Exhibit 4.1
SECURITY AGREEMENT
This Security Agreement is made as of October 8, 2004 by and among LAURUS
MASTER FUND, LTD., a Cayman Islands corporation ("Laurus"), HESPERIA HOLDING,
INC., a Nevada corporation ("Company"), HESPERIA TRUSS, INC., a California
corporation ("Hesperia Truss"), and PAHRUMP VALLEY TRUSS, INC., a Nevada
corporation ("Pahrump Valley" and together with HTI, each an "Eligible
Subsidiary" and collectively, the "Eligible Subsidiaries").
BACKGROUND
Company and Eligible Subsidiaries have requested that Laurus make advances
available to Company and each Eligible Subsidiary; and
Laurus has agreed to make such advances on the terms and conditions set
forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
1. (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 which 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
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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. Revolving Loans. (a)(i) Subject to the terms and conditions set forth
herein and in the Ancillary Agreements, Laurus may make revolving loans (the
"Revolving Loans") to Company and the Eligible Subsidiaries 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 the (I) Accounts
Availability minus (II) the Reserves. The amount derived at any time from
Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall be referred to as the "Formula
Amount". Company and each Eligible Subsidiary shall jointly and severally
execute and deliver to Laurus on the Closing Date a Revolving Note and a Minimum
Borrowing Note evidencing the Revolving Loans funded on the Closing Date. From
time to time thereafter, Company and each Eligible Subsidiary shall jointly and
severally execute and deliver to Laurus immediately prior to the final funding
of each additional $ tranche of Revolving 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
Company and each Eligible Subsidiary to Laurus on the Closing Date.
Notwithstanding anything herein to the contrary, whenever during the Term the
outstanding balance on the Revolving Note should equal or exceed $500,000 to the
extent that the outstanding balance on the Minimum Borrowing Note shall be less
than $500,000 (the difference of $500,000 less the actual balance of the Minimum
Borrowing Note, the "Available Minimum Borrowing"), such portion of the balance
of the Revolving Note as shall equal the Available Minimum Borrowing shall be
deemed to be simultaneously extinguished on the Revolving Note and transferred
to, and evidenced by, the Minimum Borrowing Note.
(ii) Notwithstanding the limitations set forth above, if requested by
Company and/or the Eligible Subsidiaries, Laurus retains the right to lend to
Company and the Eligible Subsidiaries from time to time such amounts in excess
of such limitations as Laurus may determine in its sole discretion.
(iii) Each of Company and the Eligible Subsidiaries 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 each of Company and the Eligible
Subsidiaries hereby consent to any such increases or decreases which may limit
or restrict advances requested by Company and each Eligible Subsidiary.
(iv) If any interest, fees, costs or charges payable to Laurus
hereunder are not paid when due, each of Company and the Eligible Subsidiaries
shall thereby be deemed to have requested, and Laurus is hereby authorized at
its discretion to make and charge to Company's and the Eligible Subsidiaries'
account, a Loan as of such date in an amount equal to such unpaid interest,
fees, costs or charges.
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(v) If Company or any Eligible Subsidiary at any time fails to perform
or observe 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 Company and/or such Eligible Subsidiary (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). The amount of all
monies expended and all costs and expenses (including 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 Company's and the Eligible Subsidiaries' account as a
Revolving Loan and added to the Obligations. To facilitate Laurus' performance
or observance of such covenants of Company and each Eligible Subsidiary, each of
Company and each Eligible Subsidiary hereby irrevocably appoint Laurus, or
Laurus' delegate, acting alone, as Company's and each such Eligible Subsidiary'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 Company and each Eligible
Subsidiary 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 Company
and/or such Eligible Subsidiary.
(vi) Laurus will account to Company 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 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.
(vii) During the Term, Company and each Eligible Subsidiary may borrow
and prepay Loans in accordance with the terms and conditions hereof.
(viii) 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 Eligible Account, (a "Delinquent Account"),
each of Company and the Eligible Subsidiaries shall (i) reimburse Laurus for the
amount of the Loans made with respect to such Delinquent Account plus an
adjustment fee in an amount equal to one-half of one percent (0.50%) of the
gross face amount of such Eligible Account or (ii) immediately replace such
Delinquent Account with an otherwise Eligible Account.
(b) Following the occurrence of an Event of Default which continues to
exist, 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
and the Eligible Subsidiaries), Company and the Eligible Subsidiaries 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 Company
and each Eligible Subsidiary, all right, title and interest of Company and each
Eligible Subsidiary in and to all Accounts which shall at any time constitute
Eligible Accounts (the "Receivables Purchase"). All outstanding Loans hereunder
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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, Company and each Eligible Subsidiary 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 Company's or any Eligible Subsidiary'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 of Company 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 Revolving 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 $500,000 and (ii) Company and each
Eligible Subsidiary will issue a new (serialized) Minimum Borrowing Note to
Laurus in respect of such $500,000 aggregation, and (iii) Company 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.
3. Repayment of the Loans. Company and the Eligible Subsidiaries (a) may
prepay the Obligations from time to time in accordance with the terms and
provisions of the Notes (and Section 16 hereof if such prepayment is due to a
termination of this Agreement); and (b) 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. 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 Revolving Loans. Company Agent may by written notice
request a borrowing of Revolving Loans prior to 12:00 p.m. (New York time) on
the Business Day of its request to incur, on the next business day, a Revolving
Loan. Together with each request for a Revolving 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 A, 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
Revolving Loans shall be disbursed from whichever office or other place Laurus
may designate from time to time and shall be charged to Company's and the
Eligible Subsidiaries' account on Laurus' books. The proceeds of each Revolving
Loan made by Laurus shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the terms of this
Section 4 by way of credit to Company's and the Eligible Subsidiaries' operating
accounts maintained with such bank as Company and each Eligible Subsidiary
designated to Laurus. Any and all Obligations due and owing hereunder may be
charged to Company's and each Eligible Subsidiary's account and shall constitute
Revolving Loans.
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5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, Company and each
Eligible Subsidiary shall 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
Company's and each Eligible Subsidiary's 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, respectively, (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 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) Company and each Eligible Subsidiary shall 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
Company and Laurus, Company and the Eligible Subsidiaries shall 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, Company and the Eligible Subsidiaries
shall 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 (0.50%) 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) Overadvance Payment. Without affecting Laurus' rights hereunder
in the event the Revolving Loans exceed the Formula Amount (each such event, an
"Overadvance"), all such Overadvances shall bear interest at an annual rate
equal to two percent (2%) of the amount of such Overadvances for each month or
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portion thereof such amounts shall be outstanding and in excess of the Formula
Amount.
