EXHIBIT 10.3
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (including the Disclosure Schedules,
this "AGREEMENT"), dated as of January 3, 2005, is made by and among SLS
International, Inc., a corporation organized under the laws of the State of
Delaware (the "COMPANY"), and each of the purchasers (individually, together
with its affiliated transferees and/or affiliated assignees, a "PURCHASER" and
collectively, together with their affiliated transferees and/or affiliated
assignees, the "PURCHASERS") set forth on the execution pages hereof (each, an
"EXECUTION PAGE" and collectively the "EXECUTION PAGES").
BACKGROUND
A. The Company and the Purchasers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("REGULATION D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "SECURITIES ACT").
B. Upon the terms and conditions stated in this Agreement, the Company
desires to issue and sell to the Purchasers, and each Purchaser desires to
purchase, units (the "UNITS"), each Unit consisting of (i) one share of the
Company's Series C Convertible Preferred Stock, par value $0.001 per share (the
"PREFERRED STOCK"), which Preferred Stock shall have the rights, preferences and
privileges set forth in the form of Certificate of Designation, Preferences and
Rights attached hereto as Exhibit A (the "CERTIFICATE OF DESIGNATION") and shall
initially be convertible into Four Hundred (400) shares of the Company's common
stock, par value $0.001 per share (the "COMMON STOCK"), and (ii) a warrant, in
the form attached hereto as Exhibit B (the "WARRANTS"), to acquire initially
Four Hundred (400) shares of Common Stock. The shares of Common Stock issuable
upon conversion of or otherwise pursuant to the Preferred Stock are referred to
herein as the "CONVERSION SHARES" and the shares of Common Stock issuable upon
exercise of or otherwise pursuant to the Warrants are referred to herein as the
"WARRANT SHARES." The Preferred Stock, the Warrants, the Conversion Shares and
the Warrant Shares are collectively referenced herein as the "SECURITIES" and
each of them may individually be referred to herein as a "SECURITY."
C. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit C (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws. This Agreement, the Certificate of
Designation, the Warrants and the Registration Rights Agreement are collectively
referred to herein as the "TRANSACTION DOCUMENTS."
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Purchasers,
intending to be legally bound, hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
(a) Purchase and Sale of Securities. Subject to the terms and conditions
hereof, at the Closing (as defined in Section 1(b) below), the Company shall
issue and sell to each Purchaser, severally and not jointly, and each Purchaser
shall purchase from the Company, such number of Units as is set forth on such
Purchaser's Execution Page, for a purchase price (the "PURCHASE PRICE") per Unit
equal to One Thousand Dollars ($1,000.00).
(b) The Closing. Subject to the satisfaction (or waiver) of the conditions
set forth in Sections 6 and 7 below, the closing of the transactions
contemplated hereby (the "CLOSING") shall take place at the offices of Drinker
Xxxxxx & Xxxxx LLP at One Xxxxx Square, 00xx & Xxxxxx Xxxxxxx, Xxxxxxxxxxxx,
Xxxxxxxxxxxx 00000 at 10:00 a.m., Philadelphia, Pennsylvania time, on the date
hereof, or such other time or place as the Company and the Purchasers may
mutually agree (the "CLOSING DATE").
2. PURCHASER'S REPRESENTATIONS AND WARRANTIES.
Each Purchaser, severally and not jointly, represents and warrants to the
Company as follows:
(a) Purchase for Own Account, Etc. Such Purchaser is purchasing the
Securities for its own account for investment purposes only and not with a
present view towards the public sale or distribution thereof, except pursuant to
sales that are exempt from the registration requirements of the Securities Act
and/or sales registered under the Securities Act. Such Purchaser understands
that it must bear the economic risk of this investment indefinitely, unless the
Securities are registered pursuant to the Securities Act and any applicable
state securities or blue sky laws or an exemption from such registration is
available, and that the Company has no present intention of registering the
resale of any such Securities other than as contemplated by the Registration
Rights Agreement. Notwithstanding anything in this Section 2(a) to the contrary,
by making the representations herein, such Purchaser does not agree to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption from the registration requirements under
the Securities Act.
(b) Accredited Investor Status. Such Purchaser is an "Accredited Investor"
as that term is defined in Rule 501(a) of Regulation D.
(c) Reliance on Exemptions. Such Purchaser understands that the Securities
are being offered and sold to such Purchaser in reliance upon specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and such Purchaser's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Purchaser set forth
herein in order to determine the availability of such exemptions and the
eligibility of such Purchaser to acquire the Securities.
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(d) Information. Such Purchaser and its counsel, if any, have been
furnished all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been specifically requested by such Purchaser or its counsel. Neither such
inquiries nor any other investigation conducted by such Purchaser or its counsel
or any of its representatives shall modify, amend or affect such Purchaser's
right to rely on the Company's representations and warranties contained in
Section 3 below. Such Purchaser understands that such Purchaser's investment in
the Securities involves a high degree of risk.
(e) Governmental Review. Such Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
(f) Authorization; Enforcement. This Agreement and the Registration Rights
Agreement have been duly and validly authorized, executed and delivered on
behalf of such Purchaser and are valid and binding agreements of such Purchaser
enforceable against it in accordance with their respective terms.
Each Purchaser's representations and warranties made in this Section 2
(other than Section 2(f)) are made solely for the purpose of permitting the
Company to make a determination that the offer and sale of the Securities
pursuant to this Agreement comply with applicable U.S. federal and state
securities laws and not for any other purpose. Accordingly, the Company may not
rely on such representations and warranties for any other purpose. No Purchaser
has made, and does not hereby make, any other representation or warranty,
express or implied, to the Company in connection with the transactions
contemplated hereby.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth on a Disclosure Schedule executed and delivered by the
Company to each Purchaser (the "DISCLOSURE SCHEDULE"), the Company represents
and warrants to each Purchaser as follows:
(a) Organization and Qualification. The Company and each of its direct and
indirect subsidiaries (collectively, the "SUBSIDIARIES") is a corporation duly
organized and existing in good standing under the laws of the jurisdiction in
which it is incorporated or organized, and has the requisite corporate power to
own its properties and to carry on its business as now being conducted. The
Company and each of its Subsidiaries is duly qualified or licensed as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted by it makes such qualification or
license necessary and where the failure so to qualify or be licensed or be in
good standing would have a Material Adverse Effect. For purposes of this
Agreement, "MATERIAL ADVERSE EFFECT" means any effect which, individually or in
the aggregate with all other effects, reasonably would be expected to be
materially adverse to (i) the Securities, (ii) the ability of the Company to
perform its obligations under this Agreement or the other Transaction Documents
or (iii) the business, operations, properties, prospects, financial condition or
results of operations of the Company and its Subsidiaries, taken as a whole.
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(b) Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement and the other Transaction Documents, to issue and sell the Units
in accordance with the terms hereof, to issue the Conversion Shares upon
conversion of the Preferred Stock in accordance with the terms thereof and to
issue the Warrant Shares upon exercise of the Warrants in accordance with the
terms thereof; (ii) the execution, delivery and performance of this Agreement
and the other Transaction Documents by the Company and the consummation by it of
the transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Units and the issuance and reservation for issuance of the
Conversion Shares and Warrant Shares) have been duly authorized by the Company's
Board of Directors and no further consent or authorization of the Company, its
Board of Directors, or any committee of the Board of Directors is required, and
(iii) this Agreement constitutes, and, upon execution and delivery by the
Company of the other Transaction Documents, such Transaction Documents will
constitute, valid and binding obligations of the Company enforceable against the
Company in accordance with their terms. Neither the execution, delivery or
performance by the Company of its obligations under this Agreement or the other
Transaction Documents, nor the consummation by it of the transactions
contemplated hereby or thereby (including, without limitation, the issuance of
the Units or the issuance or reservation for issuance of the Conversion Shares
or Warrant Shares) requires any consent or authorization of the Company's
stockholders.
(c) Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities (other than the Preferred Stock and the
Warrants) exercisable or exchangeable for, or convertible into, any shares of
capital stock and the number of shares to be reserved for issuance upon
conversion of the Preferred Stock and exercise of the Warrants is set forth in
Section 3(c)(i) of the Disclosure Schedule. All of such outstanding shares of
capital stock have been, or upon issuance in accordance with the terms of any
such exercisable, exchangeable or convertible securities will be, validly
issued, fully paid and non-assessable. No shares of capital stock of the Company
(including, without limitation, the Conversion Shares and the Warrant Shares)
are subject to preemptive rights or any other similar rights of the stockholders
of the Company or any liens or encumbrances. Except for the Securities and as
set forth in Section 3(c)(ii) of the Disclosure Schedule, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries, nor are any such issuances, contracts,
commitments, understandings or arrangements contemplated, (ii) there are no
contracts, commitments, understandings or arrangements under which the Company
or any of its Subsidiaries is obligated to register the sale of any of its or
their securities under the Securities Act (except the Registration Rights
Agreement); (iii) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem or otherwise acquire any security of the Company or any of its
Subsidiaries; and (iv) the Company does not have any shareholder rights plan,
"poison pill" or other anti-takeover plans or similar arrangements. Section
3(c)(iii) of the Disclosure Schedule sets forth all of the securities or
instruments issued by the Company or any of its Subsidiaries that contain
anti-dilution or similar provisions, and, except as and to the extent set forth
thereon, the sale and issuance of the Securities will not trigger any
anti-dilution adjustments to any such securities or instruments. The Company has
furnished to each Purchaser true and correct copies of the Company's Certificate
of Incorporation as in effect on the date hereof ("CERTIFICATE OF
INCORPORATION"), the Company's Bylaws as in effect on the date hereof (the
"BYLAWS"), and all other instruments and agreements governing securities
convertible into or exercisable or exchangeable for capital stock of the
Company, all of which instruments and agreements are set forth in Section
3(c)(iv) of the Disclosure Schedule. The Company or one of its Subsidiaries has
the unrestricted right to vote, and (subject to limitations imposed by
applicable law) to receive dividends and distributions on, all capital
securities of its Subsidiaries as owned by the Company or any such Subsidiary.
The "Convertible Preferred Stock" reflected on the capitalization table attached
to Section 3(c)(i)of the Disclosure Schedule was issued at $2.50 per share prior
to the filing of the certificate of designation with respect thereto. Such
certificate of designation has been filed prior to the Closing under this
Agreement. Notwithstanding any of the foregoing, the Company represents and
warrants that the Convertible Preferred Stock has no rights, preferences, or
other terms other than those set forth in the certificate designation with
respect thereto as heretofore delivered to the Purchasers.
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(d) Issuance of Securities. The Units (and the securities comprising the
Units) are duly authorized and, upon issuance in accordance with the terms of
this Agreement, (i) will be validly issued, fully paid and non-assessable and
free from all taxes, liens, claims and encumbrances, (ii) will not be subject to
preemptive rights, rights of first refusal or other similar rights of
stockholders of the Company or any other person and (iii) will not impose
personal liability on the holder thereof. The Conversion Shares and Warrant
Shares are duly authorized and reserved for issuance, and, upon conversion of
the Preferred Stock and exercise of the Warrants in accordance with the terms
thereof, (x) will be validly issued, fully paid and non-assessable, and free
from all taxes, liens, claims and encumbrances, (y) will not be subject to
preemptive rights, rights of first refusal or other similar rights of
stockholders of the Company or any other person and (z) will not impose personal
liability upon the holder thereof.
