SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this Agreement), dated as of March 23,
2006, by and among Palomar Enterprises, Inc., a Nevada corporation, with
headquarters located at 0000 X. Xxxxxx Xxxxxx, Xxxxx 000-0000, Xxxxxx Xxxx,
XX 00000 (the Company), and each of the purchasers set forth on the
signature pages hereto (the Buyers).
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration
afforded by the rules and regulations as promulgated by the United States
Securities and Exchange Commission (the SEC) under the Securities Act of
1933, as amended (the 1933 Act);
B. Buyers desire to purchase and the Company desires to issue and
sell, upon the terms and conditions set forth in this Agreement (i) 6%
secured convertible notes of the Company, in the form attached hereto as
Exhibit A, in the aggregate principal amount of One Million Three Hundred
and Fifty Thousand Dollars ($1,350,000) (together with any note(s) issued
in replacement thereof or as a dividend thereon or otherwise with respect
thereto in accordance with the terms thereof, the Notes), convertible
into shares of common stock, par value $.00001 per share, of the Company
(the Common Stock), upon the terms and subject to the limitations and
conditions set forth in such Notes and (ii)warrants, in the forms attached
hereto as Exhibit B1, to purchase an aggregate of 36,000,000 shares of
Common Stock (the Warrants).
C. Each Buyer wishes to purchase, upon the terms and conditions stated
in this Agreement, such principal amount of Notes and number of Warrants as
is set forth immediately below its name on the signature pages hereto; and
D. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights
Agreement, in the form attached hereto as Exhibit C (the Registration
Rights Agreement), pursuant to which the Company has agreed to provide
certain registration rights under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.
NOW, THEREFORE, the Company and each of the Buyers severally
(and not jointly) hereby agree as follows:
1. PURCHASE AND SALE OF NOTES AND WARRANTS.
a. Purchase of Notes and Warrants. On the Closing Date
(as defined below), the Company shall issue and sell to each Buyer and each
Buyer severally agrees to purchase from the Company such principal amount of
Notes and number of Warrants as is set forth immediately below such Buyer's
name on the signature pages hereto.
b. Form of Payment. On the Closing Date (as defined below), (i)each
Buyer shall pay the purchase price for the Notes and the Warrants to be issued
and sold to it at the Closing (as defined below) (the Purchase Price) by wire
transfer of immediately available funds to the Company, in accordance with the
Company's written wiring instructions, against delivery of the Notes in the
principal amount equal to the Purchase Price and the number of Warrants as is
set forth immediately below such Buyers name on the signature pages hereto,
and (ii) the Company shall deliver such Notes and Warrants duly executed
on behalf of the Company, to such Buyer, against delivery of such Purchase
Price.
c. Closing Date. Subject to the satisfaction
(or written waiver) of the conditions thereto set forth in Section 6 and
Section 7 below, the date and time of the issuance and sale of the Notes and
the Warrants pursuant to this Agreement (the Closing Date) shall be 12:00
noon, Eastern Standard Time on March 23, 2006, or such other mutually agreed
upon time. The closing of the transactions contemplated by this Agreement
the Closing) shall occur on the Closing Date at such location as may be
agreed to by the parties.
2. BUYERS REPRESENTATIONS AND WARRANTIES. Each Buyer
severally (and not jointly) represents and warrants to the Company
solely as to such Buyer that:
a. Investment Purpose. As of the date hereof, the Buyer
is purchasing the Notes and the shares of Common Stock issuable upon
conversion of or otherwise pursuant to the Notes (including, without
limitation, such additional shares of Common Stock, if any, as are issuable
(i)on account of interest on the Notes, (ii) as a result of the events
described in Sections 1.3 and 1.4(g) of the Notes and Section 2(c) of the
Registration Rights Agreement or (iii)in payment of the Standard Liquidated
Damages Amount (as defined in Section 2(f) below) pursuant to this Agreement,
such shares of Common Stock being collectively referred to herein as the
Conversion Shares) and the Warrants and the shares of Common Stock issuable
upon exercise thereof (the Warrant Shares and, collectively with the Notes,
Warrants and Conversion Shares, the Securities) for its own account and
not with a present view towards the public sale or distribution thereof,
except pursuant to sales registered or exempted from registration under the
1933 Act; provided, however, that by making the representations herein, the
Buyer does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time
in accordance with or pursuant to a registration statement or an exemption
under the 1933 Act.
b. Accredited Investor Status. The Buyer is an
accredited investor as that term is defined in Rule 501(a) of Regulation D
(an Accredited Investor).
c. Reliance on Exemptions. The Buyer understands that
the Securities are being offered and sold to it in reliance upon specific
exemptions from the registration requirements of United States federal and
state securities laws and that the Company is relying upon the truth and
accuracy of, and the Buyers compliance with, the representations, warranties,
agreements, acknowledgments and understandings of the Buyer set forth
herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Securities.
d. Information. The Buyer and its advisors, if any,
have been, and for so long as the Notes and Warrants remain outstanding will
continue to be, furnished with all materials relating to the business,
finances and operations of the Company and materials relating to the offer
and sale of the Securities which have been requested by the Buyer or its
advisors. The Buyer and its advisors, if any, have been, and for so long as
the Notes and Warrants remain outstanding will continue to be, afforded the
opportunity to ask questions of the Company. Notwithstanding the foregoing,
the Company has not disclosed to the Buyer any material nonpublic information
and will not disclose such information unless such information is disclosed
to the public prior to or promptly following such disclosure to the Buyer.
Neither such inquiries nor any other due diligence investigation conducted by
Buyer or any of its advisors or representatives shall modify, amend or
affect Buyers right to rely on the Company's representations and warranties
contained in Section 3 below. The Buyer understands that its investment in
the Securities involves a significant degree of risk.
e. Governmental Review. The Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed upon or made any recommendation or endorsement of the
Securities.