(iv) Financial Information Default. Without affecting Laurus' other
rights and remedies, in the event Company or any Eligible Subsidiary fails to
deliver the financial information required by Section 11 on or before the date
required by this Agreement, Company and the Eligible Subsidiaries shall pay
Laurus an aggregate fee in the amount of $500.00 per week (or portion thereof)
for each such failure until such failure is cured to Laurus' satisfaction or
waived in writing by Laurus. Such fee shall be charged to Company's and the
Eligible Subsidiaries account upon the occurrence of each such failure.
(v) Expenses. The Company and the Eligible Subsidiaries shall
reimburse Laurus for its reasonable expenses (including legal fees and expenses)
incurred in connection with the preparation and negotiation of this Agreement
and the Ancillary Agreements (as hereinafter defined), and expenses incurred in
connection with Laurus' due diligence review of the Company and its Subsidiaries
and all related matters. Amounts required to be paid under this Section 5(b)(v)
will be paid on the Closing Date.
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, each of
Company and each Eligible Subsidiary hereby assigns, pledges and grants to
Laurus a continuing security interest in and Lien upon all of the Collateral.
All of Company's and each Eligible Subsidiary's Books and Records relating to
the Collateral shall, until delivered to or removed by Laurus, be kept by
Company and each Eligible Subsidiary, as the case may be, in trust for Laurus
until all Obligations have been paid in full. Each confirmatory assignment
schedule or other form of assignment hereafter executed by Company and each
Eligible Subsidiary shall be deemed to include the foregoing grant, whether or
not the same appears therein.
(b) Company and each Eligible Subsidiary 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
Company or such Eligible Subsidiary, as the case may be, 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 of Company and each Eligible Subsidiary 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 Company's and such Eligible Subsidiary's rights under Section
9-509(d)(2) of the UCC.
(c) Each of Company and each Eligible Subsidiary 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 Company or such Eligible
Subsidiary, as the case may be) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by
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Company and/or such Eligible Subsidiary, 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 of Company and each Eligible Subsidiary represents, warrants (each of which
such representations and warranties shall be deemed repeated upon the making of
each request for a Revolving Loan and made as of the time of each and every
Revolving Loan hereunder) and covenants as follows:
(a) all of the Collateral (i) is owned by Company and/or an Eligible
Subsidiary, as the case may be, 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) neither the Company nor any Eligible Subsidiary shall encumber,
mortgage, pledge, assign or grant any Lien in any Collateral or any of Company's
or any Eligible Subsidiary 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 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 creditors of and any purchasers from Company
and the Eligible Subsidiaries 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.
(e) neither Company nor any Eligible Subsidiary shall 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 $25,000 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) each of Company and each Eligible Subsidiary 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
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actions necessary to grant Laurus "control" of any Investment Property, Deposit
Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by Company
and each Eligible Subsidiary, 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 Company and each Eligible Subsidiary (in each case,
accompanied by stock powers, allonges or other instruments of transfer executed
in blank), (iii) notification of Laurus' interest in Collateral at Laurus'
request, and (iv) the institution of litigation against third parties as shall
be prudent in order to protect and preserve Company's, each Eligible
Subsidiary's and/or Laurus' respective and several interests in the Collateral.
(g) each of Company and each Eligible Subsidiary 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, each of Company and/or each Eligible
Subsidiary, as the case may be, shall enter into a supplement to this Agreement
granting to Laurus a Lien in such commercial tort claim.
(h) each of Company and each Eligible Subsidiary shall place notations upon
its Books and Records and any financial statement of Company and each Eligible
Subsidiary, as the case may be, to disclose Laurus' Lien in the Collateral.
(i) if either Company and/or ay Eligible Subsidiary 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 security
interest of Laurus Master Fund, Ltd."
(j) each of Company and each Eligible Subsidiary 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) each of Company and each Eligible Subsidiary shall notify Laurus
promptly and in any event within three (3) Business Days after obtaining
knowledge thereof (i) of any event or circumstance that to Company's or any
Eligible Subsidiary's knowledge would cause Laurus to consider any then existing
Account as no longer constituting an Eligible Account; (ii) of any material
delay in Company's or any Eligible Subsidiary's 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 Company or any Eligible Subsidiary to any
Account Debtor; (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) which are billed on a construction completion
basis but not payable until the project is completed, represent complete bona
fide transactions which require no further act under any circumstances on
Company's or any Eligible Subsidiary's part to make such Accounts payable by the
Account Debtors, (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 either Company or any Eligible
Subsidiary. Neither Company nor any Eligible Subsidiary has made, and neither
Company nor any Eligible Subsidiary will make, any agreement
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with any Account Debtor for any extension of time for the payment of any
Account, any compromise or settlement for less than the full amount thereof, any
release of any Account Debtor from liability therefor, or any deduction
therefrom except a discount or allowance for prompt or early payment allowed by
Company or any Eligible Subsidiary in the ordinary course of its business
consistent with historical practice and as previously disclosed to Laurus in
writing.
(m) each of Company and each Eligible Subsidiary 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. Neither
Company nor any Eligible Subsidiary shall permit any such items to become a
Fixture to real estate or accessions to other personal property.
(n) each of Company and each Eligible Subsidiary shall maintain and keep
all of its Books and Records concerning the Collateral at such person's
executive offices listed in Schedule 12(bb).
(o) each of Company and each Eligible Subsidiary shall maintain and keep
the tangible Collateral at the addresses listed in Schedule 12(bb), provided,
that each of Company and/or any such Eligible Subsidiary may change such
locations or open a new location, provided that Company or any such Eligible
Subsidiary, as the case may be, provides Laurus at least thirty (30) days prior
written notice of such changes or new location and (ii) prior to such change or
opening of a new location where Collateral having a value of more than $50,000
will be located, Company and/or any such Eligible Subsidiary, as the case may
be, executes and delivers to Laurus such agreements as Laurus may request,
including landlord agreements, mortgagee agreements and warehouse agreements,
each in form and substance satisfactory to Laurus.
