Exhibit 99.1
SECURITY AGREEMENT
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LAURUS MASTER FUND, LTD.
FARMSTEAD TELEPHONE GROUP, INC.
and
EACH ELIGIBLE SUBSIDIARY SET FORTH ON EXHIBIT A HERETO
Dated: March 31, 2005
TABLE OF CONTENTS
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Page
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1. General Definitions and Terms; Rules of Construction. 1
2. Loan Facility 2
3. Repayment of the Loans 4
4. Procedure for Loans 5
5. Interest and Payments. 5
6. Security Interest. 6
7. Representations, Warranties and Covenants Concerning the
Collateral 7
8. Payment of Accounts. 10
9. Collection and Maintenance of Xxxxxxxxxx. 00
00. Inspections and Appraisals 11
11. Financial Reporting 11
12. Additional Representations and Warranties 12
13. Covenants 23
14. Further Assurances 30
15. Representations, Warranties and Covenants of Laurus. 30
16. Power of Attorney 32
17. Term of Agreement 32
18. Xxxxxxxxxxx xx Xxxx 00
00. Events of Xxxxxxx 00
00. Xxxxxxxx 00
00. Waivers 36
22. Expenses 36
23. Assignment By Laurus 37
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24. No Waiver; Cumulative Remedies 38
25. Application of Payments 38
26. Indemnity 38
27. Xxxxxxx 00
00. Borrowing Agency Provisions 39
29. Notices 40
30. Governing Law, Jurisdiction and Waiver of Jury Trial 41
31. Limitation of Liability 42
32. Entire Understanding 42
33. Severability 42
34. Captions 42
35. Counterparts; Telecopier Signatures 42
36. Construction 43
37. Publicity 43
38. Joinder 43
39. Legends 43
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SECURITY AGREEMENT
This Security Agreement is made as of March 31, 2005 by and among
LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("Laurus"),
FARMSTEAD TELEPHONE GROUP, INC., a Delaware corporation ("the Parent"), and
each party listed on Exhibit A attached hereto (each an "Eligible
Subsidiary" and collectively, the "Eligible Subsidiaries") the Parent and
each Eligible Subsidiary, each a "Company" and collectively, the
"Companies").
BACKGROUND
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The Companies have requested that Laurus make advances available to
the Companies; and
Laurus has agreed to make such advances on the terms and conditions
set forth in this Agreement.
AGREEMENT
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NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties
hereto agree as follows:
1. General Definitions and Terms; Rules of Construction.
(a) General Definitions. Capitalized terms used in this Agreement
shall have the meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement
that are not specifically defined shall have the meanings customarily given
them in accordance with GAAP and all financial computations shall be
computed, unless specifically provided herein, in accordance with GAAP
consistently applied.
(c) Other Terms. All other terms used in this Agreement and
defined in the UCC, shall have the meaning given therein unless otherwise
defined herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and
Exhibits hereto or expressly identified to this Agreement are incorporated
herein by reference and taken together with this Agreement constitute but a
single agreement. The words "herein", "hereof" and "hereunder" or other
words of similar import refer to this Agreement as a whole, including the
Exhibits, Addenda, Annexes and Schedules thereto, as the same may be from
time to time amended, modified, restated or supplemented, and not to any
particular section, subsection or clause contained in this Agreement.
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural,
and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter. The term "or" is not
exclusive. The term "including" (or any form thereof) shall not be
limiting or exclusive. All references to statutes and related regulations
shall include any amendments of same and any successor statutes and
regulations. All references in this
Agreement or in the Schedules, Addenda, Annexes and Exhibits to this
Agreement to sections, schedules, disclosure schedules, exhibits, and
attachments shall refer to the corresponding sections, schedules,
disclosure schedules, exhibits, and attachments of or to this Agreement.
All references to any instruments or agreements, including references to
any of this Agreement or the Ancillary Agreements shall include any and all
modifications or amendments thereto and any and all extensions or renewals
thereof.
2. Loan Facility.
(a) Loans.
Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Laurus may make loans (the "Loans") to Companies from
time to time during the Term which, in the aggregate at any time
outstanding, will not exceed the lesser of (x) (I) the Capital Availability
Amount minus (II) such reserves as Laurus may reasonably in its good faith
judgment deem proper and necessary from time to time (the "Reserves") and
(y) an amount equal to (I) the Accounts Availability plus (II) the
Inventory Availability, minus (III) the Reserves. The amount derived at
any time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus
2(a)(i)(y)(III) shall be referred to as the "Formula Amount." The
Companies shall, jointly and severally, execute and deliver to Laurus on
the Closing Date the Revolving Note and a Minimum Borrowing Note evidencing
the Loans funded on the Closing Date. From time to time thereafter, the
Companies shall jointly and severally execute and deliver to Laurus
immediately prior to the final funding of each additional $300,000 tranche
of Loans allocated to any Minimum Borrowing Note issued after the date
hereof (calculated on a cumulative basis for each such tranche) an
additional Minimum Borrowing Note evidencing such tranche, substantially in
the form of the Minimum Borrowing Note delivered by the Companies to Laurus
on the Closing Date. Notwithstanding anything herein to the contrary,
whenever during the Term the outstanding balance on the Minimum Borrowing
Note shall be less than the Minimum Borrowing Amount (such amount being
referred to herein as the "Transferable Amount") to the extent that the
outstanding balance on the Revolving Note should equal or exceed $300,000,
the portion of the balance of the Revolving Note that exceeds $300,000 (up
to the Transferable Amount) shall be deemed to be simultaneously
extinguished on the Revolving Note and transferred to, and evidenced by,
the next (serialized) Minimum Borrowing Note (the "Next Serialized Note");
provided that, any such extinguishment under the Revolving Note shall not
reduce the Capital Availability Amount, the Accounts Availability nor the
Inventory Availability. The Next Serialized Note shall remain in book
entry form until the Next Serialized Note balance shall equal the Minimum
Borrowing Amount; it will then be issued and registered as set forth in the
Registration Rights Agreement.
(i) Notwithstanding the limitations set forth above, if
requested by any Company, Laurus retains the right to lend to such Company
from time to time such amounts in excess of such limitations as Laurus may
determine in its sole discretion.
(ii) The Companies acknowledge that the exercise of Laurus'
discretionary rights hereunder may result during the Term in one or more
increases or decreases in the advance percentages used in determining
Accounts Availability and/or Inventory Availability and each of the
Companies hereby consent to any such increases or decreases which may limit
or restrict advances requested by the Companies. Laurus shall use its
commercially
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reasonable judgment in determining increases and/or decreases to advance
percentages used in determining Accounts Availability and/or Inventory
Availability.
(iii) If any interest, fees, costs or charges payable to Laurus
hereunder are not paid when due, each of the Companies shall thereby be
deemed to have requested, and Laurus is hereby authorized at its discretion
to make and charge to the Companies' account, a Loan as of such date in an
amount equal to such unpaid interest, fees, costs or charges.
(iv) If any Company at any time fails to perform or observe in
any material respects any of the covenants contained in this Agreement or
any Ancillary Agreement, Laurus may, but need not, perform or observe such
covenant on behalf and in the name, place and stead of such Company (or, at
Laurus' option, in Laurus' name) and may, but need not, take any and all
other actions which Laurus may deem necessary to cure or correct such
failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to Account Debtors, lessors or other
obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the
endorsement of instruments); but only after the Parent shall have received
written notice that Laurus plans to undertake any of the foregoing and is
given two (2) days after such notice to undertake any of the foregoing.
The amount of all monies expended and all costs and expenses (including
reasonable attorneys' fees and legal expenses) incurred by Laurus in
connection with or as a result of the performance or observance of such
agreements or the taking of such action by Laurus shall be charged to the
Companies' account as a Loan and added to the Obligations. To facilitate
Laurus' performance or observance of such covenants by each Company, each
Company hereby irrevocably appoints Laurus, or Laurus' delegate, acting
alone, as such Company's attorney in fact (which appointment is coupled
with an interest) with the right (but not the duty) from time to time to
create, prepare, complete, execute, deliver, endorse or file in the name
and on behalf of such Company any and all instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by such Company, in each case, to the
extent the relevant Company has failed to take the action as required in
this Agreement and the period of cure applicable to such failure (if any)
has passed.
(v) Laurus will account to Company Agent monthly with a
statement of all Loans and other advances, charges and payments made
pursuant to this Agreement, and such account rendered by Laurus shall be
deemed final, binding and conclusive unless Laurus is notified by Company
Agent in writing to the contrary within thirty (30) days of the date each
account was rendered specifying the item or items to which objection is
made.
(vi) During the Term, the Companies may borrow, prepay and
request reborrowings of Loans in accordance with the terms and conditions
hereof.
(vii) If any Eligible Account is not paid by the Account Debtor
within ninety (90) days after the date that such Eligible Account was
invoiced or if any Account Debtor asserts a deduction, dispute,
contingency, set-off, or counterclaim with respect to any
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Eligible Account, (a "Delinquent Account"), the Companies shall jointly and
severally (i) reimburse Laurus for the amount of the Loans made with
respect to such Delinquent Account to the extent of the outstanding balance
of the Loans in excess of the Formula Amount as such Formula Amount shall
be reduced to account for such Delinquent Account plus an adjustment fee in
an amount equal to one-half of one percent (0.35%) of the gross face amount
of such Eligible Account or (ii) immediately replace such Delinquent
Account with an otherwise Eligible Account.
(b) Receivables Purchase. Following the occurrence and during the
continuance of an Event of Default, Laurus may, at its option, elect to
convert the credit facility contemplated hereby to an accounts receivable
purchase facility. Upon such election by Laurus (subsequent notice of
which Laurus shall provide to Company Agent), the Companies shall be deemed
to hereby have sold, assigned, transferred, conveyed and delivered to
Laurus, and Laurus shall be deemed to have purchased and received from the
Companies, all right, title and interest of the Companies in and to all
Accounts which shall at any time constitute Eligible Accounts (the
"Receivables Purchase"). All outstanding Loans hereunder shall be deemed
obligations under such accounts receivable purchase facility. The
conversion to an accounts receivable purchase facility in accordance with
the terms hereof shall not be deemed an exercise by Laurus of its secured
creditor rights under Article 9 of the UCC. Immediately following Laurus'
request, the Companies shall execute all such further documentation as may
be required by Laurus to more fully set forth the accounts receivable
purchase facility herein contemplated, including, without limitation,
Laurus' standard form of accounts receivable purchase agreement and account
debtor notification letters, but any Company's failure to enter into any
such documentation shall not impair or affect the Receivables Purchase in
any manner whatsoever.
(c) Minimum Borrowing Amount. After a registration statement
registering the Registrable Securities has been declared effective by the
SEC, conversions of the Minimum Borrowing Amount into the Common Stock may
be initiated as set forth in the respective Minimum Borrowing Note. From
and after the date upon which any outstanding principal of the Minimum
Borrowing Amount (as evidenced by the first Minimum Borrowing Note) is
converted into Common Stock (the "First Conversion Date"), (i)
corresponding amounts of all outstanding Loans (not attributable to the
then outstanding Minimum Borrowing Amount) existing on or made after the
First Conversion Date will be aggregated until they reach the sum of
$300,000 and (ii) the Companies will issue a new (serialized) Minimum
Borrowing Note to Laurus in respect of such $300,000 aggregation, and (iii)
the Parent shall prepare and file a subsequent registration statement with
the SEC to register such subsequent Minimum Borrowing Note as set forth in
the Registration Rights Agreement; provided that any such conversion shall
not decrease the Capital Availability Amount, the Accounts Availability nor
the Inventory Availability.
3. Repayment of the Loans. The Companies (a) may prepay the
Obligations from time to time in accordance with the terms and provisions
of the Notes (and Section 17 hereof if such prepayment is due to a
termination of this Agreement) and may request reborrowings of Loans in
accordance with the terms and conditions hereof; and (b)
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shall repay on the expiration of the Term (i) the then aggregate
outstanding principal balance of the Loans together with accrued and unpaid
interest, fees and charges; and (ii) all other amounts owed Laurus under
this Agreement and the Ancillary Agreements; and (c) subject to Section
2(a)(ii), shall repay on any day on which the then aggregate outstanding
principle balance of the Loans are in excess of the Formula Amount at such
time, Loans in an amount equal to such excess. Any payments of principal,
interest, fees or any other amounts payable hereunder or under any
Ancillary Agreement shall be made prior to 12:00 noon (New York time) on
the due date thereof in immediately available funds.
4. Procedure for Loans. Company Agent may by written notice
request a borrowing of Loans prior to 12:00 noon (New York time) on the
Business Day of its request to incur a Loan. Together with each request
for a Loan (or at such other intervals as Laurus may request), Company
Agent shall deliver to Laurus a Borrowing Base Certificate in the form of
Exhibit B attached hereto, which shall be certified as true and correct by
the Chief Executive Officer or Chief Financial Officer of Company Agent
together with all supporting documentation relating thereto. All Loans
shall be disbursed from whichever office or other place Laurus may
designate from time to time and shall be charged to the Companies' account
on Laurus' books. The proceeds of each Loan made by Laurus shall be sent
by wire transfer to Company Agent on the Business Day so requested if such
request is made prior to 12:00 Noon (New York time) or the next Business
Day if such request is made after 12:00 Noon (New York time) in accordance
with the terms of this Section 4 by way of credit to the applicable
Company's operating account maintained with such bank as Company Agent
designated to Laurus. Any and all Obligations due and owing hereunder may
be charged to the Companies' account and shall constitute Loans.
5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, the
Companies shall jointly and severally pay interest at the Contract Rate on
the unpaid principal balance of each Loan until such time as such Loan is
collected in full in good funds in dollars of the United States of America.
(ii) Interest and payments shall be computed on the basis of
actual days elapsed in a year of 360 days. At Laurus' option, Laurus may
charge the Companies' account for said interest.
(iii) Effective upon the occurrence of any Event of Default and
for so long as any Event of Default shall be continuing, the Contract Rate
shall automatically be increased as set forth in the Notes (such increased
rate, the "Default Rate"), and all outstanding Obligations, including
unpaid interest, shall continue to accrue interest from the date of such
Event of Default at the Default Rate applicable to such Obligations.
(iv) In no event shall the aggregate interest payable
hereunder exceed the maximum rate permitted under any applicable law or
regulation, as in effect from time to
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time (the "Maximum Legal Rate"), and if any provision of this Agreement or
any Ancillary Agreement is in contravention of any such law or regulation,
interest payable under this Agreement and each Ancillary Agreement shall be
computed on the basis of the Maximum Legal Rate (so that such interest will
not exceed the Maximum Legal Rate).
(v) The Companies shall jointly and severally pay principal,
interest and all other amounts payable hereunder, or under any Ancillary
Agreement, without any deduction whatsoever, including any deduction for
any set-off or counterclaim.
(b) Payments; Certain Closing Conditions.
(i) Closing/Annual Payments. Upon execution of this
Agreement by each Company and Laurus, the Companies shall jointly and
severally pay to Laurus Capital Management, LLC a closing payment in an
amount equal to three and nine tenths percent (3.90%) of the Capital
Availability Amount. Such payment shall be deemed fully earned on the
Closing Date and shall not be subject to rebate or proration for any
reason.
(ii) Unused Line Payment. If, during any month, the average
of the aggregate Loans outstanding during such month (the "Average Loan
Amount") does not equal the Capital Availability Amount, the Companies
shall jointly and severally pay to Laurus at the end of such month a
payment (calculated on a per annum basis) in an amount equal to one-half
percent (0.25%) of the amount by which the Capital Availability Amount
exceeds the Average Loan Amount. Notwithstanding the foregoing, any such
due and unpaid fee shall come immediately due and payable upon termination
of this Agreement.
(iii) Financial Information Default. Without affecting Laurus'
other rights and remedies, in the event any Company fails to deliver the
financial information required by Section 11 on or before the date required
by this Agreement, to the extent such failure is not cured within five (5)
days of the date such financial information is required by Section 11 to be
delivered, the Companies shall jointly and severally pay Laurus an
aggregate fee in the amount of $500.00 per week (or portion thereof)
commencing on the sixth day following the date such financial information
is required by Section 11 to be delivered for each such failure until such
failure is cured to Laurus' satisfaction or waived in writing by Laurus.
Such fee shall be charged to the Companies' account upon the occurrence of
each such failure.
(iv) Expenses. The Companies shall jointly and severally
reimburse Laurus for its expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation and negotiation of
this Agreement and the Ancillary Agreements, and expenses incurred in
connection with Laurus' due diligence review of each Company and its
respective Subsidiaries and all related matters. Amounts required to be
paid under this Section 5(b)(v) will be paid on the Closing Date and shall
be $44,500, plus such additional fees and expenses incurred by Laurus in
connection with any required third party appraisals and/or extraordinary
diligence, for such expenses referred to in this Section 5(b)(v).