f. Transfer or Re-sale. The Buyer understands that
(i)except as provided in the Registration Rights Agreement, the sale or
re-sale of the Securities has not been and is not being registered under the
1933 Act or any applicable state securities laws, and the Securities may not
be transferred unless (a)the Securities are sold pursuant to an effective
registration statement under the 1933 Act, (b)the Buyer shall have delivered
to the Company an opinion of counsel that shall be in form, substance and
scope customary for opinions of counsel in comparable transactions to the
effect that the Securities to be sold or transferred may be sold or
transferred pursuant to an exemption from such registration, which opinion
shall be accepted by the Company, (c)the Securities are sold or transferred
to an affiliate (as defined in Rule 144 promulgated under the 1933 Act
(or a successor rule) (Rule 144)) of the Buyer who agrees to sell or
otherwise transfer the Securities only in accordance with this Section 2(f)
and who is an Accredited Investor, (d)the Securities are sold pursuant to
Rule 144, or (e)the Securities are sold pursuant to Regulation S under the
1933 Act (or a successor rule) (Regulation S), and the Buyer shall have
delivered to the Company an opinion of counsel that shall be in form,
substance and scope customary for opinions of counsel in corporate
transactions, which opinion shall be accepted by the Company; (ii) any sale
of such Securities made in reliance on Rule 144 may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any re-sale of such Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 0000 Xxx) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of
the SEC thereunder; and (iii) neither the Company nor any other person is
under any obligation to register such Securities under the 1933 Act or any
state securities laws or to comply with the terms and conditions of any
exemption thereunder (in each case, other than pursuant to the Registration
Rights Agreement). Notwithstanding the foregoing or anything else contained
herein to the contrary, the Securities may be pledged as collateral in
connection with a bonafide margin account or other lending arrangement. In
the event that the Company does not accept the opinion of counsel provided by
the Buyer with respect to the transfer of Securities pursuant to an
exemption from registration, such as Rule 144 or Regulation S, within three
(3) business days of delivery of the opinion to the Company, the Company
shall pay to the Buyer liquidated damages of three percent (3%) of the
outstanding amount of the Notes per month plus accrued and unpaid interest on
the Notes, prorated for partial months, in cash or shares at the option of
the Company ( Standard Liquidated Damages Amount ). If the Company elects to
be pay the Standard Liquidated Damages Amount in shares of Common Stock,
such shares shall be issued at the Conversion Price at the time of payment.
g. Legends. The Buyer understands that the Notes and
the Warrants and, until such time as the Conversion Shares and Warrant Shares
have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement or otherwise may be sold pursuant to Rule 144 or
Regulation S without any restriction as to the number of securities as of a
particular date that can then be immediately sold, the Conversion Shares and
Warrant Shares may bear a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of the
certificates for such Securities):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities may not be sold,
transferred or assigned in the absence of an effective registration statement
for the securities under said Act, or an opinion of counsel, in form,
substance and scope customary for opinions of counsel in comparable
transactions, that registration is not required under said Act or unless sold
pursuant to Rule 144 or Regulation S under said Act.
The legend set forth above shall be removed and the Company shall
issue a certificate without such legend to the holder of any Security upon
which it is stamped, if, unless otherwise required by applicable state
securities laws, (a) such Security is registered for sale under an effective
registration statement filed under the 1933 Act or otherwise may be sold
pursuant to Rule 144 or Regulation S without any restriction as to the number
of securities as of a particular date that can then be immediately sold, or
(b) such holder provides the Company with an opinion of counsel, in form,
substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Security
may be made without registration under the 1933 Act, which opinion shall be
accepted by the Company so that the sale or transfer is effected or (c) such
holder provides the Company with reasonable assurances that such Security
can be sold pursuant to Rule 144 or Regulation S. The Buyer agrees to sell
all Securities, including those represented by a certificate(s) from which
the legend has been removed, in compliance with applicable prospectus
delivery requirements, if any.
h. Authorization; Enforcement. This Agreement and the
Registration Rights Agreement have been duly and validly authorized. This
Agreement has been duly executed and delivered on behalf of the Buyer, and
this Agreement constitutes, and upon execution and delivery by the Buyer of
the Registration Rights Agreement, such agreement will constitute, valid and
binding agreements of the Buyer enforceable in accordance with their terms.
i. Residency. The Buyer is a resident of the jurisdiction set forth
immediately below such Buyers name on the signature pages hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to each Buyer that:
a. Organization and Qualification. The Company and each
of its Subsidiaries (as defined below), if any, is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated, with full power and authority
(corporate and other) to own, lease, use and operate its properties and to
carry on its business as and where now owned, leased, used, operated and
conducted. Schedule 3(a) sets forth a list of all of the Subsidiaries of
the Company and the jurisdiction in which each is incorporated. The Company
and each of its Subsidiaries is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which its
ownership or use of property or the nature of the business conducted by it
makes such qualification necessary except where the failure to be so
qualified or in good standing would not have a Material Adverse Effect.
Material Adverse Effect means any of (i) a material and adverse effect on
the legality, validity or enforceability of any document executed in
connection with this financing, (ii) a material and adverse effect on the
results of operations, assets, prospects, business or condition (financial
or otherwise) of the Company and the Subsidiaries, taken as a whole, or
(iii) an adverse impairment to the Company's ability to perform under any of
the documents executed in connection with this financing. Subsidiaries
means any corporation or other organization, whether incorporated or
unincorporated, in which the Company owns, directly or indirectly, any
equity or other ownership interest.
b. Authorization; Enforcement. (i) The Company has all
requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement, the Notes and the Warrants and
to consummate the transactions contemplated hereby and thereby and to issue
the Securities, in accordance with the terms hereof and thereof, (ii) the
execution and delivery of this Agreement, the Registration Rights Agreement,
the Notes and the Warrants by the Company and the consummation by it of the
transactions contemplated hereby and thereby (including without limitation,
the issuance of the Notes and the Warrants and the issuance and reservation
for issuance of the Conversion Shares and Warrant Shares issuable upon
conversion or exercise thereof) have been duly authorized by the Company's
Board of Directors and no further consent or authorization of the Company,
its Board of Directors, or its shareholders is required, (iii) this Agreement
has been duly executed and delivered by the Company by its authorized
representative, and such authorized representative is the true and official
representative with authority to sign this Agreement and the other documents
executed in connection herewith and bind the Company accordingly, and (iv)
this Agreement constitutes, and upon execution and delivery by the Company of
the Registration Rights Agreement, the Notes and the Warrants, each of such
instruments will constitute, a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) [ ] shares of Common Stock,
of which [ ] shares are issued and outstanding, [ ] shares are
reserved for issuance pursuant to the Company's stock option plans, [ ]
shares are reserved for issuance pursuant to securities (other than the Notes
and the Warrants) exercisable for, or convertible into or exchangeable for
shares of Common Stock and, [ ] shares are reserved for issuance upon
conversion of the Notes and exercise of the Warrants (subject to adjustment
pursuant to the Company's covenant set forth in Section 4(h) below); and (ii)
[ ] shares of preferred stock of which no shares are issued and
outstanding. All of such outstanding shares of capital stock are, or upon
issuance will be, duly authorized, validly issued, fully paid and
nonassessable. No shares of capital stock of the Company are subject to
preemptive rights or any other similar rights of the shareholders of the
Company or any liens or encumbrances imposed through the actions or
failure to act of the Company. Except as disclosed in Schedule 3(c),
as of the effective date of this Agreement, (i) there are no outstanding
options, warrants, scrip, rights to subscribe for, puts, calls, rights
of first refusal, agreements, understandings, claims or other commitments
or rights of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for any shares of capital stock of the
Company or any of its Subsidiaries, or arrangements by which the Company
or any of its Subsidiaries is or may become bound to issue additional shares
of capital stock of the Company or any of its Subsidiaries, (ii) there are
no agreements or arrangements under which the Company or any of its
Subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act (except the Registration
Rights Agreement) and (iii) there are no anti-dilution or price adjustment
provisions contained in any security issued by the Company (or in any
agreement providing rights to security holders) that will be triggered by the
issuance of the Notes, the Warrants, the Conversion Shares or Warrant
Shares. The Company has furnished to the Buyer true and correct copies of
the Company's Certificate of Incorporation as in effect on the date hereof
( Certificate of Incorporation ), the Company's By-laws, as in effect on the
date hereof (the By-laws ), and the terms of all securities convertible into
or exercisable for Common Stock of the Company and the material rights of
the holders thereof in respect thereto. The Company shall provide the Buyer
with a written update of this representation signed by the Company's Chief
Executive or Chief Financial Officer on behalf of the Company as of the
Closing Date.