(p) Schedule 7(p) lists all banks and other financial institutions at which
Company and each Eligible Subsidiary 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. Neither the Company
nor any Eligible Subsidiary shall establish any depository or other bank account
of any with any financial institution (other than the accounts set forth on
Schedule 7(p)) without Laurus' prior written consent.
8. Payment of Accounts.
(a) Each of Company and each Eligible Subsidiary 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 Company and each Eligible Subsidiary (the "Lockboxes")
with North Fork Bank (the "Lockbox Bank") pursuant to the terms of the Third
Party Blocked Account Agreement dated as of October 4, 2004 or such other
financial institution accepted by Laurus in writing as may be selected by
Company and/or any Eligible Subsidiary. On or prior to the Closing Date, each of
Company and each Eligible Subsidiary 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
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concerning the Lockbox. All of Company's and each Eligible Subsidiary's
invoices, account statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of Company or any
Eligible Subsidiary 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, Company or any Eligible Subsidiary receives any payments,
Company or such Eligible Subsidiary, as the case may be, shall immediately remit
such payments to Laurus in their original form with all necessary endorsements.
Until so remitted, Company and each Eligible Subsidiary 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 of Company's and each Eligible
Subsidiary'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.
(a) Laurus may verify Company's and each Eligible Subsidiary'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
Business Day after Laurus' receipt of such proceeds in good funds in dollars of
the United States of America in Laurus' account. 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 Company or any Eligible
Subsidiary, 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 and/or any such Eligible Subsidiary 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 of
Company and each Eligible Subsidiary 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 of Company's and each Eligible Subsidiary's properties and the
Collateral,(b) inspect, audit and copy (or take originals if necessary) and make
extracts from Company's and each Eligible Subsidiary's Books and Records,
including management letters prepared by independent accountants, and (c)
discuss with Company's and each Eligible Subsidiary's principal officers, and
independent accountants, Company's and each Eligible Subsidiary's business,
assets, liabilities, financial condition, results of operations and business
10
prospects. Each of Company and each Eligible Subsidiary will deliver to Laurus
any instrument necessary for Laurus to obtain records from any service bureau
maintaining records for Company and such Eligible Subsidiary. 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 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 Company, Company's audited financial statements
with a report of independent certified public accountants of recognized standing
selected by Company and acceptable to Laurus (the "Accountants"), which annual
financial statements shall include Company's balance sheet as at the end of such
fiscal year and the related statements of 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, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters
prepared by such accountants; and (ii) a certificate of Company'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 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, 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 Company'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 Company's and each Eligible Subsidiary's
Accounts, unaudited trial balances and their accounts payable and a calculation
of Company's and each Eligible Subsidiary's Accounts, Eligible Accounts,
provided, however, that if Laurus shall request the foregoing information more
often than as set forth in the immediately preceding clause, Company and/or any
Eligible Subsidiary shall have thirty (30) days from each such request to comply
with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of Company's most recent
registration statements and annual, quarterly, monthly or other regular reports
which Company files with the Securities and Exchange Commission (the "SEC"), and
(ii) the issuance thereof, copies of such financial statements,
11
reports and proxy statements as Company shall send to its stockholders.
12. Additional Representations and Warranties. Company and each Eligible
Subsidiary hereby represent and warrant to Laurus as follows (which
representations and warranties are supplemented by, and subject to, Company's
filings under the Securities Exchange Act of 1934 (collectively, the "Exchange
Act Filings"), copies of which have been provided to Laurus:
(a) Organization, Good Standing and Qualification. Each of Company and each
of its Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization. Each of
Company and each of its Subsidiaries has the corporate power and authority to
own and operate its properties and assets, to execute and deliver this Agreement
and the Ancillary Agreements, to issue and sell the Notes and the shares of
Common Stock issuable upon conversion of the Notes (the "Note Shares"), to issue
and sell the Warrants and the shares of Common Stock issuable upon conversion of
the Warrants (the "Warrant Shares"),and to carry out the provisions of this
Agreement and the Ancillary Agreements and to carry on its business as presently
conducted. Each of Company and each of its Subsidiaries is duly qualified and is
authorized to do business and is in good standing as a foreign corporation in
all jurisdictions, except for those jurisdictions in which the 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 direct and indirect Subsidiary of Company, the
direct owner of such Subsidiary and its percentage ownership thereof, is set
forth on Schedule 12(b).
(c) Capitalization; Voting Rights.
(i) The authorized capital stock of the Company, as of the date hereof
consists of 25,000,000 shares, of which 20,000,000 are shares of Common Stock,
par value $0.001 per share, 18,606,`967 shares of which are issued and
outstanding, and 5,000,000 are shares of preferred stock, par value $0.001 per
share of which 80,000 shares of Preferred Stock with a stated value of $0.40 per
share and an initial conversion ratio of 1 share of common stock per preferred
share are issued and outstanding. The authorized capital stock of each
Subsidiary of the 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 Company's stock option plans; and (ii) 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
Company of any of its securities. Except as disclosed on Schedule 12(c), neither
the offer, issuance or sale 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 Company outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.
(iii) All issued and outstanding shares of Company's Common Stock: (i)
have been duly authorized and validly issued and are fully paid and
nonassessable; and (ii) were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
12
(iv) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in Company'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 Company'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 action on the part of
each of Company and each of its Subsidiaries, their respective officers and
directors necessary for the authorization of this Agreement and the Ancillary
Agreements, the performance of all obligations of Company and each of its
Subsidiaries hereunder and under the Ancillary Agreements on the Closing Date
and, the authorization, sale, 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 valid and binding obligations of each of Company and each
of its Subsidiaries enforceable 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 sale 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 Company nor any of its Subsidiaries has any
contingent 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 Company 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,
Company or any of its Subsidiaries in excess of $50,000 (other than obligations
of, or payments to, Company or any of its Subsidiaries arising from purchase or
sale agreements entered into in the ordinary course of business); or (ii) the
transfer or license of any patent, copyright, trade secret or other proprietary
right to or from Company or any of its Subsidiaries (other than licenses arising
from the purchase of "off the shelf" or other standard products); or (iii)
provisions restricting the development, manufacture or distribution of Company's
13
or any of its Subsidiaries' products or services; or (iv) indemnification by
Company or any of its Subsidiaries with respect to infringements of proprietary
rights.
(ii) Since December 31, 2003, neither Company 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 in
the ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) of this Section
12(f) above, all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same person or
entity (including persons or entities Company 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.