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, each
Company hereby assigns, pledges and grants to Laurus a continuing security
interest in and Lien
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upon all of the Collateral. All of each Company's Books and Records
relating to the Collateral shall, until delivered to or removed by Laurus,
be kept by such Company in trust for Laurus until all Obligations have been
paid in full. Each confirmatory assignment schedule or other form of
assignment hereafter executed by each Company shall be deemed to include
the foregoing grant, whether or not the same appears therein.
(b) Each Company hereby (i) authorizes Laurus to file any financing
statements, continuation statements or amendments thereto that (x) indicate
the Collateral (1) as all assets and personal property of such Company or
words of similar effect, regardless of whether any particular asset
comprised in the Collateral falls within the scope of Article 9 of the UCC
of such jurisdiction, or (2) as being of an equal or lesser scope or with
greater detail, and (y) contain any other information required by Part 5 of
Article 9 of the UCC for the sufficiency or filing office acceptance of any
financing statement, continuation statement or amendment and (ii) ratifies
its authorization for Laurus to have filed any initial financial
statements, or amendments thereto if filed prior to the date hereof. Each
Company acknowledges that it is not authorized to file any financing
statement or amendment or termination statement with respect to any
financing statement without the prior written consent of Laurus and agrees
that it will not do so without the prior written consent of Laurus, subject
to such Company's rights under Section 9-509(d)(2) of the UCC.
(c) Except as set forth on Schedule 12(f), each Company hereby
grants to Laurus an irrevocable, non-exclusive license (exercisable upon
the termination of this Agreement due to an occurrence and during the
continuance of an Event of Default without payment of royalty or other
compensation to such Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, and wherever the same may be located, and including in such
license access to all media in which any of the licensed items may be
recorded or stored and to all computer and automatic machinery software and
programs used for the compilation or printout thereof, and represents,
promises and agrees that any such license or sublicense is not and will not
be in conflict with the contractual or commercial rights of any third
Person; provided, that such license will terminate on the termination of
this Agreement and the payment in full of all Obligations.
7. Representations, Warranties and Covenants Concerning the
Collateral. Each Company represents, warrants (each of which such
representations and warranties shall be deemed repeated upon the making of
each request for a Loan and made as of the time of each and every Loan
hereunder) and covenants as follows:
(a) all of the Collateral (i) is owned by it free and clear of all
Liens (including any claims of infringement) except those in Laurus' favor
and Permitted Liens and (ii) is not subject to any agreement prohibiting
the granting of a Lien or requiring notice of or consent to the granting of
a Lien.
(b) it shall not encumber, mortgage, pledge, assign or grant any
Lien in any Collateral or any other assets to anyone other than Laurus and
except for Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon completion
of the filings and other actions listed on Schedule 7(c) (which, in the
case of all filings and other
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documents referred to in said Schedule, have been delivered to Laurus in
duly executed form) constitute valid perfected security interests in all of
the Collateral in favor of Laurus as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with
the terms hereof against any and all of its creditors and purchasers and
such security interest is prior to all other Liens in existence on the date
hereof.
(d) no effective security agreement, mortgage, deed of trust,
financing statement, equivalent security or Lien instrument or continuation
statement covering all or any part of the Collateral is or will be on file
or of record in any public office, except those relating to Permitted Liens
and those financing statements in respect of which termination statements
have been filed on or before the date hereof.
(e) it shall not dispose of any of the Collateral whether by sale,
lease or otherwise except for the sale of Inventory in the ordinary course
of business and for the disposition or transfer in the ordinary course of
business during any fiscal year of obsolete and worn-out Equipment having
an aggregate fair market value of not more than $50,000 and only to the
extent that (i) the proceeds of any such disposition are used to acquire
replacement Equipment which is subject to Laurus' first priority security
interest or are used to repay Loans or to pay general corporate expenses,
or (ii) following the occurrence of an Event of Default which continues to
exist the proceeds of which are remitted to Laurus to be held as cash
collateral for the Obligations.
(f) it shall defend the right, title and interest of Laurus in and
to the Collateral against the claims and demands of all Persons whomsoever,
and take such actions, including (i) all actions necessary to grant Laurus
"control" of any Investment Property, Deposit Accounts, Letter-of-Credit
Rights or electronic Chattel Paper owned by it, with any agreements
establishing control to be in form and substance satisfactory to Laurus,
(ii) the prompt (but in no event later than five (5) Business Days
following Laurus' request therefor) delivery to Laurus of all original
Instruments, Chattel Paper, negotiable Documents and certificated Stock
owned by it (in each case, accompanied by stock powers, allonges or other
instruments of transfer executed in blank); it being understood that its
own stock held by it in treasury shall not be subject of this clause (ii),
(iii) notification of Laurus' interest in Collateral at Laurus' request on
or after the occurrence and during the continuance of an Event of Default,
and (iv) the institution of litigation against third parties as shall be
prudent in order to protect and preserve its and/or Laurus' respective and
several interests in the Collateral.
(g) it shall promptly, and in any event within five (5) Business
Days after the same is acquired by it, notify Laurus of any commercial tort
claim (as defined in the UCC) acquired by it and unless otherwise consented
by Laurus, it shall enter into a supplement to this Agreement granting to
Laurus a Lien in such commercial tort claim.
(h) it shall place notations upon its Books and Records and any of
its financial statements to disclose Laurus' Lien in the Collateral.
(i) if it retains possession of any Chattel Paper or Instrument
with Laurus' consent, upon Laurus' request such Chattel Paper and
Instruments shall be marked with the following legend: "This writing and
obligations evidenced or secured hereby are subject to the
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security interest of Laurus Master Fund, Ltd." Notwithstanding the
foregoing, upon the reasonable request of Laurus, such Chattel Paper and
Instruments shall be delivered to Laurus.
(j) it shall perform in a reasonable time all other steps requested
by Laurus to create and maintain in Laurus' favor a valid perfected first
Lien in all Collateral subject only to Permitted Liens.
(k) it shall notify Laurus promptly and in any event within five
(5) Business Days after obtaining knowledge thereof (i) of any event or
circumstance that, to its knowledge, would cause Laurus to consider any
then existing Account and/or Inventory as no longer constituting an
Eligible Account or Eligible Inventory, as the case may be; (ii) of any
material delay in its performance of any of its obligations to any Account
Debtor; (iii) of any assertion by any Account Debtor of any material
claims, offsets or counterclaims; (iv) of any allowances, credits and/or
monies granted by it to any Account Debtor not in the ordinary course of
business, consistent with past practice of the Companies and as disclosed
to Laurus; (v) of all material adverse information relating to the
financial condition of an Account Debtor; (vi) of any material return of
goods; and (vii) of any loss, damage or destruction of any of the
Collateral.
(l) all Eligible Accounts (i) represent complete bona fide
transactions which require no further act under any circumstances on its
part to make such Accounts payable by the Account Debtors (other than the
completion of the installation of certain Inventory by the Companies after
delivery and billing for such Inventory), (ii) are not subject to any
present, future contingent offsets or counterclaims, and (iii) do not
represent xxxx and hold sales, consignment sales, guaranteed sales, sale or
return or other similar understandings or obligations of any Affiliate or
Subsidiary of such Company. It has not made, nor will it make, any
agreement with any Account Debtor for (i) any extension of time for the
payment of any Account which is not in the ordinary course of business,
consistent with past practice of the Companies and as disclosed to Laurus;
provided that, in respect of an Eligible Account, no such extension of time
shall be granted past the 90th day following the creation of such Account,
(ii) any compromise or settlement for less than the full amount thereof,
(iii) any release of any Account Debtor from liability therefor, or (iv)
any deduction therefrom except a discount or allowance for prompt or early
payment or reasonable marketing expenses allowed by it in the ordinary
course of its business consistent with historical practice and as
previously disclosed to Laurus in writing.
(m) it shall keep and maintain its Equipment in good operating
condition, except for ordinary wear and tear, and shall make all necessary
repairs and replacements thereof so that the value and operating efficiency
shall at all times be maintained and preserved. It shall not permit any
such items to become a Fixture to real estate or accessions to other
personal property.
(n) it shall maintain and keep all of its Books and Records
concerning the Collateral at its executive offices listed in Schedule
12(bb).
(o) it shall maintain and keep the tangible Collateral at the
addresses listed in Schedule 12(bb), provided, that it may change such
locations or open a new location, provided that it provides Laurus at least
thirty (30) days prior written notice of such changes or new
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location and (ii) prior to such change or opening of a new location where
Collateral having a value of more than $75,000 will be located, it executes
and delivers to Laurus such agreements deemed reasonably necessary or
prudent by Laurus, including landlord agreements, mortgagee agreements and
warehouse agreements, each in form and substance satisfactory to Laurus, to
adequately protect and maintain Laurus' security interest in such
Collateral.
(p) Schedule 7(p) lists all banks and other financial institutions
at which it maintains deposits and/or other accounts, and such Schedule
correctly identifies the name, address and telephone number of each such
depository, the name in which the account is held, a description of the
purpose of the account, and the complete account number. It shall not
establish any depository or other bank account with any financial
institution (other than (i) the accounts set forth on Schedule 7(p), (ii)
payroll accounts to be used in the ordinary course of business and (iii)
trust accounts to the extent established to only hold payments due to
federal and state taxing authorities) without Laurus' prior written
consent.
(q) All Inventory manufactured by it in the United States of
America shall be produced in accordance with the requirements of the
Federal Fair Labor Standards Act of 1938, as amended and all rules,
regulations and orders related thereto or promulgated thereunder.
8. Payment of Accounts.
(a) Each Company will irrevocably direct all of its present and
future Account Debtors and other Persons obligated to make payments
constituting Collateral to make such payments directly to the lockboxes
maintained by such Company (the "Lockboxes") with Fleet Bank or such other
financial institution accepted by Laurus in writing as may be selected by
such Company (the "Lockbox Bank") pursuant to the terms of the certain
agreements among one or more Companies, Laurus and/or the Lockbox Bank
dated as of [__________ __, 200__]. On or prior to the Closing Date, each
Company shall and shall cause the Lockbox Bank to enter into all such
documentation acceptable to Laurus pursuant to which, among other things,
the Lockbox Bank agrees to: (a) sweep the Lockbox on a daily basis and
deposit all checks received therein to an account designated by Laurus in
writing and (b) comply only with the instructions or other directions of
Laurus concerning the Lockbox. All of each Company's invoices, account
statements and other written or oral communications directing, instructing,
demanding or requesting payment of any Account of any Company or any other
amount constituting Collateral shall conspicuously direct that all payments
be made to the Lockbox or such other address as Laurus may direct in
writing. If, notwithstanding the instructions to Account Debtors, any
Company receives any payments, such Company shall immediately remit such
payments to Laurus in their original form with all necessary endorsements.
Until so remitted, such Company shall hold all such payments in trust for
and as the property of Laurus and shall not commingle such payments with
any of its other funds or property.
(b) At Laurus' election, following the occurrence of an Event of
Default which is continuing, Laurus may notify each Company's Account
Debtors of Laurus' security interest in the Accounts, collect them directly
and charge the collection costs and expenses thereof to Company's and the
Eligible Subsidiaries joint and several account.
9. Collection and Maintenance of Collateral.
10
(a) Laurus may verify each Company's Accounts from time to time,
but not more often than once every three (3) months, unless an Event of
Default has occurred and is continuing, utilizing an audit control company
or any other agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received
on the same Business Day on which Laurus receives such proceeds in good
funds in dollars of the United States of America to an account designated
by Laurus. Any amount received by Laurus after 12:00 noon (New York time)
on any Business Day shall be deemed received on the next Business Day.
(c) As Laurus receives the proceeds of Accounts of any Company, it
shall (i) apply such proceeds, as required, to amounts outstanding under
the Notes, and (ii) remit all such remaining proceeds (net of interest,
fees and other amounts then due and owing to Laurus hereunder) to Company
Agent (for the benefit of the applicable Companies) upon request (but no
more often than twice a week). Notwithstanding the foregoing, following
the occurrence and during the continuance of an Event of Default, Laurus,
at its option, may (a) apply such proceeds to the Obligations in such order
as Laurus shall elect, (b) hold all such proceeds as cash collateral for
the Obligations and each Company hereby grants to Laurus a security
interest in such cash collateral amounts as security for the Obligations
and/or (c) do any combination of the foregoing.
10. Inspections and Appraisals. At all times during normal
business hours, Laurus, and/or any agent of Laurus shall have the right to
(a) have access to, visit, inspect, review, evaluate and make physical
verification and appraisals of each Company's properties and the
Collateral, (b) inspect, audit and copy (or take originals if necessary)
and make extracts from each Company's Books and Records, including
management letters prepared by the Accountants, and (c) discuss with each
Company's directors, principal officers, and independent accountants, each
Company's business, assets, liabilities, financial condition, results of
operations and business prospects; provided, that, with respect to
inspections and appraisals conducted by Laurus and/or any agent of Laurus
pursuant to this Section 10 prior to the occurrence of an Event of Default,
the Company shall only be required to reimburse Laurus' expenses incurred
in connection with such inspections and/or appraisals up to a maximum
amount of $15,000 per fiscal year of the Company. Each Company will
deliver to Laurus any instrument necessary for Laurus to obtain records
from any service bureau maintaining records for such Company. If any
internally prepared financial information, including that required under
this Section is unsatisfactory in any manner to Laurus, Laurus may request
that the Accountants review the same.
11. Financial Reporting. Company Agent will deliver, or cause to
be delivered, to Laurus each of the following, which shall be in form and
detail acceptable to Laurus:
(a) As soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Parent (or to the extent an
automatic filing extension has been requested by a Company required to
deliver financial statements under this Section 11(a), 105 days after the
end of each fiscal year of the Parent so long as such Company submits to
Laurus
11
a copy of its audited but "not as yet filed" draft 10-K, with auditors
opinion, within the intial ninety (90) day period)each Company's audited
financial statements with a report of independent certified public
accountants of recognized standing selected by the Parent and acceptable to
Laurus (the "Accountants"), which annual financial statements shall be
without qualification and shall include each Company's balance sheet as at
the end of such fiscal year and the related statements of each Company's
income, retained earnings and cash flows for the fiscal year then ended,
prepared, if Laurus so requests, on a consolidating and consolidated basis
to include all Subsidiaries and Affiliates of each Company, all in
reasonable detail and prepared in accordance with GAAP, together with (i)
if and when available, copies of any management letters prepared by the
Accountants; and (ii) a certificate of the Parent's President, Chief
Executive Officer or Chief Financial Officer stating that such financial
statements have been prepared in accordance with GAAP and whether or not
such officer has knowledge of the occurrence of any Default or Event of
Default hereunder and, if so, stating in reasonable detail the facts with
respect thereto;
(b) As soon as available and in any event within forty five (45)
days after the end of each quarter, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of each Company as
at the end of and for such quarter and for the year to date period then
ended, prepared, if Laurus so requests, on a consolidating and consolidated
basis to include all Subsidiaries and Affiliates of each Company, in
reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end adjustments and accompanied by a
certificate of the Parent's President, Chief Executive Officer or Chief
Financial Officer, stating (i) that such financial statements have been
prepared in accordance with GAAP, subject to year-end audit adjustments,
and (ii) whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder not theretofore reported and remedied
and, if so, stating in reasonable detail the facts with respect thereto;
(c) Within thirty (30) days after the end of each month (or more
frequently if Laurus so requests), agings of each Company's Accounts,
unaudited trial balances and their accounts payable and a calculation of
each Company's Accounts, Eligible Accounts, [Inventory and/or Eligible
Inventory], provided, however, that if Laurus shall request the foregoing
information more often than as set forth in the immediately preceding
clause, each Company shall have thirty (30) days from each such request to
comply with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of the Parent's
most recent registration statements and annual, quarterly, monthly or other
regular reports which [the Parent] files with the Securities and Exchange
Commission (the "SEC"), and (ii) the issuance thereof, copies of such
financial statements, reports and proxy statements as the Parent shall send
to its stockholders.
