Exhibit 10.04
SECURITIES PURCHASE AGREEMENT
DATED AS OF
AUGUST ___, 2005
BY AND BETWEEN
ERF WIRELESS, INC.
AS THE ISSUER,
AND
GLOBAL CAPITAL FUNDING GROUP, L.P.
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS ........................................................1
SECTION 1.1 DEFINITIONS ..............................................1
SECTION 1.2 ACCOUNTING TERMS AND DETERMINATIONS ......................9
ARTICLE II. PURCHASE AND SALE OF SECURITIES ..................................10
SECTION 2.1 PURCHASE AND SALE OF CONVERTIBLE NOTE ...................10
SECTION 2.2 PURCHASE PRICE ..........................................10
SECTION 2.3 CLOSING AND MECHANICS OF PAYMENT ........................10
SECTION 2.4 INTENTIONALLY OMITTED ...................................10
ARTICLE III. PAYMENT TERMS OF CONVERTIBLE NOTE ...............................10
SECTION 3.PAYMENT OF PRINCIPAL AND INTEREST; PAYMENT MECHANICS ..10
SECTION 3.PAYMENT OF INTEREST ...................................11
SECTION 3.VOLUNTARY PREPAYMENT ..................................11
SECTION 3.MANDATORY PREPAYMENTS (REDEMPTION) ....................11
SECTION 3.PREPAYMENT PROCEDURES .................................12
SECTION 3.PAYMENT OF ADDITIONAL AMOUNTS .........................13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES ...................................15
SECTION 4.1 ORGANIZATION AND QUALIFICATION ..........................15
SECTION 4.2 AUTHORIZATION AND EXECUTION .............................15
SECTION 4.3 CAPITALIZATION ..........................................16
SECTION 4.4 GOVERNMENTAL AUTHORIZATION ..............................16
SECTION 4.5 ISSUANCE OF SHARES ......................................16
SECTION 4.6 NO CONFLICTS ............................................17
SECTION 4.7 FINANCIAL INFORMATION ...................................17
SECTION 4.8 LITIGATION ..............................................17
SECTION 4.9 COMPLIANCE WITH ERISA AND OTHER BENEFIT PLANS ...........18
SECTION 4.10 ENVIRONMENTAL MATTERS ..................................18
SECTION 4.11 TAXES ..................................................18
SECTION 4.12 INVESTMENTS, JOINT VENTURES ............................19
SECTION 4.13 NOT AN INVESTMENT COMPANY ..............................19
SECTION 4.14 FULL DISCLOSURE ........................................19
SECTION 4.15 NO SOLICITATION; NO INTEGRATION WITH OTHER OFFERINGS ...19
SECTION 4.16 PERMITS ................................................19
SECTION 4.17 LEASES .................................................20
SECTION 4.18 ABSENCE OF ANY UNDISCLOSED LIABILITIES OR CAPITAL CALLS 20
SECTION 4.19 PUBLIC UTILITY HOLDING COMPANY .........................20
SECTION 4.20 INTELLECTUAL PROPERTY RIGHTS ...........................20
SECTION 4.21 INSURANCE ..............................................20
SECTION 4.22 TITLE TO PROPERTIES ....................................20
SECTION 4.23 INTERNAL ACCOUNTING CONTROLS ...........................20
SECTION 4.24 INTENTIONALLY OMITTED ..................................21
i
SECTION 4.25 FOREIGN PRACTICES ......................................21
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER .......................21
SECTION 5.1 PURCHASER ...............................................21
ARTICLE VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES ...................22
SECTION 6.1 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS TO
PURCHASE ................................................22
SECTION 6.2 CONDITIONS TO THE COMPANY'S OBLIGATIONS .................24
ARTICLE VII. AFFIRMATIVE COVENANTS ...........................................25
SECTION 7.1 INFORMATION ...........................................25
SECTION 7.2 PAYMENT OF OBLIGATIONS ................................26
SECTION 7.3 MAINTENANCE OF PROPERTY; INSURANCE ....................26
SECTION 7.4 MAINTENANCE OF EXISTENCE ..............................26
SECTION 7.5 COMPLIANCE WITH LAWS ..................................26
SECTION 7.6 INSPECTION OF PROPERTY, BOOKS AND RECORDS .............26
SECTION 7.7 INVESTMENT COMPANY ACT ................................27
SECTION 7.8 USE OF PROCEEDS .......................................27
SECTION 7.9 COMPLIANCE WITH TERMS AND CONDITIONS OF MATERIAL
CONTRACTS .............................................27
SECTION 7.10 RESERVED SHARES ......................................27
SECTION 7.11 TRANSFER AGENT INSTRUCTIONS ..........................27
SECTION 7.12 MAINTENANCE OF REPORTING STATUS; SUPPLEMENTAL
INFORMATION ..........................................28
SECTION 7.13 FORM D; BLUE SKY LAWS ................................28
ARTICLE VIII. NEGATIVE COVENANTS .............................................28
SECTION 8.1LIMITATIONS ON DEBT OR OTHER LIABILITIES ..............28
SECTION 8.2TRANSACTIONS WITH AFFILIATES ..........................29
SECTION 8.3MERGER OR CONSOLIDATION ...............................29
SECTION 8.4LIMITATION ON ASSET SALES .............................29
SECTION 8.5RESTRICTIONS ON CERTAIN AMENDMENTS ....................29
SECTION 8.6RESTRICTIONS ON ISSUANCES OF SECURITIES ...............30
SECTION 8.7LIMITATION ON STOCK REPURCHASES .......................31
SECTION 8.8LIMITATION ON SALES BY OFFICERS AND EMPLOYEE DIRECTORS 32
ARTICLE IX. RESTRICTIVE LEGENDS ..............................................32
SECTION 9.1 RESTRICTIONS ON TRANSFER ................................32
SECTION 9.2 LEGENDS..................................................32
SECTION 9.3 NOTICE OF PROPOSED TRANSFERS ............................32
ARTICLE X. ADDITIONAL AGREEMENTS AMONG THE PARTIES ...................33
SECTION 10.1LIQUIDATED DAMAGES ..................................33
SECTION 10.2CONVERSION NOTICE ...................................33
SECTION 10.3CONVERSION LIMIT ....................................33
SECTION 10.4REGISTRATION RIGHTS .................................34
ARTICLE XI. ADJUSTMENT OF FIXED PRICE ........................................35
ii
SECTION 11.1REORGANIZATION .....................................35
SECTION 11.2SHARE REORGANIZATION ...............................36
SECTION 11.3RIGHTS OFFERING ....................................36
SECTION 11.4SPECIAL DISTRIBUTION ...............................37
SECTION 11.5CAPITAL REORGANIZATION .............................38
SECTION 11.6PURCHASE PRICE ADJUSTMENTS .........................39
SECTION 11.7ADJUSTMENT RULES ...................................39
SECTION 11.8CERTIFICATE AS TO ADJUSTMENT .......................40
SECTION 11.9NOTICE TO HOLDERS ..................................40
ARTICLE XII. EVENTS OF DEFAULT ...............................................40
SECTION 12.1 EVENTS OF DEFAULT.......................................40
SECTION 12.2 POWERS AND REMEDIES CUMULATIVE .........................43
ARTICLE XIII. MISCELLANEOUS ..................................................43
SECTION 13.1 NOTICES ..............................................43
SECTION 13.2 NO WAIVERS; AMENDMENTS ...............................43
SECTION 13.3 INDEMNIFICATION ......................................44
SECTION 13.4 EXPENSES: DOCUMENTARY TAXES ..........................46
SECTION 13.5 ADVISOR FEES .........................................46
SECTION 13.6 PAYMENT ..............................................46
SECTION 13.7 SUCCESSORS AND ASSIGNS ...............................46
SECTION 13.8 BROKERS ..............................................46
SECTION 13.9 TEXAS LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY
TRIAL; APPOINTMENT OF AGENT ..........................47
SECTION 13.10 ENTIRE AGREEMENT ....................................47
SECTION 13.11 SURVIVAL; SEVERABILITY...............................47
SECTION 13.12 TITLE AND SUBTITLES .................................47
SECTION 13.13 REPORTING ENTITY FOR THE COMMON STOCK................48
SECTION 13.14 PUBLICITY............................................48
iii
LIST OF SCHEDULES
Schedule 4.3 Capitalization
Schedule 4.7 Financial Information
Schedule 4.8 Litigation
Schedule 4.12 Investments, Joint Ventures
Schedule 4.22 Title to Properties
Schedule 7.8 Use of Proceeds
Schedule 8.2 Transactions with Affiliates
iv
LIST OF EXHIBITS
Exhibit A Form of Convertible Note
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Officer's Certificate
SECURITIES PURCHASE AGREEMENT
AGREEMENT, dated as of August ___, 2005, between ERF Wireless, Inc.
(the "Company") and Global Capital Funding Group, L.P. ("Purchaser").
R E C I T A L S:
WHEREAS, the Company desires to sell and issue to Purchaser, and
Purchaser desires to purchase from the Company,$1,285,000 aggregate principal
amount of the Company's Convertible Note due two (2) years from the date of
issuance (the "Convertible Note"), with terms and conditions as set forth in the
form of Convertible Note attached hereto as EXHIBIT A;
WHEREAS, the Convertible Note will be convertible into shares of the
Company's common stock, .001 par value per share (the "Common Stock");
WHEREAS, in order to induce the Purchaser to enter into the
transactions described in this Agreement, the Company desires to issue to the
Purchaser a warrant to purchase shares of Common Stock upon the Closing equal to
300,000 shares of Common Stock (as defined herein) on the terms and conditions
described in the form of the common stock purchase warrant attached hereto as
EXHIBIT F (the "Warrants"), and
WHEREAS, Purchaser will have certain registration rights with respect
to such shares of Common Stock issuable as interest under, and upon conversion
of, the Convertible Note (the "Note Shares") and upon exercise of the Warrants
(the "Warrant Shares," the Note Shares and the Warrant Shares being collectively
referred to herein as the "Conversion Shares") as set forth in the Registration
Rights Agreement in the form attached hereto as EXHIBIT B;
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.1 DEFINITIONS. The following terms, as used herein, have the
following meanings:
"Additional Shares of Common Stock" has the meaning set forth in
Section 11.6.
"Affiliate" means, with respect to any Person (the "Subject Person"),
(i) any other Person (a "Controlling Person") that directly, or indirectly
through one or more intermediaries, Controls the Subject Person or (ii) any
other Person (other than the Subject Person or a Consolidated Covered Subsidiary
of the Subject Person) which is Controlled by or is under common Control with a
Controlling Person.
"Agreement" means this Securities Purchase Agreement, as amended,
supplemented or otherwise modified from time to time in accordance with its
terms.
1
"Asset Sale" has the meaning set forth in Section 8.4.
"Average Daily Closing Price" shall mean for any security as of any
date, the cumulative VWAPs divided by the number of Trading Days during a
Trading Week.
"Average Daily Trading Volume" shall mean for any security as of any
date, the cumulative trading volume as reported by Bloomberg, L.P. ("Bloomberg")
divided by the number of Trading Days during a Trading Week.
"Balance Sheet Date" has the meaning set forth in Section 4.7.
"Benefit Arrangement" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan
and which is maintained or otherwise contributed to by the Company.
"Benefit Plans" has the meaning set forth in Section 4.9(b).
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized or required by law
to close.
"Capital Reorganization" has the meaning set forth in Section 11.5.
"Change in Control" means (i) after the date of this Agreement, any
person or group of persons (within the meaning of Sections 13 and 14 of the
Exchange Act and the rules and regulations of the Commission relating to such
sections) other than Purchaser shall have acquired beneficial ownership (within
the meaning of Rules 13d-3 and 13d-5 promulgated by the Commission pursuant to
the Exchange Act) of 33a% or more of the outstanding shares of Common Stock of
the Company without the prior written consent of Purchaser; (ii) any sale or
other disposition (other than by reason of death or disability) to any Person of
more than 75,000 shares of Common Stock of the Company by any executive officers
and/or employee directors of the Company without the prior written consent of
Purchaser; (iii) individuals constituting the Board of Directors of the Company
on the date hereof (together with any new Directors whose election by such Board
of Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of at least 50.1% of the Directors still in office who
are either Directors as of the date hereof or whose election or nomination for
election was previously so approved), cease for any reason to constitute at
least two-thirds of the Board of Directors of the Company then in office.
"Closing Date" means the date on which all of the conditions set forth
in Sections 6.1 and 6.2 shall have been satisfied and Convertible Note in the
aggregate principal amount of $1,285,000 are issued by the Company to Purchaser.
"Code" means the Internal Revenue Code of 1986, as amended.
2
"Commission" means the Securities and Exchange Commission or any entity
succeeding to all of its material functions.
"Common Stock" has the meaning set forth in the Recitals.
"Company" means ERF Wireless, Inc., a Nevada corporation, and its
successors.
"Company Corporate Documents" means the certificate of incorporation
and bylaws of the Company.
"Consolidated Net Worth" means at any date the total shareholder's
equity which would appear on a consolidated balance sheet of the Company
prepared as of such date.
"Consolidated Covered Subsidiary" means at any date with respect to any
Person or Covered Subsidiary or other entity, the accounts of which would be
consolidated with those of such Person in its consolidated financial statements
if such statements were prepared as of such date.
"Control" (including, with correlative meanings, the terms
"Controlling," "Controlled by" and under "common Control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Conversion Date" shall mean the date of delivery (including delivery
via telecopy) of a Notice of Conversion for all or a portion of a Convertible
Note by the holder thereof to the Company as specified in each Convertible Note.
"Conversion Price" has the meaning set forth in the Convertible Note.
"Conversion Shares" has the meaning set forth in the Recitals.
