Exhibit 4.2
[FORM
OF WARRANT]
NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISEABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. NEITHER SECURITIES MAY BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL,
IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT
OR
(II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY
THE
SECURITIES.
TELKONET,
INC.
Warrant
To Purchase Common Stock
Warrant
No.: B-__
Number
of
Shares of Common Stock: __________
Date
of
Issuance: September __, 2006 ("Issuance
Date")
TELKONET,
INC., a Utah corporation (the "Company"),
hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged,_____________________, the
registered holder hereof or its permitted assigns (the "Holder"),
is
entitled, subject to the terms set forth below, to purchase from the Company,
at
the Exercise Price (as defined below) then in effect, upon surrender or exercise
of this Warrant to Purchase Common Stock (including any Warrants to Purchase
Common Stock issued in exchange, transfer or replacement hereof, the
"Warrant"),
at
any time or times on or after the date hereof, but not after 11:59 p.m., New
York Time, on the Expiration Date (as defined below), [ ( )] fully paid
nonassessable shares of Common Stock (as defined below) (the
"Warrant
Shares").
Except as otherwise defined herein, capitalized terms in this Warrant shall
have
the meanings set forth in Section 15. This Warrant is one of the Warrants to
purchase Common Stock (the "SPA
Warrants")
contemplated pursuant to that certain Securities Purchase Agreement, dated
as of
October 27, 2005 (the "Subscription
Date"),
by
and among the Company and the investors (the "Buyers")
referred to therein (the "Securities
Purchase Agreement").
1. EXERCISE
OF WARRANT.
(a) Mechanics
of Exercise.
Subject
to the terms and conditions hereof (including, without limitation, the
limitations set forth in Section 1(f)), this Warrant may be exercised by the
Holder on any day on or after the date hereof, in whole or in part, by
(i) delivery of a written notice, in the form attached hereto as
Exhibit
A
(the
"Exercise
Notice"),
of
the Holder's election to exercise this Warrant and (ii) (A) payment to the
Company of an amount equal to the applicable Exercise Price multiplied by the
number of Warrant Shares as to which this Warrant is being exercised (the
"Aggregate
Exercise Price")
in
cash or wire transfer of immediately available funds or (B) by notifying the
Company that this Warrant is being exercised pursuant to a Cashless Exercise
(as
defined in Section 1(d)). The Holder shall not be required to deliver the
original Warrant in order to effect an exercise hereunder. Execution and
delivery of the Exercise Notice with respect to less than all of the Warrant
Shares shall have the same effect as cancellation of the original Warrant and
issuance of a new Warrant evidencing the right to purchase the remaining number
of Warrant Shares. On or before the first Business Day following the date on
which the Company has received each of the Exercise Notice and the Aggregate
Exercise Price (or notice of a Cashless Exercise) (the "Exercise
Delivery Documents"),
the
Company shall transmit by facsimile an acknowledgment of confirmation of receipt
of the Exercise Delivery Documents to the Holder and the Company's transfer
agent (the "Transfer
Agent").
On or
before the third Business Day following the date on which the Company has
received all of the Exercise Delivery Documents (the "Share
Delivery Date"),
the
Company shall (X) provided that the Transfer Agent is participating in The
Depository Trust Company ("DTC")
Fast
Automated Securities Transfer Program, upon the request of the Holder, credit
such aggregate number of shares of Common Stock to which the Holder is entitled
pursuant to such exercise to the Holder's or its designee's balance account
with
DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the
Transfer Agent is not participating in the DTC Fast Automated Securities
Transfer Program, issue and dispatch by overnight courier to the address as
specified in the Exercise Notice, a certificate, registered in the Company's
share register in the name of the Holder or its designee, for the number of
shares of Common Stock to which the Holder is entitled pursuant to such
exercise. Upon delivery of the Exercise Notice and Aggregate Exercise Price
referred to in clause (ii)(A) above or notification to the Company of a Cashless
Exercise referred to in Section 1(d), the Holder shall be deemed for all
corporate purposes to have become the holder of record of the Warrant Shares
with respect to which this Warrant has been exercised, irrespective of the
date
of delivery of the certificates evidencing such Warrant Shares. If this Warrant
is submitted in connection with any exercise pursuant to this Section 1(a)
and
the number of Warrant Shares represented by this Warrant submitted for exercise
is greater than the number of Warrant Shares being acquired upon an exercise,
then the Company shall as soon as practicable and in no event later than three
Business Days after any exercise and at its own expense, issue a new Warrant
(in
accordance with Section 7(d)) representing the right to purchase the number
of
Warrant Shares purchasable immediately prior to such exercise under this
Warrant, less the number of Warrant Shares with respect to which this Warrant
is
exercised. No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock to
be
issued shall be rounded up to the nearest whole number. The Company shall pay
any and all taxes which may be payable with respect to the issuance and delivery
of Warrant Shares upon exercise of this Warrant.