12. Additional Representations and Warranties. Each Company hereby
represents and warrants to Laurus on behalf of itself and its Subsidiaries
as follows:
(a) Organization, Good Standing and Qualification. It and each of
its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be, duly organized, validly existing and in good
standing under the laws of its jurisdiction of
12
organization. It and each of its Subsidiaries has the corporate, limited
liability company or partnership, as the case may be, power and authority
to own and operate its properties and assets and, insofar as it is or shall
be a party thereto, to (i) execute and deliver this Agreement and the
Ancillary Agreements, (ii) to issue the Notes and the shares of Common
Stock issuable upon conversion of the Notes (the "Note Shares"), (iii) to
issue the Warrants and the shares of Common Stock issuable upon conversion
of the Warrants (the "Warrant Shares"), and to (iv) carry out the
provisions of this Agreement and the Ancillary Agreements and to carry on
its business as presently conducted. It and each of its Subsidiaries is
duly qualified and is authorized to do business and is in good standing as
a foreign corporation, partnership or limited liability company, as the
case may be, in all jurisdictions in which the nature or location of its
activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to
do so has not had, or could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) Subsidiaries. Each of its direct and indirect Subsidiaries,
the direct owner of each such Subsidiary and its percentage ownership
thereof, is set forth on Schedule 12(b). No Immaterial Subsidiary owns any
assets (other than immaterial assets) or has any significant operations.
(c) Capitalization; Voting Rights.
(i) The authorized capital stock of the Parent, as of the
date hereof consists of 32,000,000 shares, of which 30,000,000 are shares
of Common Stock, par value $0.001 per share, 3,322,182 shares of which are
issued and outstanding, and 2,000,000 are shares of preferred stock, par
value $0.001 per share of which no shares of preferred stock are issued and
outstanding. The authorized, issued and outstanding capital stock or
limited liability company membership interests, as applicable, of each
Subsidiary of each Company is set forth on Schedule 12(c).
(ii) Except as disclosed on Schedule 12(c), other than: (i)
the shares reserved for issuance under the Parent's stock option plans or
upon exercise of warrants granted by the Parent to key employees in
connection with employee incentive programs; (ii) the shares reserved for
issuance upon exercise of warrants or options issued by the Parent in
connection with acquisitions of wholly-owned Subsidiaries in which neither
the Parent nor any of its Subsidiaries receives any cash consideration and
(iii) shares which may be issued pursuant to this Agreement and the
Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal),
proxy or stockholder agreements, or arrangements or agreements of any kind
for the purchase or acquisition from the Parent of any of its securities.
Except as disclosed on Schedule 12(c), neither the offer or issuance of any
of the Notes or the Warrants, or the issuance of any of the Note Shares or
the Warrant Shares, nor the consummation of any transaction contemplated
hereby will result in a change in the price or number of any securities of
the Parent outstanding, under anti-dilution or other similar provisions
contained in or affecting any such securities.
(iii) All issued and outstanding shares of the Parent's Common
Stock: (i) have been duly authorized and validly issued and are fully paid
and nonassessable; and
13
(ii) were issued in compliance with all applicable state and federal laws
concerning the issuance of securities.
(iv) The rights, preferences, privileges and restrictions of
the shares of the Common Stock are as stated in the Parent's Certificate of
Incorporation (the "Charter"). The Note Shares and the Warrant Shares have
been duly and validly reserved for issuance. When issued in compliance
with the provisions of this Agreement and the Parent's Charter, the
Securities will be validly issued, fully paid and nonassessable, and will
be free of any liens or encumbrances; provided, however, that the
Securities may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.
(d) Authorization; Binding Obligations. All corporate, partnership
or limited liability company, as the case may be, action on its and its
Subsidiaries' part (including their respective officers and directors)
necessary for the authorization of this Agreement and the Ancillary
Agreements, the performance of all of its and its Subsidiaries' obligations
hereunder and under the Ancillary Agreements on the Closing Date and, the
authorization, issuance and delivery of the Notes and the Warrant has been
taken or will be taken prior to the Closing Date. This Agreement and the
Ancillary Agreements, when executed and delivered and to the extent it is a
party thereto, will be its and its Subsidiaries' valid and binding
obligations enforceable against each such Person in accordance with their
terms, except:
(i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; and
(ii) general principles of equity that restrict the
availability of equitable or legal remedies.
The issuance of the Notes and the subsequent conversion of the Notes into
Note Shares are not and will not be subject to any preemptive rights or
rights of first refusal that have not been properly waived or complied
with. The issuance of the Warrants and the subsequent exercise of the
Warrants for Warrant Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly
waived or complied with.
(e) Liabilities. Neither it nor any of its Subsidiaries has any
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.
(f) Agreements; Action. Except as set forth on Schedule 12(f) or
as disclosed in any Exchange Act Filings:
(i) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to
which it or any of its Subsidiaries is a party or to its knowledge by which
it is bound which may involve: (i) obligations (contingent or otherwise)
of, or payments to, it or any of its Subsidiaries in excess of $50,000
(other than obligations of, or payments to, it or any of its Subsidiaries
arising from purchase or sale agreements or agreements evidencing Purchase
Money Indebtedness, in each case, entered into in the ordinary course of
business); or (ii) the transfer or license of any patent, copyright, trade
14
secret or other proprietary right to or from it (other than (x) licenses
arising from the purchase of "off the shelf" or other standard products and
(y) licenses of Intellectual Property from Avaya pursuant to reseller
agreements entered into with Avaya which have been provided to Laurus); or
(iii) provisions restricting the development, manufacture or distribution
of its or any of its Subsidiaries' products or services other than
restrictions contained in certain reseller agreements with Avaya which
relate to the use of Avaya Intellectual Property; or (iv) indemnification
by it or any of its Subsidiaries with respect to infringements of
proprietary rights.
(ii) Since September 30, 2004 (the "Balance Sheet Date")
neither it nor any of its Subsidiaries has: (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to
any class or series of its capital stock; (ii) incurred any indebtedness
for money borrowed or any other liabilities (other than ordinary course
obligations) individually in excess of $50,000 or, in the case of
indebtedness and/or liabilities individually less than $50,000, in excess
of $100,000 in the aggregate; (iii) made any loans or advances to any
Person not in excess, individually or in the aggregate, of $100,000, other
than ordinary advances for travel expenses; or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the sale of
its Inventory and/or disposition of outdated, surplus or worn out
Equipment, so long as, in each case, such sale or disposition is in the
ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) of this
Section 12(f), all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same Person
(including Persons it or any of its applicable Subsidiaries has reason to
believe are affiliated therewith or with any Subsidiary thereof) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts
of such subsections.
(iv) the Parent maintains disclosure controls and procedures
("Disclosure Controls") designed to ensure that information required to be
disclosed by the Parent in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the
time periods specified in the rules and forms of the SEC.
(v) The Parent makes and keeps books, records, and accounts,
that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of its assets. It maintains internal control over
financial reporting ("Financial Reporting Controls") designed by, or under
the supervision of, its principal executive and principal financial
officers, and effected by its board of directors, management, and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP, including that:
(1) transactions are executed in accordance with
management's general or specific authorization;
(2) unauthorized acquisition, use, or disposition of
the Parent's assets that could have a material effect on the financial
statements are prevented or timely detected;
(3) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that its
receipts and expenditures are
15
being made only in accordance with authorizations of the Parent's
management and board of directors;
(4) transactions are recorded as necessary to maintain
accountability for assets; and
(5) the recorded accountability for assets is compared
with the existing assets at reasonable intervals, and appropriate action is
taken with respect to any differences.
(vi) To the extent that the rules issued by the SEC
implementing Section 404 of the Xxxxxxxx-Xxxxx Act of 2002 are applicable
to the Parent, there are no weaknesses in any of its Disclosure Controls or
Financial Reporting Controls that is required to be disclosed in any of the
Exchange Act Filings, except as so disclosed.
(g) Obligations to Related Parties. Except as set forth on
Schedule 12(g), neither it nor any of its Subsidiaries has any obligations
to their respective officers, directors, stockholders or employees other
than:
(i) for payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on its or
its Subsidiaries' behalf;
(iii) for other standard employee benefits made generally
available to all employees (including stock option agreements outstanding
under any stock option plan approved by its and its Subsidiaries' Board of
Directors, as applicable); and
(iv) obligations listed in its and each of its Subsidiary's
financial statements or disclosed in any of the Parent's Exchange Act
Filings.
Except as described above or set forth on Schedule 12(g), none of its
officers, directors or, to the best of its knowledge, key employees or
stockholders, any of its Subsidiaries or any members of their immediate
families, are indebted to it or any of its Subsidiaries, individually or in
the aggregate, in excess of $50,000 or have any direct or indirect
ownership interest in any Person with which it or any of its Subsidiaries
is affiliated or with which it or any of its Subsidiaries has a business
relationship, or any Person which competes with it or any of its
Subsidiaries, other than passive investments in publicly traded companies
(representing less than one percent (1%) of such company) which may compete
with it or any of its Subsidiaries. Except as described above, none of its
officers, directors or stockholders, or any member of their immediate
families, is, directly or indirectly, interested in any material contract
with it or any of its Subsidiaries and no agreements, understandings or
proposed transactions are contemplated between it or any of its
Subsidiaries and any such Person. Except as set forth on Schedule 12(g),
neither it nor any of its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other Person.
16
(h) Changes. Since the Balance Sheet Date, except as disclosed in
any Exchange Act Filing or in any Schedule to this Agreement or to any of
the Ancillary Agreements, there has not been:
(i) any change in its or any of its Subsidiaries' business,
assets, liabilities, condition (financial or otherwise), properties,
operations or prospects, which, individually or in the aggregate, has had,
or could reasonably be expected to have, a Material Adverse Effect;
(ii) any resignation or termination of any of its or its
Subsidiaries' officers, key employees or groups of employees;
(iii) any material change, except in the ordinary course of
business, in its or any of its Subsidiaries' contingent obligations by way
of guaranty, endorsement, indemnity, warranty or otherwise;
(iv) any damage, destruction or loss, whether or not covered
by insurance, which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;
(v) any waiver by it or any of its Subsidiaries of a valuable
right or of a material debt owed to it;
(vi) any direct or indirect material loans made by it or any
of its Subsidiaries to any of its or any of its Subsidiaries' stockholders,
employees, officers or directors, other than advances made in the ordinary
course of business;
(vii) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(viii) any declaration or payment of any dividend or other
distribution of its or any of its Subsidiaries' assets;
(ix) any labor organization activity related to it or any of
its Subsidiaries;
(x) any debt, obligation or liability incurred, assumed or
guaranteed by it or any of its Subsidiaries, except those for immaterial
amounts and for current liabilities incurred in the ordinary course of
business;
(xi) any sale, assignment or transfer of any Intellectual
Property or other intangible assets;
(xii) any change in any material agreement to which it or any
of its Subsidiaries is a party or by which either it or any of its
Subsidiaries is bound which, either individually or in the aggregate, has
had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect;
17
(xiii) any other event or condition of any character that,
either individually or in the aggregate, has had, or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect; or
(xiv) any arrangement or commitment by it or any of its
Subsidiaries to do any of the acts described in subsection (i) through
(xiii) of this Section 12(h).
(i) Title to Properties and Assets; Liens, Etc. Except as set
forth on Schedule 12(i), it and each of its Subsidiaries has good and
marketable title to their respective properties and assets, and good title
to its leasehold interests, in each case subject to no Lien, other than
Permitted Liens.
All facilities, Equipment, Fixtures, vehicles and other properties owned,
leased or used by it or any of its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used subject to normal wear and tear. Except as set
forth on Schedule 12(i), it and each of its Subsidiaries is in compliance
with all material terms of each lease to which it is a party or is
otherwise bound.
(j) Intellectual Property.
(i) It and each of its Subsidiaries owns or possesses
sufficient legal rights to all Intellectual Property necessary for their
respective businesses as now conducted and, to its knowledge as presently
proposed to be conducted, without any known infringement of the rights of
others. There are no outstanding options, licenses or agreements of any
kind relating to its or any of its Subsidiary's Intellectual Property, nor
is it or any of its Subsidiaries bound by or a party to any options,
licenses or agreements of any kind with respect to the Intellectual
Property of any other Person other than (x) as set forth on Schedule 12(f)
from time to time and (y) such licenses or agreements arising from certain
reseller agreements with Avaya relating to Avaya Intellectual Property
which have been provided to Laurus and such other licenses or agreements
arising from the purchase of "off the shelf" or standard products.
(ii) Neither it nor any of its Subsidiaries has received any
communications alleging that it or any of its Subsidiaries has violated any
of the Intellectual Property or other proprietary rights of any other
Person, nor is it or any of its Subsidiaries aware of any basis therefor.
(iii) Neither it nor any of its Subsidiaries believes it is or
will be necessary to utilize any inventions, trade secrets or proprietary
information of any of its employees made prior to their employment by it or
any of its Subsidiaries, except for inventions, trade secrets or
proprietary information that have been rightfully assigned to it or any of
its Subsidiaries.
(k) Compliance with Other Instruments. Neither it nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any provision of any indebtedness, mortgage, indenture,
contract, agreement or instrument to which it is party or by which it is
bound or of any judgment, decree, order or writ, which violation or
default, in the case of this clause (y), has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material
Adverse Effect. The execution, delivery and performance of and
18
compliance with this Agreement and the Ancillary Agreements to which it is
a party, and the issuance of the Notes and the other Securities each
pursuant hereto and thereto, will not, with or without the passage of time
or giving of notice, result in any such material violation, or be in
conflict with or constitute a default under any such term or provision, or
result in the creation of any Lien upon any of its or any of its
Subsidiary's properties or assets or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license, authorization
or approval applicable to it or any of its Subsidiaries, their businesses
or operations or any of their assets or properties.
(l) Litigation. Except as set forth on Schedule 12(l), there is no
action, suit, proceeding or investigation pending or, to its knowledge,
currently threatened against it or any of its Subsidiaries that prevents it
or any of its Subsidiaries from entering into this Agreement or the
Ancillary Agreements, or from consummating the transactions contemplated
hereby or thereby, or which has had, or could reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect,
or could result in any change in its or any of its Subsidiaries' current
equity ownership, nor is it aware that there is any basis to assert any of
the foregoing. Neither it nor any of its Subsidiaries is a party to or
subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no
action, suit, proceeding or investigation by it or any of its Subsidiaries
currently pending or which it or any of its Subsidiaries intends to
initiate.
(m) Tax Returns and Payments. It and each of its Subsidiaries has
timely filed all tax returns (federal, state and local) required to be
filed by it. All taxes shown to be due and payable on such returns, any
assessments imposed, and all other taxes due and payable by it and each of
its Subsidiaries on or before the Closing Date, have been paid or will be
paid prior to the time they become delinquent. Except as set forth on
Schedule 12(m), neither it nor any of its Subsidiaries has been advised:
(i) that any of its returns, federal, state or other, have
been or are being audited as of the date hereof; or
(ii) of any adjustment, deficiency, assessment or court
decision in respect of its federal, state or other taxes.
Neither it nor any of its Subsidiaries has any knowledge of any liability
of any tax to be imposed upon its properties or assets as of the date of
this Agreement that is not adequately provided for.
(n) Employees. Except as set forth on Schedule 12(n), neither it
nor any of its Subsidiaries has any collective bargaining agreements with
any of its employees. There is no labor union organizing activity pending
or, to its knowledge, threatened with respect to it or any of its
Subsidiaries. Except as disclosed in the Exchange Act Filings or on
Schedule 12(n), neither it nor any of its Subsidiaries is a party to or
bound by any currently effective employment contract, deferred compensation
arrangement, bonus plan, incentive plan, profit sharing plan, retirement
agreement or other employee compensation plan or agreement. To its
knowledge, none of its or any of its Subsidiaries' employees, nor any
consultant with whom it or any of its Subsidiaries has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such
individual to be
19
employed by, or to contract with, it or any of its Subsidiaries because of
the nature of the business to be conducted by it or any of its
Subsidiaries; and to its knowledge the continued employment by it and its
Subsidiaries of their present employees, and the performance of its and its
Subsidiaries contracts with its independent contractors, will not result in
any such violation. Neither it nor any of its Subsidiaries is aware that
any of its or any of its Subsidiaries' employees is obligated under any
contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court
or administrative agency that would interfere with their duties to it or
any of its Subsidiaries. Neither it nor any of its Subsidiaries has
received any notice alleging that any such violation has occurred. Except
for employees who have a current effective employment agreement with it or
any of its Subsidiaries, none of its or any of its Subsidiaries' employees
has been granted the right to continued employment by it or any of its
Subsidiaries or to any material compensation following termination of
employment with it or any of its Subsidiaries. Except as set forth on
Schedule 12(n), neither it nor any of its Subsidiaries is aware that any
officer, key employee or group of employees intends to terminate his, her
or their employment with it or any of its Subsidiaries, as applicable, nor
does it or any of its Subsidiaries have a present intention to terminate
the employment of any officer, key employee or group of employees.