"Convertible Note" means the Company's 6% Convertible Note
substantially in the form set forth as EXHIBIT A hereto.
"Deadline" has the meaning set forth in Section 10.1.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments
issued by such Person, (iii) all obligations of such Person as lessee which (y)
are capitalized in accordance with GAAP or (z) arise pursuant to sale-leaseback
transactions, (iv) all reimbursement obligations of such Person in respect of
letters of credit or other similar instruments, (v) all Debt of others secured
by a Lien on any asset of such Person,
3
whether or not such Debt is otherwise an obligation of such Person and (vi) all
Debt of others Guaranteed by such Person.
"Default" means any event or condition which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Derivative Securities" has the meaning set forth in Section 8.6.
"Discounted Equity Offerings" has the meaning set forth in Section 8.6.
"Directors" means the individuals then serving on the Board of
Directors or similar such management council of the Company.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the cleanup or other
remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Company and each Covered Subsidiary and all
members of a controlled group of corporation and all trades or businesses
(whether or not incorporated) under common control which, together with the
Company or any Covered Subsidiary, are treated as a single employer under the
Code.
"Event of Default" has the meaning set forth in Article XII hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financing" means a public or private financing consummated (meaning
closing and funding) through the issuance of debt or equity securities (or
securities convertible into or exchangeable for debt or equity securities) of
the Company, other than Permitted Financings.
"Fixed Price(s)" has the meaning set forth in Section 11.1.
"GAAP" has the meaning set forth in Section 1.2.
4
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing (whether by virtue
of partnership arrangements, by agreement to keep well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain a minimum net
worth, financial ratio or similar requirements, or otherwise) any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or (ii) entered into for the purpose of assuring in any other manner the
holder of such Debt of the payment thereof or to protect such holder against
loss in respect thereof (in whole or in part); PROVIDED that the term Guarantee
shall not include endorsements for collection or deposit in the ordinary course
of business. The term Guarantee used as a verb has a corresponding meaning.
"Hazardous Materials" means any hazardous materials, hazardous wastes,
hazardous constituents, hazardous or toxic substances or petroleum products
(including crude oil or any derivative or fraction thereof), defined or
regulated as such in or under any Environmental Laws.
"Intellectual Property" has the meaning set forth in Section 4.20.
"Investment" means any investment in any Person, whether by means of
share purchase, partnership interest, capital contribution, loan, time deposit
or otherwise.
"Lien" means any lien, mechanic's lien, materialmen's lien, lease,
easement, charge, encumbrance, mortgage, conditional sale agreement, title
retention agreement, agreement to sell or convey, option, claim, title
imperfection, encroachment or other survey defect, pledge, restriction, security
interest or other adverse claim, whether arising by contract or under law or
otherwise (including, without limitation, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).
"Listing Applications" has the meaning set forth in Section 4.4.
"Majority Holders" means (i) as of the Closing Date, Purchaser and (ii)
at any time thereafter, the holders of more than 50% in aggregate principal
amount of the Convertible Note outstanding at such time.
"Market Price" shall mean the VWAP of the Common Stock preceding the
date of determination.
"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $50,000.
"Maturity Date" shall mean the date of maturity of the Convertible
Note.
5
"Maximum Number of Shares" shall mean that percentage that the Company
may issue without shareholder approval under the applicable rules of the
National Market or the applicable OTC Bulletin Board or equivalent entity, of
the then issued and outstanding shares of Common Stock of the Company as of the
applicable date of determination, or such greater number of shares as the
stockholders of the Company may have previously approved.
"NASD" has the meaning set forth in Section 7.10.
"Nasdaq Market" means the Nasdaq Stock Market's National Market System.
"National Market" means the Nasdaq Market, the Nasdaq Small Cap Market,
the New York Stock Exchange, Inc. or the American Stock Exchange, Inc..
"Net Cash Proceeds" means, with respect to any transaction, the total
amount of cash proceeds received by the Company or any Covered Subsidiary less
(i) reasonable underwriters' fees, brokerage commissions, reasonable
professional fees and other customary out-of-pocket expenses payable in
connection with such transaction, and (ii) in the case of dispositions of
assets, (A) actual transfer taxes (but not income taxes) payable with respect to
such dispositions, and (B) the amount of Debt, if any, secured by a Lien on the
asset or assets disposed of and required to be, and actually repaid by the
Company or any Covered Subsidiary in connection therewith, and any trade
payables specifically relating to such asset or assets sold by the Company or
any Covered Subsidiary that are not assumed by the purchaser of such asset or
assets.
"Notice of Conversion" means the form to be delivered by a holder of a
Convertible Note upon conversion of all or a portion of the Convertible Note.
"Officer's Certificate" shall mean a certificate executed by the
President, chief executive officer or chief financial officer of the Company in
the form of EXHIBIT C attached hereto.
"OTC Bulletin Board" means the over-the-counter bulletin board operated
by the NASD.
"Other Taxes" has the meaning set forth in Section 3.6(b). "Out of
Pocket Fee" has the meaning set forth in Section 13.4.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permits" means all domestic and foreign licenses, franchises, grants,
authorizations, permits, easements, variances, exemptions, consents,
certificates, orders and approvals necessary to own, lease and operate the
properties of, and to carry on the business of the Company and the Subsidiaries.
6
"Permitted Financings" has the meaning set forth in Section 10.5.
"Person" means an individual, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock Company,
government (or any agency or political subdivision thereof) or other entity of
any kind.
"Plan" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
the Code and either (i) is maintained, or contributed to, by any member of the
ERISA group for employees of any member of the ERISA group or (ii) has at any
time within the preceding five years been maintained, or contributed to, by any
Person which was at such time a member of the ERISA group for employees of the
Person which was at such time a member of the ERISA Group.
"Purchase Price" means the purchase price for the Securities set forth
in Section 2.2 hereof.
"Purchaser" means the entity listed on the signature page hereto and
its successors and assigns, including holders from time to time of the
Convertible Note.
"Recourse Financing" means Debt of the Company or any Covered
Subsidiary which, by its terms, does not bar the lender thereof from action
against the Company or any Covered Subsidiary, as borrower or guarantor, if the
security value of the project or asset pledged in respect thereof falls below
the amount required to repay such Debt.
"Redemption Event" has the meaning set forth in Section 3.4.
"Registrable Securities" has the meaning set forth in Section 10.4(a).
"Registration Statement" has the meaning set forth in Section 10.4(b).
"Registration Rights Agreement" means the agreement between the Company
and Purchaser dated the date hereof substantially in the form set forth in
EXHIBIT B attached hereto.
"Reserved Amount" has the meaning set forth in Section 7.10(a).
"Restricted Payment" means, with respect to any Person, (i) any
dividend or other distribution on any shares of capital stock of such Person
(except dividends payable solely in shares of capital stock of the same or
junior class of such Person and dividends from a wholly-owned direct or indirect
Covered Subsidiary of the Company to its parent corporation), (ii) any payment
on account of the purchase, redemption, retirement or acquisition of (a) any
shares of such Person's capital stock or (b) any option, warrant or other right
to acquire shares of such Person's capital stock or (iii) any loan, or advance
or capital contribution to any Person (a "Stockholder") owning any capital stock
of such Person other than relocation, travel or like
7
advances to officers and employees in the ordinary course of business, and other
than reasonable compensation as determined by the Board of Directors.
"Rights Offering" has the meaning set forth in Section 11.3.
"Sale Event" has the meaning set forth in Section 3.4.
"SEC Reports" has the meaning set forth in Section 7.1(a).
"Securities" means the Convertible Note, the Warrants and, as
applicable, the Conversion Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreement" has the meaning set forth in the recitals.
"Share Reorganization" has the meaning set forth in Section 11.2.
"Special Distribution" has the meaning set forth in Section 11.4.
"Covered Subsidiary" means, with respect to any Person, any corporation
or other entity of which (x) a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the Board of
Directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person or (y) the results of operations, the assets
and the liabilities of which are consolidated with such Person under GAAP.
"Covered Subsidiary Corporate Documents" means the certificates of
incorporation and bylaws of each Covered Subsidiary.
"Taxes" has the meaning set forth in Section 3.6.
"Trading Day" shall mean any Business Day in which the OTC Bulletin
Board, National Market or other automated quotation system or exchange on which
the Common Stock is then traded is open for trading for at least four (4) hours.
"Trading Week" shall mean any calendar week in which the OTC Bulletin
Board, National Market or other automated quotation system or exchange on which
the Common Stock is then traded is open for trading for at least four (4)
Trading Days.
"Transaction Agreements" means this Agreement, the Convertible Note,
the Security Agreement, the Registration Rights Agreement, and the other
agreements contemplated by this Agreement.
8
"Transfer" means any disposition of Securities that would constitute a
sale thereof under the Securities Act.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the present value of all benefits under Plan
exceeds (ii) the fair market value of all Plan assets allocable to such benefits
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"VWAP" shall mean for any security as of any date, the volume weighted
average sales price as reported by Bloomberg on any securities exchange or
trading market where such security is listed or traded or, if the foregoing does
not apply, the volume weighted average sales price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no lowest trading price is reported for such
security by Bloomberg, then the average of the bid prices of any market makers
for such securities as reported in the "Pink Sheets" by the National Quotation
Bureau, Inc. If the volume weighted average sales price cannot be calculated for
such security on such date on any of the foregoing bases, the volume weighted
average sales price of such security on such date shall be the fair market value
as mutually determined by Purchaser and the Company for which the calculation of
the volume weighted average sales price requires, and in the absence of such
mutual determination, as determined by the Board of Directors of the Company in
good faith.
"Warrant" means the Common Stock Purchase Warrant substantially in the
form set forth in EXHIBIT F hereto.
SECTION 1.2 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared, in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a consistent basis (except for changes concurred in by the Company's
independent public accountants) ("GAAP"). All references to "dollars," "Dollars"
or "$" are to United States dollars unless otherwise indicated.
9
ARTICLE II. PURCHASE AND SALE OF SECURITIES SECTION
2.1 PURCHASE AND SALE OF CONVERTIBLE NOTE.
(a) Subject to the terms and conditions set forth herein, the
Company agrees to issue and sell to Purchaser, and Purchaser agrees to purchase
from the Company, the Convertible Note.
(b) Purchaser shall acquire the Convertible Note on the
Closing Date in an aggregate principal amount of One Million Two Hundred
Eighty-five Thousand Dollars ($1,285,000.00).
(c) In connection with the Purchaser's agreement to purchase
the Convertible Note specified in this Article II, the Company shall issue and
deliver to the Purchaser on the Closing Date Warrants to purchase an aggregate
of 300,000 shares of Common Stock.
SECTION 2.2 PURCHASE PRICE. The purchase price for the Convertible Note
and Warrants on the Closing Date shall be 100% of the principal amount thereof.
Therefore, the aggregate consideration payable by Purchaser to the Company for
the Convertible Note on the Closing Date shall be One Million Two Hundred
Eighty-five Thousand Dollars ($1,285,000.00) (the "Purchase Price").
SECTION 2.3 CLOSING AND MECHANICS OF PAYMENT.
(a) The Purchase Price shall be paid on the Closing Date by
wire transfer of immediately available funds on or before 5:00 p.m. (EST).
(b) The Convertible Note and Warrants issued on the Closing
Date shall be dated the date hereof.
SECTION 2.4 INTENTIONALLY OMITTED.
ARTICLE III. PAYMENT TERMS OF CONVERTIBLE NOTE
SECTION 3.1 PAYMENT OF PRINCIPAL AND INTEREST; PAYMENT MECHANICS. The
Company will pay all amounts due on each Convertible Note by the method and at
the address specified for such purpose by Purchaser in writing, without the
presentation or surrender of any Convertible Note or the making of any notation
thereon, except that upon written request of the Company made concurrently with
or reasonably promptly after payment or prepayment in full of this Convertible
Note, the holder shall surrender the Convertible Note for cancellation,
reasonably promptly after any such request, to the Company at its principal
executive office. Prior to any sale or other disposition of any Convertible
Note, the holder thereof will, at its election, either endorse thereon the
amount of principal paid thereon and the last date to which interest has been
paid thereon or surrender the Convertible Note to the Company in exchange for a
new Convertible Note or Convertible Notes. The Company will afford the benefits
of this Section 3.1 to any direct or indirect transferee of the Convertible Note
purchased under this Agreement that has made the same agreement relating to this
Convertible Note as Purchaser has in this Section 3.1; provided that such
transferee is an "accredited investor" under Rule 501 of the Securities Act.
10
SECTION 3.2 PAYMENT OF INTEREST. Interest shall accrue on the
outstanding principal amount of each Convertible Note as of the date of issuance
and shall be payable as specified therein.
SECTION 3.3 VOLUNTARY PREPAYMENT. For so long as no Event of Default
shall have occurred and is continuing, the Company may, at its option, repay, in
whole or in part, the Convertible Note, per the terms set forth in Section 4 of
EXHIBIT A hereto, thereof following at least five (5) Business Days prior
written notice to Purchaser (the expiration of such five (5) Business Day period
being referred to as the "prepayment date"); PROVIDED, HOWEVER, that if such
date is not a Business Day, the prepayment date shall be the next Business Day
thereafter.
SECTION 3.4 MANDATORY PREPAYMENTS (REDEMPTION).
(a) Upon (i) the occurrence of a Change in Control of the
Company, (ii) a transfer of all or substantially all of the assets of the
Company to any Person in a single transaction or series of related transactions,
(iii) a consolidation or merger of the Company with or into another Person in
which the Company is not the surviving entity (other than a merger which is
effected solely to change the jurisdiction of incorporation of the Company and
results in a reclassification, conversion or exchange of outstanding shares of
Common Stock solely into shares of Common Stock) (each of items (i), (ii) and
(iii) being referred to as a "Sale Event"), or (iv) the occurrence of a
Registration Default which continues uncured for a period of twenty (20) Trading
Days, then, in each case, the Company shall, upon request of the Majority
Holders, redeem the Convertible Note and Warrants. The redemption price payable
upon any such redemption shall be the redemption price in SECTION 5 of the
Convertible Note and SECTION 13 of the Warrants, respectively (referred to
herein as the "Formula Price").