(b) Exercise
Price.
For
purposes of this Warrant, "Exercise
Price"
means
$_____1 ,
subject
to adjustment as provided herein.
1
Insert
an amount equal to the Company Conversion Price (as defined in the Settlement
Agreement).
(c) Company's
Failure to Timely Deliver Securities.
If the
Company shall fail for any reason or for no reason to issue to the Holder within
three (3) Business Days of receipt of the Exercise Delivery Documents, a
certificate for the number of shares of Common Stock to which the Holder is
entitled and register such shares of Common Stock on the Company's share
register or to credit the Holder's balance account with DTC for such number
of
shares of Common Stock to which the Holder is entitled upon the Holder's
exercise of this Warrant, then, in addition to all other remedies available
to
the Holder, the Company shall pay in cash to the Holder on each day after such
third Business
Day that the issuance of such shares of Common Stock is not timely effected
an
amount equal to 1.5% of the product of (A) the sum of the number of shares
of
Common Stock not issued to the Holder on a timely basis and to which the Holder
is entitled and (B) the Closing Sale Price of the shares of Common Stock on
the
trading day immediately preceding the last possible date which the Company
could
have issued such shares of Common Stock to the Holder without violating Section
1(a). In addition to the foregoing, if within three (3) Business Days after
the
Company's receipt of the facsimile copy of a Exercise Notice the Company shall
fail to issue and deliver a certificate to the Holder and register such shares
of Common Stock on the Company's share register or credit the Holder's balance
account with DTC for the number of shares of Common Stock to which the Holder
is
entitled upon such holder's exercise hereunder, and if on or after such Business
Day the Holder purchases (in an open market transaction or otherwise) shares
of
Common Stock to deliver in satisfaction of a sale by the Holder of shares of
Common Stock issuable upon such exercise that the Holder anticipated receiving
from the Company (a "Buy-In"),
then
the Company shall, within three (3) Business Days after the Holder's request
and
in the Holder's discretion, either (i) pay cash to the Holder in an amount
equal
to the Holder's total purchase price (including brokerage commissions, if any)
for the shares of Common Stock so purchased (the "Buy-In
Price"),
at
which point the Company's obligation to deliver such certificate (and to issue
such shares of Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing
such shares of Common Stock and pay cash to the Holder in an amount equal to
the
excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price on the date of
exercise.
(d) Cashless
Exercise.
Notwithstanding
anything contained herein to the contrary, only if a Registration Statement
(as
defined in the Registration Rights Agreement) covering the Warrant Shares that
are the subject of the Exercise Notice (the "Unavailable
Warrant Shares")
is not
available for the resale of such Unavailable Warrant Shares, the Holder may,
in
its sole discretion, exercise this Warrant in whole or in part and, in lieu
of
making the cash payment otherwise contemplated to be made to the Company upon
such exercise in payment of the Aggregate Exercise Price, elect instead to
receive upon such exercise the "Net Number" of shares of Common Stock determined
according to the following formula (a "Cashless
Exercise"):
Net
Number = (A
x
B) - (A x C)
B
For
purposes of the foregoing formula:
A=
the
total number of shares with respect to which this Warrant is then being
exercised.
B=
the
Closing Sale Price of the shares of Common Stock (as reported by Bloomberg)
on
the date immediately preceding the date of the Exercise Notice.
C=
the
Exercise Price then in effect for the applicable Warrant Shares at the time
of
such exercise.
(e) Disputes.
In the
case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the Holder the number of Warrant Shares that are not disputed and resolve
such dispute in accordance with Section 12.
(f) Limitations
on Exercises.
(i) Beneficial
Ownership.
The
Company shall not effect the exercise of this Warrant, and the Holder shall
not
have the right to exercise this Warrant, to the extent that after giving effect
to such exercise, such Person (together with such Person's affiliates) would
beneficially own in excess of 4.99% of the shares of Common Stock outstanding
immediately after giving effect to such exercise. For purposes of the foregoing
sentence, the aggregate number of shares of Common Stock beneficially owned
by
such Person and its affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude shares of Common
Stock which would be issuable upon (i) exercise of the remaining, unexercised
portion of this Warrant beneficially owned by such Person and its affiliates
and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by such Person and its
affiliates (including, without limitation, any convertible notes or convertible
preferred stock or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein. Except as set forth in the
preceding sentence, for purposes of this paragraph, beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange Act
of
1934, as amended. For purposes of this Warrant, in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's most recent
Form 10-K, Form 10-Q, Current Report on Form 8-K or other public filing with
the
Securities and Exchange Commission, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or the
Transfer Agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written or oral request of the Holder,
the
Company shall within one Business Day confirm orally and in writing to the
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
the
SPA Securities and the SPA Warrants, by the Holder and its affiliates since
the
date as of which such number of outstanding shares of Common Stock was reported.