(o) Registration Rights and Voting Rights. Except as set forth on
Schedule 12(o) and except as disclosed in Exchange Act Filings, neither it
nor any of its Subsidiaries is presently under any obligation, and neither
it nor any of its Subsidiaries has granted any rights, to register any of
its or any of its Subsidiaries' presently outstanding securities or any of
its securities that may hereafter be issued. Except as set forth on
Schedule 12(o) and except as disclosed in Exchange Act Filings, to its
knowledge, none of its or any of its Subsidiaries' stockholders has entered
into any agreement with respect to its or any of its Subsidiaries' voting
of equity securities.
(p) Compliance with Laws; Permits. Except as set forth on Schedule
12(v), neither it nor any of its Subsidiaries is in violation of the
Xxxxxxxx-Xxxxx Act of 2002, to the extent applicable, or any SEC related
regulation or rule or any rule of the Principal Market promulgated
thereunder or any other applicable statute, rule, regulation, order or
restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership
of its properties which has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect. No
governmental orders, permissions, consents, approvals or authorizations are
required to be obtained and no registrations or declarations are required
to be filed in connection with the execution and delivery of this Agreement
or any Ancillary Agreement and the issuance of any of the Securities,
except such as have been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing Date, as will be
filed in a timely manner. It and each of its Subsidiaries has all material
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which
could, either individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(q) Environmental and Safety Laws. Neither it nor any of its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation. Except as set
forth
20
on Schedule 12(q), no Hazardous Materials (as defined below) are used or
have been used, stored, or disposed of by it or any of its Subsidiaries or,
to its knowledge, by any other Person on any property owned, leased or used
by it or any of its Subsidiaries. For the purposes of the preceding
sentence, "Hazardous Materials" shall mean:
(i) materials which are listed or otherwise defined as
"hazardous" or "toxic" under any applicable local, state, federal and/or
foreign laws and regulations that govern the existence and/or remedy of
contamination on property, the protection of the environment from
contamination, the control of hazardous wastes, or other activities
involving hazardous substances, including building materials; and
(ii) any petroleum products or nuclear materials.
(r) Valid Offering. Assuming the accuracy of the representations
and warranties of Laurus contained in this Agreement, the offer and
issuance of the Securities from the Parent to Laurus will be exempt from
the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and will have been registered or qualified (or are
exempt from registration and qualification) under the registration, permit
or qualification requirements of all applicable state securities laws.
(s) Full Disclosure. It and each of its Subsidiaries has provided
Laurus with all information requested by Laurus in connection with Laurus'
decision to enter into this Agreement, including all information each
Company and its Subsidiaries believe is reasonably necessary to make such
investment decision. Neither this Agreement, the Ancillary Agreements nor
the exhibits and schedules hereto and thereto nor any other document
delivered by it or any of its Subsidiaries to Laurus or its attorneys or
agents in connection herewith or therewith or with the transactions
contemplated hereby or thereby, contain any untrue statement of a material
fact nor omit to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in
which they are made, not misleading. Any financial projections and other
estimates provided to Laurus by it or any of its Subsidiaries were based on
its and its Subsidiaries' experience in the industry and on assumptions of
fact and opinion as to future events which it or any of its Subsidiaries,
at the date of the issuance of such projections or estimates, believed to
be reasonable and have been prepared in accordance with the standards
applicable to the preparation of projections for publicly traded companies.
(t) Insurance. It and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which it believes are customary for companies similarly situated
to it and its Subsidiaries in the same or similar business.
(u) SEC Reports and Financial Statements. Except as set forth on
Schedule 12(u), it and each of its Subsidiaries has filed all proxy
statements, reports and other documents required to be filed by it under
the Exchange Act. The Parent has furnished Laurus with copies of: (i) its
Annual Report on Form 10-K for its fiscal year ended December 31, 2003; and
(ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended March
31, 2004, June 30, 2004 and September 30, 2004, and the Form 8-K filings
which it has made during its fiscal year 2005 to date (collectively, the
"SEC Reports"). Except as set forth on Schedule 12(u), each SEC Report
was, at the time of its filing, in substantial compliance with the
requirements of its
21
respective form and none of the SEC Reports, nor the financial statements
(and the notes thereto) included in the SEC Reports, as of their respective
filing dates, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial
condition, the results of operations and cash flows of the Parent and its
Subsidiaries, on a consolidated basis, as of, and for, the periods
presented in each such SEC Report.
(v) Listing. The Parent's Common Stock is listed on the Principal
Market and satisfies all requirements for the continuation of such listing,
and Parent shall do all things necessary for the continuation of such
listing. Except as set forth on Schedule 12(v), the Parent has not
received any notice that its Common Stock will be delisted from the
Principal Market or that its Common Stock does not meet all requirements
for such listing.
(w) No Integrated Offering. Neither it, nor any of its
Subsidiaries nor any of its Affiliates, nor any Person acting on its or
their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances
that would cause the offering of the Securities pursuant to this Agreement
or any Ancillary Agreement to be integrated with prior offerings by it for
purposes of the Securities Act which would prevent it from issuing the
Securities pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will it or any of its
Affiliates or Subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings.
(x) Stop Transfer. The Securities are restricted securities as of
the date of this Agreement. Neither it nor any of its Subsidiaries will
issue any stop transfer order or other order impeding the sale and delivery
of any of the Securities at such time as the Securities are registered for
public sale or an exemption from registration is available, except as
required by state and federal securities laws.
(y) Dilution. It specifically acknowledges that the Parent's
obligation to issue the shares of Common Stock upon conversion of the Notes
and exercise of the Warrants is binding upon the Parent and enforceable
regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Parent.
(z) Patriot Act. It certifies that, to the best of its knowledge,
neither it nor any of its Subsidiaries has been designated, nor is or shall
be owned or controlled, by a "suspected terrorist" as defined in Executive
Order 13224. It hereby acknowledges that Laurus seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, it hereby represents, warrants and covenants
that: (i) none of the cash or property that it or any of its Subsidiaries
will pay or will contribute to Laurus has been or shall be derived from, or
related to, any activity that is deemed criminal under United States law;
and (ii) no contribution or payment by it or any of its Subsidiaries to
Laurus, to the extent that
22
they are within its or any such Subsidiary's control shall cause Laurus to
be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act
of 2001. It shall promptly notify Laurus if any of these representations,
warranties and covenants ceases to be true and accurate regarding it or any
of its Subsidiaries. It shall provide Laurus with any additional
information regarding it and each Subsidiary thereof that Laurus deems
necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. It understands and
agrees that if at any time it is discovered that any of the foregoing
representations, warranties and covenants are incorrect, or if otherwise
required by applicable law or regulation related to money laundering or
similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus' investment in it. It further
understands that Laurus may release confidential information about it and
its Subsidiaries and, if applicable, any underlying beneficial owners, to
proper authorities if Laurus, in its sole discretion, determines that it is
in the best interests of Laurus in light of relevant rules and regulations
under the laws set forth in subsection (ii) above.
(aa) Company Name; Locations of Offices, Records and Collateral.
Schedule 12(aa) sets forth each Company's name as it appears in official
filings in the state of its organization, the type of entity of each
Company, the organizational identification number issued by each Company's
state of organization or a statement that no such number has been issued,
each Company's state of organization, and the location of each Company's
chief executive office, corporate offices, warehouses, other locations of
Collateral and locations where records with respect to Collateral are kept
(including in each case the county of such locations) and, except as set
forth in such Schedule 12(aa), such locations have not changed during the
preceding twelve months. As of the Closing Date, during the prior five
years, except as set forth in Schedule 12(aa), no Company has been known as
or conducted business in any other name (including trade names). Each
Company has only one state of organization.
(bb) ERISA. Based upon the Employee Retirement Income Security Act
of 1974 ("ERISA"), and the regulations and published interpretations
thereunder: (i) neither it nor any of its Subsidiaries has engaged in any
Prohibited Transactions (as defined in Section 406 of ERISA and Section
4975 of the Code); (ii) it and each of its Subsidiaries has met all
applicable minimum funding requirements under Section 302 of ERISA in
respect of its plans; (iii) neither it nor any of its Subsidiaries has any
knowledge of any event or occurrence which would cause the Pension Benefit
Guaranty Corporation to institute proceedings under Title IV of ERISA to
terminate any employee benefit plan(s); (iv) neither it nor any of its
Subsidiaries has any fiduciary responsibility for investments with respect
to any plan existing for the benefit of persons other than its or such
Subsidiary's employees; and (v) neither it nor any of its Subsidiaries has
withdrawn, completely or partially, from any multi-employer pension plan so
as to incur liability under the Multiemployer Pension Plan Amendments Act
of 1980.
13. Covenants. Each Company, as applicable, covenants and agrees
with Laurus as follows:
(a) Stop-Orders. It shall advise Laurus, promptly after it
receives notice of issuance by the SEC, any state securities commission or
any other regulatory authority of any
23
stop order or of any order preventing or suspending any offering of any
securities of the Parent, or of the suspension of the qualification of the
Common Stock of the Parent for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purpose.
(b) Listing. It shall promptly secure the listing of the shares of
Common Stock issuable upon conversion of the Notes and exercise of the
Warrants on the Principal Market upon which shares of Common Stock are
listed (subject to official notice of issuance) and shall maintain such
listing so long as any other shares of Common Stock shall be so listed.
The Parent shall maintain the listing of its Common Stock on the Principal
Market, and will comply in all material respects with the Parent's
reporting, filing and other obligations under the bylaws or rules of the
National Association of Securities Dealers ("NASD") and such exchanges, as
applicable.
(c) Market Regulations. It shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other
necessary action and proceedings as may be required and permitted by
applicable law, rule and regulation, for the legal and valid issuance of
the Securities to Laurus and promptly provide copies thereof to Laurus.
(d) Reporting Requirements. It shall timely file with the SEC all
reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file
reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination.
(e) Use of Funds. It shall use the proceeds of the Loans (i) to
repay in full all of its obligations owing to Business Alliance Capital
Corporation ("BACC") under the Revolving Loan Agreement, dated as of
February 19, 2003 between the Parent and BACC and (ii) for its general
working capital purposes only.
(f) Access to Facilities. It shall, and shall cause each of its
Subsidiaries to, permit any representatives designated by Laurus (or any
successor of Laurus), upon reasonable notice and during normal business
hours, at Company's expense and accompanied by a representative of Company
Agent (provided that no such prior notice shall be required to be given and
no such representative shall be required to accompany Laurus in the event
Laurus believes such access is necessary to preserve or protect the
Collateral or following the occurrence and during the continuance of an
Event of Default), to:
(i) visit and inspect any of its or any such Subsidiary's
properties;
(ii) examine its or any such Subsidiary's corporate and
financial records (unless such examination is not permitted by federal,
state or local law or by contract) and make copies thereof or extracts
therefrom; and
(iii) discuss its or any such Subsidiary's affairs, finances
and accounts with its or any such Subsidiary's directors, officers and
Accountants.
24
Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall
provide any material, non-public information to Laurus unless Laurus signs
a confidentiality agreement and otherwise complies with Regulation FD,
under the federal securities laws.
(g) Taxes. It shall, and shall cause each of its Subsidiaries to,
promptly pay and discharge, or cause to be paid and discharged, when due
and payable, all lawful taxes, assessments and governmental charges or
levies imposed upon it and its Subsidiaries' income, profits, property or
business, as the case may be; provided, however, that any such tax,
assessment, charge or levy need not be paid currently if (i) the validity
thereof shall currently and diligently be contested in good faith by
appropriate proceedings, (ii) such tax, assessment, charge or levy shall
have no effect on the Lien priority of Laurus in the Collateral, and (iii)
if it and/or such Subsidiary, as applicable, shall have set aside on its
and/or such Subsidiary's books adequate reserves with respect thereto in
accordance with GAAP or upon learning of any such potential tax liability
take prompt action to provide for adequate reserve in respect thereof; and
provided, further, that it shall, and shall cause each of its Subsidiaries
to, pay all such taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may have attached
as security therefor.
(h) Insurance. It shall bear the full risk of loss from any loss
of any nature whatsoever with respect to the Collateral. It and each of
its Subsidiaries shall keep its assets which are of an insurable character
insured by financially sound and reputable insurers against loss or damage
by fire, explosion and other risks customarily insured against by companies
in similar business similarly situated as it and its Subsidiaries; and it
and its Subsidiaries shall maintain, with financially sound and reputable
insurers, insurance against other hazards and risks and liability to
persons and property to the extent and in the manner which it and/or such
Subsidiary thereof reasonably believes is customary for companies in
similar business similarly situated as it and its Subsidiaries and to the
extent available on commercially reasonable terms. It and each of its
Subsidiaries will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to Laurus
as security for its obligations hereunder and under the Ancillary
Agreements. At its own cost and expense in amounts and with carriers
reasonably acceptable to Laurus, it and each of its Subsidiaries shall (i)
keep all their insurable properties and properties in which they have an
interest insured against the hazards of fire, flood, sprinkler leakage,
those hazards covered by extended coverage insurance and such other
hazards, and for such amounts, as is customary in the case of companies
engaged in businesses similar to it or the respective Subsidiary's
including business interruption insurance; (ii) maintain a bond in such
amounts as is customary in the case of companies engaged in businesses
similar to it and its Subsidiaries' insuring against larceny, embezzlement
or other criminal misappropriation of insured's officers and employees who
may either singly or jointly with others at any time have access to its or
any of its Subsidiaries assets or funds either directly or through
governmental authority to draw upon such funds or to direct generally the
disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage
suffered by others; (iv) maintain all such worker's compensation or similar
insurance as may be required under the laws of any state or jurisdiction in
which it or any of its Subsidiaries is engaged in business; and (v) furnish
Laurus with (x) copies of all policies and evidence of the maintenance of
such policies at least thirty (30) days before any expiration date, (y)
excepting its and its Subsidiaries' workers' compensation policy,
endorsements to such policies naming Laurus as "co-insured" or "additional
insured" and
25
appropriate loss payable endorsements in form and substance satisfactory to
Laurus, naming Laurus as lenders loss payee, and (z) evidence that as to
Laurus the insurance coverage shall not be impaired or invalidated by any
act or neglect of any Company or any of its Subsidiaries and the insurer
will provide Laurus with at least thirty (30) days notice prior to
cancellation. It shall instruct the insurance carriers that in the event
of any loss thereunder, the carriers shall make payment for such loss to
Laurus and not to any Company or any of its Subsidiaries and Laurus
jointly. If any insurance losses are paid by check, draft or other
instrument payable to any Company and/or any of its Subsidiaries and Laurus
jointly, Laurus may endorse, as applicable, such Company's and/or any of
its Subsidiaries' name thereon and do such other things as Laurus may deem
advisable to reduce the same to cash. Laurus is hereby authorized, upon
the occurrence and during the continuance of an Event of Default, to (i)
adjust and compromise claims and (ii) apply all loss recoveries received by
Laurus upon any such insurance to the Obligations, in such order as Laurus
in its sole discretion shall determine or shall otherwise be delivered to
Company Agent for the benefit of the applicable Company and/or its
Subsidiaries; provided that any surplus shall be paid by Laurus to Company
Agent for the benefit of the applicable Company and/or its Subsidiaries, or
applied as may be otherwise required by law; provided, further, that any
deficiency thereon shall be paid, as applicable, by Companies and their
Subsidiaries to Laurus, on demand.
(i) Intellectual Property. It shall, and shall cause each of its
Subsidiaries to, maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use Intellectual
Property owned or possessed by it and reasonably deemed to be necessary to
the conduct of its business.
(j) Properties. It shall, and shall cause each of its Subsidiaries
to, keep its properties in good repair, working order and condition,
reasonable wear and tear excepted, and from time to time make all needful
and proper repairs, renewals, replacements, additions and improvements
thereto; and it shall, and shall cause each of its Subsidiaries to, at all
times comply with each provision of all leases to which it is a party or
under which it occupies property if the breach of such provision could
reasonably be expected to have a Material Adverse Effect.
(k) Confidentiality. It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement,
the name of Laurus, unless expressly agreed to by Laurus or unless and
until such disclosure is required by law or applicable regulation, and then
only to the extent of such requirement. Notwithstanding the foregoing,
each Company and its Subsidiaries may disclose Laurus' identity and the
terms of this Agreement to its current and prospective debt and equity
financing sources.