d. Issuance of Shares. The Conversion Shares and
Warrant Shares are duly authorized and reserved for issuance and, upon
conversion of the Notes and exercise of the Warrants in accordance with
their respective terms, will be validly issued, fully paid and non-assessable
and free from all taxes, liens, claims and encumbrances with respect to the
issue thereof and shall not be subject to preemptive rights or other similar
rights of shareholders of the Company and will not impose personal liability
upon the holder thereof.
e. Acknowledgment of Dilution. The Company understands
and acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Conversion Shares and Warrant Shares upon conversion of the
Note or exercise of the Warrants. The Company further acknowledges that its
obligation to issue Conversion Shares and Warrant Shares upon conversion of
the Notes or exercise of the Warrants in accordance with this Agreement, the
Notes and the Warrants is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of
other shareholders of the Company.
f. No Conflicts. The execution, delivery and
performance of this Agreement, the Registration Rights Agreement, the Notes
and the Warrants by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation,
the issuance and reservation for issuance of the Conversion Shares and
Warrant Shares) will not (i) conflict with or result in a violation of any
provision of the Certificate of Incorporation or By-laws or (ii) violate or
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which with notice or lapse of time or both could become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture, patent, patent
license or instrument to which the Company or any of its Subsidiaries is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws and
regulations and regulations of any self-regulatory organizations to which the
Company or its securities are subject) applicable to the Company or any of
its Subsidiaries or by which any property or asset of the Company or any of
its Subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as
would not, individually or in the aggregate, have a Material Adverse Effect).
Neither the Company nor any of its Subsidiaries is in violation of its
Certificate of Incorporation, By-laws or other organizational documents and
neither the Company nor any of its Subsidiaries is in default (and no event
has occurred which with notice or lapse of time or both could put the Company
or any of its Subsidiaries in default) under, and neither the Company nor
any of its Subsidiaries has taken any action or failed to take any action
that would give to others any rights of termination, amendment, acceleration
or cancellation of, any agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party or by which any property or
assets of the Company or any of its Subsidiaries is bound or affected, except
for possible defaults as would not, individually or in the aggregate, have a
Material Adverse Effect. The businesses of the Company and its Subsidiaries
if any, are not being conducted, and shall not be conducted so long as a
Buyer owns any of the Securities, in violation of any law, ordinance or
regulation of any governmental entity. Except as specifically contemplated
by this Agreement and as required under the 1933 Act and any applicable state
securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
governmental agency, regulatory agency, self regulatory organization or
stock market or any third party in order for it to execute, deliver or
perform any of its obligations under this Agreement, the Registration Rights
Agreement, the Notes or the Warrants in accordance with the terms hereof or
thereof or to issue and sell the Notes and Warrants in accordance with the
terms hereof and to issue the Conversion Shares upon conversion of the Notes
and the Warrant Shares upon exercise of the Warrants. Except as disclosed in
Schedule 3(f), all consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof. The Company is not in violation of the quotation requirements of the
Over-the-Counter Bulletin Board (the OTCBB ) and does not reasonably
anticipate that the Common Stock will be delisted by the OTCBB in the
foreseeable future. The Company and its Subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.
g. SEC Documents; Financial Statements. Except as
disclosed in Schedule 3(g), the Company has timely filed all reports,
schedules, forms, statements and other documents required to be filed by it
with the SEC pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the 1934 Act ) (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents (other than exhibits to such
documents) incorporated by reference therein, being hereinafter referred to
herein as the SEC Documents ). The Company has delivered to each Buyer true
and complete copies of the SEC Documents, except for such exhibits and
incorporated documents. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and
the rules and regulations of the SEC promulgated thereunder applicable to the
SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. None of the statements made in any such SEC
Documents is, or has been, required to be amended or updated under
applicable law (except for such statements as have been amended or updated in
subsequent filings prior the date hereof). As of their respective dates,
the financial statements of the Company included in the SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may not include footnotes
or may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as set forth in the financial statements of the Company
included in the SEC Documents, the Company has no liabilities, contingent
or otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to December 31, 2004 and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in such
financial statements, which, individually or in the aggregate, are not
material to the financial condition or operating results of the Company.
h. Absence of Certain Changes. Since December 31, 2004,
there has been no material adverse change and no material adverse
development in the assets, liabilities, business, properties, operations,
financial condition, results of operations or prospects of the Company or
any of its Subsidiaries.
i. Absence of Litigation. There is no action, suit,
claim, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending or,
to the knowledge of the Company or any of its Subsidiaries, threatened
against or affecting the Company or any of its Subsidiaries, or their
officers or directors in their capacity as such, that could have a Material
Adverse Effect. Schedule 3(i) contains a complete list and summary
description of any pending or threatened proceeding against or affecting the
Company or any of its Subsidiaries, without regard to whether it would have
a Material Adverse Effect. The Company and its Subsidiaries are unaware of
any facts or circumstances which might give rise to any of the foregoing.
j. Patents, Copyrights, etc. The Company and each of
its Subsidiaries owns or possesses the requisite licenses or rights to use
all patents, patent applications, patent rights, inventions, know-how, trade
secrets, trademarks, trademark applications, service marks, service names,
trade names and copyrights ( Intellectual Property ) necessary to enable it
to conduct its business as now operated (and, except as set forth in Schedule
3(j) hereof, to the best of the Company's knowledge, as presently
contemplated to be operated in the future); there is no claim or action by
any person pertaining to, or proceeding pending, or to the Company's
knowledge threatened, which challenges the right of the Company or of a
Subsidiary with respect to any Intellectual Property necessary to enable it
to conduct its business as now operated (and, except as set forth in Schedule
3(j) hereof, to the best of the Company's knowledge, as presently
contemplated to be operated in the future); to the best of the Company's
knowledge, the Company's or its Subsidiaries current and intended products,
services and processes do not infringe on any Intellectual Property or other
rights held by any person; and the Company is unaware of any facts or
circumstances which might give rise to any of the foregoing. The Company and
each of its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of their Intellectual Property.