By written notice to the Company, the Holder may increase or decrease the
Maximum Percentage to any other percentage not in excess of 9.99% specified
in
such notice; provided that (i) any such increase will not be effective until
the
sixty-first (61st)
day
after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to the Holder and not to any other holder of SPA
Warrants.
(ii) Principal
Market Regulation.
The
Company shall not be obligated to issue any shares of Common Stock upon exercise
of this Warrant if the issuance of such Common Stock would exceed that number
of
shares of Common Stock which the Company may issue upon exercise of this Warrant
(including, as applicable, any shares of Common Stock issued upon conversion
or
exercise of the SPA Securities) without breaching the Company's obligations
under the rules or regulations of the Principal Market (the "Exchange
Cap"),
except that such limitation shall not apply in the event that the Company (A)
obtains the approval of its stockholders as required by the applicable rules
of
the Principal Market for issuances of shares of Common Stock in excess of such
amount or (B) obtains a written opinion from outside counsel to the Company
that
such approval is not required, which opinion shall be reasonably satisfactory
to
the Required Holders. Until such approval or written opinion is obtained, no
Buyer shall be issued, upon exercise or conversion, as applicable, of any SPA
Warrants or SPA Securities, shares of Common Stock in an amount greater than
the
product of the Exchange Cap multiplied by a fraction, the numerator of which
is
the total number of shares of Common Stock issued to the Buyer pursuant to
the
Securities Purchase Agreement on the Issuance Date and the denominator of which
is the aggregate number of shares of Common Stock issued to the Buyers pursuant
to the Securities Purchase Agreement on the Issuance Date (with respect to
each
Buyer, the "Exchange
Cap Allocation").
In
the event that any Buyer shall sell or otherwise transfer any of the Buyer's
SPA
Warrants, the transferee shall be allocated a pro rata portion of such Buyer's
Exchange Cap Allocation, and the restrictions of the prior sentence shall apply
to such transferee with respect to the portion of the Exchange Cap Allocation
allocated to such transferee. In the event that any holder of SPA Warrants
shall
exercise all of such holder's SPA Warrants into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Exchange Cap
Allocation, then the difference between such holder's Exchange Cap Allocation
and the number of shares of Common Stock actually issued to such holder shall
be
allocated to the respective Exchange Cap Allocations of the remaining holders
of
SPA Warrants on a pro rata basis in proportion to the shares of Common Stock
underlying the SPA Warrants then held by each such holder.
2. ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
The
Exercise Price and the number of Warrant Shares shall be adjusted from time
to
time as follows:
(a) Adjustment
Upon Issuance of Shares of Common Stock.
If and
whenever on or after the Subscription Date the Company issues or sells, or
in
accordance with this Section 2 is deemed to have issued or sold, any shares
of
Common Stock (including the issuance or sale of shares of Common Stock owned
or
held by or for the account of the Company, but excluding shares of Common Stock
deemed to have been issued by the Company in connection with any Excluded
Securities (as defined in the SPA Securities) for a consideration per share
less
than a price (the "Applicable
Price")
equal
to the Exercise Price in effect immediately prior to such issue or sale or
deemed issuance or sale (the foregoing a "Dilutive
Issuance"),
then
immediately after such Dilutive Issuance, the Exercise Price then in effect
shall be reduced to an amount equal to the product
of (A) the Exercise Price in effect immediately prior to such Dilutive Issuance
and (B) the quotient determined by dividing (1) the sum of (I) the product
derived by multiplying the Exercise Price in effect immediately prior to such
Dilutive Issuance and the number of shares of Common Stock Deemed Outstanding
immediately prior to such Dilutive Issuance plus (II) the consideration, if
any,
received by the Company upon such Dilutive Issuance, by (2) the product derived
by multiplying (I) the Exercise Price in effect immediately prior to such
Dilutive Issuance by (II) the number of shares of Common Stock Deemed
Outstanding immediately after such Dilutive Issuance. Upon
each
such adjustment of the Exercise Price hereunder, the number of Warrant Shares
shall be adjusted to the number of shares of Common Stock determined by
multiplying the Exercise Price in effect immediately prior to such adjustment
by
the number of Warrant Shares acquirable upon exercise of this Warrant
immediately prior to such adjustment and dividing the product thereof by the
Exercise Price resulting from such adjustment. For purposes of determining
the
adjusted Exercise Price under this Section 2(a), the following shall be
applicable:
(i) Issuance
of Options.