(g) Obligations to Related Parties. Except as set forth on Schedule 12(g),
there are no obligations of Company or any of its Subsidiaries to officers,
directors, stockholders or employees of Company or any of its Subsidiaries other
than:
(i) for payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on behalf of
Company or any of its Subsidiaries;
(iii) for other standard employee benefits made generally available to
all employees (including stock option agreements outstanding under any stock
option plan approved by the Board of Directors of Company); and
(iv) obligations listed in Company's financial statements or disclosed
in any of its Exchange Act Filings.
Except as described above or set forth on Schedule 12(g), none of the officers,
directors or, to the best of Company's and each Eligible Subsidiary's knowledge,
key employees or stockholders of Company, any of its Subsidiaries or any members
of their immediate families, are indebted to Company or any of their
Subsidiaries, individually or in the aggregate, in excess of $50,000 or have any
direct or indirect ownership interest in any firm or corporation with which
Company or any of its Subsidiaries is affiliated or with which Company or any of
its Subsidiaries has a business relationship, or any firm or corporation which
competes with Company 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 Company or any of its Subsidiaries. Except as
described above, no officer, director or stockholder, or any member of their
14
immediate families, is, directly or indirectly, interested in any material
contract with Company or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between Company or any
of its Subsidiaries and any such person. Except as set forth on Schedule 12(g),
neither Company nor any of its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
(h) Changes. Since December 31, 2003, 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 the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of Company or any
of its Subsidiaries, 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 officer, key employee or
group of employees of Company or any of its Subsidiaries;
(iii) any material change, except in the ordinary course of business,
in the contingent obligations of Company or any of its Subsidiaries 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 Company 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 Company or any of
its Subsidiaries to any stockholder, employee, officer or director of Company or
any of its Subsidiaries, 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 the assets of Company or any of its Subsidiaries;
(ix) any labor organization activity related to Company or any of its
Subsidiaries;
(x) any debt, obligation or liability incurred, assumed or guaranteed
by Company 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 patents, trademarks,
copyrights, trade secrets or other intangible assets;
15
(xii) any change in any material agreement to which Company or any of
its Subsidiaries is a party or by which it is bound which, either individually
or in the aggregate, has had, or could reasonably be expected to have, a
Material Adverse Effect;
(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, a Material Adverse Effect; or
(xiv) any arrangement or commitment by Company 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), each of Company and each of its Subsidiaries has good and
marketable title to its properties and assets, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than:
(i) those resulting from taxes which have not yet become delinquent;
(ii) minor liens and encumbrances which do not materially detract from
the value of the property subject thereto or materially impair the operations of
Company or any of its Subsidiaries; and
(iii) those that have otherwise arisen in the ordinary course of
business. All facilities, machinery, equipment, fixtures, vehicles and other
properties owned, leased or used by Company 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. Except as set forth on Schedule 12(i),
each of Company 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) Each of Company and each of its Subsidiaries owns or possesses
sufficient legal rights to all Intellectual Property necessary for its business
as now conducted and to Company's 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 such
Intellectual Property of Company or any of its Subsidiaries, nor is Company 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 or entity other than such licenses or agreements arising from the
purchase of "off the shelf" or standard products.
(ii) Neither Company nor any of its Subsidiaries has received any
communications alleging that Company or any of its Subsidiaries has violated any
of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity, nor is
Company aware of any basis therefor.
(iii) Neither Company nor any Eligible Subsidiary 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 Company or
any Eligible Subsidiary or any of their respective Subsidiaries, except for
inventions, trade secrets or proprietary information that have been rightfully
assigned to Company or any such Subsidiary.
16
(k) Compliance with OtherInstruments. Neither Company nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) of 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 compliance with this Agreement and
the Ancillary Agreements to which it is a party, and the issuance of the Notes
by Company and the Eligible Subsidiaries and the other Securities by Company
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 mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of Company or any of its Subsidiaries or the suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to Company or any of its Subsidiaries, its
business or operations or any of its assets or properties.
(l) Litigation. Except as set forth on Schedule 12(l), there is no
action, suit, proceeding or investigation pending or, to Company's knowledge,
currently threatened against Company or any of its Subsidiaries that prevents
Company 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 the current equity ownership of Company or any of its
Subsidiaries, nor is Company aware that there is any basis to assert any of the
foregoing. Neither Company nor any of its Subsidiaries is a party 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 Company or any of its Subsidiaries currently pending or which
Company or any of its Subsidiaries intends to initiate.
(m) Tax Returns and Payments. Each of Company 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 each of Company 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 Company 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 deficiency in assessment or proposed judgment to its
federal, state or other taxes.
Neither Company nor any Eligible Subsidiary 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.
17
(n) Employees. Except as set forth on Schedule 12(n), neither Company 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 Company's
or any Eligible Subsidiary's knowledge, threatened with respect to Company or
any such Subsidiary. Except as disclosed in the Exchange Act Filings or on
Schedule 12(n), neither Company 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 Company's and
each Eligible Subsidiary's knowledge, no employee of Company or any of its
Subsidiaries, nor any consultant with whom Company 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 employed by, or to contract with, Company or any of
its Subsidiaries because of the nature of the business to be conducted by
Company or any of its Subsidiaries; and to Company's and each Eligible
Subsidiary's knowledge the continued employment by Company and its Subsidiaries
of their respective present employees, and the performance of Company's and its
Subsidiaries contracts with its independent contractors, will not result in any
such violation. Neither Company nor any Eligible Subsidiary 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 Company or any of its
Subsidiaries. Neither Company 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 Company or any of its
Subsidiaries, no employee of Company or any of its Subsidiaries has been granted
the right to continued employment by Company or any of its Subsidiaries or to
any material compensation following termination of employment with Company or
any of its Subsidiaries. Except as set forth on Schedule 12(n), neither Company
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 Company or any
of its Subsidiaries, nor does Company 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 Company nor any
of its Subsidiaries is presently under any obligation, and has granted any
rights, to register any of Company's or any such Subsidiary's 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 Company's and each Eligible Subsidiary's knowledge, no stockholder
of Company or any of its Subsidiaries has entered into any agreement with
respect to the voting of equity securities of Company or any of its
Subsidiaries.