(b) At the option of Purchaser, upon the consummation of one
or more Financings, the Company shall use 10% of the Net Cash Proceeds therefrom
(unless such Net Cash Proceeds from each such Financing is less than $250,000)
to redeem the Convertible Note.
(c) Upon the issuance of the Maximum Number of Shares, the
receipt by the Company of Notice of Conversion requiring the issuance of shares
of Common Stock in excess of the Maximum Number of Shares, and the failure
within 40 days of such issuance to obtain shareholder approval to issue
additional shares of Common Stock required to be issued in connection with such
Notices of Conversion (the "Redemption Event"), the Company shall redeem the
outstanding balance of each Convertible Note and Warrant for the Formula Price.
(d) In the event that there is an insufficient number of
authorized, issuable, shares of Common Stock registered under the Registration
Statement filed by the Company to allow Purchaser to fully convert the
Convertible Note and exercise all Warrants held by Purchaser and sell such
shares issued thereon, then the Company shall
11
immediately file an amendment to the then current Registration Statement to
register a sufficient number of such shares to convert said Convertible Note and
Warrants. Upon the failure within twenty (20) Trading Days measured from the
date of filing the Registration Statement to register a sufficient number of
such shares, the Company shall redeem the outstanding balance of each
Convertible Note and Warrant for the Formula Price. In addition, failure of the
Company to register a sufficient number of such shares to fully convert said
Convertible Note and exercise such Warrants shall be a Registration Default
under SECTION 10.4(E) from the date of the Notice of Conversion to the date of
the earlier of (i) the redemption of the outstanding balance of the Convertible
Note and exercise of all such Warrants or (ii) full conversion of the
Convertible Note and exercise of all such Warrants.
SECTION 3.5 PREPAYMENT PROCEDURES.
(a) Any permitted prepayment or redemption of the Convertible Note
pursuant to Sections 3.3 or 3.4 above shall be deemed to be effective and
consummated (for purposes of determining the Formula Price and the time at which
Purchaser shall thereafter not be entitled to deliver a Notice of Conversion for
the Convertible Note) as follows:
(i) A prepayment pursuant to Section 3.3, the "prepayment
date" specified therein;
(ii) A redemption pursuant to Section 3.4(a), the date of
consummation of the applicable Sale Event;
(iii) A redemption pursuant to Section 3.4(b), three (3)
Business Days following the date of consummation of the applicable
Financing (meaning closing and funding); and
(iv) A redemption pursuant to Section 3.4(c), the date
specified in each Convertible Note.
(b) On the Maturity Date and on the effective date of a repayment or
redemption of the Convertible Note as specified in Section 3.5(a) above, the
Company shall deliver by wire transfer of funds the repayment/redemption price
to Purchaser of the Convertible Note subject to redemption. Should Purchaser not
receive payment of any amounts due on redemption of its Convertible Note by
reason of the Company's failure to make payment at the times prescribed above
for any reason, the Company shall pay to the applicable holder on demand (x)
interest on the sums not paid when due at an annual rate equal to the maximum
lawful rate compounded at the end of each thirty (30) days, until the applicable
holder is paid in full and (y) all costs of collection, including, but not
12
limited to, reasonable attorneys' fees and costs, whether or not suit or other
formal proceedings are instituted.
(c) The Company shall select the Convertible Note to be redeemed in any
redemption in which not all of the Convertible Note are to be redeemed so that
the ratio of the Convertible Note of each holder selected for redemption to the
total Convertible Note owned by that holder shall be the same as the ratio of
all such Convertible Note selected for redemption bears to the total of all then
outstanding Convertible Notes. Should any Convertible Note required to be
redeemed under the terms hereof not be redeemed solely by reason of limitations
imposed by law, the applicable Convertible Note shall be redeemed on the
earliest possible dates thereafter to the maximum extent permitted by law.
(d) Any Notice of Conversion delivered by Purchaser (including delivery
via telecopy) to the Company prior to the (x) Maturity Date or (y) effective
date of a voluntary repayment pursuant to Section 3.3 or a mandatory prepayment
pursuant to Section 3.4 as specified in Section 3.5(a) above), shall be honored
by the Company and the conversion of the Convertible Note shall be deemed
effected on the Conversion Date. In addition, between the effective date of a
voluntary prepayment pursuant to Section 3.3 or a mandatory prepayment pursuant
to Section 3.4 as specified in Section 3.5(a) above and the date the Company is
required to deliver the redemption proceeds in full to Purchaser, Purchaser may
deliver a Notice of Conversion to the Company. Such notice will be (x) of no
force or effect if the Company timely pays the redemption proceeds to Purchaser
when due or (y) honored on or as of the date of the Notice of Conversion if the
Company fails to timely pay the redemption proceeds to Purchaser when due.
SECTION 3.6 PAYMENT OF ADDITIONAL AMOUNTS.
(a) Any and all payments by the Company hereunder or under the
Convertible Note to Purchaser and each "qualified assignee" thereof shall be
made free and clear of and without deduction or withholding for any and all
present or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto (all such taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes") unless such Taxes are required by law or the administration thereof
to be deducted or withheld. If the Company shall be required by law or the
administration thereof to deduct or withhold any Taxes from or in respect of any
sum payable under the Convertible Note (i) the holders of the Convertible Note
subject to such Taxes shall have the right, but not the obligation, for a period
of thirty (30) days commencing upon the day it shall have received written
notice from the Company that it is required to withhold Taxes to transfer all or
any portion of the Convertible Note to a qualified assignee to the extent such
transfer can be effected in accordance with the other provisions of this
Agreement and applicable law; (ii) the Company shall make such deductions or
withholdings; (iii) the sum payable shall be increased as may be necessary so
that after making all required deductions or
13
withholdings (including deductions or withholdings applicable to additional
amounts paid under this Section 3.6) Purchaser receives an amount equal to the
sum it would have received if no such deduction or withholding had been made;
and (iv) the Company shall forthwith pay the full amount deducted or withheld to
the relevant taxation or other authority in accordance with applicable. A
"qualified assignee" of a Purchaser is a Person that is organized under the laws
of (i) the United States or (II) any jurisdiction other than the United States
or any political subdivision thereof and that (y) represents and warrants to the
Company that payments of the Company to such assignee under the laws in
existence on the date of this Agreement would not be subject to any Taxes and
(z) from time to time, as and when requested by the Company, executes and
delivers to the Company and the Internal Revenue Service forms, and provides the
Company with any information necessary to establish such assignee's continued
exemption from Taxes under applicable law.
(b) The Company shall forthwith pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies (all such taxes, charges and levies hereinafter referred to as "Other
Taxes") which arise from any payment made under any of the Transaction
Agreements or from the execution, delivery or registration of, or otherwise with
respect to, this Agreement other than Taxes payable solely as a result of the
transfer from Purchaser to a Person of any Security.
(c) The Company shall indemnify Purchaser, or qualified assignee, for
the full amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this
Section 3.6) paid by Purchaser, or qualified assignee, and any liability
(including penalties, interest and expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted. Payment under this indemnification shall be made within 30 days from
the date Purchaser or assignee makes written demand therefor. A certificate as
to the amount of such Taxes or Other Taxes submitted to the Company by Purchaser
or assignee shall be conclusive evidence of the amount due from the Company to
such party.
(d) Within 30 days after the date of any payment of Taxes, the Company
will furnish to Purchaser the original or a certified copy of a receipt
evidencing payment thereof.
(e) Purchaser shall provide to the Company a form W-8, stating that it
is a non-U.S. person, together with any additional tax forms which may be
required under the Code, as amended after the date hereof, to allow interest
payments to be made to it without deduction.
14
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to Purchaser, as of the Closing
Date, the following:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. The Company and each
Covered Subsidiary is a corporation (or other legal entity) duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, with full power and authority to own, lease, use and operate its
properties and to carry on its business as and where now owned, leased, used,
operated and conducted. The Company is qualified to conduct business as a
foreign corporation and is in good standing in every jurisdiction in which the
nature of the business conducted by it makes such qualification necessary,
except where such failure would not have a Material Adverse Effect. A "Material
Adverse Effect" means any Material Adverse Effect on the operations, results of
operations, properties, assets or condition (financial or otherwise) of the
Company or the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby or by the agreements or instruments to be
entered into in connection herewith.
SECTION 4.2 AUTHORIZATION AND EXECUTION.
(a) The Company has all requisite corporate power and
authority to enter into and perform each Transaction Agreement and to consummate
the transactions contemplated hereby and thereby and to issue the Securities in
accordance with the terms hereof and thereof.
(b) The execution, delivery and performance by the Company of
each Transaction Agreement and the issuance by the Company of the Securities
have been duly and validly authorized and no further consent or authorization of
the Company, its Board of Directors or its shareholders is required.
(c) This Agreement has been duly executed and delivered by the
Company.
(d) This Agreement constitutes, and upon execution and
delivery thereof by the Company, each of the Transaction Agreements will
constitute, a valid and binding agreement of the Company, in each case
enforceable against the Company in accordance with its respective terms.
15
SECTION 4.3 CAPITALIZATION. As of the date hereof, the authorized,
issued and outstanding capital stock of the Company is as set forth on SCHEDULE
4.3 hereto and except as set forth on SCHEDULE 4.3 no other shares of capital
stock of the Company will be outstanding as of the Closing Date. All of such
outstanding shares of capital stock are, or upon issuance will be, duly
authorized, validly issued, fully paid and nonassessable. No shares of capital
stock of the Company are subject to preemptive rights or similar rights of the
stockholders of the Company or any liens or encumbrances imposed through the
actions or failure to act of the Company. Other than as set forth on SCHEDULE
4.3 hereto, as of the date hereof, (i) there are no outstanding options,
warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any
character whatsoever relating to, or securities or rights convertible into or
exchangeable for any shares of capital stock of the Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its Subsidiaries, and (ii) there are no agreements or arrangements
under which the Company or any of its Subsidiaries are obligated to register the
sale of any of its or their securities under the Securities Act (except pursuant
to the Registration Rights Agreement) and (iii) there are no anti-dilution or
price adjustment provisions contained in any security issued by the Company (or
in any agreement providing rights to security holders) that will be triggered by
the issuance of the Convertible Note or Conversion Shares. The Company has
furnished to Purchaser true and correct copies of the Company's Corporate
Documents, and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
SECTION 4.4 GOVERNMENTAL AUTHORIZATION. The execution and delivery by
the Company of the Transaction Agreements does not and will not, the issuance
and sale by the Company of the Securities does not and will not, and the
consummation of the transactions contemplated hereby and by the other
Transaction Agreements will not, require any action by or in respect of, or
filing with, any governmental body, agency or governmental official except (a)
such actions or filings that have been undertaken or made prior to the date
hereof and that will be in full force and effect (or as to which all applicable
waiting periods have expired) on and as of the date hereof or which are not
required to be filed on or prior to the Closing Date, (b) such actions or
filings that, if not obtained, would not result in a Material Adverse Effect,
and (c) the filing of a "Form D" as described in Section 7.13 below.
SECTION 4.5 ISSUANCE OF SHARES. Upon conversion in accordance with the
terms of the Convertible Note, the Conversion Shares shall be duly and validly
issued and outstanding, fully paid and nonassessable, free and clear of any
Taxes, Liens and charges with respect to issuance except applicable securities
laws and shall not be subject to preemptive rights or similar rights of any
other stockholders of the Company. Assuming the representations and warranties
of Purchaser herein are true and correct in all material respects, each of the
Securities will have been issued in material compliance with all applicable U.S.
federal and state securities laws. The Company understands and acknowledges
that, in certain circumstances, the issuance of Conversion Shares could dilute
the ownership interests of other stockholders of the Company. The Company
further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Convertible Note is absolute and unconditional regardless of
the dilutive effect that such issuance may have on the ownership interests of
other stockholders of the Company.
16
SECTION 4.6 NO CONFLICTS. The execution and delivery by the Company of
the Transaction Agreements to which it is a party did not and will not, the
issuance and sale by the Company of the Securities did not and will not and the
consummation of the transactions contemplated hereby and by the other
Transaction Agreements will not, contravene or constitute a default under or
violation of (i) any provision of applicable law or regulation, (ii) the Company
Corporate Documents, (iii) any agreement, judgment, injunction, order, decree or
other instrument binding upon the Company or any Covered Subsidiary or any of
their respective assets, or result in the creation or imposition of any Lien on
any asset of the Company or any Covered Subsidiary. The Company and each Covered
Subsidiary is in compliance with and conforms to all statutes, laws, ordinances,
rules, regulations, orders, restrictions and all other legal requirements of any
domestic or foreign government or any instrumentality thereof having
jurisdiction over the conduct of its businesses or the ownership of its
properties, except where such failure would not have a Material Adverse Effect.