If the
Company in any manner grants any Options and the lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such Option
or upon conversion, exercise or exchange of any Convertible Securities issuable
upon exercise of any such Option is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the granting or sale of such Option
for
such price per share. For purposes of this Section 2(a)(i), the "lowest price
per share for which one share of Common Stock is issuable upon exercise of
such
Options or upon conversion, exercise or exchange of such Convertible Securities"
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to any one share of Common
Stock upon the granting or sale of the Option, upon exercise of the Option
and
upon conversion, exercise or exchange of any Convertible Security issuable
upon
exercise of such Option. No further adjustment of the Exercise Price or number
of Warrant Shares shall be made upon the actual issuance of such shares of
Common Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities.
(ii) Issuance
of Convertible Securities.
If the
Company in any manner issues or sells any Convertible Securities and the lowest
price per share for which one share of Common Stock is issuable upon the
conversion, exercise or exchange thereof is less than the Applicable Price,
then
such share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance or sale of such
Convertible Securities for such price per share. For the purposes of this
Section 2(a)(ii), the "lowest price per share for which one share of Common
Stock is issuable upon the conversion, exercise or exchange" shall be equal
to
the sum of the lowest amounts of consideration (if any) received or receivable
by the Company with respect to one share of Common Stock upon the issuance
or
sale of the Convertible Security and upon conversion, exercise or exchange
of
such Convertible Security. No further adjustment of the Exercise Price or number
of Warrant Shares shall be made upon the actual issuance of such shares of
Common Stock upon conversion, exercise or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is
made
upon exercise of any Options for which adjustment of this Warrant has been
or is
to be made pursuant to other provisions of this Section 2(a), no further
adjustment of the Exercise Price or number of Warrant Shares shall be made
by
reason of such issue or sale.
(iii) Change
in Option Price or Rate of Conversion.
If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exercise or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into
or exercisable or exchangeable for shares of Common Stock increases or decreases
at any time, the Exercise Price and the number of Warrant Shares in effect
at
the time of such increase or decrease shall be adjusted to the Exercise Price
and the number of Warrant Shares which would have been in effect at such time
had such Options or Convertible Securities provided for such increased or
decreased purchase price, additional consideration or increased or decreased
conversion rate, as the case may be, at the time initially granted, issued
or
sold. For purposes of this Section 2(a)(iii), if the terms of any Option or
Convertible Security that was outstanding as of the date of issuance of this
Warrant are increased or decreased in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the shares
of
Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall
be deemed to have been issued as of the date of such increase or decrease.
No
adjustment pursuant to this Section 2(a) shall be made if such adjustment would
result in an increase of the Exercise Price then in effect or a decrease in
the
number of Warrant Shares.
(iv) Calculation
of Consideration Received.
In case
any Option is issued in connection with the issue or sale of other securities
of
the Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $0.01. If any shares
of Common Stock, Options or Convertible Securities are issued or sold or deemed
to have been issued or sold for cash, the consideration received therefor will
be deemed to be the net amount received by the Company therefor. If any shares
of Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of such consideration received by
the
Company will be the fair value of such consideration, except where such
consideration consists of securities which are listed on a securities exchange
or stock market, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such security on the date of receipt.
If any shares of Common Stock, Options or Convertible Securities are issued
to
the owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity, the amount of consideration therefor will
be deemed to be the fair value of such portion of the net assets and business
of
the non-surviving entity as is attributable to such shares of Common Stock,
Options or Convertible Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined jointly by the
Board of Directors of the Company and the Required Holders. If such parties
are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the "Valuation
Event"),
the
fair value of such consideration will be determined within five (5) Business
Days after the tenth day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required Holders.
The determination of such appraiser shall be final and binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be
borne
by the Company.
(v) Record
Date.
If the
Company takes a record of the holders of shares of Common Stock for the purpose
of entitling them (A) to receive a dividend or other distribution payable
in shares of Common Stock, Options or in Convertible Securities or (B) to
subscribe for or purchase shares of Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue
or
sale of the shares of Common Stock deemed to have been issued or sold upon
the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case
may
be.
(b) Adjustment
upon Subdivision or Combination of Shares of Common Stock.
If the
Company at any time on or after the Subscription Date subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of
its
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased.
If
the Company at any time on or after the Subscription Date combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately decreased.
Any adjustment under this Section 2(b) shall become effective at the close
of
business on the date the subdivision or combination becomes
effective.
(c) Other
Events.
If any
event occurs of the type contemplated by the provisions of this Section 2 but
not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of Warrant Shares
so
as to protect the rights of the Holder; provided that no such adjustment
pursuant to this Section 2(c) will increase the Exercise Price or decrease
the
number of Warrant Shares as otherwise determined pursuant to this Section
2.
3. RIGHTS
UPON DISTRIBUTION OF ASSETS.