(e) No Conflicts; Consents. The execution, delivery and performance of
this Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Units and the issuance and
reservation for issuance of the Conversion Shares and Warrant Shares) will not
(i) result in a violation of the Certificate of Incorporation or Bylaws, (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment (including, without limitation, the triggering of any
anti-dilution provisions), acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including United States federal and state securities laws,
rules and regulations and rules and regulations of any self-regulatory
organizations to which either the Company or its securities are subject)
applicable to the Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its Subsidiaries is bound or affected (except,
with respect to clauses (ii) and (iii), for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations that would
not, individually or in the aggregate, have a Material Adverse Effect). Except
(w) as may be required under the Securities Act in connection with the
performance of the Company's obligations under the Registration Rights
Agreement, (x) for the filing of a Form D with the SEC, (y) as may be required
for compliance with applicable state securities or "blue sky" laws, or (z) as
otherwise set forth in Section 3(e) of the Disclosure Schedule, the Company is
not required to obtain any consent, approval, authorization or order of, or make
any filing or registration with, any court or governmental agency or any
regulatory or self-regulatory agency or other third party (including, without
limitation, pursuant to any Material Contract (as defined in Section 3(g)
below)) in order for it to execute, deliver or perform any of its obligations
under this Agreement or any of the other Transaction Documents.
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(f) Compliance. The Company is not in violation of its Certificate of
Incorporation, Bylaws or other organizational documents and no Subsidiary is in
violation of any of its organizational documents. Neither the Company nor any of
its Subsidiaries is in default (and no event has occurred that with notice or
lapse of time or both would put the Company or any of its Subsidiaries in
default) under, nor has there occurred any event giving others (with notice or
lapse of time or both) any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party (including, without limitation, the Material
Contracts), except for actual or possible violations, defaults or rights that
would not, individually or in the aggregate, have a Material Adverse Effect. The
businesses of the Company and its Subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any governmental entity, except
for violations the sanctions for which either individually or in the aggregate
have not had and would not have a Material Adverse Effect. Neither the Company,
nor any of its Subsidiaries, nor any director, officer, agent, employee or other
person acting on behalf of the Company or any Subsidiary has, in the course of
his actions for, or on behalf of, the Company or any Subsidiary, used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity, made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds, violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, provincial or foreign regulatory authorities that are material to the
conduct of its business, and neither the Company nor any of its Subsidiaries has
received any notice of proceeding relating to the revocation or modification of
any such certificate, authorization or permit.
(g) SEC Documents, Financial Statements. Since August 15, 2000, the
Company has timely filed (within applicable extension periods) all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT") (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein, the "SEC
Documents"). The Company has made available to each Purchaser true and complete
copies of the SEC Documents that such Purchaser has requested, and all of the
SEC Documents are otherwise available at xxx.xxx.xxx. As of their respective
dates, the SEC Documents complied in all material respects with the requirements
of the Exchange Act or the Securities Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the statements made in any such SEC Documents is, or has
been, required to be amended or updated under applicable law (except for such
statements as have been amended or updated in subsequent filings made prior to
the date hereof). As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC applicable with respect thereto. Such financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("GAAP"), consistently applied, during the periods
involved (except as may be otherwise indicated in such financial statements or
the notes thereto or, in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed or summary statements) and
fairly present in all material respects the consolidated financial position of
the Company and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal, immaterial
year-end audit adjustments). Except as set forth in the financial statements of
the Company included in the Select SEC Documents (as defined below) or as
otherwise disclosed in the Select SEC Documents, the Company has no liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to the date of such financial statements and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under GAAP to be reflected in such financial
statements, which liabilities and obligations referred to in clauses (i) and
(ii), individually or in the aggregate, are not material to the financial
condition or operating results of the Company. To the extent required by the
rules and regulations of the SEC applicable thereto, the Select SEC Documents
contain a complete and accurate list of all material undischarged written or
oral contracts, agreements, leases or other instruments to which the Company or
any Subsidiary is a party or by which the Company or any Subsidiary is bound or
to which any of the properties or assets of the Company or any Subsidiary is
subject (each, a "MATERIAL CONTRACT"). Except as set forth in the Select SEC
Documents, none of the Company, its Subsidiaries or, to the best knowledge of
the Company, any of the other parties thereto is in breach or violation of any
Material Contract, which breach or violation would have a Material Adverse
Effect. For purposes of this Agreement, "SELECT SEC DOCUMENTS" means the
Company's (A) Annual Report on Form 10-KSB for the fiscal year ended December
31, 2003 (the "2003 ANNUAL REPORT"), (B) Quarterly Reports on Form 10-QSB for
the fiscal quarters ended March 31, 2004, June 30, 2004 and September 30, 2004,
and (C) Current Reports on Form 8-K filed since September 30, 2004.
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(h) Internal Accounting Controls. The Company and each of its Subsidiaries
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management's general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and designed
such disclosures controls and procedures to ensure that material information
relating to the Company, including its Subsidiaries, is made known to the
certifying officers by others within those entities, particularly during the
period in which the Company's Annual Report on Form 10-KSB or Quarterly Report
on Form 10-QSB, as the case may be, is being prepared. The Company's certifying
officers have evaluated the effectiveness of the Company's controls and
procedures as of the filing date of the 2003 Annual Report and the Company's
most recently filed Quarterly Report on Form 10-QSB (each such date, an
"EVALUATION DATE"). The Company presented in the 2003 Annual Report and its most
recently filed Quarterly Report on Form 10-QSB the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the respective Evaluation Date. Since the Evaluation
Date for the 2003 Annual Report, there have been no significant changes in the
Company's internal controls (as such term is defined in Item 307(b) of
Regulation S-K under the Exchange Act) or, to the Company's knowledge, in other
factors that could significantly affect the Company's internal controls.
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(i) Absence of Certain Changes. Except as set forth in the Select SEC
Documents, since December 31, 2003, there has been no material adverse change
and no material adverse development in the business, properties, operations,
prospects, financial condition or results of operations of the Company and its
Subsidiaries, taken as a whole. The Company has not taken any steps, and does
not currently expect to take any steps, to seek protection pursuant to any
bankruptcy or receivership law, nor does the Company or any of its Subsidiaries
have any knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings with respect to the Company or any of its
Subsidiaries.
(j) Transactions With Affiliates. Except as set forth in the Select SEC
Documents, none of the officers, directors, or employees of the Company or any
of its Subsidiaries is presently a party to any transaction with the Company or
any of its Subsidiaries (other than for ordinary course services solely in their
capacity as officers, directors or employees), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any such officer, director or employee or any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has an ownership interest of five percent or more or is an
officer, director, trustee or partner.
(k) Absence of Litigation. Except as disclosed in the Select SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body (including, without limitation, the SEC) pending or, to the knowledge of
the Company or any of its Subsidiaries, threatened against or affecting the
Company, any of its Subsidiaries, or any of their respective directors or
officers in their capacities as such. To the knowledge of the Company, there are
no facts which, if known by a potential claimant or governmental authority,
could give rise to a claim or proceeding which, if asserted or conducted with
results unfavorable to the Company or any of its Subsidiaries, could reasonably
be expected to have a Material Adverse Effect.
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(l) Intellectual Property. Each of the Company and its Subsidiaries owns
or is duly licensed (and, in such event, has the unfettered right to grant
sublicenses) to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright applications,
licenses, inventions, discoveries, processes, scientific, technical, engineering
and marketing data, object and source codes (if any), know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as presently conducted. Section 3(l) of the Disclosure Schedule sets
forth a list of all Intangibles owned and/or used by the Company in its business
that are registered, subject to an application for registration or material to
the conduct of the Company's business as presently conducted. To the knowledge
of the Company and its Subsidiaries, neither the Company nor any Subsidiary of
the Company infringes or is in conflict with any right of any other person with
respect to any third party Intangibles. Neither the Company nor any of its
Subsidiaries has received written notice of any pending conflict with or
infringement upon such third party Intangibles. Neither the Company nor any of
its Subsidiaries has entered into any consent agreement, indemnification
agreement, forbearance to xxx or settlement agreement with respect to the
validity of the Company's or its Subsidiaries' ownership of or right to use its
Intangibles and, to the knowledge of the Company, there is no reasonable basis
for any such claim to be successful. The Intangibles are valid and, to the
knowledge of the Company, enforceable and no registration relating thereto has
lapsed, expired or been abandoned or canceled or is the subject of cancellation
or other adversarial proceedings, and all applications therefor are pending and
in good standing. The Company and its Subsidiaries have complied, in all
material respects, with their respective contractual obligations relating to the
protection of the Intangibles used pursuant to licenses. To the knowledge of the
Company, no person is infringing on or violating the Intangibles owned or used
by the Company or its Subsidiaries.
(m) Title. The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and merchantable title to all
personal property, in each case, that is owned by them and that is material to
the business of the Company and its Subsidiaries. All such property is owned by
the Company and its Subsidiaries free and clear of all liens, encumbrances and
defects, except such as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company and its Subsidiaries. Any real property and facilities
held under lease by the Company and its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.
(n) Tax Status. Except as set forth in the Select SEC Documents, the
Company and each of its Subsidiaries has made or filed all foreign, U.S.
federal, state, provincial and local income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim. The Company has not executed a
waiver with respect to any statute of limitations relating to the assessment or
collection of any foreign, federal, state, provincial or local tax. None of the
Company's tax returns is presently being audited by any taxing authority.
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(o) Key Employees. Each of the Company's directors and officers and any
Key Employee (as defined below) is currently serving the Company in the capacity
disclosed in the Select SEC Documents. No Key Employee is in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each Key Employee does not subject the Company or any of its Subsidiaries to
any material liability with respect to any of the foregoing matters. No Key
Employee has, to the knowledge of the Company and its Subsidiaries, any
intention to terminate or limit his employment with, or services to, the Company
or any of its Subsidiaries, nor is any such Key Employee subject to any
constraints which would cause such employee to be unable to devote his full time
and attention to such employment or services. For purposes of this Agreement,
"KEY EMPLOYEE" means the persons listed in Section 3(o) of the Disclosure
Schedule and any individual who assumes or performs any of the duties of a Key
Employee.
(p) Employee Relations. Neither the Company nor any of its Subsidiaries is
involved in any material union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. The Company
and its Subsidiaries believe that their relations with their employees are good.
No executive officer (as defined in Rule 501(f) of the Securities Act) has
notified the Company that such officer intends to leave the Company or otherwise
terminate such officer's employment with the Company. The Company and its
Subsidiaries are in compliance with all federal, state, local and foreign laws
and regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours, except where failure to be in
compliance would not, either individually or in the aggregate, result in a
Material Adverse Effect.
(q) Insurance. The Company and each of its Subsidiaries has in force fire,
casualty, product liability and other insurance policies, with extended
coverage, sufficient in amount to allow it to replace any of its material
properties or assets which might be damaged or destroyed or sufficient to cover
liabilities to which the Company may reasonably become subject, and such types
and amounts of other insurance with respect to its business and properties, on
both a per occurrence and an aggregate basis, as are customarily carried by
persons engaged in the same or similar business as the Company. No default or
event has occurred that could give rise to a default under any such policy.