k. No Materially Adverse Contracts, Etc. Neither the
Company nor any of its Subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company's officers has or is expected in the
future to have a Material Adverse Effect. Neither the Company nor any of
its Subsidiaries is a party to any contract or agreement which in the
judgment of the Company's officers has or is expected to have a Material
Adverse Effect.
l. Tax Status. Except as set forth on Schedule 3(l),
the Company and each of its Subsidiaries has made or filed all federal, state
and foreign income and all other tax returns, reports and declarations
required by any jurisdiction to which it is subject (unless and only to the
extent that the Company and each of its Subsidiaries has set aside on its
books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on
such returns, reports and declarations, except those being contested in good
faith and has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction
and the officers of the Company know of no basis for any such claim. The
Company has not executed a waiver with respect to the statute of limitations
relating to the assessment or collection of any foreign, federal, state or
local tax. Except as set forth on Schedule 3(l), none of the Company's tax
returns is presently being audited by any taxing authority.
m. Certain Transactions. Except as set forth on
Schedule 3(m) and except for arms length transactions pursuant to which the
Company or any of its Subsidiaries makes payments in the ordinary course of
business upon terms no less favorable than the Company or any of its
Subsidiaries could obtain from third parties and other than the grant of
stock options disclosed on Schedule 3(c), none of the officers, directors, or
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner.
n. Disclosure. All information relating to or
concerning the Company or any of its Subsidiaries set forth in this Agreement
and provided to the Buyers pursuant to Section 2(d) hereof and otherwise in
connection with the transactions contemplated hereby is true and correct in
all material respects and the Company has not omitted to state any material
fact necessary in order to make the statements made herein or therein, in
light of the circumstances under which they were made, not misleading. No
event or circumstance has occurred or exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed (assuming for this
purpose that the Company's reports filed under the 1934 Act are being
incorporated into an effective registration statement filed by the Company
under the 1933 Act).
o. Acknowledgment Regarding Buyers Purchase of
Securities. The Company acknowledges and agrees that the Buyers are acting
solely in the capacity of arms length purchasers with respect to this
Agreement and the transactions contemplated hereby. The Company further
acknowledges that no Buyer is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this Agreement and
the transactions contemplated hereby and any statement made by any Buyer or
any of their respective representatives or agents in connection with this
Agreement and the transactions contemplated hereby is not advice or a
recommendation and is merely incidental to the Buyers purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into this Agreement has been based solely on the
independent evaluation of the Company and its representatives.
p. No Integrated Offering. Neither the Company, nor any
of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales in any security or solicited
any offers to buy any security under circumstances that would require
registration under the 1933 Act of the issuance of the Securities to the
Buyers. The issuance of the Securities to the Buyers will not be integrated
with any other issuance of the Company's securities (past, current or future)
for purposes of any shareholder approval provisions applicable to the
Company or its securities.
q. No Brokers. Except as set forth in Schedule 3(q),
the Company has taken no action which would give rise to any claim by any
person for brokerage commissions, transaction fees or similar payments
relating to this Agreement or the transactions contemplated hereby.
r. Permits; Compliance. The Company and each of its
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and
to carry on its business as it is now being conducted (collectively, the
Company Permits ), and there is no action pending or, to the knowledge of
the Company, threatened regarding suspension or cancellation of any of the
Company Permits. Neither the Company nor any of its Subsidiaries is in
conflict with, or in default or violation of, any of the Company Permits,
except for any such conflicts, defaults or violations which, individually or
in the aggregate, would not reasonably be expected to have a Material Adverse
Effect. Since December 31, 2004, neither the Company nor any of its
Subsidiaries has received any notification with respect to possible conflicts
defaults or violations of applicable laws, except for notices relating to
possible conflicts, defaults or violations, which conflicts, defaults or
violations would not have a Material Adverse Effect.
s. Environmental Matters. (i) Except as set forth in Schedule 3(s)
there are, to the Company's knowledge, with respect to the Company or any of its
Subsidiaries or any predecessor of the Company, no past or present violations
of Environmental Laws (as defined below), releases of any material into the
environment, actions, activities, circumstances, conditions, events,
incidents, or contractual obligations which may give rise to any common law
environmental liability or any liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or similar
federal, state, local or foreign laws and neither the Company nor any of
its Subsidiaries has received any notice with respect to any of the foregoing
, nor is any action pending or, to the Company's knowledge, threatened in
connection with any of the foregoing. The term Environmental Laws means
all federal, state, local or foreign laws relating to pollution or protection
of human health or the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants contaminants, or
toxic or hazardous substances or wastes (collectively, Hazardous Materials )
into the environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands
or demand letters, injunctions, judgments, licenses, notices or notice
letters, orders, permits, plans or regulations issued, entered, promulgated
or approved thereunder.
(ii) Other than those that are or were stored,
used or disposed of in compliance with applicable law, no Hazardous Materials
are contained on or about any real property currently owned, leased or used
by the Company or any of its Subsidiaries, and no Hazardous Materials were
released on or about any real property previously owned, leased or used by
the Company or any of its Subsidiaries during the period the property was
owned, leased or used by the Company or any of its Subsidiaries, except in
the normal course of the Company's or any of its Subsidiaries business.
(iii) Except as set forth in Schedule 3(s), there
are no underground storage tanks on or under any real property owned, leased
or used by the Company or any of its Subsidiaries that are not in compliance
with applicable law.
t. Title to Property. The Company and its Subsidiaries
have good and marketable title in fee simple to all real property and good
and marketable title to all personal property owned by them which is material
to the business of the Company and its Subsidiaries, in each case free and
clear of all liens, encumbrances and defects except such as are described in
Schedule 3(t) or such as would not have a Material Adverse Effect. Any real
property and facilities held under lease by the Company and its Subsidiaries
are held by them under valid, subsisting and enforceable leases with such
exceptions as would not have a Material Adverse Effect.
u. Insurance. The Company and each of its Subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as management of the Company believes to
be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not have a Material Adverse Effect. The Company has
provided to Buyer true and correct copies of all policies relating to
directors and officers liability coverage, errors and omissions coverage,
and commercial general liability coverage.