If the
Company shall declare or make any dividend or other distribution of its assets
(or rights to acquire its assets) to holders of shares of Common Stock, by
way
of return of capital or otherwise (including, without limitation, any
distribution of cash, stock or other securities, property or options by way
of a
dividend, spin off, reclassification, corporate rearrangement, scheme of
arrangement or other similar transaction) (a "Distribution"),
at
any time after the issuance of this Warrant, then, in each such
case:
(a) any
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of shares of Common Stock
entitled to receive the Distribution shall be reduced, effective as of the
close
of business on such record date, to a price determined by multiplying such
Exercise Price by a fraction of which (i) the numerator shall be the Closing
Bid
Price of the shares of Common Stock on the trading day immediately preceding
such record date minus the value of the Distribution (as determined in good
faith by the Company's Board of Directors) applicable to one share of Common
Stock, and (ii) the denominator shall be the Closing Bid Price of the shares
of
Common Stock on the trading day immediately preceding such record date;
and
(b) the
number of Warrant Shares shall be increased to a number of shares equal to
the
number of shares of Common Stock obtainable immediately prior to the close
of
business on the record date fixed for the determination of holders of shares
of
Common Stock entitled to receive the Distribution multiplied by the reciprocal
of the fraction set forth in the immediately preceding paragraph (a); provided
that in the event that the Distribution is of shares of Common Stock (or common
stock) ("Other
Shares of Common Stock")
of a
company whose common shares are traded on a national securities exchange or
a
national automated quotation system, then the Holder may elect to receive a
warrant to purchase Other Shares of Common Stock in lieu of an increase in
the
number of Warrant Shares, the terms of which shall be identical to those of
this
Warrant, except that such warrant shall be exercisable into the number of shares
of Other Shares of Common Stock that would have been payable to the Holder
pursuant to the Distribution had the Holder exercised this Warrant immediately
prior to such record date and with an aggregate exercise price equal to the
product of the amount by which the exercise price of this Warrant was decreased
with respect to the Distribution pursuant to the terms of the immediately
preceding paragraph (a) and the number of Warrant Shares calculated in
accordance with the first part of this paragraph (b).
4. PURCHASE
RIGHTS; FUNDAMENTAL TRANSACTIONS.
(a) Purchase
Rights.
In
addition to any adjustments pursuant to Section 2 above, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights
to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of shares of Common Stock (the "Purchase
Rights"),
then
the Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable
upon complete exercise of this Warrant (without regard to any limitations on
the
exercise of this Warrant) immediately before the date on which a record is
taken
for the grant, issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of shares of Common Stock
are
to be determined for the grant, issue or sale of such Purchase
Rights.
(b) Fundamental
Transactions.
The
Company shall not enter into or be party to a Fundamental Transaction unless
(i) the Successor Entity assumes in writing all of the obligations of the
Company under this Warrant and the other Transaction Documents in accordance
with the provisions of this Section (4)(b) pursuant to written agreements in
form and substance satisfactory to the Required Holders and approved by the
Required Holders prior to such Fundamental Transaction, including agreements
to
deliver to each holder of Warrants in exchange for such Warrants a security
of
the Successor Entity evidenced by a written instrument substantially similar
in
form and substance to this Warrant, including, without limitation, an adjusted
exercise price equal to the value for the shares of Common Stock reflected
by
the terms of such Fundamental Transaction, and exercisable for a corresponding
number of shares of capital stock equivalent to the shares of Common Stock
acquirable and receivable upon exercise of this Warrant (without regard to
any
limitations on the exercise of this Warrant) prior to such Fundamental
Transaction, and satisfactory to the Required Holders and (ii) the
Successor Entity is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market. Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant referring to the "Company" shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under
this
Warrant with the same effect as if such Successor Entity had been named as
the
Company herein. Upon consummation of the Fundamental Transaction, the Successor
Entity shall deliver to the Holder confirmation that there shall be issued
upon
exercise of this Warrant at
any
time after the consummation of the Fundamental Transaction, in lieu of the
shares of the Common Stock (or
other
securities, cash, assets or other property) purchasable
upon the exercise of the Warrant
prior
to
such Fundamental Transaction,
such
shares of the publicly traded common stock (or its equivalent) of the Successor
Entity, as adjusted in accordance with the provisions of this Warrant.