SECTION 4.7 FINANCIAL INFORMATION. Since June 30, 2005 (the "Balance
Sheet Date"), except as disclosed in SCHEDULE 4.7, there has been (x) no
material adverse change in the assets or liabilities, or in the business or
condition, financial or otherwise, or in the results of operations or prospects,
of the Company and its Subsidiaries, whether as a result of any legislative or
regulatory change, revocation of any license or rights to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation, act of God, public force or otherwise and (y) no material adverse
change in the assets or liabilities, or in the business or condition, financial
or otherwise, or in the results of operations or prospects, of the Company and
its subsidiaries except in the ordinary course of business; and no fact or
condition exists or is contemplated or threatened which might cause such a
change in the future. The audited consolidated balance sheet of the Company and
its Subsidiaries for the period ending December 31, 2004, and the related
consolidated statements of income, changes in stockholders' equity and changes
in cash flows for the periods then ended, including the footnotes thereto,
except as indicated therein, (i) complied in all material respects with
applicable accounting requirements and (ii) have been prepared in accordance
with GAAP consistently applied throughout the periods indicated. Such financial
statements fairly present the financial condition of the Company and its
Subsidiaries at the dates indicated and the consolidated results of their
operations and cash flows for the periods then ended and, except as indicated
therein, reflect all claims against and all Debts and liabilities of the Company
and its Subsidiaries, fixed or contingent.
SECTION 4.8 LITIGATION. Except as set forth on SCHEDULE 4.8, there is
no action, suit or proceeding pending or, to the knowledge of the Company,
threatened against the Company or any Covered Subsidiary, before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could materially adversely
affect the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Company or which challenges the
validity of any Transaction Agreements.
17
SECTION 4.9 COMPLIANCE WITH ERISA AND OTHER BENEFIT PLANS.
(a) Each member of the ERISA Group has fulfilled its obligations under
the minimum funding standards of ERISA and the Code with respect to each Plan
and is in compliance in all material respects with the presently applicable
provisions of ERISA and the Code with respect to each Plan. No member of the
ERISA Group has (i) sought a waiver of the minimum funding standard under
Section 412 of the Code in respect of any Plan, (ii) failed to make any required
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which as resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Code or (iii) incurred any liability
under Title IV of ERISA other than a liability to the PBGC for premiums under
Section 4007 of ERISA.
(b) The benefit plans not covered under clause (a) above (including
profit sharing, deferred compensation, stock option, employee stock purchase,
bonus, retirement, health or insurance plans, collectively the "Benefit Plans")
relating to the employees of the Company are duly registered where required by,
and are in good standing in all material respects under, all applicable laws.
All required employer and employee contributions and premiums under the Benefit
Plans to the date hereof have been made, the respective fund or funds
established under the Benefit Plans are funded in accordance with applicable
laws, and no past service funding liabilities exist thereunder.
(c) No Benefit Plans have any unfunded liabilities, either on a "going
concern" or "winding up" basis and determined in accordance with all applicable
laws and actuarial practices and using actuarial assumptions and methods that
are reasonable in the circumstances. No event has occurred and no condition
exists with respect to any Benefit Plans that has resulted or could reasonably
be expected to result in any pension plan having its registration revoked or
wound up (in whole or in part) or refused for the purposes of any applicable
laws or being placed under the administration of any relevant pension benefits
regulatory authority or being required to pay any taxes or penalties (in any
material amounts) under any applicable laws.
SECTION 4.10 ENVIRONMENTAL MATTERS. The costs and liabilities
associated with Environmental Laws (including the cost of compliance therewith)
are unlikely to have a Material Adverse Effect on the business, condition
(financial or otherwise), operations, performance, properties or prospects of
the Company or any Covered Subsidiary. Each of the Company and the Subsidiaries
conducts its businesses in compliance in all material respects with all
applicable Environmental Laws.
SECTION 4.11 TAXES. All United States federal, state, county,
municipality, local or foreign income tax returns and all other material tax
returns (including foreign tax returns) which are required to be filed by or on
behalf of the Company and each Covered Subsidiary have been filed and all
material taxes due pursuant to such returns or pursuant to any assessment
received by the Company and each Covered Subsidiary have been paid except those
being disputed in good faith and for which adequate reserves have been
established or would not have a Material Adverse Effect. The charges, accruals
and reserves on the books of the Company and each Covered Subsidiary in respect
of taxes and other governmental charges have been established in accordance with
GAAP.
18
SECTION 4.12 INVESTMENTS, JOINT VENTURES. Other than as set forth in
SCHEDULE 4.12, the Company has no Subsidiaries or other direct or indirect
Investment in any Person, and the Company is not a party to any partnership,
management, shareholders' or joint venture or similar agreement.
SECTION 4.13 NOT AN INVESTMENT COMPANY. Neither the Company nor any
Covered Subsidiary is an "Investment Company" within the meaning of Investment
Company Act of 1940, as amended.
SECTION 4.14 FULL DISCLOSURE. The information heretofore furnished by
the Company to Purchaser for purposes of or in connection with this Agreement or
any transaction contemplated hereby does not, and all such information hereafter
furnished by the Company or any Covered Subsidiary to Purchaser will not (in
each case taken together and on the date as of which such information is
furnished), contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein, in
the light of the circumstances under which they are made, not misleading.
SECTION 4.15 NO SOLICITATION; NO INTEGRATION WITH OTHER OFFERINGS. No
form of general solicitation or general advertising was used by the Company or,
to the best of its actual knowledge, any other Person acting on behalf of the
Company, in connection with the offer and sale of the Securities. Neither the
Company, nor, to its knowledge, any Person acting on behalf of the Company, has,
either directly or indirectly, sold or offered for sale to any Person (other
than Purchaser) any of the Securities or, within the six months prior to the
date hereof, any other similar security of the Company except as contemplated by
this Agreement, and the Company represents that neither itself nor any Person
authorized to act on its behalf (except that the Company makes no representation
as to Purchaser and their Affiliates) will sell or offer for sale any such
security to, or solicit any offers to buy any such security from, or otherwise
approach or negotiate in respect thereof with, any Person or Persons so as
thereby to cause the issuance or sale of any of the Securities to be in
violation of any of the provisions of Section 5 of the Securities Act.
SECTION 4.16 PERMITS. (a) Each of the Company and its Subsidiaries has
all material Permits; (b) all such Permits are in full force and effect, and
each of the Company and its Subsidiaries has fulfilled and performed all
material obligations with respect to such Permits; (c) no event has occurred
which allows, or after notice of lapse of time would allow, revocation or
termination by the issuer thereof or which results in any other material
impairment of the rights of the holder of any such Permit; and (d) the Company
has no reason to believe that any governmental body or agency is considering
limiting, suspending or revoking any such Permit.
19
SECTION 4.17 LEASES. Neither the Company nor any Covered Subsidiary is
a party to any capital lease obligation with a value greater than $500,000 or to
any operating lease with an aggregate annual rental greater than $500,000 during
the life of such lease.
SECTION 4.18 ABSENCE OF ANY UNDISCLOSED LIABILITIES OR CAPITAL CALLS.
There are no liabilities of the Company or any Covered Subsidiary of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, and there is no existing condition, situation or set of circumstances
which would reasonably be expected to result in such a liability, other than (i)
those liabilities provided for in the financial statements delivered pursuant to
Section 4.7 and (ii) other undisclosed liabilities which, individually or in the
aggregate, would not have a Material Adverse Effect.
SECTION 4.19 PUBLIC UTILITY HOLDING COMPANY. Neither the Company nor
any Covered Subsidiary is, or will be upon issuance and sale of the Securities
and the use of the proceeds described herein, subject to regulation under the
Public Utility Holding Company Act of 1935, as amended, the Federal Power Act,
the Interstate Commerce Act or to any federal or state statute or regulation
limiting its ability to issue and perform its obligations under any Transaction
Agreement.
SECTION 4.20 INTELLECTUAL PROPERTY RIGHTS. Each of the Company and its
Subsidiaries owns, or is licensed under, and has the rights to use, all material
patents, trademarks, trade names, copyrights, technology, know-how and processes
(collectively, "Intellectual Property") used in, or necessary for the conduct of
its business; no claims have been asserted by any Person to the use of any such
Intellectual Property or challenging or questioning the validity or
effectiveness of any license or agreement related thereto. To the best of
Company's and its Subsidiaries' knowledge, there is no valid basis for any such
claim and the use of such Intellectual Property by the Company and its
Subsidiaries will not infringe upon the rights of any Person.
SECTION 4.21 INSURANCE. The Company and its Subsidiaries maintain, with
financially sound and reputable insurance companies, insurance in at least such
amounts and against such risks such that any uninsured loss would not have a
Material Adverse Effect. All insurance coverages of the Company and its
Subsidiaries are in full force and effect and there are no past due premiums in
respect of any such insurance.
SECTION 4.22 TITLE TO PROPERTIES. The Company and its Subsidiaries have
good and marketable title to all their respective material properties free and
clear of all Liens except certain newly acquired companies as disclosed on
Schedule 4.22.
SECTION 4.23 INTERNAL ACCOUNTING CONTROLS. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's Board of Directors, to provide reasonable
assurance that (i) transactions are executed in accordance with managements'
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
20
SECTION 4.24 INTENTIONALLY OMITTED.
SECTION 4.25 FOREIGN PRACTICES. Neither the Company nor any of its
Subsidiaries nor, to the Company's knowledge, any employee or agent of the
Company or any Covered Subsidiary has made any payments of funds of the Company
or Covered Subsidiary, or received or retained any funds, in each case in
violation of any law, rule or regulation.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER SECTION
5.1 PURCHASER. Purchaser hereby represents and warrants to the Company
that:
(a) Purchaser is an "accredited investor" within the meaning of Rule
501(a) under the Securities Act and the Securities to be acquired by it pursuant
to this Agreement are being acquired for its own account and, as of the date
hereof, not with a view toward, or for sale in connection with, any distribution
thereof except in compliance with applicable United States federal and state
securities law; provided that the disposition of Purchaser's property shall at
all times be and remain within its control;
(b) the execution, delivery and performance of this Agreement and the
purchase of the Securities pursuant thereto are within Purchaser's corporate or
partnership powers, as applicable, and have been duly and validly authorized by
all requisite corporate or partnership action;
(c) this Agreement has been duly executed and delivered by Purchaser;
(d) the execution and delivery by Purchaser of the Transaction
Agreements to which it is a party does not, and the consummation of the
transactions contemplated hereby and thereby will not, contravene or constitute
a default under or violation of (i) any provision of applicable law or
regulation, or (ii) any agreement, judgment, injunction, order, decree or other
instrument binding upon Purchaser;
(e) Purchaser understands that the Securities have not been registered
under the Securities Act and may not be transferred or sold except as specified
in this Agreement or the remaining Transaction Agreements;
(f) this Agreement constitutes a valid and binding agreement of
Purchaser enforceable in accordance with its terms, subject to (i) applicable
bankruptcy, insolvency or similar laws affecting the enforceability of creditors
rights generally and (ii) equitable principles of general applicability;
(g) Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Securities and Purchaser is capable of bearing the economic
risks of such investment;
21
(h) Purchaser is knowledgeable, sophisticated and experienced in
business and financial matters; Purchaser has previously invested in securities
similar to the Securities and fully understands the limitations on transfer
described herein; Purchaser has been afforded access to information about the
Company and the financial condition, results of operations, property, management
and prospects of the Company sufficient to enable it to evaluate its investment
in the Securities; Purchaser has been afforded the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and the risks of investing in the
Securities; and Purchaser has been afforded the opportunity to obtain such
additional information which the Company possesses or can acquire that is
necessary to verify the accuracy and completeness of the information given to
Purchaser concerning the Company. The foregoing does not in any way relieve the
Company of its representations and other undertakings hereunder, and shall not
limit Purchaser's ability to rely thereon; and
(i) no part of the source of funds used by Purchaser to acquire the
Securities constitutes assets allocated to any separate account maintained by
Purchaser in which any employee benefit plan (or its related trust) has any
interest.
(j) Purchaser agrees that for as long as this Securities Purchase
Agreement is in effect or two years, whichever is longer, that Purchaser of any
Affiliate of Purchaser will not short sell (either in a naked or covered short
transaction) any common stock of Company. Any violation of this requirement
would be considered a condition of default by Purchaser and would automatically
void all restrictive covenants of Company imposed by Purchaser and Company.
ARTICLE VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES
SECTION 6.1 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS TO
PURCHASE. The obligation of Purchaser hereunder to purchase the Convertible Note
at the Closing is subject to the satisfaction, on or before the Closing Date, of
each of the following conditions, provided that these conditions are for
Purchaser's sole benefit and may be waived by Purchaser at any time in its sole
discretion:
(a) The Company shall have duly executed this Agreement, the
Warrant, the Security Agreement and the Registration Rights Agreement and
delivered the same to Purchaser;
(b) The Company shall have delivered to Purchaser duly
executed certificates representing the Convertible Note in accordance with
Section 2.3 hereof;
22
(c) The representations and warranties of the Company
contained in each Transaction Agreement shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at such time (except for representations and warranties that speak as of a
specified date) and the Company shall have performed, satisfied and complied
with all covenants, agreements and conditions required by such Transaction
Agreements to be performed, satisfied or complied with by it at or prior to the
Closing Date. Purchaser shall have received an Officer's Certificate executed by
the chief executive officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by
Purchaser, including but not limited to certificates with respect to the Company
Corporate Documents, resolutions relating to the transactions contemplated
hereby and the incumbencies of certain officers and Directors of the Company.