(r) Environmental Matters. There is no environmental litigation or other
environmental proceeding pending or, to the knowledge of the Company or any of
its Subsidiaries, threatened by any governmental regulatory authority or others
with respect to the current or any former business of the Company or any of its
Subsidiaries or any partnership or joint venture currently or at any time
affiliated with the Company or any of its Subsidiaries. No state of facts exists
as to environmental matters or Hazardous Substances (as defined below) that
involves the reasonable likelihood of a material capital expenditure by the
Company or any of its Subsidiaries that may otherwise have a Material Adverse
Effect. No Hazardous Substances have been treated, stored or disposed of, or
otherwise deposited, in or on the properties owned or leased by the Company or
any of its Subsidiaries or by any partnership or joint venture currently or at
any time affiliated with the Company or any of its Subsidiaries in violation of
any applicable environmental laws. The environmental compliance programs of the
Company and each of its Subsidiaries comply in all respects with all
environmental laws, whether foreign, federal, state, provincial or local,
currently in effect. For purposes of this Agreement, "HAZARDOUS SUBSTANCES"
means any substance, waste, contaminant, pollutant or material that has been
determined by any governmental authority to be capable of posing a risk of
injury to health, safety, property or the environment.
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(s) Solvency. Based on the financial condition of the Company as of the
Closing Date, (i) the Company's fair saleable value of its assets exceeds the
amount that will be required to be paid on or in respect of the Company's
existing debts and other liabilities (including known contingent liabilities) as
they mature; (ii) the Company's assets do not constitute unreasonably small
capital to carry on its business for the current fiscal year as now conducted
and as proposed to be conducted including its capital needs taking into account
the particular capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability thereof; and (iii)
the current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into account
all anticipated uses of the cash, would be sufficient to pay all amounts on or
in respect of its debt when such amounts are required to be paid. The Company
does not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be payable on or
in respect of its debt).
(t) Listing. The Common Stock is quoted on the Nasdaq Over-the-Counter
Bulletin Board (the "OTC"). The Conversion Shares and Warrant Shares are
eligible for quotation on the OTC (subject to official notice of issuance).
(u) Form SB-2 or S-2 Eligibility. The Company is eligible to register the
resale of its Common Stock on a registration statement on either Form SB-2 or
Form S-2 under the Securities Act. There exist no fact or circumstance that
would prohibit or delay the preparation and filing of a registration statement
on either Form SB-2 or Form S-2 with respect to the Registrable Securities (as
defined in the Registration Rights Agreement). The Company has no basis to
believe that its past or present independent public auditors will withhold their
consent to the inclusion, or incorporation by reference, of their audit opinion
concerning the Company's financial statements which are included in the
Registration Statement required to be filed pursuant to the Registration Rights
Agreement.
(v) Anti-Takeover Provisions. The Company and its board of directors have
taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision under its
Certificate of Incorporation or the laws of the state of its incorporation which
is or could become applicable to any of the Purchasers as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company's issuance of the Securities and any and all Purchaser's ownership of
the Securities.
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(w) Acknowledgment Regarding the Purchasers' Purchase of the Securities.
The Company acknowledges and agrees that each Purchaser is acting solely in the
capacity of arm's length purchaser with respect to this Agreement and the other
Transaction Documents and the transactions contemplated hereby and thereby, and
that no Purchaser is (i) an officer or director of the Company, (ii) to the
Company's knowledge, an "affiliate" of the Company (as defined in Rule 144 under
the Securities Act (including any successor rule, "RULE 144")) or (iii) to the
Company's knowledge, a "beneficial owner" of more than 5% of the Common Stock
(as defined for purposes of Rule 13d-3 of the Exchange Act). The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this Agreement or the
other Transaction Documents and the transactions contemplated hereby and
thereby, and any advice given by any Purchaser or any of its representatives or
agents in connection with this Agreement or the other Transaction Documents and
the transactions contemplated hereby and thereby is merely incidental to such
Purchaser's purchase of the Securities. The Company further represents to each
Purchaser that the Company's decision to enter into this Agreement and the other
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.
(x) No General Solicitation or Integrated Offering. Neither the Company
nor any distributor participating on the Company's behalf in the transactions
contemplated hereby (if any) nor any person acting for the Company, or any such
distributor, has conducted any "general solicitation" (as such term is defined
in Regulation D) with respect to any of the Securities being offered hereby.
Neither the Company nor any of its affiliates, nor any person acting on its or
their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would require registration of the Securities being offered hereby under the
Securities Act or cause this offering of Securities to be integrated with any
prior offering of securities of the Company for purposes of the Securities Act,
which result of such integration would require registration under the Securities
Act, or any applicable stockholder approval provisions.
(y) No Brokers. The Company has taken no action that would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by any Purchaser relating to this Agreement or the transactions
contemplated hereby. In connection with the transactions contemplated by this
Agreement, the Company has entered into that certain Non-Exclusive Finder's
Agreement, dated as of November 30, 2004, with the Shemano Group, Inc. (the
"FINDER'S AGREEMENT"). The Company, and no Purchaser, is responsible for any and
all fees and compensation in connection with the Finder's Agreement.
(z) Acknowledgment Regarding Securities. The number of Conversion Shares
issuable upon conversion of the Preferred Stock and the number of Warrant Shares
issuable upon exercise of the Warrants may increase in certain circumstances.
The Company's directors and executive officers have studied and fully understand
the nature of the Securities being sold hereunder. The Company acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred Stock
in accordance with the terms thereof and the Warrant Shares upon the exercise of
the Warrants in accordance with the terms thereof is absolute and unconditional,
regardless of the dilution that such issuance may have on the ownership
interests of other stockholders and the availability of remedies provided for in
any of the Transaction Documents relating to a failure or refusal to issue
Conversion Shares or Warrant Shares. Taking the foregoing into account, the
Company's Board of Directors has determined in its good-faith business judgment
that the issuance of the Units hereunder and the consummation of the other
transactions contemplated hereby are in the best interests of the Company and
its stockholders.
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(aa) Disclosure. All information relating to or concerning the Company
and/or any of its Subsidiaries set forth in this Agreement or provided to the
Purchasers pursuant to Section 2(d) hereof or otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects
and the Company has not omitted to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
exists with respect to the Company or its Subsidiaries or their respective
businesses, properties, prospects, operations or financial conditions, which has
not been publicly disclosed but, under applicable law, rule or regulation, would
be required to be disclosed by the Company in a registration statement filed on
the date hereof by the Company under the Securities Act with respect to a
primary issuance of the Company's securities.
4. COVENANTS.
(a) Reasonable Best Efforts. The parties shall use their respective
reasonable best efforts timely to satisfy each of the conditions described in
Sections 6 and 7 of this Agreement.
(b) Form D; Blue Sky Laws. The Company shall file with the SEC a Form D
with respect to the Securities as required under Regulation D and provide a copy
thereof to each Purchaser promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to each Purchaser
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United States or obtain exemption therefrom, and shall provide
evidence of any such action so taken to each Purchaser on or prior to the
Closing Date. Within two business days after the Closing Date, the Company shall
file a Form 8-K with the SEC concerning this Agreement and the transactions
contemplated hereby, which Form 8-K shall attach this Agreement and its Exhibits
as exhibits to such Form 0-X (xxx "0-X XXXXXX"). From and after the 8-K Filing,
the Company hereby acknowledges that no Purchaser shall be in possession of any
material nonpublic information received from the Company, any of its
Subsidiaries or any of its respective officers, directors, employees or agents,
that is not disclosed in the 8-K Filing. The Company shall not, and shall cause
each of its Subsidiaries and its and each of their respective officers,
directors, employees and agents not to, provide any Purchaser with any material
nonpublic information regarding the Company or any of its Subsidiaries from and
after the 8-K Filing without the express written consent of such Purchaser;
provided, however, that if a Purchaser exercises its rights under Section 4(m)
hereof, it shall be deemed to have given such express written consent. In the
event of a breach of the foregoing covenant by the Company, any of its
Subsidiaries or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the other
Transaction Documents, each Purchaser shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material nonpublic information without the prior approval by the
Company, its Subsidiaries or any of its or their respective officers, directors,
employees or agents. No Purchaser shall have any liability to the Company, its
Subsidiaries or any of its or their respective officers, directors, employees,
shareholders or agents for any such disclosure. The Company shall issue a press
release announcing the transactions contemplated by this Agreement, subject to
the Purchasers' reasonable approval, by 9:00 p.m. Eastern time on the date after
the Closing. Subject to the foregoing, neither the Company nor any Purchaser
shall issue any press releases or any other public statements with respect to
the transactions contemplated hereby; provided, however, that the Company shall
be entitled, without the prior approval of any Purchaser, to make any press
release or other public disclosure with respect to such transactions (i) in
substantial conformity with the 8-K Filing and contemporaneously therewith and
(ii) as is required by applicable law and regulations (provided that in the case
of clause (i) each Purchaser shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its release).
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(c) Reporting Status. So long as at least three thousand seven hundred and
fifty (3,750) shares of Series C Preferred Stock are outstanding and held by the
Purchasers (together with their affiliates), the Company shall timely file
(within applicable extension periods) all reports required to be filed with the
SEC pursuant to the Exchange Act, and the Company shall not terminate its status
as an issuer required to file reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would permit such
termination. In addition, the Company shall take all actions necessary to meet
the "registrant eligibility" requirements set forth in the general instructions
to either Form SB-2 or Form S-2 or any successor form thereto, to continue to be
eligible to register the resale of its Common Stock on a registration statement
on either Form SB-2 or Form S-2 under the Securities Act.
(d) Use of Proceeds. The Company shall use the proceeds from the sale and
issuance of the Units for general corporate purposes and working capital. Such
proceeds shall not be used to (i) pay dividends; (ii) pay for any increase in
executive compensation, loan or other advance to any officer, employee,
shareholder, director or other affiliate of the Company, without the express
approval of the Board of Directors acting in accordance with past practice;
(iii) purchase debt or equity securities of any entity (including redeeming the
Company's own securities), except for (A) evidences of indebtedness issued or
fully guaranteed by the United States of America and having a maturity of not
more than one year from the date of acquisition, (B) certificates of deposit,
notes, acceptances and repurchase agreements having a maturity of not more than
one year from the date of acquisition issued by a bank organized in the United
States having capital, surplus and undivided profits of at least $500,000,000,
(C) the highest-rated commercial paper having a maturity of not more than one
year from the date of acquisition, and (D) "Money Market" fund shares, or money
market accounts fully insured by the Federal Deposit Insurance Corporation and
sponsored by banks and other financial institutions, provided that the
investments consist principally of the types of investments described in clauses
(A), (B), or (C) above; (iv) pay for any perquisite to any officer, employee,
shareholder, director or other affiliate of the Company; or (v) make any
investment not directly related to the current business of the Company.
(e) Financial Information. So long as at least three thousand seven
hundred and fifty (3,750) shares of Series C Preferred Stock are outstanding and
held by the Purchasers (together with their affiliates), the Company shall send
(via electronic transmission or otherwise) the following reports to each
Purchaser: (i) within ten days after the filing with the SEC, a copy of its
Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB, its proxy
statements and any Current Reports on Form 8-K; and (ii) within one day after
release, copies of all press releases issued by the Company or any of its
Subsidiaries.
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(f) Reservation of Shares. The Company currently has authorized and
reserved for the purpose of issuance sixteen million (16,000,000) shares of
Common Stock to provide for the full conversion of the Preferred Stock and
issuance of the Conversion Shares in connection therewith, the full exercise of
the Warrants and the issuance of the Warrant Shares in connection therewith and
as otherwise required by the Preferred Stock, the Warrants and the Registration
Rights Agreement (collectively, the "ISSUANCE OBLIGATIONS"). In the event such
number of shares becomes insufficient to satisfy the Issuance Obligations, the
Company shall take all necessary action to authorize and reserve such additional
shares of Common Stock necessary to satisfy the Issuance Obligations.