v. Internal Accounting Controls. The Company and each
of its Subsidiaries maintain a system of internal accounting controls
sufficient, in the judgment of the Company's board of directors, to provide
reasonable assurance that (i) transactions are executed in accordance with
managements general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with managements general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
w. Foreign Corrupt Practices. Neither the Company, nor
any of its Subsidiaries, nor any director, officer, agent, employee or other
person acting on behalf of the Company or any Subsidiary has, in the course of
his actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses
relating to political activity; made any direct or indirect unlawful payment
to any foreign or domestic government official or employee from corporate funds
; violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
x. Solvency. The Company (after giving effect to the
transactions contemplated by this Agreement) is solvent (i.e., its assets have
a fair market value in excess of the amount required to pay its probable
liabilities on its existing debts as they become absolute and matured) and
currently the Company has no information that would lead it to reasonably
conclude that the Company would not, after giving effect to the transaction
contemplated by this Agreement, have the ability to, nor does it intend to
take any action that would impair its ability to, pay its debts from time to
time incurred in connection therewith as such debts mature. The Company did
not receive a qualified opinion from its auditors with respect to its most
recent fiscal year end and, after giving effect to the transactions
contemplated by this Agreement, does not anticipate or know of any basis upon
which its auditors might issue a qualified opinion in respect of its current
fiscal year.
y. No Investment Company. The Company is not, and upon
the issuance and sale of the Securities as contemplated by this Agreement will
not be an investment company required to be registered under the Investment
Company Act of 1940 (an Investment Company ). The Company is not controlled
by an Investment Company.
z. Breach of Representations and Warranties by the Company.
If the Company breaches any of the representations or warranties set forth
in this Section 3, and in addition to any other remedies available to the
Buyers pursuant to this Agreement, the Company shall pay to the Buyer the
Standard Liquidated Damages Amount in cash or in shares of Common Stock at the
option of the Company, until such breach is cured. If the Company elects to
pay the Standard Liquidated Damages Amounts in shares of Common Stock, such
shares shall be issued at the Conversion Price at the time of payment.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts
to satisfy timely each of the conditions described in Section 6 and 7 of this
Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a
Form D with respect to the Securities as required under Regulation D and to
provide a copy thereof to each Buyer promptly after such filing. The Company
shall, on or before the Closing Date, take such action as the Company shall
reasonably determine is necessary to qualify the Securities for sale to the
Buyers at the applicable closing pursuant to this Agreement under applicable
securities or blue sky laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to each Buyer on or prior to the Closing Date.
c. Reporting Status; Eligibility to Use Form S-3, SB-2 or
Form S-1. The Company's Common Stock is registered under Section 12(g) of the
1934 Act. The Company represents and warrants that it meets the requirements
for the use of Form S-3 (or if the Company is not eligible for the use of Form
S-3 as of the Filing Date (as defined in the Registration Rights Agreement),
the Company may use the form of registration for which it is eligible at that
time) for registration of the sale by the Buyer of the Registrable Securities
(as defined in the Registration Rights Agreement). So long as the Buyer
beneficially owns any of the Securities, the Company shall timely file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination. The Company further agrees to file all reports
required to be filed by the Company with the SEC in a timely manner so as to
become eligible, and thereafter to maintain its eligibility, for the use of
Form S-3. The Company shall issue a press release describing the material
terms of the transaction contemplated hereby as soon as practicable following
the Closing Date but in no event more than two (2) business days of the Closing
Date, which press release shall be subject to prior review by the Buyers.
The Company agrees that such press release shall not disclose the name of the
Buyers unless expressly consented to in writing by the Buyers or unless
required by applicable law or regulation, and then only to the extent of such
requirement.
d. Use of Proceeds. The Company shall use the net
proceeds from the sale of the Notes and the Warrants in the manner set forth
in Schedule 4(d) attached hereto and made a part hereof and shall not, directly
or indirectly, use such proceeds for (i) any loan to or investment in any
other corporation, partnership, enterprise or other person (except in
connection with its currently existing direct or indirect Subsidiaries); (ii)
the satisfaction of any portion of the Company's debt (other than payment of
trade payables and accrued expenses in the ordinary course of the Company's
business and consistent with prior past practices), or (iii) the redemption of
any Common Stock.
e. Future Offerings. Subject to the exceptions described
below, the Company will not, without the prior written consent of a majority-in
-interest of the Buyers, negotiate or contract with any party to obtain
additional equity financing (including debt financing with an equity component)
that involves (A) the issuance of Common Stock at a discount to the market
price of the Common Stock on the date of issuance (taking into account the
value of any warrants or options to acquire Common Stock issued in connection
therewith) or (B) the issuance of convertible securities that are convertible
into an indeterminate number of shares of Common Stock or (C) the issuance of
warrants during the period (the Lock-up Period ) beginning on the Closing
Date and ending on the later of (i) two hundred seventy (270) days from the
Closing Date and (ii) one hundred eighty (180) days from the date the
Registration Statement (as defined in the Registration Rights Agreement) is
declared effective (plus any days in which sales cannot be made thereunder).
In addition, subject to the exceptions described below, the Company will not
conduct any equity financing (including debt with an equity component)
( Future Offerings ) during the period beginning on the Closing Date and
ending two (2) years after the end of the Lock-up Period unless it shall have
first delivered to each Buyer, at least twenty (20) business days prior to the
closing of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof and proposed definitive
documentation to be entered into in connection therewith, and providing each
Buyer an option during the fifteen (15) day period following delivery of such
notice to purchase its pro rata share (based on the ratio that the aggregate
principal amount of Notes purchased by it hereunder bears to the aggregate
principal amount of Notes purchased hereunder) of the securities being offered
in the Future Offering on the same terms as contemplated by such Future
Offering (the limitations referred to in this sentence and the preceding
sentence are collectively referred to as the Capital Raising Limitations ).
In the event the terms and conditions of a proposed Future Offering are amended
in any respect after delivery of the notice to the Buyers concerning the
proposed Future Offering, the Company shall deliver a new notice to each Buyer
describing the amended terms and conditions of the proposed Future Offering
and each Buyer thereafter shall have an option during the fifteen (15) day
period following delivery of such new notice to purchase its pro rata share of
the securities being offered on the same terms as contemplated by such
proposed Future Offering, as amended. The foregoing sentence shall apply to
successive amendments to the terms and conditions of any proposed Future
Offering. The Capital Raising Limitations shall not apply to any transaction
involving (i) issuances of securities in a firm commitment underwritten public
offering (excluding a continuous offering pursuant to Rule 415 under the 1933
Act, an equity line of credit or similar financing arrangement) resulting in
net proceeds to the Company of in excess of $15,000,000, or (ii) issuances of
securities as consideration for a merger, consolidation or purchase of assets,
or in connection with any strategic partnership or joint venture (the primary
purpose of which is not to raise equity capital), or in connection with the
disposition or acquisition of a business, product or license by the Company.