(p) Compliance with Laws; Permits. Neither Company nor any of its
Subsidiaries is in violation of any 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 has been
18
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. Each of
Company 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 Company is 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 on
Schedule 12(q), no Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by Company or any of its Subsidiaries or, to
Company's knowledge, by any other person or entity on any property owned, leased
or used by Company 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, sale and issuance
of the Securities 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. Each of Company and each of its Subsidiaries has
provided Laurus with all information requested by Laurus in connection with its
decision to purchase the Notes and the Warrants, including all information
Company believes 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 Company 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 Company and its Subsidiaries were
based on Company's and its Subsidiaries' experience in the industry and on
assumptions of fact and opinion as to future events which Company and/or such
Subsidiary, at the date of the issuance of such projections or estimates,
believed to be reasonable.
(t) Insurance. Each of Company and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which Company believes are customary for companies similarly situated
19
to Company and its Subsidiaries in the same or similar business.
(u) SEC Reports and Financial Statements. Except as set forth on Schedule
12(u), Company and each of its Subsidiaries has filed all proxy statements,
reports and other documents required to be filed by it under the Exchange Act.
Company has furnished Laurus with copies of: (i) its Annual Report on Form
10-KSB for its fiscal year ended December 31, 2003; and (ii) its Quarterly
Reports on Form 10-QSB for its fiscal quarters ended March 31, 2004 and June 30,
2004, and the Form 8-K filings which it has made during its fiscal year 2004 to
date (collectively, the "SEC Reports"). Except as set forth on Schedule 4.21,
each SEC Report was, at the time of its filing, in substantial compliance with
the requirements of its 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 generally accepted accounting principles ("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 the cash flows of Company and its
Subsidiaries, on a consolidated basis, as of, and for, the periods presented in
each such SEC Report.
(v) Listing. The Company's Common Stock is traded on the NASD OTC Bulletin
Board ("OTC BB") and satisfies all requirements for the continuation of such
trading. The Company has not received any notice that its Common Stock will be
ineligible to trade on the OTC BB or that its Common Stock does not meet all
requirements for such trading.
(w) No Integrated Offering. Neither Company, 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 Company for purposes of the Securities Act
which would prevent Company from selling the Securities pursuant to Rule 506
under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will Company 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. Company will not 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. Company specifically acknowledges that its obligation to
issue the shares of Common Stock upon conversion of the Notes and exercise of
the Warrants is binding upon Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of
Company.
20
(z) Patriot Act. Each of Company and each Eligible Subsidiary certifies
that, to the best of Company's and such Eligible Subsidiary's knowledge, neither
Company nor any of its Subsidiaries has been designated, and is not owned or
controlled, by a "suspected terrorist" as defined in Executive Order 13224. Each
of Company and each Eligible Subsidiary hereby acknowledges that Laurus seeks to
comply with all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, each of Company and each Eligible
Subsidiary hereby represent, warrant and agree 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 they are within
Company's 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. Each of Company
and each Eligible Subsidiary shall promptly notify Laurus if any of these
representations ceases to be true and accurate regarding Company or any of its
Subsidiaries. Each of Company and each Eligible Subsidiary agrees to provide
Laurus with any additional information regarding Company and each Subsidiary
thereof that Laurus deems necessary or convenient to ensure compliance with all
applicable laws concerning money laundering and similar activities. Each of
Company and each Eligible Subsidiary 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 Company and each Eligible
Subsidiary. Each of Company and each Eligible Subsidiary further understands
that Laurus may release confidential information about Company 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) Schedule 12(aa) sets forth Company's and each Eligible Subsidiary's
name as it appears in official filing in the state of its incorporation, the
type of entity of Company and each Eligible Subsidiary, the organizational
identification number issued by Company's and each Eligible Subsidiary's state
of incorporation or a statement that no such number has been issued, Company's
and each Eligible Subsidiary's state of incorporation, and the location of
Company's and each Eligible Subsidiary'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), neither Company
nor any Eligible Subsidiary has been known as or conducted business in any other
name (including trade names). Each of Company and each Eligible Subsidiary has
only one state of incorporation.
13. Covenants. Each of Company and each Eligible Subsidiary, as applicable,
covenants and agrees with Laurus as follows:
(a) Stop-Orders. It will advise Laurus, promptly after it receives notice
of issuance by the SEC, any state securities commission or any other
21
regulatory authority of any stop order or of any order preventing or suspending
any offering of any securities of Company, or of the suspension of the
qualification of the Common Stock of Company for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
(b) Listing. It will promptly secure the listing of the shares of Common
Stock issuable upon conversion of the Notes and exercise of the Warrants on the
OTC BB (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. Company will maintain
the listing of its Common Stock on the Principal Market, and will comply in all
material respects with 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.
(c) Market Regulations. Company will 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. Company will 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 will use the proceeds of the Loans to repay the
existing indebtedness owing to [Mercantile Capital] and for working capital
purposes only.
(f) Access to Facilities. It will, and will 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 such
person's expense and accompanied by a representative of Company or any such
Subsidiary, as the case may be, to:
(i) visit and inspect any of the properties of Company or any such
Subsidiary;
(ii) examine the corporate and financial records of Company or any of
its Subsidiaries (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 the affairs, finances and accounts of Company or any of
its Subsidiaries with the directors, officers and independent accountants of
Company or any of its Subsidiaries.
Notwithstanding the foregoing, neither the Company nor any of its
Subsidiaries will 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 will, and will 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
22
imposed upon its 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 if the validity thereof shall currently be contested in
good faith by appropriate proceedings and if it and/or such Subsidiary shall
have set aside on its and/or such Subsidiary's books adequate reserves with
respect thereto, and provided, further, that it will, and will 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 will bear the full risk of loss from any loss of any
nature whatsoever with respect to the Collateral. It will 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; and it will
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 reasonably believes is customary for companies in similar
business similarly situated and to the extent available on commercially
reasonable terms. It 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 it's own cost and expense in amounts and with carriers reasonably
acceptable to Laurus, it shall (i) keep all its insurable properties and
properties in which it has 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 similar businesses similar including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case of
companies engaged in similar businesses 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 the assets or
funds of Company or any of its Subsidiaries 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 Company 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 Company's and its
Subsidiaries' workers' compensation policy, endorsements to such policies naming
Laurus as "co-insured" or "additional insured" and appropriate loss payable
endorsements in form and substance satisfactory to Laurus, naming Laurus as loss
payee, and (z) evidence that as to Laurus the insurance coverage shall not be
impaired or invalidated by any act or neglect of Company or any of its
Subsidiaries and the insurer will provide Laurus with at least thirty (30) days
notice prior to cancellation. Each of Company and each Eligible Subsidiary 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 Company and/or
any Subsidiary thereof and Laurus jointly. If any insurance losses are paid by
check, draft or other instrument payable to Company and/or any Subsidiary
thereof and Laurus jointly, Laurus may endorse Company's and/or such
23
Subsidiary's name thereon and do such other things as Laurus may deem advisable
to reduce the same to cash. Laurus is hereby authorized to adjust and compromise
claims. All loss recoveries received by Laurus upon any such insurance may be
applied to the Obligations, in such order as Laurus in its sole discretion shall
determine or shall otherwise be delivered to Company and/or such Subsidiary
thereof. Any surplus shall be paid by Laurus to Company and/or such Subsidiary
thereof or applied as may be otherwise required by law. Any deficiency thereon
shall be paid by Company and its Subsidiaries to Laurus, on demand.