In
addition to and not in substitution for any other rights hereunder, prior to
the
consummation of any Fundamental Transaction pursuant to which holders of shares
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a "Corporate
Event"),
the
Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon an exercise of this Warrant
at
any
time after the consummation of the Fundamental Transaction but
prior
to the Expiration Date,
in lieu
of the shares of the Common Stock (or
other
securities, cash, assets or other property) purchasable
upon the exercise of the Warrant prior to such Fundamental
Transaction,
such
shares of stock, securities, cash, assets or any other property whatsoever
(including warrants or other purchase or subscription rights) which the Holder
would have been entitled to receive upon the happening of such Fundamental
Transaction had the Warrant been exercised immediately prior to such Fundamental
Transaction. Provision
made pursuant to the preceding sentence shall be in a form and substance
reasonably satisfactory to the Required Holders. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
Corporate Events and shall be applied without regard to any limitations on
the
exercise of this Warrant.
(c) Notwithstanding
the foregoing and the provisions of Section 4(b) above, in the event of a
Fundamental Transaction, if the Holder has not exercised the Warrant in full
prior to the consummation of the Fundamental Transaction, then
the Holder shall have the right to require such Successor Entity to purchase
this Warrant from the Holder by paying to the Holder, simultaneously with the
consummation of the Fundamental Transaction and
in lieu
of the warrant referred to in Section 4(b), cash in an amount equal to the
value
of the remaining unexercised portion of this Warrant on the date of such
consummation, which value shall be determined by use of the Black and Scholes
Option Pricing Model reflecting (i) a risk-free interest rate corresponding
to
the U.S. Treasury rate for a period equal to the remaining term of this Warrant
as of such date of request and (ii) an expected volatility equal to the greater
of 60% and the 100 day volatility obtained from the HVT function on
Bloomberg.
5. NONCIRCUMVENTION.
The
Company hereby covenants and agrees that the Company will not, by amendment
of
its Articles of Incorporation, Bylaws or through any reorganization, transfer
of
assets, consolidation, merger, scheme of arrangement, 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, and will at
all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the Holder. Without limiting
the generality of the foregoing, the Company (i) shall not increase the par
value of any shares of Common Stock receivable upon the exercise of this Warrant
above the Exercise Price then in effect, (ii) shall take all such actions
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants
are outstanding, take all action necessary to reserve and keep available out
of
its authorized and unissued shares of Common Stock, solely for the purpose
of
effecting the exercise of the SPA Warrants, 150% of the number of shares of
Common Stock as shall from time to time be necessary to effect the exercise
of
the SPA Warrants then outstanding (without regard to any limitations on
exercise).
6. WARRANT
HOLDER NOT DEEMED A STOCKHOLDER.
Except
as otherwise specifically provided herein, the Holder, solely in such Person's
capacity as a holder of this Warrant, shall not be entitled to vote or receive
dividends or be deemed the holder of share capital of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the Holder, solely in such Person's capacity as the Holder of this Warrant,
any of the rights of a shareholder of the Company or any right to vote, give
or
withhold consent to any corporate action (whether any reorganization, issue
of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares
which such Person is then entitled to receive upon the due exercise of this
Warrant. In addition, nothing contained in this Warrant shall be construed
as
imposing any liabilities on the Holder to purchase any securities (upon exercise
of this Warrant or otherwise) or as a shareholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company.
Notwithstanding this Section 6, the Company shall provide the Holder with copies
of the same notices and other information given to the shareholders of the
Company generally, contemporaneously with the giving thereof to the
shareholders.
7. REISSUANCE
OF WARRANTS.
(a) Transfer
of Warrant.
If this
Warrant is to be transferred, the Holder shall surrender this Warrant to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of the Holder a new Warrant (in accordance with Section 7(d)), registered as
the
Holder may request, representing the right to purchase the number of Warrant
Shares being transferred by the Holder and, if less then the total number of
Warrant Shares then underlying this Warrant is being transferred, a new Warrant
(in accordance with Section 7(d)) to the Holder representing the right to
purchase the number of Warrant Shares not being transferred.
(b) Lost,
Stolen or Mutilated Warrant.
Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the
loss, theft, destruction or mutilation of this Warrant, and, in the case of
loss, theft or destruction, of any indemnification undertaking by the Holder
to
the Company in customary form and, in the case of mutilation, upon surrender
and
cancellation of this Warrant, the Company shall execute and deliver to the
Holder a new Warrant (in accordance with Section 7(d)) representing the right
to
purchase the Warrant Shares then underlying this Warrant.
(c) Exchangeable
for Multiple Warrants.
This
Warrant is exchangeable, upon the surrender hereof by the Holder at the
principal office of the Company, for a new Warrant or Warrants (in accordance
with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant
will represent the right to purchase such portion of such Warrant Shares as
is
designated by the Holder at the time of such surrender; provided, however,
that
no Warrants for fractional shares of Common Stock shall be given.
(d) Issuance
of New Warrants.