The Capital Raising Limitations also shall not apply to the issuance of
securities upon exercise or conversion of the Company's options, warrants or
other convertible securities outstanding as of the date hereof or to the grant
of additional options or warrants, or the issuance of additional securities,
under any Company stock option or restricted stock plan approved by the
shareholders of the Company. Notwithstanding anything in this section 4(e)
to the contrary, in the event the Company's Board of Directors decides, in
good faith, to enter into a transaction or relationship in which the Company
issues shares of Common Stock or other securities of the Company to a person
or any entity which is, itself or through its subsidiaries, an operating
company in a business synergistic with the business of the Company and in
which the Company received benefits in addition to the investment of funds,
but shall not include a transaction in which the Company is issuing securities
primarily for the purpose of raising capital or to an entity whose business
is investing in securities, the Company shall be permitted to do so.
f. Expenses. At the Closing, the Company shall reimburse
Buyers for expenses incurred by them in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement and the
other agreements to be executed in connection herewith ( Documents ), including
without limitation, attorneys and consultants fees and expenses, transfer
agent fees, fees for stock quotation services, fees relating to any amendments
or modifications of the Documents or any consents or waivers of provisions in
the Documents, fees for the preparation of opinions of counsel, escrow fees,
and costs of restructuring the transactions contemplated by the Documents.
When possible, the Company must pay these fees directly, otherwise the Company
must make immediate payment for reimbursement to the Buyers for all fees and
expenses immediately upon written notice by the Buyer or the submission of an
invoice by the Buyer If the Company fails to reimburse the Buyer in full
within three (3) business days of the written notice or submission of invoice
by the Buyer, the Company shall pay interest on the total amount of fees to be
reimbursed at a rate of 15% per annum.
g. Financial Information. The Company agrees to send the
following reports to each Buyer until such Buyer transfers, assigns, or sells
all of the Securities: (i)within ten (10) days after the filing with the SEC,
a copy of its Annual Report on Form 10-KSB its Quarterly Reports on Form
10-QSB and any Current Reports on Form 8-K; (ii)within one (1) day after
release, copies of all press releases issued by the Company or any of its
Subsidiaries; and (iii)contemporaneously with the making available or giving
to the shareholders of the Company, copies of any notices or other information
the Company makes available or gives to such shareholders.
h. Authorization and Reservation of Shares. Subject to
Stockholder Approval, the Company shall at all times have authorized, and
reserved for the purpose of issuance, a sufficient number of shares of Common
Stock to provide for the full conversion or exercise of the outstanding Notes
and Warrants and issuance of the Conversion Shares and Warrant Shares in
connection therewith (based on the Conversion Price of the Notes or Exercise
Price of the Warrants in effect from time to time) and as otherwise required
by the Notes. The Company shall not reduce the number of shares of Common
Stock reserved for issuance upon conversion of Notes and exercise of the
Warrants without the consent of each Buyer. The Company shall at all times
maintain the number of shares of Common Stock so reserved for issuance at an
amount ( Reserved Amount ) equal to no less than two (2) times the number that
is then actually issuable upon full conversion of the Notes and Additional
Notes and upon exercise of the Warrants and the Additional Warrants (based on
the Conversion Price of the Notes or the Exercise Price of the Warrants in
effect from time to time). If at any time the number of shares of Common Stock
authorized and reserved for issuance ( Authorized and Reserved Shares ) is
below the Reserved Amount, the Company will promptly take all corporate action
necessary to authorize and reserve a sufficient number of shares, including,
without limitation, calling a special meeting of shareholders to authorize
additional shares to meet the Company's obligations under this Section 4(h),
in the case of an insufficient number of authorized shares, obtain shareholder
approval of an increase in such authorized number of shares, and voting the
management shares of the Company in favor of an increase in the authorized
shares of the Company to ensure that the number of authorized shares is
sufficient to meet the Reserved Amount. If the Company fails to obtain such
shareholder approval within thirty (30) days following the date on which the
number of Reserved Amount exceeds the Authorized and Reserved Shares, the
Company shall pay to the Borrower the Standard Liquidated Damages Amount, in
cash or in shares of Common Stock at the option of the Buyer. If the Buyer
elects to be paid the Standard Liquidated Damages Amount in shares of Common
Stock, such shares shall be issued at the Conversion Price at the time of
payment. In order to ensure that the Company has authorized a sufficient
amount of shares to meet the Reserved Amount at all times, the Company must
deliver to the Buyer at the end of every month a list detailing (1) the current
amount of shares authorized by the Company and reserved for the Buyer; and (2)
amount of shares issuable upon conversion of the Notes and upon exercise of
the Warrants and as payment of interest accrued on the Notes for one year. If
the Company fails to provide such list within five (5) business days of the
end of each month, the Company shall pay the Standard Liquidated Damages Amount
,in cash or in shares of Common Stock at the option of the Buyer, until the
list is delivered. If the Buyer elects to be paid the Standard Liquidated
Damages Amount in shares of Common Stock, such shares shall be issued at the
Conversion Price at the time of payment.
i. Listing. The Company shall promptly secure the listing
or quotation, as the case may be, of the Conversion Shares and Warrant Shares
upon each national securities exchange or automated quotation system, if any,
upon which shares of Common Stock are then listed or quoted, as the case may be
(subject to official notice of issuance) and, so long as any Buyer owns any
of the Securities, shall maintain, so long as any other shares of Common Stock
shall be so listed or quoted, as the case may be, such listing or quotation, as
the case may be, of all Conversion Shares and Warrant Shares from time to time
issuable upon conversion of the Notes or exercise of the Warrants. The
Company will obtain and, so long as any Buyer owns any of the Securities,
maintain the listing or quotation, as the case may be, and trading of its
Common Stock on the OTCBB or any equivalent replacement exchange, the Nasdaq
National Market ( Nasdaq ), the Nasdaq SmallCap Market ( Nasdaq SmallCap ),
the New York Stock Exchange ( NYSE ), or the American Stock Exchange ( AMEX )
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers ( NASD ) and such exchanges, as applicable. The Company shall
promptly provide to each Buyer copies of any notices it receives from the OTCBB
and any other exchanges or quotation systems on which the Common Stock is then
listed or quoted, as the case may be, regarding the continued eligibility of
the Common Stock for listing or quotation, as the case may be, on such
exchanges and quotation systems.
j. Corporate Existence. So long as a Buyer beneficially
owns any Notes or Warrants, the Company shall maintain its corporate existence
and shall not sell all or substantially all of the Company's assets, except in
the event of a merger or consolidation or sale of all or substantially all of
the Company's assets, where the surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
agreements and instruments entered into in connection herewith and (ii) is a
publicly traded corporation whose Common Stock is listed for trading on the
OTCBB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX.
k. No Integration. The Company shall not make any
offers or sales of any security (other than the Securities) under circumstances
that would require registration of the Securities being offered or sold
hereunder under the 1933 Act or cause the offering of the Securities to be
integrated with any other offering of securities by the Company for the purpose
of any stockholder approval provision applicable to the Company or its
securities.
