6
Total
Revenue
$2.7
58.7%
Total
EBITDA
(1)
Market
revenue 1,000 subs.
Note:
Excludes corporate overhead.
Assume it
takes 250
subscribers to become
EBITDA
(1)
break even
If
TowerStream is able to sign
up 500 customers in any given
market,
EBITDA
(1)
margins
reach 48%. If 1,000
subscribers, EBITDA
(1)
margins approach
60%.
(1) EBITDA as
calculated is based only on direct costs incurred in the markets and do not
include allocations of centralized costs and overhead
.
16
Use of
Proceeds
7.0
New Metro
market developments
$20.0
3.0
$10.0
Working
capital
Total
Existing
market salesforce expansion
17
Summary
Income Statement
(Unaudited)
Nine Months
Ended
Year Ended
09/30/06
09/30/05
12/31/05
12/31/04
Revenues
4,733,028
$
3,995,550
$
5,397,510
$
4,602,109
$
Operating
Expenses
Cost of
revenues
1,242,038
1,080,937
1,509,505
1,026,068
Depreciation
876,792
686,908
933,557
742,636
Customer support
services
411,088
315,219
419,356
378,767
Selling, general and
administrative expenses (includes equity based
compensation expense
of $61,298 in 2006 and $0 in 2005 and $0 in 2004)
2,334,307
2,334,246
3,265,352
2,980,400
TOTAL OPERATING
EXPENSES
4,864,225
4,417,311
6,127,770
5,127,871
OPERATING
INCOME/(LOSS)
(131,196)
(421,761)
(730,260)
(525,762)
Other
Expense/(Income)
Interest expense,
net
169,853
157,221
216,945
214,740
Other income and gain
on retirement of debt
(114,339)
-
-
(40,838)
Other expense
-
-
-
-
TOTAL OTHER
EXPENSE
55,514
157,221
216,945
173,902
NET LOSS
(186,711)
$
(578,982)
$
(947,205)
$
(699,664)
$
Net loss per common
share - basic and diluted
(0.01)
$
(0.03)
$
(0.05)
$
(0.04)
$
Weighted average
common shares outstanding
21,245,717
20,689,729
20,776,874
19,548,257
EBITDA
745,595
265,147
203,297
216,874
EBITDA
margin
15.8%
6.6%
3.8%
4.7%
CAPITAL
EXPENDITURES
(734,560)
(986,075)
(1,369,527)
(995,262)
18
Summary
Balance Sheet
CONDENSED BALANCE
SHEET
As at September 30,
2006 and December 31, 2005
(Unaudited)
September 30,
December 31,
2006
2005
Assets
Cash
405,640
$
203,050
$
Accounts receivable,
net
172,643
173,650
Prepaid & Other
Expenses
19,386
44,354
Total Current
Assets
597,669
421,054
Property and
equipment, net
3,578,282
3,720,514
Other assets and
security deposits
64,185
64,185
TOTAL
ASSETS
4,240,136
$
4,205,752
$
Liabilities
Revolving note,
stockholder
250,000
$
250,000
$
Current maturities of
long-term debt
1,514,543
750,967
Accounts payable and
accrued expenses
414,854
479,476
Deferred
compensation
180,000
125,000
Deferred
revenue
386,127
452,322
Total Current
Liabilitites
2,745,524
2,057,765
Long-term debt, net
of current maturities
310,504
1,071,931
TOTAL
LIABILITIES
3,056,028
3,129,695
TOTAL
STOCKHOLDERS' EQUITY
1,184,108
1,076,056
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY
4,240,136
$
4,205,752
$
Draft
19
Current
Capitalization/Ownership
Ownership
Holder
Description
Shares held
percentage
Phillip Urso
Chairman
4,940,206
23.2%
Jeff Thompson
CEO
2,879,190
13.5%
Howard
Haronian
Director
2,459,198
11.5%
George Kilguss
CFO
1,330,000
6.2%
Urso relatives
10 individuals
2,869,846
13.5%
David Bourque
Individual
1,060,000
5.0%
Raymond
Bourque
Individual
900,000
4.2%
Philip Norton
Individual
708,400
3.3%
Kevin Grills
Individual
607,754
2.9%
Two Cranes
Trust
Trust
540,000
2.5%
All others
45 Individuals
3,010,383
14.1%
Total shares
outstanding
21,304,977
100.0%
Capital
Percentage
Total equity dollars
invested
8,746,178
$
79.4%
Total debt
outstanding
2,273,432
20.6%
Total capitalization
as of 09/30/06
11,019,610
$
100.0%
20
Summary
Opportunity
– With a low cost
IP based network, there is significant
opportunity to change the way
broadband is delivered and to make a
significant return on investment
First
Mover
- We have
developed a unique and hard to replicate business
model by staying away
from the status quo of legacy telecom and being
capital efficient
Experience
- Towerstream has spent
the last 5 years operating and
deploying wireless networks in major urban
markets - It has the know how,
proprietary systems, and management
experience to be successful
Brand
– Towerstream is
the recognized leader in the fixed wireless and
WiMAX industry and is
already a trusted provider of quality service
21
Investment
Highlights
Experienced and proven
operator of broadband wireless
networks (WiMAX)
Six
markets currently deployed
Poised
for rapid expansion in top markets across the country
High
margin recurring revenue model
Cost
efficient all IP network
EBITDA+
Regulatory environment
favorable for WiMAX as alternative
last mile solution
Focus on
intermodal competition (RBOC v. Cable v. Wireless)
Technology proven,
platform highly scalable
Strong
management team with extensive experience
Build
world class sales organization – to capitalize on existing
network
investments
22
Gigabit
Mesh Back-Bone Architecture
Existing
POPs
Planned
network expansion
23
tower
stream®
24