The form of such certificate is attached hereto as EXHIBIT C;
(d) The Company shall have received all governmental, Board of
Directors, shareholders and third party consents and approvals necessary or
desirable in connection with the issuance and sale of the Securities and the
consummation of the transactions contemplated by the Transaction Agreements;
(e) All applicable waiting periods in respect to the issuance
and sale of the Securities shall have expired without any action having been
taken by any competent authority that could restrain, prevent or impose any
materially adverse conditions thereon or that could seek or threaten any of the
foregoing;
(f) No law or regulation shall have been imposed or enacted
that, in the judgment of Purchaser, could adversely affect the transactions set
forth herein or in the other Transaction Agreements, and no law or regulation
shall have been proposed that in the reasonable judgment of Purchaser could
reasonably have any such effect;
(g) Purchaser shall have received an opinion, dated the
Closing Date, of counsel to the Company, in form and substance satisfactory to
Purchaser;
(h) All fees and expenses due and payable by the Company on or
prior to the Closing Date shall have been paid;
(i) The Company Corporate Documents and the Covered Subsidiary
Corporate Documents, if any, shall be in full force and effect and no term or
condition thereof shall have been amended, waived or otherwise modified without
the prior written consent of Purchaser;
(j) There shall have occurred no material adverse change in
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company or any Covered Subsidiary since January
1, 2004;
23
(k) There shall exist no action, suit, investigation,
litigation or proceeding pending or threatened in any court or before any
arbitrator or governmental instrumentality that challenges the validity of or
purports to affect this Agreement or any other Transaction Agreement, or other
transaction contemplated hereby or thereby or that could reasonably be expected
to have a Material Adverse Effect, or any Material Adverse Effect on the
enforceability of the Transaction Agreements or the Securities or the rights of
the holders of the Securities or Purchaser hereunder;
(l) Purchaser shall have confirmed the receipt of the
Convertible Note to be issued, duly executed by the Company in the denominations
and registered in the name of Purchaser;
(m) Before and after the Closing Date, no Default or Event of
Default shall have occurred and be continuing;
(n) Purchaser shall have received all other opinions,
resolutions, certificates, instruments, agreements or other documents as they
shall reasonably request;
(o) Company shall have delivered to Purchaser the Use of
Proceeds SCHEDULE 7.8.
SECTION 6.2 CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of
the Company to issue and sell the Securities to Purchaser pursuant to this
Agreement are subject to the satisfaction, at or prior to any Closing Date, of
the following conditions:
(a) The representations and warranties of Purchaser contained
herein shall be true and correct in all material respects on the Closing Date
and Purchaser shall have performed and complied in all material respects with
all agreements required by this Agreement to be performed or complied with by
Purchaser at or prior to the Closing Date;
(b) The issue and sale of the Securities by the Company shall
not be prohibited by any applicable law, court order or governmental regulation;
(c) Receipt by the Company of duly executed counterparts of
this Agreement and the Registration Rights Agreement signed by Purchaser;
(d) The Company shall have received payment of Purchase Price,
less the Out of Pocket Fee.
24
ARTICLE VII. AFFIRMATIVE COVENANTS
The Company hereby agrees that, from and after the date hereof for so
long as any Convertible Note remains outstanding and for the benefit of
Purchaser:
SECTION 7.1 INFORMATION. The Company will deliver to each holder of the
Convertible Note:
(a) within two (2) Business Days after any officer of the
Company obtains knowledge of a Default or Event of Default, or that any Person
has given any notice or taken any action with respect to a claimed Default
hereunder, a certificate of the chief financial officer of the Company setting
forth the details thereof and the action which the Company is taking or proposed
to take with respect thereto;
(b) promptly upon the mailing thereof to the shareholders of
the Company generally, copies of all financial statements, reports and proxy
statements so mailed and any other document generally distributed to
shareholders;
(c) at least two (2) Business Days prior to the consummation
of any Financing or other event requiring a repayment of the Convertible Note
under Section 3.4, notice thereof together with a summary of all material terms
thereof and copies of all documents and instruments associated therewith;
(d) notice promptly upon the occurrence of any event by which
the Reserved Amount becomes less than the sum of (i) 1.5 times the maximum
number of Conversion Shares issuable pursuant to the Transaction Agreements; and
(e) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to which the
Company or any Covered Subsidiary is a party in which the amount involved is
$100,000 or more and not covered by insurance or in which injunctive or similar
relief is sought.
25
SECTION 7.2 PAYMENT OF OBLIGATIONS. The Company will, and will cause
each Covered Subsidiary to, pay and discharge, at or before maturity, all their
respective material obligations, including, without limitation, tax liabilities,
except where the same may be contested in good faith by appropriate proceedings
or such failure to pay will not have a Material Adverse Effect and will
maintain, in accordance with GAAP, appropriate reserves for the accrual of any
of the same.
SECTION 7.3 MAINTENANCE OF PROPERTY; INSURANCE. The Company will, and
will cause each Covered Subsidiary to, keep all property useful and necessary in
its business in good working order and condition, ordinary wear and tear
excepted. In addition, the Company and each Covered Subsidiary will maintain
insurance in at least such amounts and against such risks as it has insured
against as of the Closing Date.
SECTION 7.4 MAINTENANCE OF EXISTENCE. The Company will, and will cause
each Covered Subsidiary to, continue to engage in business of the same general
type as now conducted by the Company and such Subsidiaries, and will preserve,
renew and keep in full force and effect its respective corporate existence and
their respective material rights, privileges and franchises necessary or
desirable in the normal conduct of business.
SECTION 7.5 COMPLIANCE WITH LAWS. The Company will, and will cause each
Covered Subsidiary to, comply, in all material respects, with all federal,
state, municipal, local or foreign applicable laws, ordinances, rules,
regulations, municipal by-laws, codes and requirements of governmental
authorities (including, without limitation, Environmental Laws and ERISA and the
rules and regulations thereunder) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected, in the aggregate, to have a Material
Adverse Effect on the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Company or such Covered Subsidiary.
SECTION 7.6 INSPECTION OF PROPERTY, BOOKS AND RECORDS. The Company
will, and will cause each Covered Subsidiary to, keep proper books of record and
account in which full, true and correct entries shall be made of all dealings
and transactions in relation to their respective businesses and activities; and
will permit, during normal business hours, Purchaser' Representative or an
affiliate thereof, as representatives of Purchaser, to visit and inspect any of
their respective properties during normal business hours, upon reasonable prior
notice, to examine and make abstracts from any of their respective books and
records and to discuss their respective affairs, finances and accounts with
their respective executive officers provided that Purchaser executes a
reasonable confidentiality agreement consistent with Regulation FD and
independent public accountants (and by this provision the Company authorizes its
independent public accountants to disclose and discuss with Purchaser the
affairs, finances and accounts of the Company and its Subsidiaries in the
presence of a representative of the Company; provided, however, that such
discussions will not result in any unreasonable expense to the Company, without
Company consent), all at such reasonable times.
26
SECTION 7.7 INVESTMENT COMPANY ACT. The Company will not be or become
an open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
SECTION 7.8 USE OF PROCEEDS. The proceeds from the issuance and sale of
the Convertible Note by the Company shall be used in accordance with SCHEDULE
7.8 attached hereto. None of the proceeds from the issuance and sale of the
Convertible Note by the Company pursuant to this Agreement will be used directly
or indirectly for the purpose, whether immediate, incidental or ultimate, of
purchasing or carrying any "margin stock" within the meaning of Regulation G of
the Board of Governors of the Federal Reserve System.
SECTION 7.9 COMPLIANCE WITH TERMS AND CONDITIONS OF MATERIAL CONTRACTS.
The Company will, and will cause each Covered Subsidiary to, comply, in all
respects, with all terms and conditions of all material contracts to which it is
subject.
SECTION 7.10 RESERVED SHARES.
(a) The Company shall at all times have authorized, and reserved for
the purpose of issuance, a sufficient number of shares of Common Stock to
provide for the full conversion of the outstanding Convertible Note and issuance
of the Conversion Shares (based on the conversion price of the Convertible Note
in effect from time to time) (the "Reserved Amount"). The Company shall not
reduce the Reserved Amount without the prior written consent of Purchaser. With
respect to all Securities which contain an indeterminate number of shares of
Common Stock issuable in connection therewith (such as the Convertible Note),
the Company shall include in the Reserve Amount, no less than two (2) times the
number of shares that is then actually issuable upon conversion or exercise of
such Securities. If at any time the number of shares of Common Stock authorized
and reserved for issuance is below the number of Conversion Shares issued or
issuable upon conversion of the Convertible Note, the Company will promptly take
all corporate action necessary to authorize and reserve a sufficient number of
shares, including, without limitation, either (x) calling a special meeting of
shareholders to authorize additional shares, in the case of an insufficient
number of authorized shares or (y) in lieu thereof, consummating the immediate
repurchase of the Convertible Note contemplated in Sections 3.4(c) hereof.
SECTION 7.11 TRANSFER AGENT INSTRUCTIONS. Upon receipt of a Notice of
Conversion or Notice of Exercise, as applicable, the Company shall immediately
direct the Company's transfer agent to issue certificates, registered in the
name of Purchaser or its nominee, for the Conversion Shares, in such amounts as
specified from time to time by Purchaser to the Company upon proper conversion
of the Convertible Note. Upon conversion of any Convertible Note in accordance
with their terms, the Company will, and will use its best lawful efforts to
cause its transfer agent to, issue one or more certificates representing shares
of Common Stock in such name or names and in such denominations specified by a
Purchaser in a Notice of Conversion. As long as the Registration Statement
contemplated by the Registration Rights Agreement shall remain effective, the
shares of Common Stock issuable upon conversion of any Convertible Note shall be
issued to any transferee of such shares from Purchaser without any restrictive
legend upon appropriate evidence of transfer in compliance with the Securities
Act and the rules and regulations of the Commission, including the prospectus
delivery requirement; provided that for so long as the Registration Statement is
effective, no opinion of counsel will be required to effect any such transfer
unless the transfer agent so requires. In such case the Company will promptly
obtain an Opinion of Counsel to effect such transfer. The Company further
warrants and agrees that no instructions other than these instructions have been
or will be given to its transfer agent. Nothing in this Section 7.11 shall
affect in any way a Purchaser's obligation to comply with all securities laws
applicable to Purchaser upon resale of such shares of Common Stock, including
any prospectus delivery requirements.
27
SECTION 7.12 MAINTENANCE OF REPORTING STATUS; SUPPLEMENTAL INFORMATION.
So long as any of the Securities are outstanding, the Company shall timely file
all reports required to be filed with the Commission pursuant to the Exchange
Act. The Company shall not terminate its status as an issuer required to file
reports under the Exchange Act, even if the Exchange Act or the rules and
regulations thereunder would permit such termination. If at anytime the Company
is not subject to the requirements of Section 13 or 15(d) of the Exchange Act,
the Company will promptly furnish at its expense, upon request, for the benefit
of the holders from time to time of Securities, and prospective purchasers of
Securities, information satisfying the information requirements of Rule 144
under the Securities Act.
SECTION 7.13 FORM D; BLUE SKY LAWS. The Company agrees to file a "Form
D" with respect to the Securities as required under Regulation D of the
Securities Act and to provide a copy thereof to Purchaser promptly after such
filing. The Company shall, on or before the Closing Date, take such action as
the Company shall reasonably determine is necessary to qualify the Securities
for sale to Purchaser at the Closing pursuant to this Agreement under applicable
securities or "blue sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to Purchaser on or prior to the Closing Date.
ARTICLE VIII. NEGATIVE COVENANTS
The Company hereby agrees that after the date hereof for so long as any
Convertible Note remain outstanding and for the benefit of Purchaser:
SECTION 8.1 LIMITATIONS ON DEBT OR OTHER LIABILITIES. Neither the
Company nor any Covered Subsidiary will create, incur, assume or suffer to exist
(at any time after the Closing Date, after giving effect to the application of
the proceeds of the issuance of the Securities) (i) any Debt except (x) Debt
incurred in a Permitted Financing, (y) Debt incurred in connection with
equipment leases to which the Company or its Subsidiaries are a party incurred
in the ordinary course of business; and (z) Debt incurred in connection with
trade accounts payable, imbalances and refunds arising in the ordinary course of
business and (ii) any equity securities (including Derivative Securities) (other
than those securities that are issuable (x) under or pursuant to stock option
plans, warrants or other rights programs that exist as of the date hereof, (z)
in connection with the acquisition (including by merger) of a business or of
assets otherwise permitted under this Agreement), unless the Company complies
with the mandatory prepayment terms of Section 3.4(b) hereof.
28
SECTION 8.2 TRANSACTIONS WITH AFFILIATES. The Company and each Covered
Subsidiary will not, directly or indirectly, pay any funds to or for the account
of, make any investment (whether by acquisition or stock or indebtedness, by
loan, advance, transfer of property, guarantee or other agreement to pay,
purchase or service, directly or indirectly, and Debt, or otherwise) in, lease,
sell, transfer or otherwise dispose of any assets, tangible or intangible, to,
or participate in, or effect any transaction in connection with any joint
enterprise or other joint arrangement with, any Affiliate, except, (1) pursuant
to those agreements specifically identified on SCHEDULE 8.2 attached hereto
(with a copy of such agreements annexed to such SCHEDULE 8.2) and (2) on terms
to the Company or such Covered Subsidiary no less favorable than terms that
could be obtained by the Company or such Covered Subsidiary from a Person that
is not an Affiliate of the Company upon negotiation at arms' length, as
determined in good faith by the Board of Directors of the Company; PROVIDED that
no determination of the Board of Directors shall be required with respect to any
such transactions entered into in the ordinary course of business.
SECTION 8.3 MERGER OR CONSOLIDATION. The Company will not, in a single
transaction or a series of related transactions (i) consolidate with or merge
with or into any other Person, or (ii) permit any other Person to consolidate
with or merge into it, unless the Company shall be the survivor of such merger
or consolidation and (x) immediately before and immediately after given effect
to such transaction (including any indebtedness incurred or anticipated to be
incurred in connection with the transaction), no Default or Event of Default
shall have occurred and be continuing; and (y) the Company has delivered to
Purchaser an Officer's Certificate stating that such consolidation, merger or
transfer complies with this Agreement, and that all conditions precedent in this
Agreement relating to such transaction have been satisfied.