(l) Required Approvals. It shall not, and shall not permit any of
its Subsidiaries to, without the prior written consent of Laurus, (i)
create, incur, assume or suffer to exist any indebtedness (exclusive of
trade debt) whether secured or unsecured other than (x) each Company's
indebtedness to Laurus and as set forth on Schedule 13(l)(i) attached
hereto and made a part hereof and (y) Purchase Money Indebtedness; provided
that the aggregate amount of Purchase Money Indebtedness incurred during
any fiscal year of the Company shall in no event exceed $500,000 ; (ii)
cancel any debt owing to it in excess of $50,000 in the aggregate during
any 12 month period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any
other Person, except (x) the
26
endorsement of negotiable instruments by it or its Subsidiaries for deposit
or collection or similar transactions in the ordinary course of business or
(y) guarantees of Subsidiaries of the Parent in respect of indebtedness
otherwise permitted under this Agreement; (iv) directly or indirectly
declare, pay or make any dividend or distribution on any class of its Stock
or apply any of its funds, property or assets to the purchase, redemption
or other retirement of any of its or its Subsidiaries' Stock outstanding on
the date hereof, or issue any preferred stock; (v) purchase or hold
beneficially any Stock or other securities or evidences of indebtedness of,
make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including any
partnership or joint venture, except (w) travel advances, (x) loans to its
and its Subsidiaries' (other than the Immaterial Subsidiaries') officers
and employees not exceeding at any one time an aggregate of $25,000, (y)
loans to its existing Subsidiaries so long as such Subsidiaries are
designated as either a co-borrower hereunder or has entered into such
guaranty and security documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest
in substantially all of such Subsidiary's assets to secure the Obligations
and (z) investments in joint ventures; provided that in no event shall the
sum of the aggregate principal amount of all such investments made by each
Company in joint ventures permitted by this clause (z) exceed $150,000 at
any time outstanding; (vi) create or permit to exist any Subsidiary, other
than any Immaterial Subsidiary unless (x) such new Subsidiary is a wholly-
owned Subsidiary and is designated by Laurus as either a co-borrower or
guarantor hereunder and such Subsidiary shall have entered into all such
documentation required by Laurus, including, without limitation, to grant
to Laurus a first priority perfected security interest in substantially all
of such Subsidiary's assets to secure the Obligations and (y) such Company
shall enter into a Stock Pledge Agreement in form and substance
satisfactory to Laurus in respect of the equity interests of such
Subsidiary; (vii) directly or indirectly, prepay any indebtedness (other
than to Laurus and in the ordinary course of business), or repurchase,
redeem, retire or otherwise acquire any indebtedness (other than (w) to
Laurus (x) in the ordinary course of business, (y) in respect of scheduled
payments of principal and interest thereof to the extent the underlying
indebtedness is otherwise permitted hereunder or (z) to the extent the sum
of all such prepayments, repurchases, redemptions, retirements and
acquisitions shall not exceed the aggregate amount of $25,000 throughout
the Term) ; (viii) enter into any merger, consolidation or other
reorganization with or into any other Person or acquire all or a portion of
the assets or Stock of any Person or permit any other Person to consolidate
with or merge with it, unless (1) such Company is the surviving entity of
such merger or consolidation, (2) no Event of Default shall exist
immediately prior to and after giving effect to such merger or
consolidation, (3) such Company shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) such Company
shall have provided Laurus with at least thirty (30) days' prior written
notice of such merger or consolidation; (ix) materially change the nature
of the business in which it is presently engaged; (x) become subject to
(including, without limitation, by way of amendment to or modification of)
any agreement or instrument which by its terms would (under any
circumstances) restrict its or any of its Subsidiaries' right to perform
the provisions of this Agreement or any of the Ancillary Agreements; (xi)
change its fiscal year or make any changes in accounting treatment and
reporting practices without prior written notice to Laurus except as
required by GAAP or in the tax reporting treatment or except as required by
law; (xii) enter into any transaction with any employee, director or
Affiliate, except in the ordinary course on arms-length terms; (xiii) xxxx
Accounts under any name except the present name of such Company; or (xiv)
sell, lease, transfer or otherwise dispose of any of its properties
27
or assets, or any of the properties or assets of its Subsidiaries, except
for (1) the sale of Inventory in the ordinary course of business and (2)
the disposition or transfer in the ordinary course of business during any
fiscal year of obsolete and worn-out Equipment and only to the extent that
(x) the proceeds of any such disposition are used to acquire replacement
Equipment which is subject to Laurus' first priority security interest or
are used to repay Loans or to pay general corporate expenses, or (y)
following the occurrence of an Event of Default which continues to exist,
the proceeds of which are remitted to Laurus to be held as cash collateral
for the Obligations.
(m) Reissuance of Securities. The Parent shall reissue
certificates representing the Securities without the legends set forth in
Section 39 below at such time as:
(i) the holder thereof is permitted to dispose of such
Securities pursuant to Rule 144(k) under the Securities Act; or
(ii) upon resale subject to an effective registration
statement after such Securities are registered under the Securities Act.
The Parent agrees to cooperate with Laurus in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions
necessary to allow such resales provided the Parent and its counsel receive
reasonably requested representations from Laurus and broker, if any.
(n) Opinion. On the Closing Date, it shall deliver to Laurus an
opinion acceptable to Laurus from each Company's legal counsel. Each
Company will provide, at the Companies' joint and several expense, such
other legal opinions in the future as are reasonably necessary for the
conversion of the Notes and the exercise of the Warrants.
(o) Legal Name, etc. It shall not, without providing Laurus with
30 days prior written notice, change (i) its name as it appears in the
official filings in the state of its organization, (ii) the type of legal
entity it is, (iii) its organization identification number, if any, issued
by its state of organization, (iv) its state of organization or (v) amend
its certificate of incorporation, by-laws or other organizational document.
(p) Compliance with Laws. The operation of each of its and each of
its Subsidiaries' business is and shall continue to be in compliance in all
material respects with all applicable federal, state and local laws, rules
and ordinances, including to all laws, rules, regulations and orders
relating to taxes, payment and withholding of payroll taxes, employer and
employee contributions and similar items, securities, employee retirement
and welfare benefits, employee health and safety and environmental matters.
(q) Notices. It and each of its Subsidiaries shall promptly inform
Laurus in writing of: (i) the commencement of all proceedings and
investigations by or before and/or the receipt of any notices from, any
governmental or nongovernmental body and all actions and proceedings in any
court or before any arbitrator against or in any way concerning any event
which could reasonably be expected to have singly or in the aggregate, a
Material Adverse Effect; (ii) any change which has had, or could reasonably
be expected to have, a Material Adverse Effect; (iii) any Event of Default
or Default; and (iv) any default or any event which
28
with the passage of time or giving of notice or both would constitute a
default under any agreement for the payment of money to which it or any of
its Subsidiaries is a party or by which it or any of its Subsidiaries or
any of its or any such Subsidiary's properties may be bound the breach of
which would have a Material Adverse Effect.
(r) Margin Stock. It shall not permit any of the proceeds of the
Loans made hereunder to be used directly or indirectly to "purchase" or
"carry" "margin stock" or to repay indebtedness incurred to "purchase" or
"carry" "margin stock" within the respective meanings of each of the quoted
terms under Regulation U of the Board of Governors of the Federal Reserve
System as now and from time to time hereafter in effect.
(s) Offering Restrictions. Except as previously disclosed in the
SEC Reports or in the Exchange Act Filings, or stock or stock options or
warrants granted to its employees or directors, or warrants or options
issued in connection with acquisitions otherwise permitted under this
Agreement in which neither the Parent nor any of its Subsidiaries receives
any cash consideration, neither it nor any of its Subsidiaries shall, prior
to the full repayment or conversion of the Notes (together with all accrued
and unpaid interest and fees related thereto), (x) enter into any equity
line of credit agreement or similar agreement or (y) issue, or enter into
any agreement to issue, any securities with a variable/floating conversion
and/or pricing feature which are or could be (by conversion or
registration) free-trading securities (i.e. common stock subject to a
registration statement).
(t) Authorization and Reservation of Shares. The Parent shall at
all times have authorized and reserved a sufficient number of shares of
Common Stock to provide for the conversion of the Notes and exercise of the
Warrants.
(u) Financing Right of First Refusal.
(i) It hereby grants to Laurus a right of first refusal to
provide any Additional Financing (as defined below) to be issued by any
Company and/or any of its Subsidiaries (the "Additional Financing
Parties"), subject to the following terms and conditions. From and after
the date hereof, prior to the incurrence of any additional indebtedness
and/or the sale or issuance of any equity interests of the Additional
Financing Parties (an "Additional Financing"), Company Agent shall notify
Laurus of such Additional Financing. In connection therewith, Company
Agent shall submit a fully executed term sheet (a "Proposed Term Sheet") to
Laurus setting forth the terms, conditions and pricing of any such
Additional Financing (such financing to be negotiated on "arm's length"
terms and the terms thereof to be negotiated in good faith) proposed to be
entered into by the Additional Financing Parties. Laurus shall have the
right, but not the obligation, to deliver to Company Agent its own proposed
term sheet (the "Laurus Term Sheet") setting forth the terms and conditions
upon which Laurus would be willing to provide such Additional Financing to
the Additional Financing Parties. The Laurus Term Sheet shall contain
terms no less favorable to the Additional Financing Parties than those
outlined in Proposed Term Sheet. Laurus shall deliver to Company Agent the
Laurus Term Sheet within ten Business Days of receipt of each such Proposed
Term Sheet. If the provisions of the Laurus Term Sheet are at least as
favorable to the Additional Financing Parties as the provisions of the
Proposed Term Sheet, the Additional Financing Parties shall enter into and
consummate the Additional Financing transaction outlined in the Laurus Term
Sheet.
29
(ii) It shall not, and shall not permit its Subsidiaries to,
agree, directly or indirectly, to any restriction with any Person which
limits the ability of Laurus to consummate an Additional Financing with it
or any of its Subsidiaries.
14. Further Assurances. At any time and from time to time, upon
the written request of Laurus and at the joint and several expense of the
Companies, each Company shall promptly and duly execute and deliver any and
all such further instruments and documents and take such further action as
Laurus may request (a) to obtain the full benefits of this Agreement and
the Ancillary Agreements, (b) to protect, preserve and maintain Laurus'
rights in the Collateral and under this Agreement or any Ancillary
Agreement, and/or (c) to enable Laurus to exercise all or any of the rights
and powers herein granted or any Ancillary Agreement.
15. Representations, Warranties and Covenants of Laurus. Laurus
hereby represents, warrants and covenants to each Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power
and authority under all applicable provisions of law to execute and deliver
this Agreement and the Ancillary Agreements and to carry out their
provisions. All corporate action on Laurus' part required for the lawful
execution and delivery of this Agreement and the Ancillary Agreements have
been or will be effectively taken prior to the Closing Date. Upon their
execution and delivery, this Agreement and the Ancillary Agreements shall
be valid and binding obligations of Laurus, enforceable in accordance with
their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights, and (b) as limited by general principles
of equity that restrict the availability of equitable and legal remedies.
(b) Investment Representations. Laurus understands that the
Securities are being offered pursuant to an exemption from registration
contained in the Securities Act based in part upon Laurus' representations
contained in this Agreement, including, without limitation, that Laurus is
an "accredited investor" within the meaning of Regulation D under the
Securities Act. Laurus has received or has had full access to all the
information it considers necessary or appropriate to make an informed
investment decision with respect to the Notes to be issued to it under this
Agreement and the Securities acquired by it upon the conversion of the
Notes.
(c) Laurus Bears Economic Risk. Laurus has substantial experience
in evaluating and investing in private placement transactions of securities
in companies similar to the Parent so that it is capable of evaluating the
merits and risks of its investment in the Parent and has the capacity to
protect its own interests. Laurus must bear the economic risk of this
investment until the Securities are sold pursuant to (i) an effective
registration statement under the Securities Act, or (ii) an exemption from
registration is available.
(d) Investment for Own Account. The Securities are being issued to
Laurus for its own account for investment only, and not as a nominee or
agent and not with a view towards or for resale in connection with their
distribution.
30
(e) Laurus Can Protect Its Interest. Laurus represents that by
reason of its, or of its management's, business and financial experience,
Laurus has the capacity to evaluate the merits and risks of its investment
in the Notes, and the Securities and to protect its own interests in
connection with the transactions contemplated in this Agreement, and the
Ancillary Agreements. Further, Laurus is aware of no publication of any
advertisement in connection with the transactions contemplated in the
Agreement or the Ancillary Agreements.
(f) Accredited Investor. Laurus represents that it is an
accredited investor within the meaning of Regulation D under the Securities
Act.
(g) Shorting. Neither Laurus nor any of its Affiliates or
investment partners has, will, or will cause any Person, to directly engage
in "short sales" of the Parent's]Common Stock as long as any Minimum
Borrowing Note shall be outstanding.
(h) Patriot Act. Laurus certifies that, to the best of Laurus'
knowledge, Laurus has not been designated, and is not owned or controlled,
by a "suspected terrorist" as defined in Executive Order 13224. Laurus
seeks to comply with all applicable laws concerning money laundering and
related activities. In furtherance of those efforts, Laurus hereby
represents, warrants and covenants that: (i) none of the cash or property
that Laurus will use to make the Loans has been or shall be derived from,
or related to, any activity that is deemed criminal under United States
law; and (ii) no disbursement by Laurus to any Company to the extent within
Laurus' control, shall cause Laurus to be in violation of the United States
Bank Secrecy Act, the United States International Money Laundering Control
Act of 1986 or the United States International Money Laundering Abatement
and Anti-Terrorist Financing Act of 2001. Laurus shall promptly notify the
Company Agent if any of these representations ceases to be true and
accurate regarding Laurus. Laurus agrees to provide the Company any
additional information regarding Laurus that the Company deems necessary or
convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities. Laurus understands and agrees that if
at any time it is discovered that any of the foregoing representations are
incorrect, or if otherwise required by applicable law or regulation related
to money laundering similar activities, Laurus may undertake appropriate
actions to ensure compliance with applicable law or regulation, including
but not limited to segregation and/or redemption of Laurus' investment in
the Parent. Laurus further understands that the Parent may release
information about Laurus and, if applicable, any underlying beneficial
owners, to proper authorities if the Parent, in its sole discretion,
determines that it is in the best interests of the Parent in light of
relevant rules and regulations under the laws set forth in subsection (ii)
above.
(i) Limitation on Acquisition of Common Stock. Notwithstanding
anything to the contrary contained in this Agreement, any Ancillary
Agreement, or any document, instrument or agreement entered into in
connection with any other transaction entered into by and between Laurus
and any Company (and/or Subsidiaries or Affiliates of any Company), Laurus
shall not acquire stock in the Parent (including, without limitation,
pursuant to a contract to purchase, by exercising an option or warrant, by
converting any other security or instrument, by acquiring or exercising any
other right to acquire, shares of stock or other security convertible into
shares of stock in the Parent, or otherwise, and such options, warrants,
conversion or other rights shall not be exercisable) to the extent such
stock acquisition would cause any interest (including any original issue
discount) payable by any Company to Laurus not to qualify as
31
portfolio interest, within the meaning of Section 881(c)(2) of the Internal
Revenue Code of 1986, as amended (the "Code") by reason of Section
881(c)(3) of the Code, taking into account the constructive ownership rules
under Section 871(h)(3)(C) of the Code (the "Stock Acquisition
Limitation"). The Stock Acquisition Limitation shall automatically become
null and void without any notice to any Company upon the earlier to occur
of either (a) the Parent's delivery to Laurus of a Notice of Redemption (as
defined in the Notes) or (b) the existence of an Event of Default at a time
when the average closing price of the Common Stock as reported by
Bloomberg, L.P. on the Principal Market for the immediately preceding five
trading days is greater than or equal to 150% of the Fixed Conversion Price
(as defined in the Notes).
16. Power of Attorney. Each Company hereby appoints Laurus, or any
other Person whom Laurus may designate as such Company's attorney, with
power to: (i) endorse such Company's name on any checks, notes,
acceptances, money orders, drafts or other forms of payment or security
that may come into Laurus' possession; (ii) upon the occurrence and during
the continuance of an Event of Default, sign such Company's name on any
invoice or xxxx of lading relating to any Accounts, drafts against Account
Debtors, schedules and assignments of Accounts, notices of assignment,
financing statements and other public records, verifications of Account and
notices to or from Account Debtors; (iii) verify the validity, amount or
any other matter relating to any Account by mail, telephone, telegraph or
otherwise with Account Debtors using such restraint as deemed appropriate
by Laurus in its sole discretion from unduly interfering with the
relationship between the Companies and such Account Debtors; (iv) do all
things necessary to carry out this Agreement, any Ancillary Agreement and
all related documents; and (v) on or after the occurrence and during the
continuation of an Event of Default, notify the post office authorities to
change the address for delivery of such Company's mail to an address
designated by Laurus, and to receive, open and dispose of all mail
addressed to such Company. Each Company hereby ratifies and approves all
acts of the attorney. Neither Laurus, nor the attorney will be liable for
any acts or omissions or for any error of judgment or mistake of fact or
law, except for gross negligence or willful misconduct. This power, being
coupled with an interest, is irrevocable so long as Laurus has a security
interest and until the Obligations have been fully satisfied.