(g) Listing. So long as any of the Purchasers (or any of their affiliates)
beneficially owns any of the Securities, the Company shall maintain the trading,
listing or quotation, as the case may be, of all Conversion Shares and Warrant
Shares from time to time issuable upon conversion of the Preferred and exercise
of the Warrants on each national securities exchange, automated quotation system
or electronic bulletin board on which shares of Common Stock are traded, listed
or quoted. The Company shall comply in all respects with the reporting, filing
and other obligations under the bylaws or rules of the National Association of
Securities Dealers, Inc. (the "NASD"), such exchanges, or such electronic
systems, as applicable. The Company shall promptly provide to each Purchaser
copies of any notices it receives regarding the continued eligibility of the
Common Stock for trading, listing and/or quotation, as applicable, on any
securities exchange or automated quotation system on which securities of the
same class or series issued by the Company are then traded, listed or quoted, if
any.
(h) Corporate Existence. So long as at least three thousand seven hundred
and fifty (3,750) shares of Series C Preferred Stock are outstanding and held by
the Purchasers (together with their affiliates), the Company shall maintain its
corporate existence, and in the event of a merger, consolidation or sale of all
or substantially all of the Company's assets, the Company shall ensure that the
surviving or successor entity in such transaction (i) assumes the Company's
obligations under this Agreement and the other Transaction Documents and the
agreements and instruments entered into in connection herewith and therewith
regardless of whether or not the Company would have had a sufficient number of
shares of Common Stock authorized and available for issuance in order to effect
the conversion of all the Preferred Stock and exercise in full of all Warrants
outstanding as of the date of such transaction and (ii) except in the event of a
merger, consolidation of the Company into any other corporation, or the sale or
conveyance of all or substantially all of the assets of the Company where the
consideration consists solely of cash, is a publicly-traded corporation whose
common stock is listed for trading on the SmallCap Market, the National Market,
the NYSE or the AMEX.
(i) No Integrated Offerings. The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that
requires or would require registration of the Securities being offered or sold
hereunder under the Securities Act or cause this offering of the Securities to
be integrated with any other offering of securities by the Company for purposes
of any stockholder approval provision applicable to the Company or its
securities.
- 15 -
(j) Legal Compliance. The Company shall conduct its business and the
business of its Subsidiaries in compliance with all laws, ordinances or
regulations of governmental entities applicable to such businesses, except where
the failure to do so would not have a Material Adverse Effect.
(k) Redemptions, Dividends and Repayments of Indebtedness. So long as at
least three thousand seven hundred and fifty (3,750) shares of Series C
Preferred Stock are outstanding and held by the Purchasers (together with their
affiliates), the Company shall not, without first obtaining the written approval
of the holders of a majority of the shares of Preferred Stock then outstanding
(which approval may be given or withheld by such holders in their sole and
absolute discretion), repurchase, redeem or declare or pay any cash dividend or
distribution on any shares of capital stock of the Company or repay or prepay
any indebtedness of the Company other than as expressly required pursuant to the
terms of such indebtedness as in effect on the date hereof.
(l) Information. So long as at least three thousand seven hundred and
fifty (3,750) shares of Series C Preferred Stock are outstanding and held by the
Purchasers (together with their affiliates), the Company shall furnish to each
such Purchaser:
(i) concurrently with the filing with the SEC of its annual reports
on Form 10-KSB, a certificate of the President, a Vice President or a senior
financial officer of the Company stating that, based upon such examination or
investigation and review of this Agreement as in the opinion of the signer is
necessary to enable the signer to express an informed opinion with respect
thereto, neither the Company nor any of its Subsidiaries is or has during such
period been in default in the performance or observance of any of the terms,
covenants or conditions hereof, or, if the Company or any of its Subsidiaries
shall be or shall have been in default, specifying all such defaults, and the
nature and period of existence thereof, and what action the Company or such
Subsidiary has taken, is taking or proposes to take with respect thereto; and
(ii) the information the Company must deliver to any holder or to
any prospective transferee of Securities in order to permit the sale or other
transfer of such Securities pursuant to Rule 144A of the SEC or any similar rule
then in effect.
The Company shall keep at its principal executive office a true copy of this
Agreement (as at the time in effect), and cause the same to be available for
inspection at such office during normal business hours by any holder of
Securities or any prospective transferee of Securities designated by a holder
thereof.
(m) Inspection of Properties and Books. So long as at least three thousand
seven hundred and fifty (3,750) shares of Series C Preferred Stock are
outstanding and held by the Purchasers (together with their affiliates), each
such Purchaser and its representatives and agents (collectively, the
"INSPECTORS") shall have the right, at such Purchaser's expense, to visit and
inspect any of the properties of the Company and of its Subsidiaries, to examine
the books of account and records of the Company and of its Subsidiaries, to make
or be provided with copies and extracts therefrom, to discuss the affairs,
finances and accounts of the Company and of its Subsidiaries with, and to be
advised as to the same by, its and their officers, employees and independent
public accountants (and by this provision the Company authorizes such
accountants to discuss such affairs, finances and accounts, whether or not a
representative of the Company is present) all at such reasonable times and
intervals and to such reasonable extent as the Purchasers may desire; provided,
however, that each Inspector shall hold in confidence and shall not make any
disclosure (except to such Purchaser) of any such information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such information is
necessary to avoid or correct a misstatement or omission in any Registration
Statement filed pursuant to the Registration Rights Agreement, (ii) the release
of such information is ordered pursuant to a subpoena or other order from a
court or government body of competent jurisdiction, or (iii) such information
has been made generally available to the public other than by disclosure in
violation of this or any other agreement. Each Purchaser agrees that it shall,
upon learning that disclosure of such information is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the information deemed confidential. Notwithstanding any of the foregoing,
nothing in this Agreement (including, without limitation, this Section 4(m))
shall limit or otherwise affect any Investor's rights to inspect the books of
account and records of the Company and of its Subsidiaries pursuant to
applicable law, including, without limitation, Section 220 of the Delaware
General Corporation Law.
- 16 -
(n) Shareholders Rights Plan. No claim shall be made or enforced by the
Company or any other person that any Purchaser is an "Acquiring Person" under
any shareholders rights plan or similar plan or arrangement in effect or
hereafter adopted by the Company, or that any Purchaser could be deemed to
trigger the provisions of any such plan or arrangement, by virtue of receiving
Securities under this Agreement or any other Transaction Documents or under any
other agreement between the Company and the Purchasers.
(o) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by any Purchaser in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and no Purchaser shall be required to
provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document. The
Company shall execute and deliver such documentation as a pledgee of the
Securities may reasonably request in connection with a pledge of the Securities
to such pledgee by any Purchaser.
(p) Variable Securities. So long as any Purchaser (or any Purchaser's
affiliate) beneficially owns any of the Securities, the Company shall not,
without first obtaining the written approval of the holders of a majority of the
shares of Preferred Stock then outstanding (which approval may be given or
withheld by such holders in their sole and absolute discretion), issue or sell
any rights, warrants or options to subscribe for or purchase Common Stock, or
any other securities directly or indirectly convertible into or exchangeable or
exercisable for Common Stock, at an effective conversion, exchange or exercise
price that varies or may vary with the market price of the Common Stock,
including by way of one or more reset(s) to any fixed price.
- 17 -
(q) Participation and Exchange Rights. Subject to the terms and conditions
specified in this Section 4(q), until the second anniversary of the date hereof,
each of the Purchasers (together with any of such Purchaser's affiliates to whom
such Purchaser has transferred or assigned any of the Securities and/or such
Purchaser's rights and benefits under this Agreement) shall have a right to
participate with respect to the issuance or possible issuance of any equity or
equity-linked securities or debt which is convertible into equity or in which
there is an equity component (as the case may be, "ADDITIONAL SECURITIES") on
the same terms and conditions as offered by the Company to the other purchasers
of such Additional Securities. Each time the Company proposes to offer any
Additional Securities, the Company shall make an offering of such Additional
Securities to each Purchaser in accordance with the following provisions:
(i) The Company shall deliver a notice (the "ISSUANCE NOTICE") to
each Purchaser, at least 30 days prior to the date on which it proposes to offer
such Additional Securities, stating (a) its bona fide intention to offer such
Additional Securities, (b) the number of such Additional Securities to be
offered, (c) the price and terms, if any, upon which it proposes to offer such
Additional Securities, (d) the anticipated closing date of the sale of such
Additional Securities, and (e) any and all other material terms of such offer.
(ii) By written notification received by the Company, within 20 days
after giving of the Issuance Notice, each Purchaser may elect to purchase or
obtain, at the price and on the terms specified in the Issuance Notice, up to
that portion of such Additional Securities which equals the proportion that the
number of Conversion Shares and Warrant Shares that such Purchaser then owns or
has the right to acquire (upon conversion of the Preferred Stock and exercise of
the Warrants) bears to the total number of shares of Common Stock then
outstanding (on a fully-diluted basis, assuming full conversion, exercise or
exchange of all convertible, exercisable or exchangeable securities then
outstanding). The Company shall promptly, in writing, inform each Purchaser that
elects to purchase all of the Additional Securities available to it (each, a
"FULLY-EXERCISING PURCHASER") of all other Purchasers' failure to elect to
purchaser all of the Additional Securities available to such other Purchasers.
During the five-day period commencing after such information is given, each
Fully-Exercising Purchaser shall be entitled to obtain that number of Additional
Securities equal to the proportion that (x) the amount of Additional Securities
for which the other Purchasers were entitled to, but failed to, subscribe, bears
to (y) the total number of Conversion Shares and Warrant Shares that all
Fully-Exercising Purchasers then own or have the right to acquire (upon
conversion of the Preferred Stock and exercise of the Warrants) who wish to
purchase any of the unsubscribed shares.
(iii) If all Additional Securities which the holders of shares of
Series C Preferred Stock are entitled to purchase pursuant to this Section 4(q)
are not elected to be purchased as provided in clause (ii) above, then the
Company may, during the 75-day period following the expiration of the period
provided in such clause (ii), offer the remaining unsubscribed portion of such
Additional Securities to any person or persons at a price not less than, and
upon terms no more favorable to the offeree than, those specified in the
Issuance Notice. If the Company does not consummate the sale of such Additional
Securities within such period, the right provided hereunder shall be deemed to
be revived and such Additional Securities shall not be offered or sold unless
first reoffered to each Purchaser in accordance herewith.
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(iv) Notwithstanding anything in this Section 4(q) to the contrary,
the participation rights granted in this Section 4(q) shall not be applicable
to: (A) the issuance of shares of Common Stock upon the exercise or conversion
of the Company's options, warrants or convertible securities disclosed in
Section 3(c)(ii) of the Disclosure Schedule in accordance with the terms of such
options, warrants or other securities as in effect on the date hereof, provided
that, in the case of each agreement under the heading "Pending Agreements" in
Section 3(c)(ii) of the Disclosure Schedule, such agreement includes either (A)
an exercise or conversion price of at least $2.50 per share or (B) a covenant by
the party acquiring securities thereunder obligating such party not to sell more
than 5,000 shares of Common Stock in any single trading day nor more than 25,000
shares of Common Stock in any calendar week, in each case, until the trading
price of the Common Stock is above $6.00 per share; (B) the grant or exercise of
options to purchase Common Stock, with exercise prices not less than the market
price of the Common Stock on the date of grant, or the grant of restricted
shares of Common Stock, in each case which are issued to employees, officers,
directors or consultants of the Company for the primary purpose of soliciting or
retaining their employment or service pursuant to an equity compensation plan
and the issuance of shares of Common Stock upon the exercise of any such
options, provided that (I) such plan and the issuance of Common Stock and
options are approved in accordance with reasonable judgment by a majority of the
Board of Directors of the Company or a majority of the members of a committee
comprised exclusively of independent, non-employee directors established for
such purpose, and (II) such plan is approved by the stockholders of the Company
if and to the extent required from time to time under the Securities Act, the
Exchange Act, the rules and regulations of the Commission thereunder and/or the
listing standards of any national exchange or quotation service; (C) the
issuance of securities pursuant to a bona fide underwritten public offering; (D)
the issuance of the Preferred Stock and the Warrants pursuant hereto, the
Conversion Shares upon conversion of the Preferred Stock and the Warrant Shares
upon exercise of the Warrants; (E) the issuance of securities in a bona fide
business acquisition; (F) the issuance of securities in connection with a
strategic business partnership within the Company's industry, the primary
purpose of which, in the reasonable judgment of the Company's Board of
Directors, is not to raise additional capital; or (G) the issuance of securities
pursuant to any equipment financing from an Eligible Lender (as defined in the
Certificate of Designation) approved by the Board of Directors and to the extent
not otherwise restricted by Article XIII.(vii) of the Certificate of
Designation.