Whenever the Company is required to issue a new Warrant pursuant to the terms
of
this Warrant, such new Warrant (i) shall be of like tenor with this Warrant,
(ii) shall represent, as indicated on the face of such new Warrant, the right
to
purchase the Warrant Shares then underlying this Warrant (or in the case of
a
new Warrant being issued pursuant to Section 7(a) or Section 7(c), the Warrant
Shares designated by the Holder which, when added to the number of shares of
Common Stock underlying the other new Warrants issued in connection with such
issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such
new Warrant which is the same as the Issuance Date, and (iv) shall have the
same
rights and conditions as this Warrant.
8. NOTICES.
Whenever notice is required to be given under this Warrant, unless otherwise
provided herein, such notice shall be given in accordance with Section 9(f)
of
the Securities Purchase Agreement. The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Warrant, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon any adjustment of the Exercise Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least fifteen days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the shares of Common Stock, (B) with respect to any grants,
issuances or sales of any Options, Convertible Securities or rights to purchase
stock, warrants, securities or other property to holders of shares of Common
Stock or (C) for determining rights to vote with respect to any Fundamental
Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder.
9. AMENDMENT
AND WAIVER.
Except
as otherwise provided herein, the provisions of this Warrant may be amended
and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company has obtained the
written consent of the Required Holders; provided that no such action may
increase the exercise price of any SPA Warrant or decrease the number of shares
or class of stock obtainable upon exercise of any SPA Warrant without the
written consent of the Holder. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the SPA Warrants
then
outstanding.
10. GOVERNING
LAW.
This
Warrant shall be governed by and construed and enforced in accor-dance with,
and
all questions concerning the construction, validity, interpretation and
performance of this Warrant shall be governed by, the internal laws of the
State
of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than
the
State of New York.
11. CONSTRUCTION;
HEADINGS.
This
Warrant shall be deemed to be jointly drafted by the Company and all the Buyers
and shall not be construed against any person as the drafter hereof. The
headings of this Warrant are for convenience of reference and shall not form
part of, or affect the interpretation of, this Warrant.
12. DISPUTE
RESOLUTION.
In the
case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two
Business Days of receipt of the Exercise Notice giving rise to such dispute,
as
the case may be, to the Holder. If the Holder and the Company are unable to
agree upon such determination or calculation of the Exercise Price or the
Warrant Shares within three Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within two Business Days submit via facsimile (a) the disputed determination
of
the Exercise Price to an independent, reputable investment bank selected by
the
Company and approved by the Holder or (b) the disputed arithmetic calculation
of
the Warrant Shares to the Company's independent, outside accountant. The Company
shall cause at its expense the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company
and
the Holder of the results no later than ten Business Days from the time it
receives the disputed determinations or calculations. Such investment bank's
or
accountant's determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.
13. REMEDIES,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The
remedies provided in this Warrant shall be cumulative and in addition to all
other remedies available under this Warrant and the other Transaction Documents,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder
right
to pursue actual damages for any failure by the Company to comply with the
terms
of this Warrant. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at
law
for any such breach may be inadequate. The Company therefore agrees that, in
the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
14. TRANSFER. This
Warrant may be offered for sale, sold, transferred or assigned without the
consent of the Company, except as may otherwise be required by Section 2(f)
of
the Securities Purchase Agreement.
15. CERTAIN
DEFINITIONS.
For
purposes of this Warrant, the following terms shall have the following
meanings:
(a) "Bloomberg"
means
Bloomberg Financial Markets.
(b) "Business
Day"
means
any day other than Saturday, Sunday or other day on which commercial banks
in
The City of New York are authorized or required by law to remain
closed.
(c) "Closing
Bid Price"
and
"Closing
Sale Price"
means,
for any security as of any date, the last closing bid price and last closing
trade price, respectively, for such security on the Principal Market, as
reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or last trade price,
respectively, of such security prior to 4:00:00 p.m., New York Time, as reported
by Bloomberg, or, if the Principal Market is not the principal securities
exchange or trading market for such security, the last closing bid price or
last
trade price, respectively, of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid price or
last
trade price, respectively, of such security in the over-the-counter market
on
the electronic bulletin board for such security as reported by Bloomberg, or,
if
no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the "pink
sheets" by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
If
the Closing Bid Price or the Closing Sale Price cannot be calculated for a
security on a particular date on any of the foregoing bases, the Closing Bid
Price or the Closing Sale Price, as the case may be, of such security on such
date shall be the fair market value as mutually determined by the Company and
the Holder. If the Company and the Holder are unable to agree upon the fair
market value of such security, then such dispute shall be resolved pursuant
to
Section 12. All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
the
applicable calculation period.
(d) "Common
Stock"
means
(i) the Company's shares of Common Stock, $0.001 par value per share, and
(ii) any share capital into which such Common Stock shall have been changed
or any share capital resulting from a reclassification of such Common
Stock.