l. Subsequent Investment. The Company and the Buyers
agree that, upon the filing by the Company of the Registration Statement to
be filed pursuant to the Registration Rights Agreement (the Filing Date ),
the Buyers shall purchase additional Notes (the Filing Notes ) in the
aggregate principal amount of Four Hundred Thousand Dollars ($400,000) and
additional warrants (the Additional Warrants ) to purchase an aggregate of
10,000,000 shares of Common Stock, for an aggregate purchase price of Four
Hundred Thousand Dollars ($400,000), with the closing of such purchase to
occur within five (5) days of the Filing Date; provided, however, that the
obligation of each Buyer to purchase the Filing Notes and the Additional
Warrants is subject to the satisfaction, at or before the closing of such
purchase and sale, of the conditions set forth in Section 7. The Company and
the Buyers further agree that, upon the declaration of effectiveness of the
Registration Statement to be filed pursuant to the Registration Rights
Agreement (the Effective Date ), the Buyers shall purchase additional notes
(the Effectiveness Notes and, collectively with the Filing Notes, the
Additional Notes ) in the aggregate principal amount of Four Hundred and
Fifty Thousand Dollars ($450,000), for an aggregate purchase price of Four
Hundred and Fifty Thousand Dollars ($450,000), with the closing of such
purchase to occur within five (5) days of the Effective Date; provided,
however, that the obligation of each Buyer to purchase the Additional Notes
and the Additional Warrants is subject to the satisfaction, at or before the
closing of such purchase and sale, of the conditions set forth in Section 7;
and, provided, further, that there shall not have been a Material Adverse
Effect as of such effective date. The terms of the Additional Notes and the
Additional Warrants shall be identical to the terms of the Notes and Warrants,
as the case may be, to be issued on the Closing Date. The Common Stock
underlying the Additional Notes and the Additional Warrants shall be
Registrable Securities (as defined in the Registration Rights Agreement) and
shall be included in the Registration Statement to be filed pursuant to the
Registration Rights Agreement.
m. Key Man Insurance. The Company shall use its best
efforts to obtain, on or before five (5) business days from the date hereof,
key man life insurance on all key executive employees.
n. Restriction on Short Sales. The Buyers agree that, so
long as any of the Notes remain outstanding, but in no event less than two (2)
years from the date hereof, the Buyers will not enter into or effect any
short sales (as such term is defined in Rule 3b-3 of the 0000 Xxx) of the
Common Stock or hedging transaction which establishes a net short position
with respect to the Common Stock.
o. Breach of Covenants. If the Company breaches any of
the covenants set forth in this Section 4, and in addition to any other
remedies available to the Buyers pursuant to this Agreement, the Company shall
pay to the Buyers the Standard Liquidated Damages Amount, in cash or in shares
of Common Stock at the option of the Company, until such breach is cured. If
the Company elects to pay the Standard Liquidated Damages Amount in shares,
such shares shall be issued at the Conversion Price at the time of payment.
5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue
irrevocable instructions to its transfer agent to issue certificates,
registered in the name of each Buyer or its nominee, for the Conversion
Shares and Warrant Shares in such amounts as specified from time to time by
each Buyer to the Company upon conversion of the Notes or exercise of the
Warrants in accordance with the terms thereof (the Irrevocable Transfer Agent
Instructions ). Prior to registration of the Conversion Shares and Warrant
shares under the 1933 Act or the date on which the Conversion Shares and
Warrant Shares may be sold pursuant to Rule 144 without any restriction as to
the number of Securities as of a particular date that can then be immediately
sold, all such certificates shall bear the restrictive legend specified in
Section 2(g) of this Agreement. The Company warrants that no instruction
other than the Irrevocable Transfer Agent Instructions referred to in this
Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof (in the case of the Conversion Shares and Warrant Shares, prior to
registration of the Conversion Shares and Warrant Shares under the 1933 Act or
the date on which the Conversion Shares and Warrant Shares may be sold
pursuant to Rule 144 without any restriction as to the number of Securities as
of a particular date that can then be immediately sold), will be given by the
Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the
extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way the Buyers obligations and
agreement set forth in Section 2(g) hereof to comply with all applicable
prospectus delivery requirements, if any, upon re-sale of the Securities. If
a Buyer provides the Company with (i) an opinion of counsel in form,
substance and scope customary for opinions in comparable transactions, to the
effect that a public sale or transfer of such Securities may be made without
registration under the 1933 Act and such sale or transfer is effected or (ii)
the Buyer provides reasonable assurances that the Securities can be sold
pursuant to Rule 144, the Company shall permit the transfer, and, in the case
of the Conversion Shares and Warrant Shares, promptly instruct its transfer
agent to issue one or more certificates, free from restrictive legend, in such
name and in such denominations as specified by such Buyer. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyers, by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5 may be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section, that the Buyers shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate transfer, without the necessity of showing
economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY S OBLIGATION TO SELL. The
obligation of the Company hereunder to issue and sell the Notes and Warrants
to a Buyer at the Closing is subject to the satisfaction, at or before the
Closing Date of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
a. The applicable Buyer shall have executed this Agreement
and the Registration Rights Agreement, and delivered the same to the Company.
b. The applicable Buyer shall have delivered the Purchase
Price in accordance with Section 1(b) above.
c. The representations and warranties of the applicable
Buyer shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and the
applicable Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the applicable Buyer
at or prior to the Closing Date.
d. No litigation, statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority
over the matters contemplated hereby which prohibits the consummation of any
of the transactions contemplated by this Agreement.
7. CONDITIONS TO EACH BUYER S OBLIGATION TO PURCHASE. The
obligation of each Buyer hereunder to purchase the Notes and Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date of each
of the following conditions, provided that these conditions are for such
Buyers sole benefit and may be waived by such Buyer at any time in its sole
discretion:
a. The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Buyer.
b. The Company shall have delivered to such Buyer duly
executed Notes (in such denominations as the Buyer shall request) and Warrants
in accordance with Section 1(b) above.
c. The Irrevocable Transfer Agent Instructions, in form
and substance satisfactory to a majority-in-interest of the Buyers, shall have
been delivered to and acknowledged in writing by the Company's Transfer Agent.
d. The representations and warranties of the Company shall
be true and correct in all material respects as of the date when made and as
of the Closing Date as though made at such time (except for representations
and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Company at or prior to the Closing Date.