(v) In the event that any Purchaser exercises its participation
right under this Section 4(q), such Purchaser shall be entitled to deliver to
the Company shares of Series C Preferred that such Purchaser then holds as the
consideration, in whole or in part, for the purchase of Additional Securities
pursuant to this Section 4(q).
(r) Expenses. At the Closing, the Company shall pay to Baystar Capital II,
L.P. ("BAYSTAR") reimbursement for the out-of-pocket expenses reasonably
incurred by Baystar, its affiliates and its or their advisors in connection with
the negotiation, preparation, execution and delivery of this Agreement and the
other Transaction Documents and the consummation of the transactions
contemplated hereby and thereby, including, without limitation, Baystar's and
its affiliates' and advisors' reasonable due diligence and attorneys' fees and
expenses, up to a cap of Sixty-Thousand Dollars ($60,000) plus any additional
amounts as the Company may hereafter approve from time to time (collectively,
the "EXPENSES"); provided, however, that Baystar shall be permitted, in its
discretion, to deduct all of its Expenses from the Purchase Price payable by
Baystar hereunder. Baystar shall deliver to the Company at or prior to the
Closing an invoice stating the amount of expenses due and payable by the Company
at the Closing pursuant to this Section 4(r).
- 19 -
(s) Transactions With Affiliates. Except as set forth in Section 4(s) of
the Disclosure Schedule, the Company will not, and will cause each of its
Subsidiaries not to, enter into, amend or otherwise modify any transaction with
any officer, director or employee of the Company or any Subsidiary or any family
member of the foregoing (other than for ordinary course services solely in their
capacity as officers, directors or employees), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any such officer, director, employee or family
member or any corporation, partnership, trust or other entity in which any such
officer, director, employee or family member has an ownership interest of five
percent or more or is an officer, director, trustee or partner.
(t) Registration Rights. The Company shall not enter into any contract,
commitment, understanding or arrangement under which the Company or any of its
Subsidiaries shall be obligated to register the sale of any of its or their
securities under the Securities Act prior to 30 days following the effectiveness
of the Registration Statement. Notwithstanding the foregoing, the Company may
enter into the agreements set forth in Section 3(c)(ii) of the Disclosure
Schedule under the heading "Pending Agreements", provided that each such
agreement includes either (i) an exercise or conversion price of at least $2.50
per share or (ii) a covenant by the party acquiring securities thereunder
obligating such party not to sell more than 5,000 shares of Common Stock in any
single trading day nor more than 25,000 shares of Common Stock in any calendar
week, in each case, until the trading price of the Common Stock is above $6.00
per share.
5. SECURITIES TRANSFER MATTERS.
(a) Conversion and Exercise. Upon conversion of the Preferred Stock or
exercise of the Warrants by any person, (i) if the DTC Transfer Conditions (as
defined below) are satisfied, the Company shall cause its transfer agent to
electronically transmit all Conversion Shares and Warrant Shares by crediting
the account of such person or its nominee with the Depository Trust Company
("DTC") through its Deposit Withdrawal Agent Commission system; or (ii) if the
DTC Transfer Conditions are not satisfied, the Company shall issue and deliver,
or instruct its transfer agent to issue and deliver, certificates (subject to
the legend and other applicable provisions hereof and the Certificate of
Designation and Warrants), registered in the name of such person its nominee,
physical certificates representing the Conversion Shares and Warrant Shares, as
applicable. Even if the DTC Transfer Conditions are satisfied, any person
effecting a conversion of Preferred Stock or exercising Warrants may instruct
the Company to deliver to such person or its nominee physical certificates
representing the Conversion Shares and Warrant Shares, as applicable, in lieu of
delivering such shares by way of DTC Transfer. For purposes of this Agreement,
"DTC TRANSFER CONDITIONS" means that (A) the Company's transfer agent is
participating in the DTC Fast Automated Securities Transfer program and (B) the
certificates for the Conversion Shares or Warrant Shares required to be
delivered are not required to bear a legend and the person effecting such
conversion or exercise is not then required to return such certificate for the
placement of a legend thereon.
- 20 -
(b) Transfer or Resale. Each Purchaser understands that (i) except as
provided in the Registration Rights Agreement, the sale or resale of the
Securities have not been and are not being registered under the Securities Act
or any state securities laws, and the Securities may not be transferred unless
(A) the transfer is made pursuant to and as set forth in an effective
registration statement under the Securities Act covering the Securities; or (B)
such Purchaser shall have delivered to the Company an opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; or (C) sold under and in compliance with Rule 144; or (D) sold or
transferred to an affiliate of such Purchaser that agrees to sell or otherwise
transfer the Securities only in accordance with the provisions of this Section
5(b); and (ii) neither the Company nor any other person is under any obligation
to register such Securities under the Securities Act or any state securities
laws (other than pursuant to the terms of the Registration Rights Agreement).
Notwithstanding the foregoing or anything else contained herein to the contrary,
the Securities may be pledged as collateral in connection with a bona fide
margin account or other lending arrangement, provided such pledge is consistent
with applicable laws, rules and regulations.
(c) Legends. Each Purchaser understands that the Preferred Stock and the
Warrants and, until such time as the Conversion Shares and Warrant Shares have
been registered under the Securities Act (including registration pursuant to
Rule 416 thereunder) as contemplated by the Registration Rights Agreement or
otherwise may be sold by such Purchaser under Rule 144(k), the certificates for
the Conversion Shares and Warrant Shares may bear a restrictive legend in
substantially the following form:
The securities represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, or the securities laws of any state of the
United States or in any other jurisdiction. The
securities represented hereby may not be offered, sold
or transferred in the absence of an effective
registration statement for the securities under
applicable securities laws unless offered, sold or
transferred pursuant to an available exemption from the
registration requirements of those laws.
The Company shall, immediately prior to a registration statement covering
the Securities (including, without limitation, the Registration Statement
contemplated by the Registration Rights Agreement) being declared effective,
deliver to its transfer agent an opinion letter of counsel, opining that at any
time such registration statement is effective, the transfer agent shall issue,
in connection with the issuance of the Conversion Shares and Warrant Shares,
certificates representing such Conversion Shares and Warrant Shares without the
restrictive legend above, provided such Conversion Shares and Warrant Shares are
to be sold pursuant to the prospectus contained in such registration statement.
Upon receipt of such opinion, the Company shall cause the transfer agent to
confirm, for the benefit of the holders, that no further opinion of counsel is
required at the time of transfer in order to issue such shares without such
restrictive legend.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by state securities laws, (i) there has
been a sale of such Security that was registered under the Securities Act
(including registration pursuant to Rule 416 thereunder); (ii) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect that
a public sale or transfer of such Security was completed without the requirement
of registration under the Securities Act; or (iii) such holder provides the
Company with the written advice of counsel that such Security can be sold under
Rule 144(k). In the event the above legend is removed from any Security and
thereafter the effectiveness of a registration statement covering such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then, upon reasonable advance written
notice to such Purchaser, the Company may require that the above legend be
placed on any such Security that cannot then be sold pursuant to an effective
registration statement or under Rule 144(k) and such Purchaser shall cooperate
in the replacement of such legend. Such legend shall thereafter be removed when
such Security may again be sold pursuant to an effective registration statement
or under Rule 144(k).
- 21 -
(d) Transfer Agent Instruction. Upon compliance by any Purchaser with the
provisions of this Section 5 with respect to the transfer of any Securities, the
Company shall permit the transfer of such Securities and, in the case of the
transfer of Conversion Shares or Warrant Shares, promptly instruct its transfer
agent to issue one or more certificates (or effect a DTC Transfer) in such name
and in such denominations as specified by such Purchaser. The Company shall not
give any instructions to its transfer agent with respect to the Securities,
other than any permissible or required instructions provided in this Section 5,
and the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Units to
each Purchaser hereunder is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions as to such Purchaser, provided
that such conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion:
(a) Execution of Transaction Documents. Each Purchaser shall have executed
such Purchaser's Execution Page to this Agreement and each other Transaction
Document to which such Purchaser is a party and delivered the same to the
Company.
(b) Payment of Purchase Price. Each Purchaser shall have delivered the
full amount of such Purchaser's Purchase Price to the Company by wire transfer
in accordance with the Company's written wiring instructions.
(c) Representations and Warranties True; Covenants Performed. The
representations and warranties of each Purchaser shall be true and correct as of
the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date,
which representations and warranties shall be true and correct as of such date),
and such Purchaser shall have performed, satisfied and complied with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by such Purchaser at or prior to the Closing Date.
- 22 -
(d) No Legal Prohibition. No statute, rule, regulation, executive order,
decree, ruling, injunction, action or proceeding shall have been enacted,
entered, promulgated or endorsed by any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which restricts or prohibits the consummation of
any of the transactions contemplated by this Agreement.
7. CONDITIONS TO THE PURCHASERS' OBLIGATIONS TO PURCHASE.
The obligation of each Purchaser hereunder to purchase the Units for which
it is subscribing from the Company hereunder is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions, provided that
such conditions are for each Purchaser's individual and sole benefit and may be
waived by any Purchaser as to such Purchaser at any time in such Purchaser's
sole discretion:
(a) Execution of Transaction Documents. The Company shall have executed
such Purchaser's Execution Page to this Agreement and each Transaction Document
to which the Company is a party and delivered executed originals of the same to
such Purchaser.
(b) Filing of Certificate of Designation. The Certificate of Designation
shall have been filed and accepted for filing with the Secretary of State of the
State of Delaware and a copy thereof certified by the Secretary of State of the
State of Delaware shall have been delivered to such Purchaser.
(c) Delivery of Securities. The Company shall have delivered to such
Purchaser duly executed certificates representing the Preferred Stock and
Warrants for the number of Units being purchased by such Purchaser (each in such
denominations as such Purchaser shall request), registered in such Purchaser's
name.
(d) Listing. The Common Stock shall be quoted on the OTC, and trading in
the Common Stock shall not have been suspended by the SEC or the OTC.
(e) Representations and Warranties True; Covenants Performed. The
representations and warranties of the Company shall be true and correct as of
the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date,
which representations and warranties shall be true and correct as of such date)
and the Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. Such Purchaser
shall have received a certificate, executed by the Chief Executive Officer of
the Company after reasonable investigation, dated as of the Closing Date to the
foregoing effect and as to such other matters as may reasonably be requested by
such Purchaser.