SECTION 8.4 LIMITATION ON ASSET SALES. Neither the Company nor any
Covered Subsidiary will consummate an Asset Sale of material assets of the
Company or any Covered Subsidiary without the prior written consent of
Purchaser, which consent shall not be unreasonably withheld. As used herein,
"Asset Sale" means any sale, lease, transfer or other disposition (or series of
related sales, leases, transfers or dispositions) or sales of capital stock of a
Covered Subsidiary (other than directors' qualifying shares), property or other
assets (each referred to for the purpose of this definition as a "disposition"),
including any disposition by means of a merger, consolidation or similar
transaction other than a disposition of property or assets at fair market value
in the ordinary course of business.
SECTION 8.5 RESTRICTIONS ON CERTAIN AMENDMENTS. Neither the Company nor
any Covered Subsidiary will waive any provision of, amend, or suffer to be
amended, any provision of such entity's existing Debt, any material contract or
agreement, any Company Corporate Document or Covered Subsidiary Corporate
Document if such amendment, in the Company's reasonable judgment, would
materially adversely affect Purchaser or the holders of the Securities without
the prior written consent of Purchaser.
29
SECTION 8.6 RESTRICTIONS ON ISSUANCES OF SECURITIES.
(a) In addition to and not in lieu of the covenant specified in Section
8.1 above:
(1) From the Closing Date and continuing until 180 days
following the date on which the Registration Statement becomes
effective, the Company agrees that it will not issue any of its equity
securities (or securities convertible into or exchangeable or
exercisable for equity securities (the "Derivative Securities")) on
terms that allow a holder thereof to acquire such equity securities (or
Derivative Securities) at a discount to the Market Price of the Common
Stock at the time of issuance or, in the case of Derivative Securities,
at a conversion price based on any formula (other than standard
anti-dilution provisions) based on the Market Price on a date later
than the date of issuance which is below the Market Price on the date
of issuance (each such event, a "Discounted Equity Offering") other
than (i) borrowings under conventional credit facilities existing as of
the date hereof, (ii) stock issued or credit facilities to be
established in connection with acquisitions, (iii) equity securities or
Derivative Securities in connection with employee and director
contracts, stock option and stock purchase plans, (iv) securities
issued under the Convertible Note or Warrants and (v) private placement
of restricted securities, not to exceed Seven Million Five Hundred
Thousand Dollars ($7,500,000.00) in the aggregate from the date hereof,
that cannot be re-sold into the public market (either under the
Securities Act of 1933 or contractually) until after a minimum one (1)
year statutory or contractual hold period. In addition, the Company
shall not issue any equity securities in connection with a strategic
alliance entered into by the Company unless such securities are the
subject of a one year statutory or contractual hold period or, if not
subject to such a hold period, unless the Purchaser has fully converted
all outstanding Convertible Note and exercised all Warrants. As used
herein, "discount" shall include, but not be limited to, (i) any
warrant, right or other security granted or offered in connection with
such issuance which, on the applicable date of grant, is offered with
an exercise or conversion price, as the case may be, at less than the
then current Market Price of the Common Stock or, if such security has
an exercise or conversion price based on any formula (other than
standard anti-dilution provisions) based on the Market Price on a date
later than the date of issuance, then at a price below the Market Price
on such date of exercise or conversion, as the case may be, or (ii) any
commissions, fees or other allowances paid in connection with such
issuances (other than customary underwriter or placement agent
commissions, fees or allowances). For the purposes of determining the
Market Price at which Common Stock is acquired under this Section,
normal underwriting commissions and placement fees (including
underwriters' warrants) shall be excluded. Notwithstanding the
foregoing, the Company may enter into the following types of
transactions (collectively referred to as "Permitted Financings"): (1)
"permanent financing" transactions, which would include any form of
debt or equity financing (other than an underwritten offering), which
is followed by a reduction of the said financing commitment to zero and
payment of all related fees and expenses; (2) "project financing" which
provide for the issuance of recourse debt instruments in connection
with the operation of the Company's business as presently conducted or
as proposed to be conducted; (3) an underwritten offering of Common
Stock, provided that such offering provides for the registration of the
Conversion Shares if the Registration Statement has not been declared
30
effective; (4) continued funding of the Company under the existing
Series A preferred debt conversion program as long as any new debt
conversion funding results in Series A preferred stock that is
restricted from conversion for at least one year; and (5) other
financing transactions specifically consented to in writing by the
Purchaser.
(2) The 180-day restrictive period set forth in paragraph (1)
of this Section 8.6(a) shall be increased by one day for each day a
Registration Default has occurred and not been cured by the Company.
(b) Until such time as all of the Convertible Note have been either
redeemed or converted into Conversion Shares in full, the Company agrees it will
not issue any of its equity securities (or Derivative Securities), unless any
shares of Common Stock issued or issuable in connection therewith are
"restricted securities." As used herein "restricted securities" shall mean
securities which may not be sold prior to twelve (12) months following the date
of issuance of such securities by virtue of contractual restrictions imposed by
the Company or otherwise.
(c) Notwithstanding the foregoing, the restrictions contained in this
Section 8.6 shall not apply to the issuance by the Company of (or the agreement
to issue) Common stock or securities convertible into Common Stock in connection
with (i) the acquisition (including by merger) of a business or of assets
otherwise permitted under this Agreement, or (ii) previously approved Company or
Covered Subsidiary stock option or other compensatory or employee benefit plans.
SECTION 8.7 LIMITATION ON STOCK REPURCHASES. Except as otherwise set
forth in the Convertible Note and the Warrants, the Company shall not, without
the written consent of the Majority Holders, redeem, repurchase or otherwise
acquire (whether for cash or in exchange for property or other securities or
otherwise) any shares of capital stock of the Company or any warrants, rights or
options to purchase or acquire any such shares.
31
SECTION 8.8 LIMITATION ON SALES BY OFFICERS AND EMPLOYEE DIRECTORS. For
a period of 120 days following the date the Registration Statement is declared
effective by the Commission, no executive officer or a employee director of the
Company shall, individually, sell or otherwise dispose of (other than by reason
of death or disability) to any Person an amount of Common stock greater than
that allowed by Rule 144, promulgated under the Securities Act.
ARTICLE IX. RESTRICTIVE LEGENDS
SECTION 9.1 RESTRICTIONS ON TRANSFER. From and after their respective
dates of issuance, none of the Securities shall be transferable except upon the
conditions specified in this Article IX, which conditions are intended to ensure
compliance with the provisions of the Securities Act in respect of the Transfer
of any of such Securities or any interest therein. Purchaser will use its best
efforts to cause any proposed transferee of any Securities held by it to agree
to take and hold such Securities subject to the provisions and upon the
conditions specified in this Article IX.
SECTION 9.2 LEGENDS. The Conversion Shares, upon resale by the
Purchaser pursuant to the Registration Statement, shall be freely tradeable and
unrestricted.
SECTION 9.3 NOTICE OF PROPOSED TRANSFERS. Prior to any proposed
Transfer of the Securities (other than a Transfer (i) registered or exempt from
registration under the Securities Act, (ii) to an affiliate of a Purchaser which
is an "accredited investor" within the meaning of Rule 501(a) under the
Securities Act, provided that any such transferee shall agree to be bound by the
terms of this Agreement and the Registration Rights Agreement, or (iii) to be
made in reliance on Rule 144 under the Securities Act), the holder thereof shall
give written notice to the Company of such holder's intention to effect such
Transfer, setting forth the manner and circumstances of the proposed Transfer,
which shall be accompanied by (a) an opinion of counsel reasonably acceptable to
the Company, confirming that such transfer does not give rise to a violation of
the Securities Act, (B) representation letters in form and substance reasonably
satisfactory to the Company to ensure compliance with the provisions of the
Securities Act and (C) letters in form and substance reasonably satisfactory to
the Company from each such transferee stating such transferee's agreement to be
bound by the terms of this Agreement and the Registration Rights Agreement. Such
proposed Transfer may be effected only if the Company shall have received such
notice of transfer, opinion of counsel, representation letters and other letters
referred to in the immediately preceding sentence, whereupon the holder of such
Securities shall be entitled to Transfer such Securities in accordance with the
terms of the notice delivered by the holder to the Company.
32
ARTICLE X. ADDITIONAL AGREEMENTS AMONG THE PARTIES SECTION
10.1 LIQUIDATED DAMAGES.
(a) The Company shall cause its transfer agent to, issue and
deliver shares of Common Stock consistent with Section 7.11 hereof within four
(4) Trading Days of delivery of a Notice of Conversion, as applicable (the
"Deadline") to Purchaser (or any party receiving Securities by transfer from
Purchaser) at the address of Purchaser set forth in the Notice of Conversion.
The Company understands that a delay in the issuance of such certificates after
the Deadline could result in economic loss to Purchaser.
(b) Without in any way limiting Purchaser's right to pursue
other remedies, including actual damages and/or equitable relief, the Company
agrees that if delivery of the Conversion Shares is more than one (1) Business
Day after the Deadline (other than a failure due to the circumstances described
in Section 4.3 of the Convertible Note, which failure shall be governed by such
Section) the Company shall pay to Purchaser, as liquidated damages and not as a
penalty, $500 for each $100,000 of Convertible Note then outstanding per day in
cash, for each of the first ten (10) days beyond the Deadline, and $1,000 for
each $100,000 of Convertible Note then outstanding per day in cash for each day
thereafter that the Company fails to deliver such Common Stock. Such cash amount
shall be paid to Purchaser by the last day of the calendar week following the
week in which it has accrued or, at the option of Purchaser (by written notice
to the Company by the first day of the week following the week in which it has
accrued), shall be added to the principal amount of the Convertible Note (if
then outstanding) payable to Purchaser, in which event interest shall accrue
thereon in accordance with the terms of the Convertible Note and such additional
principal amount shall be convertible into Common Stock in accordance with the
terms of the Convertible Note.
SECTION 10.2 CONVERSION NOTICE. The Company agrees that, in addition to
any other remedies which may be available to Purchaser, including, but not
limited to, the remedies available under Section 10.1, in the event the Company
fails for any reason (other than as a result of actions taken by a Purchaser in
breach of this Agreement) to effect delivery to a Purchaser of certificates with
or without restrictive legends as contemplated by Article IX representing the
shares of Common Stock on or prior to the Deadline after conversion of any
Convertible Note, Purchaser will be entitled, if prior to the delivery of such
certificates, to revoke the Notice of Conversion by delivering a notice to such
effect to the Company whereupon the Company and Purchaser shall each be restored
to their respective positions immediately prior to delivery of such Notice of
Conversion.
SECTION 10.3 CONVERSION LIMIT. Notwithstanding the conversion rights
under the Convertible Note, unless Purchaser delivers a waiver in accordance
with the immediately following sentence, in no event shall Purchaser be entitled
to convert any portion of the Convertible Note, in excess of that portion of the
Convertible Note, as applicable, of which the sum of (i) the number of shares of
Common Stock beneficially owned by Purchaser and its Affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Convertible Note or other Derivative
Securities convertible into or exchangeable for shares of Common Stock which
contain a limitation similar to that set forth in this Section 10.3), and (ii)
the number of shares of Common Stock issuable upon the conversion of the portion
of the Convertible Note with respect to which this determination is being made,
would result in beneficial ownership by Purchaser and its Affiliates of more
than 4.99% of the outstanding shares of Common Stock. For purposes of Section
10.3(i) beneficial ownership shall be determined in accordance with Rule 13d-3
of the Exchange Act and Regulations 13 D-G thereunder, except as otherwise
provided in this Section 10.3. The foregoing limitation shall not apply and
shall be of no further force or effect (i) immediately preceding and upon the
occurrence of any voluntary or mandatory redemption or repayment transaction
described herein or in the Convertible Note, (ii) immediately preceding and upon
any Sale Event, (iii) on the Maturity Date or (iv) following the occurrence of
any Event of Default which is not cured for a period of ten (10) calendar days.
33
SECTION 10.4 REGISTRATION RIGHTS.
(a) The Company shall grant Purchaser registration rights
covering the Conversion Shares (the "Registrable Securities") on the terms set
forth in the Registration Rights Agreement and herein.
(b) The Company shall prepare and file on or before the 90th
day following the Closing Date (the "Filing Date"), a registration statement or
amendment thereto (the "Registration Statement") covering the resale of the
Registrable Securities with the Commission. In the event the Company fails to
file the Registration Statement by the Filing Date for any reason other than
Purchaser's failure to provide information requested by the Company for the
completion and filing of the Registration Statement, the Company shall pay to
Purchaser as liquidated damages (and not as a penalty) one percent (1%) of the
then outstanding principal amount of Convertible Note for each 30-day period,
prorated, until the Registration Statement is filed with the Commission. The
Company shall use its best efforts to cause the Registration Statement to be
declared effective by the Commission or the earlier of (i) 135 days following
the Closing Date, (ii) twenty (20) days following the receipt of a "No Review"
Letter from the Commission or (iii) the first Business Day following the day the
Commission determines the Registration Statement eligible to be declared
effective (the "Required Effectiveness Date"). The Company shall pay all
expenses of registration (other than underwriting fees and discounts, if any, in
respect of Registrable Securities offered and sold under the registration
statement by Purchaser). The Company agrees to file an initial written response
to the Commission within twenty (20) business days of receipt of any comments by
the Commission relating to the Registration Statement. The Company shall provide
to the Purchaser a status letter of the Commission review process addressing the
estimated completion timing of the SEC review, but shall not contain
confidential non-public information which has not been previously disclosed
under Regulation FD or any other applicable regulation.