17. Term of Agreement. Laurus' agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and
effect until the expiration of the Term. At Laurus' election following the
occurrence of an Event of Default, Laurus may terminate this Agreement.
The termination of the Agreement shall not affect any of Laurus' rights
hereunder or any Ancillary Agreement and the provisions hereof and thereof
shall continue to be fully operative until all transactions entered into,
rights or interests created and the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing,
Laurus shall release its security interests at any time after thirty (30)
days notice upon irrevocable payment to it of all Obligations if each
Company shall have (i) provided Laurus with an executed release of any and
all claims which such Company may have or thereafter have under this
Agreement and all Ancillary Agreements and (ii) paid to Laurus an early
payment fee in an amount equal to (1) four percent (4%) of the Capital
Availability Amount if such payment occurs prior to the first anniversary
of the Closing Date, (2) three percent (3%) of the Capital
32
Availability Amount if such payment occurs on or after the first
anniversary of the Closing Date and prior to the second anniversary of the
Closing Date and (3) two percent (2%) of the Capital Availability Amount if
such termination occurs thereafter during the Term; such fee being intended
to compensate Laurus for its costs and expenses incurred in initially
approving this Agreement or extending same. Such early payment fee shall be
due and payable jointly and severally by the Companies to Laurus upon
termination by acceleration of this Agreement by Laurus due to the
occurrence and continuance of an Event of Default.
18. Termination of Lien. The Liens and rights granted to Laurus
hereunder and any Ancillary Agreements and the financing statements filed
in connection herewith or therewith shall continue in full force and
effect, notwithstanding the termination of this Agreement or the fact that
any Company's account may from time to time be temporarily in a zero or
credit position, until all of the Obligations have been indefeasibly paid
or performed in full after the termination of this Agreement. Laurus shall
not be required to send termination statements to any Company, or to file
them with any filing office, unless and until this Agreement and the
Ancillary Agreements shall have been terminated in accordance with their
terms and all Obligations indefeasibly paid in full in immediately
available funds.
19. Events of Default. The occurrence of any of the following
shall constitute an "Event of Default":
(a) failure to make payment of any of the Obligations when required
hereunder, and, in any such case, such failure shall continue for a period
of three (3) days following the date upon which any such payment was due
(it being understood and agreed that to the extent that Laurus shall be in
sole control of the assets of the Companies and be charged with the duty to
apply proceeds in repayment of the Obligations on behalf of the Companies,
no Event of Default shall arise as a result of Laurus' failure to apply
when due such proceeds in which it is in sole control of);
(b) failure by any Company or any of its Subsidiaries to pay any
taxes when due unless such taxes are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves are
promptly provided on such Company's and/or such Subsidiary's books;
(c) failure to perform under, and/or committing any breach of, in
any material respect, this Agreement or any covenant contained herein,
which failure or breach shall continue without remedy for a period of
thirty (30) days after the occurrence thereof;
(d) any representation, warranty or statement made by any Company
or any of its Subsidiaries hereunder, in any Ancillary Agreement, any
certificate, statement or document delivered pursuant to the terms hereof,
or in connection with the transactions contemplated by this Agreement
should prove to be false or misleading in any material respect on the date
as of which made or deemed made;
(e) the occurrence of any default (or similar term) under any
indebtedness beyond the period of grace, if any, provided in any instrument
or agreement under which such
33
indebtedness was created of any Company or any of its Subsidiaries
exceeding $25,000 in the aggregate;
(f) attachments or levies in excess of $75,000 in the aggregate are
made upon any Company's assets or a judgment is rendered against any
Company's property involving a liability of more than $75,000 which shall
not have been vacated, discharged, stayed or bonded within thirty (30) days
from the entry thereof;
(g) any change in any Company's or any of its Subsidiary's
condition or affairs (financial or otherwise) which in Laurus' reasonable,
good faith opinion, could reasonably be expected to have a Material Adverse
Effect;
(h) any Lien created hereunder or under any Ancillary Agreement for
any reason ceases to be or is not a valid and perfected Lien having a first
priority interest;
(i) any Company or any of its Subsidiaries shall (i) apply for,
consent to or suffer to exist the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of
all or a substantial part of its property, (ii) make a general assignment
for the benefit of creditors, (iii) commence a voluntary case under the
federal bankruptcy laws (as now or hereafter in effect), (iv) be
adjudicated a bankrupt or insolvent, (v) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vi)
acquiesce to without challenge within ten (10) days of the filing thereof,
or failure to have dismissed within forty-five (45) days, any petition
filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;
(j) any Company or any of its Subsidiaries shall admit in writing
its inability, or be generally unable, to pay its debts as they become due
or cease operations of its present business;
(k) any Company or any of its Subsidiaries directly or indirectly
sells, assigns, transfers, conveys, or suffers or permits to occur any
sale, assignment, transfer or conveyance of any assets of such Company or
any interest therein, except as permitted herein;
(l) the occurrence of (i) a change in the controlling ownership of
the Parent or (ii) the departure of either Xxxx-Xxxx Xxxxxxxxxxx or Xxxxxx
X XxXxxxx from senior management of the Parent; provided that, an Event of
Default under clause (l)(ii) shall not arise solely as a result of the
departure of either Xxxx-Xxxx Xxxxxxxxxxx or Xxxxxx X XxXxxxx to the extent
a successor thereto, reasonably satisfactory to Laurus, shall be appointed
within ninety (90) days thereof;
(m) the indictment or threatened indictment of any Company or any
of its Subsidiaries or any executive officer of any Company or any of its
Subsidiaries under any criminal statute, or commencement or threatened
commencement of criminal or civil proceeding against any Company or any of
its Subsidiaries or any executive officer of any Company or any of its
Subsidiaries pursuant to which statute or proceeding penalties or remedies
sought or available include forfeiture of any of the property of any
Company or any of its Subsidiaries to the extent, in the case of civil
proceedings only, such forfeiture could reasonably be expected to result in
a Material Adverse Effect;
34
(n) an Event of Default shall occur under and as defined in any
Note or in any other Ancillary Agreement;
(o) any Company or any of its Subsidiaries shall breach any term or
provision of any Ancillary Agreement to which it is a party, in any
material respect which is not cured within any applicable cure or grace
period provided in respect thereof (if any);
(p) any Company or any of its Subsidiaries attempts to terminate,
challenges the validity of, or its liability under this Agreement or any
Ancillary Agreement, or any proceeding shall be brought to challenge the
validity, binding effect of any Ancillary Agreement or any Ancillary
Agreement ceases to be a valid, binding and enforceable obligation of such
Company or any of its Subsidiaries (to the extent such Persons are a party
thereto);
(q) an SEC stop trade order or Principal Market trading suspension
of the Common Stock shall be in effect for five (5) consecutive days or
five (5) days during a period of ten (10) consecutive days, excluding in
all cases a suspension of all trading on a Principal Market, provided that
the Parent shall not have been able to cure such trading suspension within
thirty (30) days of the notice thereof or list the Common Stock on another
Principal Market within sixty (60) days of such notice;
(r) The Parent's failure to deliver Common Stock to Laurus pursuant
to and in the form required by the Notes and this Agreement, if such
failure to deliver Common Stock shall not be cured within two (2) Business
Days or any Company is required to issue a replacement Note to Laurus and
such Company shall fail to deliver such replacement Note within seven (7)
Business Days; or
20. Remedies. Following the occurrence and during the continuance
of an Event of Default, Laurus shall have the right to demand repayment in
full of all Obligations, whether or not otherwise due. Until all
Obligations have been fully and indefeasibly satisfied, Laurus shall retain
its Lien in all Collateral. Laurus shall have, in addition to all other
rights provided herein and in each Ancillary Agreement, the rights and
remedies of a secured party under the UCC, and under other applicable law,
all other legal and equitable rights to which Laurus may be entitled,
including the right to take immediate possession of the Collateral, to
require each Company to assemble the Collateral, at Companies' joint and
several expense, and to make it available to Laurus at a place designated
by Laurus which is reasonably convenient to both parties and to enter any
of the premises of any Company or wherever the Collateral shall be located,
with or without force or process of law, and to keep and store the same on
said premises until sold (and if said premises be the property of any
Company, such Company agrees not to charge Laurus for storage thereof), and
the right to apply for the appointment of a receiver for such Company's
property. Further, Laurus may, at any time or times after the occurrence
of an Event of Default, sell and deliver all Collateral held by or for
Laurus at public or private sale for cash, upon credit or otherwise, at
such prices and upon such terms as Laurus, in Laurus' sole discretion,
deems advisable or Laurus may otherwise recover upon the Collateral in any
commercially reasonable manner as Laurus, in its sole discretion, deems
advisable. The requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Company Agent at Company Agent's
address as shown in Laurus'
35
records, at least ten (10) days before the time of the event of which
notice is being given. Laurus may be the purchaser at any sale, if it is
public. In connection with the exercise of the foregoing remedies, Laurus
is granted permission to use all of each Company's Intellectual Property to
the extent permitted by (i) law and (ii) in respect of Intellectual
Property licensed by any Company from a third party, the terms of such
license agreement with such third party relating to such Intellectual
Property. To the extent Collateral is subject of a prior Purchase Money
Lien, such Collateral shall be sold subject to the Purchase Money Lien.
The proceeds of sale shall be applied first to all costs and expenses of
sale, including attorneys' fees, and second to the payment (in whatever
order Laurus elects) of all Obligations. After the indefeasible payment
and satisfaction in full of all of the Obligations, and after the payment
by Laurus of any other amount required by any provision of law, including
Section 9-608(a)(1) of the UCC (but only after Laurus has received what
Laurus considers reasonable proof of a subordinate party's security
interest), the surplus, if any, shall be paid to Company Agent (for the
benefit of the applicable Companies) or its representatives or to whosoever
may be lawfully entitled to receive the same, or as a court of competent
jurisdiction may direct. The Companies shall remain jointly and severally
liable to Laurus for any deficiency. In addition, the Companies shall
jointly and severally pay Laurus a liquidation fee ("Liquidation Fee") in
the amount of five percent (5%) of the actual amount collected in respect
of each Account outstanding at any time during a Liquidation Period". For
purposes hereof, "Liquidation Period" means a period: (i) beginning on the
earliest date of (x) an event referred to in Section 19(i) or 19(j), or (y)
the cessation of any Company's business; and (ii) ending on the date on
which Laurus has actually received all Obligations due and owing it under
this Agreement and the Ancillary Agreements. The Liquidation Fee shall be
paid on the date on which Laurus collects the applicable Account by
deduction from the proceeds thereof. Each Company and Laurus acknowledge
that the actual damages that would be incurred by Laurus after the
occurrence of an Event of Default would be difficult to quantify and that
such Company and Laurus have agreed that the fees and obligations set forth
in this Section and in this Agreement would constitute fair and appropriate
liquidated damages in the event of any such termination.
21. Waivers. To the full extent permitted by applicable law, each
Company hereby waives (a) presentment, demand and protest, and notice of
presentment, dishonor, intent to accelerate, acceleration, protest,
default, nonpayment, maturity, release, compromise, settlement, extension
or renewal of any or all of this Agreement and the Ancillary Agreements or
any other notes, commercial paper, Accounts, contracts, Documents,
Instruments, Chattel Paper and guaranties at any time held by Laurus on
which such Company may in any way be liable, and hereby ratifies and
confirms whatever Laurus may do in this regard; (b) all rights to notice
and a hearing prior to Laurus' taking possession or control of, or to
Laurus' replevy, attachment or levy upon, any Collateral or any bond or
security that might be required by any court prior to allowing Laurus to
exercise any of its remedies; and (c) the benefit of all valuation,
appraisal and exemption laws. Each Company acknowledges that it has been
advised by counsel of its choices and decisions with respect to this
Agreement, the Ancillary Agreements and the transactions evidenced hereby
and thereby.
22. Expenses. The Companies shall jointly and severally pay all of
Laurus' out-of-pocket costs and expenses, including reasonable fees and
disbursements of in-house or
36
outside counsel and appraisers, in connection with the preparation,
execution and delivery of this Agreement and the Ancillary Agreements, and
in connection with the prosecution or defense of any action, contest,
dispute, suit or proceeding concerning any matter in any way arising out
of, related to or connected with this Agreement or any Ancillary Agreement.
Subject to the per fiscal year expense limitation set forth in Section 10
hereof in connection with inspections and appraisals conducted prior to the
occurrence of an Event of Default only, the Companies shall also jointly
and severally pay all of Laurus' reasonable fees, charges, out-of-pocket
costs and expenses, including fees and disbursements of counsel and
appraisers, in connection with (a) the preparation, execution and delivery
of any waiver, any amendment thereto or consent proposed or executed in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements, (b) Laurus' obtaining performance of the Obligations
under this Agreement and any Ancillary Agreements, including, but not
limited to, the enforcement or defense of Laurus' security interests,
assignments of rights and Liens hereunder as valid perfected security
interests, (c) any attempt to inspect, verify, protect, collect, sell,
liquidate or otherwise dispose of any Collateral, (d) any appraisals or
re-appraisals of any property (real or personal) pledged to Laurus by any
Company or any of its Subsidiaries as Collateral for, or any other Person
as security for, the Obligations hereunder and (e) any consultations deemed
reasonably necessary by Laurus in its sole discretion in connection with
any of the foregoing. The Companies shall also jointly and severally pay
Laurus' actual charges for all bank related services (including wire
transfers) performed or caused to be performed by Laurus for any Company or
any of its Subsidiaries at any Company's or such Subsidiary's request or in
connection with any Company's loan account with Laurus. All such costs and
expenses together with all filing, recording and search fees, taxes and
interest payable by the Companies to Laurus shall be payable on demand and
shall be secured by the Collateral. If any tax by any Governmental
Authority is or may be imposed on or as a result of any transaction between
any Company and/or any Subsidiary thereof, on the one hand, and Laurus on
the other hand, which Laurus is or may be required to withhold or pay, the
Companies hereby jointly and severally indemnifies and holds Laurus
harmless in respect of such taxes, and the Companies will repay to Laurus
the amount of any such taxes which shall be charged to the Companies'
account; and until the Companies shall furnish Laurus with indemnity
therefor (or supply Laurus with evidence satisfactory to it that due
provision for the payment thereof has been made), Laurus may hold without
interest any balance standing to each Company's credit and Laurus shall
retain its Liens in any and all Collateral.
23. Assignment By Laurus. Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person
which is not a competitor of any Company and any such transferee shall
succeed to all of Laurus' rights with respect thereto. Upon such transfer,
Laurus shall be released from all responsibility for the Collateral to the
extent same is assigned to any transferee. Laurus may from time to time
sell or otherwise grant participations in any of the Obligations and the
holder of any such participation shall, subject to the terms of any
agreement between Laurus and such holder, be entitled to the same benefits
as Laurus with respect to any security for the Obligations in which such
holder is a participant. Each Company agrees that each such holder may
exercise any and all rights of banker's lien, set-off and counterclaim with
respect to its participation in the Obligations as
37
fully as though such Company were directly indebted to such holder in the
amount of such participation.
24. No Waiver; Cumulative Remedies. Failure by Laurus to exercise
any right, remedy or option under this Agreement, any Ancillary Agreement
or any supplement hereto or thereto or any other agreement between or among
any Company and Laurus or delay by Laurus in exercising the same, will not
operate as a waiver; no waiver by Laurus will be effective unless it is in
writing and then only to the extent specifically stated. Laurus' rights
and remedies under this Agreement and the Ancillary Agreements will be
cumulative and not exclusive of any other right or remedy which Laurus may
have.
25. Application of Payments. Each Company irrevocably waive the
right to direct the application of any and all payments at any time or
times hereafter received by Laurus from or on such Company's behalf and
each Company hereby irrevocably agrees that Laurus shall have the
continuing exclusive right to apply and reapply any and all payments
received at any time or times hereafter against the Obligations hereunder
in such manner as Laurus may deem advisable notwithstanding any entry by
Laurus upon any of Laurus' books and records.
26. Indemnity. Each Company hereby jointly and severally indemnify
and hold Laurus, and its respective affiliates, employees, attorneys and
agents (each, an "Indemnified Person"), harmless from and against any and
all suits, actions, proceedings, claims, damages, losses, liabilities and
expenses of any kind or nature whatsoever (including reasonable attorneys'
fees and disbursements and other costs of investigation or defense,
including those incurred upon any appeal) which may be instituted or
asserted against or incurred by any such Indemnified Person as the result
of credit having been extended, suspended or terminated under this
Agreement or any of the Ancillary Agreements or with respect to the
execution, delivery, enforcement, performance and administration of, or in
any other way arising out of or relating to, this Agreement, the Ancillary
Agreements or any other documents or transactions contemplated by or
referred to herein or therein and any actions or failures to act with
respect to any of the foregoing, except to the extent that any such
indemnified liability is finally determined by a court of competent
jurisdiction to have resulted solely from such Indemnified Person's gross
negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY
SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON
ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF
CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT
OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION
CONTEMPLATED HEREUNDER OR THEREUNDER.