(f) No Legal Prohibition. No statute, rule, regulation, executive order,
decree, ruling, injunction, action or proceeding shall have been enacted,
entered, promulgated or endorsed by any court or governmental authority of
competent jurisdiction or any self-regulatory organization having authority over
the matters contemplated hereby which restricts or prohibits the consummation
of, any of the transactions contemplated by this Agreement.
- 23 -
(g) Legal Opinion. Such Purchaser shall have received an opinion of the
Company's counsel, dated as of the Closing Date, in the form attached hereto as
Exhibit D.
(h) No Material Adverse Change. There shall have been no material adverse
changes and no material adverse developments in the business, properties,
operations, prospects, financial condition or results of operations of the
Company and its Subsidiaries, taken as a whole, since the date hereof, and no
information that is materially adverse to the Company and of which such
Purchaser is not currently aware shall come to the attention of such Purchaser.
(i) Corporate Approvals. Such Purchaser shall have received a copy of
resolutions, duly adopted by the Board of Directors of the Company, which shall
be in full force and effect at the time of the Closing, authorizing the
execution, delivery and performance by the Company of this Agreement and the
other Transaction Documents and the consummation by the Company of the
transactions contemplated hereby and thereby, certified as such by the Secretary
or Assistant Secretary of the Company, and such other documents they reasonably
request in connection with the Closing.
8. [INTENTIONALLY OMITTED]
9. GOVERNING LAW; MISCELLANEOUS.
(a) Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company and
each Purchaser irrevocably consents to the jurisdiction of the United States
federal courts and the state courts located in the County of New Castle, State
of Delaware, in any suit or proceeding based on or arising under this Agreement
and irrevocably agree that all claims in respect of such suit or proceeding may
be determined in such courts. The Company and each Purchaser irrevocably waives
the defense of an inconvenient forum to the maintenance of such suit or
proceeding in such forum. The Company and each Purchaser further agrees that
service of process upon it mailed by first class mail shall be deemed in every
respect effective service of process upon it in any such suit or proceeding.
Nothing herein shall affect the right of any Purchaser or the Company to serve
process in any other manner permitted by law. The Company and each Purchaser
agrees that a final non-appealable judgment in any such suit or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on such
judgment or in any other lawful manner.
(b) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed execution page(s)
hereof to be physically delivered to the other party within five days of the
execution hereof, provided that the failure to so deliver any manually executed
execution page shall not affect the validity or enforceability of this
Agreement.
- 24 -
(c) Construction. Whenever the context requires, the gender of any word
used in this Agreement includes the masculine, feminine or neuter, and the
number of any word includes the singular or plural. Unless the context otherwise
requires, all references to articles and sections refer to articles and sections
of this Agreement, and all references to schedules are to schedules attached
hereto, each of which is made a part hereof for all purposes. The descriptive
headings of the several articles and sections of this Agreement are inserted for
purposes of reference only, and shall not affect the meaning or construction of
any of the provisions hereof.
(d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
(e) Entire Agreement; Amendments and Waivers. This Agreement and the other
Transaction Documents (including any schedules and exhibits hereto and thereto)
contain the entire understanding of the Purchasers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any of the Purchasers makes any representation,
warranty, covenant or undertaking with respect to such matters. A provision of
this Agreement may be waived (either generally or in a particular instance and
either prospectively or retroactively) by the Purchasers only by an instrument
in writing signed by the holders of a majority of the shares of Series C
Preferred Stock outstanding at the time of such waiver, and any provision of
this Agreement may be amended only an instrument in writing signed by the
Company and the holders of a majority of the shares of Series C Preferred Stock
outstanding at the time of such amendment. Any waiver or amendment effected in
accordance with the foregoing shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities have been converted), each future holder
of all securities and the Company. No consideration shall be offered or paid to
any person to amend or consent to a waiver or modification of any provision of
this Agreement unless the same consideration is offered to all of the parties
hereto.
(f) Notices. Any notices required or permitted to be given under the terms
of this Agreement shall be in writing and sent by certified or registered mail
(return receipt requested) or delivered personally, by nationally recognized
overnight carrier or by confirmed facsimile transmission, and shall be effective
five days after being placed in the mail, if mailed, or upon receipt or refusal
of receipt, if delivered personally or by nationally recognized overnight
carrier or confirmed facsimile transmission, in each case addressed to a party
as provided herein. The initial addresses for such communications shall be as
follows, and each party shall provide notice to the other parties of any change
in such party's address:
(i) If to the Company:
SLS International, Inc.
0000 Xxxxx Xxxxxx
Xxxxxxxxxxx, Xxxxxxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Attention: President and Controller
- 25 -
with a copy simultaneously transmitted by like means
(which transmittal shall not constitute notice
hereunder) to:
Xxxxxxxx & Xxxxxx LLP
000 Xxxxx Xxxxxx Xxxxx
Xxxxx 0000
Xxxxxxx, XX 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Attention: Xxxxxxx X. Xxxxxxx, Esq.
(ii) If to any Purchaser, to the address set forth under such
Purchaser's name on the Execution Page hereto executed by such
Purchaser.
(g) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and assigns. Except as
provided herein, the Company shall not assign this Agreement or any rights or
obligations hereunder. Any Purchaser may assign or transfer the Securities
pursuant to the terms of this Agreement and of such Securities, or assign such
Purchaser's rights hereunder to any other person or entity.
(h) Third-Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person; provided, however, that Section 4(r) may be enforced by any
Purchaser's affiliates and its or their advisors to the extent the same is
entitled to reimbursement of Expenses pursuant thereto.
(i) Survival. The representations and warranties of the Company and the
agreements and covenants set forth in Sections 3, 4, 5 and 9 hereof shall
survive the Closing in perpetuity notwithstanding any due diligence
investigation conducted by or on behalf of any Purchaser, provided, however,
that the representations and warranties of the Company in Sections 3(h) through
(u), inclusive, shall survive the Closing for three years. Moreover, none of the
representations and warranties made by the Company herein shall act as a waiver
of any rights or remedies any Purchaser may have under applicable U.S. federal
or state securities laws.
(j) Publicity. The Company and each Purchaser shall have the right to
approve before issuance any press releases, SEC or, to the extent applicable,
NASD filings, or any other public statements with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
without the prior approval of the Purchasers, to make any press release or SEC
or, to the extent applicable, NASD filings with respect to such transactions as
is required by applicable law and regulations (although the Purchasers shall be
consulted by the Company in connection with any such press release and filing
prior to its release and shall be provided with a copy thereof and must provide
specific consent to the use of their name in connection therewith).
- 26 -
(k) Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
(l) Indemnification. In consideration of each Purchaser's execution and
delivery of this Agreement and the other Transaction Documents and purchase of
the Securities hereunder, and in addition to all of the Company's other
obligations under this Agreement and the other Transaction Documents, from and
after the Closing, the Company shall defend, protect, indemnify and hold
harmless each Purchaser and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or
indirect investors and any of the foregoing persons' agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement, collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (i)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement, any other Transaction Document or any other
certificate, instrument or document contemplated hereby or thereby, (ii) subject
to Section 9(i) hereof, any breach of any covenant, agreement or obligation of
the Company contained in this Agreement, any other Transaction Document or any
other certificate, instrument or document contemplated hereby or thereby or
(iii) any cause of action, suit, claim, order, proceeding or process brought or
made against such Indemnitee by a third party (including for these purposes a
derivative action brought on behalf of the Company) and arising out of or
resulting from (A) the execution, delivery, performance or enforcement of this
Agreement, any other Transaction Document or any other certificate, instrument
or document contemplated hereby or thereby, (B) any transaction financed or to
be financed in whole or in part, directly or indirectly, with the proceeds of
the issuance and sale of the Securities, (C) any disclosure made by such
Purchaser pursuant to Section 4(b) or 4(m) hereof, or (D) the status of such
Purchaser or holder of the Securities as an investor in the Company. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 9(l)
shall be the same as those set forth in Section 7(c) of the Registration Rights
Agreement.
(m) Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser hereunder or pursuant to any of the other Transaction
Documents or any Purchaser enforces or exercises its rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
- 27 -
(n) Joint Participation in Drafting. Each party to this Agreement has
participated in the negotiation and drafting of this Agreement and the other
Transaction Documents. As such, the language used herein and therein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party to
this Agreement.
(o) Remedies. No provision of this Agreement or any other Transaction
Document providing for any remedy to a Purchaser shall limit any other remedy
which would otherwise be available to such Purchaser at law, in equity or
otherwise. Nothing in this Agreement or any other Transaction Document shall
limit any rights any Purchaser may have under any applicable federal or state
securities laws with respect to the investment contemplated hereby. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Purchasers by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations hereunder (including, but not
limited to, its obligations pursuant to Section 5 hereof) will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Agreement (including, but not limited to, its obligations
pursuant to Section 5 hereof), that each Purchaser shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer of the Securities, without
the necessity of showing economic loss and without any bond or other security
being required.
(p) Knowledge. As used in this Agreement, the term "knowledge" of any
person or entity shall mean and include (i) actual knowledge and (ii) that
knowledge which a reasonably prudent business person could have obtained in the
management of his or her business affairs after making due inquiry and
exercising due diligence which a prudent business person should have made or
exercised, as applicable, with respect thereto.
(q) Exculpation Among Purchasers; No "Group". Each Purchaser acknowledges
that it has independently evaluated the merits of the transactions contemplated
by this Agreement and the other Transaction Documents, that it has independently
determined to enter into the transactions contemplated hereby and thereby, that
it is not relying on any advice from or evaluation by any other Purchaser, and
that it is not acting in concert with any other Purchaser in making its purchase
of securities hereunder or in monitoring its investment in the Company. The
Purchasers and, to its knowledge, the Company agree that the Purchasers have not
taken any actions that would deem such Purchasers to be members of a "group" for
purposes of Section 13(d) of the Exchange Act, and the Purchasers have not
agreed to act together for the purpose of acquiring, holding, voting or
disposing of equity securities of the Company. Each Purchaser further
acknowledges that Baystar has retained Drinker Xxxxxx & Xxxxx LLP ("DB&R") to
act as its counsel in connection with the transactions contemplated by this
Agreement and the other Transaction Documents and that DB&R has not acted as
counsel for any of the other Purchasers in connection therewith and none of the
other Purchasers have the status of a client of DB&R for conflict of interest or
other purposes as a result thereof. [Signature Pages Follow]
- 28 -
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
SLS INTERNATIONAL, INC.
By:
----------------------------------------------------------
Name:
Title:
PURCHASER:
--------------------------------------------------------------
BAYSTAR CAPITAL II, L.P.
By:
----------------------------------------------------------
Name:
Title:
ADDRESS:
Baystar Capital II, L.P.
00 X. Xxx Xxxxxxx Xxxxx
Xxxxx 0X
Xxxxxxxx, XX 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Attention: Xxxxxx X. Xxxxx
Residence: California
SUBSCRIPTION AMOUNT:
Number of Units: 6,000
Purchase Price Per Unit: $1,000
Aggregate Purchase Price: $6,000,000
[SIGNATURE PAGE 1 OF 4 TO SECURITIES PURCHASE AGREEMENT]
PURCHASER:
--------------------------------------------------------------
PSO TRADING IV, LLC
By:
----------------------------------------------------------
Name:
Title:
ADDRESS:
PSO Trading IV, LLC
00 Xxxxxx Xxxxxx
Xxxxxxxxxx, Xxx Xxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Attention: Xxxxxxx Xxxxxxxx
Residence: New York
SUBSCRIPTION AMOUNT:
Number of Units: 2,000
Purchase Price Per Unit: $1,000
Aggregate Purchase Price: $2,000,000
[SIGNATURE PAGE 2 OF 4 TO SECURITIES PURCHASE AGREEMENT]
- 2 -
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
SLS INTERNATIONAL, INC.