(i) Intellectual Property. It will, and will 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 will, and will 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 will, and
will 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 will not, and will 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. 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 Company's and each Eligible Subsidiary's
indebtedness to Laurus and as set forth on Schedule 13(l)(i) attached hereto and
made a part hereof; (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 the endorsement of negotiable
instruments by Company or an Eligible Subsidiary for deposit or collection or
similar transactions in the ordinary course of business; (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 Stock of Company or any Eligible Subsidiary
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 (x) travel advances, (y) loans to Company's and each
Eligible Subsidiaries officers and employees not exceeding at any one time an
aggregate of $10,000, and (z) existing Subsidiaries of Company; (vi) create or
permit to exist any Subsidiary, other than any Subsidiary in existence on the
date hereof and listed in Schedule 12(b) unless 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; (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 to Laurus and in the ordinary course of business) except to make
24
scheduled payments of principal and interest thereof; (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) Company or an
Eligible Subsidiary, as applicable, 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) Company and each
Eligible Subsidiary, as applicable, shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) 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 the
Company's or any Eligible Subsidiary's right to perform the provisions of this
Agreement or any of the agreements contemplated thereby; (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 Company or any Eligible Subsidiary; or (xiv) sell, lease,
transfer or otherwise dispose of any of its properties or assets, or any of the
properties or assets of its Subsidiaries, except in the ordinary course of
business consistent with past practice.
(m) Reissuance of Securities. Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 37 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.
Company 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 Company and its counsel receive reasonably requested
representations from Laurus and broker, if any.
(n) Opinion. On the Closing Date, Company and each Eligible Subsidiary will
deliver to Laurus an opinion acceptable to Laurus from Company's and each
Eligible Subsidiary's legal counsel. Company and each Eligible Subsidiary will
provide, at Company's and each Eligible Subsidiary's 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. Neither Company nor any of its Eligible Subsidiaries
will, 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 incorporation or
formation, (ii) the type of legal entity it is, (iii) its organization
identification number, if any, issued by its state of incorporation, (iv) its
state of incorporation or (v) amend its certificate of incorporation, by-laws or
other organizational document.
(p) Compliance with Laws. The operation of each of the Company's and each
of its Subsidiaries' business is and will 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
25
taxes, payment and with holding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and welfare
benefits, employee health safety and environmental matters.
(q) Notices. Each of the Company and each of its Subsidiaries will 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 reasonable 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 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 Company or any of its Subsidiaries is a party or by which Company or
any of its Subsidiaries or any of Company's or any such Subsidiary's properties
may be bound the breach of which would have a Material Adverse Effect..
(r) Margin Stock. The Company will 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 granted to
employees or directors of the Company (these exceptions hereinafter referred to
as the "Excepted Issuances"), the Company will not issue any securities with a
continuously variable/floating conversion feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement) prior to the full repayment or conversion of the
Notes (together with all accrued and unpaid interest and fees related thereto
(the "Exclusion Period").
(t) Authorization and Reservation of Shares. Company will 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) Prohibition of Amendments to Subordinated Debt Documentation. Neither
the Company nor any Eligible Subsidiary shall, without the prior written consent
of Laurus, amend, modify or in any way alter the terms of any of the
Subordinated Debt Documentation.
(v) Prohibition of Grant of Collateral for Subordinated Debt Documentation.
Neither the Company nor any Eligible Subsidiary shall, without the prior written
consent of Laurus, grant or permit any of its Subsidiaries to grant to any
Person any collateral of such Company, Eligible Subsidiary or other Subsidiary
as security for any obligation arising under the Subordinated Debt
Documentation.
(w) Prohibitions of Payment Under Subordinated Debt Documentation. Neither
the Company nor any Eligible Subsidiary shall, without the prior written consent
of Laurus, make any payments in respect of the indebtedness evidenced by
26
the Subordinated Debt Documentation, other than as expressly permitted by the
terms thereof.
14. Further Assurances. At any time and from time to time, upon the written
request of Laurus and at the sole expense of Company, each of Company and each
Eligible Subsidiary 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, or (c) to enable
Laurus to exercise all or any of the rights and powers herein granted or any
Ancillary Agreement.
15. Representations and Warranties of Laurus.
Laurus hereby represents and warrants to 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 will 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 and sold 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 purchased by 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 Company so that it is capable of evaluating the merits and
risks of its investment in Company 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) Acquisition for Own Account. Laurus is acquiring the Securities 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.
(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,
27
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 or entity, directly or indirectly
to, engage in "short sales" of Company's common stock directly related to
Company'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 agrees
that: (i) none of the cash or property that Laurus will use to purchase the
Notes 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
the 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 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 Company. Laurus
further understands that the Company may release information about Laurus and,
if applicable, any underlying beneficial owners, to proper authorities if the
Company, in its sole discretion, determines that it is in the best interests of
the Company in light of relevant rules and regulations under the laws set forth
in subsection (ii) above.