(c) If the Registration Statement is not declared effective by
the Commission by the Required Effectiveness Date, the Company shall pay to
Purchaser, as liquidated damages (and not as a penalty), an amount equal to 2%
of the outstanding principal amount of the Convertible Note, prorated, for each
30 day period the Registration Statement is not declared effective by the
Commission. In the event the Company fails to obtain a valid registration
statement by the 360th day following the Closing Date, the Company will redeem
the Convertible Note and the Warrants as set forth in Section 5 of the
Convertible Note and Section 13 of the Warrants, respectively. Additionally, the
Company will grant to Purchaser certain piggyback registration rights in the
event the Company proposes to effect a registered offering of Common Stock or
warrants or both prior to the filing of the Registration Statement referenced
above.
34
(d) Any such liquidated damages shall be paid in cash by the
Company to Purchaser by wire transfer in immediately available funds on the last
day of each calendar week following the event requiring its payment.
(e) If, following the declaration of effectiveness of the
Registration Statement, such registration statement (or any prospectus or
supplemental prospectus contained therein) shall cease to be effective for any
reason (including but not limited to the occurrence of any event that results in
any prospectus or supplemental prospectus containing an untrue statement of a
material fact or omitting a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading), the Company fails to file required
amendments to the Registration Statement in order to allow the Purchaser to
resell the Conversion Shares pursuant to the Registration Statement as
unrestricted, unlegended, freely tradeable shares of Common Stock, or if for any
reason there are insufficient shares of such shares of Common Stock registered
under the then current Registration Statement to effect full conversion of the
Convertible Note or exercise of the Warrants (a "Registration Default"), the
Company shall immediately take all necessary steps to cause the Registration
Statement to be amended or supplemented so as to cure such Registration Default.
Failure to cure a Registration Default within ten (10) Business Days shall
result in the Company paying to Purchaser liquidated damages at the rate of one
percent (1%) of the outstanding principal amount of Convertible Note for each 30
day period (prorated), the Registration Default remains uncured.
ARTICLE XI. ADJUSTMENT OF FIXED PRICE
SECTION 11.1 REORGANIZATION. The Conversion Price (the "Fixed Price")
shall be adjusted, as applicable, as hereafter provided.
35
SECTION 11.2 SHARE REORGANIZATION. If and whenever the Company shall:
(i) subdivide the outstanding shares of Common Stock into a
greater number of shares;
(ii) consolidate the outstanding shares of Common Stock into a
smaller number of shares;
(iii) issue Common Stock or securities convertible into or
exchangeable for shares of Common Stock as a stock dividend to all or
substantially all the holders of Common Stock; or
(iv) make a distribution on the outstanding Common Stock to
all or substantially all the holders of Common Stock payable in Common
Stock or securities convertible into or exchangeable for Common Stock;
any of such events being herein called a "Share Reorganization," then
in each such case the applicable Fixed Price shall be adjusted,
effective immediately after the record date at which the holders of
Common Stock are determined for the purposes of the Share
Reorganization or, if no record date is fixed, the effective date of
the Share Reorganization, by multiplying the applicable Fixed Price in
effect on such record or effective date, as the case may be, by a
fraction of which:
(i) the numerator shall be the number of shares of
Common Stock outstanding on such record or effective date
(without giving effect to the transaction); and
(ii) the denominator shall be the number of shares of
Common Stock outstanding after giving effect to such Share
Reorganization, including, in the case of a distribution of
securities convertible into or exchangeable for shares of
Common Stock, the number of shares of Common Stock that would
have been outstanding if such securities had been converted
into or exchanged for Common Stock on such record or effective
date.
SECTION 11.3 RIGHTS OFFERING. If and whenever the Company shall issue
to all or substantially all the holders of Common Stock, rights, options or
warrants under which such holders are entitled, during a period expiring not
more than 45 days after the record date of such issue, to subscribe for or
purchase Common Stock (or Derivative Securities), at a price per share (or, in
the case of securities convertible into or exchangeable for Common Stock, at an
exchange or conversion price per share at the date of issue of such securities)
of less than 95% of the Market Price of the Common Stock on such record date
(any such event being herein called a "Rights Offering"), then in each such case
the applicable Fixed Price shall be adjusted, effective immediately after the
record date at which holders of Common Stock are determined for the purposes of
the Rights Offering, by multiplying the applicable Fixed Price in effect on such
record date by a fraction of which:
36
(i) the numerator shall be the sum of:
(i) the number of shares of Common Stock outstanding on
such record date;
(ii) a number obtained by dividing:
(A) either,
(x) the product of the total number of shares of
Common Stock so offered for subscription or purchase and the
price at which such shares are so offered, or
(y) the product of the maximum number of shares of
Common Stock into or for which the convertible or exchangeable
securities so offered for subscription or
(x) purchase may be converted or exchanged and the
conversion or exchange price of such securities, or, as the
case may be, by
(B) the Market Price of the Common Stock on such record date;
and (ii)the denominator shall be the sum of:
(i) the number of shares of Common Stock outstanding
on such record date; and
(ii) the number of shares of Common Stock so offered
for subscription or purchase (or, in the case of Derivative
Securities, the maximum number of shares of Common Stock for
or into which the securities so offered for subscription or
purchase may be converted or exchanged).
To the extent that such rights, options or warrants are not exercised prior to
the expiry time thereof, the applicable Fixed Price shall be readjusted
effective immediately after such expiry time to the applicable Fixed Price which
would then have been in effect upon the number of shares of Common Stock (or
Derivative Securities) actually delivered upon the exercise of such rights,
options or warrants.
SECTION 11.4 SPECIAL DISTRIBUTION. If and whenever the Company
shall issue or distribute to all or substantially all the holders of Common
Stock:
(i) shares of the Company of any class, other than
Common Stock;
(ii) rights, options or warrants; or
(iii) any other assets (excluding cash dividends and
equivalent dividends in shares paid in lieu of cash dividends
in the ordinary course);
37
and if such issuance or distribution does not constitute a Share Reorganization
or a Rights Offering (any such event being herein called a "Special
Distribution"), then in each such case the applicable Fixed Price shall be
adjusted, effective immediately after the record date at which the holders of
Common Stock are determined for purposes of the Special Distribution, by
multiplying the applicable Fixed Price in effect on such record date by a
fraction of which:
(i) the numerator shall be the difference between:
(A) the product of the number of shares of Common
Stock outstanding on such record date and the Market Price of
the Common Stock on such date; and
(B) the fair market value, as determined by the
Directors (whose determination shall be conclusive), to the
holders of Common Stock of the shares, rights, options,
warrants, evidences of indebtedness or other assets issued or
distributed in the Special Distribution (net of any
consideration paid therefor by the holders of Common Stock),
and
(ii) the denominator shall be the product of the number of
shares of Common Stock outstanding on such record date and the Market
Price of the Common Stock on such date.
SECTION 11.5 CAPITAL REORGANIZATION. If and whenever there shall occur:
(i) a reclassification or redesignation of the shares
of Common Stock or any change of the shares of Common Stock
into other shares, other than in a Share Reorganization;
(ii) a consolidation, merger or amalgamation of the
Company with, or into another body corporate; or
(iii) the transfer of all or substantially all of the
assets of the Company to another body corporate;
(any such event being herein called a "Capital Reorganization"), then in each
such case the holder who exercises the right to convert Convertible Note after
the effective date of such Capital Reorganization shall be entitled to receive
and shall accept, upon the exercise of such right, in lieu of the number of
shares of Common Stock to which such holder was theretofore entitled upon the
exercise of the conversion privilege, the aggregate number of shares or other
securities or property of the Company or of the body corporate resulting from
such Capital Reorganization that such holder would have been entitled to receive
as a result of such Capital Reorganization if, on the effective date thereof,
such holders had been the holder of the number of shares of Common Stock to
which such holder was theretofore entitled upon conversion; provided, however,
that no such Capital Reorganization shall be consummated in effect unless all
necessary steps shall have been taken so that such holders shall thereafter be
entitled to receive such number of shares or other securities of the Company or
of the body corporate resulting from such Capital Reorganization, subject to
adjustment thereafter in accordance with provisions the same, as nearly as may
be possible, as those contained above.
38
SECTION 11.6 PURCHASE PRICE ADJUSTMENTS. Other than the financing
permitted pursuant to Section 8.6 herein, in case at any time and from time to
time the Company shall issue any shares of Common Stock or Derivative Securities
convertible or exercisable for shares of Common Stock (the number of shares so
issued, or issuable upon conversion or exercise of such Derivative Securities,
as applicable, being referred to as "Additional Shares of Common Stock") for
consideration less than the then Market Price at the date of issuance of such
shares of Common Stock or such Derivative Securities, in each such case the
Conversion Price shall, concurrently with such issuance, be adjusted by
multiplying the Conversion Price immediately prior to such event by a fraction:
(i) the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such Additional Shares of
Common Stock plus the number of shares of Common Stock that the aggregate
consideration received by the Company for the total number of such Additional
Shares of Common Stock so issued would purchase at the Market Price and (ii) the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of Additional Shares of Common Stock plus the
number of such Additional Shares of Common Stock so issued or sold.
SECTION 11.7 ADJUSTMENT RULES. The following rules and procedures shall
be applicable to adjustments made in this Article XI:
(a) no adjustment in the applicable Fixed Price shall be
required unless such adjustment would result in a change of at least 1% in the
applicable Fixed Price then in effect, provided, however, that any adjustments
which, but for the provisions of this clause would otherwise have been required
to be made, shall be carried forward and taken into account in any subsequent
adjustment;
(b) if any event occurs of the type contemplated by the
adjustment provisions of this Article XI but not expressly provided for by such
provisions, the Company will give notice of such event as provided herein, and
the Company's board of directors will make an appropriate adjustment in the
Fixed Price so that the rights of the holders of the applicable Security shall
not be diminished by such event; and
(c) if a dispute shall at any time arise with respect to any
adjustment of the applicable Fixed Price, such dispute shall be conclusively
determined by the auditors of the Company or, if they are unable or unwilling to
act, by a firm of independent chartered accountants selected by the Directors
and any such determination shall be binding upon the Company and Purchaser.
39
SECTION 11.8 CERTIFICATE AS TO ADJUSTMENT. The Company shall from time
to time promptly after the occurrence of any event which requires an adjustment
in the applicable Fixed Price deliver to Purchaser a certificate specifying the
nature of the event requiring the adjustment, the amount of the adjustment
necessitated thereby, the applicable Fixed Price after giving effect to such
adjustment and setting forth, in reasonable detail, the method of calculation
and the facts upon which such calculation is based.
SECTION 11.9 NOTICE TO HOLDERS. If the Company shall fix a record date
for:
(a) any Share Reorganization (other than the subdivision of
outstanding Common Stock into a greater number of shares or the consolidation of
outstanding Common Stock into a smaller number of shares),
(b) any Rights Offering,
(c) any Special Distribution,
(d) any Capital Reorganization (other than a reclassification
or redesignation of the Common Stock into other shares),
(e) Sale Event; or
(f) any cash dividend,
the Company shall, not less than 10 days prior to such record date or, if no
record date is fixed, prior to the effective date of such event, give to
Purchaser notice of the particulars of the proposed event or the extent that
such particulars have been determined at the time of giving the notice.
ARTICLE XII. EVENTS OF DEFAULT
SECTION 12.1 EVENTS OF DEFAULT. If one or more of the following events
(each an "Event of Default") shall have occurred and be continuing:
(a) failure by the Company to pay or repay when due, all or
any part of the principal on any of the Convertible Note (whether by virtue of
the agreements specified in this Agreement or the Convertible Note);
(b) failure by the Company to pay (i) within five (5) Business
Days of the due date thereof any interest on any Convertible Note or (ii) within
five (5) Business Days following the delivery of notice to the Company of any
fees or any other amount payable (not otherwise referred to in (a) above or this
clause (b)) by the Company under this Agreement or any other Transaction
Agreement;
(c) failure by the Company to timely comply with the
requirements of Section 7.11 or 10.1 hereof, which failure is not cured within
five (5) Business Days of such failure;
(d) failure on the part of the Company to observe or perform
any covenant contained in Section 7.10 or Article VIII of this Agreement;
(e) failure on the part of the Company to observe or perform
any covenant or agreement contained in any Transaction Agreement (other than
those covered by clauses (a), (b), (c) or (d) above) for 30 days from the date
of such occurrence;
(f) the trading in the Common Stock shall have been suspended
by the Commission or any National Market (except for any suspension of trading
of limited duration solely to permit dissemination of material information
regarding the Company and except if, at the time there is any suspension on any
40
National Market, the Common Stock is then listed and approved for trading on
another National Market within ten (10) Trading Days thereof);
(g) the Company shall have its Common Stock removed from the
OTC Bulletin Board for at least ten (10) consecutive Trading Days and is unable
to obtain a listing on a National Market or other recognized quotation service
within such ten (10) Trading Days;
(h) the Registration Statement shall not have been declared
effective by the Commission by the Required Effectiveness Date, or such
effectiveness shall not be maintained for the Registration Maintenance Period,
in each case which results in the Company incurring liquidated damages or a
default fee for a period in excess of 30 days;
(i) the Company or any Covered Subsidiary has commenced a
voluntary case or other proceeding seeking liquidation, winding-up,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency, moratorium or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, or has
consented to any such relief or to the appointment of or taking possession by
any such official in an involuntary case or other proceeding commenced against
it, or has made a general assignment for the benefit of creditors, or has failed
generally to pay its debts as they become due, or has taken any corporate action
to authorize any of the foregoing;
(j) an involuntary case or other proceeding has been commenced
against the Company or any Covered Subsidiary seeking liquidation, winding-up,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency, moratorium or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and unstayed
for a period of 60 days, or an order for relief has been entered against the
Company or any Covered Subsidiary under the federal bankruptcy laws as now or
hereafter in effect;
(k) default in any provision (including payment) or any
agreement governing the terms of any Debt of the Company or any Covered
Subsidiary in excess of $200,000, which has not been cured within any applicable
period of grace associated therewith;
(l) judgments or orders for the payment of money which in the
aggregate at any one time exceed $250,000 and are not covered by insurance have
been rendered against the Company or any Covered Subsidiary by a court of
competent jurisdiction and such judgments or orders shall continue unsatisfied
and unstayed for a period of 60 days; or
41
(m) any representation, warranty, certification or statement
made by the Company in any Transaction Agreement or which is contained in any
certificate, document or financial or other statement furnished at any time
under or in connection with any Transaction Agreement shall prove to have been
untrue in any material respect when made.