The Buyer shall have received a certificate or certificates, executed by the
chief executive officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested
by such Buyer including, but not limited to certificates with respect to the
Company's Certificate of Incorporation, By-laws and Board of Directors
resolutions relating to the transactions contemplated hereby.
e. No litigation, statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by or in any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority
over the matters contemplated hereby which prohibits the consummation of any
of the transactions contemplated by this Agreement.
f. No event shall have occurred which could reasonably be
expected to have a Material Adverse Effect on the Company.
g. The Conversion Shares and Warrant Shares shall have
been authorized for quotation on the OTCBB and trading in the Common Stock on
the OTCBB shall not have been suspended by the SEC or the OTCBB.
h. The Buyer shall have received an opinion of the
Company's counsel, dated as of the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer and in substantially the same form as
Exhibit D attached hereto.
i. The Buyer shall have received an officers certificate
described in Section 3(c) above, dated as of the Closing Date.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. THIS AGREEMENT SHALL BE ENFORCED,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE,
WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO
HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL
COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER
THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY
MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE
OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL
AFFECT EITHER PARTY S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY
LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT
OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT
PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR
ALL FEES AND EXPENSES, INCLUDING ATTORNEYS FEES, INCURRED BY THE PREVAILING
PARTY IN CONNECTION WITH SUCH DISPUTE.
b. Counterparts; Signatures by Facsimile. This Agreement
may be executed in one or more counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same agreement and shall
become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may
be delivered to the other party hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
c. Headings. The headings of this Agreement are for
convenience of reference only and shall not form part of, or affect the
interpretation of, this Agreement.
d. Severability. In the event that any provision of this
Agreement is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute
or rule of law. Any provision hereof which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision hereof.
e. Entire Agreement; Amendments. This Agreement and the
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to
such matters. No provision of this Agreement may be waived or amended other
than by an instrument in writing signed by the party to be charged with
enforcement.
f. Notices. Any notices required or permitted to be given
under the terms of this Agreement shall be sent by certified or registered
mail (return receipt requested) or delivered personally or by courier
(including a recognized overnight delivery service) or by facsimile and shall
be effective five days after being placed in the mail, if mailed by regular
United States mail, or upon receipt, if delivered personally or by courier
(including a recognized overnight delivery service) or by facsimile, in each
case addressed to a party. The addresses for such communications shall be:
If to the Company:
Palomar Enterprises, Inc.
0000 X. Xxxxxx Xxxxxx, Xxxxx 000-0000
Xxxxxx Xxxx, XX 00000
Attention: Chief Executive Officer
Telephone: (000) 000-0000
Facsimile: (775)
With a copy to:
Attention:
Telephone:
Facsimile:
If to a Buyer: To the address set forth immediately below such Buyers
name on the signature pages hereto.
With copy to:
Xxxxxxx Xxxxx Xxxxxxx & Ingersoll, LLP
0000 Xxxxxx Xxxxxx, 00xx Xxxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxxxx, Esq.
Telephone: 000-000-0000
Facsimile: 000-000-0000
Each party shall provide notice to the other party of any change in
address.
g. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
assigns. Neither the Company nor any Buyer shall assign this Agreement or any
rights or obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, subject to Section 2(f), any Buyer may
assign its rights hereunder to any person that purchases Securities in a
private transaction from a Buyer or to any of its affiliates, as that term
is defined under the 1934 Act, without the consent of the Company.
h. Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.
i. Survival. The representations and warranties of the
Company and the agreements and covenants set forth in Sections 3, 4, 5 and 8
shall survive the closing hereunder notwithstanding any due diligence
investigation conducted by or on behalf of the Buyers. The Company agrees to
indemnify and hold harmless each of the Buyers and all their officers,
directors, employees and agents for loss or damage arising as a result of or
related to any breach or alleged breach by the Company of any of its
representations, warranties and covenants set forth in Sections 3 and 4 hereof
or any of its covenants and obligations under this Agreement or the
Registration Rights Agreement, including advancement of expenses as they are
incurred.
j. Publicity. The Company and each of the Buyers shall
have the right to review a reasonable period of time before issuance of any
press releases, SEC, OTCBB or NASD filings, or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without the prior approval of each of the Buyers
to make any press release or SEC, OTCBB (or other applicable trading market)
or NASD filings with respect to such transactions as is required by applicable
law and regulations (although each of the Buyers shall be consulted by the
Company in connection with any such press release prior to its release and
shall be provided with a copy thereof and be given an opportunity to comment
thereon).
k. Further Assurances. Each party shall do and perform,
or cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.
l. No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.
m. Remedies. The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Buyers by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of
its obligations under this Agreement will be inadequate and agrees, in the
event of a breach or threatened breach by the Company of the provisions of
this Agreement, that the Buyers shall be entitled, in addition to all other
available remedies at law or in equity, and in addition to the penalties
assessable herein, to an injunction or injunctions restraining, preventing or
curing any breach of this Agreement and to enforce specifically the terms and
provisions hereof, without the necessity of showing economic loss and without
any bond or other security being required.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this
Agreement to be duly executed as of the date first above written.
PALOMAR ENTERPRISES, INC.
/s/ Xxxxx Xxxxxxxxxxx
By: Xxxxx Xxxxxxxxxxx
Chief Executive Officer
AJW PARTNERS, LLC
By: SMS Group, LLC
/s/ Xxxxx X. Xxxxxxxx
Manager
RESIDENCE: Delaware
ADDRESS: 0000 Xxxxxxxx Xxxxxxxxx
Xxxxx 000
Xxxxxx, Xxx Xxxx 00000
Facsimile: (000) 000-0000
Telephone: (000) 000-0000
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Notes: $________
Number of Series A Warrants: ________
Number of Series B Warrants: ________
Aggregate Purchase Price: $________
JW OFFSHORE, LTD.
By: First Street Manager II, LLC
/s/ Xxxxx X. Xxxxxxxx
Manager
RESIDENCE: Cayman Islands
ADDRESS: AJW Offshore, Ltd.
X.X. Xxx 00000 XXX
Xxxxx Xxxxxx, Xxxxxx Xxxxxx, B.W.I.
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Notes: $________
Number of Series A Warrants: ________
Number of Series B Warrants: ________
Aggregate Purchase Price: $________
AJW QUALIFIED PARTNERS, LLC
By: AJW Manager, LLC
/s/ Xxxxx X. Xxxxxxxx
Manager
RESIDENCE: New York
ADDRESS: 0000 Xxxxxxxx Xxxxxxxxx
Xxxxx 000
Xxxxxx, Xxx Xxxx 00000
Facsimile: (000) 000-0000
Telephone: (000) 000-0000
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Notes: $________
Number of Series A Warrants: ________
Number of Series B Warrants: ________
Aggregate Purchase Price: $________
NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By: First Street Manager II, LLP
/s/ Xxxxx X. Xxxxxxxx
Manager
RESIDENCE: New York
ADDRESS: 0000 Xxxxxxxx Xxxxxxxxx
Xxxxx 000
Xxxxxx, Xxx Xxxx 00000
Facsimile: (000) 000-0000
Telephone: (000) 000-0000
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Notes: $________
Number of Series A Warrants: ________
Number of Series B Warrants: ________
Aggregate Purchase Price: $________