By:
----------------------------------------------------------
Name:
Title:
PURCHASER:
--------------------------------------------------------------
HFTP INVESTMENT L.L.C.
By: Promethean Asset Management L.L.C.
Its: Investment Manager
By:
----------------------------------------------------------
Name:
Title:
ADDRESS:
HFTP Investment L.L.C.
c/o Promethean Asset Management L.L.C.
000 Xxxxxxxxx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxx X. Xxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Residence: Delaware
SUBSCRIPTION AMOUNT:
Number of Units: 3,750
Purchase Price Per Unit: $1,000
Aggregate Purchase Price: $3,750,000
[SIGNATURE PAGE 3 OF 4 TO SECURITIES PURCHASE AGREEMENT]
- 3 -
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.
SLS INTERNATIONAL, INC.
By:
----------------------------------------------------------
Name:
Title:
PURCHASER:
--------------------------------------------------------------
ROYAL BANK OF CANADA
By: RBC Capital Markets Corporation
Its: Agent
By:
----------------------------------------------------------
Name:
Title:
ADDRESS:
Royal Bank of Canada
c/o RBC Capital Markets Corporation
Xxx Xxxxxxx Xxxxx
000 Xxxxxxxx
Xxx Xxxx, XX 00000-0000
Attn: Xxxxx Xxx (Structured Products, 2nd Floor)
SUBSCRIPTION AMOUNT:
Number of Units: 3,250
Purchase Price Per Unit: $1,000
Aggregate Purchase Price: $3,250,000
[SIGNATURE PAGE 4 OF 4 TO SECURITIES PURCHASE AGREEMENT]
- 4 -
DISCLOSURE SCHEDULES
Attached are the Disclosure Schedules to the Securities Purchase
Agreement, dated as of January 3, 2005 (the "Agreement"), by and among SLS
International, Inc., a Delaware corporation (the "Company"), and each of the
purchasers (individually, together with its affiliated transferees and/or
affiliated assignees, a "Purchaser" and collectively, together with their
affiliated transferees and/or affiliated assignees, the "Purchasers") set forth
on the execution pages of the Agreement. Capitalized terms used but not defined
herein shall have the meanings ascribed to such terms in the Agreement.
The Schedules are not intended to constitute, and shall not be construed
as constituting, independent representations or warranties of the Company except
as and to the extent provided herein or in the Agreement.
No disclosure in the schedules relating to any possible breach or
violation of any agreement, law or regulation shall be construed as an admission
or indication that any such breach or violation exists or has actually occurred.
Matters reflected in the schedules are not necessarily limited to matters
required by the Agreement to be reflected in the schedules. Such additional
matters are set forth for informational purposes only.
SECTION 3(a)
Organization and Qualification
The Company owns 100% of the capital stock of Evenstar Mergersub, Inc., a
Nevada corporation.
SECTION 3(c)
Capitalization
Section 3(c)(i) - Authorized and Outstanding Securities
See attached capitalization table and options register.
Shares owned by Xxxx Xxxx and Xxxxxxx Xxxxxx are encumbered by the following
agreements:
1. Consent Order of Missouri Securities Division and the Company in Exhibit
99(iv) to Post-Effective Amendment No. 1 filed May 30, 2001
2. Promotional Shares Lock-In Agreement dated April 16, 2001 in Exhibit 99(v)
to Post-Effective Amendment No. 1 to Registration Statement to Form SB-2
filed May 30, 2001;
3. Modification to Consent Order of Missouri Securities Division and the
Company in Exhibit 99.1 to Post-Effective Amendment No. 2 filed February
9, 2004.
Section 3(c)(ii) - Registration Rights
All registration rights have been satisfied except as provided in the following
documents:
1. Non-exclusive Finder's Agreement, dated December 8, 2004, effective
November 30, 2004 between the Company and The Shemano Group, Inc.
o Number of Shares: 4% warrant of the gross Offering funds received in
the Offering (as defined in the Finder's Agreement)
o Conversion Price or Exercise Price: lesser of $2.50 or the
conversion price of any Equity or Equity-Related Securities sold
o Registration Rights: same as Warrants
o Timing of Registration Obligation: same as Warrants
2. Consulting Service Agreement, dated December 8, 2004, between the Company
and W. Xxxxxx Xxxxxx Co.
o Number of shares: options to purchase 100,000 shares of the
Company's Common Stock (SITI) upon contract signing with the
Retailer plus options to purchase 1 share of the Company's Common
Stock (SITI) for each $100 of sales, provided that the aggregate
number of shares entitled to purchase shall in no event exceed
500,000 shares
o Exercise Price: equal the five-day average trading price of the
Company's common stock prior to the signing of the contract with the
Retailer and the option for all sales shall be issued quarterly,
within 60 days of the close of each quarter
o Registration Rights: piggyback registration rights
o Timing of Registration Obligation: Reasonable efforts to promptly
register
3. Consulting Agreement with 3CD Consulting , LLC, dated November 18, 2004
between the Company and 3CD Consulting, LLC
o Number of Shares: 1,000,000 options to purchase the Company's shares
o Option Price: $2.00 per share for a period of three years from the
signing date of this agreement
o Registration Rights: piggyback registration rights
o Timing of Registration Obligation: at the time of the first
registration or filing of securities by the Company
Rescission Rights
1. As disclosed in the SEC Documents, the Company intends to make a
rescission offer to warrant holders who exercised Class A or Class B
Warrants during the period from May 1, 2002 through May 10, 2004. The
Company is doing this because the registration statement filed with the US
Securities and Exchange Commission to register the common stock issuable
upon exercise of the warrants may not have been "current" because it had
not been amended to include the Company's most recent audited financial
statements. The former warrant holders will be entitled to rescind their
purchases. Once made, the rescission offer is open for 30 days. The
rescission offer would require the Company to purchase warrants back at
their original exercise price, $.50 for the Class A warrants and $3.00 for
the Class B warrants, at each warrant holder's option. The current market
price is well above the $.50 exercise price of the Class A warrants so no
adjustment to the financial statements for the year ended December 31,
2003 and the nine months ended September 30, 2004 have been made for the
rescission offer. The current market price is below the $3.00 exercise
price of the Class B warrants. 22,600 Class B warrants were exercised
during the rescission offer period, so the rescission offer would not have
a material liability effect on the Company's financial statements.
Therefore, no adjustment has been made. If all warrant holders accepted
the rescission offer, the Company would be required to pay $1,340,700 plus
interest, which amount would be reduced to the extent of the proceeds from
any sales of the underlying common stock by the former warrant holders.
Acceptance of the rescission offer by all former warrant holders could
have a material adverse effect of these financial statements.
2. The Company may make a rescission offer to some current and past holders
of its Convertible Preferred Stock.
Pending Agreements (to be entered by the Company)
1. As reflected on the capitalization table, the Company intends to enter
into an agreement to issue 300,000 shares of common stock and options to
purchase up to 700,000 shares of common stock to New AV Ventures. The
Company intends to grant New AV Ventures Registration piggyback
registration rights in such agreement.
2. As reflected on the capitalization table, the Company intends to enter
into (or has entered into) an agreement to issue options to purchase
1,000,000 shares of common stock to 3CD Consulting or Cap Xxxxxx.
Section 3(c)(iii) - Anti-Dilution Rights (none of which will be "triggered" by
the sale and issuance of the Securities):
Series B Preferred
Class C Warrants
2000 Stock Option Plan
Global Drumz - Warrant and Stock Option described below
Xxxxx Securities - Warrant described below
Xxxx Xxxxxx- Option Agreement described below
Steerpike (Overseas) Ltd. - Warrant and Option Agreement described below
Xxxx Xxxxxxxx - Option Agreement described below
None of the above agreements or securities have been amended or otherwise
modified from the copies of the same heretofore provided to the Purchasers.
Section 3(c)(iv) - Certificate of Incorporation, Bylaws and Other Instruments
and Agreements governing the Company's securities convertible into or
exercisable or exchangeable for the Company's capital stock
1. Amendment and Restatement of Certificate of Incorporation dated August 7,
2000
2. Amendment to By-laws (Article VIII)
3. Certificate of Designations of Series B Convertible Participating
Preferred Stock dated April 1, 2004
4. Certificate of Designations of Convertible Preferred Stock dated December
21, 2004
5. Class C Warrants
6. 2000 Stock Purchase and Option Plan
7. Form of Option under the 2000 Stock Purchase and Option Plan
8. Option Agreement, dated as of May 19, 2003, between the Company and
Steerpike (Overseas) Ltd
9. Option Agreement, dated as of May 19, 2003, between the Company and Xxxx
Xxxxxx
10. Consulting Services Agreement, dated November 10, 2003, between the
Company and Xxxxxxx X. Xxxxxxxxx
11. Option Agreement, dated June 2, 2004, between the Company and Global
Drumz, Inc.
12. Warrant, dated March 23, 2004, issued by the Company in favor of Xxxxx
Securities Corp.
13. Redeemable Warrant, dated June 2, 2004, issued by the Company in favor of
Global Drumz, Inc.
14. Stock Option Agreement, dated February 9, 2004, between SLS International,
Inc., and Xxxx Xxxxxxxx
15. Non-exclusive Finder's Agreement, dated December 8, 2004, effective
November 30, 2004 between the Company and The Shemano Group, Inc.
16. Consulting Service Agreement, dated December 8, 2004, between the Company
and W. Xxxxxx Xxxxxx Co.
SCHEDULE 3(C) TO THE SECURITIES PURCHASE AGREEMENT BETWEEN SLS INTERNATIONAL,
INC. AND EACH OF THE PURCHASERS SET FORTH ON THE EXECUTION PAGES THEREOF.