16. Power of Attorney. Each of Company and each Eligible Subsidiary hereby
appoints Laurus, or any other Person whom Laurus may designate as Company's
and/or any Eligible Subsidiary's attorney, with power to: (i) endorse Company's
and each Eligible Subsidiary's name on any checks, notes, acceptances, money
orders, drafts or other forms of payment or security that may come into Laurus'
possession; (ii) sign Company's and each Eligible Subsidiary'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; (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
28
continuation of an Event of Default, notify the post office authorities to
change the address for delivery of Company's and each Eligible Subsidiary's mail
to an address designated by Laurus, and to receive, open and dispose of all mail
addressed to Company or any Eligible Subsidiary. Each of Company and each
Eligible Subsidiary 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 Initial 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 Company
and each Eligible Subsidiary shall have (i) provided Laurus with an executed
release of any and all claims which Company or any Eligible Subsidiary 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) five percent (5%)
of the Capital Availability Amount if such payment occurs prior to the first
anniversary of the Initial Term or any applicable renewal term, (2) four percent
(4%) of the Capital Availability Amount if such payment occurs on or after the
first anniversary and prior to the second anniversary of the Initial Term or any
applicable renewal term and (3) three percent (3%) of the Capital Availability
Amount if such termination occurs thereafter during the Initial 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 by Company and each Eligible Subsidiary 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 Company's or any Eligible
Subsidiary's account may from time to time be temporarily in a zero or credit
position, until all of the Obligations of Company or any Eligible Subsidiary
have been paid or performed in full after the termination of this Agreement.
Laurus shall not be required to send termination statements to Company or any
Eligible Subsidiary, 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 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;
29
(b) failure by the 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 have been provided on
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 Ancillary Agreement or any other
agreement between Company and/or any Subsidiary thereof, on the one hand, and
Laurus, on the other hand, which failure or breach shall continue for a period
of thirty (30) days after the occurrence thereof;
(d) the occurrence of any event of default (or similar term) under any
indebtedness (including, without limitation, the indebtedness evidenced by the
Subordinated Debt Documentation) which Company or any of its Subsidiaries is a
party with third parties;
(e) any representation, warranty or statement made by 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 at any time be false
or misleading in any material respect;
(f) an attachment or levy is made upon Company's or any Eligible
Subsidiary's assets having an aggregate value in excess of $50,000 or a judgment
is rendered against Company or any Eligible Subsidiary or Company's or any
Eligible Subsidiary's property involving a liability of more than $50,000 which
shall not have been vacated, discharged, stayed or bonded within thirty (30)
days from the entry thereof;
(g) any change in Company's or any of its Subsidiaries' 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) if 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, or fail to have dismissed, within thirty
(30) 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) 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) Company or any Eligible Subsidiary directly or indirectly sells,
assigns, transfers, conveys, or suffers or permits to occur any sale,
assignment, transfer or conveyance of any assets of Company or any Eligible
Subsidiary or any interest therein, except as permitted herein;
30
(l) the occurrence of a change in the controlling ownership or senior
management of Company or any Eligible Subsidiary;
(m) the indictment or threatened indictment of Company or any of its
Subsidiaries or any executive officer of Company or any of its Subsidiaries
under any criminal statute, or commencement or threatened commencement of
criminal or civil proceeding against Company or any of its Subsidiaries or any
executive officer of 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 Company or any of its Subsidiaries; or
(n) if an Event of Default shall occur under and as defined in any
Note or in any Ancillary Agreement;.
(o) the Company or any of its Subsidiaries shall breach any term or
provision of any Ancillary Agreement to which it is a party which is not cured
within any applicable cure or grace period;
(p) if the Company of any of its Subsidiaries attempts to terminate,
challenges the validity of, or its liability under any Ancillary Agreement; or
(q) should the Company or any of its Subsidiaries default in its
obligations under any Ancillary Agreement to which it is a party or if any
proceeding shall be brought to challenge the validity, binding effect of any
Ancillary Agreement to which it is a party or should the Company or any of its
Subsidiaries breach any representation, warranty or covenant contained in any
Ancillary Agreement to which it is a party or should any Ancillary Agreement
cease to be a valid, binding and enforceable obligation of the Company of any of
its Subsidiaries (to the extent such Persons are a party thereto).
20. Remedies. Following the occurrence 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 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 Company and/or each
Eligible Subsidiary to assemble the Collateral, at Company's and each Eligible
Subsidiaries' 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 Company or any Eligible Subsidiary 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 Company or any Eligible Subsidiary, Company agrees not to charge
Laurus for storage thereof), and the right to apply for the appointment of a
receiver for Company's and each Eligible Subsidiary'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' records, at least ten (10) days before the time of
31
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 Company's and each Eligible
Subsidiary's trademarks, tradenames, tradestyles, patents, patent applications,
licenses, franchises and other proprietary rights. 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 in cash of all of the
Obligations, and after the payment by Laurus of any other amount required by any
provision of law, including Section 608(a)(1) of the Code (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, such Eligible
Subsidiary or its representatives or to whosoever may be lawfully entitled to
receive the same, or as a court of competent jurisdiction may direct. Each of
Company and each Eligible Subsidiary shall remain jointly and severally liable
to Laurus for any deficiency. In addition, each of Company and each Eligible
Subsidiary shall 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
Company's of any Eligible such Subsidiary'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. Company, Eligible Subsidiaries 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 Company, Eligible
Subsidiaries 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 of
Company and each Eligible Subsidiary 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 Company or any such Eligible Subsidiary 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 of Company and each Eligible Subsidiary 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. Company and each Eligible Subsidiary shall jointly and
severally pay all of Laurus' reasonable out-of-pocket costs and expenses,
including reasonable fees and disbursements of in-house or 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
32
any Ancillary Agreement. Company and each Eligible Subsidiary 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 Company or any of its Subsidiaries as Collateral for, or any other Person as
security for, the Obligations hereunder and (e) any consultations in connection
with any of the foregoing. Company and each Eligible Subsidiary shall also
jointly and severally pay Laurus' customary bank charges for all bank services
(including wire transfers) performed or caused to be performed by Laurus for
Company or any of its Subsidiaries at Company's or such Subsidiary's request or
in connection with Company's and/or any Eligible Subsidiary's loan account with
Laurus. All such costs and expenses together with all filing, recording and
search fees, taxes and interest payable by Company and each Eligible Subsidiary
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 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, Company and each Eligible Subsidiary agree to jointly and severally
indemnify and hold Laurus harmless in respect of such taxes, and Company and
each Eligible Subsidiary will repay to Laurus the amount of any such taxes which
shall be charged to Company's and each Eligible Subsidiary's account; and until
Company and each Eligible Subsidiary 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 Company's and each Eligible Subsidiary'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 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. Company and each Eligible
Subsidiary agree 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 fully as though Company and/or such Eligible Subsidiary 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 Company, any
Eligible Subsidiary 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
33
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. Company and each Eligible Subsidiary
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 Company's and/or any
Eligible Subsidiary's behalf and Company and each Eligible Subsidiary hereby
irrevocably agree 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. Company and each Eligible Subsidiary agree to 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 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
COMPANY, ANY ELIGIBLE SUBSIDIARY 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. Company and each Eligible Subsidiary further agree that to the
extent Company or any Eligible Subsidiary 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 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 of Company and each Eligible Subsidiary 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 or Eligible Subsidiary, and hereby authorizes Laurus
34
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 Company and each Eligible Subsidiary and at their request.