(e) "Common
Stock Deemed Outstanding"
means, at any given time, the number of shares of Common Stock actually
outstanding at such time, plus the number of shares of Common Stock deemed
to be
outstanding pursuant to Sections 2(a)(i) and 2(a)(ii) hereof regardless of
whether the Options or Convertible Securities are actually exercisable at such
time, but excluding any shares of Common Stock owned or held by or for the
account of the Company or issuable upon conversion and exercise, as applicable,
of the SPA Securities and the Warrants.
(f) "Convertible
Securities"
means
any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.
(g) "Eligible
Market"
means
the Principal Market, the American Stock Exchange, The New York Stock Exchange,
Inc., The NASDAQ Global Market, The NASDAQ Global Select Market or The NASDAQ
Capital Market.
(h) "Expiration
Date"
means
the date sixty months after the Issuance Date or, if such date falls on a day
other than a Business Day or on which trading does not take place on the
Principal Market (a "Holiday"),
the
next date that is not a Holiday.
(i) "Fundamental
Transaction"
means
that the Company shall, directly or indirectly, in one or more related
transactions, (i) consolidate or merge with or into (whether or not the Company
is the surviving corporation) another Person, or (ii) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the properties or
assets of the Company to another Person, or (iii) allow another Person to make
a
purchase, tender or exchange offer that is accepted by the holders of more
than
the 50% of either the outstanding shares of Common Stock (not including any
shares of Common Stock held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such purchase,
tender or exchange offer), or (iv) consummate a stock purchase agreement or
other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than the 50% of the outstanding shares of Common
Stock (not including any shares of Common Stock held by the other Person or
other Persons making or party to, or associated or affiliated with the other
Persons making or party to, such stock purchase agreement or other business
combination), or (v) reorganize, recapitalize or reclassify its Common
Stock.
(j) "Options"
means
any rights, warrants or options to subscribe for or purchase shares of Common
Stock or Convertible Securities.
(k) "Parent
Entity"
of a
Person means an entity that, directly or indirectly, controls the applicable
Person and whose common stock or equivalent equity security is quoted or listed
on an Eligible Market, or, if there is more than one such Person or Parent
Entity, the Person or Parent Entity with the largest public market
capitalization as of the date of consummation of the Fundamental
Transaction.
(l) "Person"
means
an individual, a limited liability company, a partnership, a joint venture,
a
corporation, a trust, an unincorporated organization, any other entity and
a
government or any department or agency thereof.
(m) "Principal
Market"
means
the OTC Bulletin Board.
(n) "Registration
Rights Agreement"
means
that certain registration rights agreement by and among the Company and the
Buyers.
(o) "Required
Holders"
means
the holders of the SPA Warrants representing at least a majority of shares
of
Common Stock underlying the SPA Warrants then outstanding.
(p) "SPA
Securities"
means
the Notes issued pursuant to the Securities Purchase Agreement.
(q) "Successor
Entity"
means
the Person (or, if so elected by the Required Holders, the Parent Entity) formed
by, resulting from or surviving any Fundamental Transaction or the Person (or,
if so elected by the Required Holders, the Parent Entity) with which such
Fundamental Transaction shall have been entered into.
[Signature
Page Follows]
IN
WITNESS WHEREOF,
the
Company has caused this Warrant to Purchase Common Stock to be duly executed
as
of the Issuance Date set out above.
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TELKONET,
INC.
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EXHIBIT
A
EXERCISE
NOTICE
TO
BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT
TO PURCHASE COMMON STOCK
TELKONET,
INC.
The
undersigned holder hereby exercises the right to purchase _________________
of
the shares of Common Stock ("Warrant
Shares")
of
TELKONET, INC., a Utah corporation (the "Company"),
evidenced by the attached Warrant to Purchase Common Stock (the "Warrant").
Capitalized terms used herein and not otherwise defined shall have the
respective meanings set forth in the Warrant.
1.
Form
of Exercise Price. The Holder intends that payment of the Exercise Price shall
be made as:
____________ a
"Cash
Exercise"
with
respect to _________________ Warrant Shares; and/or
____________ a
"Cashless
Exercise"
with
respect to _______________ Warrant Shares.
2.
Payment of Exercise Price. In the event that the holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the
Warrant.
3.
Delivery of Warrant Shares. The Company shall deliver to the holder __________
Warrant Shares in accordance with the terms of the Warrant.
Date:
_______________ __, ______
_________________________
Name
of
Registered Holder
By:
_________________________
Name:
Title:
ACKNOWLEDGMENT
The
Company hereby acknowledges this Exercise Notice and hereby directs StockTrans
to issue the above indicated number of shares of Common Stock in accordance
with
the Transfer Agent Instructions dated October __, 2005 from the Company and
acknowledged and agreed to by StockTrans.
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TELKONET,
INC.
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