-----------------------------------------------------------------------------------------------------------------------------
SLS INTERNATIONAL CAPITALIZATION TABLE AS OF 1/4/05
-----------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED
(ASSUMING FULL
SHARES ISSUED - DETAIL AUTHORIZED ISSUED/GRANTED OUTSTANDING EXERCISE) OWNERSHIP %
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, $.001 PAR VALUE PER SHARE 75,000,000 41,751,080 41,751,080 55.81%
WARRANTS TO PURCHASE COMMON
Class C - Exercise Price of $7.00 / share 2,721,000 2,721,000 2,721,000 3.64%
Xxxxxx Securities - Exercise Price of $2.00 / share 125,000 125,000 125,000 0.17%
Global Drumz - Exercise Price of $7.00 / share 1,000,000 1,000,000 1,000,000 1.34%
Shemano - Exercise Price of $2.50 / share /1 600,000 600,000 600,000 0.80%
The Purchasers /2 6,000,000 6,000,000 6,000,000 8.02%
OPTIONS TO PURCHASE COMMON
2000 Stock Option Plan /3 2,000,000 1,270,000 2,000,000 2.67%
Global Drumz - Exercise Price of $2.00 / share 1,000,000 1,000,000 1,000,000 1.34%
Steerpike - Exercise Price of $0.25 / share 1,000,000 740,000 740,000 0.99%
Broday - Exercise Price of $0.25 / share 100,000 100,000 100,000 0.13%
Xxxxxx /4 500,000 500,000 500,000 0.67%
Xxxxxxxxx /5 800,000 800,000 800,000 1.07%
New AV Ventures /6 1,000,000 1,000,000 1,000,000 1.34%
3CD - Exercise Price of $2.00 / share /7 1,000,000 1,000,000 1,000,000 1.34%
PREFERRED STOCK - TOTAL 5,000,000
Convertible Preferred /8 2,000,000 1,891,473 350,873 3,508,730 4.69%
Series B /9 1,000,000 272,100 196,050 1,960,500 2.62%
Series C /2 25,000 15,000 15,000 6,000,000 8.02%
Conversion Shares - The Purchasers /2 4,000,000 5.35%
NUMBER OF FULLY DILUTED COMMON SHARES 59,169,003 74,806,310 100.00%
-----------------------------------------------------------------------------------------------------------------------------
SHARES ISSUED - DETAIL ANTI-DILUTION REGISTRATION RIGHTS /10
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, $.001 PAR VALUE PER SHARE
WARRANTS TO PURCHASE COMMON
Class C - Exercise Price of $7.00 / share Yes /A Already registered
Xxxxxx Securities - Exercise Price of $2.00 / share Yes /A Already registered
Global Drumz - Exercise Price of $7.00 / share Yes /A Already registered
Shemano - Exercise Price of $2.50 / share /1 Yes /A Yes - piggyback
The Purchasers /2 Yes /A Yes
OPTIONS TO PURCHASE COMMON
2000 Stock Option Plan /3 Discretionary Already registered
Global Drumz - Exercise Price of $2.00 / share Yes /B Already registered
Steerpike - Exercise Price of $0.25 / share Yes /B Already registered
Broday - Exercise Price of $0.25 / share Yes /A Already registered
Xxxxxx /4 No Yes
Xxxxxxxxx /5 No Piggyback for 100,000 shares
New AV Ventures /6 No Piggyback for 300,000 shares
3CD - Exercise Price of $2.00 / share /7 No Piggyback
PREFERRED STOCK - TOTAL
Convertible Preferred /8 No. But, Conversion Shares eligible for resale under Rule 144
Series B /9 Conversion shares registered
Series C /2 Yes - demand on conversion shares
Conversion Shares - The Purchasers /2 Yes
NUMBER OF FULLY DILUTED COMMON SHARES
------------------------------------------------------------------------------------------------------------------------------------
General Note: The options and warrants listed above consitute "Purchase Rights"
under each of the Certificate of Designation and Warrant (each as defined in the
Securities Purchase Agreement).
1/ To be issued upon closing of transaction with the Purchasers. In addition to
these warrants that are to be issued upon the closing of the transaction, in the
event that the Purchasers exercise all or part of the Warrants that they receive
at the closing, The Shemano Group will receive warrants to purchase an
additional 40,000 shares of Common Stock for each additional $1,000,000 raised.
Assuming the full exercise of its Warrants by the Purchasers, the Company would
be required to issue to The Shemano Group warrants to purchase an additional
1,440,000 shares of Common Stock at an exercise price of $2.50 per share.
2/ To be issued upon closing the transaction with the Purchasers. Assumes the
sale of 15,000 Units at $1,000 per Unit for a total of $15,000,000 and that such
Units provide for the purchase, in the aggregate of 15,000 shares of Series C
Preferred Stock and warrants to purchase 6,000,000 shares of Common Stock. Each
share of Series C Preferred originally convertible into 400 shares of Common
Stock. The Company has reserved 4,000,000 shares of its Common Stock for
issuance as "Premium" on the Series C Preferred or in the event of adjustments
to the conversion price of the Series C Preferred, or to the exercise price of
the Warrants, to be issued to the Purchasers at the closing.
3/ Includes options issued to Xxxx Xxxxxxxx to purchase up to 400,000 shares of
Common Stock. Pursuant to an agreement with Xx. Xxxxxxxx, Xx. Xxxxxxxx received
50,000 options at signing @ $2.91 per share and earns options to purchase an
additional 10,000 shares each month that the Company's Consulting Agreement with
Platinum Rye LLC is in force, up to 400,000 shares total.
4/ In December 2003, the Company entered into a Consulting Agreement with W.
Xxxxxx Xxxxxx Co. that allows W. Xxxxxx Xxxxxx Co. to earn options to purchase
up to 500,000 shares of Common Stock. Options to purchase the first 100,000
shares will be issued upon the Company entering a contract with "Retailer" and
will have an exercise price equal to the average trading price for the five days
prior to the signing of the Contract with the "Retailer" and the balance of the
400,000 options, if earned, will be based on the same price as the original
100,000 options.
5/ In November 2003, the Company entered into a contract with Xxxx Xxxxxxxxx
that allows him to earn options to purchase up to 800,000 shares of Common Stock
with an exercise price equal to the closing bid price for the Common Stock on
the day immediately preceding the date the options are issued. This contract has
a three year term.
6/ The company expects to enter into a Consulting Agreement in January 2005 with
New AV Ventures. Pursuant to this Agreement, New AV Ventures will receive
300,000 restricted shares of Common Stock and options to purchase up to 700,000
shares of Common Stock at market prices based upon sales of the Company's
products to Commercial and Multi Level Residential properties.
7/ To be issued under a Consulting Agreement that the Company expects to enter
with 3CD Consulting.
8/ Originally issues 1,891,473 shares; 1,540,600 shares converted into Common
Stock per terms of the Convertible Preferred; each share converts into 10 shares
of Common Stock.
9/ Originally issues 272,100 shares; 76,050 shares converted into Common Stock
per terms of the Series B Preferred; each share converts into 10 shares of
Common Stock.
10/ All of the underlying shares, except those associated with the following
warrants and options, have been registered: The Shemano Group, Fishback, Hargis,
3CD and New AV Ventures.
A/ General protections for increases or decreases in shares or issuances and, in
some cases, if there are issuances without consideration.
B/ Includes price-based down-round anti-dilution protection, none of which will
be "triggered" by the sale and isuance of the Securities at the Closing.
SECTION 3(e)
None.
SECTION 3(g)
SEC Documents, Financial Statements
The following SEC Documents were not timely filed:
1. The Annual Report on Form 10-KSB for the year ended December 31, 2002 was
filed on May 21, 2003.
2. The Quarterly Report on Form 10-QSB for the quarter ended March 31, 2003
was filed on June 16, 2003.
3. The Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001
was filed on May 30, 2001.
4. Current Reports on Form 8-K may not have been timely filed in all
instances.
The Company has not filed Forms 8-K with respect to the following material
agreements:
1. Xxxx Xxxxxx Option Agreement (to be filed with a Form 8-K announcing
closing of the transactions contemplated by the Agreement)
2. Non-Exclusive Finder's Agreement, dated December 8, 2004, effective
November 30, 2004, between SLS International, Inc. and The Shemano Group,
Inc. (to be filed with a Form 8-K announcing closing of the transactions
contemplated by the Agreement)
Other Contracts and Agreements
The Company may not have filed the following agreements with the SEC:
1. The Company owes Xxxxxxx X. Xxxxx $25,000 pursuant to a Promissory Note
dated December 21, 2000
2. The Company is the lessee under a Commercial Lease Agreement (Equipment),
dated October 10, 2003 (Lease No. LA22554), with Xxxxxx Equipment Co.,
Inc. The lease has an initial term of 60 months.
SECTION 3(h)
Internal Accounting Controls
Without in any way limiting the representations and warranties set forth
in Section 3(g) of the Agreement: The Company is not yet subject to all of the
requirements of the Xxxxxxxx-Xxxxx Act with respect to its internal controls and
disclosure controls and procedures. The Company (together with two consultants
hired by the Company) is in the process of assessing such controls and
procedures. The Company agrees that it will complete such assessment and the
implementation of any necessary changes to such controls and procedures in time
to comply with the requirements with respect to such controls and procedures
under the Xxxxxxxx-Xxxxx Act, as such requirements become applicable to the
Company.
SECTION 3(i)
Absence of Certain Changes
None.
SECTION 3(j)
Transactions With Affiliates
On December 4, 2004, the Company and Bull Creek Ranch LLC entered into a
Lease Agreement. Xxxx Xxxx, the President, Chief Executive Officer and a
Director of the Company, is a Manager and a Member owning a 50% interest in Bull
Creek Ranch LLC. As a result, Xx. Xxxx has a material interest in the Lease
Agreement.
Beginning in 2004, the Company has been paying $2,500 per month to Xxxx
Xxxxxx, a member of the Company's board of directors, to oversee the work by
outside consultants performed in connection with the Company's Xxxxxxxx-Xxxxx
Act compliance efforts.
SECTION 3(k)
Absence of Litigation
1. The Company entered into a Stock Purchase Option Agreement with the
stockholders of SA Sound, B.V. and SA USA on February 6, 2004 (the "SA
Sound Agreement"). In connection with this agreement, the Company placed
50,000 Euros (approx. $66,500 at current exchange rates) (the "Option
Price") into escrow to purchase the option. The agreement provided for the
following potential outcomes with regard to the Option Price:
a. If the Company proceeded to purchase the 2 companies, the Option
Price would be credited towards the final purchase price.
b. If the Company discovered any material adverse facts in its ensuing
diligence review of the 2 companies, it would be entitled to a
return of the Option Price if it made a request to the escrow agent.
c. If the option agreement expired and no action was taken by the
Company pursuant to #2 above, the stockholders of SA Sound B.V. and
SA USA would receive the Option Price.
In the Company's diligence review of the 2 companies, it found what it
determined to be many material adverse facts, such that the Company
decided not to proceed with the purchase of the 2 companies. The Company
timely demanded the return of the Option Price from the escrow agent. The
escrow agent (who was also an interested party and attorney for the
selling companies) refused to return the money. The Company sued the
escrow agent in New York, the jurisdiction listed in the option agreement,
and the case is now pending a decision with regard to the Company's
request for summary judgment. The Company has no outstanding obligations
under the SA Agreement, including, without limitation, any obligation to
issue any securities in the future.
3. See Section 3(c) of the Agreement with respect to the issuance of the
Company's Convertible Preferred Stock.
4. See Section 3(c) of these Disclosure Schedules with respect to the
rescission rights under the heading "Rescission rights."
SECTION 3(l)
Intellectual Property
U.S. Patents
1. Patent number US 6,794,932 B1
2. Patent number US 6,563,377 B2
SECTION 3(m)
Title
The Company's lease of its current location at 0000 X. Xxxxxx,
Xxxxxxxxxxx, Xxxxxxxx has expired and the Company continues to lease the space
as a month-to-month tenant.
SECTION 3(o)
Key Employee
Xxxx X. Xxxx
SECTION 4(s)
Transactions with Affiliates
On December 4, 2004, the Company and Bull Creek Ranch LLC (the "Lessor")
entered into a Lease Agreement and Lease Addendum. Xxxx Xxxx, the President,
Chief Executive Officer and a Director of the Company, is a Manager and a Member
owning a 50% interest in the Lessor. As a result, Xx. Xxxx has a material
interest in the Lease Agreement.
By the Lease Addendum, the Lessor granted the Company the right, at
Company's option, to lease the remaining Premises at the same price and upon the
same terms and conditions of any bona fide offer for the lease thereof which the
Lessor shall at any time during the primary term of the Lease be ready and
willing to accept.
Pursuant to the Lease and the Lease Addendum, the Company also has the
right to purchase the leased property at anytime during the original term of the
Lease. If the Company exercises this option during the first year of the Lease,
the purchase price for such purchase shall be $3,500,000.00. Thereafter, the
purchase price shall increase by 5% of the $3,500,000.00 price each year of the
Lease term.
The Purchasers agree that the exercise by the Company of its right to
extend the Lease or to purchase the leased property shall not be a violation of
Section 4(s) or require the prior consent of the Purchasers.