Laurus shall not incur any liability to Company or any Eligible Subsidiary as a
result thereof. To induce Agent and Lenders to do so and in consideration
thereof, each of Company and each Eligible Subsidiary 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 Company and each Eligible Subsidiary 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 each of Company and
each Eligible Subsidiary shall make payment upon the maturity of the Obligations
by acceleration or otherwise, and such obligation and liability on the part of
Company and each Eligible Subsidiary shall in no way be affected by any
extensions, renewals and forbearance granted by Laurus to Company or any
Eligible Subsidiary, failure of Laurus to give Company or any Eligible
Subsidiary notice of borrowing or any other notice, any failure of Laurus to
pursue to preserve its rights against Company or any Eligible Subsidiary, the
release by Laurus of any Collateral now or thereafter acquired from Company or
any Eligible Subsidiary, and such agreement by Company or any Eligible
Subsidiary to pay upon any notice issued pursuant thereto is unconditional and
unaffected by prior recourse by Laurus to Company or any Eligible Subsidiary or
any Collateral for Company's or any Eligible Subsidiary's Obligations or the
lack thereof.
(d) Each of Company and each Eligible Subsidiary expressly waives any and
all rights of subrogation, reimbursement, indemnity, exoneration, contribution
or any other claim which Company and such Eligible Subsidiary may now or
hereafter have against the other or other person or entity 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 paid in full and this Agreement
has been irrevocably terminated.
(e) Each of Company and each Eligible Subsidiary represents and warrants to
Laurus that (i) Company and each Eligible Subsidiary have one or more common
shareholders, directors and officers, (ii) the businesses and corporate
activities of the Company and each Eligible Subsidiary are closely related to,
and substantially benefit, the business and corporate activities of Company and
each Eligible Subsidiary, (iii) the financial and other operations of Company
and each Eligible Subsidiary are performed on a combined basis as if Company and
each Eligible Subsidiary constituted a consolidated corporate group, (iv)
Company and each Eligible Subsidiary 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 case, whether or
not such amount is used directly by Company or any such Eligible Subsidiary and
(v) all requests for Loans hereunder by the Company Agent are for the exclusive
and indivisible benefit of Company and each Eligible Subsidiary as though, for
purposes of this Agreement, Company and each Eligible Subsidiary constituted a
single entity.
35
29. Notices. Any notice or request hereunder may be given to Company,
Company Agent, any Eligible Subsidiary 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, L.L.C.
000 Xxxxx Xxxxxx 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
With a copy to: Loeb & Loeb LLP
000 Xxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxx X. Xxxxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
If to Company,
Company Agent or any
Eligible Subsidiary: Hesperia Holding, Inc.
0000 X Xxxxxx
Xxxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With a copy to:
or such other address as may be designated in writing hereafter in accordance
with this Section 29 by such Person.
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.
36
(b) COMPANY AND EACH ELIGIBLE SUBSIDIARY 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 COMPANY AND/OR EACH ELIGIBLE SUBSIDIARY, 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, EACH ELIGIBLE SUBSIDIARY AND
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 OF COMPANY AND EACH ELIGIBLE SUBSIDIARY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND COMPANY AND EACH ELIGIBLE SUBSIDIARY HEREBY WAIVES ANY OBJECTION
WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR
FORUM NON CONVENIENS. EACH OF COMPANY AND EACH ELIGIBLE SUBSIDIARY 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'S OR SUCH ELIGIBLE SUBSIDIARY'S, AS THE
CASE MAY BE, 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, ANY
ELIGIBLE SUBSIDIARY AND/OR 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 THERETO.
31. Limitation of Liability. Each of Company and each Eligible Subsidiary
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
37
omissions made in connection herewith or therewith except for actual bad faith.
32. Entire Understanding. This Agreement and the Ancillary Agreements
contain the entire understanding among Company, each Eligible Subsidiary 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 Company's, each Eligible
Subsidiary'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.
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. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
35. 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.
36. 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.
37. Publicity. Each of Company and each Eligible Subsidiary hereby
authorizes Laurus to make appropriate announcements of the financial arrangement
entered into by and among Company, each Eligible Subsidiary 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.
38. Joinder. It is understood and agreed that any person or entity that
desires to become an Eligible Subsidiary 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 an Eligible
Subsidiary hereunder by (x) executing a Joinder Agreement in form and substance
satisfactory to Laurus, (y) delivering supplements to such exhibits and annexes
to this Agreement and the Ancillary Agreements as Laurus shall reasonably
request and (z) taking all actions as specified in this Agreement as would have
been taken by such Assignor 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.
38
39. Legends. The Securities shall bear legends as follows;
(a) The Note 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 HESPERIA
HOLDING, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED."
(b) Any shares of Common Stock issued pursuant to conversion of the Note 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, 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
LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO HESPERIA HOLDING, 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 HESPERIA HOLDING, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
39
IN WITNESS WHEREOF, the parties have executed this Security Agreement as of
the date first written above.
HESPERIA HOLDING, INC.
By: /s/ XXXXXX X. XXXXX
-------------------
Name: Xxxxxx X. Xxxxx
Title: Chief Executive Officer
HESPERIA TRUSS, INC.
By: /s/ XXXXXX X. XXXXX
-------------------
Name: Xxxxxx X. Xxxxx
Title: Chief Executive Officer
PAHRUMP VALLEY TRUSS, INC.
By: /s/ XXXXXX X. XXXXX
-------------------
Name: Xxxxxx X. Xxxxx
Title: Chief Executive Officer
LAURUS MASTER FUND, LTD.
By: /s/ XXXXX GRIN
--------------
Name: Xxxxx Grin
Title: Partner
40