27. Revival. The Companies further agree that to the extent any
Company makes a payment or payments to Laurus, which payment or payments or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver
or any other party under any bankruptcy act, state or federal
38
law, common law or equitable cause, then, to the extent of such payment or
repayment, the obligation or part thereof intended to be satisfied shall be
revived and continued in full force and effect as if said payment had not
been made.
28. Borrowing Agency Provisions.
(a) Each Company hereby irrevocably designates Company Agent to be
its attorney and agent and in such capacity to borrow, sign and endorse
notes, and execute and deliver all instruments, documents, writings and
further assurances now or hereafter required hereunder, on behalf of such
Company, and hereby authorizes Laurus to pay over or credit all loan
proceeds hereunder in accordance with the request of Company Agent.
(b) The handling of this credit facility as a co-borrowing facility
with a borrowing agent in the manner set forth in this Agreement is solely
as an accommodation to the Companies and at their request. Laurus shall
not incur any liability to any Company as a result thereof. To induce
Laurus to do so and in consideration thereof, each Company hereby
indemnifies Laurus and holds Laurus harmless from and against any and all
liabilities, expenses, losses, damages and claims of damage or injury
asserted against Laurus by any Person arising from or incurred by reason of
the handling of the financing arrangements of the Companies as provided
herein, reliance by Laurus on any request or instruction from Company Agent
or any other action taken by Laurus with respect to this Paragraph 28.
(c) All Obligations shall be joint and several, and the Companies
shall make payment upon the maturity of the Obligations by acceleration or
otherwise, and such obligation and liability on the part of the Companies
shall in no way be affected by any extensions, renewals and forbearance
granted by Laurus to any Company, failure of Laurus to give any Company
notice of borrowing or any other notice, any failure of Laurus to pursue to
preserve its rights against any Company, the release by Laurus of any
Collateral now or thereafter acquired from any Company, and such agreement
by any Company to pay upon any notice issued pursuant thereto is
unconditional and unaffected by prior recourse by Laurus to any Company or
any Collateral for such Company's Obligations or the lack thereof.
(d) Each Company expressly waives any and all rights of
subrogation, reimbursement, indemnity, exoneration, contribution or any
other claim which such Company may now or hereafter have against the other
or other Person directly or contingently liable for the Obligations, or
against or with respect to any other's property (including, without
limitation, any property which is Collateral for the Obligations), arising
from the existence or performance of this Agreement, until all Obligations
have been indefeasibly paid in full and this Agreement has been irrevocably
terminated.
(e) Each Company represents and warrants to Laurus that (i)
Companies have one or more common shareholders, directors and officers,
(ii) the businesses and corporate activities of Companies are closely
related to, and substantially benefit, the business and corporate
activities of Companies, (iii) the financial and other operations of
Companies are performed on a combined basis as if Companies constituted a
consolidated corporate group, (iv) Companies will receive a substantial
economic benefit from entering into this Agreement and will receive a
substantial economic benefit from the application of each Loan hereunder,
in each
39
case, whether or not such amount is used directly by any Company and (v)
all requests for Loans hereunder by the Company Agent are for the exclusive
and indivisible benefit of the Companies as though, for purposes of this
Agreement, the Companies constituted a single entity.
29. Notices. Any notice or request hereunder may be given to any
Company, Company Agent or Laurus at the respective addresses set forth
below or as may hereafter be specified in a notice designated as a change
of address under this Section. Any notice or request hereunder shall be
given by registered or certified mail, return receipt requested, hand
delivery, overnight mail or telecopy (confirmed by mail). Notices and
requests shall be, in the case of those by hand delivery, deemed to have
been given when delivered to any officer of the party to whom it is
addressed, in the case of those by mail or overnight mail, deemed to have
been given three (3) Business Days after the date when deposited in the
mail or with the overnight mail carrier, and, in the case of a telecopy,
when confirmed.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
000 Xxxxx Xxxxxx 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
If to any Company,
or Company Agent: c/o Farmstead Telephone Group, Inc.
00 Xxxxxxxx Xxxx Xxxxxx
Xxxx Xxxxxxxx, XX 00000
Attention: Xxxxxx X. XxXxxxx
Xxxx-Xxxx Xxxxxxxxxxx
Telephone: ______________________
Facsimile: ______________________
With a copy to: ___________________________________
___________________________________
___________________________________
Attention: ______________________
Telephone: ______________________
Facsimile: ______________________
or such other address as may be designated in writing hereafter in
accordance with this Section 29 by such Person.
40
30. Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED
BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL
HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES
BETWEEN ANY COMPANY, ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND,
PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY
MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS; PROVIDED, THAT LAURUS AND EACH COMPANY ACKNOWLEDGE THAT ANY
APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE
OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER
SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER
IN FAVOR OF LAURUS. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE
TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND
EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH
COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY
AGENT'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES
HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING
BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR
OTHERWISE BETWEEN LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED
WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS
RELATED HERETO OR THERETO.
41
31. Limitation of Liability. Each Company acknowledges and
understands that in order to assure repayment of the Obligations hereunder
Laurus may be required to exercise any and all of Laurus' rights and
remedies hereunder and agrees that, except as limited by applicable law,
neither Laurus nor any of Laurus' agents shall be liable for acts taken or
omissions made in connection herewith or therewith except for actual bad
faith.
32. Entire Understanding; Maximum Interest. This Agreement and the
Ancillary Agreements contain the entire understanding among each Company
and Laurus as to the subject matter hereof and thereof and any promises,
representations, warranties or guarantees not herein contained shall have
no force and effect unless in writing, signed by each Company's and Laurus'
respective officers. Neither this Agreement, the Ancillary Agreements, nor
any portion or provisions thereof may be changed, modified, amended,
waived, supplemented, discharged, cancelled or terminated orally or by any
course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. Nothing contained in this Agreement,
any Ancillary Agreement or in any document referred to herein or delivered
in connection herewith shall be deemed to establish or require the payment
of a rate of interest or other charges in excess of the maximum rate
permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
rate permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Companies to Laurus and thus refunded
to the Companies.
33. Severability. Wherever possible each provision of this
Agreement or the Ancillary Agreements shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of
this Agreement or the Ancillary Agreements shall be prohibited by or
invalid under applicable law such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions thereof.
34. Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by Laurus and
the closing of the transactions contemplated hereby to the extent provided
therein. All statements as to factual matters contained in any certificate
or other instrument delivered by or on behalf of the Companies pursuant
hereto in connection with the transactions contemplated hereby shall be
deemed to be representations and warranties by the Companies hereunder
solely as of the date of such certificate or instrument. All indemnities
set forth herein shall survive the execution, delivery and termination of
this Agreement and the Ancillary Agreements and the making and repaying of
the Obligations.
35. Captions. All captions are and shall be without substantive
meaning or content of any kind whatsoever.
36. Counterparts; Telecopier Signatures. This Agreement may be
executed in one or more counterparts, each of which shall constitute an
original and all of which taken together shall constitute one and the same
agreement. Any signature delivered by a party via telecopier transmission
shall be deemed to be any original signature hereto.
42
37. Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against
the drafting party shall not be employed in the interpretation of this
Agreement or any amendments, schedules or exhibits thereto.
38. Publicity. Each Company hereby authorizes Laurus to make
appropriate announcements of the financial arrangement entered into by and
among each Company and Laurus, including, without limitation, announcements
which are commonly known as tombstones, in such publications and to such
selected parties as Laurus shall in its sole and absolute discretion deem
appropriate, or as required by applicable law.
39. Joinder. It is understood and agreed that any Person that
desires to become a Company hereunder, or is required to execute a
counterpart of this Agreement after the date hereof pursuant to the
requirements of this Agreement or any Ancillary Agreement, shall become a
Company hereunder by (a) executing a Joinder Agreement in form and
substance satisfactory to Laurus, (b) delivering supplements to such
exhibits and annexes to this Agreement and the Ancillary Agreements as
Laurus shall reasonably request and (c) taking all actions as specified in
this Agreement as would have been taken by such Company had it been an
original party to this Agreement, in each case with all documents required
above to be delivered to Laurus and with all documents and actions required
above to be taken to the reasonable satisfaction of Laurus.
40. Legends. The Securities shall bear legends as follows;
(a) The Notes shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER
SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO FARMSTEAD TELEPHONE GROUP, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any shares of Common Stock issued pursuant to conversion of the
Notes or exercise of the Warrants, shall bear a legend which shall be in
substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
43
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
FARMSTEAD TELEPHONE GROUP, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(c) The Warrants shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND
THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING
SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO FARMSTEAD
TELEPHONE GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
44
IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first written above.
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ Xxxxxx X. XxXxxxx
--------------------------------
Name: Xxxxxx X. XxXxxxx
Title: Chief Financial Officer
LAURUS MASTER FUND, LTD.
By: /s/ Xxxxx Grin
Name: Xxxxx Grin
Title:Director
45
Annex A - Definitions
---------------------
"Account Debtor" means any Person who is or may be obligated with
respect to, or on account of, an Account.
"Accountants" has the meaning given to such term in Section 11(a).
"Accounts" means all "accounts", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including: (a) all accounts
receivable, other receivables, book debts and other forms of obligations
(other than forms of obligations evidenced by Chattel Paper or Instruments)
(including any such obligations that may be characterized as an account or
contract right under the UCC); (b) all of such Person's rights in, to and
under all purchase orders or receipts for goods or services; (c) all of
such Person's rights to any goods represented by any of the foregoing
(including unpaid sellers' rights of rescission, replevin, reclamation and
stoppage in transit and rights to returned, reclaimed or repossessed
goods); (d) all rights to payment due to such Person for Goods or other
property sold, leased, licensed, assigned or otherwise disposed of, for a
policy of insurance issued or to be issued, for a secondary obligation
incurred or to be incurred, for energy provided or to be provided, for the
use or hire of a vessel under a charter or other contract, arising out of
the use of a credit card or charge card, or for services rendered or to be
rendered by such Person or in connection with any other transaction
(whether or not yet earned by performance on the part of such Person); and
(e) all collateral security of any kind given by any Account Debtor or any
other Person with respect to any of the foregoing.
"Accounts Availability" means the amount of Loans against Eligible
Accounts Laurus may from time to time make available to Company Agent up to
ninety percent (90%) of the net face amount of Eligible Accounts based on
Accounts of the Companies.
"Affiliate" means, with respect to any Person, (a) any other Person
(other than a Subsidiary) which, directly or indirectly, is in control of,
is controlled by, or is under common control with such Person or (b) any
other Person who is a director or officer (i) of such Person, (ii) of any
Subsidiary of such Person or (iii) of any Person described in clause (a)
above. For the purposes of this definition, control of a Person shall mean
the power (direct or indirect) to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Ancillary Agreements" means the Notes, the Warrants, the
Registration Rights Agreements, each Security Document and all other
agreements, instruments, documents, mortgages, pledges, powers of attorney,
consents, assignments, contracts, notices, security agreements, trust
agreements and guarantees whether heretofore, concurrently, or hereafter
executed by or on behalf of any Company, any of its Subsidiaries or any
other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same
may be amended, supplemented, restated or otherwise modified from time to
time.
"Available Minimum Borrowing" has the meaning given such term in
Section 2(a)(i).
"Balance Sheet Date" has the meaning given such term in Section
12(f)(ii).
"Books and Records" means all books, records, board minutes,
contracts, licenses, insurance policies, environmental audits, business
plans, files, computer files, computer discs and other data and software
storage and media devices, accounting books and records, financial
statements (actual and pro forma), filings with Governmental Authorities
and any and all records and instruments relating to the Collateral or
otherwise necessary or helpful in the collection thereof or the realization
thereupon.
"Business Day" means a day on which Laurus is open for business and
that is not a Saturday, a Sunday or other day on which banks are required
or permitted to be closed in the State of New York.
"Capital Availability Amount" means $3,000,000.
"Charter" has the meaning given such term in Section 12(c)(iv).
"Chattel Paper" means all "chattel paper," as such term is defined in
the UCC, including electronic chattel paper, now owned or hereafter
acquired by any Person.
"Closing Date" means the date on which any Company shall first
receive proceeds of the initial Loans or the date hereof, if no Loan is
made under the facility on the date hereof.
"Code" has the meaning given such term in Section 15(i).
"Collateral" means all of each Company's property and assets, whether
real or personal, tangible or intangible, and whether now owned or
hereafter acquired, or in which it now has or at any time in the future may
acquire any right, title or interests including all of the following
property in which it now has or at any time in the future may acquire any
right, title or interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all General Intangibles;
(e) all Accounts;
(f) all Deposit Accounts, other bank accounts and all funds on
deposit therein;
(g) all Investment Property;
2
(h) all Stock;
(i) all Chattel Paper;
(j) all Letter-of-Credit Rights;
(k) all Instruments;
(l) all commercial tort claims set forth on Schedule 1(A);
(m) all Books and Records;
(n) all Intellectual Property;
(o) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General
Intangibles and Investment Property;
(p) (i) all money, cash and cash equivalents and (ii) all cash held
as cash collateral to the extent not otherwise constituting Collateral, all
other cash or property at any time on deposit with or held by Laurus for
the account of any Company (whether for safekeeping, custody, pledge,
transmission or otherwise); and
(q) all products and Proceeds of all or any of the foregoing, tort
claims and all claims and other rights to payment including (i) insurance
claims against third parties for loss of, damage to, or destruction of, the
foregoing Collateral and (ii) payments due or to become due under leases,
rentals and hires of any or all of the foregoing and Proceeds payable
under, or unearned premiums with respect to policies of insurance in
whatever form.
"Common Stock" means the shares of stock representing the Parent's
common equity interests.
"Company Agent" means Farmstead Telephone Group, Inc.
"Contract Rate" has the meaning given such term in the respective
Note.
"Default" means any act or event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Deposit Accounts" means all "deposit accounts" as such term is
defined in the UCC, now or hereafter held in the name of any Person,
including, without limitation, the Lockboxes.
"Disclosure Controls" has the meaning given such term in Section
12(f)(iv).
"Documents" means all "documents", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located,
including all bills of lading, dock warrants, dock receipts, warehouse
receipts, and other documents of title, whether negotiable or non-
negotiable.
3
"Eligible Accounts" means each Account of each Company which conforms
to the following criteria: (a) shipment of the merchandise or the
rendition of services has been completed; it being understood that
rendition of services shall be deemed completed notwithstanding the fact
that installation of such Inventory may not be completed by the time such
Account otherwise conforms to the criteria set forth herein; (b) no return,
rejection or repossession of the merchandise has occurred; (c) merchandise
or services shall not have been rejected or disputed by the Account Debtor
and there shall not have been asserted any offset, defense or counterclaim;
(d) continues to be in full conformity with the representations and
warranties made by such Company to Laurus with respect thereto; (e) Laurus
is, and continues to be, reasonably satisfied with the credit standing of
the Account Debtor in relation to the amount of credit extended; (f) there
are no facts existing or threatened which are likely to result in any
adverse change in an Account Debtor's financial condition; (g) is
documented by an invoice in a form approved by Laurus and shall not be
unpaid more than ninety (90) days from invoice date; (h) not more than
fifty percent (50%) of the unpaid amount of invoices due from such Account
Debtor remains unpaid more than ninety (90) days from invoice date; (i) is
not evidenced by chattel paper or an instrument of any kind with respect to
or in payment of the Account unless such instrument is duly endorsed to and
in possession of Laurus or represents a check in payment of an Account; (j)
the Account Debtor is located in the United States; provided, however,
Laurus may, from time to time, in the exercise of its sole discretion and
based upon satisfaction of certain conditions to be determined at such time
by Laurus, deem certain Accounts as Eligible Accounts notwithstanding that
such Account is due from an Account Debtor located outside of the United
States; (k) Laurus has a first priority perfected Lien in such Account and
such Account is not subject to any Lien other than Permitted Liens; (l)
does not arise out of transactions with any employee, officer, director,
stockholder or Affiliate of any Company; (m) is payable to such Company;
(n) does not arise out of a xxxx and hold sale prior to shipment and does
not arise out of a sale to any Person to which such Company is indebted for
borrowed money; (o) is net of any returns, discounts, claims, credits and
allowances; (p) if the Account arises out of contracts between such
Company, on the one hand, and the United States, on the other hand, or any
department, agency or instrumentality of the United States, such Company
has so notified Laurus, in writing, prior to the creation of such Account,
and there has been compliance with any governmental notice or approval
requirements, including compliance with the Federal Assignment of Claims
Act; (q) is a good and valid account representing an undisputed bona fide
indebtedness incurred by the Account Debtor therein named, for a fixed sum
as set forth in the invoice relating thereto with respect to an
unconditional sale and delivery upon the stated terms of goods sold by such
Company or work, labor and/or services rendered by such Company; (r) does
not arise out of progress xxxxxxxx prior to completion of the order; (s)
the total unpaid Accounts from such Account Debtor does not exceed thirty
percent (30%) of all Eligible Accounts; (t) such Company's right to payment
is absolute and not contingent upon the fulfillment of any condition
whatsoever; (u) such Company is able to bring suit and enforce its remedies
against the Account Debtor through judicial process; (v) does not represent
interest payments, late or finance charges owing to such Company, and (w)
is otherwise satisfactory to Laurus as determined by Laurus in the exercise
of its sole discretion. In the event any Company requests that Laurus
include within Eligible Accounts certain Accounts of one or more of such
Company's acquisition targets, Laurus shall at the time of such request
consider such inclusion, but any such inclusion shall be at the sole option
of Laurus and shall at all times be subject to the
4
execution and delivery to Laurus of all such documentation (including,
without limitation, guaranty and security documentation) as Laurus may
require in its sole discretion.