(n) failure of the Company or any of its wholly-owned
subsidiaries to comply with the terms and conditions of any contractual
agreement which may result in the loss of the subsidiary or substantially all of
its assets to a third party.
then, and in every such occurrence, Purchaser may, with respect to an Event of
Default specified in paragraphs (a) or (b), and the Majority Holders may, with
respect to any other Event of Default, by notice to the Company, declare the
Convertible Note to be, and the Convertible Note shall thereon become
immediately due and payable; PROVIDED that in the case of any of the Events of
Default specified in paragraph (i) or (j) above with respect to the Company or
any Covered Subsidiary, then, without any notice to the Company or any other act
by Purchaser, the entire amount of the Convertible Note shall become immediately
due and payable, PROVIDED, FURTHER, if any Event of Default has occurred and is
continuing, and irrespective of whether any Convertible Note has been declared
immediately due and payable hereunder, any Purchaser of Convertible Note may
proceed to protect and enforce the rights of Purchaser by an action at law, suit
in equity or other appropriate proceeding, whether for the specific performance
of any agreement contained herein or in any Convertible Note, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise,
and PROVIDED FURTHER, in the case of any Event of Default, the amount, including
Default Interest, declared due and payable on the Convertible Note shall be the
Formula Price thereof.
42
SECTION 12.2 POWERS AND REMEDIES CUMULATIVE. No right or remedy herein
conferred upon or reserved to Purchaser is intended to be exclusive of any other
right or remedy, and every right and remedy shall, to the extent permitted by
law, be cumulative and in addition to every other right and remedy given
hereunder or now hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy. Every power and remedy given by the Convertible Note or by law
may be exercised from time to time, and as often as shall be deemed expedient,
by Purchaser.
ARTICLE XIII. MISCELLANEOUS
SECTION 13.1 NOTICES. All notices, demands and other communications to
any party hereunder shall be in writing (including telecopier or similar
writing) and shall be given to such party at its address set forth on the
signature pages hereof, or such other address as such party may hereafter
specify for the purpose to the other parties. Each such notice, demand or other
communication shall be effective (i) if given by telecopy, when such telecopy is
transmitted to the telecopy number specified on the signature page hereof, (ii)
if given by mail, four days after such communication is deposited in the mail
with first class postage prepaid, addressed as aforesaid or (iii) if given by
any other means, when delivered at the address specified in or pursuant to this
Section.
SECTION 13.2 NO WAIVERS; AMENDMENTS.
(a) No failure or delay on the part of any party in exercising
any right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy.
(b) Any provision of this Agreement may be amended,
supplemented or waived if, but only if, such amendment, supplement or waiver is
in writing and is signed by the Company and the Majority Holders; PROVIDED, that
without the consent of each holder of any Convertible Note affected thereby, an
amendment or waiver may not (a) reduce the aggregate principal amount of
Convertible Note whose holders must consent to an amendment or waiver, (b)
reduce the rate or extend the time for payment of interest on any Convertible
Note, (c) reduce the principal amount of or extend the stated maturity of any
Convertible Note or (d) make any Convertible Note payable in money or property
other than as stated in such Convertible Note. In determining whether the
holders of the requisite principal amount of Convertible Note have concurred in
any direction, consent, or waiver as provided in any Transaction Agreement,
Convertible Note which are owned by the Company or any other obligor on or
43
guarantor of the convertible Note, or by any Person Controlling, Controlled by,
or under common Control with any of the foregoing, shall be disregarded and
deemed not to be outstanding for the purpose of any such determination; and
PROVIDED FURTHER that no such amendment, supplement or waiver which affects the
rights of Purchaser and their affiliates otherwise than solely in their
capacities as holders of Convertible Note shall be effective with respect to
them without their prior written consent.
SECTION 13.3 INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless
Purchaser, its Affiliates, and each Person, if any, who controls Purchaser, or
any of its Affiliates, within the meaning of the Securities Act or the Exchange
Act (each, a "Controlling Person"), and the respective partners, agents,
employees, officers and Directors of Purchaser, their Affiliates and any such
Controlling Person (each an "Indemnified Party") and collectively, the
"Indemnified Parties"), from and against any and all losses, claims, damages,
liabilities and expenses (including, without limitation and as incurred,
reasonable costs of investigating, preparing or defending any such claim or
action, whether or not such Indemnified Party is a party thereto, provided that
the Company shall not be obligated to advance such costs to any Indemnified
Party other than Purchaser unless it has received from such Indemnified Party an
undertaking to repay to the Company the costs so advanced if it should be
determined by final judgment of a court of competent jurisdiction that such
Indemnified Party was not entitled to indemnification hereunder with respect to
such costs) which may be incurred by such Indemnified Party in connection with
any investigative, administrative or judicial proceeding brought or threatened
that relates to or arises out of, or is in connection with any activities
contemplated by any Transaction Agreement or any other services rendered in
connection herewith; PROVIDED that the Company will not be responsible for any
claims, liabilities, losses, damages or expenses that are determined by final
judgment of a court of competent jurisdiction to result from such Indemnified
Party's gross negligence, willful misconduct or bad faith.
(b) If any action shall be brought against an Indemnified
Party with respect to which indemnity may be sought against the Company under
this Agreement, such Indemnified Party shall promptly notify the Company in
writing and the Company, at its option, may, assume the defense thereof,
including the employment of counsel reasonably satisfactory to such Indemnified
Party and payment of all reasonable fees and expenses. The failure to so notify
the Company shall not affect any obligations the Company may have to such
Indemnified Party under this Agreement or otherwise unless the Company is
materially adversely affected by such failure. Such Indemnified Party shall have
the right to employ separate counsel in such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party, unless (i) the Company has failed to assume
the defense and employ counsel or (ii) the named parties to any such action
(including any impleaded parties) include such Indemnified Party and the
Company, and such Indemnified Party shall have been advised by counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Company, in which case, if such
Indemnified Party notifies the Company in writing that it elects to employ
separate counsel at the expense of the Company, the Company shall not have the
right to assume the defense of such action or proceeding on behalf of such
Indemnified Party, PROVIDED, HOWEVER, that the Company shall not, in connection
with any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be responsible hereunder for the
reasonable fees and expenses of more than one such firm of separate counsel, in
addition to any local counsel, which counsel shall be designated by Purchaser.
The Company shall not be liable for any settlement of any such action effected
without the written consent of the Company (which shall not be unreasonably
withheld) and the Company agrees to indemnify and hold harmless each Indemnified
Party from and against any loss or liability by reason of settlement of any
action effected with the consent of the Company. In addition, the Company will
44
not, without the prior written consent of Purchaser, settle or compromise or
consent to the entry of any judgment in or otherwise seek to terminate any
pending or threatened action, claim, suit or proceeding in respect to which
indemnification or contribution may be sought hereunder (whether or not any
Indemnified Party is a party thereto) unless such settlement, compromise,
consent or termination includes an express unconditional release of Purchaser
and the other Indemnified Parties, satisfactory in form and substance to
Purchaser, from all liability arising out of such action, claim, suit or
proceeding.
(c) If for any reason the foregoing indemnity is unavailable
(otherwise than pursuant to the express terms of such indemnity) to an
Indemnified Party or insufficient to hold an Indemnified Party harmless, then in
lieu of indemnifying such Indemnified Party, the Company shall contribute to the
amount paid or payable by such Indemnified Party as a result of such claims,
liabilities, losses, damages, or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and by Purchaser on the other from the transactions contemplated by this
Agreement or (ii) if the allocation provided by clause (i) is not permitted
under applicable law, in such proportion as is appropriate to reflect not only
the relative benefits received by the Company on the one hand and Purchaser on
the other, but also the relative fault of the Company and Purchaser as well as
any other relevant equitable considerations. Notwithstanding the provisions of
this Section 13.3, the aggregate contribution of all Indemnified Parties shall
not exceed the amount of interest and fees actually received by Purchaser
pursuant to this Agreement. It is hereby further agreed that the relative
benefits to the Company on the one hand and Purchaser on the other with respect
to the transactions contemplated hereby shall be determined by reference to,
among other things, whether any untrue or alleged untrue statement of material
fact or the omission or alleged omission to state a material fact related to
information supplied by the Company or by Purchaser and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(d) The indemnification, contribution and expense
reimbursement obligations set forth in this Section 13.3 (i) shall be in
addition to any liability the Company may have to any Indemnified Party at
common law or otherwise; (ii) shall survive the termination of this Agreement
and the other Transaction Agreements and the payment in full of the Convertible
Note and (iii) shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of Purchaser or any other Indemnified
Party.
45
SECTION 13.4 EXPENSES: DOCUMENTARY TAXES. The Company has incurred an
application fee equal to 5% of the principal amount of the Convertible Note
which shall be payable on the Closing Date to Global Capital Management
Services, Inc. the Purchaser's General Partner. In addition, the Company agrees
to pay to Global Capital Advisors, Ltd., ("GCA") on the Closing Date, a fee
equal to $15,000 (the "Out of Pocket Fee") in full satisfaction of all
obligations of the Company to Purchaser and its agents in connection with the
negotiation and preparation of the Transaction Agreements, relevant due
diligence, and fees and disbursements of legal counsel. The Company has paid
▇▇▇▇▇▇▇ money of $7,500 which shall be applied toward the Out of Pocket Fee at
closing. In addition, the Company agrees to pay any and all stamp, transfer and
other similar taxes, assessments or charges payable in connection with the
execution and delivery of any Transaction Agreement or the issuance of the
Securities to Purchaser, excluding their assigns.
SECTION 13.5 ADVISOR FEES. Upon Closing of this transaction and the
transaction documents associated with Securities Purchase Agreement between the
Company and certain purchasers dated the date hereof and closed concurrently
herewith ("Secondary Agreement"), the Company shall issue DP Securities, Inc.
("DPS") or its assigns a note as describe in the Secondary Agreement. In
addition, on the Closing Date, the Company shall issue to DPS warrants as
described in the Secondary Agreement.
SECTION 13.6 PAYMENT. The Company agrees that, so long as Purchaser
shall own any Convertible Note purchased by it from the Company hereunder, the
Company will use its best efforts under reasonable business conditions to make
payments to Purchaser of all amounts due thereon by wire transfer by 4:00 P.M.
(E.S.T.).
SECTION 13.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the Company and upon Purchaser and its respective successors and assigns;
PROVIDED that the Company shall not assign or otherwise transfer its rights or
obligations under this Agreement to any other Person without the prior written
consent of the Majority Holders. All provisions hereunder purporting to give
rights to Purchaser and its affiliates or to holders of Securities are for the
express benefit of such Persons and their successors and assigns.
SECTION 13.8 BROKERS. Except for DPS, the Company represents and
warrants that it has not employed any broker, finder, financial advisor or
investment banker who would be entitled to any brokerage, finder's or other fee
or commission payable by the Company or Purchaser in connection with the sale of
the Securities. The Company represents and warrants that it is solely
responsible for any fees due DPS.
46
SECTION 13.9 TEXAS LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY
TRIAL; APPOINTMENT OF AGENT. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. EACH PARTY HERETO HEREBY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR
THE STATE OF TEXAS AND OF ANY FEDERAL DISTRICT COURT SITTING IN TEXAS FOR
PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH
A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO THIS AGREEMENT IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY
AT ITS ADDRESS SET FORTH HEREIN. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY
PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. EACH PARTY WAIVES
ITS RIGHT TO A TRIAL BY JURY.
SECTION 13.10 ENTIRE AGREEMENT. This Agreement, the Exhibits or
Schedules hereto, which include, but are not limited to the Convertible Note,
the Security Agreement and the Registration Rights Agreement, set forth the
entire agreement and understanding of the parties relating to the subject matter
hereof and supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits and Schedules to
this Agreement are incorporated herein by this reference and shall constitute
part of this Agreement as is fully set forth herein.
SECTION 13.11 SURVIVAL; SEVERABILITY. The representations, warranties,
covenants and agreements of the parties hereto shall survive the Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
SECTION 13.12 TITLE AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
47
SECTION 13.13 REPORTING ENTITY FOR THE COMMON STOCK. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
and all Exhibits shall be Bloomberg, L.P. or any successor thereto. The written
mutual consent of the Purchaser and the Company shall be required to employ any
other reporting entity.
SECTION 13.14 PUBLICITY. The Company and the Purchaser shall consult
with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and no party
shall issue any such press release or otherwise make any such public statement
without the prior written consent of the other parties, which consent shall not
be unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other parties with prior notice of such
public statement. Notwithstanding the foregoing, the Company shall not publicly
disclose the name of Purchaser without the prior written consent of Purchaser,
except to the extent required by law, in which case the Company shall provide
Purchaser with prior written notice of such public disclosure.
[SIGNATURE PAGE FOLLOWS]
48
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers, as of the date first
above written.
ERF WIRELESS, INC.
By:
Name:
Title:
Address: ERF Wireless, Inc. ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇. ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax:
Tel.:
GLOBAL CAPITAL FUNDING GROUP, L.P.
By its General Partner, Global Capital Management
Services, Inc.
By:
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: President
Address: ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: ▇▇▇-▇▇▇-▇▇▇▇
Tel.: ▇▇▇-▇▇▇-▇▇▇▇
SECURITIES PURCHASE AGREEMENT
49