"Eligible Inventory" means Inventory owned by a Company which Laurus,
in its sole and absolute discretion, determines: (a) is subject to a first
priority perfected Lien in favor of Laurus and is subject to no other Liens
whatsoever (other than Permitted Liens); (b) is located on premises with
respect to which Laurus has received a landlord or mortgagee waiver
acceptable in form and substance to Laurus; (c) is not in transit; (d) is
in good condition and meets all standards imposed by any governmental
agency, or department or division thereof having regulatory Governmental
Authority over such Inventory, its use or sale including the Federal Fair
Labor Standards Act of 1938 as amended, and all rules, regulations and
orders thereunder; (e) is currently either usable or salable in the normal
course of such Company's business; (f) is not placed by such Company on
consignment or held by such Company on consignment from another Person; (g)
is in conformity with the representations and warranties made by such
Company to Laurus with respect thereto; (h) is not subject to any
licensing, patent, royalty, trademark, trade name or copyright agreement
with any third parties; (i) does not require the consent of any Person for
the completion of manufacture, sale or other disposition of such Inventory
and such completion, manufacture or sale does not constitute a breach or
default under any contract or agreement to which such Company is a party or
to which such Inventory is or may be subject; (j) is not work-in-process;
(k) is covered by casualty insurance acceptable to Laurus and under which
Laurus has been named as a lender's loss payee and additional insured; and
(l) not to be ineligible for any other reason. [Discuss impact of
restrictions by Avaya on Inventory valuation]
"Eligible Subsidiary" means each Subsidiary of the Parent set forth
on Exhibit A hereto, as the same may be updated from time to time with
Laurus' written consent.
"Equipment" means all "equipment" as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including
any and all machinery, apparatus, equipment, fittings, furniture, Fixtures,
motor vehicles and other tangible personal property (other than Inventory)
of every kind and description that may be now or hereafter used in such
Person's operations or that are owned by such Person or in which such
Person may have an interest, and all parts, accessories and accessions
thereto and substitute ons and replacements therefor.
"ERISA" has the meaning given such term in Section 12(bb).
"Event of Default" means the occurrence of any of the events set
forth in Section 19.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Act Filings" means Farmstead Telephone Group, Inc.'s
filings under the Exchange Act made prior to the date of this Agreement.
"Financial Reporting Controls" has the meaning given such term in
Section 12(f)(v).
5
"Fixtures" means all "fixtures" as such term is defined in the UCC,
now owned or hereafter acquired by any Person.
"Formula Amount" has the meaning given such term in Section 2(a)(i).
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time in the United States of America.
"General Intangibles" means all "general intangibles" as such term is
defined in the UCC, now owned or hereafter acquired by any Person including
all right, title and interest that such Person may now or hereafter have in
or under any contract, all Payment Intangibles, customer lists, Licenses,
Intellectual Property, interests in partnerships, joint ventures and other
business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, Software, data bases, data,
skill, expertise, experience, processes, models, drawings, materials, Books
and Records, Goodwill (including the Goodwill associated with any
Intellectual Property), all rights and claims in or under insurance
policies (including insurance for fire, damage, loss, and casualty, whether
covering personal property, real property, tangible rights or intangible
rights, all liability, life, key-person, and business interruption
insurance, and all unearned premiums), uncertificated securities, choses in
action, deposit accounts, rights to receive tax refunds and other payments,
rights to received dividends, distributions, cash, Instruments and other
property in respect of or in exchange for pledged Stock and Investment
Property, and rights of indemnification.
"Goods" means all "goods", as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including
embedded software to the extent included in "goods" as defined in the UCC,
manufactured homes, standing timber that is cut and removed for sale and
unborn young of animals.
"Goodwill" means all goodwill, trade secrets, proprietary or
confidential information, technical information, procedures, formulae,
quality control standards, designs, operating and training manuals,
customer lists, and distribution agreements now owned or hereafter acquired
by any Person.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, and any agency, department or other
entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Immaterial Subsidiaries" shall mean, collectively, FTG Venture
Corporation, a Delaware corporation, Infinet Systems LLC, a Delaware
limited liability company and each other Subsidiary of the Parent, in each
case, to the extent such Subsidiary does not own any assets (other than
immaterial assets) or have any significant operations.
"Instruments" means all "instruments", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located,
including all certificated securities and all promissory notes and other
evidences of indebtedness, other than instruments that constitute, or are a
part of a group of writings that constitute, Chattel Paper.
6
"Intellectual Property" means any and all patents, trademarks,
service marks, trade names, copyrights, trade secrets, Licenses,
information and other proprietary rights and processes.
"Inventory" means all "inventory", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located,
including all inventory, merchandise, goods and other personal property
that are held by or on behalf of such Person for sale or lease or are
furnished or are to be furnished under a contract of service or that
constitute raw materials, work in process, finished goods, returned goods,
or materials or supplies of any kind, nature or description used or
consumed or to be used or consumed in such Person's business or in the
processing, production, packaging, promotion, delivery or shipping of the
same, including all supplies and embedded software.
"Inventory Availability" means the amount of Loans against Eligible
Inventory Laurus may from time to time make available to Companies up to
the lesser of (a) thirty percent (30%) of the value of Companies' Eligible
Inventory (calculated on the average cost basis) and (b) $600,000.
"Investment Property" means all "investment property", as such term
is defined in the UCC, now owned or hereafter acquired by any Person,
wherever located.
"Letter-of-Credit Rights" means "letter-of-credit rights" as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
including rights to payment or performance under a letter of credit,
whether or not such Person, as beneficiary, has demanded or is entitled to
demand payment or performance.
"License" means any rights under any written agreement now or
hereafter acquired by any Person to use any trademark, trademark
registration, copyright, copyright registration or invention for which a
patent is in existence or other license of rights or interests now held or
hereafter acquired by any Person.
"Lien" means any mortgage, security deed, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect
of any asset of any kind or nature whatsoever including any conditional
sale or other title retention agreement, any lease having substantially the
same economic effect as any of the foregoing, and the filing of, or
agreement to give, any financing statement under the UCC or comparable law
of any jurisdiction.
"Loans" has the meaning given such term in Section 2(a)(i) and shall
include all other extensions of credit hereunder and under any Ancillary
Agreement.
"Lockboxes" has the meaning given such term in Section 8(a).
"Material Adverse Effect" means a material adverse effect on (a) the
business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of any Company or any of its
Subsidiaries (taken individually and as a whole), (b) any Company's or any
of its Subsidiary's ability to pay or perform the Obligations in accordance
with the terms
7
hereof or any Ancillary Agreement, (c) the value of the Collateral, the
Liens on the Collateral or the priority of any such Lien or (d) the
practical realization of the benefits of Laurus' rights and remedies under
this Agreement and the Ancillary Agreements.
"Minimum Borrowing Amount" means $500,000; provided that the "Minimum
Borrowing Amount" shall be reduced to $300,000 from and after the date upon
which no less than $300,000 of outstanding principal under the first
Minimum Borrowing Note shall have been converted into Common Stock.
"Minimum Borrowing Notes" means that certain Secured Convertible
Minimum Borrowing Note dated as of the Closing Date made by the Companies
in favor of Laurus evidencing the Minimum Borrowing Amount and each other
Secured Convertible Minimum Borrowing Note made by the Companies in favor
of Laurus which evidences the Minimum Borrowing Amount, as each of the same
may be amended, supplemented, restated and/or otherwise modified from time
to time.
"NASD" has the meaning given such term in Section 13(b).
"Note Shares" has the meaning given such term in Section 12(a).
"Notes" means the Minimum Borrowing Notes and the Revolving Note made
by Companies in favor of Laurus in connection with the transactions
contemplated hereby, as each of the same may be amended, supplemented,
restated and/or otherwise modified from time to time.
"Obligations" means all Loans, all advances, debts, liabilities,
obligations, covenants and duties owing by each Company and each of its
Subsidiaries to Laurus (or any corporation that directly or indirectly
controls or is controlled by or is under common control with Laurus) of
every kind and description (whether or not evidenced by any note or other
instrument and whether or not for the payment of money or the performance
or non-performance of any act), direct or indirect, absolute or contingent,
due or to become due, contractual or tortious, liquidated or unliquidated,
whether existing by operation of law or otherwise now existing or hereafter
arising including any debt, liability or obligation owing from any Company
and/or each of its Subsidiaries to others which Laurus may have obtained by
assignment or otherwise and further including all interest (including
interest accruing at the then applicable rate provided in this Agreement
after the maturity of the Loans and interest accruing at the then
applicable rate provided in this Agreement after the filing of any petition
in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, whether or not a claim for post-filing or post-petition
interest is allowed or allowable in such proceeding), charges or any other
payments each Company and each of its Subsidiaries is required to make by
law or otherwise arising under or as a result of this Agreement, the
Ancillary Agreements or otherwise, together with all reasonable expenses
and reasonable attorneys' fees chargeable to the Companies' or any of their
Subsidiaries' accounts or incurred by Laurus in connection therewith.
"Payment Intangibles" means all "payment intangibles" as such term is
defined in the UCC, now owned or hereafter acquired by any Person,
including, a General Intangible under which the Account Debtor's principal
obligation is a monetary obligation.
8
"Permitted Liens" means (a) Liens of carriers, warehousemen,
artisans, bailees, mechanics and materialmen incurred in the ordinary
course of business securing sums not overdue; (b) Liens incurred in the
ordinary course of business in connection with worker's compensation,
unemployment insurance or other forms of governmental insurance or
benefits, relating to employees, securing sums (i) not overdue or (ii)
being diligently contested in good faith provided that adequate reserves
with respect thereto are maintained on the books of the Companies and their
Subsidiaries, as applicable, in conformity with GAAP; (c) Liens in favor of
Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently
contested in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of the Companies
and their Subsidiaries or such reserves are created after the affected
Company or Subsidiary becomes aware of such potential tax liability, as
applicable, in conformity with GAAP; and which have no effect on the
priority of Liens in favor of Laurus or the value of the assets in which
Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money
Indebtedness to the extent permitted in this Agreement and (f) Liens
specified on Schedule 2 hereto.
"Person" means any individual, sole proprietorship, partnership,
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company,
institution, public benefit corporation, entity or government (whether
federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof), and shall
include such Person's successors and assigns.
"Principal Market" means the NASD Over The Counter Bulletin Board,
NASDAQ SmallCap Market, NASDAQ National Market System, American Stock
Exchange or New York Stock Exchange (whichever of the foregoing is at the
time the principal trading exchange or market for the Common Stock).
"Proceeds" means "proceeds", as such term is defined in the UCC and,
in any event, shall include: (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Company or any other Person
from time to time with respect to any Collateral; (b) any and all payments
(in any form whatsoever) made or due and payable to any Company from time
to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of any Collateral by any governmental body,
governmental authority, bureau or agency (or any person acting under color
of governmental authority); (c) any claim of any Company against third
parties (i) for past, present or future infringement of any Intellectual
Property or (ii) for past, present or future infringement or dilution of
any trademark or trademark license or for injury to the goodwill associated
with any trademark, trademark registration or trademark licensed under any
trademark License; (d) any recoveries by any Company against third parties
with respect to any litigation or dispute concerning any Collateral,
including claims arising out of the loss or nonconformity of, interference
with the use of, defects in, or infringement of rights in, or damage to,
Collateral; (e) all amounts collected on, or distributed on account of,
other Collateral, including dividends, interest, distributions and
Instruments with respect to Investment Property and pledged Stock; and (f)
any and all other amounts, rights to payment or other property acquired
upon the sale, lease, license, exchange or other disposition of Collateral
and all rights arising out of Collateral.
9
"Purchase Money Indebtedness" means (a) any indebtedness incurred for
the payment of all or any part of the purchase price of any fixed asset,
including indebtedness under capitalized leases, (b) any indebtedness
incurred for the sole purpose of financing or refinancing all or any part
of the purchase price of any fixed asset, and (c) any renewals, extensions
or refinancings thereof (but not any increases in the principal amounts
thereof outstanding at that time).
"Purchase Money Lien" means any Lien upon any fixed assets that
secures the Purchase Money Indebtedness related thereto but only if such
Lien shall at all times be confined solely to the asset the purchase price
of which was financed or refinanced through the incurrence of the Purchase
Money Indebtedness secured by such Lien and only if such Lien secures only
such Purchase Money Indebtedness.
"Registration Rights Agreements" means that certain Minimum Borrowing
Note Registration Rights Agreement dated as of the Closing Date by and
between the Parent and Laurus and each other registration rights agreement
by and between the Parent and Laurus, as each of the same may be amended,
modified and supplemented from time to time.
"Revolving Note" means that certain Secured Revolving Note dated as
of the Closing Date made by the Companies in favor of Laurus in the
original principal amount of $2,000,000, as the same may be amended,
supplemented, restated and/or otherwise modified from time to time.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" has the meaning given such term in Section 12(u).
"Securities" means the Notes and the Warrants and the shares of
Common Stock that may be issued pursuant to conversion of such Notes in
whole or in part or exercise of such Warrants.
"Securities Act" has the meaning given such term in Section 12(r).
"Security Documents" means all security agreements, mortgages, cash
collateral deposit letters, pledges and other agreements which are executed
by any Company or any of its Subsidiaries in favor of Laurus.
"Software" means all "software" as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including all computer
programs and all supporting information provided in connection with a
transaction related to any program.
"Stock" means all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in
a corporation, partnership, limited liability company or equivalent entity
whether voting or nonvoting, including common stock, preferred stock, or
any other "equity security" (as such term is defined in Rule 3a11-1 of the
General Rules and Regulations promulgated by the SEC under the Securities
Exchange Act of 1934).
10
"Subsidiary" means, with respect to any Person, (i) any other Person
whose shares of stock or other ownership interests having ordinary voting
power (other than stock or other ownership interests having such power only
by reason of the happening of a contingency) to elect a majority of the
directors or other governing body of such other Person, are owned, directly
or indirectly, by such Person or (ii) any other Person in which such Person
owns, directly or indirectly, more than 50% of the equity interests at such
time.
"Supporting Obligations" means all "supporting obligations" as such
term is defined in the UCC.
"Term" means the Closing Date through the close of business on the
day immediately preceding the third anniversary of the Closing Date,
subject to acceleration at the option of Laurus upon the occurrence of an
Event of Default hereunder or other termination hereunder.
"UCC" means the Uniform Commercial Code as the same may, from time to
time be in effect in the State of New York; provided, that in the event
that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of, or remedies with respect to, Laurus'
Lien on any Collateral is governed by the Uniform Commercial Code as in
effect in a jurisdiction other than the State of New York, the term "UCC"
shall mean the Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provisions of this Agreement relating to
such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions; provided further, that to the
extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in Article or
Division 9 shall govern.
"Warrant Shares" has the meaning given such term in Section 12(a).
"Warrants" means that certain Common Stock Purchase Warrant dated as
of the Closing Date made by the Parent in favor of Laurus and each other
warrant made by the Parent in favor Laurus, as each of the same may be
amended, restated, modified and/or supplemented from time to time.
11
Exhibit A
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Eligible Subsidiaries
---------------------
None.
Exhibit B
---------
Borrowing Base Certificate
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[To be inserted]